Small sale transactions are essential to go properties in furtherance of rebuilding our economy. They directly benefit several parties including:

• the distressed homeowner: unburdened by debt he cannot afford without the same level of credit score hurt a foreclosure would cause as well as possible deficiency judgments;
• the real estate agent: earns commissions (provides jobs etc);
• the small sale bank: removes nonperforming assets from its books,  usually at far less of a loss than if the property became an REO; and
• real estate investors: acquiring properties at a discount provides incentive to negotiate as well as to seek out qualified purchasers

Part of the fallout from the real estate market crash is a rash of negativity aimed directly at real estate investors.  They, along with mortgage brokers and other members of the real estate community, are being made the scapegoats for the Housing Bubble.  I’m going to clue you in on a small secret – it really wasn’t them.  Not that there weren’t unscrupulous investors, loan officers etc. – far from it.  Point the finger directly at the Banks and the Government. The Banks needed those deals to package up and sells as mortgage backed securities on Wall Street.  When there was not enough product, they lowered their standards to bring in more loans. They blatantly ignored fraud reports and lended on questionable properties. The banks made exotic loan products and recklessly offered them without regard to ability to pay.  The Government wanted to increase homeownership among minorities – hence ACORN. It made several programs and incentives to push the percentage of homeownership way above the standard amount.  I am also going to point the finger at the American Homeowner who chose to use their home as an ATM, or who lied on their loan applications because they needed to compete with the Joneses.  Lets also add real estate agents to the mix who fought for higher and higher appraised values and selected comparables for their Broker Price Opinions (BPO) to influence the appraiser to come in higher. (RANT finished)

These very parties, who irresponsibly handed money to unqualified buyers on overvalued properties, as part of their attempt to pass the blame to real estate investors, are throwing around the “fraud” mark with regard to flipping small sale transactions (for more discussion on Small Sale Fraud please read my prior blog post). In an attempt to curtail the investor’s ability to flip these properties, some banks are including “no-flip” clauses in their small sale approval letters. I have seen this language in Bank of America, GMAC, EMC,Countrywide to name a few.  There are varying forms of this language from purporting to restrict the transfer of the subject property for 30 days post closing to voiding the transfer and reinstating the note and security agreements, post-closing, if the bank determines that there was fraud.

The simplest language to address in the 30 day post-closing restriction on transfer.  Lets review basic contract law and the doctrine of privity.  Basically a contract does not confer rights or impose obligations upon anyone except for the parties to it. The contractual relationship is between the homeowner and the bank. The small sale approval is a settlement of the debt obligation between these parties.  The bank has no contractual relationship with the investor and/or buyer and therefore this language, purporting to impose a restriction on the investor/buyer, is unenforceable against the investor/buyer. With respect to the other no-flip clauses, Bob Massey does an brilliant job of explaining how to handle those banks in his video:

I have located an underwriting bulletin from Stewart title which addresses these problematic clauses in small sale approval letters.  It indicates that such language makes the transaction “uninsurable”.  As Massey suggests, request that the clause be removed from the small sale approval letter as title will not insure the transaction and provide a copy of the title bulletin to support your argument. You might have to bypass the negotiator and contact a supervisor but this should be sufficient to persuade them to delete the offending language.

What have you encountered and what has worked for you? Please comment!

Related posts:

1. Mortgage Assignments are Not the Real Estate Investor’s Dream!
2. PropertyShark University – Short Sales Class – Tues June 17, 2008 – Don’t Miss It!!!
3. Buyer $5,000 Short – How to Close the Gap…from a NY Point of View

Evidently the government is serious about getting these delinquent mortgages modified – here is another positive change to HAMP:

Press Release from HUD:

WASHINGTON – U.S. Department of Housing and Urban Development Secretary
Shaun Donovan today announced the Federal Housing Administration (FHA)
has implemented changes to its loan modification program to ensure
consistency with the Obama Administration's Home Affordable Modification Program. By August 15th,
FHA borrowers will be able to significantly reduce their monthly
mortgage payments by seeking a loan modification through their current
mortgage company or loan servicer under the new FHA-Home Affordable
Modification Program (FHA-HAMP).

"Today, we're bringing another vital tool to the table to help
struggling families who are desperate to keep their homes," said
Donovan. "Tens of thousands of FHA borrowers will now be able to modify
their mortgages in the same manner as so many others who are taking
advantage of the Administration''s Making Home Affordable program. This
is just the latest tool we are providing to help homeowners prevent
foreclosures through the Making Home Affordable program. Earlier this
month we announced an expansion of the Home Affordable Refinance
Program to borrowers who are up to 125 percent underwater. Together,
these actions will significantly increase the help available to
homeowners.

"The Helping Families Save Their Homes Act of 2009, signed into law on
May 20, allows FHA to give qualified FHA-insured borrowers the
opportunity to reduce their monthly mortgage payment by modifying the
mortgage through FHA-HAMP. FHA released the program's implementation
guidelines today. FHA expects all servicers to implement the changes by
August 15. The program permanently reduces a family's monthly mortgage
payment through the use of a partial claim, which defers the repayment
of mortgage principal through an interest-free subordinate mortgage
that is not due until the first mortgage is paid off.

FHA has used the partial claim option in the past, which allows a
lender to advance funds on behalf of a borrower, to reinstate a
delinquent loan that was up to 12 months delinquent. Now, this program
will allow HUD to bring the borrower's payment down to an affordable
level. This will be accomplished by bringing the mortgage current,
buying down the loan by up to 30 percent of the unpaid principal
balance and deferring these amounts in a partial claim.

FHA will pay an incentive to loan servicers for each FHA loan modified
under this program. A Mortgagee Letter, along with detailed
requirements for the FHA-Home Affordable Modification Program, was
distributed to all FHA lenders today. The implementation of this
program will further the Obama Administration's efforts to stabilize
the housing market by helping homeowners to stay current on their
mortgages and stay in their homes, therefore preventing the destructive
impact of foreclosures on families and communities.

Making Home Affordable, a comprehensive plot to stabilize the U.S.
housing market, was first announced by the Obama Administration on
February 18. More than 200,000 trial loan modifications are already
underway, tens of thousands of refinancings have closed, and
informational mailings about the program have been sent to more than
one million borrowers who may be eligible.

FHA borrowers who are experiencing difficulty making their mortgage
payments should contact their loan servicer or HUD's National Servicing
Center at (888) 297-8685 to determine if they qualify for the FHA-Home
Affordable Modification Program. The Mortgagee Letter, with detailed
information about the program, is available on the HUD website. Non-FHA
borrowers can find information about the Obama Administration's Making
Home Affordable program at www.makinghomeaffordable.gov.

HUD News Release 09-137

Related posts:

1. Treasury Department’s “Making Home Affordable” Program Attempts to Tackle 2nd Lien Dilemna
2. DON’T SAY I DIDN’T WARN YOU! NY Attorney General’s Crackdown on the Loan Modification Industry
3. Short Sales & No-Flip Clauses in the Approval Letter – Removing a Roadblock

I have been advising everyone in the real estate industry, that New York’s Foreclosure Prevention and Lender Responsibility Act went into effect September 1, 2008 and includes, among other items, strict requirements for those who seek to perform loss mitigation on behalf of distressed home owners.  These requirements include written, notarized contracts with a right to cancel and a prohibition against collecting fees upfront except for attorneys and non-profits. It seems to me that these loan modification companies are ignoring the law at their peril.
- Kathleen A. Scanlon, Esq.

Daniel Massey November 30, 2008

Shelly Ann Bell was only a month behind on her mortgage in August, but with the interest rate scheduled to adjust upward and $4,000-a-month payments staring her in the face, she knew it would soon be impossible to keep up.

So when the 28-year-ancient nurse manager got a call from a man promising to help modify the mortgage on her single-family home in Springfield Gardens, Queens, it sounded like a way out of her troubles. She says she paid $2,150 to the Loan Modification Group, a Florida-based company, and was told to stop making monthly mortgage payments. She’s now five months behind, and in danger of losing the home she bought in 2007 so her 3-year-ancient son could grow up with a backyard.“I haven’t gotten a loan modification,” she says. “I haven’t gotten anything from them.” The company could not be reached for comment.

With citywide foreclosures up 50% over a year ago, some of the same bankers and brokers who sold unaffordable, subprime loan officers are now joining the rapidly growing ranks of mortgage modification consultants. While some members of what an online ad called one of the “fastest-growing job markets in the country” run legitimate businesses, housing advocates say many are taking people’s money and doing small or nothing in return.

The burgeoning industry has caught the attention of the FBI’s New York office and the state attorney general. At best, loan modification companies provide homeowners with a service they could get for free from their lenders or nonprofit housing counselors, says the U.S. Department of Housing and Urban Development. Frequently, they question homeowners for thousands of dollars up front, which is illegal in 12 states, including New York, unless the fee is made to a lawyer or nonprofit. As part of the sales pitch, homeowners are often advised to stop making mortgage payments, putting their homes in further jeopardy of foreclosure.Often, the companies do small to facilitate an affordable mortgage modification, advocates say.

Firms bombard homeowners with mailings and phone calls; they scour public records for homeowners whose properties are in danger of being foreclosed, and they advertise on Craigslist.

“You see one here and there, and then all of a sudden you realize it’s an epidemic,” says Jessica Attie, co-director of South Brooklyn Legal Services’ Foreclosure Prevention Project. “They sound very appealing. It’s hard for people to know many are not legitimate companies.”Attorney Adam Cohen of MFY Legal Services’ Foreclosure Prevention Project, says one of his clients paid nearly $5,500 to American Modification Agency, a Long Island company that also operates as Amerimod Modification Agency. He was drawn by a flier stating that AMA was the “only company that is registered, licensed, insured and bonded to modify mortgages in the United States that has a 100% success rate and money-back guarantee.”That cloak of professionalism is misleading, as there is no way to be licensed as a mortgage modification consultant, Mr. Cohen says. And AMA not only failed to produce an affordable modification for his client, but it also caused the client to fall $30,000 behind on his mortgage by telling him not to make his payments, Mr. Cohen says.

John Schaefer, an attorney for AMA, says the client was already substantially behind in his payments and that the company was able to facilitate a modification within 22 days, which the client reneged on. As for the claims in the flier, an AMA spokesman says the agency had “no record of authorizing or authenticating” the leaflet.

The company, which claims to have 400 agents, has raised concern among officials in New Jersey, where the Mercer County clerk recently issued a consumer alert that AMA purported in phone solicitations to be working with the clerk’s office.Law enforcement agencies are zeroing in. The Illinois attorney general last month filed seven lawsuits against modification firms that failed to negotiate workouts for clients. And the Colorado attorney general has filed 15 stop-and-desist orders against such companies.In New York, Attorney General Andrew Cuomo’s office is reviewing complaints, a spokeswoman says. The FBI’s New York office is also investigating.“We are aware of it and are working diligently to address the issue,” says Supervisory Special Agent Rachel Rojas. “This is a new scheme, and we assume it’s going to get worse.”

Free | Crain’s New York Business

Tags: loanmodification, subprime mortgage, American Modification Agency, foreclosure, New York law,

Related posts:

1. DON’T SAY I DIDN’T WARN YOU! NY Attorney General’s Crackdown on the Loan Modification Industry
2. Foreclosure Defense Bar: Heads Up! Forensic Exam of TBW Mortgage Corp Loan Docs Could Be Fruitful
3. Mortgage Assignments are Not the Real Estate Investor’s Dream!

Kathleen Pender Sunday, November 16, 2008

Should you keep paying your mortgage?

If you have significant equity in your home, absolutely. Are you an idiot to keep paying your mortgage? If you don’t, it’s getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay.

Last week, the government announced a program that will substantially lower payments for many homeowners who have small or no equity, but only if they are at least 90 days delinquent. Critics say the plot, which applies to loans owned or guaranteed by government wards Fannie Mae and Freddie Mac among others, could encourage people to suspend payments.

But what about the moral obligation to pay off a debt?

Elected officials have been chipping away at that by blaming the foreclosure crisis largely on predatory lenders. In a campaign fact sheet, President-elect Barack Obama says he “recognizes that the real victims in the subprime mortgage crisis are not the lenders, but the millions of borrowers who followed the rules and whose only crime was taking out mortgages that lenders told them they could afford.”

Last year, Congress started removing some financial hazards of default when it passed a bill that temporarily waives the income tax on mortgage debt that is canceled when a homeowner is foreclosed upon, sells a home for less than the remaining debt (a small sale) or gets a loan modification that reduces the principal balance. The tax waiver originally applied only to debt on a primary residence canceled in 2007, 2008 or 2009. Last month, in the bailout bill, Congress extended the waiver until 2013. There are exceptions: The waiver applies only to debt that was used to buy or improve a primary residence. If you took out a home-equity loan or did a cash-out refinance to buy a car, you’ll still owe tax on that debt if it is canceled. For state income taxes, California has partially conformed to the federal law, but only for debt canceled in 2007 or 2008. (For more details, see my April 24 column at www.sfgate.com/ZFJS.)

The Federal Housing Administration is offering two programs to help homeowners get more-affordable mortgages, FHA Secure and Help for Homeowners. Neither requires borrowers to be current on their payments.The program announced Monday goes a step further by requiring homeowners to be late. The Streamlined Modification Program, sponsored by the government agency that oversees Fannie Mae, Freddie Mac and 27 loan servicers, promises to swiftly reduce payments for certain homeowners who appear to be on the verge of foreclosure. How to qualifyTo qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home’s value. It’s fine if you owe more than it’s worth. Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies .If you meet these requirements and can document your income, your servicer will reduce your monthly mortgage payment – including property taxes, insurance and association dues – to 38 percent of your yucky income.The reduction can be accomplished in one or more ways:– Reducing the interest rate, but not below 3 percent. (The new rate, if below market, goes back to a market rate after five years.)– Extending the term of the loan up to 40 years.– Reducing the principal on which monthly payments are calculated. Unpaid principal is added to the loan balance and due when the homeowner sells or refinances. The reduced interest payments never have to be repaid.

If you owe more than the home is worth, the plot will only reduce principal down to 100 percent of market value, according to an official for the Federal Housing Finance Agency, which supervises Fannie Mae and Freddie Mac.If all three of these maneuvers can’t reduce your payments to 38 percent of income, you won’t get a quick-track modification but could still request a customized deal, says the official, who spoke on the condition of anonymity. The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won’t be expected to sell them to pay your mortgage. Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have small or no equity will stop paying their mortgage and then reduce their income to get the largest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again. “This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible choice to buy a house they couldn’t afford. “The government is offering loan servicers $800 for every homeowner they get into the plot. Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a larger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan. “To prevent fraud, the government says a borrower “must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification.

“The housing agency official doubts that people will stop paying just to get a modification because it will hurt their credit record, and that will make it harder to get a loan and possibly a job.” Credit bureau reports are checked by employers. They’re taking a huge risk missing three payments just to get a lower rate,” she says. An existing lender who sees your credit score deteriorate could also cut back on your credit and possibly raise your rate.

Credit score impact

Risking your credit score for a lower rate “sounds like a game of chicken on the lending highway,” says Craig Watts, a spokesman for Honest Isaac, which markets the FICO credit score.A 90-day delinquency will hurt your score, but not as terribly as a foreclosure. How many points it takes off depends on other things in your credit file, such as the number and severity of late payments on other accounts.In the latest version of FICO, which is just being rolled out, “one isolated delinquency will do less hurt to your score than it has in the past,” Watts says. Consumers who suffer a severe delinquency can rebuild their scores over time by paying all credit accounts on time and keeping their balances low.

 ”If it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, I’d be for keeping the home,” Watts says. “Your score will bounce back.”Schiff predicts that many homeowners will reach that conclusion and that the new program will cost Fannie and Freddie far more than expected. Although the mortgage giants are under a government conservatorship, the housing agency official says that any losses under the program will not be paid for by taxpayers unless Fannie and Freddie exhaust their reserves.

Are you an idiot to keep paying your mortgage?

Tags: loanmodification, FHA, subprime, mortgage, equity, real estate, Fannie Mae, Freddie Mac

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