Everyone knows what Short Sales are, right? It is the process homeowners have to go through if they want to sell their property for less than what is owed. Well, Freddie Mac says its’ short sales have risen from around 4% of completed workouts in 2000 to nearly 14% in 2010. Consequently, this increase in short sale transactions has brought with it an increase in fraud. The fraud could be anything from falsifying title and loan documents, to manipulating the HUD-1, to reverse staging (making the house look more distressed than it really is).
In an attempt to reduce the amount of short sale fraud, Freddie Mac has amended its short sale affidavit policy. The new policy was issued on November 18th, 2011; however, the new changes are not required to be implemented by servicers until January 1st, 2012. Basically, Freddie Mac is requiring everyone involved in the transaction (borrowers, purchasers, real estate brokers, closing agent, transaction facilitators, etc.) to sign, date and notarize that the sale constitutes an “arm’s length” transaction. Additionally, this requirement also requires full disclosure. As is standard practice, the flexibility exists for servicers to modify and integrate their own requirements into the affidavit form, so long as the minimum requirements are met. The short sale affidavit must be a separately identifiable document, distinct from other closing or pre-closing documents, such as the sales contract. This raises some interesting questions: If the listing agent also acts as the buyer’s agent, is that an arm’s length, and what if the agent knows the investor that makes an offer?
There was another point that jumped out at me as I was reviewing the changes. I saw a clause that stated, “If the purchaser intends to re-sell the Mortgaged Premises in 120 days or less without having substantially refurbished or added value to the Mortgaged Premises … the servicer must withdraw agreement to the short payoff of the Mortgage and immediately notify Freddie Mac”. While this is important to purchasers and borrowers alike, this requirement is notably important to investors. In other words, Freddie Mac considers wholesaling short sales or even lipstick jobs, mortgage fraud. This is essentially a deed restriction of 4 months on short sales. Yes you can get around it if you “substantially refurbish” the property, but who determines what substantially means? I have a feeling it’s going to mean more than paint and carpet. Another key word in this statement is the use of the word “intends”, and more importantly, how can we as investors or Freddie Mac, prove what your intent is with the property?
So, if you are actively investing in short sales, or are adding them to your business plan in the New Year, please be aware of the regulations surrounding them. They are ever changing, and the last thing anyone wants is to misunderstand and be held liable.
Everything I referred to can be found on the Freddie Mac website.