FREDDIE & FRAUD!!
Real Estate Investor · Gainesville, GA · Member since 2009 · 241 posts · 34 votes
Any thoughts!! Is this new??
http://www.freddiemac.com/singlefamily/news/2010/0412_payoff_fraud.html?attr=EMC-SFNCAEFTSPF
Here is a great artical on this subject
http://californiashortsalelawyer.com/2010/04/freddie-mac-article-on-short-payoff-fraud/
Interesting they reference a Fraud Investigation Unit that was started long ago.
here is a 'clickable' link
http://www.freddiemac.com/singlefamily/news/2010/0412_payoff_fraud.html?attr=EMC-SFNCAEFTSPF
Here we go again! This is opposite to a bullentin that The Attorney's Title fund issued months back. They would not insure the transaction if the Buyer/Investor did not disclose to the end lender the purchase price of the A-B contract. They later revised this stating, as long as the "right to resell " was in the contract they would insure. Hopefully this will be short-lived!
As long as there is a title company that understands what we do and willing to close our transactions, and we continue to disclose everything to all parties involve, we will continue to do A-B-C transactions..
I'm sure there will be webinars coming out soon about this issue. I would not panic quite yet. Where there's a will there's a way! This is nothing new, how many times have laws and regulartions come out to discourage or eliminate Investors from make a decent living.
If it comes to it we'll just have to find, legally, a way around it!
This stuff scares the crap out of me. I can see why the perception people have of Investors is that we are defrauding people.
I know most of the active members here on this short sale forum do things differently than me but the reason we wait to relist the property until it's pretty much accepted is this line here: [i]
The facilitator neglects to disclose to the lender/investor that there is an outstanding offer between the facilitator and a second end-buyer for $95,000. [i]
Now you can interpret this many ways....as an investor, I don't need to TELL MY NEGOTIATOR (i.e. my facilitator) that I have a higher offer and the facilitator really has no knowledge...Technically in my case, we usually don't have an offer by approval. We get the offer AFTER approval and still do a simul close. We probably eat away at our profits because we do drastic price drops to get the offer in, in some cases, AND on occassion we've asked for extensions, but I still feel safer getting an offer close to or after an approval.
Thoughts?
I know most of the active members here on this short sale forum do things differently than me but the reason we wait to relist the property until it's pretty much accepted is this line here: [i]
The facilitator neglects to disclose to the lender/investor that there is an outstanding offer between the facilitator and a second end-buyer for $95,000. [i]
Now you can interpret this many ways....as an investor, I don't need to TELL MY NEGOTIATOR (i.e. my facilitator) that I have a higher offer and the facilitator really has no knowledge...Technically in my case, we usually don't have an offer by approval. We get the offer AFTER approval and still do a simul close. We probably eat away at our profits because we do drastic price drops to get the offer in, in some cases, AND on occassion we've asked for extensions, but I still feel safer getting an offer close to or after an approval.
Thoughts?
I'm interested to seeing what Jeff Watson, and/ or the guys from Old School Title think about it.
Regardless of which method the Investor uses, in most cases there will be a 2nd contract higher than the A-B purchase price. This will probably cause a lot of trouble for the majority of Investors doing Short Sales. I'm curious as to what others think about this.
I guess the BIG question is if you're contract clearly states you intend to resell the property immediately for profit, is it fraud? I notice that is not addressed anywhere.
From what the bullentin says, it looks like the 'right to resell' will be one of the red flags for the lender to look for to see if there is a 2nd higher offer on the property.
I believe the fraud will come into place when there is a 2nd higher offer and if the servicer/lender asked about it, denying or not disclosing that there is.
I tried to google it and found this:
http://coloradospringsrealestateconnection.com/colorado-springs-short-sale-scam-is-mortgage-fraud/
Read the read section.
I see the point that the Investor is trying to make, but honestly the Blog owner seems to be correct, IMO, as far as what Freddie is stating. Only time will tell how this plays out.
Let's say the blogger form Colorado is correct - he stipulates:
* The investor MUST make a FULL DISCLOSURE of the intent to make a profit off of the immediate re-selling of the home – to both the BANK and to the SELLER.
* The investor CANNOT have a simultaneous close – meaning: The home must belong to the Investor for a period of time before being resold to another Buyer, even if it is only for just 24 hours.
* The investor MUST have WET (available) FUNDS to purchase the home even WITHOUT a new buyer. Basically, each deal should be able to stand alone.
That's very easy for most to comply with. If you do not have enough personal cash to be able to borrow hard just in case your flip does not go as planned - then do 2 flips with someone else and voila you will have enough money.
It just takes 10% and you can line up some HML to back you just in case. As for holding for 24 hours.... hold for 48 and pay a little more to the transactional funder.
As for disclosure - well if you are not already fully disclosing to all parties then you are "crazy". Disclose! Disclose! Disclose!
And, for the record..... How is it that these multi billion dollar quasi public/private institutions like FREDDIE cannot figure out how to protect themselves against the little investor doing a flip? Is it really possible that they are not able to conduct a transaction where they know the true value of the property? Are they really claiming that we are smarter than they? Sorry for the rant - but really - the institutions are more than capable of protecting themselves without crying fraud at every turn. There are a dozen ways they could ensure they are protected ... the reality is that they want cash offers that will close in 15 days and they want the guy who is paying cash to pay full retail price as if they were financing the deal...... What B school did they attend? A friend of mine works with cars - he buys with cash at auction then re-sells to finance (payment) buyers at a higher price - this is how our economy works. A wholesaler works/creates a deal and then sells to a retail buyer for a spread - how is this fraud?
OK I am done. No more espresso for me.
I was going to comment on the blogger from CO too but for the life of me cannot remember how I got to that particular blog :) Maybe not enough expresso for me!
Oh there it is just a couple of posts up! And it isn't even the blog I was going to comment on! Oh well.
Guys this is nothing new even though this particular FM posting may be somewhat vague.
Jeff Watson has done numerous webinars on this subject but I suppose he will be doing a few more...sorry Jeff
I think JCC addressed most of the issues very well so I thought I would just add my 2 cents.
FM posted this bulletin last October:
http://www.freddiemac.com/sell/guide/bulletins/pdf/bll0924.pdf
Page 6 States:
Freddie Mac recognizes the benefits provided by private investors who invest in the housing market by purchasing distressed properties that are legitimately renovated and resold at a fair market value. Thus, while we are strongly committed to preventing improper transactions, including property flips that are predatory, fraudulent or otherwise illegitimate, Freddie Mac encourages continued legitimate and sustainable investment in distressed properties and distressed neighborhoods.
Again in their November update:
http://www.freddiemac.com/learn/pdfs/uw/bp_propflips.pdf
[i]Transactions that Freddie Mac Considers to be Property Flips
The term property flip refers to a transaction in which a property is purchased and quickly resold for a significant profit. A large increase in property value coupled with a short time period between transactions may indicate that the property is being flipped. Properties targeted for property flips generally include properties that can be acquired at lower prices than other properties in the same neighborhood and often include real estate owned (REO) properties, properties subject to a "short sale", other distressed properties or newly constructed properties where the builder or developer must liquidate housing inventory quickly. A property involved in a flip may be resold on the same day or within days, weeks, or months of the purchase. In some cases, the seller of a property flip never holds title to the property, but instead sells or assigns their interest in a contract to purchase the property to a third party.
Property flips are not inherently illegal and not all transactions involving a rapid purchase and resale are improper. Legitimate property flips are acceptable transactions in connection with loans purchased by Freddie Mac. Some indications of property flip transactions that may be legitimate include:
• Sales of properties that the property seller acquired at below market value after purchasing as a result of a distress sale (i.e. REO sale, short sale, tax lien sale, bankruptcy trustee's sale, etc.), where any increase in the sales price over the property seller's acquisition cost can be clearly shown to be a result of the difference (if any) in the market's reaction to distress sales and typical arms-length market sales.[/i]
FM even states they will buy the loan:
[i]Best Practices for Loans Involving Property Flips or Suspected Property Flips
To assist Seller/Servicers in their responsibility to ensure that any Mortgage involving a property flip or suspected property flip meets our definition of an investment quality Mortgage, Freddie Mac recommends that they consider adopting the following best practices:[/i]
RE; Red Flags
They don't need Red Flags for my offers which clearly states that "I am an investor who intends to purchase the property and immediately resell it for a profit and that profit may be substantial!"
RE; Second/Higher offers
The offer made by the C/end buyer wasn't made to the lender in an effort to buy a short sale.
I don't see the lenders name on the Purchase and Sale Contract submitted by the end buyer.
The C buyer is not buying a short sale.
They are making an offer to buy a property that is Free and Clear in which the increase in the sales price over the property seller's acquisition cost can be clearly shown to be a result of the difference (if any) in the market's reaction to distress sales and typical arms-length market sales.
RE; Simultaneous Closings
The operative word here is "Back-to-Back" closing where each closing including it details are completly independant of the other which includes the funding.
RE; Colorado Poster
Looks like she is taking quite a beating.
Maybe she should have googled ( colorado real estate commision+E47 ) before making that post. lol
BOTTOM LINE; Freddie Mac recognizes the role that Investors play in Legitimate Property Flips associated with Short Sales.
Does that mean someone won’t try and circumvent the process? Of course not. There will always be someone out there trying to figure out a way to beat the system.
Our biggest problem is separating ourselves from the fraudsters who use short sales as a vehicle to ply their trade.
The best way to do that is to FULLY DISCLOSE.
You know what I find so funny about all of this is that regardless if a buyer is buying the property to live in or not. The property is being bought as an investment that the buyer is hoping will go up in value in order to profit. Regardless whether that profit comes in one hour, one year or ten years from now they are still speculating to make a profit. Do you think if the seller new the buyer is eventually making a profit from the transaction that they wouldn’t sell it? Of course not, that is why the buyer is buying it! The seller/lender has done their own independant evaluations and determined what is a fair price that they are willing to accept. So all of this is just hype.
So someone is ticked we are making a profit, oh well.
That’s Capitalism and Free Enterprise at work.
Just my 2 cents.
Ok, maybe a $1.00
Thank You Doug!
Doug the majority of Investors out there use this clause in their contract. If the Freddie Mac new policy sticks that will not matter. Below you'll see what I mean by the 'right to re-sell' clause will be a Red Flag.
Sudden borrower default, with no prior delinquency history, and the borrower cannot adequately explain the sudden default.
The borrower is current on all other obligations.
The borrower’s financial information indicates conflicting spending, saving, and credit patterns that do not fit a delinquency profile.
The buyer of the property is an entity.
The purchase contract has an option clause to resell the property.
*Here`s a short video re:
http://www.reiwebinar.com/short-sale-fraud/go/
The thing that pisses me off is that Freddie is crying fraud only to protect themselves. its not like the owner or end buyer is getting screwed (assuming we are honest & ethical here on BP) and they both understood the process and our intentions from the start. Hell Freddie themselves have known each and every time what the intention was, but now they are pissed off because they are selling low to us and we are selling higher. Boo-Hoo. Poor Freddie, whatever will they do? Oh wait I know - continue to rake in billions and act like its still not enough and cry that its not fair that someone else is making money off of their misfortune. Why the hell should I be expected to disclose another higher offer to the bank? If the owner gets another offer then its on THEM to tell the bank. I have NO relationship or obligation to the bank.
If they are saying this is fraudulent then what the hell do they call it when they get loans from the FED at 1 or 2 % and "flip" that money to me for the low rate of 5%?
Isn't there something akin to a player's union in professional sports in the investment world? There sure should be.
If you don't have enough for the 1st flip how do you do the other 2 flips? Also, let's say you do have the 10%. How do you get the HML without the accepted offer which you can't get without the money - seems like a catch 22 that I am trying to get figured out.
It is a long legal stretch to argue fraud or any type of fiduciary responsibility of an investor to the bank. He is legally the "purchaser" of property under a contract the bank is either accepting or not. To argue he has any responsibility to pass on higher offers to the bank is way out there legally. Maybe we need to restructure our entire economy to eliminate all wholesailers of all types of products and require them to pass their resell contracts and clients on to the seller.
Good question. The key words were to do "with someone else" i.e.., a partner who will share some profits with you. Then bank the profits and you should have the 10% for the HML. You then asked about getting the HML and the steps involved. The point in the post was that you would have the "ability to buy" the property should the flip not go as planned. So if you have the 10% then a HML approval letter should be satisfactory to prove that you had reason to believe you could close on your own should the deal sour.
You should be able to get a HML approval letter by talking to a HML lender and telling them you want to start making offers. They usually give you a generic approval letter based on the information you have told them and you showing them you have some money to cover their requirements. That letter is acquired prior to identifying a property. If your HML lender insists on only looking at and writing a letter for a specific deal then find a new lender. There are plenty of HML's that understand you want to use their letter to make multiple offers and then borrow once you are lucky enough to get an offer accepted.
Here is a great artical on this subject
http://californiashortsalelawyer.com/2010/04/freddie-mac-article-on-short-payoff-fraud/
dustin - thanks for the great article!
JCC, all due respect, regarding the HML, I don't know any conventional HMLs that will a) provide financing without taking a lien against the property and b) loan in excess of 65% LTV.
Please clarify this.
Also - even over-disclosing your purchase and subsequent sale details to all parties involved I fear will STILL not guarantee exemption from non-compliance and possible civil or criminal sanctions given the wide latitude on interpretation of what constitutes a badge of fraud that Freddie's opinion has over ours. Unfortunately, the federal government rarely loses, even when they are dead wrong. They have deeper pockets than all the investors and their attorneys put together. Hate to be negative, but it's the truth - at least up to now.
It just takes 10% and you can line up some HML to back you
JCC, where can you get Hard Money for 10 % down in California?