Verify wiring instructions before you wire funds to escrow...

So luckily I have not experienced this first hand with any of my clients, however I know other agents who have clients that have fallen victim to this. Beware...falling victim to this scam can not only derail your home purchase, but also completely derail your life.

BUYERS: WHEN YOU WIRE YOUR DEPOSIT OR DOWNPAYMENT FUNDS TO ESCROW, BE SURE TO VERIFY THE WIRE INSTRUCTIONS AND ROUTING INFORMATION WITH YOUR AGENT AND ESCROW DIRECTLY.

I can not emphasize this enough. If you receive an email with wiring instructions, call and personally talk to your agent to verify the information is correct and legitimate.

Sadly enough, there is an online email scam that seems to be getting more prevalent. Criminals will hack into a real estate agent's email and just sit back, read the emails, and monitor activity and the progress of transactions...then, when it comes time for a transaction to close, the hacker will use the agent's email and send wiring instructions to the client -- impersonating the agent. The wiring instructions lead to offshore bank accounts, not to escrow. One funds are wired to an offshore bank account, they can not be recovered.

Again, this is not some rumor. I know real people this has happened to. I know an agent whose client wired over $100,000 to Nigeria -- lost and gone forever. Don't let this happen to you! I have recommended to my buyers NOT to wire funds at all, and obtain cashiers checks and deliver them to escrow directly. The California Association of Realtors has a new advisory/disclosure document that addresses this as well. Just be careful.

Bank of America - Requiring New 3rd Party Authorization Form for Short Sales

The Bank of America legal department seems to be busy lately, because today I received yet another email from the BofA short sale department regarding a new 3rd Party Authorization Form that they will require starting April 14, 2012.

A 3rd Party Authorization Form is submitted by a property owner to a lender, and this document allows an "authorized 3rd party" permission to speak with the lender on the seller's behalf. As a short sale listing agent, I obtain a 3rd party authorization document from each short sale seller at the time I list a property so that the lender is allowed to discuss the details of the loan(s), the short sale, any pending foreclosure, etc.

I had created my own 3rd Party Authorization Form based on the requirements of different short sale banks, and I have never received any objections from the short sale banks when I have submitted it...my homegrown authorization form included the property address, sellers' names, the last 4 digits of their social security numbers, loan number(s), a note stating that the seller gives me authorization to speak with the short sale bank on their behalf regarding a short sale, and my complete contact information, and then the form was signed by the sellers.

BofA's new 3rd Party Authorization Form takes that a few steps further. In addition to many of the elements of my homegrown authorization letter, there is a section that requires the listing agent to provide licensing information, and sign acknowledging that he/she is a licensed as a real estate agent, will present all material facts pertaining to the circumstances of the short sale, and that the agent will comply with all applicable state and federal laws, rules and regulations governing the services provided.

Fraud prevention at its finest! Nicely done Bank of America.

HUD Proposes Changes to FHA Loan Program

The US Department of Housing and Urban Development (HUD) announced today that it is planning to make some changes to its FHA loan program. Hmm...the announced changes include:

- Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending. Per HUD's press release, "the first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge." This change will supposedly take place this coming Spring 2010. Eventually, they plan to shift this from an up-front fee increase to an annual premium increase. What does this really mean, in plain english? The FHA mortgage insurance premium is paid by the buyer up front, however the cost is financed into the loan. For example, if your purchase is for $300,000, your "base" loan amount after your 3.5% downpayment is approximately $289,500...the MIP is added to the base mortgage loan amount. Currently, MIP is approximately 1.75%. This would add approximately $5,066.25 to your financed loan amount, making your total financed purchase approximately $294,566.25. With this change, with the MIP being raised to 2.25%, this would add an additional $1,447.50, for a total financed amount of $296,013.75...a difference in monthly payment of about $10 depending on the interest rate?

- Update the combination of FICO scores and down payments for new borrowers. Per HUD's press release, "new borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%." This change will supposedly take place this Summer 2010. What does this really mean, in plain english? Candidly, I really do not anticipating this having a huge impact on FHA lending as it exists. Until now, there has been no minimum FICO score requirement imposed by HUD, however, lenders who fund FHA loans have imposed their own "overlay" requirements. I do not know of ANY lender who currently will fund an FHA loan for a borrower with a credit score below 580 (and really, that number is probably 620). I just hope lenders do not create new "overlay" requirements that raise downpayments for borrowers with credit scores under, say, 640 or something...

- Reduce allowable seller concessions from 6% to 3%. Per HUD's press release, "the current level [at 6%] exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions." This change will supposedly take place this Summer 2010. What does this really mean, in plain english? Candidly, this does suck (for lack of a better way of saying it). While I think it is pretty rare to see a buyer ask for a 6% seller concession (aka, a credit for buyer's closing costs), it is not uncommon to see a buyer ask for 3.5%, or 4% to cover their closing costs. Also, often times a credit will be negotiated after the buyer and seller are in contract to compensate for a repair or something of that nature...now ALL credits will be capped at 3%. Heck...many conventional loans allow more than 3%. It means that buyers will have to come into the transaction with more money...that concept is not a terrible thing, but all of the (probably unintended) consequences of limiting the seller concessions could be really crappy.

So what is the net effect of all of this? If you are an FHA buyer looking for a home, and these changes above will adversely affect your ability to purchase a home, you may want to get in gear and complete your purchase...or, start saving more money for your purchase. If you are a seller, and potential buyers for your home may be using an FHA loan (which in Sacramento, will be MOST sellers), get ready for these changes...you will be capped at a 3% seller concession, so throwing money at a transaction in lieu of repairs may not fly in some cases.

Lenders must use a new Good Faith Estimate (GFE) Form starting January 1, 2010

I got a sneak preview this week at the new "Good Faith Estimate" that lenders will now be required to provide to consumers who are shopping for a mortgage loan. Starting January 1, the US Housing and Urban Development (HUD) will require lenders to use this new standard form.

What is a Good Faith Estimate? A "GFE" is an itemization of all of the costs associated with obtaining a mortgage loan. It breaks out different costs, like loan origination, appraisal fees, estimated taxes, and prominently displays the estimated interest rate, length of the loan, etc. It also shows the "fully loaded" estimated monthly payment (fully loaded = total monthly payment amount of loan principle, interest, taxes and insurance). You can get GFE from multiple lenders and compare them side-by-side.

The current GFE is one page and resembles a spreadsheet...if you have never looked at one, they can be a little cryptic to decipher. I often help my buyer clients understand what they are looking at as they shop for a loan.

Most of this new 3-page GFE document is written in plain english, and really describes what the items are, which is really nice. There are specific sections with checkboxes that are not noted on the current GFE - like for example if the loan has a "pre-payment penalty" or a "balloon payment." I think it will be very difficult for dishonest lenders to fudge different fees and terms on the new form.

The one short-coming I think the new GFE has (that I am sure will be addressed by HUD with a revision or Addendum soon) is that no where does it explain or show the "fully loaded" payment. It only shows the principle and interest monthly payment amount (and does not factor in the full payment with the monthly allocation of property taxes and insurance)...which is only part of the true picture.

Overall I give HUD a thumbs up with regard to this new GFE...but PLEASE - HUD make that revision so the full PITI payment is clearly defined on the form!

LOW Interest Rates...my clients are locking in below 5%!

Just learned that one of my buyer clients who closes escrow on her Sacramento home purchase in a couple weeks was able to lock in her conventional loan interest rate at 4.875%! That is phenomenal!

I have another client looking to make an investment property purchase that was quoted 5.5% for a conventional 30-year fixed...that is really low for non-owner occupant borrowing!!

Please be aware that there are reputable sources for this information, and there are other not-so-reputable sources for this information. Whichever company is giving you a rate quote, mortgage loan pre-approval, or whatever - MAKE SURE to obtain what is known as a "Good Faith Estimate" from them. A GFE is an itemization of all of the costs associated with obtaining the loan, states all of the terms of the loan, and states what your estimated monthly payment will be (including prinicple, interest, taxes, and insurance)...GET THIS IN WRITING! If a lender refuses to give this to you, consider this a HUGE red flag!!!

If you would like a referral to a reputable source for your mortgage lending, please shoot me an email, and I am happy to match you with someone great...

Home Valuation Code of Conduct coming soon to a Sacramento appraisal near you...

Last week I had an experience with an appraisal gone awry. The appraisal value was deemed substantially lower than the contract price for my listing, which obviously threw a wrench into an otherwise smooth transaction. Luckily, I was able to obtain a copy of the appraisal. I found a few errors in the appraisal, made my case, and thankfully it was revised. Phew! Problem solved...for now...

Starting in May, real estate agents and lenders will not be allowed to have any contact with appraisers. Lenders will be ordering their appraisals from large "Appraisal Management Companies" (as opposed to directly from the appraiser himself) that take a cut of the appraisal fee off the top, and farm appraisal orders in mass to registered appraisers. Follow the link to read the new rules imposed by the HVCC (Home Valuation Code of Conduct).

While I do understand the rationale behind this new law, I think it creates a whole new set of problems.

• Instead, appraisal issues like the one I experienced last week will not be resolved. Agents will not receive a copy of the appraisal, nor will agents be allowed to contact the appraiser.
• Appraisers will be forced to try to do the same work for less compensation. An appraisal fee is usually anywhere between $350 - $450...with the management companies taking a bite out of that fee, appraisers will be expected to turn out the same quality of work for less money...either that, or I imagine the cost will be passed along to the consumer, making appraisals more expensive. Which do you think is more likely to happen?
• Out-of-town appraisers will be determining values for areas in which they are not familiar. The management companies will be dispatching appraisers from all over northern California to do Sacramento appraisals. Gee - Land Park vs Oak Park...Arden Park vs Arden Manor - they are close enough together, so they must be comparable, right?

Wouldn't a better solution be to crack down on the shady appraisers, lenders, and agents?

FHA Tightens Underwriting Guidelines for Folks Converting Existing Homes to Rentals

I blogged about changes to the Fannie Mae / Freddie Mac underwriting guidelines concerning keeping a home as a rental property and purchasing a new property a couple months ago. These changes have now hit FHA lending guidelines as well. Last week HUD released new temporary underwriting guidelines surrounding this practice.

Unfortunately, there are folks out there who have been producing phony rental agreements for the home they are vacating, closing escrow on their new replacement home, and then allowing their "rental" home fall into foreclosure. This is known as "Buy and Bail."

Directly from the language in HUD's Mortgagee Letter 2008-25:

"Recently, FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence. ... Due to FHA's concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyers can make payments on the full debt service of both mortgages. Consequently, beginning with case number assignments on or after the date of this Mortgagee Letter and until further notice, the underwriting analysis may not consider any rental income from the property being vacated..."

There are two exceptions.

• If you are relocating for a new employer or being transferred by a current employer to an area that is not within a reasonable commute distance, you may be allowed an exception if you can show an executed rental agreement and demonstrate that a security deposit has been collected.


• If you can demonstrate that the vacated property has 25% equity via a current appraisal (less than 6 months old), you may be allowed an exception.

Unfortunately, this new underwriting guideline will prevent some legitimate buyers from purchasing a new home while keeping their existing home. Speak with your loan officer to see how these guidelines may pertain to your individual situation.

FHA Loans Anti-Flipping Policy - What does this mean for you?

I caught wind of a brand new listing near Tahoe Park today before it actually went in to MLS, that sounded like a possible fit for one of my current buyer clients. When I called the listing agent to find out the scoop on the property, in the course of our conversation she mentioned that the house had been recently acquired by the seller via a Trustee Sale (foreclosure auction by the bank on the county courthouse steps).

RED FLAG!

So, I immediately called the buyer's loan officer, and he confirmed what I suspected. The buyer is using an FHA loan program, and FHA has strict guidelines regarding the purchase of "flipped" homes. FHA defines a flipped property as one that has changed ownership within the last 90 days. FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days...the exception to this anti-flipping rule is REO property marketed and sold by property disposition firms (asset management companies) on behalf of lenders / banks.

Buyers - if you are using an FHA loan program, make sure that your agent confirms the property has been owned by the seller for longer than 90 days. If you are purchasing a home from an investor who fixed up a property to sell, you may have issues when it comes time to fund your loan. When you look at the pre-liminary title report, see if there are any recent recordations in this regard. Your agent should be on top of this for you.

Sellers - if you are planning on rehabilitating a property and selling it prior to your 90th day of ownership, understand that you may be limiting your pool of buyers. Other scenarios are considered "flipping" per FHA as well. For example, if your property transfers ownership in and out of a living trust, or if the property transfers ownership in and out of a Corporation or LLC you may have the same issue.

There is an an appeal process (if the seller is not a bank or asset management company) and has owned the property for 90 days or less...however there is no guarantee that an exception will be granted though. Just be aware...

Lending Guidelines tighten to prevent "Buy and Bail" Scams

I caught wind of some changing lending Fannie / Freddie guidelines...starting August 1st (and perhaps sooner), buyers who own homes and who are planning to purchase a second home must qualify for the new mortgage including BOTH mortgage payments in their debt-to-income ratio.

Currently, if a fully executed rental agreement can be produced, a lender will factor in 75% of the monthly rent as income to offset the mortgage payment of the first home. This is changing.

Lenders are doing this in response to "Buy and Bail" scams, where a homeowner will purchase a second home, and let the first home (that they are upside-down on) foreclose. Got news for you folks - this scam is fraudulent and illegal!

There are several nuances to these new lending requirements...Marlena Olson with Vitek Mortgage Group is a great resource - 916-486-6900. Ultimately I am glad these guidelines are changing, but in addition to preventing Buy and Bail scams, it is going to get more difficult for legitimate purchasers of second homes - talk to your loan officers NOW!

New Legislation Proposal: Loan Officers to be Licensed

The proposed "Secure and Fair Enforcement in Mortgage Licensing Act", aka SAFE, would establish national licensing standards for mortgage brokers and loan officers. In California (not sure about how other states handle lending practices), there is no current licensing requirement for loan officers. The loan officer that I normally refer my clients to, Marlena Olson, actually does have a Real Estate license issued by the California Department of Real Estate...however she is the exception to the rule...

I think this legislation is long overdue. It will ensure that all mortgage professionals are trained in legal aspects of lending, ethics, and consumer protection. In addition, I think it will separate true professionals from the folks who looked to make a quick buck in the industry.

Part of the licensing requirements will include classroom study, DOJ background check, and passing a written exam.

I like it. There are many loan officers out there that really have no clue what they are doing. To read more regarding this proposed legislation, click here.

For those of you who like late night TV Infomercials...

For those of you who ever watch the late night TV Infomercials that advertise how to get rich quick by purchasing homes for no money down blah blah blah - this website is a good read!

FYI I have said it before and I will say it again...most of the secret techniques the infomercials tout are fraudulent.

Link:
http://www.johntreed.com/Reedgururating.html

Ask Erin: Mortgage Fraud...

Ok - so I have to admit...no one really asked me specifically about Mortgage Fraud. Having said that, I get approached by people all the time who have been promised shady things by loan officers, other real estate professionals, get-rich-quick property flipping seminars, and lord only know who else, and they want me to "help" them.

People - I hate to be the one to break this to ya'll, but scams like cash back at the close of escrow, taking excessive credits, falsifying your income, forging documents, having your mentally incompetent grandmother co-sign your loan, etc. are not kosher!

I would be happy to share with you the correct way to transact real estate, and re-align your expectations if you have been misinformed. But please do not ask me to do anything illegal....you are asking the wrong agent! I happen to be very fond of my real estate license!!

Links:
http://www.mortgagefraudblog.com/
http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm#d1

Reverse Mortgages

I found a good article on reverse mortgages that provides some useful info...

Cash-hungry retirees look to reverse mortgages
Despite benefits, disadvantages exist
by Robert J Bruss

If you (or someone you know) admit to being at least 62 and own your principal residence house or condominium, and if you can use more tax-free cash: read on. However, if you are just plain snoopy, unless you fit the aforementioned profile, this article isn't for you. Now that I have aroused your curiosity, you probably wonder what I am going to reveal.

As thousands of baby boomers decide to retire every day, many suddenly realize they don't have enough income to provide for a comfortable lifestyle. Meager Social Security income certainly isn't the answer.

But there is an easy solution. It's a reverse mortgage, which can provide lump sums of cash for any purpose (such as a new roof, new car, trip around the world, bill payoffs, or something frivolous), a credit line for emergencies or investments (except in Texas), or lifetime monthly income even if you live to 110.

Or, you can select any combination of the above. The best part is tax-free reverse-mortgage money never needs to be paid back as long as you live in your principal residence. Also, there is no personal liability.

Even if your home plummets in market value, the reverse-mortgage lender must honor its agreement and can never force you out of your home (as long as you live in the home and pay the property taxes and the homeowner's insurance).

WHAT IS A SENIOR-CITIZEN REVERSE MORTGAGE? Instead of paying money to a home mortgage lender who loaned you money secured by your residence, a reverse mortgage is the exact opposite.

A reverse mortgage lender pays money to you, the homeowner. But no repayment is required until you move out for longer than 12 months, sell your house or condo, or die.
Then the reverse mortgage "matures" and the lender becomes entitled to receive the principal repayment plus accrued interest. The remaining home equity goes to you or your heirs.
Contrary to widespread misbelief, the reverse-mortgage lender does not own the residence. If your heirs want to keep the house, they can refinance the mortgage to pay off the reverse mortgage balance.

To be eligible for a tax-free reverse mortgage, you and any co-owner must be at least 62. If any co-owner is younger than 62, the residence is not eligible unless that under-62 co-owner signs a quitclaim deed conveying the title to the over-62 co-owner.
The amount of reverse-mortgage eligibility is determined by the age of the youngest co-owner and the appraised market value of the residence. The older you are, the greater your reverse-mortgage entitlement.

For this reason, homeowners in their 70s, 80s and 90s can receive the largest reverse-mortgage payments. The reason is their life expectancy is shorter than for youngster homeowners in their 60s.

NOT ALL HOMES ARE ELIGIBLE. Because a reverse mortgage is recorded like a first mortgage, there can be no other financing secured by the residence. However, if you have a small mortgage balance, such as less than 25 percent of your home's market value, you still can probably qualify by using a reverse-mortgage lump sum to pay off the old mortgage.
Because most senior citizens own their residences free and clear, or with a small mortgage balance, this is usually not a problem. However, a large mortgage balance over 40 percent of the home's appraised value usually makes a reverse mortgage unavailable.

Eligible homes include an owner-occupied house, condominium, or a manufactured house located on an owned lot. Ineligible properties include vacation, second and rental homes, most co-op apartments, houseboats, mobile homes, commercial properties, and farms (unless the residence is on a separate lot).

THREE MAJOR REVERSE-MORTGAGE LENDERS. Although there are a few local reverse-mortgage lenders, the three nationwide lenders are FHA (which has over 90 percent of the market), Fannie Mae and Financial Freedom Plan. FHA reverse-mortgage interest rates are tied to the Treasury Bill Index, plus a margin. But the big disadvantage, especially for owners of expensive homes, is the low FHA limits that vary by county. The Fannie Mae "Home Keeper" reverse mortgages have a higher limit, currently $417,000 (higher in Hawaii and Alaska). These loans are tied to the one-month secondary market CD adjustable-rate index. Fannie Mae is the only lender offering a reverse mortgage for home purchase so you can buy a retirement home with no monthly payments. Financial Freedom Plan reverse mortgages have no maximum limit. They are most attractive for owners of homes worth over $500,000. But this program is not available in all states.

HOW TO COMPARE REVERSE MORTGAGES. The best way to compare reverse mortgages from the three major companies is to use the Internet reverse-mortgage calculator at http://www.financialfreedom.com/. Federal law requires reverse mortgage borrowers be provided with a Total Annual Loan Cost (TALC) calculation. This TALC shows the annual effective interest rate for 1) the first two years as a percentage of the amount borrowed (usually very high), 2) at the borrower's life expectancy age (much lower), and 3) at 40 percent beyond the borrower's life expectancy (very reasonable). The TALC considers the up-front loan origination fees. Because these lender fees are usually substantial, senior citizen homeowners should not obtain a reverse mortgage unless they plan to stay in their home at least five years. A homeowner in poor health, or who plans to move in a few years, usually should not obtain a reverse mortgage.

WHERE TO FIND REPUTABLE REVERSE-MORTGAGE LENDERS. Although there are only three major nationwide reverse mortgage lenders, these loans are originated by local representatives. The largest reverse mortgage originators are Financial Freedom Plan, Wells Fargo Mortgage, Seattle Mortgage and GMAC. Most local banks and other home loan lenders do not offer reverse mortgages.

The easiest place to find a reputable local reverse-mortgage originator is on the Internet at http://www.reversemortgage.org/. Then click on your state for a list of local lenders and the types of reverse mortgages they offer. If you don't have a computer, your local public library reference department will be glad to assist you.

REVERSE-MORTGAGE DISADVANTAGES. Although reverse-mortgage tax-free money sounds wonderful for senior-citizen homeowners, there are possible disadvantages. The reality is the homeowners will be borrowing on their home equity. The result can be greedy prospective heirs often discourage obtaining a reverse mortgage because the homeowners will be "spending" the heir's inheritance.

But many potential heirs encourage their senior-citizen parents to obtain a reverse mortgage to enjoy their "golden years" with financial comfort. However, senior-citizen homeowners who are receiving SSI (Supplemental Security Income) or Medicaid (Medi-Cal in California) should know these benefits can be reduced if the recipients do not spend their entire reverse-mortgage income each month. But Social Security and Medicare benefits are not affected by non-taxable reverse-mortgage income.

Link:
http://www.inman.com/InmanINF/golyon/story.aspx?ID=62912