Controversy over HUDs Arm's Length Policy

When HUD announced its most recent changes to the Pre-Foreclosure Sale (PFS) guidelines that take effect on October 1, 2013, the changes that pertained to their Arm's Length policy spiked a quick and concerned response from the National Association of Realtors® (NAR).

In response to HUD's new guidelines, Gary Thomas, 2013 President of NAR, sent a letter to The Honorable Carol Galante, Assistant Secretary for Housing - Federal Housing Commissioner in Washington[i]. His letter addressed the association's concerns regarding the policy change that will no longer allow two agents working for the same Broker to participate in a PFS transaction.

As published in Mortgagee Letter 2013-13, the following defines and outlines the new arms-length requirements for PFS transactions[ii]:

1. Any PFS proposed by the mortgagor or his agent, and approved by the mortgagee, must be an arm’s length transaction between the mortgagor and “would-be” purchaser;

2. HUD defines an “arm’s length” transaction as a PFS between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment. Also, no hidden terms or special understandings can exist between any of the parties (e.g., buyer, seller, appraiser, sales agent, closing agent, and mortgagee) involved in the transaction;

3. No party that is a signatory on the sales contract, including addenda, canserve in more than one capacity. To meet the PFS Addendum requirements, brokers and their agents may only represent the buyer or the seller, but not both parties;

4. The broker hired to sell the property may not share a business interest with the mortgagee (if a shared interest exists between appraiser and sales agent and is known to the mortgagee, it must be noted in the servicing file); and

5. All doubts will be resolved in a manner to avoid a conflict of interest, the appearance of conflict, or self-dealing by any of the parties (e.g., a real estate agent shall never be permitted to claim a sales commission on the sale of his own property, or that of an immediate family member [spouse, sibling, parent, or child], under the PFS procedure).

Item #3 became a hot topic quickly and caused the NAR to respond immediately. Dual agency is a transaction in which two agents work for the same broker and one agent represents the seller and the other agent represents the buyer. Dual agency also applies to a single agent who takes on the role of a transaction coordinator and represents both the buyer and the seller. In either case, the dual representation must be disclosed in writing and be accepted by both parties before the dual agency representation can commence.

The NAR was told that the policy was implemented because HUD's Inspector General detected fraud and abuse in the pre-foreclosure sales process; however, no statistics or reports were provided to NAR detailing short sale fraud by real estate agents. Additionally, the FHA pre-foreclosure sales reports available on HUD Inspector General’s website stated, “pre-foreclosure sales are not meeting minimum net sales proceeds requirements.”

Gary's letter addressed both concerns by stating the 'members take fraud very seriously and each member adheres to a very strict code of ethics.' If there is evidence of fraud by our membership, the association would like to be part of an effort that will develop policies that can effectively address fraud issues. He goes on to say that 'restricting real estate agents from representing buyers or sellers in the short sales process is only going to make the problem worse. More homeowners are at risk of falling into foreclosure if they cannot find a real estate agent, especially one who is knowledgeable about the short sale process, to list their homes.'

To contradict the NAR's argument, Consumer Advocates in America Real Estate (CAARE) stepped in to plead their case. Douglas R. Miller, Executive Director of CAARE, wrote a letter to The Honorable Carol Galante supporting HUDs new dual agency decision.[iii]

Based on CAARE, they have a different perspective on dual agency transactions. Douglas Miller stated while dual agency transaction may be legal in most states in one form or another; it interferes with a consumer's ability to make informed investment decisions.

He wrote in his letter, 'Dual agency (and the legal fiction called “designated agency”) is a form of “representation” that disclaims all representation (it is really no representation at all). Dual agency is illegal in every other profession. It involves conflicts of interest that usually devolve into undisclosed dual agency. As soon as one of the agents or brokers engage in any form of negotiation (most do), undisclosed dual agency results. Undisclosed dual agency is common?law fraud.'

While each of the different viewpoints were submitted to HUD, the result ended Wednesday, September 25, 2013, with an announcement stating HUD intended to lift the restriction on their dual agency policy regarding PFS transactions until a 'to-be-determined date' to allow time to address the legitimate concerns and develop alternative solutions. 'HUD officials told NAR they would reissue Mortgage Letter 2013-23 with all dual agency language removed.'

While this announcement brought good news to NAR, it created disappointment for CAARE. However, is the debate over? What will HUDs final decision be? Will they side with NAR or CAARE? On the other hand, will HUD settle on a policy that meets both contradictory opinions in the middle? Stay tuned to Pink Realty's blog. We will keep you abreast of the issue with update you with any news that follows.

[i] http://www.ksefocus.com/billdatabase/clientfiles/172/3/1865.pdf

http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/letters/mortgagee

[iii] http://www.inman.com/wp-content/uploads/2013/09/CAAREHUDDualAgencyBanLetter.pdf