Lee County, Florida has become infamous for speeding foreclosure cases through its courts. The super-charged system — or “rocket docket” — can dispense with a foreclosure case in minutes, sometimes mere seconds. In the interests of speed, the courts have even refused requests for delay from foreclosing banks to get their papers in order and exempted banks from rules that apply to others.
Indeed, earlier this month Lee County Judge James Thompson denied a bank’s request to delay a foreclosure so it could try to complete a short sale under the government’s Home Affordable Foreclosure Alternatives program. A HAFA short sale was presumably in the bank’s interest, which is why it requested the delay, and it certainly was in the homeowner’s interest, as the program would protect the homeowner from having to pay the roughly $200,000 difference between the mortgage and the short sale price. Whose interests does Judge Thompson’s order serve?
Florida’s “rocket docket” has been suggested as a reason why so many banks are now voluntarily dismissing Florida banks just aren’t ready to go forward. Those voluntary dismissals have two negative consequences for the banks, so surely they wouldn’t undertake them lightly. The first is that the banks will have to pay new filing fees, some $2,000 per case. (The banks can recoup the costs from the proceeds of an eventual foreclosure sale.) The second is that banks can only do a voluntary dismissal once; if they file again and have to dismiss the case for some reason, it will be with prejudice.
I’ll Say it again Caveat Emptor… I do hope NAR’s President Vicki Cox Golder got my email!
By: Carrie Bay 04/23/2010 DSNEWS.COM
With defaults continuing to mount and declining property values still widespread, the industry is seeing an increase in short sales. Such transactions are expected to burgeon even further now that the federal government has implemented its Home Affordable Foreclosure Alternatives (HAFA) program.
Under HAFA, servicers participating in the administration’s foreclosure prevention effort are required to consider a short sale for all homeowners that don’t qualify for a modification, and incentives are paid out to borrowers, servicers, and lien holders for successful short sales.
With the new policies and still-precarious market conditions, short sales are gaining in popularity among lenders and distressed homeowners alike, but as with any modus operandi that rapidly picks up steam, this proliferation can open the gate for fraudulent activity.
Experts say one area of the short sale process particularly vulnerable to fraud is property valuation. Bank-owned fraud attributed directly to schemes involving short sales and REO inventories has increased by 40 percent over the past year and has more than doubled from two years ago, according to market data from the California-based risk mitigation firm Interthinx.
The administration’s HAFA program allows broker price opinions (BPOs) to be used to determine the value of properties to establish a minimum offer for a short sale. Some industry groups claim the allowance of BPOs is likely to exacerbate the potential for fraud. They say that the real estate agents and brokers who perform BPOs have an inherent bias toward producing a fee for themselves, irrespective of ensuring a fair return for the lien holder or homeowner.
In response to these allegations, the National Association of Realtors (NAR) stressed that BPOs are completed by licensed real estate agents who have a detailed knowledge and understanding of real estate pricing and local market trends. The organization argues that BPOs are widely accepted in the industry because of their established reliability and accuracy, and practitioners providing BPOs must adhere to a rigorous code of ethics and recognize their fiduciary responsibility to their clients.
While the Federal Bureau of Investigation (FBI) has described short-sale fraud schemes as “difficult to detect since the lender agrees to the transaction,” they are moving higher on the agency’s list of types of mortgage fraud to watch, with the number of cases mounting rapidly.
The FBI defines such fraud as: “Any material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.”
Freddie Mac recently issued a notice to its servicers and real estate practitioners on what the GSE called an emerging fraud trend – short payoff, or short sale, fraud.
Short sale volume at Freddie Mac has grew more than 1,000 percent from 2007 to 2009, and the GSE says this upward trend in volume leaves the market ripe for incidences of short payoff fraud.
According to a member of Freddie Mac’s Fraud Investigation Unit, any misrepresentation related to the buyer, a subsequent transaction at a higher prices, or the seller’s hardship reason to qualify for a short sale constitutes fraud.
The GSE outlined several red flags that might suggest short sale fraud:
Sudden borrower default, with no prior delinquency history, and the borrower cannot adequately explain the sudden default.
The borrower is current on all other obligations.
The borrower’s financial information indicates conflicting spending, saving, and credit patterns that do not fit a delinquency profile.
The buyer of the property is an entity.
The purchase contract has an option clause to resell the property.
Treasury officials say they have already incorporated safeguards against fraud into HAFA. To participate in the program, borrowers and the licensed real estate agent who lists the property are required to sign a Short Sale Agreement (SSA) and sales contract attesting that the transaction is being conducted at arm’s length, meaning the property is not being sold to a relative.
In addition, buyers must agree not to resell, or “flip,” the home within 90 days of the closing date, and the lender/servicer must have an independent property valuation in hand that meets their pre-set net return requirement before agreeing to the short sale. Treasury officials say servicers should terminate the short sale agreement if any evidence of falsification or misrepresentation is discovered.
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A few weeks ago I posted an article on this blog in which I expressed concern about deductions that could occur from real estate agent commissions because of the language in the new HAFA short sale guidelines that are about to go into effect. That language states that agent commissions are protected up to six percent of the transaction unless the servicer chooses to retain “a vendor to assist the listing broker with the sale” and if a vendor is retained, “this vendor must be paid ___% (or $___) from the commission.”
In essence, I predicted that a new industry of short sale vendors would spring up, not really to assist the broker, but to do the servicer’s job at the real estate agent’s expense, resulting in smaller commissions than were being paid even a few years ago when servicers were routinely reducing commissions as a condition of short sale approval. I noted at the time that some agents were already running into some of these vendors in their short sale transactions.
With the effective date of HAFA only ten days away, these short sale vendor companies are starting to appear like weeds. Here are excerpts from three press releases I have seen in just the last few days:
March 16, 2010 — Lender Processing Services, Inc. (LPS), a leading provider of integrated technology and services to the mortgage and real estate industries, is pleased to announce the launch of its professional short-sale service. Offered through LPS Asset Managements Solutions, LPS short-sale solution helps servicers respond more quickly to short sale offers and close more transactions. http://www.lpsvcs.com/NewsRoom/Pages/20100316.aspx
March 18, 2010 — Scottsdale, Ariz.-based Loan Resolution Corp., a provider of short sale services, plans to add 100 positions this month to meet demand for the government’s new Home Affordable Foreclosure Alternaltives program. http://www.mortgageorb.com/e107_plugins/content/content.php?content.5487
Notice how the press releases proclaim these companies are creating these divisions to help the servicers comply with HAFA. I guess they didn’t read that it was supposed be the agents they were assisting. I hope that they do make the short sale process easier, but the drafters of the HAFA program (with recommendations from the servicers) shouldn’t have tried to be cute with their wording in HAFA by guaranteeing a 6% commission unless a vendor is hired to assist the broker.
The implication is that the vendors will make an agent’s job so much easier, that the agent doesn’t really deserve a full commission on the transaction. After all, now all the agent will have to do is work with the seller, list the property, qualify the seller for HAFA, market the property, deal with buyers with low ball offers, negotiate with unrepresented buyers, negotiate with selling agents, get a contract signed, send it to the servicer or vendor for approval, guide it through closing, appear at closing and deal with all the other usual issues in a transaction.
In other words, HAFA listing agents will not only be doing everything they would do in any other transaction, but will also now have to deal with the HAFA process. HAFA’s drafters should have just honestly stated in the guidelies that: Real estate agents are going to give up one quarter of their commission so that the servicers can hire somebody to do the servicer’s job.
All the complaining aside, the HAFA program is what it is unless NAR can lobby the Treasury Department and get this provision changed. Hopefully, when Freddie and Fannie come out with their own HAFA compliant guidelines in the near future, they will strike this provision. After all, both Fannie and Freddie within the past year changed their loss mitigation policies to protect 6% commissions for agents.
I think a real effect of this provision is that it will result in many selling agents avoiding HAFA short sales which will ultimately affect the success of the HAFA program. One of the primary reasons that the investors/owners of loans listed as short sales started paying 6% commissions, was they realized that in today’s difficult real estate market, some selling agents with solid buyers were avoiding short sale properties that only paid a two or two and one half percent commission to the selling agent. With all the short sales on the market, there were plenty of properties to show their buyers that paid a full commission. If this happens, the lenders and servicers greed will have caused them to once again shoot themselves in the foot.
In the next installment on the new HAFA program taking effect on April 5, 2010, I will discuss some of the pros and cons of participating in the HAFA program along with some of HAFA’s flaws that may cause it a lot of problems as it is implemented. In the meantime, for more education on the HAFA program, check out our free video series at www.hafaprogram.com or our in depth course at www.2010shortsaleplaybook.com.
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