Cautionary Tale of Land Contract Sales

         The use of Land Contracts for the conveyance of real property has become more popular. A land contract is an agreement for the purchase of real estate on installment payments. This differs from the traditional earnest money deposit upon offer and lump sum at closing. Lately, there are more interested buyers who are able to pay but unable to find a lender from which to borrow money through the traditional methods. Some prospective borrowers may have suffered a temporary set back and been foreclosed on previously, but are now gainfully employed. Others may have a steady job, but at a lower income than before which put them into trouble with their previous lender. Both of these situations may require the borrower to wait at least two years before seeking a traditional home loan.
          While land contracts themselves do not pose a hazard - in fact they can be mutually beneficial to buyer and seller in a tough real estate market. However, There are some in Michigan who must tread lightly when taking part in such a transactions. Most notes for home loans contain a "due on sale" clause, which requires that if the property subject to the note and mortgage are conveyed or transferred that the entire remaining unpaid balance of the note is due. Most due on sale clauses require the borrower to get written permission from the lender before entering into a land contract on the subject property. Michigan State law imposes a penalty for any licensee who assists in avoiding the due on sale clause. (MC.L. 445.1628)http://legislature.mi.gov/doc.aspx?mcl-445-1628. This penalty is spelled out in subsection 2 as

"Any person licensed to do business in this state who, while carrying on that business, knowingly advises a person selling or transferring property securing a residential window period loan not to notify a lender as required by section 3 or who knowingly otherwise aids or assists a person in evading the enforcement of a due-on-sale clause enforceable under this act shall be liable for a civil fine not to exceed $5,000.00 for each offense and shall be subject to revocation of his or her license."  (emphasis mine)       

      Licensees in the State who should be wary include, but are not limited to, Real Estate Agents, Title Agents, Mortgage Brokers, and Attorneys. It has been suggested by the Michigan Association of Realtors (MAR) that while the licensee has no affirmative duty to contact the lender, they should still be cautious. MAR recommends that real estate agents should make their home owners aware that their loans may contain a due on sale clause and that the homeowner should seek the written approval of the lender before entering in to a Land Contract sale. MAR also suggest that real estate agents have the home owner sign an acknowledgment that they were advised to do so and keep it in the file.
     This signed acknowledgment is good advice for other licensees as well to keep in their files. While I am currently hearing through my available channels that more lenders are agreeable to written approval of a land contract, that this may not always be the case. Ultimately, if the lender chooses to enforce its due on sale clause, which may happen  if and when mortgage interest rates rise, it is best to be covered. I think all Michigan licensees would agree that it is best to avoid any penalties or threat of losing one's license over such an easily avoidable situation.

Cash From Lenders to Homeowners to complete Short Sales?

When I first read this article "Getting Cash in Exchange for a Short Sale"http://bucks.blogs.nytimes.com/2011/09/22/getting-cash-in-exchange-for-a-short-sale/ by Ann Carrns I could hardly believe my eyes. Upon first read, it seems like a dream for underwater homeowners. However, this article seems to focus on California where it is my understanding that a first mortgage holder does not have recourse against a borrower on a principle residence for any deficiency on the note if the borrower defaults. In California, it appears that the only hope the Lender has of recapturing its equity is to take back the property in good condition for resale or get it to a short sale buyer. Since home values appear to still be dropping in most of the Nation, I will assume the Lender would like those options to happen sooner rather than later.
This is not the case in recourse states, such as Michigan, where the Lender may take the borrower to court to recapture some or all of its losses. In Michigan, I have not seen any Lenders offering cash to borrowers beyond the token "cash for keys" $3,000 to move out or as an incentive for a short sale or a deed in lieu of foreclosure. I would like to hear from others who negotiate short sales on behalf of borrowers. Please comment if you have seen any activity that would indicate Lenders are more willing to participate in Short Sales or Deeds in Lieu of Foreclosure.

Federal Home Loan Assistance Program not as effective as hoped

    In Paul Kiel's article "One Obstacle to Obama’s New Plan to Help Homeowners: A Gov’t Regulator"   http://www.propublica.org/article/one-obstacle-to-obamas-new-plan-to-help-homeowners-a-govt-regulator. He states that the administration had expected to reach up to 4-5 million homeowners with Fannie Mae and Freddie Mac guaranteed loans with modifications for underwater property with the historically low interest rate offerings. However, only 838,000 homeowners had refinanced as of June 2011. In an attempt to increase the rate of homeowners who have been assisted by the program, the Obama Administration is suggesting that the Federal Housing Finance Agency (FHFA) back the modifications instead of leaving the risk in the hands of the original lenders.
     The argument for FHFA backing  is that original lenders are reluctant to make loan modifications based on the idea that homeowners who are already in trouble on their notes, will continue to be and more so, with a loan modification. If FHFA takes over the risk from the original lender, then more loan modifications may happen.
     The argument against this is coming from the FHFA director Edward DeMarco himself, and rightly so. Allowing FHFA to guarantee the risks for original lenders would, once again, shift the risk of possible inappropriate lending from the lenders and their mortgage brokers to the taxpayers. This puts too much risk and burden on the taxpayers which the article claims has already reached $141 Billion. There is no mention of whether Fannie Mae and Freddie Mac could continue to pursue lenders in court for reimbursement. Some lenders had agreed to home loans for borrowers who were not qualified for loans under the FHA guidelines, but whose notes were then turned over to Fannie Mae and Freddie Mac. There is at least one lawsuit filed http://stopforeclosurefraud.com/2011/05/03/complaint-u-s-v-deutsche-bank-mortgageit-for-reckless-practices/) on matters such as this to reimburse the taxpayers for payment on risks which should be the original lenders alone. Unless the Administration's suggestion to have FHFA guarantee the loan modifications under FHA guidelines comes with a reservation of rights for the U.S. Government to sue the original lender for recovery on the original note then further guarantees should be granted.