by: Marge Lindsay
When I hear things that aren’t good, or right, I often say “bad doggie”. Well, with some of the calls, and stories I am hearing about some lenders right now I say “bad doggies”! As an example, I just had a call from one of our sales associates. She said she is representing buyers who are suppose to close on their home purchase this next week.
There is a first and a second on the property. The first lender agreed to terms and provisions for a short sale and the second lender just came back and said they would agree for a specific dollar pay off, which is higher than they expected.
The buyer still likes the house and is willing to pay the increased amount to the second lender because the seller doesn’t have the money to do it. That all sounded good, until the lender who is working with our buyer said we needed to make a few changes. The lender said the buyer cannot pay the difference because it is prohibited by FHA rules on this particular loan. (I don’t know the specifics as to why it is prohibited.) The lender told our associate to pay the money to the second lender out of her commissions. She then suggested we get a Buyer Broker Exclusive Employment Agreement form signed by the buyer to repay this amount to our associate at the closing. The comment was you can then do this and not get in trouble.
I disagree. If it is prohibited by FHA regulations, how does coming in the back door, calling it a front door make it okay?
My immediate suggestion was to rewrite the contract, increasing the sales price by the additional amount needed. The seller could then pay whatever is needed by the lenders for approval. In addition it is fully disclosing what monies the buyer is putting down and how it will be disbursed.
Our associate even suggested something like this but the lender discouraged it because it will drag this out longer causing unnecessary delays.
My second suggestion was for our associate to have the lender give her something in writing that very specifically stated that although FHA regulations prohibit this, our company and our underwriter suggest you pay the money to the second lender out of your commissions and get reimbursed by the buyer with a Buyer Broker Agreement. I also said the lender needs to add words that give our associate and John Hall & Associates release and indemnification language for our protection.
I suspect the lender will not put anything like this in writing. I suspect we will end up requesting an extension to work out the details to properly handle this situation. I recommend you read this article: http://www.cnbc.com/id/34877347
I fully understand the need to earn money, to close transactions and to satisfy our clients needs when we can. I also fully understand staying out of trouble, not needing to defend myself in a legal action and not going to jail. If you can’t disclose the whole, true picture on the HUD 1, don’t play. We don’t want bad doggies here!
Marge, you are my hero.
The problem isn’t so much that a second short sale lender demands/requests more $$$ at the close of escrow, rather it is when the parties (read: overly eager and unregulated short sale negotiator) insists that the subsequent demand by the second short sale lender doesn’t require approval from the first short sale lender. Without any question whatsoever, it absolutely does! I mean really, if the first lender knew there was more money available in the deal, they would likely want those funds paid to them.
The nasty practice of the 2nd lender demanding more $$$ right at the close of escrow is not uncommon. Think about it. They know that they have a viable transaction will all the hard and laborsome approvals out of the way. The buyer is emotionally vested in the deal and likely would pony up a few more $$$’s to make the deal. The Realtors and Seller are all eager to get the deal closed.
They also realize that there is a lot of naive people out there that are willing to accept a casual statement like “it’s done all the time”, or worse “if you don’t do it, we’ll find another Realtor/Title Company that will”, just like the example in the artcile you mention.
By the way, thank you for re-posting that article. It is an important tool to get to where we need to be in processing short sale transactions.
My educated guess is that too many of the same people that brought us mortgage fraud, are now in the short sale business. There is a right way to do this, and as you have so aptly pointed out, there is are wrong ways.
Thanks
[...] One Lender’s Bad Idea of the Week – Another horror story of lenders gone wild. Hey there is a Youtube idea, who wants to run with [...]
I had this same issue arise with one of my buyers. I discussed with a title officer that is very involved in short sale transactions. His advice-don’t do it! There is always the possibility the 1st lender will see the additional funds on the HUD-1 & decide they should have the extra funds. In this environment, I would not trust what any short sale lender promises until the deal closes!
[...] Lindsay, 2nd in command, shares a true life story from our broker’s [...]