If there was ever a time when federal regulators should be knocking heads it’s now. The plain truth about the subprime meltdown is that investors got greedy and lenders began looking the other way. There’s plenty of blame to go around but now the blame rests with those who should pass rules that stop the industry from manipulating the system.

Final subprime underwriting guidelines (1) were released recently by the patchwork of federal regulators charged with overseeing the soundness of our banking system. Guidelines aren’t rules they are suggestions. And they apply only to those lenders under jurisdiction of the federal agencies. Calling this a ho-hum approach is charitable.

It was almost predictable that regulators would emphasize the need for even more arcane disclosures to ensure that consumers will receive information they need about the features of these loans. They didn’t disappoint us. We’re headed for more mandatory disclosures that attempt to simplify what is a very complex transaction. Worse, lawyers – the last people who should be writing a simple explanation for anything, will write them.

The feds decided to sidestep any call for increased regulation of third party originators, leaving that issue in the laps of wholesale buyers of loans from brokers. Not a good idea. Why? Nearly all of the disclosures are made at or within three days of loan application. That occurs long before a lender or investor sees the loan. Add to this the fact that some mandatory disclosures are so out of date they actually contribute to misleading borrowers.

The final TILA Reg Z disclosure doesn’t even contain the actual loan amount. More than a few major fraud cases have shown that unscrupulous brokers use this fact to trick borrowers. The ancient RESPA-required Good Faith Estimate form, which is rarely completed correctly, is an industry joke. There isn’t even a federal penalty for those who don’t provide the form! Other examples abound.

The Beltway would rather encourage lenders to be more lenient in working out potential foreclosure problems than clamp down on rules designed to prevent all of this in the first place. No one in Washington has the stomach to create real change so the regulatory team has thrown the ball back to lenders and called for an early lunch.

What the agencies failed to address was that many loan servicing agreements prohibit the Servicer from modifying loan agreements entirely, or limit such modifications to no more than 5-10% of a total pool. Further, loan modification may run afoul of FASB rule #140, (2), which says that if a bank alters the terms of a loan it has pooled, it cannot keep the loan off its books. It must repurchase the loan, return it to the books, set aside a reserve for losses, and actively manage it. The industry is asking for relaxation of this rule.

Two years ago, these agencies wanted to tighten this rule to keep predation in control but were shouted down. Endless hearings will keep the issue on hold for a long time. Meanwhile predators who’ve survived the upheaval will design new and improved loan programs complete with premiums for delivering above par rates. How will this be resolved? By the entity that pumps the most money into congress for re-election campaigns.

Published by Inman Real Estate News
July, 2007

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Gordon Schlicke is a consultant and expert witness on predatory lending and mortgage fraud, RESPA, the HUD-1 Settlement Statement, federal and state lending compliance, and RESPA-compliant Affiliated Business Arrangements. He is affiliated with CE Forward, Inc. and the National Association of Mortgage Fiduciaries.
 
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[1] See FDIC Press Release 55-2007 issued 6/29/07

[2] Federal Accounting Standards Board

At the height of the bubble run up in 2005, there were hundreds of people attending foreclosure auctions, encouraged to make their millions in real estate, usually after attending a get-rich-quick seminar.  As you read this blog post, the get-rich-quick hucksters are still luring in the same type of person who thinks there’s a magic diet pill that will help you lose those last ten pounds, and who thinks there’s still a way to make six figures with no experience, or in the case of this company, $2,000 per hour.

Readers on this blog and elsewhere have been highly critical of our state lawmakers for being reactionary and passing laws only after they would have done any good.  In this case, our legislature has tried to be pro-active and place boundaries around “distressed property transactions.”  Yes, the law as passed has some flaws.  Yes, there are parts that could be re-drafted for clarity.  However, we’re stuck with it until the next legislative session so we might as well learn how to live with it. 

This law should have come as no surprise to anyone in the industry.  Governor Gregoire’s task force recommended passage of this legislation and Attorney General Rob McKenna put “foreclosure rescue scam legislation” on his agenda for 2008.  But real estate agents were caught off guard. They’ve been swept into the definition of being a “distressed home consultant” by way of not being excluded. 

The highest risk transaction under the new law is when a homebuyer purchases a distressed home from a distressed homeowner and is allowing the homeowner to rent the home back, and is also offering to share any equity upon a future sale.  As of June 12, 2008, taking part in a distressed home transaction such as this will become enormously risky. I recommend that get-rich-quick investors “invest” several thousand dollars to have an attorney on retainer and available to you 24/7. Critics of the new law say that this means homeowners who might have otherwise been helped by the “rescue” crowd will now end up going into foreclosure.  Critics have miraculously turned themselves into victims and state that there are only a few bad apples, only a few scammers and the rest of them are above-board, honest and honorable yet this website devotes an entire section on exposing a long list of “possible” get rich scammers, also known as the site’s competitors.

If it is true that the foreclosure rescue angels have floated from the heavens down to the earth and now can be seen wandering the streets of Seattle wearing a baseball cap and a jean jacket with the slogan “I buy homes in foreclosure call me” on the back like the guy who was in front of me at the Sprint store this week, then Realtors should be pro-actively seeking out the Larry-the-Cable-Guy angel rescuers and bringing them together with homeowners in financial distress.  However, I believe the opposite to be true.

Instead, I believe most the rescue guys and gals never met a Realtor they liked nor do they have any intention of coming anywhere near a Realtor, (because they want to keep the commission for themselves, as part of their riches) are in it for the cash, couldn’t give a rip about the homeowner, and are taught how to embody the caring compassionate stance of someone who does care in order to use the homeowner’s trust against them to “get rich quick.”

I believe that this law, no matter how flawed, has more good consequences than bad. 

Real estate agents and Realtors are on the front lines when the homeowner comes out of denial and starts looking at their options. 

For those real estate agents and Realtors who say, “Well, this law is so confusing that I’m not going to work with any distressed homeowners.” First, that’s going to rule out a whole lot of your market area in the next several years and second, would you answer the question differently if you were the one who sold them the home?

It is possible that fear will drive Realtors to not take these listings, although I don’t think that will happen because there are still way too many hungry Realtors out there who will take a listing at the drop of a hat. If the law does scare Realtors away, this means we’ll see more foreclosures in Washington State. Get-rich-quick buyers can still buy the home at the trustee sale or directly from the lender after foreclosure; neither of these types of transactions is affected by the new law. 

I have heard people say “this law will be repealed the next legislative session.”  I’m not so sure about that, nor am I sure that Realtors will automatically be “exempt” from being a “distressed home consultant.”

It’s time we acknowledge that distressed home transactions are becoming more and more specialized.  The topic of foreclosure is not taught in real estate pre-licensing classes.  It’s time to admit that a real estate agent with ZERO training on foreclosures and short sales is doing a home seller a grave disservice by taking that listing.  More harm could be done in this instance than good, and it appears as though our legislature understands this.  Unfortunately, the get-rich-quick investors probably know more about foreclosure laws than your average real estate agent. Average real estate agents, you have some work to do.

Real estate agents ARE distressed home consultants when they take a home that’s in pre-foreclosure or a home that has short sale terms.  Exempting real estate agents from this law will not happen, nor should it.

Real estate agents should embrace this new law. Some might decide that distressed property is going to be their new market niche.  Commercial real estate, property management, multifamily homes, resort and vacation homes, all are specialty areas.  It’s time that the real estate industry creates a new specialty area for distressed property transactions.  Perhaps all “get rich quick” investors will be required, at the very least, to have a real estate license (or some other sort of professional license,) and all real estate licensees who want to become purchasers of distressed homes will now be taking part in a high risk transaction with elevated duties. There are other ways for real estate agents to buy homes for investment purpose. Maybe this option should only be for those with the capital to cushion the risk, the willingness and ability to consider the homeowner’s interests, and the education to feel secure in their actions.

Becoming a fiduciary of a distressed homeowner is not a human rights violation. 

I’ve been on the lookout for an attorney who is interested in serving the short sale and preforeclosure homeowner market.

Realizing that many homeowners in financial distress often do not have access to thousands of dollars to pay for an attorney, I believe that a flat fee arrangement for homeowners to receive a set, minimum number of hours of an attorney’s time is a good idea.

Now someone’s done just that. Craig Blackmon and Marc Holmes are offering a document review service for short sale homeowners at a flat fee of $300.