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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

Source of Title Blog ::


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

1242 words | 5609 views | 8 comments | log in or register to post a comment

I have seen so many loans like this...
I have seen so many loans like this being a signing agent. I always thought to myself it was fishy 
by Cathy Yuille | 2007/10/30 | log in or register to post a reply

They would all be doing time in fed...
They would all be doing time in federal prison for bank fraud or conspiracy to commit bank fraud...not to mention the civil suits smith has against them for fraud, contract breach and possible negligence. I am sure the State would also be investigating them for larceny 
by Kevin W. Ahern | 2007/10/30 | log in or register to post a reply

One of the other questions to ask i...
One of the other questions to ask is where was Mr. Smith in all of this?

If someone says you are getting something for nothing and throwing around a bunch of concepts that you don't understand that sound like they are of questionable legality, how much responsibility should you have? Smith himself participated in the fraud here with the phony land contract, so I'm not sure how much he can claim to be the victim if he was a willing participant in part of the fraud.

A lot of the bad loans had willing borrowers who didn't really want to ask questions because they knew they wouldn't like the answers.

If Mr. Smith had talked to an experienced attorney before the process began instead of after, he might have been much better off.
by David Jenkins | 2007/10/30 | log in or register to post a reply

I believe that these types of closi...
I believe that these types of closings occur on a regular basis. Some are just more blatant about it than others. As for federal prison, I think it is unlikely. The prisons are not large enough to hold all of those they would have to convict. However, I do think that as more borrowers relate their closing horror stories to bankruptcy trustees and foreclosure attorneys there will be a price to pay.  
by Robert Franco | 2007/10/31 | log in or register to post a reply

Your 3/14/07 commentary struck me a...
Your 3/14/07 commentary struck me as if your were anti notary agent signing, and that attorneys only should be those "impartial witnesses" during such signings. Do you take into account that all of the preliminary paperwork has already been done by the lender, the title co, etc.? AND that the responsibility concerning ethics and legalities lies with those parties? No, we're not lawyers, nor are we supposed to perform such functions. We are there as impartial witnesses to back up the validity of the abovementioned parties. Please, don't forget that impartiality plays an imortant role in these transactions. There should be no need for an attorney a at a signing, for that is all it is. If the borrower chooses to hire an atty before the papers are drawn up, fine. If the borower decides to hire an atty after the fact, that is fine as well. But to have an attorney performing the signing IS a conflict of interest, only because the borrower doesn't know what relationship the atty has with the lender, title company, etc. Remember, atty's are a shrewd bunch, and in my experience, it's a toss up as whether the atty is on the borrower's side IF the transactions (signing) is done with the atty presiding. 
by Richard Mann | 2007/11/05 | log in or register to post a reply

Well, as I have stated previously, ...
Well, as I have stated previously, South Carolina is an attorney-only closing state. And, yes, there are mortgages out there in South Carolina that have obviously been conducted illegally with not attorney present. I think South Carolina has the best real estate law concerning closings. There shall be an attorney representing the borrower at closing, no bank attorney, and no signing agents. The attorney is responsible for looking out for the borrower's interest. Not all attorneys do this however, especially with these subprime lenders. I would never buy a home without an attorney representing my interests.

by Janis Talbot | 2007/11/05 | log in or register to post a reply

Richard: I assume you are referrin...
Richard: I assume you are referring to my post "Attorney Closings." I have nothing against notaries - I am a notary. I am also a licensed title agent and I do the closings for my title agency. I feel that is part of my job as a title agent and I do not ship my closing packages off to a notary to close. I once drove 3 hours one way to close a simple cash sale because I believe that is part of MY job. Someone who is familiar with the file and can answer borrowers' questions should be doing the closings, in my opinion.

Notaries, and even title agents, are limited to what they can do for a borrower. THEY CANNOT GIVE LEGAL ADVICE... and THAT is what they need. Regardless of who does the closing, there is a need for legal representation.

I'm sure there are many good notaries that are capable of getting all of the documents properly executed. But, there is more to a closing than that. Borrowers shouldn't be told to call someone else with their questions at the closing table, or told that they have a three day recission period to seek legal advice.
by Robert Franco | 2007/11/06 | log in or register to post a reply

Here, here. Hoorah!...
Here, here. Hoorah! 
by Diane Cipa, General Manager, The Closing Specialists® | 2007/11/06 | log in or register to post a reply
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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