Oregon Mortgage News

If you are adding seller paid concessions on top of the purchase price in an amendment do not be surprised if the loan doesn't close!! This "common" practice has been a borderline fraud issue for a while. CWBC, has now made it official that they will no longer fund loans where the Purchase Agreement has been modified  (increased) to cover seller concessions.

In an email from my Account Executive today:

"Purchase Price/Property Value

I want to make sure that you are aware of our policy regarding adjusting the purchase price of a property upward to cover the seller paid closing costs after the initial sales agreement.  This is not allowed!  If you have an accepted offer, we can not allow them to raise the purchase price to cover the closing costs.  The original purchase price would have to be used as the value. (Or, the appraised value if it is less)  If your borrowers and the sellers agree to the seller paid costs up front, it is totally acceptable for the seller to pay for the closing costs and prepaids up to the allowable percentage for the loan program.  If they want to change it after the fact, and raise the purchase price to cover the fees, that is when it isn't allowed.  It can appear that they are artificially inflating the value to cover the closing costs.

So, make sure that when you send in your file to us all of the negotiations have been made between the buyer and the seller.  The original purchase agreement should spell out the seller contributions, if applicable.  Let me know if you have any questions."

I wrote about this in a post entitled "Are You Committing Fraud With Seller-Paid Concessions?"  This was featured and the responses were all over the map. Some agreed and others felt that I was wrong.

My stance was based on a CE classI took over 2 years ago on mortgage fraud taught by an expert in the field. One of his speakers was the Oregon Asst. Atty Generalwho confirmed what was being taught.

I highly recommend that you read the previous post as it gives more clarification as to why it's considered fraud and some work-arounds.

Countrywide isn't calling it fraud, but are no longer allowing it. I haven't checked with my other lenders, but would assume that they have similar practices.

Loan Officers: Stop suggesting that the purchase price be increased. If you get an offer that has it, be sure to clarify with an underwriter that they will allow it.

Realtors: Find out up front if your buyers are going to need Seller-paid Concessions and build them into the initial Purchase Agreement.

Buyers: Make sure that you let your loan officer and Realtor know that you will need Seller-paid concessions built into the original purchase agreement, even if they suggest that you add it later.

Sellers: Don't be afraid of Seller-paid concessions, it's only 2-6% of the sales price. If it means a closed sale, then it could still be worth it. Have the discussion with your Realtor when you are determining the price that you want to start with PRIOR to listing the home.

UPDATE:

I found a post online that sheds some interesting light, Another Look at "Sellers' Concessions" in Real Estate by Stephen J. Dubner. It speaks to some of the issues raised in the comments. If there is full disclosure, what's the harm?  Well, here's an interesting take from the seconday market's perspective. It's a pretty chilling assessment of today's market written in June of 07.:

"...In other words, where is the fraud if everyone is aware that this is going on? However, an astute observer must ask two questions: (1) if the seller had advertised her house in the market and the highest bidder was $200,000, how did the appraiser just a few short weeks later appraise the home for $240,000?; and (2) why doesn't the bank just advertise that they are willing to provide loans in excess of 100% of the contract price?

The answer to this riddle may lie in the fact that most banks securitize their home loans - that is, they do not hold these loans on their balance sheets but sell them to the capital markets. While there may be no fraud on the buyer, the seller, or the bank, there may yet be a fraud if this new type of financing is not fully disclosed to the capital market investors.

If this practice is disclosed, then it can be presumed that the investors factor it into their models and price their purchases of mortgage backed securities accordingly. If it is not, then it is a safe assumption that they are holding a portfolio that is much riskier than they had bargained for. If the loan was in excess of the market value from Day 1, as the housing market declines, this difference - and the capital market investors' losses - will grow accordingly.

As they start to lose money on these portfolios, the willingness of the capital market investors to supply of capital to the housing market will decline. When people are unable to obtain mortgages, the demand for houses will fall. As demand falls house prices will fall. And as house prices fall, the losses that capital market investors sustain will increase, making them less willing to supply capital to the housing market ..."

Kind of sound like where we're at today?

 2nd Update: An Appraiser Weighs In

Sara Goodwin posted on the previous blog a few minutes ago and I asked her permission to place that post her. I feel it is relevant to the discussion.

"Hello Larry -

Excellent post.  I have a friend that is an appraiser and loan officer who went to a similar class with Tim Spencer.  He said that LOs had the same reaction as you stated (especially after going over the fines for such incendences).

Tchaka wrote the following:

On the other side of the coin, appraising is an art, not a science and there is an allowable leeway.  3% leeway isn't out of whack, so by that token, that $100k home might really be worth $103k.

Where I think it gets more complicated is in your notion that appraisers will take the seller concessions into account when appraising.  That may be so, but most realtors don't take that into consideration when pricing homes.  Does every MLS even give that info?  So if some realtors don't know and they're pricing based on sales price alone, they are manipulating the market.

Now, the Oregon ACLB (appraiser's board) sent out a letter last year that said in short: Realtors are not required to disclose concessions to the public, but we appraisers are required to ask.  This means that if the concession information is not disclosed to us (which is not required) then we have to make the assumption that there were no concessions.  Imagine report after report with 3% concessions that were not confirmed for the sales comparison adjustments.  Compounded over time, it does make a difference. It will falsely increase values. 

RMLS has this dandy private remarks area where Realtors can go in after the sale closes and type in any concession information, short sale, etc.  I can't tell you how much this helps everybody because I don't have to hold up an appraisal waiting for a call-back from a Realtor regarding concessions...

... It occurred to me that I wrote a post on this very subject a while back.  Here is the link to the post with the letter from the ACLB. "

Again, it looks like the issue is full disclosure. If seller concessions were used and the RMLS wasn't updated to reflect it, then future comps could be artificially inflated.

Larry Morris is a Certified Mortgage Planning Specialist (CMPS) with Equipoint Financial Network in Newberg, Oregon. He specializes in financing for Senior Citizens and Rural Properties. He can be reached atlarry@PDX-Mortgage.com . His website is www.PDX-Mortgage.com .

This material is copy protected 2008 by Larry Morris, Mortgage News that Matters. All Rights Reserved His opinions do not necessarily represent the views of Equipoint Financial Network.