Comments on: Sellers — are you getting SC@EWED by the lender? Fight back!

By: Rhonda Porter

Rhonda Porter — Thu, 10 May 2007 20:44:02 +0000

My original post on this was the subject of the words “up to” for the credit. Just say they get $x dollars and confirm it’s the proper amount needed from the Mortgage Professional.

Then it doesn’t go back to the seller.

By: Craig

Craig — Thu, 10 May 2007 20:11:35 +0000

Ardell — yes, the PSA should reflect the intention of the parties, which is that the buyer get the full benefit for the additional funds paid by buyer, presumably through payment of necessary and appropriate closing costs, but by some other means if necessary (such as a reduction in the purchase price). As you know, however, a last minute reduction in the purchase price can cause problems for the lender and may need re-review by the underwriters, thus delaying closing, etc. Hence, the MLS form uses the “up to” language so that there are no last minute problems: the purchase price does not change, and seller, per the terms of standard PSA language, pays up to a certain amount, thus retaining any unused portion.

My post and subsequent comments are based on this standard PSA language. Per those terms, the buyer has relinquished a legal right to the funds. Under those facts, it is the seller who is defrauded by the loan originator by the “harvest.” The claim would become much more convoluted and complicated if the buyer asserted ownership over the funds based on the parties’ intent in entering the contract.

Ideally, the contract would in fact be written to reflect the intent of the parties. Indeed, when my office writes an offer for a buyer, we include language that prevents such a “harvest.” From the buyer’s perspective, that is the ideal solution — address the problem up front. The problem is that it usually is NOT so addressed. I don’t think that should allow an LO to harvest the money, though. The seller has the contractual right to the money, and the LO acts in an unfair and deceptive manner when he/she harvests it.

By: ARDELL

ARDELL — Thu, 10 May 2007 19:55:02 +0000

Craig,

How about retained by BUYER vs. retained by SELLER, by reducing the sale price, as long as the original agreement contained that method of dealing with the excess? Isn’t that the REAL answer here?

Why are you trying to get this money to the SELLER, if the original understanding was the sale price reflected the FULL seller credit TO BUYER?

Isn’t it better to effect the original meeting of the minds understanding that the buyer WOULD in fact GET the benefit of the credit? I thought lawyers tried to effect the original meeting of the minds? No?

By: Craig

Craig — Thu, 10 May 2007 16:06:03 +0000

Brian, I think in that instance (a direct benefit to the borrower by lowering the rate) it would not be considered “harvesting,” at least not by my definition. Rather, the funds are harvested when the loan originator (or any other professional) increases his/her/its own fee at the last second to insure that the full amount of seller paid closing costs are in fact paid and not retained by seller.

By: Rhonda Porter

Rhonda Porter — Thu, 10 May 2007 14:23:40 +0000

Ardell,
“I know GFE’s are required shortly after “application”, but what about before they purchase and go to a lender for a prequal letter? What if they don’t see a GFE until after they follow “the lender’s” house price cap”? Another factor that could push into subprime is the taxes and HOA dues on the property. That could throw the ratios off after the fact.”

This is why borrowers should get preapproved before they make an offer on a home. They need to understand what all of their lending options are so they can make an educted choice about which program best suits their needs. A GFE should be provided when ever a rate quote is done. How else does a buyer know what costs or points are associated with the rate?

I also let the buyer (and agent if I have not worked with them before) know that I use 1.25% of the sales price for taxes and that the home owner insurance or dues are estimates. If the preapproval is “tight” on the ratios, I let the agent know that too.

I often find that it’s either the buyer or agent who is pushing for the higher sales price. When you tell the the buyer or agent that they only qualify for $450k and Brand X with the Retail Mortgage Sales Person tells the buyer, you qualify for $500k…the buyer and the agent think that you have not done your job as a Mortgage Professional.

I do explain, as any Mortgage Professional would, if they are considering a sales price that is a stretch that they can buy $500k you’ll need this program or, you can buy $450k with this program.

It needs to be the borrowers choice…once they’re educated on their options (the differences in the programs/rates).

By: Brian Brady

Brian Brady — Thu, 10 May 2007 07:35:05 +0000

There is one good reason to “harvest” those costs; if it directly benefits the borrower (Buyer) by lowering his/her rate.

By: ARDELL

ARDELL — Thu, 03 May 2007 19:01:17 +0000

The hardest to spot “predatory” aspect I have seen is artificially pushing a buyer into subprime territory by stretching their ratios without the buyer knowing it. For instance, they could hand someone a pre-qual letter saying they can go out and buy a house for $550,000, when they only qualify at $550,000 via sub-prime. The non-subprime price might be $475,000.

The buyer has no idea and just assumes they can go look at and make offers on property priced up to $550,000. Once they make an offer and are in contract, hard to correct the situtation when they start applying for their loan and realize it is subprime.

I know GFE’s are required shortly after “application”, but what about before they purchase and go to a lender for a prequal letter? What if they don’t see a GFE until after they follow “the lender’s” house price cap”? Another factor that could push into subprime is the taxes and HOA dues on the property. That could throw the ratios off after the fact.

That’s why it’s good for an agent to do reverse qualifying saying “at that price your should be making about X and your debts should be no more than X. Say someone comes in with a letter up to $450,000 and the buyer ends up selecting a townhome with a $350 a month condo fee and taxes of $4,200 a year. If the lender assumed “single family” and didn’t allow for condo fees, that could push the “back end” out.

There’s a vague description in the predatory lending pamphlet regarding qualifying the buyer at more payment than they can readily afford.

By: Jillayne Schlicke

Jillayne Schlicke — Thu, 03 May 2007 07:01:05 +0000

Hi Rhonda,

Well, we could start by defining “unfair.”
That would be any lending practice labeled predatory.

By: Rhonda Porter

Rhonda Porter — Thu, 03 May 2007 06:50:25 +0000

Thanks, Jillayne. What does the Federal Consumer Protection Act mandate for LOs when closing cost or rates change for a consumer? And (sorry for the follow up question) how does a consumer know what type of lender and what their regulations are?

(You know my goal is to have all LOs operate under the same rules).

By: Jillayne Schlicke

Jillayne Schlicke — Thu, 03 May 2007 06:45:50 +0000

Rhonda, regarding comment 11, if rates and fees go down, no other disclosure is needed, unless the LO is switching the consumer to another loan product with different terms.

Regarding comment 12, here are some general guidelines
If the LO is working for a consumer finance company, then the state consumer protection act applies.

If the LO is working for a state regulated bank or CU same same.

If the LO is working for a federally chartered bank or CU, then they are operating under federal laws (and of course state laws as well). We have a federal consumer protection act.

WA State laws for re-disclosure in regards to mortgage BROKERS are stronger than federal laws.