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.
Larry Morris is a Certified Mortgage Planning Specialist in Portland, Oregon. He specializes in USDA Guaranteed Rural Home Loans, FHA Purchase and Refinance, FHA 203k Rehab loans, FannieMae HomePath loans, Oregon VA Loans and conforming purchase and refinances in the states of Oregon, Washington and Idaho.
He can be reached at 503-421-0096.
There goes Countrywide shooting themselves in the foot again. First of all, it's not fraud! As long as everything is property disclosed to all parties, it's simply a restructuring of a transaction. It happens all the time.
Two weeks prior to closing the engine shoots craps in the borrowers car and now he's $1,500 short of funds to close, but the appraisal came in $3,000 high. What to do?
Raise the selling price $1,500 and have the seller pay $1,500 in closing costs. Problem fixed.
The appraisal is the appraisal and deals are renegotiated all the time....What's next, Countrywide won't do the deal if we put closing off a week? How about this? The home inspection mentions that the electrical box is older and probably in need of being upgraded...it's functional, but old. The buyer asks that the sales price be reduced. Is that loan fraud too?
This sort of behavior is evidence of the type of knee jerk reactions that mortgage lenders are making to the current situation. Man, I can't wait until things get back to normal!
Bob Mitchell
ValueList Real Estate Services, Inc.
Larry, which loan programs are you referring to that do not allow this?
It is perfectly acceptable with FHA and VA loan products.
Edited: I just reread your post and the letter that you quoted. My confusion came into play because it appears it is a 2nd offer to purchase that you are talking about.
As long as the appraisal is good and the value is there what difference does it make that if there is a renegotiation. What you will see will be Realtors rewriting the entire contract instead of just admending it. I think if CW insist on this course of action it will also increase desk reiviews of apprasials and of course they will use the apprasial company that they own which will again increase fees to the buyer.
Joe - I can't speak for CWBC, but by disallowing it entirely, they are getting away from the need for a desk review. If they acccepted teh amendment, they would probably require a desk review, and yes, it would probably come in at a lower amount.
I've actually seen Realtors re-write offers once they've expired to clean them up. I'm not a Realtor, so I can't speak to the legality of re-writing a contract.
Larry,
I understand CW's position. The appearance of allowing the sales price to be increased after they have seen the original contract is the problem for auditors. Several on the comments are correct, the sales price is negotiated. The inclusion of seller paid cost is a legal and common practice, but it should be done before the contract is written and the loan application is finalized. A renegotiated sales price that increases to add closing costs should not accepted.
Larry - Thanks for the addition (as mentioned before) I'm honored....
I'm sure that many of you have run into situations where UWs will drop the loan amount by 3-6% below the appraised value as a precaution to
Please note that the more proof the appraiser can provide that concessions did or didn't exist during the comparable sales transactions, the better chance you have of a UW not tampering with the loan amount...
According to Merriam-Webster's Online Dictionary:
Fraud is defined as:
1 a: deceit, trickery; specifically : intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right b: an act of deceiving or misrepresenting : trick2 a: a person who is not what he or she pretends to be : impostor; also : one who defrauds : cheat b: one that is not what it seems or is represented to be
In Colorado, an Agreement to Amend/Extend a Contract signed by the buyer and seller is legally part of the Contract to Buy and Sell. So, if it is agreed to, signed and the lender is aware of it right off the bat, how can that be fraud? There would be no decpetion because all are aware and in consent. If it doesn't appraise for that amount - then that is another issue, still not fraud.
Am I off base?
Hey, folks -
I think we can all write a book on this one! How common it became for sellers to provide sometimes thousands of dollars in concessions or credits at closing.
Most of the money was buried, or mis-identified, on the RESPA. But, it was wrong!
Many of those who got that money are now paying dearly - in lack of equity, pre-foreclosure, and despair.
Cold comfort - but we all knew, in the back of our minds, that the gravy train would have to end.
Stop in anytime!
DEAN & DEAN'S TEAM CHICAGO
THANK YOU for that clear explanation! Not many out there.
Larry,
Thanks very much for the thorough evaluation of this important topic. I see so many deals where seller concessions make the difference between the deal working and not, and I think the information here will help in the future.
Thank you!
Dan
What is the house is priced under appraised value. The house has to appraise for the purchase price and any seller assist. I can see this being a very grey area - how do you insure that the appraisal isn't biased. I wouldn't even attempted doing so in this market.
I did recently have an offer go in with a seller assist (offer + seller assist was under the list price). Seller countered at listing price + sellers assist (pretty confident that it would appraise). We didn't take it.
WOW - A guy decides to work for a day and look what happens!!
Mike - Thanks for the comment. I can see times it's appropriate, but it should be a rare exception and not standard practise.
Lee - Good point. I hadn't thought about it from the auditor's perspective.
Susan - Thanks for the kind word.
Joyce - I wonder how much is pressure from B of A to clean up the books/risk pool.
Sara- Once again, thanks for teh insight from an appraiser's perspective.
Renee - Sounds like you got good training.
Michael - For some, it wouldn't matter how low you went. As long as there are concessions, there will be applications for them. The issue is the disclosure of the need for concessions up front to the seller, with the appraiser getting the PA prior to the appraisal.
Eileen- I think "Cheat" would come the closest. The 1st update I did yesterday provided the perspective from the secondary market who is probably not aware of what percentage of loans in the bundle are artificially inflated. It could be deemed to be not what it was thought or represented to be.
Christine- You are right. It really can be. Not all Amendments have the intent to fraud, just as not all Stated Income loans are lies. My guess is that CWBC has been able to identify an abnormal percentage of defaults where Amendments to the PA increased the purchase price.
Michael - Good point. Today's sale becomes tomorrow's comparable sale.
Dean - Thanks for the input. 6% on a $300k loan is $18,000. Do that a couple of times on a property and values are significantly increased.
Keith - You are welcome
Bryant - Good advise as always. Yes, it's been interesting. Yesterday was more negative then today...
Dan- I agree. They are an important tool to home ownership. But they need to come off the top, rather then added to the top. If a seller thinks his/her property is worth $200k today, why do they believe it's now worth $212k? And why didn't they ask that to begin with?
Judi- The class I took basically said that it's a fair market as long as all negotiating happens under the original asking price. It's when you start taking the price up in order to cover closing costs that lenders have an issue.
Rick - Thanks
Krista- Not sure if I'm too excited about that... : ) It will be interesting to see what comes out of it. I just don't like intervention...
Wayne -Thanks
Stephanie- Good points. Often the last to know id the Title company who now has to create new estimates, which throws off the GFE and raises the closing costs... Also, the appraiser might never find out about it... As to your other point. I wonder the same....
Dustin - Thanks for the concise comment.
Thanks for the interesting post there were so many things that were in the gray area before that are now an absolute no-no
Whether or not it is legal to operate that way...I never understood why anyone should jack up the price of the home in order for the seller to give back 3-6% in closing costs. It perforates the true sales price and why can't the loan-just be approved as what the buyer can afford...if they need additional funds...then let the lender approve a 2nd. This creative financing doesn't make sense....soon they will start selling cars this way. The other problem is the buyer and seller usually have to pay IRS taxes based on the gross price and commissions are usually paid on the gross even though there is a different price net.
Your post hit on it several times, but it is all about disclosure. When I was appraising, I hated the request after the appraisal was already done and sent, can you increase the value by XXXXX so that we can change the seller credit
Russ - Thanks for your comment.
Bob- I agree. Sometimes there are legitimate circumstances where a contract needs to be adjusted to keep it alive. But it should not be a bargaining tool by the Realtor or Lender.
Joshua- O think you will find it interesting. I even spoke with our Bank's Sr. Underwriter and she had never heard opf this being a problem. When I explained it to here she understood, but... It will probably be something that will be guided by the Secondary Market investors who ultimately dictate our guidelines.
Neal- Yes, I've seen situations where the Realtor has "reduced their commission" and teh Buyer has paid the taxes in order to keep the seller happy.
Carolyn- Thanks for teh insight from an appraiser. I truly don't believe that most LO's or Realtors realize the place they are putting appraiser in when they ask them to do this, especially after the fact.
Christy - Good Point.
? - Thanks for the comment.
I have a question- we increased our loan by the 6% closing cost and our mortgage broker and seller both said it was okay because the price of the house was much lower than market value since the seller had relocated and needed the cash for his new house. Now the question is, how does it get paid out at closing? Can the 6% come back to us at closing? We are paying lots of fees as we are going along this contract process (like credit application fee, mortgage application fee, inspection fee, etc.), so does the seller give us the 6% so we can recoup the closing costs already paid? Also, if closing costs are 5% instead of 6%in the final analysis, do we get back the remaining 1% from the seller? HELP, we are signing the contract in three days!
Touchy issue, Larry, and great cautionary advice in your message. If there's a way to roll all of the costs into the deal somebody will. Great post and good thoughts. Hope you have a great weekend.
Jane - It's hard to say based on what you have given. While you might receive a credit for any expenses that you have currently paid, generally, you will not receive any cash back through a home purchase. If closing costs are 5% rather hen 6%, then the loan should be adjusted to reflect that. However, it might go to the seller or mortgage company. What state are you in? What does your Realtor advise? If you would like me to review your Good Faith Estimate I can. Also, check your Purchase Agreement, in many states there is a mandatory escape clause that financing must be acceptable to you or you can back out of the transaction and get your earnest money back. Feel free to call me at 503-421 0096.
You are right David.