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Millions Paid in False Short-Sale Claims

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | October 5th, 2012

How can you make a billion-dollar mistake and still come out ahead? When you are a federal agency that botches payouts to financially strapped homeowners.

No, this is not a trick question. But it is the trick that the Department of Housing and Urban Development thinks it pulled off when it neglected to adequately supervise its Preforeclosure Sales Program, costing taxpayers millions of dollars.

According to estimates by HUD's own Office of Inspector General (OIG), the department paid out $1.06 billion in claims for 11,693 preforeclosure sales that failed to meet the criteria for participation in the program, which allowed borrowers in default to sell their homes at less than what was owed on them.

But here's the kicker: While HUD deputy assistant secretary Charles Coulter agreed that execution was "inconsistent," HUD maintained in a statement that "absent the short-sale option, many of the loans would have gone into foreclosure, resulting in a far more costly conveyance claim" to the government.

According to Coulter, the claims the OIG says were paid erroneously may have resulted in a net benefit to the government of as much as $170 million.

The inspector general, which is an independent audit and investigative office within HUD that promotes efficiency and roots out fraud and waste, sees it a bit differently.

While it is "reasonable to assume" that some of these loans would have gone into foreclosure, and therefore that the ultimate cost to the government would likely be more than the $1 billion estimate, the OIG says in its report, "It is also reasonable to assume that at least some of these would have resulted in no claim or reduced claims due to alternative loss mitigation procedures."

The OIG arrived at its estimates by examining a small but statistically selected sample of 80 claims made to the program during the 12 months ended Aug. 31, 2011.

During that time, the Federal Housing Administration, the agency within HUD that insures lenders against losses should borrowers default on their mortgages, paid claims on nearly 20,000 preforeclosure sales.

The audit focused on the 16,976 preforeclosure sales claims submitted by the nine largest lenders participating in the program. Of the 80 claims in the sample, 61 -- or 76.3 percent -- did not meet the rules.

Coulter took exception to the quality of the sample, noting that the borrowers had an average credit score of 596 and an average delinquency of 8.7 months.

Given this profile, he said, it is likely that most of the 80 loans would have gone into foreclosure had their borrowers not been allowed to take part in the short-sale program. And since the recovery rate is greater in the preforeclosure program, he added, the claims paid were lower than they might otherwise have been.

Whether you accept Coulter's reasoning or the OIG's, there seems to be no question that HUD failed miserably in enforcing the program requirements. As a direct result, borrowers who otherwise may have been able to sustain their obligations were inappropriately relieved on their debt using FHA insurance fund reserves.

Specifically, the OIG found that claims were paid to borrowers who:

-- Had at least $5,000 in cash assets. In some cases, borrowers had bank balances that could cover up to nine months' worth of house payments. Yet they weren't required to put those funds toward their delinquent balances, even when it would have brought them current.

-- Did not show they had experienced an adverse and unavoidable hardship. In one instance, the borrower claimed his income had been declining, when in actuality it was rising.

-- Did not live in the property. In some instances, the borrowers' tax returns listed the property as a rental for several years. In others, borrowers reported their properties as rentals to their lenders.

The report also noted that lenders failed to verify the borrowers' income or calculate it properly.

HUD paid by far the largest number of claims in instances where the lender did not adequately verify expenses and subtract them from income to determine if borrowers had enough surplus to pay at least part of what they owed under some kind of repayment arrangement.

"In nearly all cases," the OIG found, "expenses claimed by the borrowers exceeded those verified by the lender."

The investigation also found that in some cases, lenders calculated income based on the earnings of only one co-borrower or determined borrower income without actually verifying it.

The OIG recommends that HUD go after the lenders involved in the improper claims. But here's the other kicker: Many of them are going to skate.

Of the 61 bad claims, 55 were submitted by the five major lenders involved in the big national mortgage settlement. In exchange for providing $25 billion in relief for distressed borrowers, the five were pardoned for misconduct in loan servicing in the settlement with state and federal authorities.

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Listing Errors Aren't Always Laughable

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 28th, 2012

"Three bedroom, one badroom."

– Local MLS listing

One misplaced letter in your entry in the local multiple listing service can be comical, as is the one above that Jane Peters of Power Brokers International in Pasadena, Calif., discovered. Or it can be fatal.

For example, if your house is listed on Polar Lane when it is actually on Poplar, your place may never be found, even if it is the cream puff everyone is looking for. The same holds true if the school district is incorrect, the ZIP code is wrong, the number of bedrooms is misstated, or the map coordinates are inaccurate.

"It's not always the price that prevents a sale," says Jim Crawford, an agent with RE/MAX Paramount Properties in Atlanta, who specialized in expired listings in the early 1990s. "Sometimes the listing is so totally flawed -- incorrect data, price, directions -- that no one can find it."

"Open Hose With Cheese and Wine"

Even worse, perhaps, is that buyers often rely on information contained in the listing, and if it's not correct -- perhaps the listing said 30 acres when it was actually 20, or that zoning allowed for an in-law suite when it really didn't -- they go to court.

As counsel to the Pennsylvania Association of Realtors and an attorney representing numerous brokers and agents, James Goldsmith has defended hundreds of lawsuits over inaccuracies in MLS descriptions. Plaintiffs usually don't prevail, Goldsmith says, but both sides spend a lot of time and money litigating who's right and who's wrong.

Some MLS errors are simple typos, such as "bring us your fuzziest buyers," when the agent surely meant "fussiest." But a simple transposed number, such as when an agent enters 2,300 square feet instead of 3,200, can be a huge mistake.

Or when the house is listed with four upstairs bedrooms and one bathroom instead of two. "Nobody in their right mind will show a house with just one bathroom feeding four bedrooms," says Crawford, the Atlanta agent.

Sometimes the gaffe may not be a mistake at all, but rather a purposeful entry by a less-than-honorable agent who is trying to drive traffic to the property. After all, once a would-be buyer shows up, the error can be corrected. No harm, no foul. Right?

That's why it's always a good idea for sellers to review their listings for errors and omissions before they are posted.

If you don't, your castle may not sell, no matter how grand, especially in this day when would-be buyers scour the Internet for properties before hopping in the car for a personal visit. Or you could find yourself as the defendant in an unwanted lawsuit.

"If a buyer gets his first tax bill and it is much higher than what was stated in the listing, the first thing he does is go to a lawyer," says Goldsmith, the Pennsylvania attorney.

"First Peeview Sunday"

It would be wrong to say listings are riddled with miscues. Indeed, many agents are surprised there are so few mistakes, especially considering the huge volume of data that makes its way into local listings every day.

But once an error is made, it is compounded almost instantly, because listings these days are propagated immediately to regional, national and even international aggregators such as Zillow, Realtor.com and dozens of others.

Almost any error can blow up a sale. If the address is incorrect, the house becomes nonexistent. It could be a wrong house number, wrong street, wrong ZIP code or wrong MLS area.

Sometimes the directions are incorrect. Even in this age of GPS, a prospect may not be able to find your place, especially if the map coordinates are wrong or missing, or if a particularly sloppy agent made other mistakes.

The list of possible errors is as detailed as the listing form itself. If the agent lists the wrong school district, or perhaps doesn't list the district at all, a buyer may pass on your place without giving it a second look. Or, worse, he might buy your house thinking it's in the better school system and sue you when he finds out it's not.

Maybe the house is so close to the county line that in an attempt to draw interest, the agent "inadvertently" puts down that it's in what's perceived as the better county. Again, a lawsuit in the making.

Then there are errors of fact. The wrong room dimensions, square footage, acreage and age of the house also can -- and do -- get people in hot water, especially if the buyer relies on the misinformation to be truthful.

"Call for Privates Showing"

On the buyer's side, there's simply no substitute for your own due diligence.

"The smart buyer checks everything that's important to him," advises Goldsmith. He points out that not only are transcription errors "not infrequent," but that information entered into the MLS often is taken directly from inaccurate public records.

He advises buyers who depend on MLS information to add a proviso to the sales contract stating that the decision to purchase the property is based on specific seller representations -- such as acreage or square footage -- which the seller represents and warrants to be accurate. And it wouldn't hurt to add a sentence that states: "This warranty to survive settlement."

Such a clause "shifts the risk of accuracy squarely on to the seller's shoulders," Goldsmith says.

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What to Expect From a Housing Counselor

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 21st, 2012

Joy and Andrew Giordano thought they could save their Baltimore home from foreclosure without any help. But in the end, they couldn't.

To avoid foreclosure, the Giordanos applied twice to their lender for refinancing under the government's Making Home Affordable program. Twice, they were turned down.

"We were not getting the right information from our bank," says Joy, who had to close her advertising specialties business because of the economic downturn. "We did everything we were told to do. But each time, we were not approved because of this or not approved because of that."

A friend suggested they speak to a housing counselor, but they were hesitant. On top of being embarrassed over their plight, the Giordanos didn't like the idea of pouring out their hearts to a total stranger.

"We thought we were doing a pretty good job on our own ratcheting things back," Joy recalls. "But through no fault of our own, we were on the verge of losing our house."

They called the counselor their friend recommended. But even that didn't help. They talked to the counselor several times, but she was too "overwhelmed" trying to help so many people in the same situation to offer much guidance.

Finally, out of desperation, the Giordanos gave counseling one last shot. This time, it worked.

The second counselor was "absolutely wonderful," says Joy, whose husband, a retired police officer, lost his job as an older-adult fitness specialist when a grant ran out at the college where he was working.

"We were pulling out money from our pensions and investments to make our house payments, and we got to the point where we realized we could not only lose our house, we could lose everything. But (the second counselor) worked with us and helped us put the package together into a format the underwriters could understand. And we got approved," Joy says.

Study after study has found that the Giordanos are not alone. For any number of reasons, people are way too timid when it comes to housing counseling.

Some view their situations as hopeless, while others think they can resolve their problems without any outside help. Still others are reticent to divulge their financial messes, are worn down by unresponsive lenders or have been burned by unscrupulous businesses that charge high fees but deliver no service.

Some even believe they cannot afford to ask for

assistance.

But research shows that counseling works if you embrace it. According to one Department of Housing and Urban Development study, nearly seven out of 10 families were able to retain their homes with the help of a HUD-certified counselor. More than half cured their defaults and became current on their loans.

Want more proof? A Federal Reserve study found that counseled borrowers were more likely to obtain a loan modification and with better terms than uncounseled borrowers. And the Harvard Joint Center for Housing Studies reports that counseled owners were more likely to remain current once a modification was won.

Still, seeking help from a government-approved counseling agency is a big step. So, to help you understand the process and ease your fears, here is what you can expect.

-- Beforehand: You can help the dialogue with the counselor by having the following information at your fingertips: your monthly income and expenses, a list of debts and assets, the name of your mortgage servicer, the date the loan was issued, your payment amount, the interest rate and balance due, and the day and name of your last contact with the servicer or the company collecting your payments.

-- Contact: The phone call will last about an hour and will begin with a privacy disclosure. Once you understand your rights, the counselor will collect the above information and take the time to answer any questions or concerns you have. You will be asked to discuss your "hardship," or the reason you are having difficulty making your payments.

-- Choices: Based on a review of the information you provide, the counselor will explain all the options available to you. These might include a loan modification, in which your lender agrees to any number of changes, including principal reduction. Or they might include ways to dispose of your property and ease you out of your tenuous situation.

The discussion also could cover nonprofit resources and services of which you may not have been aware.

-- Action plan: The counselor will work with you to create an action plan to be used in preparing a recommendation to your lender.

You can take it from here, or your counselor can call the lender on your behalf to go over his or her recommendation and determine whether the lender is willing to help. If the counselor calls, you can listen in on the line or not. It's your choice.

-- Pay dirt: If the lender agrees, or if you and the lender find another alternative to save your house, you, with the help of a counselor, have succeeded where you alone might otherwise have failed. If the lender cannot help for some reason, you will be told what to expect and perhaps offered post-foreclosure counseling or even a cash stipend to ease your transition out of the house and into another dwelling.

All this is free. No charge. Gratis. If you happen to reach someone who asks for money upfront, hang up and go elsewhere.

You can find a list of HUD-certified counselors at the HUD website (www.hud.gov) and at www.nfcc.org, the National Foundation for Credit Counseling.

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