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Some form of compensation for the homeowners was expected, but what surprised many was the speed at which the Fed came to this decision – previously, officials were going through complaints on a case-by-case basis, a lengthy and time consuming process that would have taken many months to complete. While the agreement announced last week probably means that lenders get away with paying less, the Fed says that the advantage is that borrowers will receive the financial assistance they need “in a more timely manner”.

As part of the agreement, lenders will hand out more than $3.3 billion in cash to those homeowners that were wrongly foreclosed upon, with another $5.2 billion set aside for other forms of assistance, such as forgiveness of deficiency judgments and loan modifications. The amount of compensation due to each former homeowner will vary depending on their individual circumstances, but officials said that payouts will range from a few hundred dollars to more than $100,000 in some cases.

Opening a Can of Worms

Several observers have said that with any luck the payout will have brought an end to this long running issue, but these people are seriously mistaken. In all likelihood, all the lenders have achieved is to give themselves an even bigger headache, for the small matter of dividing up the payouts so that everyone entitled to compensation receives a fair amount will be no walk in the park.

One of the most controversial issues, and something that is absolutely likely to cause arguments later on down the line, is that dozens of affected homeowners that may or may not receive adequate compensation from the deal, have been denied the right to an “independent foreclosure review”, as is stated in the FAQ section of the review.

The problem here is that in order for such a review to be independent, both the lenders and the federal regulators representing the homeowners should have been given the chance to nominate a neutral third party to carry out this review – sadly, it seems that the lenders themselves actually chose these reviewers.

As ProPublica explains in this article:

“Federal regulators designed the program to work like this: Each of the banks would hire an ‘independent consultant’ (approved by the regulator) to conduct reviews of the bank’s foreclosure cases. The bank was supposed to foot the bill, but the consultant, not the bank, was supposed to decide which of the bank’s customers deserved compensation and how much.”

Clearly then, the consultants chosen to do the job cannot be seen as ‘impartial’ reviewers, and so their fairness in deciding who is entitled to how much compensation will inevitably come into question. In fact, the awards will be paid out according to the stipulations of the agreement, which would appear to be arbitrary at best, and will likely be anything but fair. For an example of this ‘arbitrariness’, consider the actual rules for eligibility, which state that only those foreclosed upon between 2009 and 2010 can be considered for compensation – irrespective of the fact that millions were foreclosed upon before 2009.

Like It or Lump It

Perhaps even worse than this arbitrary decision making is the fact that homeowners will have no rights to appeal the independent review process. The FAQ page states:

“The decision of the review is considered final and there is no further recourse within the Independent Foreclosure Review process. The Independent Foreclosure Review will not have an impact on any other options homeowners may pursue related to the foreclosure process of their mortgage loan.”

The Neighborhood Assistance Corporation of America was quick to jump on the agreement, pointing out these deficiencies and underlining my own concerns that homeowners will not be properly compensated.

It pointed out that more than 65,000 cases had been submitted to the review process so far, and that these reviews were turning up even more evidence that huge numbers of homeowners were wrongly foreclosed upon, without being informed that they could apply for loan modification. Furthermore, it states that the $8.5 billion is simply an insufficient amount to adequately compensate concerned homeowners, and slams the $5.2 billion earmarked for ‘other assistance’, saying “this will do little in assisting homeowners stay in their homes since it is not dedicated to principal reduction.”

Who Gets What?

At the end of the day, lenders are left with an even more pressing headache – which former homeowners are entitled to compensation and which aren’t? How do these people go about filing a claim? And what about those who are not ‘entitled’ to any of this compensation, because their homes were foreclosed upon outside of the Fed’s extremely narrow window?

There remain many other unanswered questions too, such as why the arbitrary $8.5 billion figure (which is surely inadequate), and why was the Neighborhood Assistance Corporation of America not allowed to take part in the settlement making? Is there any avenue of appeal for homeowners that miss out?

Until these questions are answered adequately, this problem won’t be going away anytime soon…

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Lenders are verifying home values with automated systems, broker price opinions (BPOs) and in some cases, appraisals. In short, they are ensuring that offers accepted reflect current comparable properties. Despite what lenders publicly say, there is little motivation to complete a short sale; foreclosure is not a bad option for them or one they shy away from.

Key points for buyers interested in short sales to remember:

• Most agents price short sales to generate offers, it is likely and often a virtual certainty that there will be multiple offers and that the accepted offer will be at or above list. Going in 20% lower is likely a waste of time.
• Lenders look at the net amount of an offer. A full price offer with 5% in closing costs is not a full price offer. Look at the net, lenders will.
• Keep the offer clean and simple. Cash is king and so is simplicity, focus on the net amount and demonstrate the ability to close quickly. The fewer stipulations and the shorter the time frames the better.
• Homes are almost always transferring “as is”, repairs are almost never completed.
• Don’t be surprised if the lender counters. Most short sales are not “binding” until approved; in GA it’s fairly common for lenders to counter an offer that’s been under review for weeks or months. Right or wrong, this typically happens as a result of their research on market value. In many cases, it’s wise to challenge poorly prepared BPOs and an experienced agent can often successfully appeal them.
• Don’t be surprised if the process drags on and on. As noted, lenders are mostly ambivalent about short sales; foreclosure is not a bad thing for them. As many former owners and many buyers will note, dealing with the bureaucracy can lead to aggravation, stress and ulcers. The most important thing for a particular seller and buyer is merely one of hundreds for a lender, and they treat it as such.
• Don’t be surprised if the deal falls apart. A short sale has many variables that are completely outside of the buyer’s control. Of all involved, the buyer has the smallest and least influential role after contract acceptance. Often, buyers grow weary of the process and terminate realizing that the ends do not justify the means.

Zillow apparently intends to be able to deliver new marketing and effectiveness value to lending pros by year’s end, a beefing up of Zillow® Mortgage Marketplace, at least according to their media department. Spencer Rascoff, Zillow’s CEO, offered this about the deal:

“We are following our proven strategy of building home-related marketplaces. In the case of Zillow Mortgage Marketplace, we first innovated on behalf of consumers by creating a transparent marketplace where the borrowers’ needs come first, then we connected borrowers with lenders, and now we are investing in tools to help lenders be even more successful serving consumers. Enhancing the capabilities of mortgage lenders ultimately leads to a more vibrant and transparent consumer experience.”

As for Mortech™, that company was founded back in 1987 and currently has 39 employees. Their current software solutions include:

• A product and pricing engine to help lenders quickly match the right mortgage products to the needs of a borrower at the best prices
• A lead management platform to help lenders efficiently serve borrowers from multiple channels both online and offline
• Marketing tools to keep lenders’ brand and rate quotes in front of borrowers throughout the mortgage shopping process

Moretech’s founder and CEO, Don Kracl (top left), also commented with respect to his company’s solutions for helping lenders close deals with Moretech solutions. In effect, many deals go South because of a lack of integration between mortgage estimation tools and the other core elements of purchases – essentially the buyer “bails” when key elements appear to go sour. He said; “we are focused on helping mortgage professionals do a better job at closing deals through a variety of best-in-class productivity tools.”

For some these recent moves by Zillow reveal a sort of shift in direction or focus from an “agent competitive” service, towards an “agent inclusive” company. Business Insider’s Owen Thomas encapsulates:

“Put Simply: Zillow’s trying to buy agents’ affections—through services that help them close deals.”

Buyfolio, Moretech, and other similar acquisitions by Zillow recently, offer nothing dissuasive of Thomas’ suggestion either. It almost seems a late arrival of clarity for Zillow that real estate agents will always be part of the property market equation. Anyhow, the value for the whole industry these “integrations” bring seems to be the important thing, especially given the market now.

Zillow also acquired RentJuice ( $40 million), and Postlets earlier this year.

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It is normal for commercial real estate closing costs, even for an inexpensive property, to run into the thousands of dollars.  As a buyer you need to be aware of these costs and factor them into your overall price for obtaining the property.

All of the closing costs are negotiable between the seller and buyer.  As a buyer you can, and should, have it stated in the contract which party will be responsible for each cost at closing such as title insurance, deed stamps, surveys and settlement fees just to name a few.  However, since RESPA (Real Estate Settlement and Procedures Act) does not apply to properties that have more than 4 residential units, your lender is not restricted in what they can collect from you at closing.

For example, in a residential closing the lender can only collect a certain amount of money to hold in escrow for expenses like real estate taxes and insurance.  In a commercial real estate transaction there is no limitation and your lender could require you to put significantly more money into escrow or charge higher loan administration fees, points or any other cost they deem acceptable.  Because of this it is critical you negotiate all of the fees for your loan with your lender well in advance of closing.

While there is nothing stopping you from closing a commercial real estate transaction on your own, it is highly recommended you use the services of a qualified real estate attorney.  Although this presents an added expense at closing that can run anywhere from $1,000 to $5,000 or more depending on the size and complexity of the deal, it is money well spent.  A mistake made at the closing table can cost you untold tens of thousands of dollars over your entire length of ownership of the property.

With all of this in mind, here is a basic breakdown of what you can expect each party to pay for in a commercial real estate closing.

Seller Paid Expenses

1. Title Policy covering the basic insurance requirements but if your lender requires specific endorsements to the title policy then the buyer can expect to pay for those endorsements.
2. ALTA Survey.  Most lenders will require a new survey before lending on a commercial property.  These surveys can cost anywhere from $800 and up depending on the property involved.
3. UCC Searches.  These are similar to title searches except they are done on any personal property or equipment that is being sold as part of the transaction.  The UCC is similar to a mortgage that is placed on property.  The UCC search tells the prospective buyer if there are any remaining liens on the property and equipment being transferred.
4. State and County Transfer Taxes.  This is normally the deed stamps required by the local jurisdiction to be paid whenever title changes hands on a piece of property.  The rate collected is set by the state or county.
5. Pro-rated expenses up until the day of closing.  For example any utility bills such as water/sewer or electric that are paid on a monthly or quarterly basis will be paid by the seller up to and including the day of closing.  This is also true for any real estate taxes that are owed on the property.  The seller is responsible for paying all taxes owed up to the day of closing.
6. Costs to clear title.  This includes any amounts needed to pay off the sellers existing financing on the property, record satisfactions of liens or mortgages, payoffs to municipalities, or any other expense that must be paid in order for the seller to deliver clean title to the buyer.

Buyer Paid Expenses

1. Environmental Due Diligence.  This includes a Phase I or Phase II environmental study on the property.  However many times a contract will state the seller will reimburse the buyer for this expense if any undisclosed contamination is found in the report that causes the closing to be canceled.
2. Title Endorsements.  As stated above, these are endorsements to the title policy such as an environmental hazard endorsement that the buyer’s lender requires in order to fund the loan on the transaction.
3. Municipal Transfer Taxes that may be required such as operating permits or pre-paid business licensing requirements.
4. Special Survey Additions such as a flood search or topographical contours of the property or aerial views required by the buyer’s lender.
5. Property Inspection expenses.  These include the expenses you incurred as part of your due diligence to determine the status of the property both structurally and for its intended use.
6. Financing Expenses.  These are any fees charged by the buyer’s lender to facilitate the funding of the transaction and can include the cost of recording the mortgage, assignment of rents, recording the deed, lender administration and closing fees.

Some expenses are shared by both parties such as the settlement closing fee charged by the title company to perform the actual signing and recording of documents.  Also any escrow fee charged by the title company to transfer the funds from one party to the other.

Daniel Doran is a 20+ year veteran in the real estate industry. He is a previous owner of a law firm, mortgage and title company. Daniel has also written several books on mortgage modification, short sales and real estate investing. He currently specializes in Commercial Finance and Real Estate Development and is a graduate of Manhattanville College and Brooklyn Law School. You can contact Dan at Buildings By Owner.

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If you’re planning on holding the property for a short while like a fix and flip scenario, then you want to obtain a loan that has the lowest up front fees.  The interest rate and payments on the loan aren’t that important because you, hopefully, will be selling the property quickly.

If you plan on keeping the property in your inventory for a substantial period of time, like a fix and hold scenario, then you would normally trade paying higher up front fees for a lower interest rate and payments.  Over the course of the loan those lower payments will save you much more money then whatever up front fee you may have paid to get the rate.

Once you have determined your loan priorities, then it’s time to go loan shopping.  Here are some places you will want to look.

Traditional Lenders

The lending requirements for a commercial loan are significantly different from a residential loan.  In commercial lending the properties loan worthiness is determined more by it’s income and expenses than it’s actual physical condition or location.  Commercial lenders look at a property in terms of it’s ability to produce income to support its expenses and financing.

A traditional lender will want to see the income and expense statements for the property for the past three to five years.  They will also want to determine what the NOI (Net Operating Income) for the property is. All of this is done to determine if the property is a sound financial investment.  Once they determine if this is true, then they will look at the condition and use of the property as well as the financial and credit status of the borrower and make a final lending decision.

Non-Traditional Lender

These are also known as creative financing lenders.  One of the more common methods of creative financing is to assume the existing financing on the property.  This is when you agree to take over the seller’s current loan/loans that exist on the property.  Many commercial loans are freely assumable so you can do this without getting the approval of the lender.

However if the seller’s loan is not freely assumable then you will need to qualify for the loan with the lender.  The benefits of doing this instead of getting your own financing on the property are when the seller has a very attractive loan on the property like a low interest, long term loan.  If you were to apply for a loan you would not be able to get these favorable terms so assuming the sellers financing is very attractive.

Another method is using a Master Lease.  This used with a seller who is looking to avoid paying taxes on the gain from the sale of the property right now but can’t use a 1031 exchange to delay the taxes.  In a master lease the buyer agrees to pay the owner a set lease payment every month and in turn gets to run the property as if they owned it.  The lease term can be anywhere from three to five years and will include an option to purchase the property at it’s current market value when the lease expires.

The benefit to the seller is he is only charged capital gains on the current value of the property and not the future value of the property when the deal actually closes.  Of course if the property should decline in value during the course of the lease then neither party will want to exercise the option and ownership of the property will revert back to the seller who can then decide to sell it or enter into another master lease agreement.  A master lease can also be good for a buyer as it gives them time to see if the property is going to be a good investment without having to take the leap and close on it immediately.

Another common creative finance technique is the Blanket Mortgage.  This is where you offer the seller or traditional lender the added security of giving them a lien not only on the property in question but also on another piece of property you own.  This means if you go into default on the loan then the lender has the right to foreclose on all of the properties they have a security interest in and not just the property you are buying.  This type of incentive may get a lender to approve a loan they ordinarily would have denied.

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This is amazing when you consider that when shopping for big ticket items, 89% of Americans comparison shop. What’s bigger than your home?

Given the fact that variations between lenders can be as much as 1.5% for a 30 year fixed, these homeowners missed out on some potential savings.

Doug Lebda, founder and CEO of LendingTree note:

“Deciding on a mortgage is likely the most important financial decision consumers will ever make, yet borrowers are more often than not taking the first offer that comes their way, failing to fully capitalize on low rates. It is important for borrowers to understand that they have the power to choose which loan and which lender to use. It is acceptable to negotiate with lenders and to walk away if you are not fully satisfied. Consumers need to be engaged in the mortgage process to secure the best deal.”

The survey revealed that during the first week of August, 2012, quotes for a consumer with a 759 credit score ranged from 3.25% to 4.625% – that’s a huge variance. On a moderate loan amount of $260,000, the cost savings to a borrower would be $214 per month, $2,568 annually and over the life of the loan…? $74,000 dollars!

“Many people approach the process of getting a mortgage with apprehension, thinking they have very little control of the end result. But rushing through the process without comparing loan offers could be a costly mistake,” Lebda continued.  ”LendingTree provides borrowers with an easy-to-use, educational tool to help consumers compare multiple mortgage loan offers and to choose the loan and the lender that best suits their needs and financial situation. Our goal is to ensure every borrower is confident they have received the best possible value on their mortgage.”

Perhaps some of this trend can be attributed to the current atmosphere of doubt and uncertainty when it comes to financing home purchases. Lenders have been tight with the purse strings since the GFC (global financial crisis) so perhaps many of these individuals who are not comparing loans are simply relieved that they can obtain a loan.

Perhaps a restructuring of the mortgage broker industry is in order – for example, changing incentives to finding consumers the best deals. What do you think?

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CoreLogic, the logic and information systems giant, recently announced a joint venture with FICO, to provide a new risk assessment tool – the FICO® Mortgage Score Powered by CoreLogic®.

The new “mortgage credit score” is expected to lessen risk for lenders by combining information derived from traditional credit repositories with unique data from CoreLogic’s CoreLogic CoreScore™ , to create a more complete profile of a consumer’s credit risk.

CoreLogic maintains that their model, which has been created to apply specifically to mortgage loan risks, is more accurate than currently available models. Why the need for a new analytical report?

FICO recently released a quarterly survey, done by the Professional Risk Managers’ International Association (PRMIA), which showed that about 75% of bankers surveyed expected their delinquencies to either increase or stay the same over the next six months.

Tim Grace, Senior VP of Product Management at CoreLogic said:

“In this complicated operating environment, lenders are increasingly turning to new data sources to help better interpret a consumer’s credit risk, so that more loans can be approved while mitigating potential losses. Today, we are announcing an industry first—a new composite, multi-bureau credit score generated from both traditional credit data and CoreLogic supplemental data, expanding the applicant credit spectrum by including property transaction data, landlord/tenant data, borrower-specific public data, and other alternative credit data. For a top-20 lender processing 300,000 applications a year, adopting this new score could translate into 3,900 more loans approved every year along with a net financial benefit of $14.5 million. As such, it not only provides a more complete and predictive evaluation of a consumer’s credit risk profile, but it can empower lenders to better mitigate risk and approve more loans for more consumers.”

“The new FICO Mortgage Score is designed especially for prequalification and origination and delivers increased insight when it matters most,” Joanne Gaskin, senior director of Scores product management and mortgage practice leader at FICO, stated.

“For many lenders, the increased predictive lift will translate into thousands of new mortgages, and the avoidance of millions of dollars in bad loans and associated costs. This innovation is a win-win for lenders and consumers alike.”

While automating the credit decision process may be necessary, am I being sentimental in saying that there is no replacing the human mind when it comes to determining a credit risk assessment? Computer models cannot replace human reasoning. Or am I wrong?

Had this new technology been available before the recent sub-prime lending fiasco would it still have happened? I believe yes, but that’s a story for another blog post.

Chime in, please mortgage professionals. What is wrong with my logic?

For many borrowers, having a down payment isn't enough © Scanrail - Fotolia.com

The report was compiled by the Federal Reserve, following a survey of major lenders in the US, and found that banks were much less likely to grant a mortgage to borrowers than they were back in 2006, before the market crashed, reported the New York Times.

Looking at the example of a borrower with a FICO credit score of 620 and a 10% down payment, the report found that the majority of banks were unlikely to issue a mortgage to any individual in this situation.

For borrowers with a FICO score of 680, the report states that moderate net fraction of banks were less likely now than in 2006 to issue a mortgage, irrespective of any down payment.

Furthermore, the report states that even borrowers with a FICO score of 720 could struggle to get accepted for a loan, as, compared to 2006, “a modest net fraction of banks were less likely to originate loans to borrowers with a FICO score of 720 and a 10 percent down payment.”

However, survey respondents did indicate that the likelihood of a loan being issued in the case of a 720 FICO score would increase if the borrower was able to put up a deposit of 20% or more.

The report underlines the general perception that while mortgages continue to be offered at record low rates, numerous home buyers cannot get accepted for one, and even those who do find they cannot qualify for the lowest rates.

In its analysis of the report, the New York Times explained that borrowers with a FICO score of 720 would likely receive a loan at 3.70% interest, for a standard $300,000 fixed rate mortgage over 30-years. Meanwhile, a borrower with a FICO score of 620 would likely be offered a 5.07% mortgage interest rate, which amounts to an extra $242 a month on their mortgage repayment.

YOU WILL TELL US EVERYTHING!!! © imageegami - Fotolia.com

Take one recent incident, recently reported by the Wall Street Journal, in which one borrower was ordered to produce a copy of her divorce certificate – from two years ago! In addition, she faced a grilling over a measly $200 deposit paid into her savings account by her ex-husband, which he did in order to help her pay for raising the kids.

The problem comes down to the fact that lenders are being more cautious than ever about who gets approved for a loan these days. This has led to a tightening of lending standards across the board, with applicants having to submit to some serious scrutiny of their finances, so that banks can be sure of their ability to pay off the mortgage.

As a result, pretty much anything goes as far as lenders are concerned. They can ask questions about absolutely anything – such as cash deposits in the applicant’s bank accounts, their income, disputes about late payments, and many other seemingly trivial matters, even if they took place years before. There have even been reports of mortgage lenders asking to see college degree certificates and transcripts in order to ‘verify the applicant’s employment history’, reports the WSJ.

One particular red flag that is sure to invite a flurry of questions is any previous inquiries into a person’s credit. As such, anyone who has taken out financing or applied for a credit card is sure to get a grilling when they try to secure a mortgage.

Rhonda Porter, a Seattle-based loan officer, admitted that consumers are beginning to get a little irritated over the lender’s growing demands:

“I have customers who know they’re a strong [borrower], and they’re still asked for documentation. Some of them are getting their feathers ruffled a bit.”

Indeed, the questioning has got so bad for some borrowers – like those who are trying to refinance – that many just give up the ghost rather than submit themselves to what has basically become an interrogation.

And let’s face it, who can blame them?

New Consumer Financial Protection Bureau proposals could lead to cheaper mortgages for some consumers © Hedgehog - Fotolia.com

The New York Times reports that the agency is determined to do away with origination fees, which are calculated depending on the value of the loan being take out. Many consumers confuse origination fees with discount points, which are usually charged when a borrower wants to secure a lower interest rate on the mortgage.

In addition to doing away with origination fees, the Consumer Financial Protection Bureau wants to implement a new rule that would force lenders to offer interest at a lower rate if the borrower decides to pay off discount points upfront. In such a case, lenders would be compelled to offer a loan option that doesn’t include any discount points.

The thinking behind the changes is to make life easier for consumers wishing to compare different loan offers, explained Richard Cordray:

“We want to bring greater transparency to the market so consumers can clearly see their options and choose the loan that is right for them.”

Before being formally submitted, the proposals will need to be scrutinized by a special panel and public review, which should take place this summer. The Consumer Financial Protection Bureau says that so long as the proposals are accepted, they should come into effect by January 2013.