In recent weeks there has been a flurry of discussion over the required use of the Freddie Mac Short Sale Addendum in short sales being serviced by B of A.  I find now that many other lenders are tryin to get this same addendum signed by all parties on short sales.

BEWARE.  This addendum puts you, the title agent as well as all other parties involved on the hook in the case of a fraud. 

The addendum lists 13 specific provisions that are to be acknoweldged by ALL parties to the transaction, including the title agent.  Many of the provisions that the title agent is being asked to acknowledge and warrant are well beyond the scope of our examination of title and well beyond our ability to control.

Of particular concern is paragraph 13:

13. Each signatory agrees to indemnify the Servicer and Freddie Mac for any and all loss resulting from any negligent or intentional misrepresentation made in the affidavit including, but not limited to, repayment of the amount of the reduced payoff of the Mortgage;.

I cannot imagine any title agent signing this document, and more importantly, I can't imagine any title underwriter who will stand behind an agent who signs this document.

ALTA has taken up this issue and has issued a statement to its members with regard to them signing this document.  In short, ALTA recommends that members reach out to their respective attorneys AND to their E & O carriers to see if they would be covered by their E & O policies. 

ALTA specifically states:

According to Steve Gottheim, ALTA’s legislative and regulatory counsel, there are three main issues Freddie Mac’s short sale addendums pose for the title industry.

The affidavit requires a closing or escrow agent to certify information that is not available to them, in particular whether the transaction is arms length. The relationship between the buyer and seller may not be evident from the public record information or their identification documents.

The affidavit places a negligent misrepresentation standard on the escrow agent. Unlike a "to the best of my knowledge standard" a negligence standard requires the escrow agent to use the reasonable efforts of an ordinary person to determine whether the transaction is arms length. Instead of laying out clearly what the escrow agent must do to release themselves from liability, the escrow agent is at risk of liability if fraud is discovered after signing the affidavit.

The affidavit requires the escrow agent to sign the transaction in a personal capacity as well as in a corporate capacity. Thus if fraud is discovered, then Freddie or the servicer can go after the escrow agent's personal property and monies in addition to going after the corporation.

I have not personally seen this addendum in any of my transaction to date, but you can be sure that I would NOT sign it.  I am told by other title agents that B of A in particular has stated that either all parties sign the addendum or they will not approved the short sale.

I will be following this matter closely to see how it finally plays out.