Bye Bye Countrywide
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Category Archives: Investing
New Form to Prevent Mortgage Fraud
This morning I received an email from one of the major banks we work with recommending the use of a “FBI 
Occupancy Cert”. They are recommending the use of this form on any loans we sell to their bank, including owner occupied, investment or second homes. The form, which must be acknowledged by the borrower, states:
“Mortgage Fraud is investigated by the Federal Bureau of Investigation and is punishable by up to 30 years in federal prison or $1,000,000 fine, or both. It is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.”
The borrower must then select the occupancy for the specific property that is being financed:
- Primary Residence – Occupied by Borrower(s) within sixty (60) days of closing as stated in the Security Instrument I/we excuted.
- Second Home – To be occupied by the Borrower(s) as a second home (vacation, etc) while maintaining principal residence elsewhere.
- Investment Property – Not occupied by Borrower. Purchased as an investment to be held or rented.
Directly above the signature line, the form states:
“I/we acknowledge it is illegal for a person(s) to make a false statement regarding occupancy of property being financed in a loan and credit application and that we are subject to prosecution under Section 1001, 1010 and 1014 under Title 18 of the United States Code”
This document seems to make it crystal clear what occupancy is and the potential risk of trying to finance an investment property as owner occupied or as a second home. Can something so direct make a difference and curb mortgage fraud?
I’ll Be at the Factoria Courthouse Friday Morning at 10AM for the Foreclosure Auctions
Every Friday morning at 10:00 AM, Trustee Sales are held in various locations throughout the county. Phil Leng, one of my students, invited me to attend the foreclosure auction with him this Friday at 3535 Factoria Blvd SE, Bellevue outside of the south entrance to the Northwest Trustee Services building. I’ve been hearing rumors that banks are discounting their own opening bids right at auction and I want to check this out.
If you’ve been following along with Craig Blackmon’s foreclosure series, this means the amount of money owed to the bank, plus expenses, is the opening bid. Bidders show up with cashier checks, receive a bid number, and typically bid UP from the bank’s opening bid. During the height of the bubble run up, there were multiple bidders bidding the final price way up. The rumor is that some banks or lenders may now be opening the auction at a bid price lower than their cost. I have heard of this happening in other states such as California, but not in Washington state.
I’ll be there tomorrow. If you want to come and join me, I’ll be the one with a video camera recording as much as I can for a new class I’m writing.
When is a Second Appraisal required on FHA Jumbos?
The last few FHA High Balance (aka FHA Jumbo) purchases that I’ve closed, the buyers and agents thought a second appraisal was automatically required. FHA did adopt conforming appraisal guidelines for declining markets at the beginning of this month, but that does not guarantee a second appraisal.
What triggers a second appraisal for FHA?
- base loan amount over $417,000; and
- loan to value equals or exceeds 95%; and
- the appraisal indicates it’s a declining market; and/or
- if the wholesale lender/bank decides the area is in a declining market.
Per Mortgagee Letter 2009-09, FHA defines a declining market as:
“…any neighborhood, market area or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times.”
Appraisers are having to determine overall trends for market areas including analyzing the current supply and demand, days on market, absorption rate and the prevalence seller concessions. For FHA and conventional loans, this is documented on Fannie Mae Form 1004MC which FHA adopted effective April 1, 2009.
Please note that conventional, FHA and VA appraisals require this new form. FHA does have additional requirements:
- At least two of the three recent sales (comparables aka comps) must be within the last 90 days of the effective date of the appraisal. Plus,
- A minimum of two active listings or pending sales. The appraiser must insure the active listings and pending sales have “reasonable market exposure to avoid use of overpriced properties as comparables”.
If a home buyer is using a FHA mortgage with a base loan amount over $417,000, they may want to consider saving up for that extra 1.51% down so that they are at a 94.99% loan to value and therefore (currently) avoid the potential second appraisal issue and make sure that the lender you’re working with does not have underwriting “overlays” that will impact you. FHA’s second mortgage requirements can be found on Mortgagee Letter 2009-09.
Regardless of what type of financing you’re doing, know that the underwriter is going over the appraisal with a fine tooth comb. It’s quite possible that if they don’t require a second appraisal, they may request additional information or comps from the appraiser which could take more time for your transaction to close. Since this post is based on FHA transactions–we won’t even venture into HVCC here…that’s a whole other can of worms.
When is Foreclosure Right for You? Part 2 of 2
This post is not legal advice. It is a general discussion of SOME of the relevant legal issues surrounding foreclosure. If you are considering or facing foreclosure, you need specific legal advice for your particular situation. Consult an attorney in your area.
In my last post, I discussed the difference between a judicial and a nonjudicial foreclosure, which is one of the two essential issues to understand when considering whether to allow your property to go into foreclosure. The other essential issue concerns the number of mortgages you have on the property.
For many reasons, people often took out a first and a second mortgage when they bought property. Others opened up a home equity line of credit which they then used to pay other bills. In either case, the owner has a first and a second mortgage on the property. Where there are two mortgages, foreclosure creates much greater risk.
First, some background: mortgages, like all other liens, are arranged by seniority. (A “lien” is a legal right to force the sale of particular property to repay a debt, whether on a mortgage, unpaid property taxes, an unpaid contractor’s bill, etc.) As a very general rule, seniority is determined by time; the older the lien (i.e. the longer ago it was created or placed on the property), the greater the seniority. The “first” mortgage (or any other lien) — known as “first position” — will be paid in full by the sale of the property before the second and all subsequent liens are paid. The second will be paid in full before the third and all subsequent liens are paid. The third will be paid in full before the fourth, and so on. So, in a market like this one, the only debtor who has any real chance of being repaid in full is the mortgage or other lien in first position.
Where an owner has two mortgages, one is senior to the other (usually in first and second position on the property). Typically, when an owner stops making payments on these mortgages, the first position mortgage will foreclose. By foreclosing, the first position mortgage (under authority created by the deed of trust) forces the sale of the property and the proceeds (after payment of costs) are used to satisfy the debt. If there are any remaining funds (very unlikely in today’s market), they are applied to the second position mortgage and then to the remaining liens in order of priority.
Now, here is the important part: foreclosure extinguishes the debt that is being foreclosed, but it does not extinguish the junior debts (such as a second mortgage). So, if the lender forecloses the first mortgage and the proceeds are insufficient to pay the total amount due, the balance is extinguished as a matter of law (with certain tax implications — perhaps the topic of a future post). In other words, even though the debt was not repaid in full, the debtor is off the hook and does not need to pay the difference on the first mortgage.
However, the debt of the second mortgage survives. Admittedly, the second lender can no longer foreclose on the property because the legal right to do is extinguished by the foreclosure of a senior debt. The problem for the owner, though, is that he still owes the money borrowed under the second mortgage. In WA, you have six years in which to sue for breach of contract. The owner/debtor’s failure to make payments on the second mortgage (per the terms of the promissory note) constitutes a breach of contract. So, after foreclosure of the first, the second lender will have six years in which to sue the debtor for the full amount of the debt. The debtor will probably lose that suit. At the end of that process, the lender will have a judgment against the debtor for the full amount of the balance due, plus interest and late fees, plus attorney’s fees and costs incurred by the suit. Judgments are bad (see Part 1).
So, if you’re thinking about foreclosure, you’re taking a very big risk if you have multiple mortgages. You could get a very, very unpleasant surprise five years later. At that point, bankruptcy may be the only viable option.
When is Foreclosure Right for You? Part 1 of 2
This post is not legal advice. It is a general discussion of SOME of the relevant legal issues surrounding foreclosure. If you are considering or facing foreclosure, you need specific legal advice for your particular situation. Consult an attorney in your area.
Practically every day, I get a call from a potential client wondering what to do with a property that is seriously “under water.” A property is under water where the owner owes more on the mortgage(s) than what the property is worth in today’s market. The problem can be compounded by high mortgage payments (in the go-go market of yesteryear, it was not uncommon for someone to buy “more house” than they needed in the hopes of continued double-digit appreciation — the more expensive the asset, the greater the total appreciation). At least once a week, I speak with someone who has mortgage payments of $3000+ per month, where they could rent a suitable place for half that and they owe $50,000+ on the property beyond what it is worth.
So what to do? It’s been the topic of some discussion. One option is to hunker down, bite the bullet, and wait for the market to bounce back. After all, you’ve got to live somewhere. Eventually, the market will start going up and some day you’ll regain equity in the property (equity = value in the property greater than what is owed on it). However, depending on when you bought and what you paid, it may be a loooooooooonnnnng wait…. In the meantime, you’ll keep making those big mortgage payments.
Some people wonder whether they can just walk away from the property and be done with it. The usual plan: Let it go to foreclosure, temporarily ruin your credit, and start saving the difference between rent and the mortgage. To determine whether this is a good idea — or, more accurately, to get an idea as to the risks and benefits of doing so — you must first understand the difference between a judicial foreclosure and a nonjudicial foreclosure. [Author’s Note: This post is written for residents of Washington State. If you live somewhere else, your laws may differ. Yet another reason to consult an attorney.]
First, some background: When you bought the property, you borrowed money from a lender. In doing so, you signed two key documents: a promissory note, and a deed of trust. The promissory note is the legal document that sets forth the debt and the terms of repayment. The deed of trust is a type of deed (a document that transfers title to real property). Under a deed of trust, you transferred title to the property to a trustee, who “owns” the property for the sole purpose of guaranteeing that you repay the debt as set forth by the promissory note. If you fail to pay the debt, the trustee has the power to sell the property without your permission so that the proceeds of the sale can be used to repay the debt.
Now, the two types of foreclosure: A judicial foreclosure is a civil action filed in court by the lender. The lender sues for payment of the debt reflected by the promissory note. The process takes 12+ months and is expensive. At the end of the process, the court will order the sale of the property, the property will be sold at public auction, and the proceeds from that sale (after costs incurred) are applied to the amount owed. If there is a balance remaining on the debt, that difference becomes a judgment against you. This is a “deficiency judgment” because it is a judgment for the deficiency between the amount paid (via the sale) and the amount owed. A “judgment” is a court order requiring a person to pay a specific sum, and if not paid immediately it accrues simple interest at 12% until paid. A judgment expires 10 years after it is entered by the court, but it can easily be renewed for another 10 years. Once a creditor has a judgment, the creditor can use various legal tools to extract payment from the debtor without the debtor’s consent. For example, the creditor can garnish the debtor’s wages (the employer pays a portion of the wages directly to the creditor) or garnish the debtor’s bank account (the bank disburses the funds in the account directly to the creditor). It is safe to say that judgments are bad. So, one should avoid a judicial foreclosure.
The other type of foreclosure is a nonjudicial foreclosure. With this type of foreclosure, the trustee orders the sale of the property under the authority conferred on him or her by the deed of trust. Once again, the proceeds (less costs of sale) are applied to the debt owed under the promissory note. This process is quicker and cheaper than a judicial foreclosure. However, a nonjudicial foreclosure extinguishes the debt set forth in the promissory note, even if the sale does not net enough to repay the debt in full. There is no possible deficiency judgment. Thus, with a nonjudicial foreclosure, the debtor knows that he or she will not owe anything following the foreclosure, regardless of whether or not the lender is repaid in full following the sale.
Obviously, then, foreclosure may make sense if the lender foreclosures nonjudicially, but probably does not make sense if the lender forecloses judicially. Which will happen to you? Unfortunately for debtors, lenders do not advertise in advance which method of foreclosure they intend to use. That said, the vast majority of foreclosures are nonjudicial. A judicial foreclosure would make sense for a lender if the debtor has other assets that can be used to satisfy the deficiency judgment. If the debtor has no other assets, then they are “judgment proof” (a term used to describe someone who simply has no money to satisfy a judgment, thereby discouraging anyone (including a lender) from incurring the costs of a lawsuit). Where the debtor is judgment proof, it makes no sense at all for the lender to incur the costs of obtaining a judgment.
So, if you’re willing to assume the risk of a judicial foreclosure, and/or you have no assets whatsoever such that you are comfortable being judgment proof, then it may make sense to just walk away. [Note: you’ll have a hard time getting credit, finding a landlord, or otherwise living in the modern world if there is an unpaid judgment against you.] However, this is only ONE of the TWO key factors you need to consider. Stay tuned for Part 2.
When showing houses, watch where you’re stepping
Real Estate photographers come across some interesting subjects and situations in the course of their work but this one is at the top of my list. An inter – species friendship that’s truly unique…
And when you’re showing houses, please watch where you’re stepping. The gal on the right would really appreciate that.
Understanding the terminology of “loan docs”
Back in February of 2006 I took the time to type out an outline of everything that happens with a real estate transaction, and color coded it to reflect who does what. I called it Anatomy of a Real Estate Transaction, and I did it backwards from the end to the beginning. Many have found it helpful, but it may be time to re-write it, though I don’t think much has changed since then as to how an escrow starts and ends.
Recently with loan processing becoming a bit more difficult than it was back in 2006, I have noticed a lot of confusion regarding the terminology used by lenders and agents and escrow at the end of the transaction. In the 2006 post I said:
***This one little line is THE MOST IMPORTANT PART OF ANY REAL ESTATE TRANSACTION INVOLVING FINANCING! And yet, I purposely put it there as quietly as it happens, no fanfare, no bold lettering, no all caps, to notice to all parties. “Docs are in” – A quiet little event between the lender and escrow that is clearly THE BE-ALL-END-ALL OF EVERYTHING!***
There are actually three things that happen at the end of a real estate transaction where the buyer is using a mortgage to purchase.
1) Docs are ORDERED
2) Docs are SENT
3) Docs are IN
This is the nail biting stage of every real estate transacton.
Often the confusion regarding the last word in those three stages creates many phone calls back and forth due to a misunderstanding of the terminology. This happens often enough that I thought it would be helpful to those buying and selling homes to highlight the distinction in a separate blog post.
Often the buyer will say “lender said the loan documents are at escrow” when what the lender really said was the loan documents have been ordered. Sometimes the lender says the loan documents have been sent, which is not quite the same as their being in escrow.
If you are buying a home you want to make sure your lender is instructed to notify you TWICE.
You want to be notified when the docs have been ORDERED, as that pretty much means your loan is really fully approved and out of underwriting. It also tells you that you likely are pretty much “done” and on your way to closing. It also tells you to start preparing to go and sign your closing documents, as most escrow companies will not sechedule a signing appointment until they receive the loan documents.
You also want to be notified by the lender when the loan documents are SENT, especially if you need a little advance time to clean up your desk, or give your boss a little notice that you will likely be leaving work to go sign your closing papers. The closer the loan documents are ordered to the actual closing date, the less time you will have to give your boss notice that you need a little time off or a longer lunch to sign your closing papers. These two cues: Docs have been ordered and Docs have been sent, can be pretty important if you can’t just jump up and leave work without notice.
Unlike states that don’t have escrow, where people have 30 days or more notice as to what day they need to take off from work to go and sign their papers, escrow states require that the buyer sign at least a day before closing. In WA and CA, closing is a phone call, often between 4 and 5 p.m., so taking off from work “on closing day” is not usually needed. In fact, if you do take off on closing day, be prepared to be sitting around staring at the wall waiting for a phone call before you can get the keys and start moving into the house.
I am currently waiting for “docs” on two closings. In one “docs have been ordered”, on the other “docs have been sent” on neither have docs made it to escrow. As the agent, I wait impatiently for docs to be IN so I can review the closing numbers for my clients. One is a seller, so those numbers are not loan document sensitive and final numbers have already been reviewed and corrected at my end, and the seller has already signed their closing papers.
On the other, I can’t review the final numbers for my buyer client until the loan docs are IN, as escrow prepares the Buyer Closing Statement after receiving those loan documents. We are pretty sure what the numbers should be…but given the documents are “late”, I vigilantly watch my email and phone so I can review the numbers immediately. I don’t want to be part of the delay on a closing, by not being available to review the final numbers within 15 minutes of receiving them.
“docs have been ordered” is the breathe a little easier cue. That usually converts IF it will close to WHEN it will close. So asking your lender to notify you when docs have been ordered, is a very good idea.
Top 3 Mistakes Home Buyers Make
If every agent would post the Top 3 Mistakes they actually see home buyers make in the real world, we would have an excellent list for people to use.
Yesterday I gave my $.02 on the Top Ten List of mistakes “first time buyers” make that’s been floating around the internet. But I can’t honestly say I saw the real mistakes people make in that list. I also don’t like the idea that “first time buyers” make more mistakes than 2nd time buyers. Not necessarily so. In fact 1st time buyers are more likely to spend lots of time making sure they aren’t making mistakes. 4th time buyers may not be paying enough attention to changes that took place since they bought their last home. So being careful not to make “mistakes” is not only for “first time” buyers.
Here’s my view of The Top 3 mistakes I see buyers (almost) make:
1) Starting out with the wrong attitude.
It’s a big decision. Starting out with the right attitude for “home shopping” is very important. Knowing your own strengths and weaknesses will help you select an agent who complements you best. Sometimes finding an agent you disagree with more often than not, will give you the right balance.
Ms. Happy Face often likes everything and never likes to say anything bad about anyone or anything. If you can’t change to Ms. Objective and Discerning, find an agent who looks for all the bad stuff for you. Biggest mistake Ms. Happy Face can make is having an agent who is always happy, happy with her. We all like our “YAY-Days”, but best to save YAY Day for “loan docs are at escrow” day, and not every house you go to see.
Mr. Sad Face is often too sure that the house he buys isn’t going to make him happy. The fact that nothing is perfect is too embedded in his psyche. Biggest mistake Mr. Sad Face makes is he often ends up sucking up defects as “oh well, they all have defects” and doesn’t make the right list of priorities as to acceptable vs. unacceptable defects. Mr. Sad Face is best served by an agent who will list all the pros and cons of the home he selects, both before and after home inspection, and separates “normal” defects from “abnormal” defects. Otherwise they tend to get all lumped together and overlooked in their entirety.
Mr. Angry hates the process. He hates that he has to use an agent. He hates agents. He hates that the process isn’t more simple so that he can proceed without an agent. He hates it if the agent is stupid. He hates it if the agent doesn’t know more than he does. He hates it if the agent thinks they do know more than he does. He hates having to talk to so many different people during escrow. Mr. Angry isn’t happy until it’s all over and behind him and he can sit down and watch his TIVO in his new home. Mr. Angry would be best served by delegating everything except choosing the house to someone he trusts. Finding someone he trusts is the hard part 🙂
Mr. and Ms. Objective and Discerning are of course the model for Right Attitude. Their glass is not half full or half empty. They empty their glass before each home, and look at each home’s particular strengths and weaknesses each time anew. They narrow their choices down to the top two or three, and then they compare those one to another. In the hot market, these nice people were pressured by the “quick sales” and not having enough time to apply their best judgment. But in this market, Mr. and Ms. Objective and Discerning will thrive and be successful and happy with their choices.
The alternative to BEING Mr. and/or Ms. Objective and Discerning, is to hire Mr. or Ms. Agent who is Objective and Discerning.
2) Spending too much time on WHAT and not enough time on WHERE.
Everyone knows someone who moved fairly quickly after they bought their home. Now go ask them why they were unhappy. Chances are they were unhappy with WHERE vs. WHAT. Before going to Open Houses or talking with a lender or an agent, spend lots and lots of time finding the “Where of Happiness” for you. Buying where you are currently renting and happy, is good. Renting at another where before you buy there, is good. Renting in your percieved best where before you buy there, is the best advice I can give on this one.
3) Not being selfish enough.
This problem is more about couples that are buying than single people. The Red Flag that you may be in this category is if you say to the agent “We always agree on everything”. No one always agrees on everything. BE SELFISH! Don’t factor in what you think your spouse may or may not like, when you are evaluating homes. Make your own separate list of pros and cons, and make sure they are All About YOU.
If you aren’t selfish enough, one day you may wake up to find that neither one of you really liked the house in the first place 🙂
JBA Financial Group: Get Licensed or Get Out of Washington State
I heard a radio ad on KIRO 973.FM on Monday, April 13, 2009 at 11:45 AM during the Dave Ross show and again on Tuesday, April 14, 2009 at 6:02PM on the Ron and Don show. The company was JBA Financial Group and they are advertising their loan modification services. JBA Financial Group is not licensed to do business in Washington State, and they are not licensed as either a mortgage broker or consumer loan company according to the DFI database which is updated as of today. I called JBA Financial. Here is how the conversation went:
Jillayne: “Hi, I’m a Washington State homeowner and I just heard your ad on KIRO 97.3FM here in Seattle. I was wondering if you are licensed to do business in Washington State.”
JBA: “Well you sure sound happy. My name is X, what’s your name?”
Jillayne: “Jill.”
JBA: “Hi Jill, yes, we are licensed by the department of real estate and licensed by the department of corporations to do business in all 50 states.”
Jillayne: “Well on your website, it just says DRE-California. With all the news reports about predatory loan modifications, I want to be sure I’m dealing with a legitimate company.”
JBA: “That’s very smart of you. As you can see on our website, we’re licensed to do business through the Department of Real Estate and that’s good for all 50 states.”
Jillayne: “No, I don’t think so. It just says “California” on your website, not “all 50 states.”
JBA: “Well you can call the department of real estate yourself and check us out.”
Jillayne: “No thank you, good bye.”
Newsflash for JBA: The California Department of Real Estate does not give you approval to do loan modifications in all 50 states.
Isn’t there something in the contract KIRO radio signs with advertisers that they have to be sure the company is following state law? I asked KIRO this question and here is what a KIRO representative, who refused to be identified, said on Monday: Listener concerns should be directed to the attorney general’s office. KIRO has left a message for JB Financial to inquire about the status of their ability to do business in Washington State. On Tuesday, the same KIRO representative emailed me confirmation that JBA has the authority to do loan modifications in all 50 states, which they received from the owner of JBA. Here is the document. There is nothing in this document that allows JBA to claim that it can do loan modifications in all 50 states. If I can easily figure this out, why can’t KIRO or it’s parent company, Bonneville?
I also put in a call to JB Financial Group’s owner, letting him know that I was preparing this blog post. I received a phone call from their vice president, who informed me that JBA’s primary business is real estate investments and they only recently began doing loan modifications. He did not know if JBA is licensed to do loan mods in Washington State. He referred me to the company’s CFO, “the strictest compliance person you will ever meet.” The CFO was not able to talk long because he was, no kidding, in the middle of recording another radio commercial, so the president called me back. He said that he believes the California Department of Real Estate gives them approval to perform loan modifications in all 50 states unless a state contacted them and told them otherwise. Wow, so much for strict compliance. He believed that because his company is “attorney assisted” they didn’t need to be licensed. I informed him that WA State gives his company no such exemption.
I’ll be happy to update this post once I find out that JBA Financial Group is actually licensed in Washington State to perform the services that they are advertising on the radio.
During the last decade we had hundreds and maybe thousands of predatory lenders roaming around Washington State. In some of our state’s investigations, there were NO consumer complaints filed against lawbreakers such as the case of Liza Bautista. It will take a village to shut down the predatory loan mod companies. I’m hoping that the legitimate loan mod companies as well as radio advertising decision-makers will help. The closest we can come to “legit” is to make sure they are, at minimum, licensed with the Department of Financial Institutions working under either a mortgage broker OR licensed as a consumer loan company, or otherwise exempt from the act such as attorneys and free HUD-approved housing counseling agencies.