Lynn Arends - Attorney | Managing Broker

By now, we all know that federal and state officials have announced a $26 billion foreclosure settlement with five of the largest home lenders (Bank of America, Citigroup, Ally Financial/GMAC, JP Morgan Chase and Wells Fargo).

The deal is supposed to protect consumers from unsound practices in mortgage servicing and foreclosure processing, and requires banks to give money back to borrowers who have been foreclosed on, and principal reduction to homeowners who are currently underwater. It also sets aside funds to help borrowers refinance or modify their loans.

While this sounds like great news for homeowners, there are some caveats…

Good news: Homeowners who are current, but “underwater”, may have their principal reduced.

Bad news: But only by an average of $20,000.

Good news: The settlement bars lenders from foreclosing on a homeowner who is under consideration for a loan modification. (Isn’t that the way it is supposed to be now?)

Bad news: This only works if assiduously and tirelessly enforced.

Good news: Eligibility.

Bad news: Borrowers whose loans are held by Fannie Mae or Freddie Mac need not apply.

Already foreclosed on?

Good news: You are eligible for restitution if you lost your home in 2008—2011 due to “robo-signing”.

Bad news: $2,000 max—not much help for families who have lost their homes.

Conclusion? I am cautiously…(un)optimistic about this settlement!

******************

For more information, check out the Legal Resources page at my website for a summary of the settlement, who is affected by it, and the projected timeline.

All of the details, including FAQs and further links can be found at www.nationalmortgagesettlement.com.

Contact my office today and set up an appointment to discuss your options and how this settlement could affect you.

OVERVIEW

Buyers pursue short sales to get a good deal. But you might want to think twice about making an offer on a pre-foreclosure, short sale home. It's not as simple as you may believe, and very few can close in 30 (or even 60) days or less.

A short sale occurs when a bank agrees to accept less than what is owed on a Mortgage or Deed of Trust to release its lien. Negotiated right, a short sale can be an excellent alternative to foreclosure to both sellers and buyers. And banks will consider a short sale because it allows them to recoup some of their investment without the work and expense of selling the home themselves. However, just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.

It is important to do your research before making an offer to purchase. Your agent can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer and the likelihood that the lender(s) will accept your offer.

In addition, the lender will want to see that you have your own loan available and you are preapproved. Send a preapproval letter to the lender. It will help if your agent sends a list of comparable sales that support the price you are offering to pay for the home.

WRITING THE SHORT SALE OFFER AND SUBMITTING TO THE BANK

Short Sale Homes Sell at (Near) Market Value

Before a buyer writes a short sale offer, a buyer should ask his or her agent for a list of comparable sales.The bank will want to receive somewhat close to market value. Lenders will insist on a comparative market analysis, known as a CMA, or broker price opinion, known as a BPO. If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.

Many banks will discount the price a little bit from market value, but to get an acceptance, offers should be reasonable and close to the comparable sales. Some short sales are priced ridiculously low. The short sale price may have little bearing on market value and may, in fact, be priced below the comparable sales to encourage multiple offers. Or for that matter, any offer on the eve of a scheduled Trustee Sale (in an attempt by the Real Estate Agent to salvage commissions). So to get your offer accepted, it will need to be priced near market value. If you're not prepared to pay above a superficial price on a lowball short-sale listing, then pass.

The Buyer Must Qualify

In a normal transaction, a buyer's lender will examine credit history, length of time on the job, debt ratios, and a host of other criteria to determine a borrower's qualifications. In a short sale transaction, buyers also need to submit their loan prequalification letter along with their offer to the seller’s lender.

Prequalification means a loan officer has determined a borrower is credit worthy and financially able to qualify for a certain loan.Prequalification differs from preapproval because prequalified is based on a lender's opinion, not on verification.

Contrast that with a Preapproval Letter from a lender which says the borrower’s credit, bank references and employment have been verified. The letter is not binding on the lender because it is subject to other conditions such as an appraisal of the property. A preapproval letter from a lender carries substantial weight because it shows the seller and seller’s lender the buyer is serious.

Tip: Send a preapproval letter and a copy of a sizeable earnest money deposit that adequately reflects the buyer's ability to obtain a mortgage and intent to close the transaction.

SHORT SALE BUYER: BEWARE!

Lenders Discount Commission

Generally, only lenders who have sold loans to Fannie Mae or Freddie Mac are paying traditional real estate commissions to real estate agents. The rest often discount commissions. Moreover, agents end up doing two to three times the work of a conventional transaction and don't appreciate getting paid less to do more work. If you have agreed to pay your agent a certain percentage under a buyer broker agreement, you could be liable for the difference between what the lender will pay and what your contract stipulates, if your agent refuses to waive the difference.

Higher Buyer Closing Costs

Because lenders rarely will pay for any extras, as a seller would be willing to do, if you want any of those extras, you will pay for them yourself. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes, too. If you want specific inspections, you will probably pay for them out-of-pocket.

Lynn Arends, concentrates her Seattle practice at Lynn Arends Law Group PLLC and Lynn Arends Realty Group, on short sale and foreclosure issues. She is a frequent speaker for the Washington State Bar and the King County Bar and an instructor for the Washington Association of Realtors. Contact her at lynn@lynnarends.com or visit her blog and website at www.lynnarends.com.

Attorney's Life on MARS

The FTC has issued a final rule that gives federal and state authorities a new tool to combat the increase in deceptive mortgage relief practices.

The final rule does not affect attorneys who provide mortgage assistance relief services (MARS) in connection with the practice of law if certain basic requirements are met, but the FTC warns of MARS providers that try to use attorneys as fronts to avoid state laws.

Over the past three years, the FTC noticed a spike in the number of consumers scammed by MARS providers that charge advanced fees in the hundreds or thousands of dollars then disappear or fail to provide the promised service. Often, the delay and the cost combine to leave homeowners in a much worse position.

Many states have responded by passing state laws, commonly known as mortgage rescue statutes, under which MARS providers cannot charge advanced fees. Lawyers often are exempt from these mortgage rescue statutes.

Mortgage assistance relief services

In general, MARS means "any service, plan, or program" that offers or provides assistance in preventing or postponing foreclosure sales, negotiating loan modifications, obtaining forbearance's or modifications in the timing of loan payments, or negotiating extensions.

Lawyers often provide these services in connection with representing clients in bankruptcy, foreclosure, or other administrative proceedings. Without an exemption, lawyers would become subject to all the requirements of the new federal rule.

Under the new rule, any for-profit entities providing mortgage assistance relief services are, among other things, prohibited from misrepresenting any material aspect of their services, advising a consumer to cease communication with a lender, or taking advanced fees. The prohibition on advanced fees is not effective until Jan. 31, 2011.

In addition, a person violates the rule by providing substantial assistance to a MARS provider if the person knows (or consciously avoids knowing) the provider is violating the rules.

The rule also is designed to prevent abuses by mandating that MARS providers disclose certain information to the consumer, including their "for-profit" status.

Attorney exemption/client trust accounts

Attorneys who are providing MARS "as part of the practice of law" are partially exempt from the new rule as long as the attorney is licensed in the state in which services are provided (or where the consumer's "dwelling" is located) and the attorney complies with applicable state laws and regulations.

However, to get the full benefit of the exemption, attorneys must comply with certain provisions regarding client trust accounts. In order to be fully exempt, lawyers must place advanced fees in a client trust account before performing legal services and comply with state laws and regulations, including licensing regulations, applicable to client trust accounts.

A lawyer who does not comply with the client trust account provisions cannot charge advanced fees, or "request or receive payment of any fee or other consideration," until the lawyer executes a written agreement between the consumer and the consumer's loan holder. In addition, the lawyer must make specific disclosures through the written agreement, but is otherwise exempt from other provisions of the final rule.

The proposed rule did not exempt lawyers at all, but several state bar associations, along with the American Association, sought an amendment to the proposed rule that would provide an exemption for lawyers.

Without an exemption, these bar associations feared the rule could undermine the confidential attorney-client relationship and "make it difficult or impossible for many consumer debtors to obtain the legal services that they desperately need to help negotiate changes to their residential mortgages with their lenders and keep their homes."

All in all, it is hoped that the new FTC MARS rule will curb the "mortgage rescue" charlatans who prey on the most vulnerable of our public.

To find out what the Federal Trade Commission is saying: http://www.ftc.gov/opa/2010/11/mars.shtm

Freddie Mac announced Wednesday it will suspend foreclosure evictions from December 20^th through January 3^rd. This is the third straight year Freddie Mac has suspended evictions during the holiday season. (This move only applies to those homes that have mortgages backed or guaranteed by Freddie Mac). Sibling company, Fannie Mae, also won't evict people over the holidays, but that has not yet been announced via news release regarding their upcoming suspension of holiday foreclosures. Fannie Mae and Freddie Mac purchase home loans from lenders and package them into bonds with a guarantee against default and sell them to investors. Today they own or guarantee about half of all U.S mortgages.

So Happy Holidays from Fannie and Freddie!

However, did you know...

According to RealtyTrac, foreclosure homes accounted for 25% of all U.S. residential sales in the third quarter of 2010 and the average sale price of properties that sold while in some stage of foreclosure was more than 32% below the average sales price of properties not in the foreclosure process-up from a 26% discount in the previous quarter and a 29% discount in the third quarter of 2009.

• REO's sold for an average discount of nearly 41% and accounted for 15% of all sales in the third quarter.
• Pre-foreclosure sales, which are often short sales, sold for an average discount of 19% and accounted for nearly 10% of all sales.

Looking at those statistics, it makes you wonder why investors Fannie and Freddie seem so eager to foreclose.

But at least for the Holidays... Merry Christmas!

For more information and foreclosure statistics visit - www.RealtyTrac.com.

Q: In a short sale, do Listing Brokers have a duty to disclose how far underwater the Seller is?

A: If you're in California, the answer may be "yes".

In Holmes v. Summer, G041906 (Cal.App.4th, filed October 6, 2010), a recently decided California appellate case, the court ruled that the sellers' brokers can be held liable for damages and costs incurred by a buyer in a failed transaction when the existing debt on the property exceeded the sale price. The court found that the brokers owed a duty of disclosure to the buyers.

No doubt, Holmes was an extreme case--three deeds of trust created a total debt of $1,141,000 with a sale price of $749,000--but the seller's real estate brokers were still held to answer for not disclosing this information to the buyer, despite the fact that this information was available on the preliminary title report and was a matter of public record.

The court found that real estate agents have the same responsibility as sellers to disclose information they have that affects the "value and desirability of the property."

In Holmes, the seller and the listing associate withheld from potential buyers knowledge of three mortgages against the property totaling $1.141 million. The sellers accepted a buyer's offer of $749,000, but the deal fell through when the sellers couldn't deliver clear title. So the buyers sued the real estate firm and the court found that the real estate practitioner had a greater duty to disclose facts affecting the desirability and marketability of the property than he did to protect the privacy of the seller.

It is my customary practice to make immediate inquiry with Sellers and in the public records to try to ascertain the status of a seller's mortgage liens at the outset of every short sale transaction that I work on. Buyers certainly want to know information like this as they determine how much (or whether) to make an offer in a short sale situation. Why bother putting up earnest money or wasting time, if the short sale is not viable?

Analysts say this decision makes it incumbent on practitioners with short sale listings to provide specific information about circumstances surrounding the sales, including approvals required for the sales to close. Admittedly, Holmes is a California case and not Washington law, but it certainly seems like good advice to listing agents out there.

In light of this recent ruling and the movement of the courts towards finding brokers liable for the damages of buyers who cannot complete a sale, real estate brokers should pay careful attention to their listings and be fully aware of potential liability for failure to disclose these types of issues.

So the question for Listing Brokers with short sales in Washington: is it really enough to just check the box "Yes" to short sale and "3rd Party Approval Required" on the NWMLS Form 1 Listing Input Sheet?

To read Holmes v. Summer in its entirety: http://www.courtinfo.ca.gov/opinions/documents/G041906.PDF