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.

Photo: Weekend Funnies

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Weekend funnies:   I picked up my kids from school and they spotted this hilarious scene.   They took the photo from inside the car, so it’s grainy.   “Dad, loooook !…..it’s just like the Ikea TV commercial!”  The occupants of the car were actually smiling and waving at each car passing by.  A complete hoot.   Maybe they just purchased a home and are furnishing the bedroom.

Car mattresses

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.

Seattle Condo Market – Lender says “more insurance mandatory”

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Lenders and the condo market are still in a world of gray. No market can stabilize if the rules keep shifting faster than we can keep up with them. This frustrates both buyers and sellers, as some of these changes come into play while someone is in escrow, and the lender did not foresee the “complication”.

We are seeing this more with condo purchases than with single family homes. One of the reasons I have not done stats on the condo market for many, many months, is that all of the cards are NOT on the table with which to draw conclusions. Lenders are very, very tough on the condo market, and increasingly so.

Before I get into the “more insurance mandatory” piece of this post, I am seeing other complications with condo financing.

1) Conventional sellers wanting higher than usual downpayments and/or PMI companies refusing insurance on the difference between the down payment the lender will allow and 20% down. In the high end condos, some lenders are requiring 30% down payment if it is a condo and the resultant mortgage is a jumbo loan after the 30% down. In the lower priced condos, the lender may allow a 5% or 10% down, but the PMI won’t insure the remaining 10% or 15% to get to an 80% LTV in some cases.

2) SIGNIFICANT changes in HOA dues or special assessments caused by the “NEW RULE” that makes it mandatory for a condo association to have a Reserve Study. The net result of the reserve studies done by condos that had never before done one (some did even when it was not mandatory) is that they are finding they are grossly underfunded as to reserves. This is creating an increase in dues (in some cases double) to catch up on insufficient reserve requirements, or outright special assessments when the study points out deferred maintenance items.

BE VERY CAREFUL when valuing a condo based on “The Comps”!!! If the comps sold when the monthly dues were $185, but the dues are now $365 because a Reserve Study was done that indicated insufficient reserves, the PRICES of “the comps” need to be adjusted to compensate for the increase in dues since those condos sold.

Now to the topic of this post “Lender says: More Insurance Mandatory”. A recent comment on one of the lender posts (Rhonda’s) asked about the ability of lenders to require the buyer of a condo to have a separate policy. This additional requirement, if noted while in escrow, can cause a sale to fail if the additional unanticipated monthly amount increases the buyer’s ratios as to monthly payment outside of the pre-approved status. So VERY important.

A short history on this issue. Traditionally lenders ONLY required a copy of the Association’s Master Insurance Policy in order to close escrow on a condo purchase. The buyer of the condo was not required by the lender to have additional insurance over and above the HOA Master Policy.

Over the years I have seen the Deductible Amounts of the Association Master Policies increase from $1,000, to $5,000 to $10,000 and in some cases as high as $20,000. The Master Policy no longer covers the condo buyer and buyer’s lender as it once did due to these increases in deductible amounts. After 911 and Katrina a lot of insurance companies (due to weakened financial position generally) decided not to insure Condos at all. The number of Companies willing to provide a Master Policy to Condo developments (especially old ones built in the 70s) dwindled in some cases from 100 or more to a small handful.

Insurance premiums for same coverage and deductible skyrocketed, BUT the condo associations did not want to increase the dues that drastically. Consequently in order to reduce the insurance cost and keep dues from increasing drastically, the Boards of the Condo Associations increased the deductible in order to keep the insurance cost in line with prior year premiums.

OK…that’s the history. It has always been advisable for a condo unit buyer to get a separate personal insurance policy to supplement the Master Policy. Each Association’s Master Policy has different coverage and so I have often suggested that the condo buyer use the same insurance provider, if and when possible, and always give the Master Policy of the complex to the insurance agent to determine what supplemental insurance is needed. Covering the difference between the huge deductible on the Master Policy is a need for everyone buying a condo, in addition to covering their interior responsibility and belongings.

Apparently some lenders are now requiring this separate policy in order to fund a condo mortgage. This is hitting some lenders by surprise. Surprise is not good, ever. BUT requiring the condo buyer to have a supplemental policy IS good and this change is not only for the better…but a long, long time overdue.

To answer the question “CAN a lender require this?” Of course the answer is yes the same as they can and do require “adequate” insurance when buying a house. The only change is that “adequate” insurance with regard to condos “used to be” the Master Policy only. Now in some cases it is Master Policy PLUS unit owner Supplemental Policy, and that is as it should be IMO.

It’s Official: FHA Upfront Mortgage Insurance to Increase in April

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Yesterday at The Mortgage Porter, I wrote about changes that HUD had confirmed via a press release for FHA insured loans.   Seasoned mortgage professionals know that the HUD lady hasn’t sang until a Mortgagee Letter is issued and this morning, HUD did just that with ML 2010-02.

Effective on FHA insured loans with case numbers assigned April 5, 2010 or later, the upfront mortgage insurance premium will increase.  Typically the FHA upfront mortgage insurance premium is financed, however it can be paid as a closing cost  (which is how the 2010 GFE discloses the premium). 

FHA insured mortgages for purchases and non-streamline refinances will increase from 1.75% of the base loan amount to 2.25% and streamlined FHA refinances (refinancing an FHA underlying mortgage) will increase from 1.5% to 2.25%.

According this Mortgagee Letter, HUD states that the “annual premiums will not change at this time“.   The annual premiums are what consumers pay in the monthly mortgage payment…and I do believe we will see risk based pricing utilizing credit scores impact FHA’s monthly (annual) mortgage insurance premiums in just a matter of time.

According to HUD’s Press Release yesterday, the following changes should take place with FHA insured loans in early summer:

  • Seller contributions towards allowable closing costs reduced from 6% to 3%.
  • Increasing the down payment requirements for lower credit scores (risk based underwriting).   The Press Release states that those with a 580 score would need a minimum of 10% down payment.   Lenders all ready have underwriting “overlays” which will not permit this scenario so this “toughening” of the guidelines is a bit lost…unless things are loosey goosey again this summer (I’ll eat two shoes).  

HUD’s press release also stated they will “implement a series of significant measures aimed at increasing lender enforcement”.

The upfront mortgage insurance premium increase will go into effect just 25 days before a home buyer needs to be “in contract” to qualify for the home buyer tax credit.

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.