As published in Scotsman Guide's Residential Edition, May 2012.
Distressed properties have become a large percentage of the housing market in the past few years, and many homeowners continue to face foreclosure in today’s market. In fact, according to data from the National Association of Realtors, distressed sales accounted for 35 percent of the residential market this past January.
In addition, Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) currently own approximately 215,000 distressed properties. This volume is so significant that it’s begun to impact the industry’s practices and its residential lending products.
These properties can come with a host of challenges, however. It’s increasingly important for mortgage brokers and originators to be well-versed in working with distressed properties and to be prepared for some of the problems that occur when originating distressed-property loans. Overcoming these issues may be easier than some people think — and can help originators close more loans and help more customers.
When originating loans for distressed properties, there are several common problems well worth your attention. Further, mortgage brokers and originators should be acquainted with the number of special programs specifically designed for certain types of distressed properties, including programs that are offered by Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development (HUD), among others.
By definition, distressed properties typically are in poor financial or physical condition, which can trigger additional title or appraisal issues during financing. To achieve a higher closing ratio when working with distressed properties, brokers and originators must carefully review the house and lot in question, choose the right loan program and communicate well with all parties involved.
Ultimately, some failures may be inevitable in the distressed-property business, but keeping yourself prepared for a few of the most common pitfalls can help you improve your chances of closing loans in even the most complicated scenarios.
Many distressed properties have titles that were transferred only recently from the prior homeowner. To complicate matters even further, the property’s title often shows multiple liens, like judgment liens, tax liens or homeowner’s association (HOA) liens. As a result, title problems are common to distressed properties. Some of these issues can be easily solved, but others must be carefully considered before choosing a prospective lender for a loan.
Brokers and originators should know that a common underwriting requirement is to provide documentation that proves the seller’s signer is authorized to sign on behalf of the seller. Oftentimes, it’s difficult to determine the name that appears in the actual signature, however.
In this case, many mortgage professionals would contact the seller’s Realtor, but in fact the correct channel to pursue is the title company itself, which should have the name of the documents’ signer in addition to any paperwork regarding the authorization of this person. Proper communication is key to solving this all-too-common snag.
Additional title problems often are related to specific lenders’ guidelines. Because some lenders never accept certain types of titles or properties, originators must carefully consider and understand each lender’s closing guidelines before submitting their files. Here are a few of the common conflicts related to lender guidelines and title requirements:
If the given property’s title was transferred to the current seller in the past six months, a second-level underwriting review may be required. Some lenders may not even allow these transactions, as this kind of scenario could be perceived as a flip — even in cases when it’s not.
The seller may need a mail-out closing. As a result, some sellers cannot sign the closing document until one or more days after the buyer signs.
The title company may require funds before either the buyer or seller’s signing.
The lender may require a closing protection letter (CPL). Some seller-appointed title companies do not offer CPLs, however, potentially complicating a deal’s closing.
Frequently, brokers may have to compromise in terms of pricing and send the loan to a less demanding lender with less competitive pricing.
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