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Many home owners are in financial distress and owe more than their home is worth. In this case, selling their home will not net enough proceeds to pay off their current mortgage. Often, the only option is a “short sale,” in which their lender agrees to accept less than a full payoff to release the mortgage.

HAFA is a Federally sponsored program providing incentives to lenders that agree to short sales. A short sale is a long, difficult process requiring weeks if not months of negotiation with the bank to convince them to accept less than the full amount due. The goal of HAFA is to streamline and standardize the short sale process. HAFA, however, only applies to certain home owners and to lenders that participate in the program.

More importantly, HAFA did not apply to loans owned, underwritten, or guaranteed by Fannie Mae and Freddie Mac. This excluded a large number of loans… until now!

Fannie Mae and Freddie Mac Introduce Their Own HAFA Program

Fannie Mae and Freddie Mac recently announced their own entry into the HAFA Program. Both programs will likely be very similar to the original HAFA program. This development will open the door to a vast majority of distressed homeowners to utilize the HAFA Short Sale Program. And, this means that sellers, REALTORS, and attorneys must understand how the various programs work.

Like the original HAFA program, the Fannie Mae and Freddie Mac programs “piggy back” off of the HAMP Mortgage Modification program. Distressed homeowners must first apply for a mortgage modification under the federal HAMP program. And, like the original program, the new programs provide similar incentives to homeowners and lenders to close a short sale. Homeowners can receive up to $3,000 in “relocation assistance” for completing a short sale.

These programs have just been announced and are not yet in effect. Homestead will continue to provide updates prior to the August 1st implementation date.

For updates and more information on this and other topics, please subscribe to this blog.

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Changes to Recording Fees & Social Security Protection

Effective June 25, 2010 the cost to record a real estate document in the County Register of Deeds office will be $30 regardless of the number of pages.

Formerly, the fee was based on the number of pages in a document: $11 for the first page and $2 for each additional page. This old fee structure made it difficult to give exact quotes prior to closing. The new fee will, on average, not add much in total fees and will add certainty to transactions. Lenders and Realtors will be able to give exact quotes for recording fees.

Five dollars of the new fee is designated for the removal of social security numbers from all public documents. The recording fee will revert to $25 upon the earliest of the following 1) the Register of Deeds has successfully redacted all social security numbers from electronic format; 2) January 1, 2012, unless an extension of time is granted by DOA; or 3) January 1, 2015.

New Rules for Correcting Errors in Recorded Documents

Errors in recorded documents are common and unavoidable. Everyone makes mistakes from time to time. It is how we correct those mistakes that separates us.

For over a decade, the tool for correcting a mistake was an “Affidavit of Correction.” If a deed or a mortgage contained an error, the title company or an attorney would record an Affidavit that described the error and showed how it was to be corrected. For instance, if a deed omitted a Buyer’s middle initial, the title company would file an affidavit of correction that stated: “The Deed recorded on May 24th omitted John D. Smith’s middle initial. The Buyer’s correct name is John D. Smith.”

In 2007, the Wisconsin Court of Appeals ruled in Smiljanic v. Niedermeyer, 2007 WI App 182, 737 N.W.2d 436, that using Affidavits of Correction to correct errors is not proper because there is no Statute in Wisconsin that authorizes the use of this tool. This new ruling not only made it much more difficult to correct errors, it called into question all of the past Affidavits that had been filed.

A new law now authorizes the use of Affidavits of Correction in certain circumstances and describes who must sign the document.

What May Be Corrected? A corrective instrument may be used to correct a legal description (such as a distance; unit, or building number; subdivision or condominium name, etc.), a party’s name or marital status, homestead information, dates, notary information, and a number of other issues.

Who May Sign? The new law provides that the person who may sign is a “…person having personal knowledge of the circumstances of the conveyance and of the facts recited in the correction instrument, including the grantor, the grantee, the person who drafted the conveyance that is the subject of the correction instrument, or the person who acted as the settlement agent in the transaction…” In other words, the title company, any party, or an attorney involved in the transaction can all sign.

In certain circumstances, however, only a party can sign. For instance, if a buyer is to be removed from title, THAT buyer must sign. If a parcel is corrected to add land, the Sellers must sign. 

What About Old Affidavits of Correction? The new law “grandfathers” in old Affidavits of Correction if they would be valid under the new law.

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Foreclosures continue to rise in 2010, and with them, we continue to see more REO and Sheriff’s Sales. A sheriff’s sale is the judicial auction at the end of the foreclosure process. If there are no bidders, the bank retakes the property and sells it from its “Real Estate Owned” Department, or REO for short.

Both of these sales occur after a foreclosure, a judicial proceeding designed to end all ownership rights in former owners. This raises the question:

Do buyers of these properties really need title insurance?

The Answer is a resounding YES!

A Sheriff’s sale is designed to “strip” all interests and liens from the property and sell it free and clear to a new buyer. But, that does not always happen. Lien holders, like mortgages and judgments, that are not properly named or served in the foreclosure proceedings may retain an interest in the property. Taxes likely will remain due against the property. And, certain federal liens can be enforced months after the sale.

The Sheriff’s deed provides no warranties. This means that any title problems are solely the buyer’s responsibility. While title insurance will not entirely take the place of a warranty, it provides a level of protection and insurance in the event of a title claim.

Similarly, a Bank generally will transfer the property by “Special Warranty Deed” or “Quit Claim Deed.” These deeds also lack the full warranties of an ordinary deed. The warranty is the seller’s promise of good title.  Without a full warrenty, buyers will not be able to go after the seller for most title problems.

Thus, the need for title insurance.  A title insurance policy can protect buyers from liens such as past mortgages, judgments, taxes, or construction liens that might attach to the property.

Buying a property out of foreclosure without title insurance – whether at Sheriff’s sale or through REO – is a risky proposition. The cost of an owner’s policy of title insurance is a small price to pay to substantially minimize the risk.

Title insurance, however, is not the perfect solution.  It won’t eliminate all risks.  Title policies usually include certain “exceptions” or “exclusions” from coverage. The policy may not cover for some title risks such as adverse possession, boundary line disputes, construction liens, or matters not shown in the public record (among others). A full warranty deed would be the only protection from all title claims. But, Banks and Sheriff Sales don’t generally offer full, warranty deeds.

The trade-off when buying an REO or Sheriff’s sale is a great price in exchange for a little risk… unless you don’t bother with title insurance, in which case you’ll get a great price with a whole lot of risk.

This discussion is not intended as legal advice and should not be used outside of Wisconsin.  Buyers of REO or Sheriff sale properties are urged to seek the advice of a qualified attorney.

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Foreclosure This Exit: Highway Sign

Short Sale Seminar

May 26, 2010: 9am – 12pm

City Center West
525 Junction Rd.
Madison, WI 53717-2152

Licensed REALTORS and lenders are invited to attend this powerful seminar on short sales, foreclosures, and the new HAFA Program.

Attorney Peter Zarov will be breaking down the Agent’s responsibilities, the foreclosure time line, and the short sale process. This class will cover:

  • Short sale time line
  • Foreclosure process
  • How to avoid liability during a short sale (Your referral team, common scams, etc.)
  • The short sale packet and best practices to submit
  • The NEW Federal HAFA Short Sale Program
  • Transactional pitfalls that will kill the deal that can be avoided

Agents will a acquire critical knowledge of the foreclosure process in Wisconsin, short sale procedures, and the changes brought about by the new HAFA Program that went into effect on April 4, 2010. Surviving and thriving in this market requires a familiarity and understanding of these topics.

The Event is $15 and includes materials, bagels, pastries, coffee, and juice. We accept payment by credit card or check.

Attend This Event

For more information, go to www.homesteadtitle.net/seminars or subscribe to our blog at www.homesteadtitle.net/blog

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The deadline for accepting a “binding contract” and qualifying for the home buyer tax credits expired on Friday April 30th.  For those who signed an offer on or before April 30th, they can still get the credit if they close by June 30th.

But the big question on the minds of Realtors and those in the real estate industry is:  Will buyers stop buying? 

 Will buyers jump back on the fence?  Will the market slow down?  Many expected a sharp decline in activity after the credit expired.  Others feel that the influence of tax credits and incentives is overstated. 

 We are curious to see what you are experiencing?  Post a comment and let us know.

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Land Contracts have come back in vogue as lending standards have tightened.  Land Contracts are essentially a form of Seller financing.  In a nut shell, the buyer pays the Seller in installments over a period of time until the total purchase price is paid in full. 

A buyer’s ownership interest in a Land Contract differs state by state.  So do enforcement provisions.  In Wisconsin, a land contract buyer is deemed to have “equitable title” upon signing the land contract.  This means that, for all intents and purposes, the Buyer owns the property and the seller owns a right to get paid.  This is why the seller needs to think like a bank.

If a bank won’t extend long-term financing to the buyer, why should the seller?  The short answer is: the seller needs the money, needs the sale, and needs it now.  Nevertheless, the Seller still should act like a bank by asking for credit reports, payment history, assets and liabilities, and a decent down payment.

Many (if not most) land contracts are structured so that the Buyer will make payment for a number of years and then make a balloon payment at the end.  A typical land contract might have the Buyer making 36 monthly payments of $1200 and then paying the balance in full at the end of the third year.  In this era of strict loan standards, a buyer with poor credit won’t be able to refinance in year 3 unless he has great credit and equity in the property.  That is why a seller should want to know at the front end whether the buyer has good credit (or terrible credit).  If the buyer has terrible credit, what are the odds that he will be able to refinance in the next 3 years?

And, the worse the Credit, the more the Seller should want in a down-payment.  A buyer with poor credit is also more likely to incur judgments or tax liens that can attach as liens on the property.  Once this happens, the seller’s only way to remove those liens (in Wisconsin) is to have them paid or to foreclose on the property.  Foreclosure is expensive.  Thus, a Seller that knows he is extending a land contract to a buyer with poor credit may want a large enough down-payment to cover these potential costs. 

The most important thing to understand is that only a licensed Broker or Attorney can draft a land contract on behalf of another in Wisconsin.  We strongly advise all sellers considering selling on a land contract to consult an attorney… and act like a bank.

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 The Tax Deadline Approaches . . . or does it?

Buyers who wish to qualify for the first time home buyer tax credit must meet two deadlines:

  1. They must “enter into a binding contract to buy, a principal residence on or before April 30, 2010” and
  2. Close on the home by June 30, 2010.

See The IRS Website for more information.

So why are people flocking to close on April 30th?   We are seeing record volume for the last few days of the month. Indeed, Homestead Title’s sales volume for the last 4 days of April is up over 250% compared to the previous 5 year average.

Most title companies in Madison are already booked and the orders keep rolling in. (Homestead is still available for those who truly need to close – link here to place a title order). 

But this is a phantom deadline — the deadline for closing is not until June 30th.  Perhaps we are seeing a coincidental market upswing?  Perhaps buyers are erring on the side of caution?  Or perhaps buyers were simply confused when they wrote their offers and think they really need to close by the end of April?

Any questions about whether you or your buyer qualifies for the tax credit should be directed to an accountant. We have provided information from the IRS website, but it is important to consult with an expert about your specific facts and circumstances.

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On January 1, 2010, new Federal Rules took effect, requiring lenders and home buyers and sellers to use new forms.  Specifically, lenders must use a new, standardized Good Faith Estimate (called the GFE) when taking loan applications.  And, at closing, title companies must use a new HUD-1 Settlement Statement (usually called the HUD).

The HUD has always been the document that discloses all closing costs.  The new HUD must disclose closing costs and must show how those closing costs compare to the lender’s original estimates on the GFE.  Thus, lenders cannot quote one thing and then charge a much higher price.  Indeed, the new HUD contains a 3rd page that shows exactly what was quoted on the GFE and compares those quotes to the actual closing costs.  Certain of  these charges are allowed to change and some cannot.   The amount of price difference that is allowed under Federal law is called the “tolerance” limits. 

 These “tolerances” for differing prices have caused confusion and problems for some lenders and title companies.  One of the most confusing aspects of the “tolerance” limits relates to the Owner’s Title Policy and the State Transfer Tax.  In many states, those charges are paid by buyers.  In Wisconsin those charges are virtually always paid by the seller (indeed, Wisconsin is one of four states that statutorily requires the seller to pay the Transfer Tax).  Nevertheless, the lender is required to disclose these seller fees to the buyer on the GFE.

Herein lies the problem.  When taking the loan application, lenders are required to disclose to their buyers fees that the buyer will not have to pay at closing.  If lenders fail to disclose these fees, there could be penalties or, worse yet, delays in closing.  And, more problematic yet, the transfer tax is one of the few fees that has a zero tolerance.  This means that the quote on the GFE must match exactly to the final amount charged at closing (even though it won’t even be charged to the buyer at closing).  The Transfer Tax, in Wisconsin, is based upon the purchase price, which lenders may not know  at the time of the loan application.  Even the smallest inaccuracy in the purchase price and transfer tax can lead to problems.

So what is a lender to do?  Lenders should disclose the owners policy of title insurance on the GFE.  Then, on the HUD, there will be a seller credit to the buyer for that same amount.  This is confusing, bur required under the new rules.  The American Land Title Association has taken the position that lenders in Wisconsin need not disclose transfer taxes as a buyers fee on the GFE.  And, as a practical matter, most lenders in Wisconsin have not been disclosing the Transfer Tax on the GFE. 

Homestead Title has a spotless record on preparing the new HUDs and complying with the new GFE rules.  While we’ve heard many lenders complain of difficulties and confusion relating to the forms, we have not experienced any problems on our end.  If you have any questions on the title or closing implications and rules of the new GFE (in Wisconsin), just call or email and we’re here to help.

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Home Affordable Foreclosure Alternatives Program (known as HAFA) went into effect on April 5, 2010. HAFA allows owners to participate in a “short sale” with standardized procedures and expedited timelines. Short sales are traditionally the hardest and longest transactions to complete and involve dozens of hours of phone calls and paperwork and a very high level of expertise. HAFA, it is hoped, will streamline this process. It is important to note, however, that HAFA does not replace the traditional short sale. Rather, it is a stream-lined short sale process that applies to specific owners who have mortgages with specific, participating lenders.

HAFA Is Not For Everyone

HAFA is not a mandated program that all lenders must follow. Nor does it apply to all distressed home owners. HAFA only applies to lenders that voluntarily participate in the HAMP Mortgage Modification Program. The good news is that this includes most major, national lenders, such as: Citi, Bank of America, Wells Fargo, GMAC Mortgage, Chase, Litton, and many others. The bad news is that the program does not apply to Fannie Mae or Freddie Mac loans, which account for a huge percentage of home loans. Nor does it apply to most smaller, local lenders.

In addition, the program does not apply to the following:

  • Loans originated after January 2009,
  • Loans with a balance over $729,750,
  • Property that is not the seller’s principal residence,
  • Loans where the total monthly mortgage payment does not exceed 31% of the seller’s gross income.

In other words, HAFA may make a difference for some distressed home owners. But, it may not even apply for a large group of owners and their lenders. In that case, the traditional short sale process may still be a viable option.

How It Works

HAFA is a short sale program designed to work with the Federal home loan modification program called HAMP. The HAMP program is intended to allow distressed homeowners to stay in their homes by using mortgage modifications that lower their monthly payment. The Federal government recognized that many (if not most) homeowners either did not qualify for HAMP or could not even pay the lowered mortgage payment. HAFA is intended to offer these home owners an option to sell their home through a streamlined short sale process.
Traditional Short Sale

In a traditional short sale, the home owner needs to request a short sale from the lender. The process, in a nutshell, goes something like this:

  1. Sellers and/or Realtor contact lender and initiate discussions about short sale.
  2. Sellers collect reams of documents to prove to the lender that they cannot pay the mortgage.
  3. The Realtor lists the property and tries to find a buyer, having no idea how much the lender will demand or what purchase price will be enough for a short sale.
  4. Once a buyer has signed an offer to purchase, the seller submits a “short sale package” to the bank. The package contains all financial information and documentation showing the seller is unable to pay and the offer to purchase.
  5. The bank often (usually) requests additional documents and follow up documents and it can take many efforts, phone calls and faxes to finally confirm that the bank has what it needs.
  6. The Seller, Realtor, and perhaps attorney spend weeks or months negotiating with the bank over the terms of the short sale, including the purchase price, what closing costs and commissions will or will not be paid, how much money the seller might need to contribute at closing, and whether the bank will forgive the debt or demand a deficiency after closing.
  7. The Bank finally approves the short sale based on the purchase price, offer to purchase, and any amendments that needed to be negotiated to get bank approval;
  8. The sale finally closes.

This process can take months, and in some cases more than a year. Every lender has slightly different requirements and they each handle transactions differently. Most short sales require dozens upon dozens of long phone calls and an unbelievable level of persistence, patience, and hard work. And, Sellers and Realtors must repeat this process for every second mortgage. Up Until the moment of closing, the seller may not know if the lender will demand a deficiency. If the lender does demand a deficiency, the Seller will still owe the bank after closing.

HAFA Short Sale Process

HAFA is intended to streamline and standardize the procedures for short sales. The HAFA process goes something like this:

  1. Seller applies for mortgage modification through HAMP program and is either denied or misses payments;
  2. The lender must proactively notify the Seller about the option of a HAFA short sale (or the seller can ask);
  3. The lender sends a Short Sale Agreement (SSA) and a blank document called a Request for Approval of Short Sale (RASS);
  4. The Seller has 14 days to sign the SSA and return it to the lender along with the Realtor’s listing agreement and a title search showing any other mortgages or liens;
  5. The Lender will inform the Seller (even before any buyer submits an offer) what it will take to get short sale approval – either a purchase price or the amount of proceeds needed
  6. Once a buyer has signed an offer to purchase, the Seller and Realtor have 3 days to fill out and submit the Request for Approval of Short Sale (RASS) to the lender.
  7. The lender has 10 days to accept or deny the RASS;
  8. Upon acceptance of the RASS, the Seller proceeds to closing.

The fact that we were able to summarize both processes into 8 steps does not mean that HAFA will be just like an ordinary short sale. Step one will require the seller to submit much of the same documents as a traditional short sale. Indeed, a Mortgage Modification also requires financial disclosures and reams of documentation. But, once this step is done, the rest of the process is much smoother, much faster, and standardized.

Differences Between HAFA and Traditional Short Sales

HAFA improves the short sale process in a number of important ways. But it also comes with some trade-offs. The following chart highlights the differences between HAFA and traditional short sales:

Traditional Short Sale

HAFA

The home owner generally does not make mortgage payments up to the date of closing. They live “rent free” during the short sale process. Under HAFA, the owner must make mortgage payments up to 31% of their income. Failure to pay the mortgage will disqualify the owner from participating in HAFA.
Lenders can demand a deficiency for the amount of the short-fall. In other words, the debt is not forgiven after closing. First-Mortgage lenders must waive the deficiency and must negotiate with second-mortgage lenders to waive their deficiency as well.
The Seller could receive no funds at closing. Sellers can receive “cash incentives” at closing for up to $3,000.
Lenders generally budget up to $3,000 to pay second mortgage holders. Lenders are given a government incentive of up to $6,000 to pay to second mortgage holders.
The property could be sold by a Realtor or For Sale By Owner (FSBO) Property must be listed with a Realtor.
Lenders can take as long as they wanted to approve or deny the short sale HAFA imposes strict and short time-lines on participating lenders
Lenders will not begin to “negotiate” a short sale or even initiate the process until a buyer has signed an offer to purchase Lenders must start the process at the time or even before the property is listed with a Realtor.
Lender does not give short sale approval until days before the closing. Lender must approve the short sale, including the amount they will receive within 10 days of receiving the accepted offer.

 

These differences are important to understand. More importantly, it is critical to understand that HAFA
does not replace the traditional short sale. It is an additional tool that applies to certain lenders and certain home owners.

Homestead Title is always available to answer questions and help you with your short sale closings. Look for additional posts in the coming days and weeks.

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The new Federal Program designed to aid distressed home owners went into effect on April 5, 2010. The HAFA Program is designed to assist distressed home owners in selling their home, even if they owe more than the home is worth. The program allows owners to participate in a “short sale” with standardized procedures and expedited timelines. Short sales are traditionally the hardest and longest transactions to complete and involve dozens of hours of phone calls and paperwork and a very high level of expertise. HAFA, it is hoped, will streamline this process.

Homestead has provided some basic information on HAFA in a previous post. Click Here. And, we are always available to answer your short sale or foreclosure questions (relating to Wisconsin properties).

On March 26, the Federal government announced a few changes to HAFA including:

  1. Sellers who are relocating can receive up to $3000 as an incentive to close (the original amount was $1,500).
  2. Changing some of the requirements when a homeowner declares bankruptcy and allows them to apply for HAFA (if you are considering a short sale and bankruptcy, you really need an attorney!)
  3. Allows for certain home owners to apply for the HAFA program even if they have not previously applied for a HAMP loan modification.
  4. Clarifies how third-party vendors (negotiators) may be paid.

Bloomberg news recently reported that this new program could be a “game changer.” Indeed, MoodysEconomy.com predicts that the HAFA program may stave off nearly 1.5 Million foreclosures over the next 2 years. While this may be a positive over the long term, it could mean more short sales over the short term. This has the potential to dampen sales prices in certain markets.

One key provision of HAFA is that it REQUIRES the use of a Realtor. All short sales are difficult and require expertise and the federal government recognizes that licensed Realtors will need to be a part of the transaction. Likewise, it is critical to use a title company with an incredibly high level of expertise and experience. Homestead Title has closed hundreds of distressed properties over the last 3 years and provides guidance and expertise whenever appropriate.

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