Short Sale Equity Skimming

April 20, 2009

How can their be equity skimming from a property that is upside down?  A good question and one that I would not have an answer to until recently.  Here is the scenario:  A homeowner is selling a property that is upside down hoping that the lender will approve the sell for less than what is owed.  An investor presents an Option Agreement where they pay a nominal amount (generally around $100).  The purchase price on the Option Agreement is a low-ball offer.  The offer is presented to the lender for approval.  If the lender approves the price, the investor markets the home as a "Pre-Approved Short Sale" for the true market value of the home.  If the investor  can find a buyer who can close immediately after the investor closes, the investor will proceed and pocket a nice profit.  If they cannot find a buyer in that time frame or for more than the approved price, the investor simply walks away from the deal.

Many have described this as a win-win situation.  It is tough getting a buyer to wait around for weeks and weeks for the lenders approval that may never come.  This takes the wait out of the process for the ultimate buyer.  The seller gets his/her sale, the real estate broker their commission, the lender gets paid and the investor makes a profit. 

So what is the problem?  Well, the first problem is that the Option Agreement is not a bona fide purchase agreement.  The investor has no intention of buying the property unless they can get an approval of a purchase price that is below the true market price.  If the investor walks away, the seller may have lost all of his/her time to get a sale and has no recourse.  The second problem is that the investor only profits if the lender approves a purchase price that is below the fair market value.  While I don't have much sympathy for the lender, would they approve this price if they knew what the real plan was?  In addition, the price was probably approved based on a BPO that was provided by a real estate agent that is paid little for their opinion and the investor is going to provide that agent with the "comparables" that justify the low price.  Since the agent is not being paid a lot, how much further is he/she going to dig?  Even if the lender was not somehow tricked into agreeing to a low price, what about the seller?  The profit that would have gone to further reduce what is owed to the lender now went to the investor.  This is especially troubling if the short sale approval did not include an agreement by the lender to give up their right to sue the seller/borrower for the amount not paid from the sale.

The worst part of this type of transaction is that the only person that really has no risk in this deal is the investor.  If they can't turn an immediate profit, they simply walk.   

Everyone should be wary of deals that seem to good to be true.  These are complicated transactions that create a lot of frustration especially given the inefficiency of the lenders in dealing with these properties.  Before you jump at a solution make sure that you understand all of the consequences that will come out of that solution.  What seemed like a great solution for all may turn into your nightmare.     

It's Time for a Plan - You'll Feel Better

3.15.09

So many people are struggling to keep their heads above the water.  What started out as a "bad mortgage" problem has become a full-fledged economic problem.  Everything we own has lost 30 to 50 percent in value from 2006.  People are losing their jobs, their hours are being cut and business owners income is famishing.      

You can see the stress in peoples eyes.  People having been doing everything they can to save their homes, going further into debt with credit cards and credit lines, withdrawing money from their retirement accounts - anything to survive one more month.  The strain of these problems is unbearable.  Most have always been successful, always paid their bills and never dreamed they would be in this situation.  

It is now clear that it is going to be awhile before our economic troubles are over and quite some time before our homes are going to return to their 2006 values.  For many people they have lost hope or are desperately looking for a miracle cure.  The reality is there is no miracle cure but their are options.  The earlier you explore your options, the more you will have.  Don't get me wrong, there is no one cure-all.  But you can take some control over how you will get through this and, more importantly, how you move forward again.

It has been my experience that once people admit they need help, explore their options and begin to create a plan to get them through these trying times there is a tremendous sense of relief.  It's as if a huge burden has been lifted off them.  

You are not alone.  There are options and it does make a difference to your future what options you chose today.  If you would like more information regarding the different options you might have, go to the Life Security Home Plan webpage.   We can't promise you that we can make all of your problems disappear but we can help you meet the challenges that you are facing so that your future is secure.            

Mortgage Modifications, Forebearance Agreements and Other False Hopes

1.7.09

The lenders, government and media are all talking about working with homeowners to help them avoid foreclosure with loan modifications or forbearance agreements.  The problem is that reality doesn't match-up with reality.  Despite what the lenders are saying, loan modifications are not being routinely given and in most cases do not significantly improve the loan terms.  As a result, many, if not most, loan modifications end up in default within the next 9 months.  If the modifications involved reducing the amount owed so that the homeowner no longer owes more than their house is worth, they would have a greater chance that the loan modification would work in the long term.

Unfortunately, because the real estate market is in such bad shape, everyone now is seeing an opportunity to make money off of homeowners seeking loan modifications.  Loan officers, real estate agents and others are now becoming loan modification negotiators.  Just do a quick interned search or look for the signs on the side of the road.  While some have educated themselves to provide a valuable service to homeowners in need others are simply doing them because it is the only place they can make money.  Are they really looking out for the best interest of the homeowner?  Are they referring the homeowner to non-profits that in some cases will process the loan modification for free?  How much are they charging for this service?  Is the money paid up front or only if successful?  Is anyone looking to see if the loan modification is actually in the homeowners best interests?

Homeowners in trouble are vulnerable to a salesperson who feeds them false hope.  Many of these same homeowners got into houses they couldn't afford or into subprime or exotic mortgages that have now blown up in their faces by the same type of slick sales pitches.  As long as their is a perception that there is no governmental regulation of this activity, the prevailing attitude seems to be anything goes.  If I can get somebody to pay me, it is okay no matter what service I provide and/or how much I charge.  This attitude and a lack of regulation greatly contributed to the real estate mess that we find ourselves in today, why are we allowing the same type of behavior go unchecked yet again?  Is this type of activity going to help stabilize the real estate market or is it going to be another dagger into a sickly market?         

More Letters, More Phone Calls - the DOC Gets Serious!

5.27.08 

The DOC has sent out scores of enforcement letters relating to the First American Title Affiliate ownerships in the last few months.  In addition, they are in the process of calling those individuals who have received a DOC letter who have not settled with the DOC or joined a defense group.  The DOC intends on forcing everyone to decide to settle or fight.  There appears to be approximately 300 individuals who are either just receiving a DOC letter or who have received one in the past but ignored it.  

The DOC has hired independent contractors to "investigate" this case.  A number of the investigators are from Florida.  They compute from Florida each week to work on this case.

It is still unclear where the DOC intends to go with this case.  While they say they intend on taking each person to a hearing if they do not settle with the DOC, the cat is there are many hurdles to them actually doing so.  There are at least 3 defense groups in existence.  The largest group is represented by Nash & Lodge, PLLP, and consist of around 140 members.  The amount of time and money necessary to investigate hundreds of people would be staggering.  To actually go to a hearing, the DOC has to turn the case over to the Minnesota Attorney General's Office who will then bill the DOC for their services.  This is especially interesting since the two departments are political rivals - the DOC is headed by a Republican appointee, while the AG's office is headed by an elected Democrat.  The other hurdle the DOC will face is that they will have to finally articulate the standard that they say has to be met in order to comply with RESPA.  To date, they have refused to do so.  This is important to the industry as a whole because it would appear that their position will put all affiliate relationships at risk.  When this occurs, it is unlikely that the rest of the industry will sit idly by while a group of individuals who happen to get caught in this political net are left to fight for a standard that will be applied to the rest of the industry.

An example of how the current case can impact the entire industry is the DOC's position with respect to the need for having a license to sell title insurance.  Most in the industry would say that this is common sense until you look at more closely at their position.  As best that I understand it, if you refer individuals to a title company and receive anything of value from that title company the DOC takes the position that you are "selling" title insurance.  You don't have to receive the compensation directly as the result of the referal.  It could be in the form of tickets to events, boat rides, a reduction on office rent, better benefits, ownership dividends, etc.  In other words, unless you recommend that your client gets title insurance from a title company that never provides you with anything of value, directly or indirectly, you are at risk if you don't have a license to sell title insurance.

While we do not know where this enforcement action will ultimately go, we do know that the DOC is aggressively going after the former owners of the First American Title affiliates.  If you have already received a DOC letter you can expect to receive an intimidating call unless you sign their settlement or join a defense group.  If you have not yet received a DOC letter, you can expect to receive one in the near future or you are an extremely lucky individual.