Mortgages

I’m happy to welcome guest blogger, Patrick Maddigan, Esq.,the Director of Operations and Business Development at our new entity, TitleHub Closing Services. Pat is writing today on the new FHA lending changes.

On January 20th, the Federal Housing Administration (FHA) announced it would tighten certain lending requirements and guidelines with the purpose of reducing risk and improving its weakening financial health. The changes include:

  • Borrowers must pay an increased upfront mortgage insurance premium (MIP) of  2.25% of the loan amount (increased by 50 basis points from 1.75%). FHA has also requested legislative authority to increase the maximum annual MIP so it can reduce upfront costs for prospective home buyers.
  • For borrowers with poor credit (credit score of below 580), they must make a minimum down payment of 10% (up from 3.5%).
  • Seller credits for closing costs are cut by 50% and cannot exceed 3% of the purchase price.
  • FHA will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.

The formal Mortgagee Letter released by FHA can be found here. FHA has not announced a firm date on which the proposed changes will be effective, though they are expected to go into effect in either spring or summer.

The Rising Tide Of FHA Loans

With the current recessionary economic state, constricting mortgage availability, and general credit crunch, FHA loans have become extremely popular. FHA loans, which feature low down payments, competitive interest rates, and more forgiving credit requirements, have proven the loan of choice for many first time home buyers and those with marginal credit scores. In 2009, approximately $290 billion in FHA loans were issued, up nearly 500% from 2007. Despite the housing downturn and credit crunch, FHA mortgages have continued to grow, thanks in part to incentives like the First Time Home-Buyers Credit. In anticipation of the continued increase in interest and demand for FHA mortgages, HUD is requesting $400 Billion for the expected flood of FHA loan applications in 2010. The dramatic rise in FHA backed loans, however, has caused the steady depletion of FHA reserves, putting the agency at greater risk of financial distress and even collapse. Regulators proposed the changes outlined here as  to ensure its long-term financial integrity while positively impacting the ailing housing market.

Two of the recently announced changes in FHA loans will have a clear effect upon buyers in the more immediate future- the rise in upfront mortgage insurance premiums (UFMIPs) and the FICO/minimum down payment adjustments.

Up-Front Mortgage Insurance Premiums Increased To 2.25%

The first change that will immediately impact borrowers is the FHA’s increase of the required up-front mortgage insurance premium by 50 basis points to 2.25% of the base loan amount. This change is effective beginning April 5, 2010.

FHA requires two types of mortgage insurance premiums (known in the industry as a MIP): an up-front and an annual. The MIP is similar to private mortgage insurance, or PMI, for borrowers investing less than a 20% down payment. The MIP amount is based on a percentage of the remaining debt on the FHA loan, so as the mortgage is paid down, the MIP will decrease. Unlike private mortgage insurance, FHA borrowers are able to finance the MIP into the loan, thereby spreading the cost over many years. The “annual” MIP is termed annual but paid monthly as part of the loan payment.

For a $300,000 loan, the increase in the MIP fee would add approximately $1,447 to the loan amount, not a huge amount, but nothing to sneeze about when financed over a 30 year loan term. 

Minimum FICO Credit Score/10% Down Payment for New Borrowers

New borrowers will now be required to have a minimum FICO credit score of 580 to qualify for FHA’s 3.5% down payment program. Borrowers with a credit score below 580, while still able to qualify for a FHA loan, must now put down at least 10% of the purchase price–an amount that may be prohibitive for many borrowers with poor credit.

Until now, there has been no minimum FICO score requirement imposed by FHA, however some lenders who fund FHA loans have previously imposed their own requirements (often lenders would not work with credit scores under a 620), so the net effect of this change may not be that significant. While this will preclude some of the underserved community the FHA is seeking to help, it will better balance the FHA’s risk levels and still continue to allow borrowers who have historically performed well to access the benefits of an FHA loan.

Patrick Maddigan, Esq.

Impact Of The Changes

The FHA is making an effort to lower its overall risk and improve the financial soundness of its insured loans, which in turn allows for the continued support of home buying in the United States. In doing so the FHA must find a way to keep their insurance fund’s capital ratio returns above the Congressionally mandated 2%, while continuing on their overall mission of aiding borrowers in underserved communities and facilitating the recovery of the housing market

These changes, along with the other FHA reforms (including a reduction in allowable seller concessions and significant changes and oversight for lenders) will have varying effects on borrowers interested in a FHA loan. For borrowers with low credit scores, some of these changes, such as the higher down payment percentage, will significantly affect their ability to buy a home. In the short term, the changes may motivate borrowers to lock into the old FHA guidelines before the new changes become effective.

If you are interested in an FHA loan, click here to Find An FHA Approved Lender In Your Area.

Thanks for the great information Pat! We’ll be seeing more of you around here hopefully.

If you wish to speak with a very knowledgeable mortgage lender about an FHA loan, we recommend that you contact David Gaffin at Greenpark Mortgage.

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My post on lenders using loan cost worksheets and estimates was the featured post on ActiveRain yesterday, spawning over 140 comments by last count. It turned into quite a lively discussion by mortgage lenders about how frustrated they are with the new Good Faith Estimate and RESPA rules. After digesting all the comments, I have to say that I completely understand mortgage lenders’ frustration, and that worksheets are a necessary evil, if you will, due to HUD’s failure to get the new GFE right.

As my mortgage lender friends point out, the new GFE inexplicably fails to provide some of the most important information for homebuyers: (1) the total monthly mortgage payment (including escrows, taxes and insurance), (2) total cash needed to close, and (3) seller paid closing costs. Every borrower wants to know how much they are paying a month and how much they’ll need to bring at closing. Since the new GFE doesn’t provide this important information, lenders are filling in the gaps with loan worksheets. This why one mortgage lender called the new GFE “the single worst government form dumped on the real estate industry.”

Here are a few of the comments from mortgage lenders:

Ted Canto of Academy Mortgage writes:

Hi Richard,

Timely and important post. Thank you!

We are a company that does provide a worksheet/ summary of the costs but that is before the triggers take effect (Quoting stage).  Our worksheet is actually based off all the costs that we input into the file and we are in compliance to the new rules. Once the triggers are set we immediately send them the new GFE.

The problem with the new GFE is that it doesn’t provide any uniformity to the quoting stage of the conversation between lender and client.  This causes almost all lenders to create their own idea of what constitutes a quote or a GFE.  I have seen a bunch of them and I can say that many of them are deceitful as they do not come close to disclosing the actual costs that the client, ultimately, will have to pay.

Chris Richter, Chicago Mortgage Loan writes:

Richard, Nice post.  I can’t figure out if I 100% agree or disagree with you.

I 100% agree with your position against the homemade comparison charts.  I saw a mock excel worksheet yesterday from one of the two big bailout recipient banks yesterday.  It had costs that did not pass through on the =sum() function and the rates were .5% higher than market.  It was deceptive at best.

I am not going to contend that the new rules are not without fault.  I agree that, if it was issued, the new GFE would be a fantastic apples-to-apples comparison. As a lawyer, if XYZ Bank was your client, would you advise them to issue a GFE when they don’t have to and can’t reasonably measure their exposure?

Personally, I think they missed an opportunity to create a standardized preliminary document.  I think the best part of the GFE is that it won’t vary in form or function between lenders.  Yet the preliminary estimate sheets will vary infinitely and that defeats the entire spirit of the changes.

As for the complaints about cash-to-close and monthly payment, that is simply not the purpose of the document.  I’d argue that information should not be on the GFE.  It is a GFE “of settlement costs” not “of everything you’d want estimated all rolled up onto one page.”

An overpriced lender can no longer redirect the consumer’s attention by talking about the monthly payment or cash-to-close. I don’t see how that is bad.

Gerard Ladalardo, Bank of America

I agree with most of the comments about the new GFE. While the intentions were good and warranted, it does fall short of simplifying all the fees to the borrowers. It seems like it’s even more confusing for borrowers, lenders and realtors. I had lunch with a very experienced, extremely intelligent broker friend of mine last week and he said that some lenders aren’t even allowing them to send out GFE’s because they are completely confused on the correct way to have them completed correctly and they are also afraid of the potential liability.

At Bank of America our Closing Cost Worksheet (CCW) DOES DISCLOSE the total closing costs broken down individually, the seller credit (if any), the cash to close and the total PITI mortgage payment. This is what we send to the borrowers when they are qualified to buy a home prior to the disclosures being mailed out by our processing staff. You can be completely confident that working with a B of A loan officer that your client will get a great loan! We have low rates, we never, ever charge origination fees, low lender fees and we can’t get overage/rebate at all. (you can’t selll the borrower a higher rate and get paid on this overage/rebate- if there’s any at all, it goes back to the borrower to pay closing costs).

And to sum up, as Mark Aalto of First Pacific Mortgage so succinctly does:

It does no one any good to just gripe about the new form.  It’s here in it’s present form and the best policy is to do what we can to live with it and to understand what it is and what it isn’t all about.

Lenders, what are your thoughts about the new GFE? How has it changed the manner in which you assist borrowers with pre-approvals, if at all? What should HUD fix next go-around with the new forms?

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The Los Angeles Times and other media outlets are claiming that lenders’ use of loan cost worksheets and estimates are a “sidestep” of the new RESPA mandated Good Faith Estimate which went into effect on January 1. HUD officials say they plan to conduct a review of the growing use of “worksheets” and “fee estimate” forms by mortgage lenders providing quotes to home buyers and refinancers. Lenders vehemently deny that they are doing anything wrong; in fact, they argue, cost worksheets are necessary because of several glaring deficiencies with the new Good Faith Estimate. This is all part of the shake-out during the first 30 days of the new RESPA reform which went into effect on January 1.

The new closing cost rules under the Real Estate Settlement Practices Act (RESPA) significantly changed the manner in which lenders are required to estimate loan and closing costs. Many charges cannot deviate at all, or at most by a 10%, from the Good Faith Estimate to the closing. That’s in stark contrast to earlier rules, which essentially allowed some lenders to quote low estimates of total costs, with no responsibility for the final dollar charges at closing, HUD contended.

Lenders — many of whom are feel the new GFE is the single worst government form ever to hit the real estate industry — respond that since the new GFE has a number of major deficiencies, such as not providing a total monthly cost payment, seller paid items and most importantly cash-to-close, it justifies the worksheets/estimates. (And if you can believe this, there’s no place on the GFE for the borrower to sign!).

Lenders, what are your complaints with the new GFE? (Try to keep them under 10!). Do you think providing these worksheets will ultimately help consumers? Are the criticisms about the worksheets unfair? Did HUD get it wrong with the new GFE? (I think I know the answer to that!). What can HUD do to improve it?

There is nothing explicit in the new RESPA rules prohibiting the use of these cost worksheets/estimate. Since this practice is on HUD’s radar, my recommendation to lenders is to explain clearly to the customer, preferably with a written disclosure right on the estimate, that this is not binding and not a substitute for the new GFE. That way, if HUD comes knocking on the door, you’ve covered yourself.

My goal with this post is to get the conversation going on the new GFE, not to rail against the mortgage industry. I’m on your side! As Jerry Maguire said, “Help me, help you…help me, help you!”

On a related note, as buyer’s counsel I now insert a rider provision into the P&S providing that the seller agrees to an extension (up to 7 days) of the closing date due to any RESPA/GFE related delays.

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David Gaffin, Greenpark Mortgage

I’m pleased to welcome another guest blogger, David M. Gaffin, a licensed Loan Officer with Greenpark Mortgage Corp. of Needham MA. Dave is licensed to originate in MA, NH and FL. You can visit him at Greenpark Mortgage or through his LinkedIn profile.

The new 2010 RESPA rules are all the rage right now. So I’m especially pleased to have a mortgage industry veteran like Dave to offer his views on the new rules, especially the new Good Faith Estimate (GFE).

So, you thought getting a home loan for purchase or refinance before was confusing? Well, I’ve got GREAT NEWS for you. Your government has heard you and has come to help! (Insert Sarcastic Mental Voice.)  The federal Housing and Urban Development agency (HUD) has dismantled the previous 1 page Good Faith Estimate that itemized most of the settlement charges for your loan and created a new 3 page “simplified” GFE to “help borrowers understand and compare the costs associated with obtaining a mortgage.”

In my opinion, HUD is trying to do at least 2 things for consumers:

1. Protect the consumer from dealing with shady mortgage companies that will disclose certain fees on the GFE, and then charge higher or additional fees at the closing table and

2. Encourage consumers to use the GFE as a shopping tool to ensure a fair deal.

An informed consumer will typically make better choices than an ill-informed one, so the premise behind the changes to the new GFE is a worthwhile one. However, there are several areas where a consumer may not be able to compare the costs of loan programs on an equal basis and thus make the most appropriate loan choice.

Page 1 of the new GFE groups together all of the “Adjusted Origination Charges” (e.g. processing and underwriting fees, points, doc prep, etc.) as one figure and the Charges for All Other Settlement Services (e.g. closing attorney fees, title insurance, recording fees, etc.) associated with closing your loan as another figure and adds them together to come up with the Total Estimate Settlement Charges.

The new GFE also spells out your loan amount, loan term, interest rate and the initial monthly payment for principal interest and any mortgage insurance.

However the new GFE does not include expected expenses for monthly real estate taxes, homeowners insurance, or home owner’s association dues. Nor does it inform the borrower about expected funds needed to close the loan. Because all the origination charges are lumped together, the new GFE is not specific in disclosing the number of points required to close the loan. It also does not include the Annual Percentage Rate, or APR.

Escrow funding for reserves of real estate taxes, home owner’s insurance and mortgage insurance are included on page 1.

However, despite the fact that this total sum should be uniform across lenders, the new GFE allows the lender to quote whatever number of months of reserves they choose, resulting in a variance of hundreds or thousands of dollars when comparing GFEs. This is not a borrower savings from lender to lender. At settlement these charges will be the same for all lenders.  This could result in the borrower unexpectedly bringing additional funds to the closing.  Some mortgage companies will try to gain a competitive advantage by initially disclosing lower escrow totals.  This would be an unfair and deceptive trade practice to the consumer.

Page 2 breaks into sections the charges for All Other Settlement Services which will include such newly disclosed charges as Owner’s Title Insurance, (which is an optional, but recommended purchase) and Transfer Taxes.  In many states, the Transfer Taxes are disclosed as a borrower–related cost, even though the borrower may not be responsible for this cost, thereby inflating the Total Charge Estimate.

Page 3 gives the consumer information about which expense items on the GFE cannot increase at settlement, which one’s can have a total increase of a 10% increase and which ones can change without limit. The origination charges cannot change at settlement.

Lenders who allow borrowers to choose settlement service providers will receive a Page 4 to the new GFE which will list those providers.

Analysis:  Does the new GFE Help Consumers Or Is It Just Another Complicated Form?

I have been in the mortgage industry for many years and have advanced educational degrees. I have passed my required national and state licensing exams and even I find this form to be confusing and not very helpful when comparing loans. My job as a loan consultant is to inform and educate my clients so that we arrive at the best loan program for them with the least costs based on their needs. I use different tools to compare programs, including cost/benefit analysis, total interest paid comparisons, length of loan term reviews, etc., but, with the new GFE rules, I must disclose 1 loan program within 3 business days of collecting 6 points of entry for an application. If I fail to do so, even if the borrower and I have not determined the best program for them yet, I am in violation of the law. I do not see how this helps the borrower determine the best loan program.

I will give HUD credit for trying, and as this is now the law of the land it is what we must all work with, however, given the vast departure from the look and feel of the previous form, it is going to take a lot of education on the part of loan officers, realtors and attorneys to establish a comfort level with the borrower’s understanding of the form.

When a borrower chooses a lender, they should be referred by someone they trust, should check out the lender’s and loan officer’s reputation by reviewing its website or other public information and feel comfortable that the loan officer is knowledgeable, understands their needs and has the borrower’s best interests in mind.  Then a GFE received from that company can be viewed as a Good Faith Accurate, and not just a Good Faith Estimate.

Dave, thanks so much for your insightful analysis! This is a great post and a boon for our readers. This underscores why borrowers must have an experienced and knowledgeable loan officer such as David Gaffin on their team.

I have certainly spend a fair amount of time digesting the new changes, but perhaps that is because I am so used to the old forms. The irony may well be that many consumers will be seeing the new GFE for the first time and may not be as confused as some of us industry veterans. Adjusting to major changes to long standing practices is always difficult.

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In this post, I’ll discuss a very important issue to lenders, closing attorneys and borrowers alike: how the new RESPA rules handle the disclosure of closing attorney fees/costs and title insurance.

The new RESPA rules significantly change the way lenders must disclose settlement services, in particular closing attorneys’ fees, and title insurance. Generally, under the new rules, closing costs are divided into one of three “buckets”:

(1) those that cannot change from initial Good Faith Estimate (GFE) disclosure

(2) those subject to a 10% tolerance–that is, those which cannot increase by more than 10% from the GFE to the closing, and

(3) those that can change, i.e., increase without limitation.

Here is how the GFE (page 3) shows the 3 buckets:

For closing attorney fees (which HUD now calls “title services”) and title insurance, bucket #1 does not apply, and whether the cost belongs in bucket #2 or #3 will depend on whether the lender recommended the service provider on a written list of preferred providers. If the borrower selects a provider from the list, such as a closing attorney, their charges cannot increase by more than 10% from the GFE to the closing.

Thus, lenders have an incentive to recommend trusted providers whose charges are standard and predictable. If the borrower wants a particular attorney or title insurance provider not on the preferred list, he/she is free to select one, but their charges are not subject to the 10% tolerance and can go up (or down) by any amount.

Also remember that lender’s title insurance is universally required by every public mortgage lender, and in Massachusetts the borrower pays that premium at closing (except for no closing cost loans). A lender’s title insurance policy, however, does not protect the homeowner. As HUD and I always advise, borrowers should always get their own owner’s title insurance policy. (See HUD’s Shopping For Your Home Loan Booklet and my post, Title Insurance Demystified for some horror stories about what happens when you don’t purchase an owner’s title insurance policy).

Here is how the new GFE (page 2) discloses closing attorney fees/title services and title insurance:

Note that lines 3 and 4 represent a huge change from prior practice for closing attorneys. Now closing attorney fees must be disclosed as a single, lump sum charge, plus the cost of the required lender’s title insurance policy. The old GFE itemized such closing costs as courier fees, discharge tracking fees, and the like, but the new GFE is intended to simplify the disclosure of attorney closing costs in favor of one standard charge that consumers can compare across the board.

From the GFE, these fees and costs are ultimately carried over on the new HUD-1 Settlement Statement, with reference to the new GFE lines:

At the closing, the borrower can now simply compare the GFE with the new HUD to ensure that the quoted charges have carried over to the closing table. Remember though that selected costs from a “preferred provider” may deviate up to 10% under the tolerance rules. Also, for the first time the new HUD mandates disclosure of the closing attorney’s share, or split, of the title insurance premium.

This is my second post in a series on the new Real Estate Settlement Practices Act (RESPA) rules which went into effect on January 1. My first post was Are You Ready For Some RESPA Reform? An Overview Of The New Regulations. Click here for a listing of the entire RESPA series.

As always, please contact Attorney Richard Vetstein with any questions.

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Update (2/25/10)Mass. High Court May Take Ibanez Case

I’ve been asked several times recently for an update on the status of Land Court judge Keith Long’s controversial ruling in U.S. Bank v. Ibanez, which invalidated thousands of foreclosures across Massachusetts. Click here for my prior post on the case.

Unfortunately for those affected by the decision, not much is going on. Lenders have reportedly appealed the decision. Word has it that the lenders have hired mega-firm K&L Gates to handle the appeal. (Interestingly, K&L Gates is the same firm which secured a major ruling against the Massachusetts Real Estate Bar Association over non-attorneys handling real estate closings in Massachusetts).

The record in the Land Court is currently being assembled. The Massachusetts Appellate Court database doesn’t even list the case as yet up on appeal. Accordingly, this appeal is many, many months away from being decided.

Also, watch for the lenders to ask the Massachusetts Supreme Judicial Court to take the case on direct appeal. While this will delay the appeal some in the short term, the SJC is the final stop on the appellate railway, and its decision is the final word on the matter. Given the pro-consumer decisions recently issued by the high court and its current makeup of somewhat liberal justices, my money is still on an unfavorable decision for lenders in this case.

In the meantime, I’m hearing that lenders are simply re-doing their foreclosures with the correct loan paperwork (i.e., the mortgage assignments) brought up to date. For buyers who had an agreement to purchase a foreclosed home, this most likely means you will have to wait in line again and re-bid on the second foreclosure.

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With 11 days and counting until all lenders and closing attorneys must be in compliance with the new RESPA requirements and the new Good Faith Estimate (GFE) and HUD-1 Settlement Statement, HUD has released two helpful documents:

The booklet encourages retaining a competent real estate attorney in the transaction:

Before you sign a sales agreement, you might consider asking an attorney to review it and tell you if it protects your interests. If you have already signed your sales agreement, you might still consider having an attorney review it. (Ed. You definitely want an attorney to review and mark up the purchase and sale agreement, or else you’ll wind up signing the standard form and getting burnt).

If choosing an attorney, you should shop around and ask what services will be performed and whether the attorney is experienced in representing homebuyers. You may also wish to ask the attorney whether the attorney will represent anyone other than you in the transaction. (Ed.: You definitely want to choose an attorney who specializes in real estate, as opposed to an attorney who dabbles in it. Residential real estate practice, once considered fairly basic, has rapidly changed into a complex maze of regulations, disclosures and standards. You need someone who does this every day.)

In some areas, an attorney will act as a settlement agent to handle your settlement. (Ed.: In Massachusetts, it is fairly common that the same attorney will represent a buyer and close the loan for the lender. This is called a dual representation and often saves the home buyer money on closing costs. The buyer’s and lender’s interests are aligned as both parties must have clear and marketable (and insurable) title to the property).

The booklet also provides very helpful encouragement for buyer’s to purchase title insurance, which I always recommend:

Title Services and Settlement Agent

When you purchase your home, you receive “title” to the home. Certain title services will be required by your lender to protect against liens or claims on the property. Title services include the title search, examination of the title, preparation of a commitment to insure, conducting the settlement, and all administration and processing services that are involved within these services. Many lenders require a lender‟s title insurance policy to protect against loss resulting from claims by others against your new home. A lender‟s title insurance policy does not protect you.

If a title claim occurs, it can be financially devastating to an owner who is uninsured. If you want to protect yourself from claims by others against your new home, you will need an owner’s policy.

Kudos to HUD for finally advocating the benefits of title insurance!

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I’m getting pretty tired of all the condominium developers and realtors out there claiming and clamoring that the new FHA condominium guidelines which went into effect this week are the next coming of the Apocalypse. The fact remains that the new guidelines will ensure that condominiums are financially sound and well-run, and that’s good news for everyone: lenders, consumers, buyers, unit owners and realtors alike.

David Fletcher, a Florida real estate broker and former developer who has survived every recession since the 1970’s, gets it. In an article in Realty Times yesterday, he outlines 10 benefits of the new rules, especially from a sales and marketing perspective:

  1. More buyers will enter the market because they can afford the lower down payment.
  2. No single investor can purchase more than 10% of the units, so the idea of a controlled association by one or two investors is no longer a threat.
  3. More inventory will offer wider choices tending to keep prices in check, as “FHA approved’ condominiums come on line.
  4. More real estate agents will be willing to show condominiums to their buyers, because the lender who provides the mortgage will have to approve not only the condo documents, but the condo association’s budget, reserve account and its fidelity insurance policy.
  5. New construction developers have the guidelines needed to create urgency in their pricing strategies, which is key to building and maintaining momentum.
  6. Commercial lenders will have a more comfortable level with developers. While the 50% presale requirement may look obtrusive, it is actually a benefit to the developer, because it will create urgency for buyers to purchase.
  7. Established associations that have dragged their feet to get their finances in order, now have a valid value-based reason to become “FHA Approved.”
  8. Real estate agents will show FHA approved condominiums with confidence in the association’s finances, not just because the down payment is low.
  9. Forward thinking lenders will hustle to become a “an approved lender’ in resale and new communities alike
  10. Knowing the property already has approved lenders will make competition for listings tighter and will attract more buyers and more prospects to the listing.

David believes — and I agree with him — that “FHA Approved” will become one of the most sought after seals of approvals for condominiums in 2010 and beyond. Let’s hope that all the realtors, lenders, and condominium developers out there realize the benefits that can be gained from obtaining FHA approved status.

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After several revisions and delays, the Federal Housing Administration (FHA) has finally issued major changes to its revised guidelines on mortgage insurance requirements for condominium projects. FHA first proposed the revisions back in June (under Mortgagee Letter 2009-19). The new guidelines are effective December 7, 2009; however, some of the requirements are phased in through January 31, 2010.

There has been a considerable amount of controversy involving HUD/FHA’s proposed requirements for obtaining FHA mortgage insurance for condominiums. The newest guideline revisions are in response to the strong reaction from condominium associations and mortgage industry representatives who saw many of the FHA requirements as counter-productive and burdensome to condominium associations and owners.

The latest guidelines are described in two separate HUD/FHA documents:

  • Mortgagee Letter 2009-46B (the revised guidelines for FHA approval of residential condominium projects)
  • Mortgagee Letter 2009-46A (temporary guidance for condominium approvals).

Under the Temporary Guidance:

  • The “Spot Loan” approval process will continue through February 1, 2010, after which it will be replaced by the new Direct Endorsement Lender Review & Approval Process (DELRAP); and
  • The 30% cap on FHA loans per condo project will be expanded to 50% until December 31, 2010. Concentrations may be increased to 100% if certain additional conditions are met. After January 1, 2011, the cap reverts back to 30%.

The highlights of the New Guidelines are as follows:

  • Condominium project approval is not required for condominiums comprised of single-family totally detached dwellings (no shared garages or any other attached buildings).
  • Until December 31, 2010, at least 30% pre-sale level must be reached before any FHA mortgage can be granted on any unit. After 12/31/10, 50% pre-sale level must be reached.
  • 50% owner occupancy rate for the entire project.
  • No more than 15% of unit owners can be delinquent (over 30 days late) on their condominium fees.
  • Capital reserve funding:  The reserve study requirement has been eliminated, along with the requirement of at least 60% of the fully funded reserves. The new requirement requires merely that at least 10% of the association’s annual budget be set aside for reserves.
  • Budget review:  Lenders must review the condominium budget to determine that the budget is adequate and: (i) includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; (ii) provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and (iii) provides adequate funding for insurance coverage and deductibles.
  • No more than 25% of space allocated to commercial use.
  • No more than 10% of units held by a single investor.
  • The 1-year waiting period for conversion condominiums is eliminated.
  • Unit owners must obtain individual HO-6 insurance policies if the master policy doesn’t cover unit interiors.
  • Fidelity insurance must be obtained for 20+ unit projects.
  • Re-certification required every 2 years.

Transition Strategy:

  • FHA will move all currently approved condominium projects to the new approval list and FHA Connection database.
  • Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2009.
  • Projects that received approval between October 1, 2008 and December 7, 2009, will be “grandfathered” and will have to follow the new guidelines’ recertification process (recertification required every two years).

couple-homeAnalysis:

Although the condominium association and mortgage lobby were successful in watering down some the more onerous requirements, the new revised guidelines will still represent a major change in how lenders underwrite condominium mortgages. Lenders will have to perform much more extensive due diligence on condominium projects than before.

The new guidelines will also force existing condominium associations to really get their acts together, especially with their unpaid condominium fees, budgets, insurance and capital reserve accounts. FHA mortgage programs are becoming the first choice for first time home buyers, and condominium units are particularly suitable for first timers. I have already seen situations where condominium trustees feel no obligation to comply with FHA (and Fannie Mae) guidelines in connection with a proposal sale of a unit, and it is not a good situation. Condominium trustees and association can certainly open themselves up to liability if they don’t cooperate and maintain the marketability of the units which they govern. Trustees owe unit owners a fiduciary obligation to get their associations in compliance with all new FHA/FNMA guidelines, in my opinion.

For condominium associations, the Community Associations Institute has published this helpful “Head’s Up” and FAQ.

As always, contact Richard Vetstein with any questions.

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For my entire series on the new 2010 RESPA rules, look to the right under “Spotlight On: RESPA Reform” or click here.

The U.S. Department of Housing and Urban Development (HUD) announced on Friday that it will not enforce for a 120 day period new, sweeping regulatory changes to the Real Estate Settlement Procedures Act (RESPA) set to go into effect January 1, 2010. The new regulations will still go into effect on January 1, 2010, but the board overseeing enforcement of these new rules will “exercise restraint in enforcing” them. HUD wants all lenders to make a good faith effort to comply with the new regulations beginning on January 1.

The major components of the new RESPA reform are the new and substantially revised HUD-1 Settlement Statement and Good Faith Estimate (GFE) of closing costs issued by lenders, settlement agents, and closing attorneys. HUD will require that lenders and mortgage brokers provide consumers with a newly revised Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. Closing agents will also be required to provide borrowers a new HUD-1 Settlement Statement that clearly compares consumers’ final and estimated costs.

The new RESPA rule became effective on January 16, 2009, but provided a one-year transition period for the mortgage industry to incorporate these changes. HUD will continue to work with the mortgage industry during this period, including providing a comprehensive set of frequently asked questions (FAQs) on its website.

This is very good news for lenders and closing attorneys so they can take advantage of some well needed additional time to digest the new forms and procedures. I recently attended a seminar on the new RESPA changes, and they are quite a substantial change to the current GFE and HUD-1. Lenders must provide borrowers with a firm “origination charge” which must include all the various loan origination fees now separately itemized on the HUD-1 Settlement Statement, including points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees. This origination fee cannot increase. Lenders also have to provide borrowers with a “firm” quote for typical closings costs, including attorneys’ fees, title insurance and recording fees, and select up to 1 preferred provider for such services. The firm quote cannot increase by more than 10% at closing. If the lender allows, borrowers can use their own providers who will not be subject at all to the firm quote requirement. The new changes will require quite a bit of coordination between lenders and closing attorneys.

Most lenders who I have spoken to are not ready for these changes. The likely impact is that for the first 4 months of 2010, borrowers could see either the current or the revised GFE and HUD-1 form, depending on whether the lender/closing attorney has implemented the changes.

For a more comprehensive review of the new GFE and HUD-1, please read my posts, Are You Ready For Some RESPA Reform?  Part I, An Overview of the New Regulations, and New RESPA Rules 2010: Disclosure of Settlement Services, Attorneys Fees and Title Insurance.

As always, contact me, Richard Vetstein with any questions.

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Update: 11/10/09–FHA Issues Final Revised Guidelines–Spot Approvals Extended Until Feb. 1, 2010

With an eye on the “volatility” of the condo market, the Federal Housing Administration (FHA) has backed off some of the stingy new rules for condominium lending set to be implemented Dec. 7.

After a meeting with the Mortgage Bankers Association last week, the FHA made the following changes to its June 12 condominium guidance letter in a new letter dated Nov. 6:

  • Spot loan approvals can continue until Feb. 1, 2010.
  • The FHA will allow a 50 % concentration of FHA loans – up from 30 %- in condominium buildings, and well-qualified buildings can have up to 100 %.
  • A 50 % owner-occupancy requirement for new condo projects.
  • The pre-sale requirement has been reduced to 30 % of new projects.
  • Reserve study requirement eliminated.  Condominium budget must provide for funding reserve account for at least 10% of operating budget

The original implementation date for new condo rules was Nov. 1, but that date was pushed back to Dec. 7. The above rules, except the spot loan approval, are all labeled as “temporary,” effective through Dec. 30 – although the FHA reserves the right to extend that date.

A copy of the new guidelines can be found here.

As always, contact Richard Vetstein with any questions.

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Banker and Tradesman is reporting that Wells Fargo and U.S. Bank will appeal the controversial U.S. Bank v. Ibanez Massachusetts Land Court decision that stung the lenders earlier this year by invalidating two foreclosures in Springfield because of improperly recorded mortgage assignments.Massachusetts Foreclosure Ibanez decision

Lenders filed the appeal on Oct. 29, according to Lawrence Scofield, a senior real estate attorney at Ablitt Law Offices of Woburn, who represented the lenders in the Land Court case. Scofield said Ablitt Law Office would not handle the appeal, but would work with an unnamed “downtown law office” that will be retained to argue in Appeals Court. Scofield said the lenders, lawyers, and parties that filed amicus briefs in the Land Court will meet this week to discuss the more substantive details of the appeal. The disputed decision has raised questions in the mortgage industry regarding potentially thousands of clouded titles, as the practice of back-dating mortgage assignments had been widely used in recent years. “This is a big deal,” Scofield said. “I hope in the worst case situation, the court will recognize the public policy impact this would have, and make this prospective decision and not a retroactive decision, which could really mitigate some of the collateral damage.”

My prior posts on this very important and far-reaching decision can be found here.

If the appeal takes the typical course in the Appeals Court, a decision may not come for up to one year. Given the importance of the decision, I had originally predicted that the lenders would file a direct appeal to the Massachusetts Supreme Judicial Court, the highest appellate court in the state. There’s no indication that the case is going up to the Supreme Judicial Court.

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What Is A Short Sale?

A short sale is special type of real estate transaction between a homeowner, his mortgage holder, and a third party buyer. In a short sale, the homeowner’s mortgage company agrees to take less than what is owed on the outstanding mortgage, thereby being left “short.” In some but not all cases, the lender will agree to wipe out the entire debt. Many people believe that short sales offer bargain basement prices, but lenders will do their best to get as close to fair market value as possible so as to minimize their loss.

Short sales are a unique type of transaction and far different from the typical transaction between parties of equal bargaining power. Likewise, the legal aspects of a short sale are unique.

Short Sale Approval Required

The most important legal issue in a Massachusetts short sale is to recognize that the deal doesn’t go through unless the seller’s lender(s) approve the short sale. Thus, the offer and purchase and sale agreement must reflect that the buyer’s and seller’s obligation to close is contingent upon the lender’s approval of the short sale.

Sometimes, sellers need to obtain short sale approval from not one, but two, lenders with mortgages on the property. Buyers and their agents should research the title ahead of time because a second lienholder can often muck up an otherwise promising short sale.

The Waiting Game

Another significant issue is timing. The typical time-line on a short sale can vary greatly from 45 days to 6 months or more from accepted offer to closing. The approval of a short sale and the negotiation for the reduction in the mortgage balance can be a time-consuming process. There is a long, but manageable, list of documents that must be submitted by the seller/homeowner before a lender will approve a short sale.

Inspections and Financing

Short sale transactions don’t follow the typical process of the “normal” transaction, especially with financing and inspection contingencies. Due to the often lengthy wait for short sale approval, most buyers are reluctant to lock in mortgage financing and otherwise spend to secure a firm loan commitment. The same is true for home inspections. Buyers argue why should I pay for a home inspection if the deal may not even happen? Sellers and their agents often feel that buyers should put a little “skin in the game” and do a home inspection early on. These issues will be negotiated from deal to deal.

When I represent buyers of short sales, I insist that the the closing, inspection, and mortgage contingency deadlines dates in the offer and purchase and sale agreement start “x” days from the short sale approval. There should also be a end date for obtaining short sale approval and protection for the buyer’s rate lock so the agreement is not left completely open-ended and delays won’t adversely affect the buyer’s financing.

Short Sale Addendum/Rider

The deal agreements must be tailored quite specifically to a short sale transaction. Experienced Massachusetts short sale attorneys (like us!) always use a customized short sale addendum/rider. A form, however, is no substitute for an experienced short sale attorney and guidance through the complicated short sale process.

Buyers Bring Your Tools

Also, cash strapped sellers are usually unwilling to do any repairs in a short sale situation. Inspections may be performed and “outs” may be negotiated for significant repairs, but most buyers must ultimately accept the property “as is.”ar123517806003655

Get Experienced Advice and Watch For Scams

Lastly, there’s a growing perception that short sales are akin to the old Wild West. There are also reports of scams and illegal and unethical behavior by realtors such arranging for illegal buy backs to the defaulting homeowners. I suggest reading Metrowest Realtor Bill Gassett’s advice on realtor ethical issues in short sales.

Given the unique nature of the Massachusetts short sale transaction, the sage advice is to work with ethical Realtors and short sale attorneys who have significant experience with short sale transactions.

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Breaking News (1.7.11): Mass. Supreme Court Upholds Ibanez Ruling, Thousands of Foreclosures Affected

Click Here For Our Entire Series Of Post On the Ibanez Case

Update (2/25/10)Mass. High Court May Take Ibanez Case

Today, Massachusetts Land Court Judge Keith Long reaffirmed his controversial ruling made back in March 2009 that invalidated foreclosure proceedings involving two Springfield homes because the lenders did not hold clear titles to the properties at the time of sale. A copy of the decision can be found here.

As I outlined in my prior post on this case, the problem the Land Court dealt with in this case is what happens when modern securitized mortgage lending practices meets outdated foreclosure laws. When mortgages are packaged to Wall Street investors, the ownership of a mortgage loan may be divided and freely transferred numerous times on the lenders’ books. But the mortgage loan documentation actually on file at the Registry of Deeds often lags far behind.

Here is a diagram of the securitized mortgage process (click to enlarge):

The Ruling

Judge Long ruled that foreclosures were invalid when the lender failed to bring  the ownership documentation (known as an assignment) up-to-date until after the foreclosure sale had already taken place. An assignment is a legal document confirming that a mortgage loan has been transferred from one lender to another. Assignments must be recorded with a registry of deeds so anyone researching a property’s title can track the loan’s origin and ownership. Oftentimes, as in the Ibanez case, lenders will sell bundles of loan and record backdated assignments with an effective date before the first foreclosure notice. Judge Long effectively prohibited this practice.

Despite the lender’s attempt to convince him otherwise, Judge Long came out (again) in favor of consumers:

The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.

Judge Long also had some choice words for lenders:

[T]he problem the [lenders] face (the present title defect) is entirely of their own making as a result of their failure to comply with the statute and the directives in their own securitization documents… What the plaintiffs truly seek is a change in the foreclosure sale statute (G.L. c. 244, § 14), which can only come from the legislature.

What Now?

That’s a good question and one not readily answerable. To be sure, the current state of flux and confusion surrounding foreclosure titles affected by an Ibanez issue will remain intact until an appellate court considers the case or some action by the Legislature (which may be unlikely). Given the importance of the decision, I predict that the Massachusetts Supreme Judicial Court will take the unusual step of taking the case directly from the Land Court.

As for what happens in the year or so the case may be in appellate limbo, I asked an in house counsel for a leading title insurance company, and his response was essentially that it’s going to take a fair amount of time and research to figure this one out. If there’s an existing title insurance policy on the property, some but not all of the title companies may be willing to insure over the problem. If there’s no title policy in place, affected parties are going to have to ride this one out for awhile.

Once title insurance companies offer some further guidance, I will post it here.

My Two Cents

While I see both sides of the argument, the decision is troubling to me because Judge Long gave short shrift to the fundamental legal principle that the mortgage follows the note. A valid mortgage is security for some type of underlying obligation, whether it’s a loan or the promise to do something in the future. There’s no question that the millions (or billions) of dollars in loans secured by all these mortgages were validly transferred from one bank/lender to securitized lenders. The money was lent and it didn’t just evaporate into the ether. If the lenders can ultimately demonstrate ownership of the underlying loan which follows the mortgage and produce a valid assignment (albeit late), why isn’t this enough? The borrowers owe the money, and now after this ruling they are immunized from foreclosure by what many folks in the real estate industry view as elevating form over substance.

“For many years, real estate attorneys in Massachusetts have understood that the assignment of a mortgage can be recorded at any time and be effective,” Christopher S. Pitt, chairman of the Title Standards Committee of the Real Estate Bar Association tells Massachusetts Lawyers Weekly.

Now that doesn’t mean lenders don’t need to get their act together. They do. The net effect of this decision will be that lenders must get loan documentation up to date and recorded promptly. Indeed, the Ibanez loan changed ownership at least four times prior to foreclosure — without any of this appearing on the public record.  Two of those entities (Lehman Brothers and its subsidiary) are currently in bankruptcy and a third (Option One) has ceased operations. This is a huge wake up call to the securitized lending industry.

But the question remains, what about all the foreclosures that have already been conducted? And the new homeowners who own these properties and are now saddled with unresolvable title defects? What about these “innocent victims” and the neighborhoods blighted by foreclosed properties which cannot be sold? I guess we can all blame Wall Street once again…

The Consumer Advocate’s Point of View

Attorney Meyer Potashman of Greater Boston Legal Services which filed a brief in the Ibanez case offers this analysis:

This case has the potential to do a lot of damage (or rather reveal the damage that foreclosing lenders did over the past few years), but I think Judge Long was completely right about the law.  Both the statute and all of the securitization documents were clear, and these foreclosures violated both of them. These banks had sophisticated lawyers who knew real estate law when they planned to securitize these loans, but they never bothered to consult their own agreements when the time came to actually securitize, or foreclose, on the loans.  As a result, mortgages were never properly transferred, and the foreclosing lenders never had the right to foreclose.

As with any controversial legal decision, there’s always compelling arguments for both points of view.

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Update: 11/10/09–THESE RULES HAVE CHANGED. Please see my post: FHA Issues Final Revised Guidelines–Spot Approvals Extended Until Feb. 1, 2010

Update: 10/26/09–The FHA Has Delayed Implementation Of New Rules Until December 7, 2009

Under revised guidelines which were to be effective October 1, 2009 but now delayed until November 2, 2009, the Federal Housing Administration (FHA) is implementing a new stricter approval process for condominiums to be eligible for FHA financing. The guidelines are very similar to the new Fannie Mae regulations issued earlier in the year. Some “highlights” of the new regulations include that all FHA approved condominium projects have at least a 50% level of owner occupancy or sell out, no more than a 15% condo fee delinquency rate and a capital reserve study, among other requirements. There is also a little known requirement for an affirmative action housing plan for new construction and conversions. The FHA guidelines will surely slow down condominium mortgage financing, and negatively impact first time home buyers’ ability to obtain FHA mortgages for condominium units.

For those who don’t know, FHA is a government program designed to help more people buy homes, and more borrowers will qualify with FHA financing than with conventional. It is a low down payment (3.5% down) program and the credit standards are much looser. The mortgage rates are typically better, as well.

To obtain a FHA mortgage on a condominium, the project must be FHA approved. Prior to these changes, there were two ways a condominium could be FHA approved: (1) full project approval, and (2) “spot” approval. Full project approval means that FHA has already done the approval on the entire condominium. Spot approvals were performed on non-FHA approved projects on a loan by loan basis, and were a way to make FHA loans available to home buyers in well run condo projects even if they haven’t gone through the full approval process.

No More Spot Approvals

Under the new guidelines, the popular spot approval process will no longer be available and will be replaced with an entirely new process called Direct Endorsement Lender Review and Approval Process (DELRA). FHA claims the DELRA process is more uniform and streamlined that the former spot loan approval process, but that remains to be seen. The good thing is that lenders will retain the ability, like the former spot approval process, to underwrite FHA loans on non-FHA approved projects, albeit with tighter guidelines.

The new regulations also limit the duration of full project approvals to two years. Thus, even approved condominiums must re-certify every 2 years.

New Project Eligibility Guidelines

Under the new project eligibility requirements, all condominiums (consisting of 2 or more units) must meet the following requirements:

  • At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 % of the number of presold units (the minimum pre-sale requirement of 50 percent still applies).
  • Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
  • At least 50% of the total units must be sold prior to endorsement of any mortgage on a unit. Valid pre-sales include an executed sales agreement and evidence that a lender is willing to make the loan.
  • No more than 15% of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
  • No more than 25% of the property’s total floor area in a project can be used for commercial purposes.  The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
  • Reserve Study – a current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current reserve study must be no more than 12 months old – if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed. The regulations fail to define what is “adequate,” however, guidance may be found in the new Fannie Mae/Freddie Mac condominium guidelines which mandate at least 10% of annual operating budget in reserves.
  • No more than 10% of the units may be owned by one investor.  This will apply to developers/builders that subsequently rent vacant and unsold units.  For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100% complete; and only one unit can be conveyed to non-owner occupants.
  • Rights of first refusal are permitted unless they violate discriminatory conduct under the Fair Housing Act.

Buried in the fine print is a requirement for an affirmative action-type housing plan. For both new construction and conversions, if the developer intends to market 5 or more units within the next 12 months with FHA mortgage insurance, an Affirmative Fair Housing Marketing Plan (AFHMP) or a Voluntary Affirmative Marketing Agreement (VAMA) must be in place. An affirmative fair housing marketing plan requires that the racial, socioeconomic, and ethnic composition of the condominium residents closely mirror that of the neighboring area, to the greatest extent possible. Most new condominiums don’t have these in place.

Click here for the new FHA condominium guidelines. You can look to see whether a condominium is approved on the HUD Homes & Communities website located here. Here is the FHA Condominium Mortgage webpage.

The Impact: More Work For Lenders, Condominium Associations/Managers And Attorneys

I expect FHA lenders will approach condominium association boards and managers, asking for certain information, certifications, and even legal opinions regarding compliance with FHA (and Fannie Mae) legal requirements. If a condominium is not on the FHA-approved list, or has lost its approval, condominium associations should consider applying for approval (or re-approval). Reportedly, FHA/HUD is backlogged a month or more in reviewing submitted applications. Thus, should your condominium need to be submitted for approval, keep in mind the process may take some time. Also keep in mind that the work to compile and complete the application package itself can take weeks, and require the board, its manager, and legal counsel to gather data, documents, and expert opinions required for FHA approval. The package of materials that must be submitted can vary from condominium to condominium, and often requires an updated reserve study and certain legal opinions.

Our office is well equipped to assist lenders and buyers with FHA loan compliance issues as we have recently issued opinion letters and certifications under the similar Fannie Mae condominium regulations. Contact [email protected] for more information.

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IMPORTANT UPDATE: 11/16/09:  FHA Issues Final Revised Condominium Lending Guidelines

As a follow up to my post on the new FHA condominium regulations, I received word from my friend Seth Wills at XLT Property Management, that the Community Associations Institute — the leading condominium and homeowner’s association trade group — recently sent a bulletin to its members, railing against the new FHA and Fannie Mae regulations as overly onerous and hurtful to the real estate market. CAI’s memo states:

CAI believes the new regulations would be a serious burden for condominium associations, and lead to market confusion that could hinder the housing and economic recovery. Under the proposed regulations, all condominiums previously approved for FHA financing would have to be reapproved or FHA financing would not be available. Also, instead of FHA staff reviewing and underwriting condominium projects, FHA would follow Fannie Mae and Freddie Mac by allowing lenders to review and underwrite these projects and certify compliance to FHA. This is the same system that resulted in the current mortgage default crisis. Furthermore, condominium boards (and management) would be asked to provide legal documents, contracts, plans, insurance coverage, pre-sale and owner occupancy percentages and other documentation to lenders performing the underwriting reviews. Condominium associations would also be required to compile, maintain and provide the necessary documentation and information requiring them to develop and implement new procedures — adding significantly to the workload of community managers and condominium boards.

CAI’s position is not surprising given the spat of recent, increased government intervention and regulation affecting condominium and HOA governance.  CAI makes a good point with respect to the agencies’ failure to coordinate their regulatory policies:

CAI believes it is essential that these agencies coordinate their actions. These agencies are all essential to mortgage financing and the housing market. Different requirements create confusion for lenders, borrowers, associations and the general public. Such confusion can only slow the recovery of the housing market and the economy in general.

The FHA regulations are set to go into effect November 2.  We’ll see if CAI’s promised lobbying push this next month has any effect.

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images-13An excited young couple about to close on their first home walk into into the closing attorney’s office. The day before they received via secure email all of the loan documents to review and approve with their personal attorney. The closing attorney arrives without any paper, armed only with a laptop attached to a digital signature pad. The sellers are not present as they have already signed the deed and other documents electronically the day before over the secure electronic closing system. The couple quickly review the closing documents on the attorneys’ laptop, clicking an “I Agree” button acknowledging receipt and review of each document. The couple sign the digital signature pad, and the captured signatures are automatically applied to all of the signature blocks of the documents. The closing attorney electronically notarizes all documents requiring witnessing or notarization. The closing is over in 15 minutes, and the couple walks out with a CD-ROM containing all the signed closing documents and the keys to their new home. The closing attorney then electronically records the deed and mortgage with the registry of deeds, funds the loan, and makes all of the disbursements. The executed loan documents are then electronically transmitted to the lender and digitally archived.

This is not an imaginary scenario. Electronic closings (e-closings) are happening now, and they are the future of real estate conveyancing. I believe that electronic closings will change the way lenders, title companies and closing attorneys do business.

The advantages of an e-closing system are numerous and include:

  • More convenient and efficient closing process for home buyers and sellers.
  • Automated delivery of electronically signed loan documents directly to post closing – eliminating costs and time. Fund the loans faster, in as little as 48 hours.
  • Drastically improve the efficiency of real estate transactions with reduced contract-to-closing times.
  • The Green Factor: Eliminates thousands of paper documents. Buyers receive the entire signed closing package on CD.
  • Reduce shipping and closing costs.

Electronic closings are very slowly moving into Massachusetts. (Attorneys, who must conduct most real estate closings in Massachusetts, are notorious late adopters of new technology). Since July, without much fanfare, the Middlesex Registry of Deeds in Cambridge, Hampden County Registry in Springfield, and Plymouth Registry of Deeds have adopted electronic recording capabilities. Hopefully, the other registries follow suit.

TitleHub Closing Services LLC, in Massachusetts, is on the cutting edge of e-closing technology.

Electronic closings are a great selling point to customers mortgage lenders, banks and credit unions. Here is a recent article about a credit union in Michigan successfully offering electronic closings.

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Breaking News (1.7.11): Mass. Supreme Court Upholds Ibanez Ruling, Thousands of Foreclosures Affected

Update (2/25/10)Mass. High Court May Take Ibanez Case

Breaking News (10/14/09)–Land Court Reaffirms Ruling Invalidating Thousands of Foreclosures. Click here for the updated post.

In late March of this year in the case of U.S. Bank v. Ibanez, Massachusetts Land Court Judge Keith C. Long issued one of the most controversial rulings in recent years which has called into question hundreds if not thousands of foreclosure titles across Massachusetts. The Ibanez decision is what happens when you mix equal parts of a deteriorating real estate market with Wall Street’s insatiable demand for mortgage back securities with sloppy lending practices and outdated state foreclosure statutes.

The Facts

In the Ibanez case, the Land Court invalidated two foreclosure sales because the lenders failed to show proof they held titles to the properties through valid assignments. In modern securitized mortgage lending practices, the ownership of a mortgage loan may be divided and freely transferred numerous times on the lenders’ books, but the documentation (i.e., the assignments) actually on file at the Registry of Deeds often lags far behind. The Land Court ruled that foreclosures were invalid when the lender failed to bring  the ownership documentation (the assignments) up-to-date until after the foreclosure sale had already taken place. This was true even if the lender possessed an assignment with an effective date (i.e., backdated) before the first foreclosure notice.

The net effect of the Ibanez decision is to call into serious question the validity of any foreclosure where the lender did not physically hold the proper paperwork at the time it conducted its auction. This has already caused significant uncertainty in the ownership of many properties that have already been foreclosed and are awaiting foreclosure.

In deciding the case, Judge Long took a very pro-consumer approach to the foreclosure law, persuaded that the apparent title defect would chill a foreclosure sale and harm debtors:

None of this is the fault of the [debtor], yet the [debtor] suffers due to fewer (or no) bids in competition with the foreclosing institution. Only the foreclosing party is advantaged by the clouded title at the time of auction. It can bid a lower price, hold the property in inventory, and put together the proper documents any time it chooses. And who can say that problems won’t be encountered during this process?

Also of significance was that Judge Long rejected a customary Massachusetts conveyancing standard which provides that recording out of order assignment documents does not create a title defect. I think Judge Long got it wrong as he elevated form over substance and didn’t give enough credence to the legal principle that the note follows the mortgage, but hey, I’m just a lowly attorney.

What now?

The Ibanez ruling is not final as the lenders have filed a motion to reconsider with the Land Court. And now the heavy hitters have gotten involved. The Real Estate Bar Association of Massachusetts has taken the unusual step of filing a friend of the court brief, urging the Land Court to reconsider its decision.

On the consumer side, the National Consumer Law Center and well known consumer class action attorney Gary Klein have joined the fray and filed a brief. Attorney Klein has also filed a class action in federal court to challenge completed foreclosures and future foreclosures on the same facts as the two foreclosures voided in Ibanez.

As of now, Judge Long of the Land Court has not made a final decision which should come in a matter of weeks. I will update you when the ruling comes down. Either way, in my opinion, given the widespread impact of this case, it is destined for the Massachusetts Supreme Judicial Court. It’s hard to say how the SJC will come down on this.

What can you if you are affected by the Ibanez ruling?

Well, if you are a homeowner facing foreclosure, consider Ibanez an early Christmas present. You now have a powerful tool to argue for the invalidation of the foreclosure sale. (I won’t comment on the fact that you still owe the lender money).

If you are contemplating purchasing a property out of foreclosure or are selling a previously foreclosed property, pray that there’s an existing title insurance policy on the property, and ask the title company to insure over the issue. Some are willing to do this. Others are not. The other option (albeit expensive) is to hire an attorney to file a Land Court “quiet title” action to validate the proper assignment of the mortgage loan, assuming you can track the documents down and they were not backdated. In Ibanez, the lender couldn’t produce the assignment until 14 months after the auction. The last option, and unfortunately probably the safest bet, is to sit, wait and see how the Land Court and appellate courts will rule ultimately. Not the answer you probably want to hear, but it’s reality.

Please contact Richard D. Vetstein, Esq. for more information.

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title-insuranceIn my opinion, title insurance is an absolute necessity in every real estate conveyance transaction. Even though I’m an experienced real estate attorney, when I purchased my own house, I obtained owner’s title insurance. With the instances of title and bank paperwork problems on the rise, I prefer not having to worry about hidden title defects which could affect my ability to refinance and sell my house down the road.

The problem is that most home buyers don’t know what title insurance is or what it covers, and only see it for the first time on the closing settlement statement. Closing attorneys and title insurance companies need to do a better job explaining the excellent benefits and value of title insurance, so consumers don’t have the perception that it is just another junk fee.

What Is Title Insurance?

Title insurance is policy of insurance (technically an indemnification policy) protecting homeowners and lenders from actual financial loss in the event that certain covered problems develop regarding the rights to ownership of property. While Massachusetts closing attorneys search and certify each title to real estate before a closing, there are often hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.

There are two types of title insurance, lender’s and owner’s policies. Lender’s policies are required by most every public mortgage lender in the U.S., and are typically paid as part of closing costs.  Owner’s policies are optional and paid for by home buyers. I will discuss owner’s policies in this post.

Title Defects:  What Does An Owner’s Policy Of Title Insurance Cover?

The recent foreclosure paperwork mess and the Massachusetts high court ruling in U.S. Bank v. Ibanez are perfect examples of the importance of title insurance. Thousands titles in Massachusetts coming out of faulty foreclosures were rendered defective because of the Ibanez ruling. Those without owner’s title insurance were left to fix the title problems on their own at great expense. Those with title insurance, by contrast, were able to sell their property with the title insurer issuing “clean” policies over the defects.

Here are some other real world examples of how title insurance protects you. I recently represented a condominium seller who was shocked to learn a day before the closing that there were several un-discharged mortgages and liens on her unit left over from the original developer. Fortunately, she had an owner’s title insurance policy which allowed her closing to go forward as scheduled. I represented a young family who was dismayed to learn that the property they were about to buy was subject to the claim of a long-lost heir of a prior owner. The title insurance company agreed to file litigation against the “missing” heir, and clear the title. If title insurance was not available in these transactions, the deals would have been canceled altogether, or the closings would have been delayed by months if not years until the issues were resolved, if at all.

In addition to undischarged mortgages and the sudden appearance of unknown or missing heirs claiming an interest in the property, an owner’s policy of title insurance also covers a myriad of other types of title defects, including:

  • Faulty foreclosures
  • Forged deeds or impersonations
  • Incorrect legal or boundary descriptions
  • Recording errors

There is also a new extended or enhanced coverage policy available from all major title insurance companies which covers:

  • Building permit violations
  • Adverse possession or prescriptive easements
  • Building encroachments
  • Incorrect surveys
  • Pre-existing violations of subdivision, zoning laws, restrictive covenants.

For a full list of just about every conceivable situation covered by title insurance, please read my article: 50 Ways To Lose Your Home.

How Much Does Title Insurance Cost?

Title insurance is a one-time premium paid at closing and is calculated based on the purchase price of your home. The cost is for standard coverage is $3.65 per $1,000 in home value. Enhanced coverage policies run $4.00/thousand, and provide better coverages (i.e., for boundary disputes) and inflationary protection. These days, we are always recommending enhanced coverage as it’s a better value. When you purchase both lender’s coverage (always required by mortgage lenders) and owner’s coverage at the same time, there is a substantial discount.

Title insurance is a good deal because you pay once and it continues to provide complete coverage for as long as you or your heirs own the property. Those who decline title insurance rationalize that the risk of a title defect is minimal and not worth the premium. That is false. As a former claims counsel for a national title company, I could write a treatise on the different types of title problems I have seen derail closings and drag on for years.

The Role Of The Closing Attorney

The closing attorney ensures that the title examination is done on the property, certifies that the title is “marketable,” and issues the title insurance policy. While all U.S. public lenders require lender’s policies of title insurance, closings attorneys should always recommend owner’s policies for buyers. Attorneys do share in the title premiums generated. However, as I said before, even the most careful title search cannot reveal a hidden title defect that can wreck havoc on any subsequent sale or refinancing of the property.

To borrow from Nike’s old slogan, Title Insurance:  Just Get It.

Please contact me at [email protected] if you have any further questions about title insurance.

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Recent Fannie Mae (FNMA) condominium lending regulations are beginning to live up to the hype as having an onerous impact on condominium sales and project development. The changes, made in January 2009, were part of an effort by mortgage giants Fannie Mae and Freddie Mac to limit risky lending in a segment of the housing market particularly hard hit by foreclosures in recent years.

Here is a brief overview of the Fannie Mae condo guideline changes:

  • For new construction and newly converted condominium developments, 70% of the units must be pre-sold (closed or under contract). This guideline is being increased from 51%.  This is the real Catch-22.  Fannie Mae won’t approve condominium mortgages unless 70% of the units are sold, but a developer cannot sell 70% of the units without buyers being able to obtain conventional Fannie Mae compliant mortgages. Buyers who run into problems here are being forced to get loans from small local banks who hold their own mortgages and are not bound by the FNMA guidelines.
  • No more than 15% of condominium units within a single project can be more than 30 days delinquent on condo fees. This is an existing guideline that is now being applied to new condominium projects. The requirement was also changed from being 15% of the total fee payments to 15% of total units.
  • Fidelity insurance will be required for condominiums with 20 or more units, ensuring that homeowner association funds are protected. Presently, this requirement applies to new projects and is now being extended to include established condominiums.
  • Borrowers must now obtain an HO-6 condominium unit owners insurance policy unless the condominium master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condominium owners policy, known as an HO-6 policy, typically covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider. Click here for a more extensive post on HO-6 policies.
  • No more than 10% of a project can be owned by a single entity. Apparently, this was to keep the so-called “vulture buyers” from taking over project.
  • No more than 20% of a project can consist of non-residential space. The new guidelines therefore severely impact most mixed commercial-residential use projects, a highly popular development scheme.
  • The condominium/homeowners association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. Many older condominium associations keep woefully inadequate reserves and operating budgets, so they are non-compliant.
  • No pending litigation involving the structural soundness, safety or habitability of the condominium project. Fannie Mae underwriters will reject financing if the condominium association is involved in litigation over the construction of the project. I’ve written about this more extensively here. Borrowers may ask for a waiver if they can establish adequate insurance coverage for the litigation or otherwise little or no risk of loss to the association.
  • Fannie Mae and Freddie Mac have also boosted fees on mortgages for condominium units. Buyers without a minimum 25% down payment have to pay closing-cost fees equal to 0.75% of their loan, regardless of their credit score, under new rules that took effect in April. Fannie Mae has said it will drop that fee in August for cooperative apartments and detached condos.

According to a Fannie Mae, the guidelines can be modified for condominium projects on a case-by-case basis.  Therefore, these guidelines may not apply to all condo projects.

Click here for the guidelines.

What’s the impact of the changes?FNMA condominium guidelines

Certainly, the revised guidelines are negatively affecting condominium buyers’ ability to obtain conventional loans for either a new or established condominium if the project does not conform. Most notably, the changes are dramatically affecting new developments, especially in hard hit areas such as Florida and California.

Fannie Mae has already approved a number of projects. Click here for the full list of FNMA approved projects.

Through discussions with some fellow Massachusetts real estate professionals, the impact here in the Bay State is not as bad as some of the harder hit states, but it’s proving to be a major thorn in many transactions. Real estate attorneys on both sides of the table are working hard to get existing condominium developments in compliance with the new regulations.

Rep. Barney Frank (D-Mass.), who ironically spent the last year lambasting Fannie Mae for its questionable lending practices, is now calling for Fannie Mae to relax these guidelines. We’ll see what happens in D.C., and keep you posted on any changes coming down the pipeline.

Update:  Since I posted this article, I’ve been retained several times to issue attorney opinion letters certifying to a lender that a particular condominium project is in compliance with the new FNMA regulations. If you are in need of such an opinion letter, please contact Richard Vetstein at [email protected].

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