28 March 2012
Current estimates of homes that are underwater (worth less than the debt) range from 22.8% (investmentwatchblog.com) to a high 28% (mortgagenewsdaily.com). While across the country we have struggled with solutions to this problem it is recognized that foreclosures have a more deleterious effect on the market than short sales. It, therefore appears, that we are going to see more short sales across the country.
The problem is that many in the real estate community have figured out how to game the short sale process to the further detriment of the lenders accepting the short payoff. Recent schemes involving short sales include:
- Falsifying a short sale listing to indicate there is an offer so as to discourage legitimate offers.
- Manipulating the short sale price by making the property look worse than it really is.
- Flipping the property for a higher price (there are several complicated schemes here).
- Skimming equity by manipulating the closing numbers or by “phantom repairs”.
- Engaging in a short sale for a relative and returning the property to the relative with reduced debt
As a direct result of these schemes and scams, the FHLMC (Freddie Mac) has required all parties, including the realtors and title company, to execute an affidavit affirming that the transaction is arms length and further, providing for indemnification of the lender if the arms length attestation is not true.
The problem was that indemnification was required by all. This was problematic for realtors and title companies because even if one of the parties was not aware of, or had not participated in any fraud they still provided indemnification to the lender. So the result was that we were indemnifying for things we knew nothing about and could not control.
The National Association of Realtors, the American Land Title Association and other trade organizations prevailed upon the FHLMC to modify the indemnity document to provide that each party would provide indemnity only for irregularities known to that party. In the latter part of last year, FHLMC acquiesced and now the short sale affidavit and indemnity provides that it is executed only to the best knowledge and belief of each party to the transaction.
Problem solved, right? Not so fast, at least not so fast for Texans. Title insurance in Texas is governed, and oversight is provided, by the Texas Department of Insurance, TDI. TDI maintains a Basic Manual that sets out the rules and regulations by which Texas title companies and underwriters are required to operate. The basic manual includes Procedural Rule 35 which is a “Prohibition Against Guarantees, Affirmations, Indemnifications, and Certifications.” So now the question is: Does Procedural Rule 35 prohibit all Texas title companies from executing the FHLMC affidavit and indemnification? Even though the industry’s position on the execution of the affidavit was mixed (some would execute the affidavit and some would not because of P-35), the Commissioner of the Texas Department of Insurance has removed all doubt. In March the Commissioner, Eleanor Kitzman, has provided unequivocally that execution of “the short sale affidavits seek assurances beyond the scope of the title agents knowledge”. Accordingly, execution of these affidavits and indemnities by title companies is not allowed in Texas because they are violations of P-35.
Lastly, in this regard, please note that a title company that violates this order is subject to fine and/or suspension.