What about a short sale to yourself?
The FHFA will not allow short sales to friends and relatives of the seller. But Sen. Elizabeth Warren argues that such arrangements should be allowed as a way to keep the owners in their home.
One of the ironies of short sales is that many owners could afford to keep their dwellings if they could buy them at the short-sale price.
But that’s not allowed, nor can they sell their home to friends or family members with an arrangement to rent the house or buy it back later.
That’s wrong, says Sen. Elizabeth Warren, D-Mass., who was instrumental in setting up the Consumer Financial Protection Bureau. She has caused a stir with a piece she wrote arguing that the Federal Housing Finance Authority, which oversees Fannie Mae and Freddie Mac, should not only allow such inside deals but should encourage them rather than classifying them as fraud.
In a short sale, a homeowner sells a house or condo for less than the loan amount, and in many cases the lender agrees to write off the forgiven debt. To be approved for a short sale, a homeowner has to demonstrate financial hardship and provide substantial financial documentation, usually multiple times.
Among the documents the seller must sign is an arms-length affidavit, attesting that there is no relationship between the seller and the buyer, the real-estate agent and the seller, etc. The real-estate agent often has to sign an affidavit, too.
It is certainly possible to game the system – to sign the affidavit but to sell the house to a friend or to a relative with a different last name. But should such sales be considered fraud, as they are now?
Warren argues that the bank gets the same amount of money either way, whether the home goes to a friend or to a stranger or to a nonprofit that will sell or rent it back to the seller. She writes in the Dorchester Reporter and on her website:
The FHFA claims that its policy prevents sweetheart insider deals that benefit the homeowners at the expense of Fannie and Freddie. But that makes no sense when the house is sold at market value or when people affiliated with the homeowner put in the highest bid to save the home. In those cases, the identity of the bidder makes no meaningful difference, because Fannie and Freddie's bottom line stays the same. And every time a family stays in a home, rather than being pushed into foreclosure, the neighborhood does better and the overall housing market does better – both of which help the value of all the other mortgages that FHFA holds.
But Bill McBride, at the Calculated Risk blog, argues that Warren’s proposal would lead to fraud and that the lender would not necessarily get the same price. He writes:
Warren doesn't understand that short sales don't go to the highest bidder. The first chance to negotiate with the bank goes to someone the homeowner (or agent) picks. Since the homeowner has no financial interest in the property, this creates an agency problem and opens the door to fraud (I've suggested having the lender hire the agent). The "arms-length" protection is an important tool to prevent fraud.
The current system is also open to fraud, as my colleague Melinda Fulmer wrote, including sales to friends of the seller or to the real-estate agent or "floppers" who persuade lenders to take less than the home is worth and then immediately resell it at a higher price. She details how some of the fraudulent deals are done. In some cases, real-estate agents have refused to submit higher offers, telling the lender that the offer from their preferred buyer was the highest received.
Certainly there have been cases where the home was sold to a relative or friend of the homeowner with plans for the homeowner to buy it back, with all parties lying on the arms-length affidavit.
You might wonder why a homeowner who could afford to keep the house if the payments were lower would not just apply for a mortgage modification with a principal reduction. But Fannie Mae and Freddie Mac will not agree to principal reductions on any mortgages they back.
What do you think of Warren’s proposals? Should short sales be allowed to someone who plans to rent or sell the home back to the original seller?
Now what if the house is paid for would or could any of this apply
In Michigan, one of the Supreme Court judges did a short sale and wound up in jail. Too bad the manager of the bank that did the sale didn't wind up in jail also.
It takes 2 to tango, unless you are a tea bagger, then you can tango with yourself.
I agree with Sen. Warren's arguments, and she is looking at the BIG picture....avoiding blighted neighborhoods which usually happens in many areas.
She should also advocate ease in loan modifications so that mortgagors would allow reduction of principal, if such is the fact in the neighborhood.
What's wrong with Elizabeth Warren? Has she lost her mind encouraging criminal actions. There is so much corruption in my neighborhood by attorneys, builders, developers and realtors who are also inter related and corrupt. After reading this article, I am troubled enough to switch my party affiliation. I am totally disgusted watching over half of my neighbors using their houses as automatic teller machines.
Some have 3 mortgages as high as $3,000,000 on an appraised home of 800,000.00. Then they offshore the 3 mil and allow the home to go into foreclosure while renting the house for the years that it takes to foreclose on the home. These same home owners provided the banks with incorrect names spelled out on the mortgage paperwork; i.e. First Name as middle name and then Middle name as initials etc., and then file their mortgage documents with the clerk of the court in the adjacent county from which they bought their home. Foreclosures are finally getting cleared up after many years yet those who bought their homes with the intent of providing the banks with incorrect data on these asset backed securities are taking much longer to remedy the bankruptcy proceedings. Of course these same people brag about how cleaver they are. If you do the crime you should be indicted and prosecuted to the full extent of the law!l
US Bank told us in 2012, we will not talk to you until you are three months in arrears. Way to reward deadbeats. I called them a year in advance for help on our mortgage. Of course, we are seriously underwater. We also ended up in a prettily flipped house with no wall insulation.
As soon as I heard this stipulation from the bank (our income did not keep up to the mortgage plus all of our other self generated bills, even after paying down debt, paring bills, and, eliminating bad habits such as groceries. My spouse FINALLY gave up nicotine and alcohol in our desperate bid to keep the house, and, we both gave up visits to the dr); I made sure we had somewhere else to live, but, tried to pay down the principal enough to get us to the magic 20% equity. I failed, and, sure enough, exactly one year after I called US Bank for help, and, some unexpected medical bills (child & cat), along with the depleted savings, we did not have enough money to make the mortgage.
Still no help from the bank, and, it is strange how the heartless customer service agents are so willing to help one into a Deed in Lieu or Short Sale...I told them they seriously have to consider a career with the US Ari Force as Fighter Drone Pilots. I will not talk to them, again, if I can help it. And, have told them we will foreclose in order to cost the bank time and money.
We have another complication to the then affordable mortgage we purchased in 2007. It was sold to us by the Wisconsin Department of Veterans Affairs...and the note did not fully explain some very interesting details of the mortgage which would have led us NOT to buy it in the first place. I am currently pursuing this angle...Mortgage Fraud by the mortgage note seller. We are still foreclosing, however. My pleas fall on deaf ears to politicians and consumer protection agencies (state & federal), and, everyone thinks it is all our fault for signing the bottom line, anyway.
Once the kid begins school, I am searching for a lawyer. I will help us, even though no one else cares to.
In addition, the banks have lost us as customers, permanently. PERMANENTLY. Try to manipulate our credit score so they can take advantage and charge us 2-3X the going interest rates for up to seven years, tell us to become deadbeats before they will help us...screw the banks.