Oregon Mortgage News

You might be closer then you think...or want to believe. The way that you structure Seller Paid Concessions might be considered an attempt to defraud the lender and artificially inflate the value of the property. I'm sure that most of you (us) have had the opportunity to seal the deal by getting a seller to agree to cover the allowable seller paid concessions in order to close on a home. This happens every day. It is legal, or it wouldn't be allowed. It is done by Realtors and Mortgage Brokers. It is in the guidelines of most lenders, including FannieMae and the FHA.

However, if you are increasing the sales price above what it has been listed for, you are treading on thin ice and had better be careful. Especially if it has been on the market for several months with price reductions and no offers. Here's why.

This is a public post as I believe that all parties need to be aware of the problem and possible solutions.

I attended a Fraud class last year as part of my continuing education in Oregon. The instructor was Richard Hagar, SRA. While he spoke on a lot during the 6 hour class, a HOT topic was the 3-6% seller paid concessions allowed by many lenders. 90% of the class was loan officers and it got ugly. Why? Because we were all guilty AND we had been led to believe that what we were doing was ok by our lenders. What he said upset most of us, and we doubted him, until the Asst. Attorney General for Oregon, Tim Spencer, got up and confirmed what he said.

Fraud can be defined in the Real Estate transaction as the "failure to disclose....anything" This goes for options, fees, rates, problems with the property... It revolves around the intent of the involved parties. It can be a State of Federal crime.

Here's where it gets ugly. If the money crosses a state line it becomes a Federal offense. This means if the lender is based in another state, if the underwriting is done in another state, if the funds come from another state... it has crossed state lines. My guess is that 90% of all transactions fall under the jurisdiction of the FBI, not just our State government.

The FBI is using the Rico Act, Title 18, US Code, Sections 1956 to enforce this. This is the statute that covers Laundering of monetary instruments. (i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds. RICO was used by the Feds to bring down the mob in the 1930's and they are using it today to clean up the real estate industry.

An aspect of RICO deals with Layered Transactions. This is when layers are added on top of the list price to cover:

• Down Payments
• Loan Fees
• Increased commissions for the agent
• Cash to the buyer before and/or after closing

UPDATE: Ed Rybczynski - Mortgage Fraud Speaker & Expert  AR member and Fraud Expert has sent me the following definition of a Layered Transaction.

Larry
Thanks for the mention in your post. I was very aware of the practice detailed, but wasn't aware of the term "layered transaction." Essentially, a first contract is written at the legitimate selling price while a second contract at a higher price appears upon the completion of the appraisal. The difference migrates in one form or another back to the buyer. The appraiser is intimidated into rendering a higher than realistic valuation.

Your definition of fraud was right on target and I thought the entire post was very accurate and appropriate.

So what the heck does all of this have to do with Seller Paid Concessions? Here is a simplified home sale. It doesn't include all of the costs and fees and is merely for illustration purposes, so lighten up!

In the Normal Transaction, the buyer paid for his/her own closing costs. In the Layered Transaction, the purchase price was increased to cover the closing costs giving the seller the same net.

Our response was "SO WHAT!!" As long as the property value justifies it what's the problem? Again, this is where we need to be upfront and honest with our intent.

If the above scenario had been listed for $103,000 for 6 months with no offers and then reduced to $100,000 for another 3 months and finally received an offer at the $100,000 revised list price...with a later addendum asking the seller to cover the buyers closing costs, and increasing the sales price back to $103,000 you've probably committed fraud.

Here's why. If the property had not been able to sell for 6 months at $103,000 or for 3 months at $100,000, why is it all of a sudden worth $103,000? If you can truly point to increasing property values or multiple offers you are ok. If the only reason was to cover the buyers closing costs, you have artificially inflated the market value of the property.

This revised market value then becomes a comparable sale for "like" properties and artificially inflate their value as well. If done often enough, you have an over-inflated market with unrealistic values. Sound familiar?

(UPDATE: I've received a lot of feedback. 3% is an allowable increase in a property value, so let's say that the appraiser had to really stretch values to get there and used 15% adjustments on his/her comparables, or that the Seller Paid Concessions were 6% which are within SubPrime guidelines and outside of acceptable appraisal increases.

Also, the reason that this is such an issue is that it is the buyer who is paying the concessions when the selling price is increased over what the seller is actually willing to receive and not the seller. This alone is an attempt to fraud the lender by a strict reading of underwriting guidelines and the RICO statutes. Since it is an acceptable lender guideline, there is grace.)

So what should we do? Should we abandon Seller Paid Concessions? Should we never accept an offer with them? By all means NO!! But, use your head.

I had a met with Richard and asked him a few questions. My understanding of our conversation led me to believe that:

• If the Sellers had left the List Price at $103,000 and offered to pay up to $3,000 of the Buyers Closing costs then it would have been ok.
• It might be acceptable if the Buyers Agent would have come in with an initial offer of $103,000 with the Seller to pay $3,000 of the Buyers closing costs.
• It would have been most appropriate for the Buyers agent to come in with an offer of $100,000 with the Seller to pay up to $3000 of the Buyers closing costs.

My advice to Listing Agents and Sellers is to have a good sit-down and discuss the type of buyer who would be interested in the property and have a clear understanding of how seller paid concessions can be used. Just as you increase the price the Seller wants in order to cover your commission and closing costs, have a conversation about covering Seller Concessions.

Not all borrowers who want Seller Concessions are broke or bad risks. Here's a few legitimate reasons for Seller Paid Concessions:

• Borrower is short on cash to close, but meets the underwriting guidelines for their loan.
• Repairs need to be done on the property and the borrower wants to use their own cash for repair or remodel work.
• Borrowers money is tied up in another property that hasn't closed yet.
• Borrower is using their own funds for an investment that provides a greater rate of return.
• Borrower wants to use Seller Concessions to buy down the interest rate on their loan.

My advice to Sellers is to be open minded about all offers. Ask questions about why Seller Paid Concessions are needed. If you do accept an offer with Seller Paid Concessions, especially if it to cover closing costs on a 100% offer, make sure that you get a true Credit Approval. See my blog on this.

My advice to Buyers Agents is to make sure that your initial offer includes Seller Paid Concessionsif that is the direction that your buyer needs to go. Whether to cover closing costs or to buy down the rate, use Seller Paid Concessions appropriately. Don't bargain down the price even further on a slow mover and then ask for concessions (unless you are now back to the current list price).

My advice to Lenders is to know your guidelines, don't coerce your appraiser, don't be backed into a corner by a Realtor or Buyer. Educate your client and Realtor on how to best structure an offer to be legal and in everyone's best interests.

My advice to Buyers is to work with a qualified lender and Realtor who can help you get the best long term deal which includes a good price on your new home and the best loan/rate for your situation.

UPDATE: Here's a remark from an AR mortgage fraud expert:

"Larry

An outstanding post for any number of reasons.  I hope that it's content is being read by many and accepted as factual. "

Larry Morris can be reached at larry@PDX-Mortgage.com.com . His website is www.PDX-Mortgage.com. This material is copy protected 2007 by Larry Morris, Mortgage News that Matters. All Rights Reserved

Licensed in: OR, WA