Category Archives: Investing

The Morality of Walking Away

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This is not legal advice. For legal advice, consult an attorney not a blog.

I came across this interesting article in the Wall Street Journal, that bastion of conservatism. The article goes into some detail encouraging homeowners to just “walk away” from houses that are deeply under water (not literally, of course; rather, the owner owes much more on the property than what the property is worth). For the record, I agree 100% with the sentiment expressed by the author. Any successful business — or business person, for that matter — would not think twice about breaching a contractual obligation if fulfilling that obligation made no business sense whatsoever. In this regard, and as noted by the author, the economy is fundamentally amoral. It is high time that “regular” people take the same approach as the wealthy and Big Business.

That said, is it really a good idea? I’ve discussed the issue previously (in two parts). Here, I’ll only say that Washington is generally a non-recourse state, but that the situation is much more complicated if you have a second mortgage. Whether you decide to walk away or not, though, that decision needs to be based on what is in your (and your family’s) best financial interests. “Morality” should not factor into the equation.

Coming Soon: Pacific Northwest Housing Summit and Seattle RE Barcamp

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I’m very excited about two events that will be taking place next month at the Seattle Center on March 18 and 19, 2010 for the real estate community.   Full disclosure:  I’m actually involved on the planning committees for both.  🙂

The Pacific Northwest Housing Summit is on Thursday, March 18th and consists of panelist from across the country reprensenting all aspects of the real estate industry and various levels of government.

panelist
At this time, the featured panelist include (in no particular order):

  • Lieutenant Governor Brad Owen
  • David Horn with the Federal Trade Commission
  • Ohan Antebian with Realtors Property Resource (RPR)
  • Bret Bertolin with the Washington State Economic and Revenue Forecast Council
  • Spencer Rascoff, COO of Zillow
  • Stan Sidor Chairman of the Appraisal Coalition of Washington
  • Brenda Rawlins, President of the Washington Land Title Association
  • Frank Garay and Brian Stevens from Think Big Work Small
  • Marc Savitt of the National Association of Independent Housing Professionals
  • Ken Reid of Genworth Mortgage Insurance

We are still adding panelist to the event–I’m pretty amazed at how its all coming together!   It will be interesting to hear from these folks what they see for the near future of our housing market.   The Pacific NW Housing Summit has been approved for clock hours (some pending approval).    If you pre-register, you can save ten bucks (that’s 2 or three lattes!) vs. signing up at the door on the day of the event.    Registration includes a gourmet boxed lunch from Gretchens on Thursday.

This event is brought to you by Washington Realtors and the Washington Association of Mortgage Professionals.

barcamp-logosmallRE Barcampis no stranger to Seattle.   This will be the third Seattle REBC (not counting Bellevue’s mini-REBC last year) and what I appreciate about RE Barcamps is that each one is unique and has their own personality.  I think this happens because the volunteers vary and even more so because the event is planned based on the attendees.    I’m betting that since this RE Barcamp is taking place the day after the Pacific NW Housing Summit, that we’re going to see more sessions on issues far beyond social media.   This won’t be your “typical” REBC…at least that’s not what I’m expecting.   No lunch is included on Friday–but with all the great restaurants located near by, you won’t have to travel far.   Even though REBC Seattle is free–your rsvp is greatly appreciated.

The venue for both days is going to be great.   It’s located at the Northwest Rooms at the Seattle Center with tons of parking.   The rooms are designed for conferences and will easily handle both days formats…and there will be free wi-fi!    

I look forward to seeing everyone next month!

IRS and Homebuyer Tax Credit: obtaining a”signed” Final Settlement Statement

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This is tax time.

Sometimes escrow offices wonder if we are CPA firms during tax time.   Our office has received numerous phone calls from clients that are in need of their “signed” Final Settlement Statements.   Lynlee wrote a quick post on our blog with an IRS link addressing what the IRS may need from borrowers to claim the tax credit.

As always, please contact your CPA or tax professional for specific details regarding claiming the homebuyer tax credit.

We contacted a CPA and they responded:

“we generally have found that the Final Settlement Statement (with NO signatures) are acceptable.”

Why?  Because in Washington State (and other escrow states) Final Settlement Statements do not have signatures from borrowers.   Final Settlement Statements are mailed to clients after a transaction is closed.  Estimated Settlement Statements are signed at escrow prior to your transactions being closed.

Join us at the HomeQuest Social Media Summit Next Week

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David speaking at Real Estate Connect NYC '10Hey real estate professionals! I’m super excited to be taking part in the HomeQuest Social Media Summit next week in Portland…

I’m going to be speaking about creating and promoting your content… but more interestingly, the HomeQuest team has also lined up:

I know all three of these guys well and can tell you without a doubt that these are three of the smartest guys in online real estate.

This is sure to be a great event with lots of great learning (did I mention it’s free???).  You can register here!

And if you’re planning to attend, let us know in the comments. Maybe some folks from the Seattle are would like to carpool down!


[photos courtesy of Dale Chumbley of the Clark County Real Estate Blog, who always brings #thefun and will almost definitely be joining us next week as well!]

Predatory Short Sale Negotiators

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I received a call the other day from a consumer who was in the process of purchasing a short sale home.  The homeowner has defaulted on her mortgage and the trustee sale auction has been postponed a few times now that this buyer’s firm offer has finally reached the lender’s loss mitigation decision-maker.  Once the offer was accepted by the seller, the homebuyer was surprised to learn that there’s a third party involved, a “Short Sale Negotiator” who is charging an additional $9,000 fee on top of the real estate commissions paid to both the agent for the seller and the agent for the buyer. The Short Sale Negotiator is demanding that the homebuyer sign an agreement that the homebuyer will be responsible for paying the $9,000 fee.  The homebuyer emailed me asking what I thought of this additional fee and could I offer some advice. 

The first thing I did was to find out the name of the Short Sale Negotiator company, the owner of the company, and the person who is doing the short sale negotiating. I discovered that the negotiation company is owned by the same person who also owns the real estate firm where the listing agent works.  I also ran the name of the short sale negotiator and discovered that this person IS a licensed real estate agent. 

Readers please note that WA State’s regulators recently changed the real estate licensing laws and there’s a great FAQ section here that answers the question: Does a Short Sale Negotiator have to be a licensed real estate agent? The answer is yes, or a licensed loan originator or otherwise exempt from licensing such as an attorney. (Clicking through from the link, scroll down to “doing business” and see the second question.)

So we have a licensed real estate agent who is earning money as a short sale negotiator who works for a company owned by the same person who owns the listing agent’s real estate company.

There are a couple of things that come to mind here. First of all, isn’t there a bit of a conflict of interest for the real estate broker/owner of that company?  Where are your duties? To the home seller, whose listing you’re charged with overseeing, or are your duties to the buyer, a client who signs the agreement to pay your other company $9K?  What are the duties of disclosure to BOTH the seller and the buyer?

For example, if I’m the seller in this transaction, charging a buyer an extra $9,000 out of pocket might preclude a number of qualified buyers to make an offer….unless I hold back this information until after the buyer has emotionally fallen in love with the home and is already arranging the furniture in his/her mind.  That seems manipulative.  Why not tell all possible prospects up front what the short sale negotiator’s fee is: Make it mandatory to display this extra fee in the PUBLIC comment section of the multiple listing service. 

You might be thinking: “Yes we could disclose this god-awful fee to the public this but that’s not in the best interest of the home seller.”  Well, okay but what happens if you end up attracting a lot of buyers but they all walk when told of this high third party fee? Now the listing agent has wasted everyone’s time.  It’s like if someone asks me out on a date and then later he tells me he’s married.  Come on! Hey, some women might say yes and it’s nice to know up front how big of an a-hole a guy is.   I say the listing agent would actually be attracting the right kind of buyer if they disclosed that their Short Sale Listing comes with baggage.  It seems to work fine for the married guys who post personal ads on craigslist day after day.

More: If there is an affiliated business arrangement going on between the two companies that are owned by the same person/people, then a RESPA-required Affiliated Business Arrangement disclosure form should ALSO be required so that the home seller and home buyer are aware of the dual company ownership. Part of that AFBA disclosure form should state that the homebuyer understands that buying this home means he/she does NOT have to use this particular short sale negotiation firm and is free to select another short sale negotiation company to do the same or similar work.  However, since a ‘short sale negotiator fee’ might not necessarily be classified as a “settlement service” then this rule might not apply. HUD are you listening? It’s highly possible that the next time a federal regulator makes it out to Washington State, the Seahawks will have won the Superbowl. Knowig this, we should look to the state regulators for assistance.

For a home buyer, a big red flag would be if the listing agent demands that you use this affiliated short sale negotiator. Demanding that a buyer use a real estate broker’s affiliated company is a licensing law violation as well as a violation of federal law when those companies are a title, escrow, appraisal company, and so forth. So why not a short sale negotiations company also?

Even more: Is the listing agent receiving part of that $9,000 fee? One way of structuring this is for the owner of both companies to promise the listing agent something like this: “if the lender cuts your commission, don’t worry, I’ll give you a portion of that $9,000 negotiator fee.”  Unearned fees are not allowed under RESPA.

Even worse: Is the short sale negotiator splitting the $9,000 with the home seller?  How fast can you say “Mortgage Fraud is now a Class B Felony in Washington State?”

The other logical problem that comes up for me when I see an additional fee of $9,000 is this: what work is being done for NINE THOUSAND DOLLARS?  That’s an awful lot of money. I could install all new vinyl windows in my 1959 house with that kind of money. I could put this in my teenager’s college fund. I could accomplish a lot with $9,000 so why would I want to pay that kind of money to a short sale negotiator?  Is this like extortion/payola in order to get that particular house for that price? 

Maybe not.  What is this third party negotiations company doing for their $9,000?  Wait, let me go find out. I’ll read their website.  Gee, there’s nothing on the website telling a consumer what their company actually does for that fee but the pictures of their team tell me they’re all good looking guys under 30. Not that there’s anything wrong with doing business with good looking guys under 30 but it should make us wonder how much experience the negotiator has at short sale negotiating.  In 2009 I believe we added ten million “short sale experts” in the real estate industry.

My advice to the consumer: Negotiate that fee down to somewhere around $1,000 to $2,000.  If the home is that close to the auction date, tell your real estate agent that you’re going to buy the home at the auction if the lender won’t approve the short sale and if the negotiators won’t go for a reduced fee.  Most of the third party short sale negotiators out there are paid much less than $9,000. 

Here’s some help with the math:  I asked the consumer to ask the short sale negotiator how many hours he’s spending on this file v. how many hours he’s working on those biceps. Consumer says the SSN said he’s spent 10 hours so far on this transation! !! !!! Wow! Well! Okay then, let’s divide $9,000 by 10 hours.  That’s a going rate of $900 per hour. That’s probably close to the hourly rate charged by the Johnnie Cochran law firm for litigation cases and I’m fairly certain that this licensed real estate agent negotiator doesn’t have as much experience or education as the JC legal team.  Counter back with $100/hour and settle around $200/hour max.

I am betting they’ll take the $2k.

Ask for the negotiator’s $2K to be put on the HUD I Settlement Statement as a seller’s closing cost.  There’s a chance the lender will pay it.  If not, the buyer needs to as himself: Is this house worth $2k out of pocket at closing?  It’s also important for the buyer’s new lender to know about this additional fee. Insist that it’s paid out through escrow and shows on the buyer’s side of the HUD I Settlement Statement if the lender refuses to pay it as a seller’s cost.

Buyers: do not agree to pay any money after closing, on the side, without disclosing this additional amount to all parties including the lender. 

Predatory Short Sale Negotiators: The world is watching you.  I wonder if your dreams are haunted the way I was haunted after watching The Hurt Locker.  Soon your predatory fees are going to explode in your face. Oh, and loan mod salesmen thinking that being a short sale negotiator is the next big way to “make six figures with no experience,” please go back to the used car lots. I’m sure there are some openings at the Toyota dealerships.

The Financing Contingency: Does it disfavor mortgage brokers?

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As always, this is not legal advice. For legal advice, consult a lawyer, not a blog.

First and foremost, let me admit my own ignorance up front as to exactly how a buyer works with a mortgage broker. Hopefully, someone with such knowledge and experience will clarify any errors below that result from my ignorance. Indeed, this post is for my own education as much as anything else.

In its current iteration, the financing contingency (NWMLS Form 22A) specifically defines “lender” as “the party funding the loan.” Thus, by its very terms, the term lender does not include a mortgage broker, since a mortgage broker simply brokers the loan (i.e., matches up a lender with a borrower) and does not actually lend any money.

So what’s the issue? Its two-fold. First, in paragraph 1 Form 22A states: “If Buyer changes the lender without Seller’s prior written consent after the agreed upon time to apply for financing expires, then the Financing Contingency shall be deemed waived.” [Only relevant portions of sentence included in quote.] If the buyer is using a mortgage broker, it is possible that the buyer will not have decided on a specific “lender” before expiration of the application period (by default 5 days but often shortened). In that case, the buyer may be deemed to have waived the contingency, or at a minimum the buyer may need to get the seller’s written consent for a lender selected after expiration. If seller refuses to give such consent, then the buyer may have waived the contingency. Note use of the word “may” as the form is ambiguous and open to some interpretation on this issue.

One the second issue, however, the risk is clear. If buyer’s financing fails, then per paragraph 4 the buyer must present “written confirmation from buyer’s lender” of the date of application, that buyer had the funds to close (i.e. the down payment), and why the loan was denied. I think its safe to say that a declining letter from a mortgage broker would not satisfy this requirement given the specific definition of “lender” in the form. So don’t rely on a letter from your mortgage broker (as many buyers do).

The upshot? If you’re using a mortgage broker rather than dealing directly with a lender, discuss this issue with your broker to confirm that you will still get the protections of the contingency. Make sure the broker will have “applied” for a loan on your behalf with a specific lender prior to expiration of the application period. And if the application is denied, make sure you get a letter so indicating from the LENDER, not just your broker.

Loan Originators: Stop Your Crying…Let’s Love the Good Faith Estimate

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Okay, I admit…I’ve been groaning, sniveling and bitching along with many other mortgage originators about HUD’s 2010 Good Faith Estimate.   The document has it’s faults and was created pretty much because of the faults of loan originators who used the GFE as a tool for bait and switch.   We’ve had a month to mourn the loss of the old good faith estimate, which was an asset in how I explained scenarios to my clients…it’s gone.  Get over it.

I’m hearing from consumers that many mortgage originators are refusing to issue Good Faith Estimates — even if they have provided the “six points of information” which HUD uses to define a loan application.   A mortgage originator has three business days to provide you with a good faith estimate or deny your “application” if you have provided the following:

  • the borrower(s) name
  • monthly income
  • social security number to obtain a credit report
  • property address
  • estimated value of the property
  • loan amount

HUD has added an additional item (which can be vague):  any other information deemed necessary by the loan originator.

Per HUD’s most recent RESPA FAQs that were updated on January 28, 2010, a mortgage originator cannot refuse to issue a good faith estimate if they do not have supporting documentation (such as income or assets documentation) or verification disclosures signed by the borrower.   If after providing a GFE to a borrower, it is discovered that their income they provided is not how an underwriter would view it, this may constitute a “changed circumstance” allowing a revised good faith estimate to be issued.    If you read the FAQs, you can tell that HUD is well aware that consumers have been having a real challenging time getting their hands on the 2010 GFE.

Update from HUD’s RESPA FAQs (page 11, #33)

“In order to prevent over burdensome documentation demands on mortgage applicants, and to facilitate shopping by borrowers, the final rule specifically prohibits the loan originator from requiring an applicant, as a condition for providing a GFE, to submit supplemental documentation to verify information provided by the applicant on the application…

Similarly HUD has long supported a public policy goal of creating a circumstance where consumers can shop for a mortgage loan among loan originators without paying significant upfront fees that impede shopping”.  (Only a credit report can be charged to a borrower at this point).

So dry your eyes, my fellow mortgage professionals, the Good Faith Estimate IS a tool for consumers to use for shopping…whether we like it or not.  It’s time to open our arms wide and embrace it.valentinescandy 

PS LO’s:  This post (and any of my articles) are not a replacement to your employer’s compliance department or legal advice.

Happy Valentines Day

Major Bank No Longer Allowing Mortgages with Zero Points/Zero Costs

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Technically this is still a rumor in my book because I have not heard this directly from the bank in question…you can watch this video from Think Big Work Small where they state they have learned that Bank of America has all ready started doing this on the retail level and that Wells Fargo is rumored to follow.

The email that I saw today stated that BOA is only offering “par pricing”.   This means that there is no rebate pricing.   Many people have villainized rebate pricing (such as yield spread premium)…it’s become a real dirty word and that’s really too bad.   Rebate pricing is how a mortgage originator is able to price a mortgage rate with “zero points” or “zero costs”.  The mortgage originator is not paying for this stuff out of his or her pockets, they’re using the rebate pricing (ysp) paid by lender for offering a rate slightly above par.   Typically pricing a mortgage with zero points means your rate is higher by about 0.25.   It often  makes more sense for the consumer to have a mortgage priced with zero points depending on what their financial plans are.   Paying a point may take years to “break even” on that cost.

This appears to be a preemptive strike from the banks for what may be coming down the line with Congress proposing a bill which eliminates YSP… this is really ludicrious when the 2010 Good Faith Estimate gives the YSP as a credit to the borrower…so why take it away now? 

It’s not that the loan originator is not getting paid, it’s that the borrower’s cost just went up for that mortgage if they’re working for.   The borrower is losing more options for how their mortgage is structured, right down to the pricing.   The borrower should have the choice of having their mortgage priced with or without points…and they currently still do just perhaps not with every lender.

New Construction — does that property even legally EXIST?

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This post is not legal advice. For legal advice, consult an attorney in person and not via a blog.

I recently had the opportunity to submit an offer on behalf of a client for a new construction home. The price was right and the clients really liked the house. However, in preparing the offer it quickly became apparent that the developer had yet to record the short plat used to create each of the new parcels that contained the new construction (there were a total of three new parcels, each with a SFR).

Before I go further, and in case anyone is wondering “What’s a short plat?”: Generally speaking a short plat is the division of an existing legal parcel of land into smaller parcels. Depending on the jurisdiction (e.g., King County, City of Seattle, City of Bellevue, etc.) a short plat can consist of up to 9 new parcels. A short plat must be approved by the jurisdiction in which the property is located. Once approved and recorded, the short plat creates the new legal parcels of land.

So what’s the big deal in buying a property BEFORE the short plat is approved and recorded? Well, in that instance you’re buying property that is not yet a legal parcel. If for some reason the short plat is not approved or recorded, then you could be in for a real hassle in terms of paying taxes or dealing with the city or county in regards to your property. To be perfectly frank, I don’t know exactly howthat might play out, but I do know it would be a pain (and if you have to hire a lawyer, expensive). On the other hand (and perhaps a title insurer or escrow agent will weigh in here) its possible that the transaction would not close until the plat had been recorded.

But there is at least one other issue as well: A short plat can create additional legal interests (such as easements) in or restrcitions on the property. If you commit to buying the property before the short plat is recorded (by signing a purchase and sale agreement, which certainly can happen before the plat is recorded) you may be in for an unpleasant surprise. For example, what if you discover that you have a shared driveway?

The bottom line: Be careful in buying property that legally does not exist when you sign the purchase and sale agreement. At a minimum, any purchase and sale agreement for property that does not legally exist should include a contingency allowing the buyer to receive and approve the recorded short plat before closing.

Home Buyers: Please Be Aware of the Owners Policy on the GFE

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HUD had dramatically revised the Good Faith Estimate to a uniform document with summary of fees.  If you compare a GFE issued prior to 2010, one big difference is that buyers will not see a charge for the owners title policy–why? Because they generally do not pay for the owners title policy–the seller does!  Please don’t ask me why this is on the new GFE and why, if it’s not charged in our market LO’s must disclose it…I don’t have an answer…and don’t have the answer for why mortgage originators are held to the 10% tolerance when quoting this fee when it has nothing to do with mortgage origination.

The fee for an owners title insurance policy is much more than that of a buyer’s policy. Typically the Seller pays for the owners policy and the buyer pays for the lenders policy which has a reduced rate (simultaneous issue). There are also various coverages available with an owners policy and the coverage that is required should be specified in the purchase and sales agreement.

Here’s an example of title fees for the owners (seller) and lenders (buyer) policies based on a $500,000 sales price (FYI LO’s: the owners policy is based on the sales price not the loan amount) and a loan amount of $400,000. Examples below do not include sales tax.

FEES BELOW NOT SHOWN ON GFE PRE-2010

Homeowners Policy (1998 ALTA): $1,192
2006 Standard Owners Policy: $1,053
Extended Coverage Owners Policy: $1,937 (not commonly requested)

 ALWAYS SHOWN ON GFE (because the buyer pays for it)

Lenders Policy (simultaneous issue): $647

So with a purchase price of $500,000 and a loan amount of $400,000; I would disclose $647 plus tax for my estimated title insurance fee for the borrower on my GFE–both now and before 2010.  Now I need to add over $1000 to this scenario on my good faith estimate even though the buyer isn’t paying for it…my closing costs on a purchase appear $1000 higher!  

And to add insult to injury, the title owners policy is included in HUD’s 10% tolerance bucket of charges.

The Talon Group offers this tip to mortgage originators quoting an owners title insurance rate (when you don’t know what the specified coverage will be on the purchase and sales agreement):

Lenders should quote the 1998 ALTA Homeowner’s Policy rather than the less costly Standard Owner’s Policy in block 5 of the GFE. The local Purchase and Sale Agreement defaults to the Homeowner’s Policy because of it’s superior title coverage. There is as much as a 12.5% difference in price between the two policies.

The lender’s policy (and escrow/settlement charges) are included in Block 4 of the Good Faith Estimate and the owners policy is included on Block 5.

According to HUD’s RESPA FAQ’s last updated December 30, 2009:

Q&A #3 page 27:

If the borrower requests an enhanced owner’s title insurance policy or an endorsement to an owner’s title insurance policy after the loan originator issues the GFE, the loan originator may choose to treat such a request by the borrower as a changed circumstance.  The loan originator may then choose to provide a revised GFE to the borrower to disclose the increased charges.  If the increased charges do not exceed tolerances, the loan originator may opt not to issue a revised GFE.

I take this as saying that if the borrower decides they want more expensive coverage after I have issued a GFE and I do not re-disclose the cost difference and it exceeds the 10% tolerance, I just paid for the difference…even though it’s a seller cost!

With a purchase transaction, if the borrower accepts the title insurance company as selected by the real estate agent or seller (assuming the company is not on my “list of providers”), then there is no tolerance as HUD views this as the borrower selecting the service provider (same is true with escrow companies).    Regardless, even quoting from my preferred provider, the fees on my good faith estimate look $1000 higher based on this scenario. 

At least until consumers and mortgage originators are accustomed to using the new GFE (and unless HUD makes additional changes) this is going to take some getting used to!

For the record, this post all of my posts are my interpretation and my opinions–this is not a substitute for your legal staff or your compliance department!