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Source of Title Blog : Appraisals

Freehold Found an Economist to Tout Transfer Fee Covenants
by Robert Franco | 2010/05/06

Last month Freehold Capital Partners, formerly Freehold Licensing, issued a press release: The Economics of Private Transfer Fee Covenants.  The source is identified as Dr. Tom McPeak, Ph.D., an economist who claims that he has "always been fascinated by the allocation of land resources."  It was an interesting read, but like most of Freehold's marketing material, it focuses on the theoretical benefits and not the practical, real-world consequences to homeowners.  It dismisses opposing views by calling them "illogical" arguments by biased industry groups. 

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Categories: Appraisals, Title Industry, Title Problems

Source of Title Blog :: 14 comments ::

Mr. Smith Gets A Home
by Robert Franco | 2007/10/30

Let's take a walk through a fictional home purchase scenario and see if we can spot all the problems with the process. Mr. Smith, our fictional buyer, wants a to buy his first home so he calls Ricky, the Realtor. Ricky shows Mr. Smith a few homes until he finds one he wants to make an offer on. The listing price is $150,000. Mr. Smith then calls his local bank and is told that he will need at least 3% down, or $4,500, which Mr. Smith doesn't have. Ricky explains to Mr. Smith that he can still buy the home, but he needs to call Max, the mortgage broker.

Max, tells him that he can get him approved, but the 30-year fixed rate will be higher. "But, don't worry," explains Max. "Your payment won't go up because we will get you a variable rate." Because Mr. Smith doesn't have enough money for closing costs, Max and Ricky devise a plan to allow Mr. Smith to borrow more money than the actual purchase price.

Ricky talks Sam, the seller, into increasing the purchase price to $155,000 and paying up to $5,000 of Mr. Smith's closing costs. "But, don't worry Sam," explains Ricky. "We will still base your commission on the $150,000 so it won't really cost you anything."

Max calls his friend Andy, the appraiser, and tells him that they need the appraisal to come back at $170,000. That way, Mr. Smith will have some equity in the home and the down-payment can be avoided by running it through as a refinance. How does that work? Max and Ricky get Sam and Mr. Smith to back-date a phony land contract. Now instead of a purchase, this transaction has been miraculously transformed into a refinance of a land contract.

Tammy, the title agent, gets ready for the closing. She notices the land contract was never recorded, but doesn't say anything to the lender. At the closing, the interest rate and Mr. Smith's payment are a little higher than he expected. Fortunately, Max is there to help explain that. "I know it's a little higher than you expected Mr. Smith, but that is because you are buying this house with no money down and we couldn't verify enough income for the program we wanted to put you in." Rather than verify Mr. Smith's actual income, which was insufficient, Max put him in a stated-income program. "But, don't worry about it - you make your payments on-time for a year and we will refinance you into a lower fixed-rate mortgage."

"But, what about the prepayment penalty?" Asked Mr. Smith. The loan has a three year prepayment penalty. "Yes, but it's only 1%. It will be worth paying for the savings we are going to get you," says Max.

Then Mr. Smith notices another "funny" fee on the settlement statement. A "yield spread premium" of $2,325 to the broker marked as "POC" on the HUD-1. "The little 'l' after the amount indicates that the lender is paying that fee. You aren't paying it, so you don't have to worry about it." Nobody explains to Mr. Smith that the lender is willing to pay Max more than $2,000 because he sold Mr. Smith a loan with a higher rate than he could have gotten. This, of course, is in addition to the 1% Max had already charged him.

By this time, Mr. Smith is thinking he may be in over his head. Who is supposed to be looking out for his best interest? His Realtor, his mortgage broker, the title agent? Nope. Mr. Smith is realizing that he is unrepresented.

Tammy, in an effort to get Mr. Smith to close the loan, explains to him that because of the land contract, this is technically a refinance. "In a refinance transaction, you have a three day rescission period to think about the terms. And, if you don't like any of them, you can cancel the loan." But, nobody mentions to him that if he cancels the transaction he may be in breach of the sales contract. "You can even have your attorney review the documents during the next three days if you like," says Tammy.

Mr. Smith reluctantly signs and Ricky, Max and Tammy all cross their fingers and hope that the loan doesn't rescind so they can get their checks in three days. Ricky will get $9,000, Max will get about $4,000, and Tammy will make about $1,000 and has the potential of getting more business from Ricky and Max, who are impressed that she was able to convince Mr. Smith to close.

Fast forward one year... Mr. Smith's loan adjusts upward by 2% and his payment went from $1,031.22 to $1,247.17. Unfortunately, he cannot refinance into a lower fixed rate because he wasn't able to make all of his payments on-time and he still cannot verify enough income to qualify for a traditional mortgage.

Now that Mr. Smith's payments are even higher, he will be seeing an attorney about bankruptcy and foreclosure. Like millions of other homeowners who thought that their Realtor, mortgage broker, and title agent were looking out for them, Mr. Smith has learned a lesson the hard way. And, that is how Mr. Smith gets... and loses... his home.

Robert A. Franco

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Categories: Appraisals, Escrow/Funding, Ethics, Foreclosures, Mortgage Fraud, Title Industry

Source of Title Blog :: 8 comments ::

Honest Appraisals
by Robert Franco | 2007/06/08

Ohio Attorney General Marc Dann

Ohio Attorney General, Marc Dann filed suit against 10 lenders for violating the state's new predatory-lending law. The lawsuit claims that the lenders pressured appraisers to inflate the value of homes to allow them to close the loans.

(PHOTO: Ohio Attorney General, Marc Dann)

"Predatory lending is driving Ohio's shameful home foreclosure rate," Dann said in a statement. "Today's crackdown on appraisal fraud will help protect consumers and move us one step closer to driving unscrupulous lenders out of our communities."

Ohio has an incredibly high rate of foreclosures and subprime lending has been particularly problematic. The new law and the action taken by Dann may just be a turning point for the state. The suit asks for permanent injunctions to prevent the companies from engaging in such practices, civil penalties of $25,000 each, and reimbursement to consumers.

Personally, I have always found the appraisal mechanism to be somewhat flawed. When the lenders order the appraisals, they provide the appraiser with the loan amount, and the sales price if it is a sale transaction. Ummm... can anyone explain why the appraiser would need that information? By providing that information to the appraiser, the lender is providing a target amount that the appraiser is supposed to justify (wink, wink, nod, nod).

Why not just provide the owner's name and address, and ask for an "honest" appraisal? I don't mean to imply that a reputable appraiser cannot provide an honest appraisal when they are provided with the extra information, but why leave any doubt? We all know that in just about every sale transaction, the appraisal comes back for exactly the sales price. On refinance transactions, the vast majority of the appraisals come back for just enough to justify the loan. Is that a coincidence?

When the appraisals are based on the sales price, and the appraiser's job is just to "look harder" for comps to justify it, we are letting the Realtors and lenders exercise too much control over the inflation of home values. The more appraisals that are "tweaked," the more comps there are to justify the next one. Then we end up where we are now... with homes over-valued and depreciating. Home prices have reached the point where the appraisals just can't be justified. Not to mention that now that appraisers are starting to get "busted" for some of their work, others are a bit more gun-shy to stretch the values.

The appraisal is there to protect the lender. They should really want an honest, unbiased appraisal. My suggestion is to stop providing the loan amount and sales price and see what happens. Let the appraisers do their job and report the actual value... THEN make the decision to approve or disapprove the loan.

Robert A. Franco


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Categories: Appraisals, Ohio Legislation

Source of Title Blog :: 6 comments ::

Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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