1 Best Practices Checklist For Reverse Mortgages And New Construction (Black: All transactions, Red: Reverse Mortgage, Blue: New Construction) Title Application Obtain all contact information for all parties Acknowledge the order with an explanation of coverage and the available endorsements New Construction title insurance premium discounts Send introductory to purchaser, seller, attorneys, etc., as applicable Delivering Commitment If an exception can be omitted via affidavit, provide a copy. New Construction Concerns/Tips: New filed and tax maps (have they been approved?) Ensure ingress / egress (order street report) Verify that grantor business entity can validly make conveyance Search developer mechanic s/materialmen s liens and UCCs Name acceptable forms of ID for borrowers. Reverse Mortgagors might not have current standard IDs like drivers licenses. Closing Title closing affidavits must contain the necessary representations and/or agent must perform due diligence for the affirmative insurance provided in the applicable endorsements: Future Advance Reverse Mortgage 3-06 Zoning Unimproved Land Zoning-Completed Structure Closing Protection Letters: In New York State transactions, consider substituting proof of Fidelity & Surety Coverage in lieu of CPLs used in other states. Sometimes a lender will accept an underwriter s Agency Authorization Letter. Reverse Mortgage Concerns/Tips: Make sure that the closer has had experience with Reverse Mortgages and is sensitive to the needs of elderly borrowers Make an introductory phone call / reminder phone calls to the borrower(s) Get a copy of the borrower s statement confirming that they have received the required counseling (informed consent) Require that closer bring some extra tools: felt-tip pens magnifying glass video-enabled phone Verify the current status of any Certificates of Occupancy that were provided by the sponsor (developer) Post Closing Make sure that there is an appropriate tickler in place for closing out escrows.
2 Reverse Mortgages Outline Introduction These days, when we talk of, Reverse Mortgages, we are usually talking about Reverse Mortgages that are insured by the Department of Housing and Urban Development. A Reverse Mortgage is a type of negative amortization mortgage, i.e. the indebtedness secured thereunder increases after the policy date. From the loan originator s perspective, there are many distinguishing characteristics of a Reverse Mortgage, but as title insurance and settlement services professionals, we should be particularly mindful of the following Reverse Mortgage traits: As a class, borrowers on reverse mortgages are different and, in some cases, more susceptible to predation; There are specials rules/discounts for recording taxes and charges; Two security instruments are being recorded for the same indebtedness. When a Reverse Mortgage is insured by HUD, it means that the mortgage has the traits of a qualified mortgage under part of the National Housing Act codified at 12 USCS 1715z-20, which sets out HUD s requirements for insuring Home Equity Conversion Mortgages. The term home equity conversion mortgage means a first mortgage which provides for future payments to the homeowner based on accumulated equity 1 Reverse Mortgage Quick Reference 1) Parties a) Borrower: i) Must be at least 62 years of age [12 USCS 1715z-20(b)(1)]. Note that if you are issuing a Reverse Mortgage Endorsement, you are giving affirmative insurance to the lender of this fact at Section 2(d) of the endorsement. ii) Capacity and undue influence of these borrowers is more likely to be at issue. iii) Borrowers must use subject premises as primary residence. b) Lender: must be approved by HUD [12 USCS 1715z-20(d)(1)]. c) HUD (in addition to its role as regulator): i) HUD is selling mortgage insurance to the lender which guarantees that the lender will not suffer in the event that the value of the home subsequently becomes inadequate to satisfy the indebtedness. ii) HUD is agreeing to step into the shoes of the lender in making payments to the borrower if the lender defaults. Therefore HUD requires its own security instrument to be executed in its favor. 2) Transaction Documentation a) Two Security Instruments are recorded: 1 12 USCS 1715z-20(b)(3)
3 i) The first mortgage is to the lender; ii) The second mortgage is to the Secretary of HUD. b) The two mortgages secure the same portion of home equity. (See figure 1) c) Regarding mortgage recording and other conveyance taxes: the appropriate exemptions must be applied for and/or taxes need to be collected with the understanding that the indebtedness attached by the security instrument will grow after the policy date. 3) Funding Proceeds, available scenarios: a) Lump sum payment b) Payments over X number of years c) Credit Line (line is not revolving: i.e. you don t repay then re-borrow, but the line of credit grows per the actuarial tables) d) Or a combination of the above e) Can also be used to purchase a new residence (i.e. Downsizing). (This borrowing mechanism has also been targeted by scammers, unfortunately.) 4) Title Insurance a) Title Policy: i) Amount: The following New York rule is generally applicable but statespecific rate manuals should be consulted: A title insurance policy issued to a mortgagee of a Reverse Mortgage may not be written for an amount less that the greater of (1) the fair market value of the insured premises at the time the mortgage is made, or (2) the maximum amount of principal as stated in the mortgage. 2 Your applicable state rate manual will specify how much. ii) Form: ALTA (or state analog) Short Form title policy is usually requested. Short form policies incorporate the terms of the long form policy, and several endorsements, by reference rather than by individual policy jackets. As its predecessors did, the 2006 loan policy (whether short form or long form), contains exclusions from coverage for defects attaching or created subsequent to the title policy date 3. Therefore Lenders will usually want a Reverse Mortgage Endorsement. 2 New York Department of Insurance, Office of General Counsel Opinion December 18, The current TIRSA manual for New York gives more detail at Section 36: (A) A loan policy insuring a Reverse Mortgage (as identified in Section 280 and 280-a of the Real Property Law) may not be issued in an amount less than the Loan Amount as shown on the HUD/VA Addendum to Uniform Residential Loan Application or the Direct Endorsement Approval for a HUD/VA- Insured Mortgage. In the event that neither the HUD/VA Addendum to Uniform Residential Loan Application or the Direct Endorsement Approval for a HUD/VA-Insured Mortgage are available, an amount equal to the Loan Amount as shown on the final loan application shall be used. (B) Upon the request of the insured, the policy may be issued in an amount greater than the minimum amount of insurance set forth in (A) above, but: (i) no greater than the Maximum Claim Amount on Home Equity Conversion Mortgages (HECM) insured by HUD, or (ii) in all other types on Reverse Mortgages loans, no greater than the property s appraised value as used by the lender in connection with the making of the loan. 3 See ALTA Loan Policy Exclusions from Coverage Section 3(d).
4 b) Title Endorsements i) Form 14.3 Future Advance-Reverse Mortgage. The Reverse Mortgage Endorsement provides several forms of affirmative insurance, but chiefly resolves the loan policy exclusion 3(d) referred to above. 4 Requires specific affirmations by borrower(s). 5) Closing Considerations: a) Capacity b) Physical limitations (eyesight, hearing, handstrength, etc.) c) Undue Influence 4 See ALTA Endorsement (Future Advance Reverse Mortgage) Section 1.
5 New Construction Introduction Insuring New Construction transactions involves many more moving parts than does insuring the, normal, real property purchase. In particular, when insuring new construction it is important to note the following: The real property that is the subject of the transaction has undergone at least some degree of augmentation or modification since the last time title insurance was obtained. The purchaser may be entitled to reduced title insurance premiums on their owner s policy, the lender s policy, or even both. Attorney representation of the parties, where required, is an even more sensitive and important an issue than it is in other types of transactions. New Construction Quick Reference 1) Parties a) Seller: Usually, but not always, will be the developer. Sometimes the seller will be paying for, or part of, the closing costs. b) Lender: Usually this is a conventional, federally-related, mortgage lender so RESPA will therefore apply. c) HUD: The regulator at the federal level which dictates the format and procedure for various things; of particular significance is: i) Good Faith Estimate: The lender has to disclose, among other things, title-related settlement costs, very soon (three business days) after loan application. The disclosure should include ALL settlement costs, not just those incidental to the lender s loan policy. Watch for: (1) Transfer taxes, both at the state and local levels (2) Deed recording fees (3) Title policy filing fees. (National agents should be mindful that the $5 or $10 you normally pick up for a policy fee may actually be a per-policy fee. In a purchase you are usually issuing two or more policies.) ii) HUD Settlement Statement: RESPA is not just about prohibitions on marketing and referral payments. It also requires that HUD Settlement Statements be accurate as well. The tolerance levels for the GFE can apply even to costs that are entirely purchase-related. Some states may dictate a different methods of itemizing or, break out, of bundled settlement costs (run it by underwriting if in doubt) d) Settlement Agent: By geography, custom, or law, the extent of participation of a non-attorney settlement agent will vary. For the most part, the settlement agent is acting on behalf of the bank in following the lender s closing instructions. Some states arguably give the right to choose the settlement agent to the borrower. (Be particularly sensitive to Mid-Atlantic and Southeastern states rules on this.)
6 2) Transaction Documentation a) Deed: i) Preparation and the Unauthorized Practice of Law: Production of the vesting deed in a purchase/sale transaction cannot be an after-thought accommodation to a lender client. Even where there is legal authority for non-attorney preparation of deeds, extra care is necessary when the deed is a bona fide purchase because of the agreements which, surround, the conveyance. Care must be taken that the title company not cross the line into attorney representation on such things as purchase contracts, or other terms. UPL cases are often built upon transactions where an attorney was legally required to prepare the conveyancing document but a non-attorney actually prepared it. ii) Corporate Authority: Not all developers are giants. Not all condominiums are hundred plus-unit miniature villages. New construction projects also include spot-building where the developer may be somewhat dabbling in real estate development or is very thinly capitalized. Almost all development projects are done in the name of a non-human being business entity. Proving the authority of a signatory on a deed is always important but when you are dealing with potentially small developer entities, with perhaps very shallow capitalization, it is not hard to imagine that an out-sale could actually involve conveying, all or substantially all, of the entity s assets. Such transfers can carry increased obligations to prove the authority of the signers. For example, a major developer company s charter might authorize the president to execute transfers of the company s inventory of real estate. However, when the real estate being sold is not so clearly inventory sold in the normal conduct of the business, it may be advisable to have the specific transfer authorized by the directors or shareholders of the entity, rather than merely relying upon some general power of sale. So review the by-laws, operating agreements, declarations, etc., and also the formation certificate at the department of state. Where indicated, an attorney s opinion on the validity of the upcoming conveyance may be advisable. In general, where corporate creditors are not an issue, the following bodies can typically authorize a conveyance, listed below from most-secure to least-secure. (1) Resolution From Shareholders (Corp) or Members (LLC) (2) Resolution From Board of Directors (Corp) or Board of Managers (LLC) (3) Sealed signature of officer iii) Covenants and Restrictions: In a, normal, sale, you are usually merely carrying-over the covenants and restrictions from previous deeds. Not so here. Some of the covenants, restrictions, etc., will be new. Old C&Rs might actually get retired in the process of aggregating the developer s land. (1) Remember that flip-fees and private transfer fees are increasingly being regulated and/or prohibited.
7 3) Special Considerations a) Affixation: This usually comes up in the context of manufactured housing but similar issues are found in New Construction in general. The point is to make sure that the personal property has properly become real property. b) Mechanics (or Materialmans) Lien Release: Logically enough, New Construction transactions often involve mechanics and materialman s liens that can prime even purchase-money mortgages. c) Permits and Zoning: Not often a title concern, but sometimes affirmative insurance as to these matters is sought. d) Tax Lots: Make sure that the local municipalities have properly designated the tax lots, both to make sure that any subdivisions are accurately reflected, and that improvements are properly assessed. If a permanent number has not been assigned, try to get the tentative tax lot number. e) Construction Mortgages: Get partial releases ahead of time to hold in escrow if possible. In a, normal, transaction where the mortgage only encumbers a single parcel, the form of the discharge can sometimes be more forgiving because it will often state that the underlying debt has been paid, even if there is a scriveners error in the legal description. Construction projects, on the other hand, are often completed in phases, with out-sales of each subsequent phase helping to finance the construction of later phases. Therefore if the proper property is not released, you could have a true claim on your hands. Additionally, in areas where new development financing has to take transfer tax and mortgage tax into consideration, the title agent needs to be mindful that the purchaser s proceeds will not necessarily be used to satisfy a developer s lien. In states where this type of taxation is an issue, providing unencumbered title will usually involve the partial release and/or shifting (i.e. spreading) of a persistent lien rather than a simple discharge. Make sure that your staff understands what they are going to be presented with at closing. Once you have issued your title policy you do not want to be in the position of getting transfer affidavits re-executed due to some technical defect, or worse, due to an inapplicable exemption having been claimed and relied upon at closing, but which now prevents you from recording the transfer and lien documents at the clerk s office. f) Ingress and egress: With new construction, you often have newly-created ways of ingress and egress. Be particularly careful in sales from spot builders. Remember, the boiler-plate of the title policy ensures adequate ingress or egress so make sure it works in your subject premises. 4) Title Insurance a) Title Policy: i) Coverage: Make sure that the purchaser/borrower has been informed of the additional (likely minimal) cost of obtaining title insurance protection. ii) Title Policy Amount: (1) Owners Policy: Purchase Price
8 (2) Lenders Policy: Amount of Mortgage iii) Discounts: Depending upon where the real property is located, and the size and nature of the development, the purchasers may be entitled to a special discounted rate for their owners policy. If you are not aware of available new construction discounts, you are missing an opportunity to add value to the transaction for the purchaser and the lender. Make sure your staff is knowledgeable about these discounts. b) Title Endorsements: i) Zoning Endorsement 3.0 Vacant Land. Since it is used primarily for vacant land before construction commences it will usually not be a part of the out-sale but, if provided by builder, it may be useful as a reference. ii) Zoning Endorsement 3.1 For Improved Land. Used to insure against loss from a judgment requiring the removal or alteration of existing structures on the land. Where available, it is often used in commercial transactions. 5) Closing Considerations: a) Escrow Accounts: Sometimes the only practical option, but have an exit strategy. i) A well-drafted escrow agreement will make the following things clear: (1) The names of the parties: escrow agent, depositor, seller, purchaser, etc. (2) The subject matter of the agreement: Be as specific as possible. Example: Dismantling of fence along western property boundary. Proof of satisfaction of judgment docketed in document # xxxx, etc. (3) The expiration of the deposit and where the funds will be sent after such time. (4) Acknowledgment that the escrow agent may eventually have to escheat the deposit to the appropriate authority (usually state authority) should the deposit never be claimed. (5) Consider including a provision for indemnification in the event that an unforeseen dispute arises as to where the escrow agent should direct funds.
9 Figure 1: Title Lien Priority of Reverse Mortgages * The above is for illustration of lien priority only. Whether the liens subsequent to the reverse mortgage violate the terms of the reverse mortgage is not considered here.
10 Figure 2: Interim Events between Acquisition of Land and Development
11 Short Sales, A Question of Relationships How to Make the Connection Presented by David W. Moore, President D.W. Moore & Associates, Inc. P ! F P.O. Box Salt Lake City, Utah Introduction. The settlement agent is a key player to a successful real estate transaction. They provide the foundation to complete the transaction. The other parties have limited relationships with the other players. Real estate agents have duties to their client, the seller or the buyer. Mortgage lenders have a contractual relationship with the borrower. It is the escrow, settlement and closing agent who join the parties together. Through the escrow closing, the parties come together in their required manner. There are many different aspects to a short sale. Each party looks at this type of transaction in a different way. The settlement agent is the one who must look at a short sale from a unique perspective. They have relationships with all the parties and must therefore view the transaction from each party s view point. Other parties have limited relationships. Lenders have developed and continue to improve their process for approving a short sale. The short sale no longer involves just a buyer, seller and their lenders. The settlement agent is now playing an expanded role and is contributing in a greater capacity to a successfully completed short sale. Many settlement, escrow and closing agents are helping real estate agents and mortgage lenders as facilitators to gather and submit the short sale application package. Escrow agents often have more experience in completing successful short sales. They are involved with all the parties, and must act in a manner that will benefit all parties. Escrow Agent. A settlement, closing and escrow agent is a fiduciary. Fiduciary 1 (n) from the Latin, meaning "trust," a person who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty. The most common is a trustee of a trust, but fiduciaries can include business advisers, attorneys, guardians, administrators of estates, real estate agents, bankers, stockbrokers, title companies, escrow agents or anyone who undertakes to assist someone who places complete confidence and trust in that person or company. Characteristically, the fiduciary has greater knowledge and expertise about the matters being handled. A fiduciary is held to a standard of conduct and trust above that of a stranger or of a casual business person. He/she/it must avoid "self-dealing" or "conflicts of interests" in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him/her/it. 1 DW Copyright 2011 D.W. Moore & Associates, Inc. 1
12 Definition. A short sale is a sale transaction in which the seller's mortgage lender agrees to accept a payoff of less than the balance due on the loan. Lenders will generally require the seller to be in a hardship situation. Approving a short sale payoff request is not absolute and other options may be available to the lender. One concern that has developed relates to who negotiates the short sale with the lender. In many states, only licensed real estate agents, attorneys and a party to the contract are permitted to negotiate a real estate contract. Third party facilitators offer guaranteed services to negotiate the short sale with the lender. If the negotiator is not an attorney or a licensed real estate agent, then there may be concerns and subsequent problems. Lenders who agree to a short sale will issue an approval letter. This letter will contain conditions, requirements and escrow instructions. The structure of the short sale, the purchase, and the loan transaction will be conditional upon the requirements of the short sale lender s approval letter, together with other agreements between the parties. Relationships. In every real estate transaction there are relationships between the parties. The buyer and seller have negotiated a purchase contract and are both interested in completing the sale. Borrowers and lenders have agreed to a mortgage loan and want the approved loan to be completed in an appropriate manner. Real estate agents and mortgage lenders have an agency relationship with their clients. Questionable short sales will often involve relationships which are not arms length or which skew the normal relationships in a sale transaction. Fraudster will incorporate abnormal mechanisms to facilitate their crimes. There are standard and customary ways of completing a real estate transaction. The use of unusual transfers, trusts, contracts, leases and loan, together with the diversion of funds from property owners or existing lenders will ultimately result in problems and concerns for the other parties in the transaction. Fraud. There are as many schemes of short sales fraud as can be dreamed or imagined in the human mind. According to Freddie Mac: The number of short sale transactions has grown significantly since the housing crisis began, and unfortunately, so has the number of scams involving short sales. 2 According to Zillow, negative equity hit a new high-water mark in the first quarter of 2011, with 28.4% of homeowners with mortgages owing more on the loan than their home is worth 3. With a continued increase in upside-down property owners, the number and percentage of short sales will continue to increase together with the related fraud.. The California Department of Real Estate has issued a warning to consumers concerning DW Copyright 2011 D.W. Moore & Associates, Inc. 2
13 short sales. It includes the following: Be aware that in response to this new program (Home Affordable Foreclosure Alternatives) there may be an increase in the number of companies soliciting homeowners in distressed situations and offering to conduct the short sale negotiations with your bank/lender in exchange for charges and fees. Their interest may not so much be to help you as it may be to try to be the vehicle through which they could flip the short sale for a profit. 4 According to a WSJ article 5, the Financial Crimes Enforcement Network, a Treasury agency, reported 70,472 suspicious active reports related to suspected mortgage fraud. That s the highest number reported by the government since tracking began in William Grassano, an agent spokesman added, If people are about to lose their jobs or lose their homes, there are scammers out there who are read to go in for the kill. Players. In each and every real estate transaction, there are a wide variety of players. Each player has a unique position in the transaction. While each wants the transaction to be completed in an appropriate manner, their needs and requirements in the transaction will differ. Short sales are no different. However, in a short sale, these interest may be slightly skewed. Seller. A seller in a short sale transaction is in a distressed situation, where they cannot sell their house for an amount sufficient to payoff the existing loan. They are facing foreclosure, have lost a job or have other financial pressures. Because of lender requirements, seller will need to be in a hardship situation. A lender will generally not approve a short sale when a borrower has sufficient assets to payoff the existing loan. The seller does not need to be in default or foreclosure to have an approved short sale. Seller s RE Agent. A licensed real estate agent is generally involved in negotiating the short sale for the seller with the lender. They have an agency relationship with the seller and must focus on the seller s interest, not on the needs of the other parties in the transaction. Most states permit only a licensed real estate agent or an attorney to negotiate a real estate contract. Concerns arise when the licensed real estate agent hires or involves an unlicensed individual to negotiate with the lender. Seller s Lender. This lender owns a mortgage loan for which they want to be paid. The loan may be in default. There are incentives for a mortgage lender to accept a short sale offer, rather than to complete a foreclosure. With the recent problems in the foreclosure arena, a short sale may be a more manageable option. It is a negotiated contract, approved by the borrower and the lender. The short sale provides an option which may not result in actions to disqualify the sale. It may provide a better financial option to a borrower and to the lender. The loss to a bank from a short sale is about half that of the loss from a foreclosure. The lender s loss from a short sale is approximately 20% of the loan amount, while the loss from a foreclosure is approximately 40%. Buyer. With the softening of the real estate market, many individuals are looking for a good deal. The short sale offers the buyer the opportunity to buy a house at a cheaper price. However, 4 Robbie Whelan. 5 Wall Street Journal, May 10, 2011, Reports on Mortgage Fraud Reach Record Level by DW Copyright 2011 D.W. Moore & Associates, Inc. 3
14 this deal may come at a price. The buyer must wait for the seller s lender to approve the sale. Approval by the seller s lender is not guaranteed. Buyers must be patient, have a pending loan waiting, and recognize the deal is not done until the seller s lender sings. Buyer s Lender. Many lenders are concerned that the purchase transaction is a flip of a short sale. Flipping is a concern because there are questions as to the property s value and a disclosure of the short sale transaction s terms. The buyer s lender is concerned with value and fraud. Lenders are now asking for a title history, information supplied to the short sale lender, and are placing restrictions in their escrow instructions to prevent short sale fraud. Settlement Agent. The escrow agent, also known as a "closing" or "settlement" agent or officer, is an impartial third party who oversees the final details of a real estate transaction. Their duty is to coordinate all the documents, financial arrangements, conditions of parties, and recording of the transactions. They are more that just an instruction follower. The escrow agent is a fiduciary and must assure that each party (seller, buyer, lenders) receive their bargain. Facilitator. There are many unlicensed individuals who consider themselves experts on short sales. As an unregulated industry, facilitators have little invested in the transactions, and are generally more concerned with collecting a fee than protecting the interests and rights of the parties in the transactions. Investor. With the collapse of the real estate market and the lack of opportunities that generated the flipping frenzy and sup-prime lending, many investors are turning to short sales. With the proper negotiations, an investor can buy the property at a discount and then hold or resell it at a profit. A major concern with a short sale flip is when the investor negotiates the short sale with the seller s lender and then turns around and resells the property at an increased amount. The investor has put forth two different prices. One price was given to the seller s lender for the short sale and another price was given to the buyer and their lender for the flip. Different amounts are given on the two transactions. Which value is correct? The Good, The Bad & The Ugly. Because of the characteristics associated with a short sale, problems and concerns are involved in almost every aspect of the transaction. Parties in the transaction are willing to do just about anything to get the transaction closed. The legal ramifications of these tactics may affect even the most honest of players. The settlement, closing and escrow agent has a unique position to view and understand the actions of each party in the transaction. They connect the players. The settlement agent may be the only player who sees the entire picture. They know, meet or connect with each party. Their duties and obligation far exceed that of an instruction follower. The following is a discussion on the areas of concern that may occur in the short sale transaction. (1) The short sale is not an arms-length transaction. This would include a sale transaction to a relative or friend, where the objective is to lease or sell the property back to the current owner. This tactic is used as an attempt to reduce the owner s monthly mortgage payment and to allow them to remain in possession of the property. Concealment of the seller s and buyer s relationship in not appropriate and should be disclosed. DW Copyright 2011 D.W. Moore & Associates, Inc. 4
15 (2) There is no hardship on the part of the seller. When a seller is upside down, owing more on their mortgage than the property is worth, but has sufficient assets to pay off the existing loan, the lender will generally not approve the short sale. The seller/owner may conceal assets, or the assets may exist in a business entity, and its ownership is not disclosed. The owner s attitude is that it is the lender s problem and their purchase of the property and promissory notes are irrelevant. This the lender made me do it attitude, with no responsibility in the matter, is questionable. (3) The property s value is often an issue in a short sale. Low balling the sales price will often result in a non-approved short sale. Lenders will generally accept reasonable offers, but need to be assured that the price is appropriate. Determining the appropriate sales price is problematic. (4) The owner s vacating, or transfer, of the property may be a concern. Owners are often encouraged to abandon their property. With a pending foreclosure, they are convinced that they will lose the property anyway. A scammer will often then lease the property and pocket the rent for themselves. Many mortgage loan documents include an assignment of rents provision which means the rent should be sent to the lender, not to someone who does not own the property. (5) Buyer s lender may require a review of the short sale application package and approval letter. The buyer s lender is concerned about a flip. Is the value of the new sale appropriate with the prior short sale? Has the value of property been inflated from the amount used during the short sale? The negotiator of the short sale may be the current buyer. The short sale application package is confidential and generally outside the purview of the buyer s lender. A review by the buyer s lender will require written permission from the seller. (6) The buyer s new loan closing may have special conditions and/or instructions. The buyer will often enter into a mortgage loan as part of the purchase. There are escrow instructions and requirements associated with any loan closing. These instructions and requirements may affect the short sale transaction. (7) Second mortgage holders may create problems to a successful short sale. Historically, second mortgage holders were willing to take a nominal payment to release their interest. With a foreclosure they would generally get nothing, so a nominal payment was better than nothing. However, second mortgage holders are now requiring additional amounts or subsequent liens before they will release their interest. These additional demands are often defeating the short sale. (8) A purchase contract that has expired or which has been substituted or replaces that submitted to the seller s lender may be an issue. A short sale is approved based upon a specific purchase contract. Many real estate agents will continue to push for approval, even if a buyer walks and cancels the contract. They only want to get an approval, and are not concerned about the details. The short sale approval letter will often require a specific buyer and sales price. With a change, the settlement agent cannot complete the short sale transactions because it does not conform to the short sale approval letter. (9) Flipping is almost always a concern. This practice of flipping, in itself, is generally not illegal. It is the American Way of business to buy low and sell high. However, when sales prices are artificially inflated without an offsetting increase in value, it may be considered fraud. The appropriate requirement for any flipping transaction is notice to all parties. (10) The use of unlicensed facilitators to negotiate the short sale with the seller s lender DW Copyright 2011 D.W. Moore & Associates, Inc. 5
16 may be contrary to state law. In states where the ability to negotiate a real estate contact is limited to licensed real estate agents and/or attorneys, the use of unlicenced individuals or entities will result in disciplinary actions against the licensed entities who hired the unlicensed entity. (11) Questionable title items (lease options, notices of interest, mechanic liens, ownership changes) may be an issue in the short sale. Many techniques are used to complete a short sale. Fraudsters will incorporate many schemes to pull money out of the transactions. The seller may be convinced to transfer ownership. Liens may be recorded on the property. A tenant may be given a lease option. A review of these items may help to prevent fraud and to better fulfill the duties of the settlement agent. Summary & Conclusion. A short sale is a tool, but not the only tool available. Settlement agents need to become an involved player. They need to be realistic and understand the status of title and property exceptions. Often, a short sale is recommended, when the possibility of success is minimal. Depending upon the status of title, a short sale may be impossible to negotiate. A foreclosure may be better suited to clear title. Settlement agents should also avoid the position of giving legal or financial advice. This is reserved for attorneys and CPA s. Be cognizant of the situation. Escrow agents should encourage the parties to involve their attorney and CPA is structuring and completing the short sale. We have all heard the terms sub-prime and robo-signing and understand the negative connotation they have. While many individuals had accepted the use of sub-prime loans as a legitimate mortgage loan vehicle, we have now come to understand how they have affected and caused the current real estate downturn. With the associated problems and fraud, will short sales be the next problem transaction? With the number of distressed transactions and the level of fraud, we need to recognize our role as settlement agents and help prevent the current problems from continuing. The settlement agent has a unique and important role, especially in short sale transactions. They connect the parties together and make the transaction work. Only when the settlement agent recognizes their responsibility and becomes directly involved as the connection between the parties, will problems, concerns, and fraud be kept to a minimum. Make the Connection D.W. Moore & Associates is an independent consulting company, providing education, training and expert analysis on real estate, title and escrow matters. Our clients include title and escrow companies, attorneys, mortgage lenders, real estate agents, and other real estate professionals together with state and federal government agencies. We provide professional services, training and educational seminars, research and the analysis of claims and litigation, We are an approved CE instructor in a number of states, and have provided expert testimony in several lawsuits. We have more than 40 years experience in the settlement, title and real estate industries. Please contact us if we can help solve your problems or to provide professional seminars. A Vision of Tomorrow, A Dedication to Today DW Copyright 2011 D.W. Moore & Associates, Inc. 6