The Obama administration on Monday set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program (HAFA) provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed. The announcement can be found here. A complete set of the guidelines can be found here.
The new federal guidelines address barriers that have often sidelined short sales by setting limits on the time it takes a bank to approve an offer, freeing borrowers from debt and capping claims of subordinate lenders. New financial incentives for completing short sales or similar “deed-in-lieu” transactions — in which the deed is simply transferred to the lender — include a $1,000 payment to servicers, and a maximum of $1,000 to go to investors who sign off on payments to subordinate lien holders, the Treasury said. Borrowers would also receive $1,500 in relocation expenses.
While a short sale may be preferable to a foreclosure, they have been frustrating for borrowers, buyers and realtors, because they are often hung up by lengthy negotiations with multiple lien holders and mortgage insurance companies. Realtors have complained that sales fall through as lenders bicker over the sales price, what they should receive from the proceeds, and whether the borrower will be held accountable for the debt in the future.
Under the new rules, mortgage servicers have 10 days to approve or disapprove a request for short sale, and when done the transaction must fully release the borrower from the debt. The rules also prohibits mortgage servicing companies from reducing real estate commissions on the sale, a practice that has dissuaded many agents from taking short sale listings.
This may help, but by how much remains to be seen.
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.
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.
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.”
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.
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…
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.
Boston Globe reporter Jenifer McKim today is reporting that Massachusetts Land Court Judge Keith Long’s much anticipated ruling in the Ibanez v. U.S. Bank case, which invalidated thousands of foreclosures across the state, could come as early as today.
Previously, in late March of this year Judge Long issued one of the most controversial rulings in recent years which has called into question hundreds if not thousands of foreclosure titles because lenders failed to show proof they held titles to the properties through valid assignments. Click here for my prior post on the case. A copy of the case can be found here.
The Globe reports that the decision is “imminent” and could come as early as today. The Globe also has interesting commentary from a number of affected sources:
Among those watching the case are Boston city officials, who say they hope Long will clarify title issues for homes that have already gone into foreclosure. In the meantime, the judge’s actions have stymied the city’s effort to buy as many as 20 bank-owned properties, hurting much-needed redevelopment efforts in neighborhoods plagued by foreclosure, officials said.
“There are thousands and thousands of titles that have gone through foreclosures with these late filed’’ ownership records, said Lawrence Scofield, an attorney with Ablitt Law Offices in Woburn, who represented plaintiffs in three consolidated Springfield cases ruled on by Long. “Judge Long is saying you don’t really own it. That is the real, overwhelming, economic effect.’’
Locally, the Massachusetts decision has pitted advocates trying to revive neighborhoods against others trying to help homeowners stave off foreclosures. Gary Klein, a consumer law attorney who filed a friend of the court brief in the case, said the real estate system placed “expedience and convenience’’ before the law. Providing home buyers with a “full set of procedural protections,’’ he said, is more important than comforting lenders who ignored the law.
Indeed, since March, the number of foreclosure deeds has slowed, according to Warren Group, a Boston company that provides real estate data. “There are probably at least a thousand families who are getting at least some period of temporary delay while lenders go back and get a proper paper trail,’’ said Klein, an attorney with the Boston-based law firm Roddy, Klein and Ryan. “Slowing foreclosures down allows people to get loan modifications and other relief.’’
Once the decision is released I will post it here with my analysis and commentary.
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.
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.
I’m pleased to have Donald J. Griffin, MAI, SRA, an experienced appraiser with Don Griffin Appraisals, Inc., who is here to guest blog about a topic very much on the mind of Massachusetts homeowners, buyers and sellers: Massachusetts property values.
Don Giffin, MAI Appraiser
What Happened? The Last Three Years
The Massachusetts real estate market was artificially stimulated by forces outside the normal supply demand model. This led to artificially increased values, mostly at the lower end of the value range in communities at the lower end of the income range. Once the stimulation was terminated, around 2006, and market forces returned to normal, the correction process began. The Massachusetts market has to absorb all of the artificially induced value, before it can start to act in a normal supply demand model. Any particular property will be affected by the market that it is in, therefore to answer the question, “How much has my property value declined?”, look at the community it is in, and the location of its value in the community’s range of value, i.e. low medium and high. In general a high end valued home in a community with high incomes will see little to no loss, while a low end valued home in a community with low income will see high declining value. Most communities will continue an upward trend in average value. The upper end in both markets will continue to feel the pressure of the recession and tight credit for 12-18 months until the recession’s negative effects are mostly dissipated and we have moved into a strong growth mode. Properties at the low end of the value range in all communities will wait a long time to attain the values seen in 2006.
The Broad Strokes
In general, decline in real estate value is a result of an imbalance in supply and demand. More sellers than buyers, cause reduced prices. If possible sellers wait, hoping the market will improve.
The Impact of the Sub-Prime And Credit Crisis On Massachusetts Property Values
There have been many articles written describing the sub prime mortgage market in relation to the collateralized mortgaged backed security market. For our purposes I will simply state that the effect was to increase demand for real estate, mostly at the low end of the value range. I say the low end because the goal was to bring marginal buyers into the market by lowering the bar for qualification for a mortgage.
This did not affect the middle and upper income value ranges in Massachusetts as much, since high income earners were already in the market.
However, there was an “upsurge effect.” When a low value owner sold for a profit, they moved up to the middle market, creating a secondary effect on the middle and upper markets.
From 2003 to about 2006 we can document an upsurge in Massachusetts property values, which we attribute to the excess demand entering the market during this period.
Case Study, Arlington, MA: The Middle Market
I’ll use Arlington, Massachusetts as a sample middle market community. I’ve tracked the average sales prices of single family homes from 2003 through 2009 Year to Date, shown here:
Case Study, Wellesley, MA: The High End Market
I’ll use Wellesley, Massachusetts as a sample upper market community where I’ve tracked the average sales prices of single family homes from 2003 through 2009 Year to Date, shown here:
What Markets Have Been Affected?
In general, middle market Massachusetts communities, such as Arlington, have seen declines at the low end, with recent increases at the middle value ranges, mostly correcting the effects of the oversupply caused by the subprime mortgages. The upper value range in a middle market community has mostly seen steady growth in value, but is now starting to feel the impact of the recession.
High income communities, such as Wellesley have seen similar changes. The YTD value declines at the upper level are more pronounced and reflect not only the recession but also the lack of ready loans for jumbo mortgages.
Property Value Predictions: What Does The Trend Tell Us?
Following the trend lines we would predict that the lower and middle value ranges in most Massachusetts communities will continue an upward trend in average value. The upper end in both markets will continue to feel the pressure of the recession and tight credit for 12-18 months until the recession’s negative effects are mostly dissipated and we have moved into a strong growth mode.
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Thanks so much for the informative post, Don. We look forward to your future contributions to the Massachusetts Real Estate Blog. As you can see, Donald J. Griffin, MAI, SRA really knows his stuff. So please contact him for your appraisal needs.
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.
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].
The Boston Globe is reporting that foreclosures in Massachusetts took a steep dive in May, the second consecutive month they have fallen, according to data released yesterday by Boston real estate tracking firm Warren Group.
According to the Globe, there were 582 foreclosure deeds recorded in May, a 58.6 percent decrease from 1,405 during the same month in 2008, and a 24.3 percent drop from April.
Others attribute the drop to the so-called Ibanez decision by the Massachusetts Land Court in late March that invalidated two foreclosures because the lenders failed to show proof they held titles to the properties. The Ibanez decision is a product of the Massachusetts conveyancing practice struggling to keep up with modern mortgage lending practices. The ownership of a 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 brought the ownership documentation (the assignments) up-to-date after the foreclosure sale had already taken place — even if the effective date of the assignment was before the first foreclosure notice. The ruling, which is ultimately expected to head to the Massachusetts Supreme Judicial Court, has prompted concern throughout the conveyancing and mortgage industry, and is stalling sales of foreclosed properties, real estate specialists say.
Based on discussions I have had with other real estate attorneys, up to 20% of all foreclosure titles in Massachusetts may be affected by the Ibanez decision.
This is causing so much angst in the industry that title insurers are refusing to insure foreclosure titles affected by the problem. That means in cases where this issue is present, the lender cannot foreclosure, and the real estate sits barren for the indefinite future. This is bad for the lender who is trying to get rid of a non-performing asset, for the potential buyers interested in purchasing foreclosed properties, and certainly for the neighborhoods affected by blighted foreclosed properties.
Here is a copy of a portion of a memo sent by Stewart Title Company to its local title agents suspending authorizations to issue title insurance over titles derived from foreclosures which are affected by this problem:
Date:
April 22, 2009
To:
All Massachusetts Issuing Offices
RE:
Recent Land Court Decisions Requiring Suspension of Authorization to Insure Massachusetts Titles Based on Foreclosures with Post-Foreclosure Assignments
Dear Associates:
As you may be aware, the Land Court issued two recent decisions that call into question the validity of several titles coming out of foreclosure.
The result of these two decisions is that titles based on foreclosures by an Assignee lender are potentially fatal unless the Assignment in question was executed and held by the foreclosing lender prior to the commencement of foreclosure under M.G.L. c. 244, §14. Foreclosures based on Assignments that were dated after the foreclosure sale were deemed invalid even if the Assignments were “backdated” (i.e., contained an “effective date”) prior to the first c. 244, §14 notices.
Accordingly, subject to certain exceptions discussed later in this Bulletin, until further developments in these cases and the law upon which these cases were decided, Stewart Title Guaranty Company is suspending authorization to insure titles derived from foreclosures where the recorded Assignment into the foreclosing Lender is not dated prior to the date of the first publication under c. 244, §14.
I will be monitoring the Land Court decision through what will surely be an appeal to the Supreme Judicial Court, the highest appellate court in Massachusetts.
Update (Aug. 27, 2009): I have been informed by attorneys involved in the Ibanez case that the lenders have filed a motion to reconsider the Land Court’s ruling. Also, 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. The National Consumer Law Center and well known consumer class action attorney Gary Klein has also joined the fray. As of now, Judge Long of the Land Court has not made a final decision. I will update you when the ruling comes down. Either way, this case is going up to the Supreme Judicial Court, and probably on direct appellate review.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With 25 years in practice, he was voted a "Super Lawyer," a "Top Lawyer" by Boston Magazine and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
A complete set of the guidelines can be found here.
According to the Globe, there were 582 foreclosure deeds recorded in May, a 58.6 percent decrease from 1,405 during the same month in 2008, and a 24.3 percent drop from April.
