Short Sale Negotiations

We have been asked by several real estate agents to investigate whether or not a title company or title agent can conduct short sale negotiations. One of Berlin Patten’s contacts at the Florida Department of Financial Services, Bureau of Investigation, Title Services, responded to our inquiry as follows: 

“The license for a title insurance agent does not authorize the agent to negotiate short sale transactions, or any type of loan modification.  A person who wants to negotiate a short sale needs to be licensed by the Office of Financial Regulation as a loan originator (I believe).  The alternative is to be an attorney eligible to practice law in Florida. The Florida Supreme Court has made it very clear that title insurance agents are allowed to issue documents related to a closing only when those documents are directly related to the title insurance transaction.  By creating new documents, or modifying existing documents, these agents may be engaging in the unlicensed practice of law as defined by the Supreme Court.” (Emphasis Supplied)

Consequently, it is Berlin Patten’s opinion that a title agent who wishes to conduct all or any portion of the short sale negotiations on behalf of a client must also possess a license with the Office of Financial Regulation or be a licensed attorney. Any referral to a non-licensed title agent to perform such services could be a negligent referral.

 It is also our opinion that this same analysis applies with equal force to licensed real estate agents who are conducting short sale discussions/negotiations for their sellers. The failure to possess a license with the Office of Financial Regulation or a Florida Bar license could cause any such real estate agent who is conducting short sale negotiations for their sellers to lose their real estate license, no matter how good their intentions.

Lender Incentives

Some lenders are reaching out to borrowers with incentives in order to encourage them to complete a short sale. For example, Chase is offering sellers between $20,000 and $35,000 at closing (yes, this is true!).  The HAFA Program allows qualified sellers who participate in the program to receive up to $3,000 at closing.  Wachovia and Litton solicit borrowers through letters, which allow sellers to receive up to $5,000 at closing. At this juncture, we have no reason to doubt that some, if not all of these programs are indeed quite legitimate. In fact, we have assisted borrowers in successfully completing many of these programs.

However, with these incentives come questions, and some degree of caution should be exercised. Are there hidden requirements? Are there adverse tax implications? Has the lender explained all of the details of their respective programs to the borrower? Will the deficiency be clearly waived at closing?

These questions can be difficult to answer unless some analysis is done of the borrower’s specific circumstances and the specific proposal made by the lender. As such, it is Berlin Patten’s opinion that if the borrower is asked to participate in one of these programs, that the borrower should review the terms of the incentive program with a real estate attorney and discuss the tax implications with a tax attorney prior to participating in any such program.

Berlin Patten Update – Short Sale Leasebacks

We have seen a recent increase in the number of short sale contracts that contemplate a leaseback to the seller. Please be advised that most short sale lenders will not permit any such arrangement between the buyer and the seller that permits the seller to remain in the property post closing. In fact, most short sale lender affidavits/agreements specifically prohibit the practice.

As such, if your seller expresses an interest in leasing the property back post closing (or otherwise occupying the property post closing), the seller should first contact his/her short sale lender to determine if their lender will permit the arrangement. In most cases, they will not.

Fraud Investigation – A Top Priority for Freddie Mac

In previous blogs, we have discussed our concerns about short sale fraud and the warning signals to watch for.  According to Freddie Mac’s Mortgage Fraud Officer, Short sale fraud has also become the top priority for Freddie Mac’s fraud investigation unit as well. 

Per the attached article, recent trends that Freddie has been alerting Real Estate Professions to include:

• Falsely indicating on a new short sale listing that there is an offer on a property in order to discourage legitimate offers and protect an accomplice’s planned low bid.
• Manipulating the short sale listing price by making the house look more distressed than it really is (“reverse staging”), inflating repair estimates, or using similar tactics designed to obtain an artificially low home value on the Broker Price Opinion. (Our requirements prohibit the buyer, buyer’s agent, buyer’s attorney, or a third-party short sale negotiator to be the contact point for the agents preparing the BPO.)
• “Flipping” schemes where the fraudster “buys” a house at a short sale without putting down any of his own money and then sells it a few hours (or days) later to a legitimate buyer at a much higher price. These are complex multi-step schemes that use falsified title and/or loan documents to fool a lender into approving the ultimate buyer’s mortgage, which the fraudster uses to settle the earlier closing on the house he “acquired” at the short sale for a much lower price.
• Manipulating the HUD-1 settlement statement so the fraudster can skim away net proceeds from the sale for himself or other parties in the transaction without the seller’s or investor’s knowledge. (The HUD-1 is the document that itemizes all fees, charges, and other funds involved in a home sale.

The article also states that as a result of the uptick in short sale issues, Freddie Mac now requires all of the parties involved to sign an affidavit attesting that it is a true arms-length transaction. 

With short sale fraud on the rise, Real Estate Professionals need to ensure that their sellers are being properly advised and represented. Berlin Patten will continue to stay abreast of the trends in short sale fraud to help prevent sellers from becoming unsuspecting be parties to it.

Assignable Contracts & Specific Buyers

Please be advised that short sale lenders are getting very strict about approving the specific buyer identified on the contract. As such, lenders are carefully scrutinizing assignment provisions in contracts. Short sale lenders who are reviewing contracts (that permit the contract to be assigned) are kicking back the contracts more and more frequently.)

Lenders are also increasingly approving the specific buyer on the contract. What that means is that lenders are not permitting last minute buyer changes or additions. If your buyer attempts to add a buyer or change the name, that is increasingly causing lenders to require the parties to begin the short sale process from scratch.

As such, to maximize the chances of getting your short sale approved and avoid delays the process, we strongly recommend (a) that any contract you submit for short sale approval NOT be assignable, and (b) that you make it clear to your buyer that there can be absolutely no changes to the name of the buyer whatsoever, including the addition of last minute parties and/or last minute entity formation.

Finally, please be a bit wary of submitting offers from corporate buyers who do not appear to be end users. While you may need to do so, please be advised that Berlin Patten had a recent instance in which a lender actually revoked an approval due to its belief that the corporate buyer was a flipper. The sole basis for such conclusion was the fact that the buyer was a limited liability company that had bought (but not sold) other parcels recently.

While we strongly disagree with the lender’s approach and rationale, it is clear that lender’s do not like to approve short sales where they believe the property might be immediately flipped for a higher amount. They are carefully scrutinizing any transaction that has red flags (at least in their opinion) and appear to be more than willing to run the risk of rejecting legitimate deals to weed out transactions that they feel are flip transactions.

Berlin Patten’s Short Sale and Bankruptcy Services

Real Estate professionals are frequently confronted with listing a short sale property encumbered by two or more mortgages and a seller who is strongly considering bankruptcy as its “exit strategy.” We have struggled with that same scenario… working on a short sale for months, and then the seller decides to file for bankruptcy. At that point, the deal usually dies.

But that does not need to be the case. In fact, we believe that short sales and bankruptcy can go hand in hand if the bankruptcy lawyers are working with the real estate lawyers/short sale negotiating team. That is why Berlin Patten elected to add bankruptcy to its array of legal services.

 Berlin Patten believes that a short sale can be successfully completed even if the borrower is considering bankruptcy. For that reason, Berlin Patten’s bankruptcy services will be different than the traditional bankruptcy services. Our legal counsel will give due consideration to the value of completing a short sale and how the bankruptcy may actually facilitate the completion of a short sale, even if the borrower is considering (or even files) for bankruptcy protection.

HAFA Policy Changes for Servicers

Lenders’ inconsistent eligibility requirements seem to be the most consistent thing we have seen with respect to the Federal Government’s HAFA (Home Affordable Foreclosure Alternatives) Program.  The Federal Government seems to have taken notice.

On August 9, 2011, the Home Affordable Foreclosure Alternatives Program adopted certain policy guideline changes.  The changes, we presume, are in response to concerns raised with respect to the unwillingness of lenders to publish their respective HAFA guidelines and requirements. Indeed, we have seen that each lender’s HAFA guidelines amounted to no more than a moving target, a target which changed frequently. That could now be a thing of the past.

The attached HAFA Update states that a servicer must now complete and post to its website a matrix that indentifies the servicer’s unique HAFA eligibility criteria and program rules.  This matrix must be consistent with the lender’s HAFA Policy and any specific investor requirements. 

All lenders are required to have their matrices posted no later than October 15, 2011.  During this time period, we will keep abreast of each lender’s specific program rules and guidelines as they become available.  It is our belief that in forcing lenders to publish these guidelines, lenders will be less able to make arbitrary changes to their HAFA guidelines. That could eventually lead to more reliability and certainty in the short sale approval process.

Foreclosure Filings Affecting the Number of Short Sales

A recent article in the Herald Tribune discusses the increase in foreclosure filings and the expected increase in foreclosure filings.

We have seen a substantial increase in the number of short sales we have been asked to handle for borrowers over the same period last year. Whether or not that is related to the increase in mortgage foreclosure filings is subject to debate.

However, it is not uncommon for borrowers to consider a short sale as the better “exit strategy” once foreclosure proceedings have been initiated. One might reasonably surmise that the foreclosure filing becomes the catalyst for the consideration of a short sale. If true, the increase in foreclosure filings could lead to a substantial increase in short sales.

Berlin Patten Welcomes Donetta Sanchez

Berlin Patten is pleased to announce the addition of Donetta Sanchez to its expanding team of short sale negotiators.  With the addition of Ms. Sanchez, Berlin Patten adds to one of the largest and most experienced short sale negotiation teams in Southwest Florida. Ms. Sanchez comes to us directly from commercial real estate management in Sarasota and Bradenton.  Her previous experience of 14 years in the mortgage industry, by way of Hawaii and Michigan, is consistent with Berlin Patten’s core philosophy of bringing in seasoned mortgage lenders who have substantial behind the scenes lender experience.  We welcome Donetta to our growing short sale group.  Her years of experience and organizational skills will be an asset to the Berlin Patten team.

Jason P. Ramos Joins Berlin Patten

Jason P. Ramos, ESQ.

The law firm of Berlin Patten is pleased to announce that Jason P. Ramos has joined the firm as an Associate. Mr. Ramos will practice in the areas of Real Estate Litigation, Consumer Bankruptcy and Immigration. He will be based in the firm’s Sarasota office.

Mr. Ramos received his undergraduate degree, summa cum laude, in Biology from Sacred Heart University in San Juan. In 2003, he received his Juris Doctor, cum laude, from the University of Puerto Rico School of Law.

Mr. Ramos is licensed to practice law in Federal and State Courts in both the State of Florida and the Commonwealth of Puerto Rico. He is fluent in Spanish and has extensive experience in matters pertaining to Commercial Litigation, Bankruptcy and Immigration. His background and unique insight will make him a valuable addition to the expanding Berlin Patten litigation team.