Why is it When We Remove Payments off the HUD it’s Short Sale Fraud, but when a Lender Forces it, it’s OK?

So this got me thinking.  Nick and I have always worked to make sure any payments to anyone involved in the short sale transaction are ON THE HUD.  We feel squeamish otherwise.  I do realize there are cases where there are POC’s (paid outside of closing) and other circumstances where a payment is made in relation to a short sale closing in Massachusetts, but we’ve always been taught that when you are making payments to parties related to the short sale transaction, it MUST BE on the HUD or it could be interpreted as fraud.  Or IS IT?

Here is where I’m having trouble.  Many short sales have an arms length transaction form or affidavit that a seller and buyer must sign.  The common language in these forms looks something like this:

“All amounts to be paid to any party, including holders of other liens on the Property, in connection with the short sale payoff transaction have been disclosed and approved by the Lender/and or Servicer and will be reflected on the HUD-1 Settlement Statement”

Keep in mind seller’s lenders are in charge of the SELLERS side of the HUD, not the buyer’s side.  I once had an Ocwen rep tell me to take the buyer’s DEPOSIT of the buyer’s side of the HUD.  Ocwen in a short sale is not in charge of the buyer’s side of the HUD.  Thankfully we escalated to Freddie Mac and they literally put in writing they could care less what is on the buyer’s side of the HUD.

This is my problem.  This JUST happened to me.  Lender A (The primary lender and priority position on title) issues approval and stipulates Lender B, MAY RECEIVE $500 out of the proceeds on the HUD for payment.  Lender B, stipulates they want $6000 for the release of their lien.  In reality, this amount is not off base because Lender B’s full owed amount is $60,000 and most people know in short sale transactions that the inferior lien holders get much less of a payoff.  If you are in second position on title you typically receive 10% of your loan balance which in this case was $60,000.

NO WHERE on Lender A’s approval did it stipulate that Lender B could not be paid MORE than the $500 from other parties in the transaction.  So, with approval from the buyer’s attorney we were going to close the transaction with the buyer paying $5500 towards the second lien and $500 granted by the first lien holder.  The language above was NOT IN MY approval letter.  Lender A did not even require a final HUD approval and I would say 85% of lenders do require this, but in this particular case lender A did not need a final HUD, so we were ready to close…….UNTIL:

Lender A wanted to see Lender B’s approval, and this is the exact transcript of what transpired next:

Short Sale Mitigation, Massachusetts
Hi Lender A,
Here is Lender B Lien release.
Please let me know if you need anything clarified or additional information.

Lender A
Please counter the second lien @ $1,000.00.  I don’t believe that management will approve much more than that amount. The asset is bank-owned and the sale will take place 01-21-15, if his client cannot be made to see reason. I am equally sure that they will not be appearing or sending their para-legal to bid at that sale in his client’s interest. The only way that all of us walk away happy is for the 2nd lien to accept our offer @ $1K to release and so this can close quickly.

Short Sale Mitigation, Massachusetts
We plan on closing as is.  I’m not sure what approval process there is.  We are utilizing the approval letter you sent already.  It has been sent to the buyer’s attorney who is now scheduling closing. Please let us know what else we can do to help.  We appreciate all your effort on this.

Lender A
Why would you want to do this when you have no release from the 2nd lien? I cannot allow this unless we have a clearly negotiated release for the 2nd lien on the property. Part of the closing instruction is that we need to approve the final HUD. We will not approve the final HUD when you send it if it is not accompanied by the 2nd lien’s release letter for the agreed/negotiated amount.
The HUD sent with the review docs showed $500 going to the 2nd lien.  I was surprised that with the foreclosure sale in place for 01-21-14, that this was not the pre-negotiated release amount.  We already postponed the sale once to allow you to get the documents together.  I would have expected that the 2nd lien would have been handled long ago. Please send 2nd lien acceptance at $1,000 for their release or their counter. I need the closing agent’s contact information immediately.  I want to make sure there are no misunderstandings about how this will close.

Short Sale Mitigation, Massachusetts
There seems to be an inconsistency.  The second lien IS releasing their lien.  Also you only gave a lien release.  The seller is NOT HAPPY at all that the deficiency is not released, but she has been advised as to what this means on both liens. I have had two attorneys review the approval letter and there are 6 conditions we must meet to close which the closing attorney said she could meet. The last line of the approval asks for proceeds, final HUD, and the approval sent to you, which we intend to do.  There was no stipulation to receive a final HUD in the approval letter.

We are planning on closing on the 16th.

Short Sale Mitigation, Massachusetts
Lender A’s Boss email
We are closing this property this Friday and I believe there is some confusion with your negotiator.

This morning she said she could not allow closing because the second lien didn’t release their lien, but they are giving a lien release to close.  It’s a bit confusing because you aren’t  releasing you deficiency and maybe that’s what she is confused about.  She then told me to offer the second lien holder double what she originally offered (Which was $500) – Anyways, that reduces your net, $500.  She wanted us to offer $1000 for the lien to be released.  It’s already being released.  We have approval.  We don’t need another one with a $1000 payout to the second.  I asked to speak to you because we are going in circles, but she did not respond.  Anyways, we plan on closing this on Friday.  I’ve got two attorneys working on this and closing it as we are an attorney state and they have both given an ok to close.  We are just waiting for the buyer to put the funds in escrow.

Lender A’s Boss
I think the confusion comes in here as she is needing the 2nd mortgage approval letter.  Also, she indicated to me that she sent over closing instructions on her 1-7-15 email to your person and that we need to see a copy of the HUD1 48 hours prior to closing.  Here is the updated letter for your records.  Let me know if you have any questions.
Also, please forward me the second mortgage approval letter as she has not received this as of today.
Hope this clear things up for everyone

Here is where they get very tricky AND SNEAKY.  The first approval letter stipulated no restrictions on the $500 payout to Lender B.  Suddenly when they got a hold of the approval letter from Lender B they CHANGED their original approval.  NOW they throw in two additional terms – 1) which was the requirement of a HUD-1 and 2) that $500 is the MAX the second lien holder can receive from the short sale transaction.

Short Sale Mitigation, Massachusetts
We provided the approval for the second.  We sent it on the 9th.  Then we were asked to counter the lien holder.  That makes no sense.  We have approval from you.  We are following the terms, getting your net.  Why would we counter them higher?  You will then get $500 less in your net.  We were then told it was because the second isn’t releasing their lien???  They are releasing their lien and I’m not sure why this is of a concern at all to you.  That would be my or the seller or buyer’s problem if they don’t.  You’ve provided approval already.

Please call me to discuss.  I need to know what the problem here is.  We are following the terms of the original approval letter, but I will ask the attorney to forward you a final HUD.  I don’t see any issue in that.  Why are you amending approval letters?  I need someone to call me and discuss what the issue is.
Lender A
There is no confusion here then.  The negotiator has advised we would allow $500 and not the $6,000 as the letter you sent indicates.  She countered at $1,000 to the 2nd.  I am not sure what the confusion is here?  So I updated the letter to make this more clear for everyone.

Short Sale Mitigation, Massachusetts
I have received three approvals now on the same property in less than one week.  We were all set to close Friday, but your bank is now changing the terms of the approval which could prevent the closing and this will go to auction on 1/21.  I have never seen any lender do anything like this.

I will confer with the borrower and see where to go from here.

Lender A
I am not sure what the confusion is since we have been telling you what is allowed to the 2nd mortgage which started at $500 and no $1,000. **NOTE FROM MARYANN** [They are only allowed to dictate their side of the HUD, not the BUYERS SIDE  - They offered $500 out of the proceeds and we could work with it]  The only letter has for the second is for $6,000 and I am under the impression that you guys are allowing the $6,000 with a cash contribution with the borrower or somewhere else.  It was made clear by her what was allowed.  Also, she stated in the email that she needed HUD prior to closing and you are disputing sending that now.  If you want to call and discuss I am in all day.

Short Sale Mitigation, Massachusetts
At this point, it will be out of my hands.  I spoke to the borrower,  who by the way is on social security and has a severely reduced income, and was denied a modification. Last night she asked me to contact the Attorney General, Consumer Protection Finance Bureau, and OCC, which I don’t want to do because that will likely muck this sale up and the closing attorney now wants to close Thursday.

The chain of events is clear.  You emailed your required NET for the sale on 11/10.  We countered and got that NET from the buyer.  At that point we could close.  You said you would “allow $500 to the second lien” out of your proceeds for a payment to the second lien.  You issued approval on 1/7 and I gave everything to the closing attorney except the second lien approval because we didn’t have it yet.  On 1/9 we got the second lien to agree to a release and submitted it to you as requested.  The closing attorney scheduled closing.

On 1/9 we were asked to give the second lien MORE than $500, which reduces Guaranty’s net, which makes no sense.  YOU ISSUED AN APPROVAL we could close with.  When I pointed that out I was given all kinds of conflicting information from you and conflicting approvals. On 1/12 you then said that the second lien wasn’t releasing their lien so you wouldn’t allow it.  I’m not sure what you won’t allow, when you’ve already issued approval.

Then, AFTER you went back through the review of the approval I was then issued a second letter with completely different verbiage.  On 1/12 we at 4:12pm we received a different approval with 8 different requirements to close and one letter at 4:13 with 7 different items to close.

Anyways, what it boils down to is we are able to close this on Thursday 1/15 and you will not have a complete loss.  You will NET the $55,000.  Once I get the office above involved it will likely go to FC and you will get nothing, so I’m not sure how that helps the investors who invest in your bank at all.  You will then likely incur MORE costs, chasing the borrower in court, for the balance and not be able to get it because she has nothing, preserving the property, paying another agent to list and sell it, paying more in taxes and all the utilities will then become your banks issue, as MA is a superlien state.

What I see was a lot of last minute changing of information that possibly prohibits this sale, when last week when we got approval, we were all set to schedule closing.

I don’t think there is much more to discuss at this time.  It’s extremely disappointing.  I’ve done well over 300 short sales and never had a lender pull a last minute flip flop on their approval.  I make one last plea to allow us to close with the original letter from last week.  I don’t see how it’s a good business decision otherwise, but let me know.

Lender A
All our notes on system indicate that she was negating the release of the second mortgage and not allowing the $6,000 to the second as their approval indicates.  Notes clearly state that we allowed $500 and went back when that was denied to you to offer them $1,000.  Because you stated to me that things are being misunderstood by us, I put everything that was discussed in the final letter to make it clear.  Now you don’t like the letter because you are allowing the first to get $6,000 which you clearly know we were not allowing the $6,000 and because a letter that was sent didn’t clearly state this and now it does?

Here is the only HUD we have received from your office and we approved it based off of this.   This is what we were lead to believe.

Short Sale Mitigation, Massachusetts
Your bank cannot negate someone else’s release.  If the borrower paid them $6000 today, they can issue release, and that has nothing to do with your bank, but the borrower has nothing so that won’t happen.

You can either offer the $500, the $1000 or nothing to the second lien.  That’s up to you, but at this point if you cannot honor the terms of the original approval, I must take all of this information, including the three different approval letters, and contact the AG’s office, Office of Comptroller, and Consumer Protection Finance Bureau as the seller requested.  I want to make it perfectly clear I do NOT want to do that because we can close this on THURSDAY with the original approval letter.

Here is where he completely does NOT understand a lien release and dictating terms of an approval letter

Lender A
Yes, the first does dictate what the second is allowed in a closing inside the HUD1.  ***note from Maryann*** [This is partially true.  If the lender allows $500, without restrictions, then anyone can pay MORE to the second lien to finalize the sale.  Lender A had NO RESTRICTIONS in their original approval letter]If they (buyer, seller, agents) agree to pay something outside of the HUD to meet the 2nd mortgage request, I am fine with that.  You asked me for clarification on the short sale and I added more details [NO HE CHANGED APPROVAL LETTERS]to the short sale letter in hopes to put all information in our system notes and emails I was forwarded from both you and Nancy.

Please make sure you include all the emails and correspondence in regards to the short sale so they have a clear understanding both sides.

Short Sale Mitigation, LLC
Ok thank you.

I will forward to the closing attorney to see her thoughts and if we are allowed to use the first approval letter, I will request a final HUD for your review.  Does that work for you?

Lender A
That would be fine with me.  But again to be clear we are allowing the second $6,00 in the HUD.  If the buyer/seller pay the second prior to sale the $5,500 and they reissue a letter for $500 to release lien or settle (can’t believe we are being questioned here about only releasing our lien only and the second is doing the same) that is fine with me.  At this point if this doesn’t make sense I think it is best just to give me a call.

—————–

The last email is the best.  Here he writes, we are ALLOWING the second $6000 on the HUD.  Then says if we want to pay it PRIOR TO THE SALE  we should get a second approval letter – This is the funniest thing I’ve ever seen.  This is A VP at a bank.  I have NEVER EVER had this back and forth before.  Either you want to close your transaction or not.

The beauty is this whole sale just unraveled not because of the above, but because of a major title issue (currently being fixed) we DID however get them to cancel the foreclosure sale and they SAID they were issuing a NEW approval which is hysterical.  I’m sure it will be different the 5th time around.

So I ask you, is it FRAUD when a lender asks you to take something off the HUD you previously disclosed?  If I disclose to this lender that the buyer is making a $5500 payment and they ask me to remove it from the HUD is it fraudulent?  Why is this ok?  We are CLEARLY trying to disclose that we are making a payment to the second lien holder and had we closed with the original approval, we could have had the $5500 on the buyer’s side of the HUD.  Should a SELLER’s LENDER be allowed to dictate the BUYER’S side of the HUD?  Absolutely not.  Why then we would end up with the seller’s lender dictating points, fees, appraisal amounts, attorney fees, which has nothing to do with them.  Why is it ok for a lender to tell you to remove a fee from the HUD on the buyer’s side? That makes no sense. Why is it ok at all?  Do you know how many times we’ve been $200-$300 short for utilities in Massachusetts that someone ponied up, and we HAD it on the HUD and were asked to remove it?  It has to get paid.  Why is it ok for the lender to ask us to remove it and then cry fraud if something isn’t there.  It’s a double standard and not even remotely regulated, which is so sad.

Maryann Little, VP Short Sale Mitigation
Nick Aalerud, Exec VP Short Sale Mitigation, Broker New Hampshire / Massachusetts
http://shortsalemitigation.net
http://twitter.com/rapidshortsales
http://aapremierproperties.com
978-384-0032
603-505-4642 (f)
Stoneham, MA - Plaistow, NH
Short Sale Negotiation in Massachusetts and New Hampshire