Galvin Realty Law Group

To:Brokers

From:Dale Galvin

6100 - 219th Street S.W., Suite 560

Mountlake Terrace, WA 98043

Office: (425) 248-2163 | Fax: (425) 248-2168

Email:

Website.

Date:May 8, 2013

Re: Checklist for Listing and Selling Broker in Short Sale Transaction

LISTING BROKER CHECKLIST

Obtain preliminary title report to determine exact nature and number of liens against property;
Obtain payoffs for all liens. Be aware to include prepayment penalties;
Refer client to attorney, and/or accountant, mortgage professional or HUD certified counselor to assure that a short sale is best decision for client. Client must understand legal, credit and tax ramifications of short sale. (A deed-in-lieu, bankruptcy, modification, or foreclosure may be better for the client). Provide client with a copy of the Short Sale Seller Advisory, published by DFI and DOL, or the advisory provided by your brokerage and have client acknowledge receipt of it before taking the listing.
Who will negotiate the short sale with the lender(s), how will they be paid, and who will pay them? Buyer, Seller or Broker(s)? Will the negotiator be the listing broker or independent short sale negotiator? Is the short sale negotiator licensed to negotiate short sales according to DOL, DFI and MARS regulations?
The Department of Licensing (“DOL”) and the Department of Financial Institutions (“DFI”) require that a person have either a mortgage loan originator license, a real estate license, or be an attorney licensed to practice law in Washington, to negotiate short sales.
DOL and DFI state that real estate brokers may only negotiate short sales in transactions where the Broker is providing real estate brokerage services to the seller. Thus, Brokers may not offer to negotiate short sales as a separate service, but may only negotiate short sales in conjunction with performing traditional real estate brokerage services (e.g. listing a property for sale). Brokers may not charge any fee for providing short sale negotiation services in addition to the normal and customary real estate commission.
While Real Estate Brokers are generally exempt from compliance with the Federal Trade Commission (“FTC”) Mortgage Assistance Relief Services (“MARS”) Rules they may violate MARS byreferring a non-compliant negotiator to a consumer.
Especially in the case of a second lien where lender is likely to have a large deficiency, is the client willing to execute a note or otherwise acknowledge the deficiency if required by the lender in approving the short sale? If not, should you take the listing?
Once you have decided to take the listing, immediately work with the client to put together the short sale package which will be uploaded to the lender(s). Most lenders have this package available on their website; if not, our office can provide you with a copy of the items in a typical short sale package. Your short sale package should include a property condition report and your Broker’s Price Opinion (“BPO”).
Advise the Seller that this is a potentially long process, namely, that once an offer is received, it will be uploaded to the lender(s), who will receive it into their system; explain that the lender(s) will then conduct their own evaluation of the value of the property (eg. a BPO or appraisal), and in approximately 60 days, the negotiator for the lender may be in a position to negotiate the terms of the short sale. (If the investor is Fannie Mae or Freddie Mac, the servicer is required to acknowledge receipt of the purchase offer within 3 days; respond to short sale requests within 30 days with a possible 30 day extension and, if so, weekly status updates to borrower during the 30 day extension; and make a final decision within 60 days of receiving purchase offers; therefore, important to know if investor is Fannie Mae or Freddie Mac). The Seller should be advised that 90-150 days to close a short sale is not unreasonable, especially in non-Freddie Mac and Fannie Mae transactions, and can be longer if buyers rescind during the approval process requiring a new submittal for the next buyer.
Be aware of a pending Trustee’s sale. If within 30 days of potential listing, you may want to decline the listing as the lender may refuse to discontinue the trustee’s sale. Talk to your negotiator, or if you are the negotiator, contact the trustee and lender as soon as possible to determine if it will extend.
In negotiating form 22-SS, consider the following:
Paragraph 2, allow at least 90 days for lender’s consent. Keep in mind, once the period for lender’s consent has passed, the deal is DEAD.
Paragraphs 3 and 4. Current form 22-SS (Rev. 12/12), allows the Seller to accept other offers, and submit multiple offers to Seller’s lender(s), none of which have any priority over any other. This creates a disincentive for the Buyer to either conduct its inspection or place its earnest money until after Seller has obtained Lender’s consent. Parties should consider amending this paragraph to provide that Seller will only submit Buyer’s offer, and Buyer, in turn, will not terminate before Notice of Lender’s Consent and agrees to immediately conduct its inspection and place its earnest money, thereby substantially increasing the probability of the successful conclusion of the short sale as each party is vested in the transaction.
Paragraph 5, Computation of Time. Be aware that none of the time frames commence, except for obtaining lender’s consent, as mutual acceptance is delayed until receipt of lender’s consent, unless the parties execute one or more of the boxes marked in paragraph 5. This is problematic for Seller as once lender’s consent is received, if Buyer thereafter seeks a reduction in price associated with an inspection undertaken after lender’s consent, this may not be approved by lender, and if approved, may take several weeks for lender’s consent. Also, Seller wants to have Buyer be pre-approved on its financing, so that Buyer does not refuse to close after lender’s consent has been obtained. Finally, should the Buyer be allowed to wait until lender’s consent is received before depositing earnest money?
Following lender’s consent, the lender typically requires closing be within

30 days of lender’s consent; thus, insert such a provision in paragraph 6 of 22-SS.

If the agent is not the negotiator, neither agent nor client should contact the lender directly. This will result in a loss of leverage by the negotiator. Let the negotiator do its job!
Be aware of the rules regarding commission “cram-downs”. In a Fannie Mae loan, the commission may not be reduced below 6%; however, many transactions may involve a Fannie Mae loan in first position, but a non-Fannie Mae loan in second position. Will the second position lender attempt to cram down the commission? If a non-Fannie Mae transaction, be aware of NWMLS Rule 101 (g), that for all short sale listings entered into after December 12, 2012, the SOC must be paid as set forth in the listing, just like all other listings, and the listing firm will bear any and all risk related to the creditors’ reduction of the commission. Any comments in the listing providing “SOC subject to lender approval” will be ineffective. Finally, if a non-Fannie Mae servicer is using a third party vendor to negotiate, likely the servicer will cram down the commission to 5% to cover the negotiator’s fee.
Don’t participate in any schemes, such as the double short sale, where a first sale at a low price is followed immediately thereafter by a second sale at a much higher price. Effective November 1, 2012, Fannie Mae and Freddie Mac imposed a deed restriction limiting this practice which appears on the face of the short sale deed and reads as follows: “Grantee herein is prohibited from conveying captioned property for any sales price for a period of 30 days from the date of this deed. After this 30 day period, Grantee is further prohibited from conveying the property for a sales price greater than $ (120% of the short sale price) until 90 days from the date of this deed. These restrictions shall run with the land and are not personal to the Grantee.” Will this place limits on a buyer who wants to obtain a rehab loan as title can’t be fully insured if the rehab loan is 20% or more of the purchase price of the property? Is this restriction also contrary to the standard title clause in NWMLS form 21 which requires title to be marketable at closing? It should also be noted that the negotiator in such a transaction, if also the Buyer in the first sale may be a distressed home consultant, and is placing his interests ahead of those of his client. A similar scheme is the option, where the optionee enters into an option with your Seller, but does not exercise the option until he finds a Buyer at a higher price than the option price offered your client. Listing short sale options is prohibited under NWMLS Rule 4(F).
Who will pay delinquent utility charges and past due HOA dues? (Note: Even if deed of trust was recorded before assessments became delinquent, HOA still has priority as to the amount of common area expenses that would have become due (based on budget) during the 6 months preceding foreclosure under the WA Condominium Act, except where the HOA forecloses non-judicially) Typically seller’s lender will not pay, thus indicate in sale agreement whether Buyer or Seller agrees to pay; if Seller, may need to occur prior to closing and outside of escrow with addenda so indicating.
Is there mortgage insurance (MI)? If so:
Will the mortgage insurer require the Seller to pay all or a portion of the deficiency?
Is the servicer “fully delegated” to resolve the MI claim?
Is the price agreed to between Buyer and Seller less than the lender would receive if it proceeded to foreclosure and received mortgage insurance? If so, lender may reject short sale and proceed to foreclosure
Is the mortgage insurance lender placed? Often the originating lenders would pay for the mortgage insurance, and it would not be known to the borrower that there is mortgage insurance until the sale is submitted for lender’s consent
In a cash sale have buyer provide proof of funds.
If you perceive buyer’s offer is low, ask buyer’s agent to justify with a CMA and if price is low based on perceived repairs, seek any written repair estimate.
Be there when lender’s agent does the inspection for purposes of providing the BPO to lender. Can you provide the agent with information which would be helpful to support the offer your client accepted on the property? Consider removing key box when offer signed around so lender’s agent conducting BPO will have to contact listing agent to make arrangement for entry.
Keep in mind that under new Fannie Mae and Freddie Mac regulations effective November 1, 2012 borrowers can now sell their home in a short sale even if they are current on their mortgage if they have an eligible hardship, such as death of a borrower or co-borrower, divorce, disability, or relocation for a job without any additional approval from Fannie Mae or Freddie Mac.
Does your client have a FHA insured mortgage? If so, does he qualify for HUD’s Pre-Foreclosure Sales program, which may allow him to avoid foreclosure and any deficiency obligation on the FHA insured mortgage? FHA follows a Waterfall test to determine whether a borrower qualifies for the HUD Pre-Foreclosure Avoidance Program. The Waterfall considers the options in this priority with the objective of keeping the borrower in the home: 1. Special Forbearance; 2. Loan Modification; 3. Partial Claim (eg. lender advances funds necessary to reinstate, secured by a note signed by Secretary of HUD); 4. FHA’s Home Affordable Modification; 5. Pre-foreclosure Sale; and finally, 6. Deed in Lieu of Foreclosure.

U. If the Buyer intends to finance its loan through FHA, Rural Development (RD) or VA program, can it close that loan within 30 days of the seller obtaining seller’s lender consent, a typical requirement of the seller’s lender?

V. Are you dealing with a seller’s lender which won’t waive a deficiency on the first even though it knows that deficiency will be eliminated in a non-judicial foreclosure; if so, is your client better off allowing the property to go to foreclosure (eg. A credit union)?

W. Is/was this your client’s primary residence or rental in client’s name, with a 1st loan originated prior to 1/01/2009 and current loan balance less than $729,750? Is the mortgage delinquent (or default is foreseeable), and does the borrower’s total monthly mortgage payments (including taxes and insurance) exceed 31% of the borrower’s gross income (effective 2/01/11, Fannie & Freddie HAFA requirement only)? If so, does he qualify for the Home Affordable Foreclosure Alternatives Program (HAFA), which may allow him to avoid foreclosure and any deficiency obligation?

X. Is your client’s first mortgage owned or guaranteed by Freddie Mac or Fannie Mae? If so, and there is a second be aware that Fannie Mae and Freddie Mac regulations effective November 1, 2012, allow a borrower, even if current, to undertake a streamlined short sale, and if the borrower has a valid hardship such as death of borrower or co-borrower, divorce, disability or job relocation in excess of 50 miles from the residence, Fannie Mae or Freddie Mac will give up their deficiency and offer $6,000 to subordinate lien holder(s); however, those lien holders must accept the $6,000 in full satisfaction of their debt. Since the debt of the second lien holder is not eliminated by a non-judicial foreclosure by the first lien holder, many second lien holders will refuse to accept a maximum of $6,000 in full satisfaction of their debt, and borrowers may have to consider other options such as refusing the $6,000 from Fannie Mae and Freddie Mac and negotiating with the second lien holder for a number in excess of $6,000 to obtain release of both the second lien and debt.

Y. Washington State Law, RCW 64.04.007 (1) and (2), effective June 7, 2012, provides that with respect to owner occupied property if the beneficiary or mortgagee intends to release its deed of trust or mortgage for less than full payment of the secured debt, UPON ITS FIRST WRITTEN NOTICE TO BORROWER, must advise the borrower whether it waives or reserves its right to pursue the deficiency and the statute of limitations for pursuing the deficiency is reduced from 6 years to 3 years from the date it released its security interest. Therefore, if your servicer is evasive in its Letter of Lender’s consent or its emails regarding whether the deficiency is being waived, it should be reminded of this statute.

SELLING BROKER CHECKLIST.

Know your Buyer. Is the Buyer prepared to wait up to 120 days to close? If not, a short sale is not for him. Is the Buyer prepared to pay a portion of the short sale negotiator fee, if the negotiator is someone other than the listing agent? Is your Buyer qualified to purchase the property and prepared to do its inspection during the period that Seller is obtaining lender’s consent? Explain to the Buyer that his sales costs may be higher in a short sale if he has to pay part of the negotiator’s fee or pay you a portion of the commission, but that he is getting the benefit of a much lower price.
Do you have a Buyer Brokerage Agreement? Many commission splits in short sales are unequal (eg. Listing office 3.5%; Selling Office-2.5%). While the SOC cannot be reduced by a commission “cram down” (see 1 (L) above), The Selling broker who wants a full 3% commission may want the Buyer to pay the difference between the commission split initially offered and 3% through the Buyer Brokerage Agreement.
When negotiating 22-SS, if you want your offer to be the only offer to be considered by Seller, consider giving Seller adequate time to get lender’s consent, and agree not to withdraw your offer during that time. (See 1 (I) above).
When negotiating an offer, find out from listing agent if the Seller is willing to accept a deficiency, especially if a second. Get a copy of title from listing agent or check with your title co. to see what the liens are. If the Seller refuses to give you a copy of title, insert 22T, title contingency, in your offer, so that you can review the title, and if you see a second, and/or other encumbrances, consider whether you want to continue with the transaction if Seller won’t agree to be bound by a deficiency. Keep in mind; some sellers are actually putting a provision in their sales agreements providing that if lender’s consent is conditioned upon Seller agreeing to a deficiency, that Seller can opt out.
Make sure your client’s financing is in order so that it can close within 30 days of lender consent.
Find out who is going to negotiate the short sale. Is it the listing agent; if not, and a third party, find out exactly what the fee is and who is going to pay it. Many Buyers are blind sided by a last minute request from the short sale negotiator that they pay the negotiator’s fee and transactions end up being restructured so that the Buyer (or its agent) pays the fee because the lender won’t and the Seller can’t. If the negotiator is the listing broker, ask them about their experience in negotiating short sales.
Be suspicious of schemes such as the double short sale and option (See 1 (M) above), as well as a representation by the listing agent that it already has short sale approval, unless a HUD approved pre-foreclosure on FHA insured mortgages or a HAFA pre-approved short sale. Some listing brokers have submitted dummy short sale offers and preliminary settlement statements to lenders to get lender approval before actually getting a valid offer. Ask the listing broker if it says it has short sale approval, how it got it before your offer was submitted to the lender. There may be cases where a prior legitimate offer was accepted by the lender, and did not close because the Buyer failed to perform, but even in that situation, your offer will have to be submitted to the lender for approval, and considered on its own merits. Also, Bank of America does have a program for accepting backup offers without the necessity of setting up a new transaction in Equator, but the backup must be available within two business days of the date after Bank of America has been advised that the original buyer is no longer interested in the property. And, there are other occasions in which your negotiator may be able to obtain a “soft decline” from the lender to allow a quick approval of a new offer.

Carefully consider whether to make an offer within 30 days of a pending trustee’s sale. May be difficult to continue the trustee’s sale to get your sale closed.
See paragraph 1 (N) regarding payment past due HOA dues and utility delinquencies.
See paragraph 1 (U) regarding buyer financing via FHA, RD or VA loans.