Lenders are building buffers to protect themselves from an anticipated rise in borrower fraud when the Home Affordable Foreclosure Alternatives (HAFA) program launches on April 5, 2010 and prompts a surge in demand for short sales states an article in Housing Wire.
Due to an increasing “awareness” of real estate agent ethics, banks can rely on agents to be ethical, honestly.
SHORT SELLING TO YOUR AUNT IS LEGAL- AS LONG AS IT IS DISCLOSED
Some controversial real estate experts might argue that creative short sale transactions, with their cool descriptions, including strawman deals, lease back with option to purchase, flipping, wet and dry double escrows (I think it means funded and unfunded simultaneous escrow closings), etc., are legal, so long as everything is disclosed and the deal is approved by the involved parties.
Local real estate licensing laws may prohibit their agents from participating in certain transactions such as simultaneous escrows. But if everyone knowingly agrees to the deal, someone cannot come back later and claim the deal was illegal- especially if they had previously signed a waiver form releasing that right.
A LEASE BACK SIDE DEAL
Borrowers sometimes have a relative or partner purchase the property in a short sale and rent it back to the defaulted borrower. This is OK (yes, it’s ok), as long as the homeowner discloses it, and gets approval for it from everyone including the lender in advance.
As short sales are increasing in demand with the onset of HAFA, lenders are now having all parties of a short sale transaction – borrowers, buyers and real estate agents – sign affidavits assuring that there are no under-the-table agreements and the transaction is taking place at arms length.
FLIPPING PROPERTY COMES FULL CIRCLE
Simultaneous and back to back same day escrow closings aka “flipping” is another potential gray area. Here, an investor makes a lowball offer to the lender to buy the property at a short sale. If the lender approves the offer, the investor then sells the property to an end buyer at a “simultaneous closing.” The investor collects the ‘spread’ between the amount of money the lender was willing to accept and the purchase price that could be obtained on the open market.
A new trend referred to as “property flopping” has emerged, where a property is artificially appraised below its actual market value (using a BPO) and sold to a related party of the real estate agent, who then sells the property at its real market value for a quick profit.
Using real estate agents to appraise property has generated outcry from the Appraisal Institute: In a letter to Treasury Secretary Timothy Geithner, members of our industry wrote, “We strongly believe continuing to allow ‘broker price opinions’ (BPOs) in the property valuation component will not adequately protect the public interest (consumer, borrowers, etc.) or the interests of the various parties to the loan (lenders, loan servicers, etc.) and is likely to exacerbate mortgage fraud.” The letter was signed by the Appraisal Institute, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, and the National Association of Independent Fee Appraisers.
“We urge the Department to re-establish independence in the valuation process to protect the safety and soundness of financial institutions, improve transparency, and safeguard the public trust,” the appraiser organizations’ letter said, later adding, “We urge the Administration to revise the [Home Affordable Foreclosure Alternatives] HAFA guidelines to prohibit the use of BPOs for property valuation requirements involving foreclosure alternatives, including short sales.”
LENDERS RELY ON AGENTS FOR PROTECTION
In order to crack down on all of this, many lenders now require that the offer come from a licensed real estate agent, in fact, the agent has to send in their licensure information along with the short sale application. The Greater Las Vegas Association of Realtors (GLVAR) takes particular pride in having its members abide by stringent standards, and most agents are “extra careful” about violating a myriad of different real estate ethics.