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.
www.thomasmoens.com
Wednesday, March 12, 2008
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?
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.
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:
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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:
- Who is in title, or who owns the property? Only the individuals named on the deed own the property.
- Who owes the money? Only the individuals who sign the promissory note owe money to the lender.
- 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.
www.thomasmoens.com
Tuesday, February 26, 2008
Hire an attorney before a real estate agent?
Yes!
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.
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.
www.thomasmoens.com
www.thomasmoens.com
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.
www.thomasmoens.com
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.
www.thomasmoens.com
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