What if you bought a property only to find out that it had been foreclosed upon by robo-signers? Can the previous owner come after you and demand you turn over the deed? And will they?
Archives for October 2010
New regulations introduced by the Frank-Dodd act have put new limits on seller financing at a time when the real estate market can hardly handle any more shocks. The Dodd-Frank Wall Street Reform and Consumer Protection Act (PL-111-203), which was signed into law July 21, 2010, allows only up to three residential carrybacks within any 12 month period. (Hint: this is not much.) Sellers who wish to carry back a fourth note must obtain a mortgage originator’s licence in order to be able to do so legally.
The Dodd-Frank act has amended the S.A.F.E. act by increasing the number of allowable nonlicensed owner carrybacks from one to three per year (which was the prior HUD interpretation). But why limit them to three and not to five or seven or not limit them at all is anyone’s guess.
If you think that shielding each property in a separate LLC is sufficient to comply with the new regulations, think again.
Even if you happen to stay within the limit of three carrybacks in any 12 month period, each of your carryback notes must comply with all the other requirements, too. In order for you, the seller, to not need a mortgage originator’s license for any particular note, you must:
- not have participated in the development of a residence on the property in the ordinary course of your business, AND
- the loan must be fully amortizing, AND
- you must verify that the buyer is in a position to repay it, AND
- the interest rate may not be adjusted within the first five years, AND
- any rate increases over the lifetime of the loan must be “reasonable” (whatever that means) AND
- you must comply with any other regulations “the Board” might have introduced in the meantime.
“The Board” is the Consumer Advisory Board under the Bureau of Consumer Financial Protection, which has recently been established within the Federal Reserve. (So much red tape might create jobs but mostly jobs of the wrong kind.)
What this means is: Notes with balloon payments or notes in which interest rates adjust during the first 5 years are not included in the allowable transactions limit and must be licensed even for a single, solitary one. (Individuals who are seller-financing their primary residence are in most likelihood exempt from the S.A.F.E. act.)
For more information on the S.A.F.E. act and related regulations, see: http://www.ffiec.gov/safeact.htm
You could use a licensed third party to comply with the law. Even though this is going to cost you money and the numbers may not work out for every deal, it most likely beats the alternative of getting licensed yourself.
A few days ago, Ally Financial (previously known as GMAC Inc.), and JPMorganChase independently announced they were putting a temporary halt to foreclosures in 23 states (in those states which require judicial foreclosure). It turns out they were employing robo-siogners to initiate foreclosures on autopilot. Their employees swore to personal knowledge of foreclosure documents when in fact quite the opposite was true: they could not have had “personal knowledge” if they were signing hundreds foreclosure documents per day per person. In many cases they had no proof of title either.
Now title insurers are beginning to catch on.
Old Republic National Title Insurance informed agents Friday that it would not write policies on foreclosed Chase properties until the issue is resolved one way or the other. The Minneapolis based title insurer already refuses to write policies on properties which had been foreclosed upon by GMAC Mortgage/Ally Financial.
To homeowners facing foreclosure, these events could bring much-welcomed relief. Our sources report some banks are sending out letters confirming mortgage modifications on properties they seem unable to foreclose upon.
Foreclosure investors, on the other hand, are less excited. Unless they obtain title insurance, they cannot secure institutional financing.
How widespread the problem is among other lenders is an open question. Bank of America has already joined the club of banks which admitted to robo-signing foreclosure documents. But only Bank of America halted all judicial and non-judicial foreclosures in order to not further embarass themselves.
In states which do not require judicial foreclosure it’s still more or less business as usual, at least for the other lenders.