I think HUD needs to address the abuse of seller's concessions. It has become nothing more than a joke. Why don't they just call it what it really is... borrower financed closing costs. In many of these transactions, the seller really isn't giving any concessions, it's merely a game of showing the seller paying the borrower's fees and adding more money to the loan amount.
The borrower can't afford his closing costs? Well that is easy to fix. Just mark up the sales price, and the loan amount, then have the seller pay them. But what is the seller really paying? Nothing.
This is obviously a sham. We all know what's going on when the sales contract is modified to show a higher sales price and all of the sudden the seller is willing to offer "seller's concessions." It's particularly clear when the Realtor charges a commission based on a lesser amount than the "new" sales price. How does the borrower come up with the extra money for the increased sales price? The amount of the loan is increased. For some reason, they can't borrowe more money to cover the closing costs, but it's okay to borrow more money to cover the higher sales price even though the seller is now contributing to the borrower's closing costs. It seems rather circular.
And, for some reason, it's not okay to show the amount the seller is contributing as a lump sum "seller's concessions" on page one of the HUD - the lender requires that the borrower's fees get moved over to the seller's side of page two of the HUD. The numbers all come out the same - but the lender will not allow them to be accurately disclosed on the front page of the HUD as "seller's concessions."
The end result is the borrower has financed the closing costs, something he apparently wasn't permitted to do outright. But this complicated ruse seems to make it all okay. I don't understand why.
Everyone seems to be aware of it; the borrower, seller, Realtor, and lender all understand it. But does the FHA approve of this practice? What about the investors who buy these loans on the secondary market? Someone must object to the borrower simply financing the fees, else this sham transaction would not be necessary.
I sometimes think that this tactic is used by lenders to obtain higher fees. The seller doesn't care because he is still getting the sales price he originally agreed to, even after paying thousands of dollars of the borrower's fees. The borrower doesn't care because the fees are all paid by the seller - or so it appears. The loan amount is higher? So what - it's a 30-year mortgage and the payments aren't much higher. The borrower gets the home and didn't have to come up with the money out of pocket. Is it any coincidence that on a loan with thousands of dollars in "seller's concessions" there are more lender's fees than there are 800 lines on the HUD? I don't think so.
If HUD wants to improve the transparency of real estate transactions, it really needs to do something about this ruse. This is anything but transparent - it lulls the borrower into believing the exorbitant fees are being paid by the seller. I wonder what, if any, impact this has on the APR of the loan? Are the numbers accurately reflecting the true cost of the loan when the sales price and loan amount are inflated to cover the borrower's closing costs? Does the borrower even care?
Unfortunately, I have more questions than answers. However, I do not feel comfortable with this type of arrangement.
Robert A. Franco
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