Wednesday, September 24, 2008

Foreclosure "rescue" scams

Whenever disaster strikes, most people try to help out others. Most people. A few others swoop in to try to take advantage of the situation. Foreclosure "rescue" scamsters are just such scumbags. Since foreclosures are public record, it is very simple for the scamsters to get online and see who might need their "help." We used to have one such gentleman in our community who provided such services for a couple of years. What he would do is contact his potential victim, er, I mean client and tell them he could clear up their foreclosure for them. He would have the homeowner sign a power of attorney, sometimes a deed to him, and an authorization to talk with the homeowner's lender. He would make sure he would drain the homeowner of any money they might happen to have for his service fee.

Early in his career he would contact the lender, and find out what it would cost to get the mortgage payments current, and pay that. He skipped this step later. He would then require that the homeowner pay him the monthly payment, which he generously bumped up for more of his "service fees." He even set up an out of state corporation for this payment processing. For a while, he actually made some payments directly to the lenders. This must have been very boring, since he stopped doing this after a time.

You might be thinking that the homeowner would get notification that their payments were not being made. You would be right if he hadn't used that power of attorney to change the address the lender had on file for sending notices to his address. Of course, he had that signed when he was the great guy, white knight, rescuer, etc. Often the next thing people knew was that the foreclosure was back on, and the scamster had been pocketing their money for months without making a single payment to their lender.

In one particularly egregious case, he had the homeowner deed the property to him, in addition to paying him a $20,000 service fee. When the homeowner got wind that he was not making payments, she wisely contacted a lender to help her straighten things out. The scamster, since he was now the owner of the property, demanded that the homeowner give her some money to "buy the house back from him," because he had lots of equity (which he of course stole from the homeowner in the first place). We eventually got him and his equally sleazy attorney to drop this preposterous demand, and we got the property back in her name, with a fair and reasonable mortgage. I wish I could give you a transcript of our "negotiations" with the scamster's attorney, but his language and his claims of what he was going to do to me would require this blog to get an R rating if I did post it. Lucky for us, both the scamster and his sleazy attorney have left town--no doubt raining fraud upon another community.

Moral of the story: If you are in financial trouble, contact your lender right away. And contact a reputable real estate attorney before you sign anything designed to help you. I will bet most attorneys will charge you less than $20,000...

Saturday, August 23, 2008

Interesting how they change their tune

We had another "deed and green" transaction, this one in Poweshiek County in Iowa. The attorney charged $85 to prepare a deed. There was a strange little title defect, and when we called the attorney, he told us, "Why are you asking me? The real estate agent represents them." Clearing title defects in Illinois and Iowa is considered the practice of law, and therefore real estate agents are not allowed to clear title defects. We believe we are assisting in the unauthorized practice of law when we "work with" real estate agents in clearing title defects. We also believe that attorneys should "do their job." I sent the attorney a letter outlining my concerns, advising that I was not about to assist in the unauthorized practice of law, and including a copy of the Iowa Court Rules which set forth what real estate agents can and cannot do in real estate transactions. By golly, he called me right back, and started working on clearing that title defect.

Thursday, August 21, 2008

These are supposed to be smart people,0,1998638.story

Ticor is claiming that they should not have to cover a title claim because Countrywide should not have given the loan to these scammers. Heck yes, Countrywide should never have given this loan. But Ticor agreed to take some money to insure title. Unfortunately, their local agent may have been a bit sloppy according to the article. That's not really Countrywide's problem. Maybe Ticor should have done a better job of qualifying and/or checking on their agents.

I understand the sentiment, really I do. If Countrywide had done its job and seen all of the neon clues that this was a scam from top to bottom, they would never have given the loan, and therefore, they would never have hired Ticor to give them a title policy, and therefore, there would be no title claim. But isn't this tantamount to your car insurance company refusing to cover you because the accident would not have happened if you were not driving? If Ticor succeeds in this case, haven't they demonstrated that title insurance is worthless? And, having done that, wouldn't they have litigated themselves out of existence?

Tuesday, August 19, 2008

Say the name! Say the name!

A banker friend of mine told me he had a conversation with a real estate agent who was complaining that I was not "flexible" about how something should be done in a real estate transaction. He knows how I operate, and he asked, "Well, was he right?" To which the real estate agent responded, "I guess so. Technically....." I was so proud.

Speaking of flexibility, I came across the following press release from the Department of Justice District of New Jersey website.

Here is a brief quote:

"According to the Indictment, the borrowers attended closings at a Garfield law office where Gebbia worked. There, at the closing attorney’s direction, Gebbia prepared fraudulent HUD-1 Uniform Settlement Statements that were signed by the borrowers, Ugwu and others reflecting deposits that had never been made. The closing attorney then allegedly distributed proceeds of the fraudulently-obtained mortgage loans to the conspirators by checks made payable to companies controlled by Eliasof, who in turn paid kickbacks to Carti, the closing attorney and others. "

I can only hope they did not name the closing attorney because they have something really "special" planned for him/her. Not only do attorneys have a lot to lose by playing these games, they violate their duty to their clients by allowing these transactions to go through this way. Perhaps if a few more attorneys would have stood firm, we might not be in the mess we are in right now. Sure, some real estate agent might complain that we are "not flexible," but isn't that our job?

Monday, June 30, 2008

This is a bad thing, isn't it?

Then why didn't it get more publicity? This is lifted right from the Office of United States Attorney District of Arizona's website.

PHOENIX - The United States reached a civil settlement with Wells Fargo Bank and Ticor Title Agency of Arizona. In the settlement, Wells Fargo Bank has agreed to pay $4,046,786 and Ticor Title has agreed to pay $265,370.

Under certain circumstances, the Federal Housing Administration’s "pre-foreclosure sales" program allows homeowners with federally-insured loans to avoid foreclosures by listing their homes for sale. If a sales price is not enough to pay-off a loan, then the lender submits an insurance claim to the Federal Housing Administration which will pay the lender the balance owing on the loan.

The United States contends that Well Fargo Bank submitted more than 70 false claims to the Federal Housing Administration under the pre-foreclosure sales program and that Ticor Title prepared inaccurate escrow documents which allowed lenders to submit false claims to the Federal Housing Administration. The United States contends that it suffered $2,156,078 in losses. Wells Fargo Bank and Ticor Title deny the United States’ contentions but agreed to pay the amounts listed above.

The investigation leading to the settlement was conducted by the U.S. Department of Housing and Urban Development, Office of Inspector General.

RELEASE NUMBER: 2008-165(Wells Fargo settlement)

Unless I am completely misunderstanding this, Ticor Title and Wells Fargo were in cahoots to lie to the government--OUR government--about the sale price of properties that were in foreclosure but not yet owned by Wells Fargo. This is the way I understand it, and please someone correct me if I am mistaken: Homeowner owes Wells Fargo $100,000, stops making payments, and foreclosure is commenced. Homeowner tries to sell house before foreclosure sale, but can only get $80,000 for the place. The FHA's pre-foreclosure sale program would allow Wells Fargo to recoup that $20,000 (which is darned nice of us taxpayers). But that's not enough for Messrs. Wells and Fargo. They somehow get Ticor to prepare a HUD-1 that says the property only sold for $50,000, so now Wells Fargo can get a $50,000 shortfall (rather than the $20,000 to which they are entitled) from the government, as well as the $80,000 from the sale of the house. This would net them $130,000 rather than the $100,000 they were owed.


Thursday, June 26, 2008

Oooo, you're in trouble....

And it's about time. Of course, I won't mention that I contacted her office about three years ago concerning rampant mortgage fraud in the Quad Cities by a couple of bad apples (no offense intended to apples), and got absolutely nowhere. Apparently it wasn't a glamourous crime at that time. Anyway, I'm glad we're getting after it now.

Here's the link to the press release:
If you have scads of time on your hands (it's 81 pages), you can download the complaint here:

From the Illinois Attorney General's website:

Alleges Company Deceptively Sold Risky Loans Despite Borrowers’ Inability to Pay

Chicago – Attorney General Lisa Madigan today filed a lawsuit in Cook County Circuit Court against Countrywide, the nation’s largest mortgage lender and servicer. The complaint alleges that Countrywide Home Loans, Inc., and its parent company, Countrywide Financial Corporation, engaged in unfair and deceptive conduct on a large scale in creating, originating, marketing and servicing unnecessarily risky and costly mortgage loans for Illinois homeowners.
The complaint also names as defendants Countrywide’s subprime lending unit, Full Spectrum Lending; the company’s servicing arm, Countrywide Home Loans Servicing LP; and Angelo Mozilo, the co-founder and former CEO of Countrywide Financial whose name has become synonymous with the excesses of the subprime mortgage industry. The lawsuit is the result of a nine-month probe by Madigan’s office into the lending practices of Countrywide.

Madigan’s complaint alleges that Countrywide, in a single-minded quest to dominate the nation’s mortgage market, sold risky and costly loan products to borrowers who could not afford them. The lawsuit also details how, as failure rates on Countrywide loans began to escalate, the company intensified its originations of unaffordable and poorly underwritten loans to satisfy its obligations to Wall Street investors.

“Countrywide created risky and costly loan products and marketed them to borrowers who could not afford them,” Madigan said. “Countrywide’s unfair lending practices have harmed tens of thousands of borrowers who’ve been placed in unaffordable loans and, as a result, our communities are now being destabilized by a skyrocketing number of home foreclosures.”

Countrywide’s Major Role in the Foreclosure Crisis

Madigan’s complaint comes in the midst of an unprecedented foreclosure crisis. In May 2008, there were 9,670 foreclosure filings reported in Illinois, up nearly 42 percent from May 2007, and the delinquency rates on Countrywide loans in Illinois from 2005 through the first half of 2007 are even higher than Countrywide’s national rates.

Countrywide’s delinquency rates are having a devastating impact on Illinois homeowners because of the company’s massive presence in the market:
By 2007, Countrywide was both the nation’s largest originator of prime and subprime mortgage loans.

In the first quarter of 2008, Countrywide originated $73 billion in mortgage loans nationally.
At its peak, Countrywide operated approximately 100 retail branches in Illinois and was the largest mortgage lender in the state from 2004-2006, selling approximately 94,000 loans to Illinois consumers in that period.

Countrywide also was the largest seller of high-cost, or subprime, home loans in the Chicago area in 2006, according to a 2007 Chicago Reporter study.

Moreover, Countrywide is unique among lenders for its involvement in virtually every segment of the mortgage industry. Countrywide sells, purchases, services and securitizes mortgage loans.
“At the start of our investigation, we knew that Countrywide was a major player in the rapidly collapsing subprime mortgage market,” Madigan said. “Through the investigation, we have learned the larger story of how Countrywide created and implemented a corporate strategy that resulted in widespread loan failures by luring Illinois homeowners into unfair and unaffordable loans.”

Countrywide Relaxed Underwriting Standards and Placed People into Unaffordable Loans Madigan’s complaint outlines the Countrywide practices that put borrowers into unaffordable home loans, including relaxing underwriting guidelines to qualify borrowers with insufficient income and assets; inflating borrowers’ income on loan applications; and underwriting borrowers for less than the full amount ultimately owed—a practice that counted on borrowers refinancing when payments became too expensive. Madigan further alleges that the company combined lax underwriting standards with products containing multiple layers of risky features, thus ensuring that loans would fail.

As one example of Countrywide’s practice of placing borrowers into unaffordable loans, the complaint describes how Countrywide lessened its underwriting standards to place more subprime borrowers into reduced document loan products, which were faster and easier for Countrywide to sell, but came with higher costs for borrowers and higher delinquency rates. The complaint alleges that Countrywide sales employees and independent brokers selling its products used reduced document loans to inflate incomes of borrowers who otherwise wouldn’t qualify for a loan.

“Countrywide repeatedly qualified borrowers for mortgage loans based on salaries that were significantly higher than what they really made,” Madigan said. “As a result, Countrywide put borrowers into loans that they could never afford, leading to high failure rates.”
Moreover, the complaint alleges, even as Countrywide was increasing sales volume with reduced document loans based on inflated incomes, the company was also ramping up its sales of “affordability” products that exposed borrowers to unnecessarily high risk of foreclosure or loss of home equity. “Affordability” products are loans with low payments that last for only an initial period. Madigan alleges that Countrywide routinely qualified borrowers for affordability loans based on the initial low payment amount, even though the company knew that the borrowers would not be able to repay the loan after it reset to a higher rate.

One example of these risky products is Countrywide’s popular hybrid adjustable rate mortgage (hybrid ARM). These loans typically have a two- or three-year fixed rate, followed by 28 or 27 years in which the rate varies. Countrywide’s hybrids usually had discounted interest rates during the short fixed-rate period. After that period, the rate would reset upward every six months to a year, resulting in higher monthly payments. Most of the Countrywide borrowers who qualified for the lower fixed-rate period would not have qualified at the higher payment amounts after reset. Nonetheless, the company put borrowers into these unaffordable loans, assuming that borrowers would refinance the loan or sell the home before the payments increased.

Countrywide Used Unfair and Deceptive Sales Techniques to Lure Borrowers

Madigan also alleges that Countrywide relied on a host of unfair and deceptive sales techniques to push its unaffordable loan products on unsuspecting borrowers. Specifically, the lawsuit alleges that Countrywide enticed borrowers with promises of the best loan terms, low monthly payments, low interest rates and no closing costs but failed to disclose the loan’s true costs, affordability and risk.

The lawsuit alleges that Countrywide’s deceptive sales techniques were due in large part to a compensation structure that encouraged sales employees to place borrowers in risky loans by tying their compensation to the volume of loans sold. Madigan further alleges that Countrywide incentivized its vast network of independent mortgage brokers to sell home loans that were riskier and costlier than necessary, to the exclusion of other products.

Countrywide’s Conduct Violated Illinois Law
Madigan’s complaint alleges that Countrywide violated Illinois law by engaging in unfair and/or deceptive practices that included:
Originating mortgage loans that borrowers could not afford;
Relaxing certain underwriting guidelines, particularly through the company’s reduced documentation loan program, dramatically increasing the risk that borrowers would be unable to pay;
Originating mortgage loans that exposed borrowers to an unnecessarily high risk of foreclosure or loss of equity, particularly through risky products like pay option ARMs;
Originating unnecessarily costly loans to borrowers;
Engaging in unfair and deceptive marketing and advertising practices to lure borrowers into risky loans;
Incentivizing employee and broker misconduct and the use of unnecessarily costly and risky loan products; and
Engaging in deceptive practices in the servicing of mortgage loans, resulting in greater risk of foreclosures.

“Countrywide used egregiously unfair and deceptive lending practices to steer borrowers into loans that were destined to fail,” Madigan said. “As the nation’s largest originator of mortgage loans, Countrywide’s conduct has had and will continue to have a devastating financial impact on tens of thousands of families and many communities in Illinois.”

Madigan’s lawsuit asks the court to rescind or reform all Countrywide loans originated with the use of unfair and deceptive practices. This includes providing financial relief to borrowers who lost their homes to foreclosure, refinanced, sold, or have loans currently being serviced by Countrywide, even if that requires Countrywide to repurchase loans from current investor owners. For those loans currently being serviced by Countrywide, Madigan requests that the court allow the Attorney General’s Office 90 days to review any loans in foreclosure or moving toward foreclosure that were originated using the unfair and deceptive practices alleged in the complaint to determine if the loan can be modified to be affordable.

The Attorney General issued a second subpoena to Countrywide in March seeking information to determine whether the company has violated state and federal fair lending laws. That investigation is ongoing.

A team of attorneys in Madigan’s Consumer Fraud Bureau is handling this suit for the Attorney General’s Office.

Wednesday, June 25, 2008

We don't need no stinkin' title insurance

Most purchase agreements in the Illinois portion of this area obligate the seller to provide either an abstract or a policy of title insurance to the buyer. If your purchase agreement does not, negotiate for title insurance. If your agreement leaves the option up to the seller, negotiate to get the title insurance. If the seller refuses, buy it yourself. The price depends on the purchase price of the real estate. But unlike most insurance policies, this one is good as long as you own the property. It does not matter if you live there for one year or fifty years. Once the premium is paid, you are covered until you sell the property.

DO NOT let anyone tell you you don't need it. You might hear that it costs too much, the bank is doing a title search, the bank's lender's policy will protect you, or any number of other excuses. All are wrong, wrong, wrong.

Here's a recent horror story, from the Columbus Dispatch:

Family in Ohio buys a house from a Doctor in 2001. The Doctor had a couple of mortgages on the property. The County Recorder entered the Doctor's name wrong in the computerized index on one of the mortgages, so when the title company went to search the records, they did not find this mortgage (don't know why they didn't search the property index--maybe they don't have one in Ohio?). The Doctor didn't see fit to mention this oversight at closing, and it was not paid out of the settlement funds. It appears that the mortgage was for a line of credit, so the Doctor actually paid on it for a few years. Apparently the Doctor ran into a bit of a financial difficulty, and stopped paying in 2007. Now that lender is going to foreclose. All the buyers got was a title search, which is not insurance, and now the buyers stand to lose their home.

Tuesday, June 17, 2008

Peoria! Whatsamatta with you?

We are currently representing sellers who own property in the Peoria area. Our clients advised the real estate agent numerous times that we were representing them, to provide copies of all documentation and correspondence to us. The real estate agent has continually "forgotten" to do this. We had to request one particular document four times. Big surprise here--that document was written confirmation that the commission was to be reduced. We also informed the real estate agent that we would be taking care of obtaining title insurance, deed preparation, obtaining mortgage payoffs. You know, the usual attorney things.

We found out that the real estate agent had, against our clients' specific demand, ordered title insurance from its in-house title company. We were told that this in-house title company would be "hiring" one of the attorneys who owns the title company to "represent" our client. Talk about conflict upon conflict of interest. How can any sentient individual argue that this "attorney" would exercise independent judgment in the exclusive interest of the seller? The title company is beholden to the real estate company. The attorney is beholden to the title company. Is there room in that bed for all of them?

I told them they were engaged in the unauthorized practice of law by ordering title insurance. This attorney the title company "hired" was not involved in this transaction at all. My guess is, this was going to be a "Deed and Green." I must have struck a nerve, since this was what I found in my email the next day. (Thay gots gud grammer an' spellin' two!)

"I have attached written conformation for the commission reduction for 1234 Main. Again, I request for title insurance threw a title company, they send it to the Lawyers that own their company. I do this for every closing, there is nothing illegal about the way we get these ordered. If you think so, maybe you should do some research." [sic, sic, sic, sic, and I changed the address]

Oh, young lady, but I have done the research. And this is from a real estate agent's assistant no less.

In Chicago Bar Association v. Quinlan & Tyson, Inc., the Illinois Supreme Court tended to disagree with their assessment:
". . . [W]hen the broker has secured the signatures on the usual form of preliminary contract or offer to purchase, completed by the insertion of necessary factual data, he has fully performed his obligation as broker."

Obviously, these folks know better than the Illinois Supreme Court. To summarize, after the purchase agreement is signed, the real estate broker's job is complete; as in finished, done, rifinito, acabado.

So, if I may be so bold: Sellers and buyers, do your own research, and find an attorney knowledgable in real estate law who is willing to represent only you. Someone who works for the title company that works for the real estate company might not be your best choice.

And please, somebody tell me it is just this particular real estate agent or company that does this, and that it is not common practice in the Peoria area.

Wednesday, April 23, 2008

Not funny, but it kind of is...

Have you heard about the latest spam scam? Those pesky scammers are targeting attorneys, and hitting us where we live (some attorneys anyway). Right in the ego.

Starts out with the usual professionally polite nearly sychophantic introduction, commenting on how the attorney was referred to the scammer by some lofty individual or organization. My recommendation came via the U.S. Chamber of Commerce, so they said. The story goes that Mr. Scammer is owed significant sums of money by some nefarious deadbeat located in the attorney's jurisdiction. But of course, since Mr. Scammer is located in some foreign locale, it is very difficult for him to try to collect. Because of the attorney's stellar reputation, Mr. Scammer is just certain the attorney could obtain that money.

For those simple individuals that took the bait, here's what happens. The attorney sends a demand letter to Deadbeat, Inc. (or Mr. Deadbeat, as the case may be). Deadbeat, Inc., due in no small part to the attorney's aggressive tactics, stellar reputation, and impressive legal acumen, immediately forwards a certified check to the attorney via overnight courier. Mr. Scammer is so grateful, and requests the attorney to please wire the funds and of course keep a healthy, nay, HUGE fee for the valiant efforts in bringing Deadbeat, Inc. to justice so quickly. Without breaking a sweat. Before tee time!

Here's where it gets comical/sad. The check was a forgery and Mr. Scammer and Deadbeat, Inc. are in cahoots (if not the same individual). The attorney gets to pony up the shortfall in his trust account.

Seriously, if it sounds too good to be true.........

Tuesday, April 22, 2008

Certified Checks at Closing

I just got yelled at, and likely lost a client, because [competitor's names deleted] don't require certified funds at closing.

We were acting as closing agent for a large Midwestern Bank located in the US (get it?). The buyer was getting ready to give me a $35,000 personal check at closing. Attorneys in Illinois and Iowa are required to obtain certified funds or wire transfers if they are planning to disburse before check clearance. Makes sense, don't you think? I wonder why the same isn't required of title companies. And even more curious, why would a title company even want to accept personal checks. [The good funds act now requires this.]

Sure, most people's checks will clear. Ignore for the moment those that don't. Banks now put a three to ten day hold on personal checks before the funds are available. That means, if a closing agent disburses at closing or shortly thereafter, they are disbursing money that belongs to someone else. The money for that transaction won't be available for a week or more, but here they are ponying up money that belongs to someone else. At some point, that little house of cards is doomed to collapse, whether it's because there is not enough float, or funds don't arrive on time, or business slows down to the point they don't have enough money to cover YOUR closing.

The excitement which would ensue for a check which did not clear really does not require discussion.

I asked the buyer on which bank the check was drawn, hoping it was nearby so she could just zip over there to get a certified check. She told me it was Bank A, and passed a check over to me drawn on Bank B. I pointed this out, and she rifled through her purse and announced that she did not have the checks with her for Bank A--the bank where money was located! So, yes, her check would have bounced. I try to follow the rules, and I get yelled at and lose a client.

So, I put it to you: Would you want to have your closing for your purchase or your sale at a closing agent's office who accepts personal checks and is using money that belongs to someone else to fund your closing? Or would you prefer to close at a title agent who diligently obtains good funds from all parties so there are no, um, "complications" which can occur when it is time to divvy up the money?

Tuesday, April 1, 2008

Iowa Delay of Sale in Foreclosures

Iowa's foreclosure laws have some unusual quirks. One is the ability to request a delay of sale. Make no mistake--requesting a delay of sale does nothing except delay the date of the sheriff's sale. Here is a brief overview of how delay of sale works:

A foreclosure petition is filed.

The borrower/mortgagor/defendant (will call this person the borrower from here on out) files a demand for delay of sale.

If the property is not the residence of the borrower, the sheriff's sale will be delayed two months from the date the foreclosure decree is entered.

If the property is the residence of the borrower, and the lender is seeking a deficiency judgment, the sheriff's sale will be delayed twelve months from the date the foreclosure decree is entered. A deficiency judgment is best explained with an example: The borrower owes $100,000 on the mortgage. The lender only gets $80,000 when it sells the property after the foreclosure. The $20,000 difference is the deficiency. If the lender is going to try to get that difference from the borrower, the lender is seeking a deficiency judgment.

If the property is the residence of the borrower, and the lender is NOT seeking a deficiency judgment, the sheriff's sale will be delayed six months from the date the foreclosure decree is entered.

Remember, these delay periods only apply IF the borrower demands a delay of sale.

Friday, March 28, 2008

Dual Contracts....

....are bad. This one's not even very clever. The "bad guys" write up two contracts. One contract is the "real deal." The other contract goes to the end lender. Sometimes it is the real estate agent who comes up with this scheme, sometimes the buyer, sometimes the mortgage broker. Sometimes even the attorney. But the effect is the same. Maybe the buyer wants to put some cash in his pocket. Maybe the real estate agent or the mortgage broker want to pad their commission.

Say the seller wants $100,000 for the house. There will be a contract which specifies this price--the real deal. Then we have the second contract. This will either be a completely separate contract or just an extra page which will be conveniently removed before the appraiser and/or end lender get hold of it. This contract will say the purchase price is $140,000 and the buyer will "refund" the extra $40,000 to the seller, either under the table or via a "flexible" closing agent.

Again, not even clever. This is fraud, pure and simple. If the lender does not know the whole transaction, you are committing fraud. Hope you look good in orange....

Wednesday, March 12, 2008

Bad closing agent! Sit! Stay!

Monday I attended a closing at one of our fine local lenders, with whom I do not have a business relationship. And now I know why.

We represented the seller. The purchase agreement said the termite inspection fee was to be paid by the buyer. The purchase agreement also said the buyer was getting a "conventional/VA" loan--whatever that is. We received a HUD-1 settlement statement from THE bank's closing agent which showed the buyer paying the termite inspection. When I got to closing, THE bank's closing agent had moved that fee from the buyer's to the seller's side of settlement statement without letting us know. That alone is merely annoying, rude, and unprofessional. I can live with that. What went beyond annoying, rude, and unprofessional was the explanation I received when I questioned this unauthorized revision. THE bank's closing agent said that since it was a VA loan, the lender would not allow the settlement statement to show the buyer paying the termite inspection fee, which is true. But then she said that the buyer would reimburse the seller directly outside of closing. Honestly, I was appalled at the ease with which this scheme was suggested. Usually, I would expect a whispered, "Psst, hey buddy, come here, I gotta talk to ya about something." She even offered to cut the checks that way from her trust account! I am pretty sure the VA does not look favorably on schemes to circumvent their rules.

I had to call shenanigans. I did. Really. I said, "Unacceptable! Mortgage fraud! RESPA fraud! Ain't gonna happen!" Except, without the exclamation points. And I don't think I used the word "ain't."

I suggested that the buyer pay the termite inspection fee directly, since he was contractually obligated to do so. THE bank's closing agent left the room, ostensibly to contemplate my refusal to engage in fraud, but more likely to disparage the jerk sitting in their closing room. THE bank's closing agent claimed that the "underwriter" said that "they" would verify with the termite inspection company that the buyer paid the fee directly. I really doubt that is true, but even assuming it was, why wouldn't "they" verify with the seller, the closing agent, the buyer, the seller's attorney, the listing agent, or the selling agent that the buyer paid the fee. I even read that portion of the settlement statement aloud to the class where it says:
I have carefully reviewed the HUD-1 Settlement Statement and to the best of my knowledge and belief, it is a true and accurate statement of all the receipts and disbursements made on my account or by me in this transaction.

This had the expected effect. "Do it our way, or we won't close." Well, I will not be coerced into committing mortgage and RESPA fraud, but apparently I can be coerced into paying a $50 to protect my clients.

Yes, I know, it was only $50. What's the big deal? The lender will never know, right? Doesn't matter. That kind of attitude is what has cause the current mortgage debacle. Fraud is not a matter of degree--an action is fraudulent or it is not. How can I allow a $50 fraud to occur, and then refuse to commit a $5,000 fraud, and a $50,000 fraud the next month, and then a $5,000,000, and pretty soon you are talking about real money there? It's a bright line, and we all know where it is. Stay on the right side of it.

Thursday, March 6, 2008

Stated Income Loans

A stated income loan is exactly what it sounds like: A borrower states their income to the lender, and the lender usually does not verify that information. It is usually used for people who are self-employed or have significant ups and downs in their income, for example, landscapers who work only when the ground is not frozen. I think that most people go into this type of loan properly. The tell the lender how much money they make. End of story.

But I have been shocked by the number of people who think "stated income" means, "I can make up any amount I want." Sometimes it is the borrower, and sometimes it is the lender/broker who is the instigator. The bottom line is, if the income you state to your lender does not match the amount you actually make, you are committing fraud. And if that amount does not match what you told the IRS you made, you are not only committing tax fraud, but you are a true pillock.

Take this purely fictional scenario:

"I only made $30,000 'on paper' last year."

"What does that mean, 'on paper'?" I ask, innocently.

"Well that's what we put on our tax return, but really we made about $50,000 with our side businesses, and we just put down $70,000 for our stated income 'cause we'll probably get that once my [insert get rich quick scheme de jour here] comes through for me," they gormlessly respond.

So, now we have mortgage fraud and tax fraud, but here's the really, really stupid part. Because they utilized a B-C stated income program, their interest rate on their principal residence is............14%! So, they committed tax fraud and saved probably nothing on their taxes, and committed mortgage fraud so they could get a bigger loan than they can afford. If they had just gone "legit" their interest rate would probably be less than half of what it is. But they sure beat the system, eh?

Wednesday, March 5, 2008

Mortgage Forgiveness Debt Relief Act of 2007

With all the talk of foreclosures, short sales, workouts, principal reductions, etc., I am surprised we have not heard more about the Mortgage Forgiveness Debt Relief Act of 2007 (the Act). Under the Act, people may be able to exclude debt forgiven on their principal residence. The balance on the loan must be less than $2 million ($1 million for a married taxpayer filing a separate return, and the debt must have been forgiven in 2007, 2008, or 2009.

It appears to apply whether the debt was forgiven pursuant to a short sale, a foreclosure, or a workout with the lender to reduce the principal balance. Since just yesterday Ben Bernanke suggested that lenders should forgive portions of mortgages when the borrowers are at risk of defaulting, the Act will be very important for many people.

To qualify under the Act, the debt must have been used to buy, build, or substantially improve principal residences, as well as being secured by that residence. That would seem to mean that folks who pulled out tons of equity to pay off credit cards, buy boats, etc. might not qualify.

More details are on Form 982, and its accompanying instructions. Apparently, because this revision took place so late in the year, many tax preparation software packages do not include the updated form.

Monday, March 3, 2008

Spouses need to sign mortgages

Loan officers in Iowa and Illinois please take note: Spouses need to sign the mortgage. We just had a closing go awry because the loan officer told the married borrower that her husband did not need to sign the mortgage. No matter how many times we try to make it clear, if a person is married, except in certain rare circumstances, the spouse needs to sign the mortgage. And anyone who signs a mortgage should be signing a Truth in Lending Statement as well as a Notice of Right to Cancel if it is a refinance of your residence.

This is especially true in Iowa, where the mortgage is VOID if not signed by both husband and wife. V-O-I-D. As in, it has no effect, means nothing, rubbish, bird cage liner. Wells Fargo found out the hard way recently when they were not allowed to foreclose their mortgage lien because the wife did not sign the mortgage. They came in pretty cocky with all kinds of fancy legal theories why they should be able to foreclose anyway. The judges said nope. Only they used a few more words than that. And no it does not matter that you are in the process of getting a divorce, legally separated, or even just generally annoyed with your spouse.

What I think trips people up is that there are three different things we are talking about here:
  1. Who is in title, or who owns the property? Only the individuals named on the deed own the property.
  2. Who owes the money? Only the individuals who sign the promissory note owe money to the lender.
  3. Who signs the mortgage? The more the merrier from the lender's perspective. Everyone who owns the property MUST sign the mortgage. Everyone who signs the note should sign it. The spouse(s) of everyone who owns the property MUST sign it. Signing the mortgage does not mean you owe money. It only means you agree to give up your rights to the property if the payments are not made by whoever signed the note.
On the bright side, if you are in Iowa, and you were married when you took out your mortgage, and your spouse did not sign the mortgage, there is a real possibility you have a free house. And we would be happy to help you out with that, if you like.

Tuesday, February 26, 2008

Hire an attorney before a real estate agent?


I was interviewed yesterday by a national publication for an article concerning advantages and disadvantages of using a real estate agent when you are buying or selling real estate. I highly recommend that people have real estate agents, but I am even more adamant that people hire an attorney to assist them with purchasing or selling real estate. I mentioned, somewhat in passing, that I always recommend that people hire an attorney before doing anything else in anticipation of buying or selling real estate. The interviewer was taken aback by this concept and reasonably asked why someone would want to do that.

Sure, it may be a bit self-serving for an attorney to suggest that buyers and sellers should hire an attorney. But let me explain.

Buying or selling real estate is, for most of us, the biggest financial transaction of our lives--tens or even hundreds of thousands of dollars and decades of financial obligation. You need someone by your side who represents only you. You need someone who understands the issues and problems. While lenders, real estate agents, appraisers, and title companies may be involved in your transaction, only your attorney is ethically bound to have an undivided loyalty only to you. If any of these individuals tell you that you do not need an attorney, you owe it to yourself to question why they would make such a recommendation to you. Are they trying to hide something? Are they afraid someone who is looking out only for you might question the transaction? Our website has a whole page of examples of what did go wrong for people who did not have an attorney, and things that did not go wrong but would have had we not been involved.

Most attorneys charge a flat fee for real estate transactions. So they are not interested in maximizing the purchase price to maximize their fee. Their fee is their fee whether your purchase price is $10,000 or $1,000,000. Their fee also is not dependent on whether or not you actually purchase the property. So a good real estate attorney is not afraid to tell you when it is appropriate to walk away from the purchase or sale. Reputable attorneys are never, ever, ever "dual agents." An attorney should represent the buyer or the seller, but not both.

A real estate attorney has the experience and expertise to guide you through a complicated process, from start to finish. What often happens, at least in this area, is that people hire a real estate agent first. They find a house (or a buyer for their house) and sign a purchase agreement. At this point, they are already obligated. If there is something in that agreement which would work to your detriment, there usually is not much that can be done by your attorney. Find an attorney first, and have them review the purchase agreement before you sign it. The best time to contact your attorney is before you even start looking for a home or when you are just preparing to sell your current home.

An experienced real estate attorney can even recommend lenders and real estate agents who have a demonstrated track record of reliability, integrity, and expertise, saving you a great deal of worry and frustration. As with any profession, the vast majority of lenders and real estate agents are reputable and work very hard for their clients, but there are a few who do not. A real estate attorney will have the experience to know who falls into which category, and will not be afraid to let you know--in fact, you attorney will be ethically obligated to let you know.

And for those of you who opt for the FSBO (for sale by owner) route, your attorney can be a wealth of information, and ensure that you comply with all applicable laws and disclosure requirements.

I honestly think that if everyone hired an attorney to represent them, there would be much less mortgage fraud, and much, much less predatory lending. If I had a nickel for every time I prevented a lender from taking advantage of one of my clients, I would have $4.35. Sure, I would be on the St. Patrick's Day card list of quite a few more people than I am currently if I would just "look the other way," but that is not a trade off I am willing to make.

Wednesday, February 20, 2008

New Illinois Radon Disclosure

As of January 1, 2008, the Illinois Radon Awareness Act (420 ILCS 46/1) requires sellers of residential real estate to provide to the buyer the IEMA pamphlet entitled "Radon Testing Guidelines for Real Estate Transactions" (or an equivalent pamphlet approved for use by IEMA) and the Illinois Disclosure of Information on Radon Hazards. The way the statute is worded, the buyer is not obligated to purchase the property until the disclosure and pamphlet are provided. If the disclosure and pamphlet are provided after an offer is presented to the seller, the seller must provide these documents to the buyer before accepting the offer, and allow the buyer an opportunity to review the information and possibly amend the offer. I find the italicized language problematic, since it does not distinguish between "good" and "bad" disclosures. For example, a buyer tenders an offer to a seller. The seller dismisses other offers, provides a radon disclosure which shows the home was tested last week and has no radon, and then accepts the buyer's offer. The buyer can then lower the offered purchase price. Sure, sure this is a counteroffer and the seller does not have to accept it. So, sellers, be careful, and give a radon disclosure and pamphlet to anyone who even looks like they might think about looking at your home.

Friday, February 8, 2008

Short Sales

First of all, what is a short sale? It is simply paying the lender less than the amount due on your mortgage loan in exchange for a release of lien against the real estate.

Why would a lender agree to this? Foreclosure is much more time consuming and expensive. The lender owns your property after foreclosure, and is responsible for maintenance, taxes, and most importantly, selling the property. So, accepting a short sale is sort of a "bird in the hand" theory. The lender knows the property is sold, and they know exactly what they are going to receive. With foreclosure, it can take months (even years) before the property is sold, and there is no way to know how much the lender will get when it eventually sells.

Why isn't the the perfect plan to avoid foreclosure? There are some risks involved for the home owner. Most people think that they no longer owe the money because the mortgage has been released. That is not necessarily the case. More often than not, the lender wants all the money to which they are entitled--and who can blame them. This point needs to be negotiated. If the lender actually does forgive the debt, another potential pitfall is the tax liability of the forgiven debt. Since you are given a "gift" of not having to pay back the money, this can be considered income. There are circumstances where you would be responsible for the taxes on this forgiven debt.

How do you do it? There is a great deal to be aware of when you try to do a short sale. Please don't try to do this on your own. Make sure you hire a competent real estate attorney to assist you. Your attorney will probably need your written authorization to contact the lender. Your attorney will prepare a preliminary settlement statement so that the lender can see that the sale price of the home is not sufficient to pay off the loan. Some lenders will require hardship letters. Some will even want appraisals so they can see you aren't selling the property for less than you could.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

Wednesday, February 6, 2008

Lenders in Illinois who require you to use their title company

You have a right, under Illinois law, to select any title agency you like. Simple as that. Boiled down: No firm which may make a loan secured by an interest in real estate with a single family residence shall require, either directly or indirectly that any borrower obtain title insurance through a particular insurer, agent, or broker. Here it is in its entirety:

(815 ILCS 505/2T) (from Ch. 121 1/2, par. 262T) Sec. 2T. No person, firm, corporation, partnership or association which may extend credit or make a loan secured by an interest in real estate which is or is to be improved with a single family residence or any residential condominium unit occupied or to be occupied as a principal residence by either the borrower as an individual or, if the borrower is the trustee of a trust, by a beneficiary of that trust, shall require, either directly or indirectly, as a condition precedent to making such loan or extending such credit (a) that any seller, borrower, mortgagor or debtor to whom such money or credit is extended negotiate, obtain or contract for title insurance through a particular insurer, agent or broker; or (b) that any seller, borrower, mortgagor or debtor pay for a title commitment or policy other than a title commitment or policy issued at the request of the seller, borrower, mortgagor or other debtor. Nothing contained in this Section shall be construed to prohibit the lender from requiring title insurance as a condition of making a loan secured by an interest in real estate. The lender may refuse to make the loan or may reject the title insurer or the proposed policy if the lender believes on reasonable grounds that the title insurance will afford insufficient financial protection to the lender or insufficient protection as defined under regulations administered by the Federal Home Loan Bank Board. Nothing contained in this Section shall be construed to affect any provision in a contract between a seller and buyer of real estate with respect to the selection of title insurance. (Source: P.A. 85‑1209; 85‑1351; 85‑1440.)

Certainly makes me wonder about lenders who, when faced with this statute, still refuse to let their borrowers select their own agent. What exactly do they have to hide? Are they receiving illegal kickbacks? Is their title agent a little "flexible" with the rules? Something even more nefarious? There are a few lenders in this area who have refused to allow borrowers to choose their own title agent. I wonder how much they will enjoy defending an Illinois Consumer Fraud and Deceptive Business Practices Act claim? Please call me if your lender has problems understanding this law. Or better yet, find a new lender.

Tuesday, February 5, 2008

Deed and Green

Deed and green. Sounds like someone who works to improve the environment. But it is actually a pejorative term to describe what lazy attorneys do, or rather don't do, for their clients. In the olden days in Illinois, the declarations of value required when selling real estate were green. Hence they were called "green sheets." So "deed and green" refers to an attorney who does nothing but prepare a deed and green sheet for a seller of real estate--no representation, no attending closing, nothing. Seriously, all they do is fill in the blanks on a couple of prepared documents. This is not representation. This is providing secretarial services. In Illinois, there is an ethics opinion which states it is unethical for an attorney to prepare a deed and delegate all other responsibilities of the real estate transaction to a non-attorney. Here is a snippet of that opinion:

Opinion No. 94-1 July, 1994
Topic: Unauthorized Practice of Law; Conflicts of Interest; Limitation of Scope of Representation Digest:
A lawyer aids in the unauthorized practice of law, and may violate rules pertaining to confidentiality, conflicts, and the duty to communicate with and explain matters to a client, by limiting his role in a real estate transaction to the drafting of documents and delegating the gathering and dissemination of information, the resolution of problems arising from such the documents drafted, and other problems which may arise at the closing, to the real estate broker.
Ref.: Illinois Rules of Professional Conduct, Rules 5.5(b), 1.4(b), 5.4(c)
ISBA Opinion on Professional Conduct, Nos. 90-35 and 87-2

If you would like to read the rest, just let me know.

So why would an attorney do this? Are they lazy? Are they trying to minimize risk? Sucumbing to the demands of referring real estate agents? I have no idea. I am sure, however, that if a problem arises, the disciplinary commission and the attorney's malpractice carrier will not be amused with any arguments that the attorney felt his or her responsibility ended at preparing the deed.

In our area, there are only a couple of bad apples I know of who pull the "deed and green" routine, but in other parts of Illinois, with the exception of the Chicago area, it is more common. And in Iowa? Oh my goodness! You certainly would not guess Iowa prides itself on keeping attorneys involved in real estate transactions. We are involved in transactions throughout the entire state, and I am constantly shocked at how little attorneys do in "representing" their clients. Outside of our community, you are more likely to see Sasquatch on your way home from work this morning that you are to find an attorney at a closing.

So, come on "deed and green" attorneys; either represent your clients or don't represent your clients. Stop being satisfied with doing only part of your job. And sellers, if you can't find an attorney who will actually represent you, don't pay for someone to complete a couple of simple documents for you. Keep looking for someone who is willing to actually do his or her job. We are out there! And if there really is not one attorney in your community willing to represent you (and sadly, there are places like that), fill in the blanks yourself and save the $50-$100. All the documents you need are easily available on the Internet.

Friday, February 1, 2008

Good for her!

One of the reasons many of the mortgage fraud schemes can flourish is because of complicity, or at least indifference, of a very few appraisers. Just a few bad apples make it very difficult for appraisers with a strong moral compass to succeed. A California appraiser was "blacklisted" by Washington Mutual because she refused to lie about market conditions. This is pretty much the same problem legitimate closing agents and title companies suffer through every day. If I had a nickel for every "client" or "deal" we lost because we were not "flexible" enough.... Well, it would be a nice big pile of nickels. Of course, who need clients like that, I know, I know, but it sure would make life and business easier if we all played by the same rules.

Here's the whole story:,0,5983594.story

Good luck Jennifer! We're all rooting for you.

Thursday, January 31, 2008

Your check register needs to match the HUD-1

Isn't that a simple rule? But for some reason, many closing agents and title companies just can't quite seem to follow this rule. When I look at a title/closing/escrow company's trust or escrow account check register for a particular file, it needs to match exactly what is on the HUD-1 Settlement Statement. So, if the seller is getting $23,000 on the settlement statement, your check register better show a check to the seller for $23,000. Not only that, but the names need to match. If the settlement statement says "Repairs to Smith Construction," that check best have gone to Smith Construction, and not back to the buyer or seller. Likewise, the seller's proceeds need to go to the seller, not to the seller AND the buyer, as some of the "flexible" closing agents will do.

The buyer and seller sign under this language on the HUD-1 Settlement Statement:

I have carefully reviewed the HUD-1 Settlement Statement and to the best of my knowledge and belief, it is a true and accurate statement of all the receipts and disbursements made on my account or by me in this transaction.

The closing agent signs this:

The HUD-1 Settlement Statement which I have prepared is a true and accurate account of this transaction. I have caused or will cause the funds to be disbursed in accordance with this statement.

Those statements are pretty simple too, aren't they? What often happens is that the purchase agreement says that the seller will pay $3,000 of the buyer's closing costs (we won't discuss the fact that they have artificially inflated the purchase price by that $3,000). Sometimes, the closings costs don't amount to $3,000. Sometimes, the lender will not allow the seller to pay certain closing costs. Sometimes, the buyer would end up getting money back if the buyer gets the full $3,000, and the lender does not allow the buyer to get a check at closing. Doesn't matter.
Let's say the lender, for whatever reason, only allows the buyer to receive a credit for $2,000 of the $3,000 seller paid closing costs. The loan officers and real estate agents will beg, plead, and argue that you should give the seller $22,000 of the $23,000 shown on the settlement statement, and give the other $1,000 to the buyer. When the real estate agents and the loan officer are telling you that it's not fair if the buyer doesn't get the full $3,000, that all the other title companies in town will cut checks which differ from the settlement statement, go back and read what you just signed:

The HUD-1 Settlement Statement which I have prepared is a true and accurate account of this transaction. I have caused or will cause the funds to be disbursed in accordance with this statement.

And then ask yourself if their business is worth damaging your community, hurting our economy, and committing mortgage, RESPA, mail, and wire fraud.

Wednesday, January 30, 2008

Fake second mortgages

Why would anyone give a "fake" second mortgage? Here's how the scam works. Let's say the seller wants $100,000 for their house. The buyer does not have a down payment, and does not want to pay mortgage insurance. The buyer, seller, and sometimes the real estate agent, loan officer, and title company all conspire to increase the purchase price to $120,000 with the seller "financing" $20,000. The $20,000 seller financing is shown on the settlement statement. There is an actual note and mortgage signed by the buyer at closing evidencing the $20,000 debt. In extreme cases, the title company will even record the mortgage (though most do not).

So far, this is completely legitimate. What happens next though, is that the mortgage is immediately released, and the note cancelled. I have actually heard tell of the president of a big title company in our area who actually makes a big show of tearing up the note at closing.

As soon as that is done, it becomes a $20,000 gift from the seller to the buyer. And it becomes mortgage and RESPA fraud. The end lender is led to believe that the purchase price is actually $120,000, and that the buyer will be making payments to the seller on the $20,000. The truth is that the house is only worth $100,000 and the buyer has absolutely no investment in the property. Not really any different that under the table kickbacks, except that they put it on the table first.

Tuesday, January 29, 2008

Corporations selling real estate

Since the Quad Cities is a community which is split into two states, we often have "jurisdictional" problems. One common problem is when a corporation or LLC sells real estate in a state in which it is not authorized to do business. In other words, an Iowa corporation sells real estate in Illinois without being authorized to do business in Illinois.

In Illinois a corporation does not need to be authorized to do business in Illinois if all it does is buy and sell real estate. Buy it and sell it. That's it. As soon as it does anything to the property, the rules change. The problem arises when that corporation "transacts business" in Illinois. For example, if Iowa Property, Inc. buys a lot in Illinois, then builds a house on that lot, Iowa Property, Inc. needs to be authorized to do business in Illinois. Similarly, if Iowa Property, Inc. buys a house or building in Illinois and then fixes it up, it also needs to be authorized to do business in Illinois. In both of these examples, Iowa Property, Inc. is transacting business in Illinois and therefore needs to be authorized to do business in Illinois.

If Iowa Property, Inc. is not authorized to do business in Illinois when it buys property, improves it, and then sells it, all of the franchise tax, income tax, and registration fees it would have owed had it been paying its fair share become liens against any real estate it owns in Illinois. So essentially, if an attorney or title company allows the Iowa corporation to sell this real estate, the buyer could end up being responsible for this lien.

I have had numerous "stern discussions" with Iowa attorneys regarding this. I will never let my buyer-client purchase property from a corporation not authorized to do business in Illinois, when it should have been authorized to do business in Illinois. It is a simple enough process to will tell you whether or not a corporation or LLC is authorized to do business in Illinois. Unfortunately, I see attorneys and title companies allow this to slide by all the time. They succeed in failing their clients.