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Friday, July 31, 2009
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Thursday, July 30, 2009
NEW FEDERAL "REGULATION Z" CHANGES START TODAY - and how at least one contract was saved from its clutches...
Simply put, the fastest anyone is going to possibly be able to close is 7 business days after the lender delivers its GFE and TIL. That assumes everything goes flawlessly in the mortgage approval process. If there was a significant mis-statement of closing costs that results in a 1/4 % change in the APR before closing, new disclosures must be given and a new 3 business day waiting period must follow.
These regulations are likely to wreck havoc with closing schedules for the foreseeable future - at least until mortgage lenders and title companies adopt new work flows. Preliminary GFEs and TILS are notoriously inaccurate documents. Lenders routinely under-estimate actual closing costs. Under the current system, the documents would simply be amended & buyers would re-sign them at the closing table. Now, we will cancel closings and wait three days.
Good luck to anyone who schedules movers or cancels their lease, or plans to buy a new home the same day they sell their old one.
How are the title companies planning to deal with this change? I've spoken to representatives at First American and at Chicago Title, the two largest operators in the Chicago market.
One indicated that they are hiring and training new respa / closing department personnel to contact lenders as early as possible, once a closing is scheduled to try to better coordinate on the preparation of preliminary HUD-1/RESPA settlement statements. Their goal is to let lenders know if there will be a change in the TIL early enough to allow them time to issue out revised / final TILs without delaying closings. I suppose this strategy could be likened to the early bird hoping to catch the worm.
The other is planning on issuing title commitment invoices that include every conceivable title charge - whether needed, or requested - to encourage lenders to issue GFE's that OVERSTATE the actual charges and resulting APRs. That company's interpretation of the new law suggests that revised TILs will only be needed when they understate charges. In essence, their approach is "better safe, than sorry."
Will either approach work? Only time will tell. The real problem here is not going to be title company communication with lenders. It is going to be the lenders who habitually wait until days or hours before closing to get things done. Lenders, you see, simply do not clear many loans to close until days (hours) before the scheduled closings. RESPA settlement statements (showing all of the closing costs) are not prepared until lenders loans are approved, and they get around to telling the title companies what charges to include on those settlement statements.
SO HOW WILL THIS PLAY OUT FOR REALTORS & CLOSING LAWYERS? Contracts simply must be drafted with realistic mortgage contingency and closing dates. I am recommending that my clients do two things: (a) set closing dates at least 30 days after the date of the contract and (b) lengthen the time between the mortgage contingency date and the closing date to no less than seven calender days. Setting unrealistic targets is only going to anger clients and frustrate their abilities to plan for their move-ins and move-outs. Building more time into the contracts will at least allow the possibility that the lenders and title companies will have opportunity to coordinate and get timely, accurate TILs to buyers, so that we can all close on time.
Please let me know if you have any questions about this important change in the law; or how you can protect your contract or your client's contract
Tuesday, July 21, 2009
Someone at Freddie Mac must to be watching a lot of late night television infomercials. The nations #2 mortgage finance company is offering comprehensive two year home warranties and will pay up to 3.5% of the purchase price to qualified buyers of their HomeSteps foreclosures.
The "Smart Buy" sales promotion is intended to help the mortgage giant unload a larger share of its growing portfolio of repossessed homes.
It is no secret that glut of foreclosed homes is weighing on Freddie Mac, just the same as other financial institutions. Freddie had 29,145 homes in its "real estate owned" portfolio as of March 31st, more than double that at the end of 2007. The costs have deepened the company's losses, which have forced it to draw $51.7 billion in government support.
Foreclosure inventory is costly to maintain and difficult to unload.
So, what does any good retailer do when they cannot move the merchandise? They have a sale!
Here is the script for the fast talking guy who reads the disclaimer at the end of the commercial
- offer valid for initial purchases made by Oct. 31, 2009, with deals that close by Dec. 31, 2009.
- Owner-occupied, principal residence only.
- Homes costing less than $25,000 do not qualify
- Sorry, offer void only in the continental 48 states.
- Buyers must complete a SmartBuy Buyer's Closing Cost registration form, and obtain a coupon that must be presented both at the time of the original offer and at closing.
A great many savvy buyers are already demanding that their sellers offer closing cost credits and home warranties, but there are several key differences in this announcement.
First, the warranties cover a two year term, twice the conventional one year offer.
Second, even the warranties comes with bonus features: Cross Country Home Services will cover electrical, plumbing, air conditioning and heating systems, as well as ductwork and many major appliances. They will guarantee repairs for 180 days and will replace appliances that can't be repaired with comparable units. The warranties also include a discount buying program for up to 30% on the cost of name brand appliances and up 15% on installation.
These incentives should draw a lot of interest from home buyers, and likely will lead to many more sales of Freddie owned homes. Burning off that inventory is good for Freddie and in turn, good for the overall economy, but man, this is going to smack a lot of home owners in the pocket book. hard. Prospective buyers are drawn out of the "conventional" marketplace and into the foreclosure pool. Fewer Buyers looking willing only lead to more downward price pressures for the rest of the home-selling world.
Gotta figure that this is going to play out, just like it does when retailers and airlines announce price cuts, rebates and other incentives; everyone else is going to have to match those discounts or suffer a loss of market share. Stay tuned for similar announcements from some other the REO portfolios
Friday, July 17, 2009
Traditionally, commissions are based on an agreed percentage of a property's sale price. More recently, some brokers have adopted flat fee commission protocols.
Over the last several years, a growing number of local real estate brokers have begun to add fixed administrative brokerage charges to their sale-price based commissions. The admin charge is supposed to cover office overhead or related expenses. The fee amounts seem to vary from office to office. To the best of my knowledge and understanding, they are not shared with sales agents, but are retained by the office.
A recent court decision handed down by a Federal District Court in Alabama, Busby v. JRHBW Realty, calls the legality of such fees into question.
The 11th Federal Circuit has ruled that such charges violate the Real Estate Settlement Practices Act because the brokerages that impose the fees do not provide any additional services to the consumers who are being asked to pay them; they are unearned fees.
Does that make local broker admin charge RESPA compliant?
We here in Chicago are part of the 7th Federal Circuit, not the 11th. The two have historically had very different view of the RESPA regulations and there are some conflicts in their respective interpretations of the law. But the 7th Circuit has not yet made any pronouncements on these issues, so we might not have a clear answer any time soon.
Contact me for a review and recommendation or let me know if you have any questions about this issue.
(hat tip on this post to Los Angeles attorney Sherwin Root)
UPDATED: 7/21/09: more on this story here.
Thursday, July 16, 2009
"We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a downpayment".I blawged about it here.
I've represented a dozen or so first time home buyers in Chicago area closings since then. I've seen many more first time buyers while representing sellers, too. Still waiting to see someone who is actually use the tax credit at the closing table. Noone in Illinois seems to have figured out how to implement the FHA's proposal.
Not so for Massechusets. The Commonwealth's MassHousing loan program, announced yesterday, is one of the only programs accross the nation that actually monetizes the tax credit (allows Buyers to use the tax credit at closing, rather than wait for a benefit when they file their federal income tax returns).
Those cream pie eating, red hose wearing, celtic loving types better act quick. The program ends in November. More details here.
Friday, July 10, 2009
The Mortgage Bankers Association released the National Delinquency Survey last week, reporting that the increase in foreclosure rates between quarters has reached its highest point since 1972 (when the records were first kept). The increase in foreclosures on first time mortgages increased by 36% between the first quarter 2008 and first quarter 2009.
Little wonder why lenders are scrutinizing loan applications with an even finer toothed comb.
Nor should it come as any surprise that lending guidelines are getting even tighter than they already are. Fannie Mae recently announced several new underwriting / eligibility guidelines that will become effective September 1st.
Some key changes all Chicago area home buyers (and their agents) need to know:
- Buyers wishing to purchase owner occupied 2 flats will need to make 20% down payments. Investment 2 flats will be limited to 75% loans. (These new loan to value ratios conform to existing standards for 3 & 4 unit buildings).
- Stocks, bonds, and mutual funds will only be valued at 70% of the current worth (reduced from 100%); Retirement accounts at 60% reduced from 70%). Stock options & non-vested restricted stock will not be eligible for use as reserves at all. (Lenders are hedging against further stock market declines)
- "Trailing secondary wage earner income" will be disallowed. (projected employment & income anticipated, but not currently earned by a borrower, such as a spouse relocating who is currently employed but does not yet have a job lined up here in Chicago).
- Tip income can only be used qualify for loans if a borrower can prove tip earnings for two years and if his or her employer indicates that tip income will "in all probability" continue. Such income will be counted based on a 2 year average.
- The maximum age of credit documents will be reduced from 120 days to 90 days. (The paperwork used to "prove" a borrowers assets and income). New construction buyers get 30 days more - Buyers need to have good (current) records of their assets to support their applications.
- 2nd loans & HELOC lenders will be allowed to recoup closing costs paid on behalf of the borrower if the borrower pays the HELOC or second mortgage off early, regardless of whether the lender labels this as a prepayment penalty. (Costs on 2nd loans are going to go up).
- Borrowers will be required give lenders two sets of tax return authorization forms (once during the application process, and again at closing). Fannie is strongly encouraging lenders to actually pull tax returns from the IRS as part of the underwriting process
- Final pre-closing verifications of employment must be well documented.
Buyers relocating to Chicago, Commissioned and tip-based workers, and folks intending to buy two-flats are going to be most severly impacted by these changes. But even with these new guidelines, well qualified Buyers will still be able to find lenders willing and able to make loans. It is just going to take a whole lot more effort to prove that they are indeed well qualified and they might find that they will be able to borrower substantially less money than they might have otherwise hoped to.
Savvy Buyer-agents are well advised to encourae their clients to start the loan pre-qualification process early, so that they can know know exactly what type of documentation they will need to gather for their loan underwriters and so that they can make reaslistic assessments of the loans they will be able to qualify for.
As always, I am available to answer questions about these guideline changes, and to help with other closing-related matter.
Thursday, July 9, 2009
2008 FBI Mortgage Fraud Report Reminds Buyers (and Sellers) Why it is So Darn Hard to Get that Loan Approval
- Tight mortgage lending guidelines are requiring Buyers to document every last nickel of income and savings, the sources of those funds.
- New appraisal rules are insulating property appraisers from real estate agents and loan officers.
- Lenders are requiring specific (and increasingly careful) examination of chains of the transfer of title ownership.
I hear a lot of grousing from Buyers, Sellers & Real Estate Agents. (OK, I grouse about it too)
But then, Tuesday's FBI report on Mortgage Fraud reminds us all why we are working so much harder. Our present day (would be) borrowers are bearing the consequences of the sins of our predecessors.
Some key findings & conclusions:
- The downturn in the economy, spike in foreclosures and defaults, & diminishing credit availability are fueling rampant mortgage fraud fraught with opportunistic participants desperate to maintain or increase their current standard of living
- In 2008, suspicious activity reports increased 36 percent to 63,713 after 46,717 filings were reported in 2007.
- at least 63% of all pending FBI mortgage fraud investigations during 2008 involved losses totaling more than $1 million.
- In 2008 FBI mortgage fraud investigations totaled 1,644, a 37 percent increase from 2007 and a 100% increase from 2006.
- Popular schemes include builder bail-out, short sale, foreclosure rescue, credit enhancement, loan modification, illegal property flipping, seller assistance, bust-out, debt elimination, mortgage backed securities, real estate investment, multiple loan, assignment fee, air loan, asset rental, backwards application, reverse mortgage fraud, and equity skimming.
None of this makes it any easier for our clients, or our workloads. But at least it helps remind us why things are the way they are right now.
Wednesday, July 8, 2009
Condominium Managers & Disclosure Requirements
Condominium Buyers should do at least some due diligence investigation of the Association's over-all financial condition. No one wants to buy a new condominium and then learn about the $20,000 special assessment that they have to pay the month following.
Illinois law allows for this. If a Buyer asks, the Seller must produce information, such as the organisational documents (Declaration and By-Laws) and financial records (Budgets and Financial Statements). The association must also state whether there are any known liens against the individual unit, known or planned special assessments or capital improvements for the property, and whether or not there is a reserve of funds set aside to pay for those improvements.
Collectively, the list of required disclosures are set out in Section 22.1 of the Illinois Condominium Property Act. Creative minds that we are, Buyer's lawyers ask Seller's lawyers for "22.1 disclosures." (Some Chicago area real estate agents refer to them as Rider 5 disclosures, a reference to the form number for the Chicago Association of Realtor's contract attachment that formalizes a request for this information.
If a Buyer does asks, but does not receive this information, or if a Buyer receives, but does not approve of the information provided, the Buyer can cancel the contract, and demand a refund of Buyer's earnest money.
Whoever makes the request, and whatever the request is called, some one has to provide the requested information. When an association is professionally managed, the property manager is charged with making the disclosures.
Condominium Paid Assessment Letters
At closing, Sellers must also produce a letter from their association(s) confirming either that all monthly assessments have been paid in full or otherwise stating the amount that must be paid to bring the unit's account current. Property closings cannot take place without this letter. Again, when an association is professionally managed, the property manager is charged with generating paid assessment letters ("PALs").
Wolin-Levin has been managing Condominiums, Co-ops and rental properties in Chicago for more than 50 years. Reports suggest that they manage over 300 properties totalling more than 17,000 residential units. About five years ago, they were acquired by FirstService Corporation, a publicly traded national provider of property management and related services.
The New Wolin-Levin Web Platform
Wolin-Levin recently migrated all requests for 22.1 disclosures and PALs to a web site - welcome-link. Sudler Property Management implemented CondoCerts.com a similar web-based platform in 2006.
It would appear that the new web site is an "efficiency" that was driven by the parent entity, and created without little or no regard for Chicago area lawyers or condo owners. The product is unreasonably expensive, unduly burdensome, the system conflicts with local custom and practice, and the web site is anything but welcoming.
The Problems (besides the cost)
Wolin-Levin's new web site troubles me, and I believe will aggravate many transactions, for a number of reasons:
- Selection: Wolin-Levin has taken an all or nothing approach to the delivery of sale packages. Whereas Sudler allows uses to pick and choose from an a la carte menu of documents and disclosures (i.e., just a paid assessment letter; just a declaration and by laws; just a 22.1 disclosure, etc), Wolin-Levin requires that everyone order (and pay for) every single stinking document - whether they want 'em or no).
- Delivery: Documents ordered from a Chicago area property manager by a Chicago area requester are sent in some as yet undetermined (but I'll bet electronic) format to Lexena, Kansas, where they are sent by UPS in hard-copy format back to the Chicago area requester. By contrast, Sudler allows for immediate electronic delivery of documents. A much more efficient, and environmentally friendly approach. Easier and cheaper to forward things to a Buyer or Buyers' attorney this way too.
- Timing: Wolin-Levin gives users only two timing options: 30 day delivery, or, for a significantly higher fee, expedited handling. The condo act allows property managers 30 days to respond to requests for 22.1 disclosures, but the typical real estate contract calls for delivery of these materials within two or three days of contract acceptance. Sellers must choose to either pay the expediting fee or delay their contract contingencies and closing dates.
- File Identification: Local Attorneys, title companies, real estate agents, and parties to a deal refer to the transaction by the property address and/or the Buyer and Seller names. These are universally known and understood. Not Wolin-Levin. Even though they require a use to input the condo's property address and buyer/seller names, all welcome-link communications refer to their order number ONLY. If you do not know your order number, you will not be able to identify any email or correspondence to any given file. (How hard would it be to reference orders using any descriptor the rest of the world besides Wolin-Levin & Welcome-Link uses?
- expect to pay more for these transactional services. for the sole and simple reason that Wolin Levin is making you use Welcome-Link
- don't expect to close within 30 days of signing that contract, unless you are willing to shell out an additional $100-150 for the privilege of doing so.
- understand that the condominium due-diligence contingency is likely to stay for a long, long period of time after your contract is signed.
- expect to pay a fee to produce and deliver the condo declaration and bylaws to your buyer - whether you need to order those documents or already have them. Since there is no a la carte selection, your gonna pay whether you need them or not.
Thursday, July 2, 2009
"At least in Minnesota, it is now unethical for solo practitioners to use "& Associates" in the law firm name. The Minnesota Lawyers Board of Professional Responsibility just adopted that rule in its new Opinion 20.
The stated reason for the rule is that Rule 7.1 prohibits false and misleading statements and Rule 7.5(a) shall not use a firm name or letterhead that is in violation of Rule 7.1. Using the term "& Associates" in a firm name, the LBPR reasoned, is misleading if there are not more than two licenses attorneys in the firm. While recognizing that "Associates" has other meanings in general use, the term has come to have a specific meaning in the custom of law firms.Needless to say, there has been consternation among some solo practitioners. Many solos feel they are being unfairly picked on; that if large law firms could continue to use the names of dead partners they should be able to intimate non-existent "Associates." (That is specifically dealt with in the comments to the Minnesota Rule 7.5 - a firm can continue to use the name of a dead partner if their is a continuation of practice or a trade name.)
Not an issue for me of course. I practice solo. No associates. No clerks. Just a computer or two. Neither the law office nor the computer has a name (and for the record, no dead partners either)
Title Insurance provides critically important protection for property owners. Savvy Buyers insist that sellers provide a policy of insurance as part of every purchase transaction. It affords indemnity insurance against financial loss from defects in title to real property. It protects an owner's financial interest in real property against loss due to title defects, liens or other matters. The insurer will defend against lawsuits attacking the title. or reimburse the insured for actual monetary losses incurred, up to the dollar limit of the insurance policy.
Problem is, what happens when the title insurance company shutters its doors?
Contracts that are "in process" grind to a halt. Mortgage payoff checks or other checks issued from closings that are "in the mail" or otherwise un-cashed may no longer be good. Loans can go unpaid. Claims and Liens may not get released. If the company did not re-insure risks, policy holders may lose their insurance protection.
Past blawg reports detailed the demise of PLM Title, Guaranty Title & Trust, and LandAmerica. Now joining the on the scrap heap, are the late great local title agencies Absolute Title and LaSalle Title. Not quite ash-canned, (still fully operational) but certainly of note is a late-breaking announcement from Professional National Title Network. Details follow below.
Appears to have closed down operations, without announcements of any sort or advance warnings. It was, at one time, the largest issuing agent for Stewart Title Guaranty Company in the state of Illinois. Based in Schaumburg, it serviced a great many north-west suburban real estate lawyers, and had a strong market niche providing insurance for smaller condominium developers. According to one insider I spoke with, Absolute may have fallen victim to numerous instances of closings involving mortgage frauds.
LaSalle Title's phone number is disconnected and appears to have closed hastily in the wake of last week's federal indictments in which the US Department of Justice alleges that LaSalle and three other businesses allegedly schemed to obtain more than $10 million in loans on 70 residential properties in Chicago, resulting in losses totaling about $5.8 million to various mortgage lenders.
Professional National Title Network
PNTN is NOT CLOSED and is not in financial trouble (that I am aware of anyway), but its underwriter, The Florida based Attorney's National Title Fund may have been. attorney-agents were notified this week that the Florida Fund has formed a "joint venture" with Old Republic Title Insurance Company and that, going forward, they must all sign new agency agreements with Old Republic. As "the Fund" operates primarily in Florida, which was one of the epicenters of the recent real estate bubble. Apparently is suffered a substantial decline in surplus funds and was unable to continue operations. It will continue to cover claims on existing policies, but will not sell new insurance as an independent underwriter. The Fund's press release announcing the joint venture is here.
It has long been my practice to do business with only large, well capitalized title insurance companies to minimize the risks associated with a title insurer's collapse. My Seller-clients are assured that the insurance purchased for their Buyers is strong and can be reasonably relied upon. My long-standing practice has been to demand that other Sellers likewise provide my clients with insurance from reputable companies.
Please let me know if you have questions or concerns about your title insurance provider or your Chicago area closing. I will be happy to be of service
Wednesday, July 1, 2009
Everyone knows that a Buyer and Seller set out the terms of their real estate deal by writing and signing a contract. All agreed terms get spelled out, including the sales price and the closing date.
The parties set the closing date in the contract. It gets written in stone, so to speak, no? Well, more written in sand than stone. Sand on a shoreline smacked over and over again by pounding waves of mortgage rules and procedures. Waves that erode the shoreline of that contract, and that will all but wipe those closing dates clean off the beach.
Regulations spawned by the Federal Housing and Economic Recovery Act of 2008 go into effect at the end of July. The new regulations, coupled with Fannie Mae & Freddie Macs recent implementation of the Home Valuation Code of Conduct are going to take that "false illusion" of a fixed, certain, closing dates clear out of great many transactions.
Buyers and Sellers who rely on a contract closing date when they arrange their moves-in and moves-out are likely going to be in for big, frustrating, costly surprises. Savvy lawyers, realtors, and especially loan officers better start spreading the word, so that there clients are not adversely impacted, or disappointed by the delays that will inevitably follow.
According to the Wells Fargo summary, there are a couple of key points everyone is going to need to understand. My thoughts follow.
- These changes are only going to apply to residential transactions - first and second homes purchased with mortgage financing (and for re-finances as well).
- The EARLIEST date that a contract can close will be 7 business days AFTER the buyer receives mortgage initial written disclosures from the lender. (truth in lending, good faith estimate, fair credit, etc.).
- Lenders will not be allowed to collect upfront fees for appraisals (any upfront fees at all - other than for credit reports) until the next business day AFTER those initial disclosures are received.
- Closings cannot take place until 3 business days after Homebuyers receive copies of their appraisals (at least this requirement can be waived).
- New Truth in Lending disclosures will be required if a buyers interest rate (technically, the APR) changes by more than 1/8th% from an initial disclosure. If necessary, closing cannot take place until 3 business days after it is received. If the lender mails that new TIL, it is considered "received" 3 business days AFTER the mailing date.
How will this impact buyers?
- Any buyer who does not intend to apply for a mortgage loan, in person, is going to see longer processing times on their loans. The waiting times increase when documents and checks pass back and forth by mail. Delays will become the new norm in such instances.
- Anyone who does not lock-in an interest rate, who changes loan amounts, who changes loan programs, or takes time after the contract is signed to decide what type of loan they want (or who's lender suddenly discontinues or changes the intended loan program), and those who decide to add a second mortgage into the mix), will need new/updated Truth in Lending Disclosures and will force mandatory three day waits for closing. In my practice, that seems to cover about 90-95% of all mortgage-financed transactions.
- Poor communication between loan processors and title companies will lead to inevitable last minute changes on TiLs, to include charges for new or additional title searches / services after the initial TIL is given out, that will trigger the waiting periods. Again, in my practice, this is the case in an overwhelming majority of cases (but not so, with certain highly regarded and well organized lending institutions.
- Title companies change in fees for services will automatically trigger the same.
- Appraisals will be ordered even later in the process, since Buyers will be unable to pay for them at the time of a first meeting with their loan officers and many lenders refuse to order them without a buyer's cash in hand.
Buyers will be best served by (a) applying for their mortgage loans in person, (b) using highly reputable and well established loan officers (c) who communicate regularly and reliably with their borrowers, attorneys and agents. Sellers, attorneys, agents, and title companies will be happy too.
Let me know if you have any questions about the new regulations or how they may impact your Chicago-area home deals (or your client's deals as well). I can also help you find those highly sought after "good" lenders who will minimize the inconvenience these new regulations will cause, and can help you deal with those not-so-good ones, and the consequences of lender delays too.