Oliver E. Frascona, a Boulder attorney gives advice to real estate brokers regarding short sales.

The short sale has gone well.

You finally get the first lien holder to agree to pay the second $10,000.00 and accept the resulting bigger short sale.

It looks like this one will close.

Then the second lien holder, who is just a spoiler anyway, says “If we don’t get $15,000.00, we will not release our lien. And in addition, we don’t care if that other $5,000.00 comes from the buyer.”

Now what?

You thought that it all had to be on the HUD-1.

If the first lender sees an additional $5,000.00 payment, they might not sign off on the deal. Don’t worry says the second, it is all OK, go ahead and do it.

Sounds sort of like the devil giving advice, to me.

The second lien holder does not care about the broker or anyone else; they just want to get all the money they can.

Do not listen to the second.

If it is not part of the contract, written, approved by the lenders, and on the HUD-1, you have problems.

You have to go back to the first lender and get approval.

“Well can’t I just put it on the HUD-1 and hope that they don’t notice it?”

No – you can not.

That is an attempt to defraud the first lender.

“What if the first lender will not approve the deal? I mean whatever happens after closing is not my problem, if the buyer wants to pay the second lender money, that is their decision. Right?”

Wrong.

The lender is counting on you to tell them all that is part of this transaction, so that it can make a decision as to how much to accept for their loan in the short-sale.

If there is another $5,000.00 in the deal they have the right to know this.

We are representing to the lender that the contract is what is in the HUD1. There is no way to “slip it in” and hope they do not catch it.

Just wait and see

One of these will come back with a “no release” by the first lender or a letter from an enforcement agency that your attendance is needed in a forum that you do not want to attend.

Do it right.

Use a title company that will not close this kind of deal. If a title company agrees to close this kind of transaction, that raises a red flag and you should seek another title company.

Oliver E. Frascona, Esq. is licensed to practice law in Colorado and is a shareholder in Frascona, Joiner, Goodman and Greenstein, P.C. in Boulder. He can be reached at 303-494-3000 or oliver@frascona.com.

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The biggest changes in 30 years regarding rules about disclosing information to consumers who are buying homes are scheduled to go into effect on Jan. 1, one of the nation’s top real estate attorneys told about 400 mortgage, title insurance and other industry officials in Denver.

That gives the real industry about 10 weeks to prepare for the changes, said Phillip L. Schulman, a partner with the Washington, D.C.-based K&L Gates law firm.

“It probably couldn’t be a worse time,” to implement the changes in RESPA – the federal Real Estate Settlement Procedures Act – Schulman told the audience attending a seminar titled “You Really Need to Know This Stuff,” on Wednesday afternoon at the Four Points by Sheraton hotel at East Hampden Avenue and Interstate 25.

RESPA is about closing costs and settlement procedures. RESPA, a HUD consumer protection statute designed to help home buyers be better shoppers during the home buying process, requires that consumers receive disclosures at various times during the sales transaction and outlaws kickbacks that increase the cost of settlement services.  RESPA is enforced by HUD.

The 2 1/2 -hour workshop by Schulman on the new Good Faith Estimate and the HUD-1 document, was sponsored by Universal Lending and Land Title Guarantee, who are also  the sponsors of InsideRealEstateNews.com.

“With these changes coming, this will probably be the first of many meeting you are going to attend over the next 12 to 24 months,” Peter Lansing, president of Universal Lending, told the audience.

He said there is so much information – and misinformation – floating around that is sometimes difficult to separate fact from fiction.

“This is fact,” Lansing said.

Following Schulman’s talk – which he gave with Seinfeld-like timing, full of jokes, wit and self-deprecating humor – Lansing said that he encourages people to “embrace the changes,” even if they don’t like them, because they are the new reality. And the government is sure to implement more changes, so everyone in the industry needs to keep up to date, as rules are changed or fine-tuned.

The intent of the changes is to provide more transparency and knowledge to consumers, said Schulman, the former General Counsel to the Home Improvement Lenders Association and the former Assistant General Counsel of the Inspector General and Administrative Proceedings Division, U.S. Department of Housing and Urban Development.  He frequently lectures at seminars and conferences sponsored by the Mortgage Bankers Association, the American Land Title Association, the National Association of Realtors, and other industry groups.

Schulman said the rules are “never without controversy, as proposed changes typically pit settlement service providers against each other,” he said. Changes that might help Realtors, for example, might mean more work and less money for lenders, and what is good for lenders, might be bad for title companies, he said.

The changes, which many in the industry wanted delayed, include new good faith estimates, which is said the “centerpiece” of RESPA reform; controversial yield spread disclosures, which many mortgage bankers feel creates an unlevel playing field and favors bank lenders over brokers; new HUD-1 settlement statements; and new rules on allowing lenders to provide “average amounts” for various charges.

All told, the changes are so detailed, that he provided a 46-page guide to the changes. And he encouraged people to go to HUD’s Website and check the FAQ’s on the new rules. For example, he said that HUD has not addressed how the changes will affect reverse mortgages. He said when he asked about that, HUD officials told him that reverse mortgages will be addressed when they update their FAQ. But he indicated you might not want to hold your breath waiting for the update, “as it may not come in our lifetime,” he quipped.

He noted that HUD has been at this for a long time. In 2005, it conducted round tables with representatives, trade association, and consumers groups.  And when it publishes its proposed RESPA rules changes on March 14, 2008, it received about 12,000 public comments.

Last December, the National Association of Mortgage Brokers sued HUD, seeking a permanent injunction, claiming the new Good Faith Estimate rules were “arbitrary and capricious,” and created an unlevel playing field, among other things. But the court denied the NAMB request for an injunction in July.

The good faith estimate is the “guts of this thing,” he said. “But only HUD could simplify the process by taking a one-page GFE and turning it into three pages,” he said. His presentation included a copy of the Good Faith Estimate, which lists everything from the time the GFE will be honored to various scenarios for tracking settlement services. He walked the audience through the form, showing them how to fill out the various boxes.

He also discussed the yield spread premiums, which requires mortgage bankers to disclose their fees, but does not apply to banks, such as a Wells Fargo or a Bank of America.

“Brokers scream, “This is not  level playing field,” Schulman said. He gave an example where a loan closes at 6.5 percent and it has to be disclosed that the lender received a $1,500 origination fee and the mortgage broker received a $2,000 yield-spread premium. Again, he walked the people through the process, showing them how to fill out the forms.

While he said that HUD did a “decent job of providing more transparency and clarity to settlement process,” at the same time some of the rules are “cockeyed” and may conflict with other rules, such as the Truth in Lending Act.

And he noted that HUD has made it clear that its new rules, even though they are federal, will not preempt state laws. And Colorado has some rules not found in other states, so industry officials should check with the Colorado Real Estate Commission if there appears to be conflicts between the federal RESPA rules and Colorado rules, he said.

Some people in the audience said that they think the rules are going to backfire and create more problems and not help consumers.

“I think some closings are going to be be missed because of these new rules,” and people might miss a chance to to lock-in an attractive interest rate, said Heidi Colbenson,  a loan processor who attended the workshop.

“I really think there are going to be some unintended consequences,” she said.

And James Nolan, a loan originator, said he understands that there were some bad lenders that misled consumers and put them in bad loans, playing a role in the current housing mess.

But he said there also were also bad appraisers and bad real estate agents, and “to a certain extent,” he thinks the government is unfairly burdening lenders with more and unnecessary rules, which he said will do little to help consumers.

Mortgage broker Jim Spray, however,  gave Schulman’s talk a big  thumbs-up.

“I would give him a 5 out of a 5 on my rating system,” said Spray, an expert on mortgage fraud, who long championed efforts to have mortgage brokers licensed in Colorado.

“He gave a most excellent presentation,” added Spray, calling Schulman’s presentation “One of the best I have ever seen (and that’s a lot). He covered the knowns quite well and dodged the unknowns in a very admirable manner. I am delighted Pete (Lansing) brought him and told Pete that.”

Philip Schulman spoke about changes in RESPA at a conference sponsored by Universal Lending, headed by Peter Lansing, and Land Title Guarantee. Photo credit: Patrick Hester

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

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