Francis M. Miller

By Francis M. Miller

Special to InsideRealEstateNews

Take a poll at the end of this column

A freelance columnist, Mary Winter, writing in the Sunday Denver Post, questioned why more people aren’t walking away from mortgages on their upside down homes.

Without a doubt there are many situations where many people are upside down, or underwater, on their mortgages. That is, their mortgages are worth more than their homes.

There are numerous areas in Douglas County, where I live, for example, such as Franktown, where housing values have dropped 20 percent, according to the assessor’s office. A recent study of residential equity revealed average equity countywide was less than 15 percent before the collapse of the market.  Many homeowners are 5 percent to 15 percent upside down, representing a crisis on a $1 million dollar home when divorce, death or job loss occurs.

A quick spreadsheet analysis of trends would suggest this problem will grow and intensify, particularly for ex-urban homeowners with horse properties and McMansions.

Many people would have to go to closing with tens of thousands of dollars just to get out from under their current property.

They would end up renting for many years to recover sufficiently to re-enter the market.  Many people are seriously beginning to consider buying a smaller property and walking on the mortgage on the larger property.

Dark side to walking away

Despite the dire housing market, in my mind there is a dark side to what the Mary Winters of the world would like to portray as a rational economic analysis.

It all boils down to integrity.

Integrity is doing what you say, both in terms of your explicit contracts and implied social contracts. It is just such an implied social contract that motivates soldiers to risk their lives to recover their buddy’s body from the battlefield.

The self-interested, profit-maximizing borrower who is upside down can always rationalize that it was the money-changer lenders who caused this problem and brought us all to the brink of disaster.

The borrower can do a cost-benefits analysis and quickly conclude that he or she would be better off by walking away.

But, the mere act of doing such a cost benefit analysis, instead of just doing what had been agreed to, demonstrates a de facto lack of integrity, regardless of what the analysis might reveal. I’m not talking about morals or ethics or religion. I’m talking about raw, old-fashioned integrity – the act of doing what you said you were going to do– nothing less.

If you have integrity, you don’t need to waste your time doing cost-benefits analyses. If you have integrity, you don’t rationalize your bad behavior because the lender is a snake or the government sanctions weaseling out of the deal. You do the right thing  because you have integrity.

Calculations don’t factor in ethics

Every day you and I run into people whose integrity is conditionally dependent on the latest spreadsheet cost-benefits analysis.

The calculus on integrity is rampant in mercantile affairs where defaulting, backing out, or stabbing someone in the back is merely “doing-business.”  When we find ourselves in the midst of such a situation you and I are afforded a golden opportunity to declare to the world who we really are.

If we personally chose to do something that is immoral, unethical and maybe even illegal all the while calculating the probability of whether we will get caught, then we have tossed our integrity to the four winds. Trying to shore up our decision with some rationalization or cost-benefit analysis is all the more pathetic.

Sure, lacking integrity, like crime, can sometimes pay.

Some people live out their entire lives, become massively wealthy and display little integrity. They live in the shadows.  A real estate deal goes bad and they collapse the limited liability corporation that was the actual owner. The bank fails to turn a profit and they let the regulators take it over and sell it off to some out-of-state buyer.

Still, there are a few – decried as throwbacks to the dinosaur age – who will die as a pauper, but are iron-willed when it comes to displaying integrity. Many of us do the proverbial cost-benefit analysis to see what we can get away with and what we can justify. If we can weasel out of the deal we’ll do it. When such behavior begins to occur on a mass scale,  it is hard to see how our social-economy can function. The credit markets will never be robust again without government intervention. Government programs create a cascade of unintended consequences.  I assert that personal integrity is a thing of intrinsic worth and the need for it never changes, no matter how many spreadsheet programs exist.

Don’t get me wrong. I’m not lending lenders off the hook, either. Let me give you a real life example of a real estate deal my wife and I are trying to consummate right now.

It’s personal

We want to relocate my wife’s psychology practice of 25 years to Lone Tree. We have identified the perfect property, a 1,200-square-foot office condo that is for sale. What astounds me that the current seller is upside down, but she has had the integrity to continue making her mortgage payments.

It has caused a real hardship for her and her family and it is not her fault that the lending industry allowed overbuilding and a crash that decimated property values.

She is being punished by the likes of JP Morgan/Chase, even though a qualified buyer (my wife and me) wants to buy the property. The lender will not allow the current loan to be assumed and they insist on a new loan with a new appraisal and a 20 percent down payment. We can handle the 20 percent down, but the gap between the lendable value and the payoff on the seller’s current mortgage is a chasm that neither the current owner nor we can cross. Forget that during the past five years JP Morgan/Chase has collected $25,000 a year, largely for interest payments. Forget that JP Morgan/Chase would have a new borrower with impeccable credentials going forward. JP Morgan/Chase stubbornly insists that they will not entertain a short sale and that unless the current mortgage holder quits making payments and creates a default situation, there is nothing they can do.

Obviously, identifying people with integrity takes a face-to-face meeting. That’s why I believe all the computer credit scoring in the world will never be a substitute for a seasoned loan officer taking the time to get to know his customer.

As long as we let computers substitute for human judgment we can expect the borrower to try and game the system. I know we cannot go back to the old days, which were not that, good, but the current system is not working either. People with true integrity are being unduly punished and the scoundrel walker is getting a pass. Something must be done systematically if the residential credit markets are to forestall greater government intervention and meddling and tinkering with the system.

As long as this perverse situation tyrannizes the borrowing public, the lending institutions can expect great animosity and harm to their reputations. If it continues another few years, the lenders can expect the public to rise up politically and use the power of their vote to regulate the industry. It may even be like the S & L debacle of the 1980s—Oh, wait, there are no more S & L’s to hand out toasters. The borrowers are not in a position of power to finesse a solution to what seems to be an impossible situation. Only the lenders can act proactively and that will take not only integrity, but also morality and ethics. They will have to quit treating the borrower like a commodity.

Francis M. Miller is a management consultant who founded Lone Tree Consulting and specializes in strategy, workouts and turnarounds. He has degrees in math, finance and economics and a graduate degree in public policy from the University of Colorado Graduate School of Public Affairs. He spent a decade with firms such as Deloitte Touche and KPMG Peat Marwick. He was a U.S. Navy Seabee for six years during the Vietnam era and grew up in Montana. He was on the Douglas County Planning Commission and the Infrastructure 2050 Committee. He blogs at www.theThoughtCzar.com

To read Mary Winter’s column, “The Wisdom of Walking Away From Your Mortgage, please visit this link.

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“Unfortunately, we did have to cancel the event this weekend, due to lack of registrations,” said Kristi Collins, spokeswoman for Scottsdale, which is based in Arizona, but has an office in Boulder.  She said a number of people from out-of-state were going to travel to Golden for the seminar, and with only 10 registrants to date, “we had to make a group decision and the overall consensus was to cancel this one and regroup at a later time.” She said a similar expo in Arizona drew more than 300.

Collins has notified all 10 registrants that the expo has been canceled. Experts have agreed to meet with each of those people individually to discuss their specific situation and “help get them pointed in the right direction,” she said

Contact John Rebchook at JRCHOOK@gmail.com.

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Ronald D. Jung bought a home, well priced at $475,000, in Longmont almost a year ago. The home happened to be a short sale, in which the lender accepts less than the mortgage amount in the transaction. Although Jung is a real estate attorney, he had little experience with short sales at that point. Like many have found, it was not a pleasant experience, to say the least.

“It was a nightmare,” Jung said from his Boulder office at 6630 Gunpark Drive. Now, however, Jung is working the other side of the short-sale transaction process.

Jung recently became “of counsel” in Colorado to the Scottsdale Law Group in Phoenix, although it remains a small part of his practice.

The Scottsdale Law Group works closely with Brent White, a law professor at the University of Arizona E. Rogers College of Law, who also has authored books and papers on real estate topics, including short sales. Scottsdale also provides free videos and periodic conferences for distressed homeowners.

Strategic defaults

White, who has appeared on 60 Minutes and has been quoted in newspapers such as the New York Times, Washington Post and Wall Street Journal, has received the most notoriety by arguing that at times breaching a mortgage contract with a so-called “strategic default” can be the most responsible and ethical course of action when it is done to fulfill more important obligations to one’s family.

Jung said that if an affluent homeowner who could afford to make a mortgage payment, but makes a business decision not to because the house is “underwater,” that is, worth less the mortgage, isn’t something he necessarily condones.

“Philosophically, I guess I do not see as much of a societal benefit to that as much as helping people who really are in need,” Jung said.  “However, that being said, the bank is being made aware of the financial circumstances of the customer. So if the lender chooses to release the borrower of some or all of the borrower’s obligations, and they agree not to after the deficiency of what they owe, I have no problem with that. It’s not like the borrower is hiding something. There has to be full disclosure. If someone is trying to hide information from the lender, I would not accept them as a client.”

Jung learned first hand that going through a short sale not only requires a lot of hand-holding, but it is a process that could benefit from the scrutiny provided by a qualified attorney.

Realtors cannot practice law without a law license

In his case, he believes the Realtors involved at times over-stepped their legal authority allowed under their licenses.

Boulder lawyer Ronald Jung is now handling short sales as "of counsel" in Colorado for the Phoenix-based Scottsdale Law Group.

Yet, he said that almost no one uses a lawyer in a short sale.

“In Colorado, I would be surprised if it is 1 percent,” Jung said.

One obvious reason, of course, is that someone contemplating a short sale almost by definition is financially strapped and can’t afford a lawyer.

“My hourly rate is $320,” Jung said. “If my office was going to take a short-sale case and charge on an hourly basis, between my fees and my para-legal charges, it probably would cost about $5,000 to $8,000. That is why I think this arrangement is a no-brainer.”

$500 upfront fee

With his arrangement with the Scottsdale Law Group it costs $500 upfront and Scottsdale gets paid on the back-end, “hopefully, by the lender,” Jung said.

Scottsdale typically will receive $3,000 or 2 percent of the transaction, which is ever greater, he said, when the home is sold.

“The only expense to the client is the $500,” he said.

Initially, Jung will meet with prospective client, preferably in person, free of charge, to discuss if this is the path they want to go down.

He will explain that for the $500, they will get a consultation with him to discuss “whether the short sale is the right avenue and the best thing. And the clients typically have a lot of questions about their particular circumstances.”

If the homeowner agrees to work with Jung, he sends their paperwork to the Scottsdale law firm in Phoenix, where a staff is on hand that specializes on dealing with a variety of lenders.

When all of the paperwork is completed, Jung reviews it and makes sure everything is in proper order. For example, he will make sure that both the mortgage and the promissory note is released with no liability, so the seller can’t be later sued by the lender for a deficiency judgment.

Options explored

In most cases, so far, short sales have been the best option, although on occasion he has referred owners to bankruptcy lawyers. Sometimes, homeowners have unsuccessfully tried to get government modifications on their loans, and other times they are so close to the foreclosure sale they may not realistically have enough time to complete a short sale.

If Jung takes the case, the homeowner still will list the home with a real estate agent.

“Realtors, so far, have responded favorably to our involvement,” Jung said. “It frees them up to sell and market the home.”

However, the owner will no longer need a short-sale facilitator to work with the lender – even though, in Jung’s personal ordeal to buy a short sale, it almost certainly will not have closed, if a short-sale facilitator had not been brought in by one of the Realtors.

“We replace the short-sale facilitator,” Jung said.

Lawyers, but not real estate brokers or short-sale facilitators, are exempt from the so-called MARS – Mortgage Assistant Relief Services – a FDIC rule that took effect in January.

Among other things, the MARS rule prohibits short-sale facilitators and others from accepting upfront fees, which had been a common practice among many reputable firms. Using such a firm greatly increases the chances of a short sale consummating, experts say.

Beyond that, Jung noted that a real estate attorney can be an advocate for a homeowner, while a short-sale facilitator typically serve a more neutral role to help streamline the process by assuring that all of the proper forms are filled out accurately and in a timely manner.

“I think Realtors will increasingly choose to work with attorneys, if they can provide a cost-effective arrangement such as the one I have with the Scottsdale Law Group,” Jung said.

Frascona uses RealtyTMS

Oliver Frascona, a prominent real estate lawyer in Boulder, also is finding that short sales are an increasingly large part of his business.

Prominent real estate attorney Oliver Frascona finds short-sale facilitators provide valuable services when representing distressed homeowners.

However, he doesn’t replace short-sale facilitators, but works with them.

Frascona, a shareholder of Frascona, Joiner, Goodman, and Greenstein, P.C., uses RealtyTMS, a short-sale facilitator, on most of the short sales he handles.

“I pay the fee to RealtyTMS,” Frascona said. He said the combination of a qualified facilitator, such as RealtyTMS, and an experienced real estate attorney, makes for a powerful team.

“RealtyTMS does a good job and does not step over the line,” Frascona said. “They know what extension to hit if they’re calling Wells Fargo or some other lender.”

However, he agreed with Jung that it would be far too expensive for a typical short-sale candidate to hire his law firm on an hourly basis.

Frascona said anyone who is contemplating a short sale needs the help of several professionals, each serving a different role – a Realtor, a short-sale facilitator, a CPA and a lawyer.

“Realtors need to be freed up to do what they do best – go out and find buyers for real estate,” Frascona said. “I think when it comes to short sales, a lot of Realtors come dangerously close to practicing law without a law license.”

A CPA should be consulted because tax consequences of a short sale can become extremely complicated, Frascona said. “It’s not something you want to try to handle using QuickBooks,” said.

“And I hate to say this, but you can’t just hire any lawyer,” Frascona said. “A law license does not mean that you understand short sales, anymore than a general practioner can do brain surgery. A lawyer used to doing divorces, or corporate or intellectual property work won’t know the first thing about doing short sales.”

Indeed, Frascona said a lot of his short sale business comes from referrals from other lawyers.

Contact Ronald D. Jung at rjung@scottsdalelawgroup.com or ron@legalrealty.com.

To learn more about Oliver E. Frascona, please visit www.Frascona.com

In his own words: Ron Jung Video.

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Prominent real estate attorney Oliver Frascona doesn't think the MARS rule regarding short sale transactions is as onerous as many think.

Prominent real estate attorney Oliver Frascona has heard all of the wailing  from real estate brokers regarding the six-month-old rule known as MARS, but he doesn’t buy it.

Any real estate broker who does short sales, in which a lender accepts less then the mortgage amount, is surely familiar with MARS.

MARS, an acronym for Mortgage Assistance Relief Services Act, went into effect on Jan. 1. A 54-page, single-spaced document such as the Federal Trade Commission’s MARS, addresses a number of topics, of course. But the most significant  change is that it makes it illegal for real estate brokers to charge sellers an upfront fee or to pass along a short sale coordinator’s fee on any short sale prior to receiving a written offer from a lender or servicer that the homeowner decides is acceptable.

This is what FTC Chairman Jon Leibowitz had to say about this portion of MARS in February: “Banning the collection of up-front fees will protect homeowners from being victimized. This is especially important at a time when so many people are behind on their mortgages or facing foreclosure.”

Penalties for breaking the rules are stiff – up to fine of $11,000 a day.

But Frascona, a shareholder  of the Boulder-based firm Frascona, Joiner, Goodman and Greenstein, PC, said that he does not believe the intent of MARS is to go after brokers who pay small upfront fees to reputable short-sale assistant firms. Studies have shown that brokers who use these short-sale facilitators have a much greater likelihood of completing a short-sale quickly.

Culprits: Out-of-state firms that charge upfront fees

“They’re not going to go after the broker who pays a couple of hundred bucks upfront to a short-sale company that needs the money to cover its overhead,” Frascona told me. “They’re going after the out-of-state guys who charges a bunch of money and didn’t do anything. And they should be going after those guys.” He also said that the FTC rule would apply to real estate brokers who are giving short-sale work to unqualified family members, who are not helping the distressed homeowners.

“They’re not going after Joe Broker who has got a short-sale listing and says I’ll pay a reputable firm to get the process started,” Frascona said. “Unless, I’m missing something, I just don’t see it. The public is not being harmed. The consumer is actually being helped. There is no kickback involved.”

The reality, even if the FTC decided to go after real estate brokers who are paying legitimate firms upfront fees, they couldn’t, he said. “The FTC has the same budget constraints as everybody else,” Frascona said. “There is no way they have the financial resources to go after a reputable broker working with a reputable company, especially when they are helping people at a reasonable cost.”

Not that he is a fan of MARS.

“i don’t think the FTC knew what it was doing,” Frascona said. “It’s like it’s left hand didn’t know what it’s right hand was doing. MARS is a mess.”

To contact or learn more about Oliver Frascona’s law firm, please visit this link to his law firm.

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The conventional wisdom since last fall is that the drop in foreclosure activity in Colorado and Denver wouldn’t last.

The double-digit, year-over-year drop in foreclosure filings was a result of well-publicized problems with paperwork, such as robo-signing of foreclosure documents. Once they were worked out, the state could expect another wave of people losing their homes, many observers predicted.

Still, the report by the Colorado Division of Housing released today, which showed a 27 percent drop in foreclosure filings, came as a surprise.

There were 8,115 foreclosure filings in the first quarter in Colorado, compared with 11,136 during the same period a year earlier, according to the report by the Colorado Division of Housing.

Foreclosures not roaring back

“Loan servicers (that process mortgage paperwork, and decide who gets loan modifications or face foreclosure) have been saying that once all of the paperwork problems were worked out, foreclosure filings would come roaring back,” said Ryan McMaken, the division spokesman who released the report and analyzed the data, which was covered earlier by InsideRealEstateNews.

“But they have been saying that since November,” McMaken said. “And I’ve looked at April numbers, and it appears they continue to decline. They’re not bouncing back so far.”

Foreclosures still high

While that is good news, the numbers are still high.

“Clearly, at this rate, it still will take us several years before we can return to what we would consider a normal foreclosure market,” McMaken said.

But the big question is whether the foreclosure crisis is going to get much worse, before it starts to claw its way back?

Short sales surge

Ron Woodcock, a broker with RE/MAX Southeast, said one reason that fewer homes may be entering the foreclosure process is because lenders are more willing to do short sales. In a short sale, a lender accepts less than the mortgage amount when the home trades hands.

“A lot more short sales are being done now than in the last year or last six months,” Woodcock said. “They are up dramatically.”

But the foreclosure crisis is far from over, he said. “We’re not coming out of this mess anytime soon.”

Shadow market lurks

Woodcock said that he things banks are sitting on a great deal of distressed homes that eventually will hit the market.

“We’re at a plateau right now,” Woodcock said. “But there is a huge shadow market out there that is going to greatly increase the inventory of homes on the market.”

Part of the slow-down is because loan mitigation officers in charge of processing and deciding the fate of distressed properties, are incredibly over-worked, he said.

Woodcock said he has talked to loan mitigation officers who have 700 to 800 cases they need to process.

Zach Urban, of the Adams County Housing Authority, said while the recent drop in foreclosure filings may be the “eye of the storm, before we experience a dramatic increase in filings,” he will take it.

“I’m just enjoying the holiday, even it is only a temporary reprieve,” he said.

Urban said that much of the financing for housing counselors is drying up or being curtailed. That will mean if there is another surge in filings, there will be fewer counselors to help homeowners in danger of losing their homes, he said.

Foreclosure bill to be re-introduced

Earlier, a bill that Urban put together to charge banks a fee for each foreclosure sale it processed to fund counseling, died in a committee, despite its support from the banking industry. Urban said a similar bill will be re-introduced next year. Urban also has met with lenders to see if they would pay the fee on a volunteer basis.

“We’ve met face-to-face with a number of servicers, and no one has said “no” yet,” Urban said.

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“Obviously, we would like to have exempted real estate brokers, and if the FTC had offered that, we would have said, “Thank you very much,” NAR attorney Laurie Janik told InsideRealEstateNews this morning.

“But I do not see that happening,” said Janik, a Chicago-based attorney, who is negotiating with the FTC to get some clarification regarding some of the disclosure requirements for real estate brokers handling short sales.

Real estate brokers not to blame

Real estate brokers are not the root cause of the problems that led to the creation of MARS, which went into effect on Jan. 31, she said.

“Real estate brokers have not been involved in any of the 40 or so enforcement actions that have been brought to date by the FTC,” Janik said. “We do not believe that real estate brokers are in the heart of the bull’s eye,” which led to the creation of MARS.

That said, Janik cautions that real estate brokers are bound by MARS.

The NAR is not looking to change what is considered to be the most critical part of MARS, which bans accepting upfront fees from distressed homeowners seeking a short sale. Some companies had been charging upfront fees for people seeking loan modifications to prevent a foreclosure, but were doing little or nothing to help them. The rule was extended to short sale transactions.

“Brokers should not ever charge upfront fees,” Janik said.

That extends to short-sale transaction companies that are brought on by brokers to help facilitate the time-consuming and complicated short-sale process, she said.

MARS also requires numerous advertising requirements, which InsideRealEstateNews detailed in an earlier article.

“If brokers are advertising themselves as short-sale specialists because they have passed some course or they have done more than 100 short sales, they must include in their advertisements all of the disclaimers required under this rule,” she said.

Disclosures need tweaking

A couple of the rules, however, are not a “good fit” for real estate brokers, she said, which the NAR is seeking to have clarified.

For example, the rule requires brokers to tell consumers they can stop using their services anytime.

“What the FTC is referring to is that you can stop using our mortgage relief services anytime,” Janik said.

In most cases, she said, the broker has a listing agreement with the homeowner, and MARS does not give them the right to void the listing agreement at any time. The home seller is still bound by the listing contract.

“The intent was not to allow them to walk away from a listing contact,” Janik said. “It’s confusing to consumers.”

Also, MARS requires various disclosures that pertain to loan modifications, but also are being required during short sales, she said.

That just doesn’t make any sense, she said.

“They have all of these required disclosures that are demanding you use loan-modification terms. They are about loan modifications and not short sales,” Janik said. “We want to make sure they are requiring meaningful disclosures. Some of these disclosure requirements are not helping anyone.”

Contact John Rebchook at JRCHOOK@gmail.com.

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Vote on MARS at the end of this blog

Tara Rogers firm, TMS Realty, is MARS-compliant.

Mars is the red planet, but MARS has some real estate professionals seeing red. The National Association of Realtors is working to fine-tune MARS – the acronym for Mortgage Assistance Relief Services Act – regarding real estate brokers, although some brokers already are cheering MARS.

The act, sponsored by the FTC, with relatively little fanfare, went into effect on Jan. 31 to help protect distressed homeowners from mortgage relief scams.  Only now, does it appear to have started appearing on the radar screen of many Realtors.

MARS lands on Realtors who do short sales

The 54-page MARS document defines “mortgage assistance relief service” to include “negotiating, obtaining or arranging a short sale of a dwelling.” A short sale is when a bank accepts less than the mortgage amount, and is seen as a less costly alternative to a foreclosure. There were more than 3,300 short sales in the Denver area last year.

Among other things, MARS:

• Outlaws charging advanced fees or passing along a short sale coordinator’s fee to homeowners prior to the seller receiving a written notice from the lender saying the offer is acceptable.
• Broker and others involved in the short sale process must disclose that they and their companies are not associated with the government.
• Consumers must be reminded that it is within their right to reject the offer.
• Mortgage relief companies are prohibited from making a false or misleading claims in about a dozen specific areas. Among other things, misrepresentations are not allowed regarding the likelihood of consumers getting the results they are seeking; the consumer’s payments and other obligations; and the amount of money a consumer will save by using their services. In short: Do not mislead consumers on any aspect of the process. All disclosures must be clear and prominent. It even goes as far to say that text advertisements must have the heading IMPORTANT NOTICE in bold font that is at least two-point type larger than other type in the document.
• Sellers cannot be advised to not contact or communicate with their lenders or loan servicers.

MARS also imposes record-keeping and compliance requirements. Indeed, one criticism has been that the FTC went a bit over-board with multiple disclosures.

There is no exception in MARS for real estate brokers, as there is in the Colorado Foreclosure Protection Act, although there is an exception in MARS for lawyers.

“This means real estate brokers working with short sellers or any seller in foreclosure need to understand and comply with MARS,” according to Damian Cox, a Denver real estate lawyer.

Indeed, violators of MARS could face fines of up to $11,000 per day.

Although it has been in effect for two months, the gravity of it is only now starting to sink in.

Consumers may be hurt

“It was adopted with no real fanfare,” said Cox. “It was intended to help consumers, but, unfortunately, I think it could hurt the ability to get a short sale done. I think it is overly broad. Realtors are starting to become more aware of it, and they should. It is a big deal.”

It’s a national rule and has had a national response.

Earlier this month, Jim Schneider, a Realtor in the Chicago area, criticized the National Association of Realtors for not making a bigger deal about MARS.

“They didn’t do much to rally the troops to change this ruling to make (it) something less difficult to implement; they issued their findings long after the ruling came into effect, and they haven’t exerted any effort to make the Realtor community aware that this exists. Trifecta!” Schneider wrote.

NAR looks to tweak ruling

However, Laurie Janik, an attorney with the NAR, this morning told InsideRealEstateNews that it she is  working with the FTC regarding required disclosures under MARS by real estate brokers who are working on short sale transactions.

“The rule is not a good fit,” for real estate brokers as far as some disclosure requirements, Janik said. “We are working with the FTC to get some additional guidance. The FTC has been most willing to engage in conversations with us.”

Some Realtors like MARS

But MARS already has its fans.

Bobby Burnett, principal of Keller Williams Realty-DTC, for example, thinks MARS is just what the industry needs.

“I think it is a good thing,” said Burnett, who expects to complete at least 100 short sales this year. He estimates short sales account for 50 percent to 60 percent of the activity by his Burnett Team at Keller Williams.

“No. 1, it has a prohibition of upfront fees, and I like that,” Burnett said. “You can get paid at the closing or after the lender has accepted the offer, but it is illegal to charge upfront fees. I agree with that.”

He also said that he likes the disclosure requirements, such as saying you are not representing the government and that consumers can reject offers.

“I was doing most of this stuff before,” Burnett said. “You know how much I hated these guys that were cheating people and double-selling properties. I hated those guys.”

Regulations inevitable

Ryan Lantz, who works with a number of companies that provide short sale services to brokers, as well as Realtors, months ago said it was inevitable the industry would face more regulations.

Lantz, co-founder and managing director of Claremont Information Systems, which developed Short Sale ProLogic, a software program that helps brokers identify short-sale listings and unsold homes in the shadow market, thinks that MARS is on the right track. He said outlawing upfront fees is a good move, for example.

“I think it is better for the consumer and the industry,” Lantz said. “I think that makes everyone 100 percent incentivized to get the deal closed. Some of the good companies out there are already dong that. PMH Financial, for example, has a fee structure that they only collect their fees at the closing.

“There are other good (short sale companies) out there that collect their fees upfront, and they are going to have to adjust,” Lantz said. “And the good companies will. They will adapt and it won’t be a problem. Some of the other companies, which depend solely on front-end fees, will go out of business. That is a good thing. We want to get the bad actors out of the business, which will be better for the good guys. Honestly, I don’t think this is going to have any impact on the market’s ability to get short sales closed.”

Tara Rogers is chairwoman of RealtyTMS, one of the biggest players is the short sale service field. She emphasized that RealtyTMS is completely MARS-compliant and will follow all of the rules set out by the FTC. She and her lawyers will continue to monitor the ruling.

Bad apples caused problems

“Unfortunately, there were several bad apples out there who were using predatory practices to take advantage of homeowners,” during a very vulnerable time, Rogers said. “We are taking the position that anything that gets rid of those predatory folks is a good thing. That will allow people to get the help they need from legitimate companies and Realtors.”

The act traces its roots to March 11, 2009, when President Obama signed the Omnibus Appropriations Act. A section of the act directed the FTC to seek comments to come up with new rules to combat mortgage fraud.

The ban on charging upfront fees, though, could have a downside for some short-sale coordinators who help brokers navigate the time-consuming and complex short-sale process, said real estate lawyer Cox.

“Upfront fees are now prohibited,” Cox said. “That is going to change the market. I think it could have a chilling effect on the completion of short sales.”

Cox said many brokers use short-sale coordinator firms that help brokers and sellers deal with the banks, when it comes to such things as finding the correct forms to fill out.

“These are the people who will sit on the phone for hours with the bank,” Cox said.

Many of these companies charge an upfront fee for their time and effort, while the broker only gets paid if the home is sold.

Most distressed consumers may suffer

He said he expects that some short-sale transaction firms will “cherry pick,” cases, and only take on the ones that seem almost certain to close. That could mean some of the most distressed homeowners – those with multiple liens on their houses, for example – will be forced into foreclosure.

“It is amazing to me that the government on one hand is encouraging short sales as an alternative to a foreclosure, but on the other hand is making it more difficult to accomplish them,” Cox said.

Colorado Attorney General John Suthers is not only a big fan of MARS, but played an important role in creating the act.

Colorado Attorney General John Suthers is a fan of MARS and played a pivotal role in shaping it.

Suthers and the Illinois Attorney General were the lead state attorneys who helped shape MARS in April 2010, when the FTC was considering comments from various groups. Comments by the National Association of Attorneys General group called the ban on advanced fees as the “linchpin” of the new rule.

MARS another tool for Suthers

“We support the FTC rule,” Suthers said through a spokesman. “We believe the rule complements the Colorado Foreclosure Protection Act,” and does not preclude any actions that his office can take under the Colorado act he said.

Suthers said he welcomes MARS as “another tool we have to pursue individuals or companies defrauding Colorado homeowners seeking foreclosure-relief services.”

Ron Woodcock, a broker with RE/MAX Southeast, who has completed more than 400 short sales during the past 22 years in Florida and Colorado, also supports MARS.

“I believe, overall, it is good legislation,” Woodcock said. “It is coming on the scene a little late, but is good legislation. Hopefully, it will help put the brakes on most of the scams out there where people are paying thousands of dollars upfront for mortgage modifications that never happen and were never going to happen, anyway.”

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Despite hitting a 30-month low in foreclosure activity in February, the market needs to see another 50 percent drop in foreclosure activity to declare a victory over the crisis, which has gripped the state for more than a half dozen years, Ryan McMaken, of the Colorado Division of Housing said. McMaken released a report that showed foreclosure filings last month in the dozen biggest counties in Colorado were down 34.7 percent from February were down 34.7 percent from February 2010. And foreclosure sales were down 19.6 percent, during the same time period. There were 1,986 foreclosure filings in February, compared with 3,042  a year earlier. And there were 1,338  foreclosure sales at public trustee auctions last month, compared with 1,664 in February 2010. An earlier report by SKLD showed a similar trend.

Not out of the woods yet

“Really, what we have done is plateaued at a very high number,” McMaken said. “What we really need to see is filings fall to about 20,000 a year – a 50 percent drop – before we can say that foreclosure problem seems to be a thing of the past. We are still in the midst of a really bad situation.”

Still, much of the recent housing and economic news for Denver has been good, said McMaken. “Good news continues to show up, whether you are looking at Case-Shiller, Mortgage Bankers Association, or FHA data,” he said. “January’s employment data was not fantastic for Colorado, but that reason we rose above the national rate is because of young people entering the job market. Of course, they have never owned homes, so they can’t drive up the foreclosure rate.”

Bad loan legacy ending

Also, if often takes five years from the time that a homeowner has received a loan until it is lost to the lender, McMaken said. Since the last of the subprime loans that initially led to the crisis were made in 2007, foreclosures due to bad loans should work their way out of the system by 2012 and 2013, he said. Also, the default rate for loans made in 2009 and 2010 are near or at historic lows, in part because banks have been so conservative in making new loans, so a new crop of potential foreclosures do not appear to be lurking in the wings.

In the past two years or so, many of the distressed homeowners calling the Colorado Foreclosure Hotline, 1-877-601-HOPE, because of lost income, not because they are saddled with bad loans. “It’s good news, of course, whenever you see foreclosure activity go down,” said Shannon Peer, director of Housing Counseling at Brothers Redevelopment, which manages the hotline. “But to keep it realistic, we are not seeing any drop in the number of calls to the hotline.”

He said it is possible that loan servicers are not processing loans in foreclosure as quickly as before, in the wake of sloppy record-keeping such as the highly publicized robo-signing of loans. If lenders take more than a year to complete the process, they have to start over again, which also could prolong the foreclosure problem, he noted.

Home equity rising

But there also has been some promising developments, he said. More and more people are calling who have a small amount of equity in their homes, he said. Selling a home, even if the owner only breaks even, is always considered a better option than a foreclosure, or even a short-sale, Peer noted. A short sale is when the lender accepts less than the mortgage amount.

Ron Woodcock, a broker with RE/MAX Southeast, is seeing that first-hand. He is listing a home for $345,000 in Erie, and expects that the couple selling it could walk away with $10,000 or $15,000 in profit after their home is sold. “They are thrilled,” Woodcock said. “They thought they were going to have to bring money to the closing table. They had no idea that their home has risen 10 percent in value since they bought it five years ago. After talking to neighbors and seeing what was happening, they thought they would be lucky to break even.”

Middle East, Japan woes worrisome

Woodcock, however, said he is concerned that global turmoil could end up costing the Denver-area economy jobs, which could stall a housing foreclosure and increase the number of foreclosures. “I’m hoping what is happening in Japan and the Middle East, mostly the Middle East, does not hurt our economy, but it is something that could, but we have no control over it,” Woodcock said.

He also said he thinks a new federal law that went into effect in January regarding short sales and loan modifications, has paralyzed bank processing of foreclosures to a certain extent. “It’s a case of another federal law going on the books and the banks do not understand it,” Woodcock said. “It is just creating a whole new realm of confusion.”

Of course, Denver is not alone in facing challenges from national and international events.”I think Denver is so much better off than the rest of the country,” Woodcock said.

County	February 2010	February 2011	Percent change
Adams	395	313	-20.8
Arapahoe	498	302	-39.4
Boulder	110	81	-26.4
Broomfield	24	24	0.0
Denver	424	230	-45.8
Douglas	237	115	-51.5
El Paso	376	288	-23.4
Jefferson	327	232	-29.1
Larimer	152	103	-32.2
Mesa	142	81	-43.0
Pueblo	117	85	-27.4
Weld	240	132	-45.0
Total	3042	1986	-34.7

County	February 2010	February 2011	Percent Change
Adams	209	151	-27.8
Arapahoe	271	211	-22.1
Boulder	61	40	-34.4
Broomfield	14	12	-14.3
Denver	247	270	9.3
Douglas	121	74	-38.8
El Paso	227	142	-37.4
Jefferson	155	125	-19.4
Larimer	73	64	-12.3
Mesa	74	69	-6.8
Pueblo	78	71	-9.0
Weld	134	109	-18.7
Total	1664	1338	-19.6

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