Concerned By What A Mortgage Guy Said Last Night
I attended a RE investors meeting last night where our speaker was a mortgage guy. He mentioned that beginning in January he was going to be required to record with the title the purchase prices of a property over the last 12 months. Maybe this is just an Arizona thing. He said that, in his opinion, this situation would really hurt the rehab industry because a lender would be less likely to beleive that the value of a property really increased that much over a few month period. It sounded like the money-people he deals with aren't even considering weather the property is purchased at wholesale, or the sweat equity involved in rehabbing a property.
Has anyone heard anything similar to this? Am I just worried over nothing?
I would hate to start down the path to my first rehab, and have to rent it out for a year before I can get my equity out.
Dave
I have heard something like that. This being supposedly to stop investor fraud, where they buy low, do nothing, and get a high appraisal. I have wondered what is going to happen with this also. Let me know if you hear anything positive from this.
In Iowa we must file what we call a Declaration of Value which goes to the assessor. This is public information which is available to any idiot with a computer. It is impossible to conceal the sales price since the recorder refuses to record any deed, contract, etc without it. Is this not the norm for the rest of the country??
This may be in response to the new law that defines illegal flipping that went into effect around June this year.
Some lenders are already requiring a 12 or 24 month chain of title.
Here is a link that may help you understand why. http://www.irs.gov/newsroom/article/0,,id=118224,00.html
It is also why I call out anyone on here recomending that we break the law to get a loan. Look at the "Average Months to Serve" for breaking the LAW.
I don't want investigators / reporters coming to TCI to get proof that this is wide spread.
What you are seeing is a state by state approach to correct present abuses in real estate speculation.
If you run title chain (Grantee/Grantor Index files) on some of the HUD transactions in the southern part of Los Angeles in particular, you can quickly see the fraudulent activities as properties are sold with no money down and the prices adjusted upwards to absorb costs and commissions. Then back into foreclosure and the same thing happens again only each time the price advancing to cover commissions, inflated profits etc.
You can on a days work chart the whole ugly picture. The interesting part is that while the buyers names are different, the same players remain in the game,
Brokers, Salesman, and Appraisers. The Buyers have to change cause any credit they had is long gone on the first foreclosure. It is in essence a Mugs game (a confidence game with no class.) Interesting enough most of the participants are ethnicaly allied with the ever changing Buyers. Repeating a situation that has occured throughout recorded history. The newly arrived quickly set up and pray on those who come after.
Interesting HUD set up certain escrow companies to handle all their sales. The thinking behind this would be that such escrow officers would moniter the activities and spot any fraudulent activities. Well, guess what? It has not happened. When you go into these designated Escrow Companies, there is a very friendly relationship with the Brokers who of course bring in the transactions on the same property. A sale, a foreclosure back into Hud inventory, a sale, a foreclosure and once again back into Hud Inventory.
If I as a casual observer can spot these, repetative patterns involving the same properties, why cannot HUD police itself?
Good question. Oh Tempres Oh Mores.
Quizzicle Lucius
With regards to recording the prices with a mortgage, I'd just like to say "SO WHAT!"
No one can tell me that I f I buy an undervalued property for a deep discount because I paid cash, that I can't make a profit on it.
If a finance company isn't ready to listen to reason, there's other finance companies out there. If they don't believe the appraisal, get a second opinion. If there are comps to prove that the property is priced right I'll bet someone will finance the purchase.
The fundamentals of our economy are based on this. If the existing finance companies won't step up to the plate, it will create a vacuum. Somebody else's drive for success will fill that vacuum. That being said, I'd recommend keeping reciepts on all of your materials, and labor involved in rehabbing your properties. The rules may change a little, We may have to write letters explaining the jump in price etc. But sellers will find the financing they need to find your immaculately rehab'd properties, we may have to hone our acrobatic skills to jump through more hoops though.
Jeff
yes, some lenders are requiring a 12 mos seasoning period. However, all this does is make things difficult, but not impossible.
because of fraud, inflated values etc they are looking at chain of title to base a loan. I f you keep receipts take pictures you can re-establish fmv. There is no arv value untill the repairs are done and proved.
I bet if you were in the diamond biz and you bought 1000 phoney diamonds you would make some changes too.
[addsig]
Hope everyone had a lovely holiday!
I am a Mortgage Broker - and at the risk of sounding ignorant...
My lenders have been requiring 12 month chain of title for the past year. They also submit all appraisals to a review board and they go over it with a fine tooth comb.
I have yet to encounter a situation where the lender even cares what the SELLER originally bought the property for. They only care that the appraised value supports the purchase price.
Example - you buy a house for a steal. The seller is bound to a purchase contract on a new home with a "sell" contingency - he must sell his home within 60 days. He's desperate, so he sells at a discounted price. You, the buyer, do nothing to the home you just bought. You immediately put it back on the market at a higher price based on the real value. You sit on the market until you get your price. You've made a decent profit. Have you done anything wrong here?
Of course not. Exception - if YOU got a FHA loan - you're in trouble because they require that you occupy the property for a certain period of time.
Now, will the buyer have trouble getting a loan? Nope. Not as long as the appraisal supports the purchase price. The lender can see what you paid - and they may scrutinize the appraisal - but ultimately they can not base the entire value of the property on what you paid for it...
Thoughts or expertise on this anyone? Am I wrong here?
This chain of title thing evolved to prevent a specific type of "flipping" that occured with some unethical Brokers. They would refi a client at a really high rate, securing a large back end premium (commission) from the lender, split the commission with the client, then refi again...
I've never done this, but I was a closer for a title company and saw this often.
I don't mess with FHA. There are plenty of subprime lenders for my purchasers who will do the deal. HUD has always been penny wise and pound foolish. Much of what they do is politically mandated. There's the right way, the wrong way, and the HUD (FHA) way. If you wait long enough, they will swing 100% in the opposite direction. Examples:They get an area management company who steals them blind. They do give-away programs /subsedized programs only to ultimately foreclose upon them, their recored with non-profit organizations has been catistrophic. www.etc.etc. ad nauseum.
For your information. The appraiser on her report must address the history of the property over the past 36 (use to be 12) months. If you can justify the price increase and it is corraborated by an appraisal (or 2) you are good to go.
hud has become increasingly more difficult to deal with in loans and pricing on their foreclosures. i no longer deal with them i have better luck in the private sector. ggod luck. kenmax
caterina,
Where you will find the most trouble with seasoning is with A paper loans and the lenders with the best rates.
The better the lenders rates the less risk they want to take.
So the problem happens when a person wants the house. They want to use X broker so that they get the best rate. The lender sees that the house sold for X a few months ago. They will not do the loan.
The broker say I can get you a loan but the rate will be .25% higher. The buyer freaks out something must be wrong with the house the seller and broker are @#%^ ect. so they walk.
When working with Alt A paper and subprime this usually is not an issue.
Log onto some of the sites for A paper lender and look at the requirments. You will that they want 12 months. Some will only have it for the lowest rate products.
Thank you for the insight! I am realizing quickly that most of my knowledge is subprime and I mistakenly believed that it was transferable to A prime...
I am wondering... do you think that given the economy today - more people than not don't fit into A products anymore? Most of my clients have had rough patches and are patiently repairing their credit.
Also, it seems unethical for a lender to go by the last sale price versus a solid appraised value... This would make rehabbing extremely tough...
I'm beginning to feel like I'm living in a different country these days! We are being regulated to death! Whatever happened to capitalism and the freedom to make money in a legitimate business? Just trying to keep up with the added regulations in the RE business and the banking/finance industries is making my head spin.... not to mention all of the tax laws! Now days just to do Rehabbing or RE sales you need to have a tax advisor, an attorney and an accountant just to be in business to try to keep things straight. I can't even call to chnge the electric bill from one tenant to another anymore because of the "consumer protection" laws. As a RE agent I had trouble even finding out from the mortgage broker if the buyer's loan was going to go through because of all the new laws that forbid the mortgage broker from telling me anything (slow or bad credit, etc.) I do understand to a point. I want to be protected from those who may steal my identity or worse but I still feel regulated to death and taxed to death.
Sandbahr,
I couldn't agree more. A few people are out there trying to make a fast (unethical/illegal) buck, and they make it hard for the rest of us.
I feel you on all of the regs. Things have changed a lot in a few years.
But in the last few years lenders have seen Billions of dollars worth of fraud. When they including HUD looked at the data most of these homes were only owned a short time. A big percent were double closed. That is why it is very hard to do a double close now.
The FBI has a task force going after mortgage fraud. So as tax payers we have to pay for this and all of the cost of fraud that HUD has to eat. So as a tax payer I want them to do something. But what?
I was hopeing that lenders would adobt the 90 day rule used by FHA. 90 days on a rehab I can live with one year and I have to change the way that I do business.
I don't want to be a landlord but it looks like I will be. I don't want to work in war zones so I am dealing with A paper buyers.
You don't have to wait one year before selling to an FHA buyer. As long as you can show your improvements. I think the minimum timeline is somewhere around 3-6 months. Keep good records of the improvements along with before and after pictures.
The loan fraud associated with flipping has been outrageous and that is what they are attempting to protect themselves from. I recently saw an instance in the Atlanta area where a house was flipped between 4 different investors over the course of a year and the ending price was more than double it's true value. Obviously there were some more people involved such as the Mortgage Broker and the Appraiser. But on that deal the lender really got the shaft to the tune of about $200K.
Any residential appraiser, on a standard appraisal, must now list any sales of the subject property and the comparables in the past 12 months.
Titlework now has to show chain of title as well.
Flipping abuses have made quick resales very difficult for conforming loans, even some Alt-A loan product.
Of course, the abuses involved conspiracies of investors, lenders, appraisers, and title companies where the property value was pushed so high that by the time some poor slob unwittingly bought the home, they couldn't afford it and the home foreclosed on a loan balance much, much higher than the property was ever worth.
We are now seeing the title requirements on some commercial deals too.
What ticks me off is that some of the lenders that do this will shut down when caught, and open back up under a different net-branch lending operation where they don't use their own license but still operate independently.
HUD has done a very poor job of correcting this situation. As a result, lenders tighten their guidelines and we all suffer.
Just an update:
I keep hearing about this as an issue here in Phoenix. It sounds like some memo come out nationally around the first of the year from HUD concerning title seasoning in an attempt to stop the fraud that some people were commiting.
Anyway, I'm ready to purchase my first rehab property. My mortgage guy insists that a buyer won't be able to find financing until at least 6 months up to a year, if I increase the sales price beyond normal appreciation. I'm told that this situation extends beyond just HUD financing, that all of the A lenders are doing this, as well as most B lenders.
Anyone else runnning into this? Any creative ways of getting around it without sitting on the property for 6-12 months?
Dave