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.