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1st Mortgage investor limits on what can be paid to 2nd mortgage

Posted by Bonnie Milstead, CDPE, CRS, GRI on February 15, 2012 at 9:10am in Short Sale Discussions

First mortgage, Bank of America is allowing the second mortgage which is CCO Mortgage, 6% of outstanding second mortgage balance or an allowance of $1,554.40. Typical.

CCO rep tells me the balance is now written off and they want a total of $2,600.00 to release. Seller agrees to pay the $1,045.60 difference. Then I get this e-mail from Bank of America negotiator:

" Please be advised that the investor on this deal will not allow funds exceeding the amount on the approval letter to go toward the second lien. Therefore, we cannot approve a HUD which shows additional funds going toward the second lien, even if those funds are not coming from the sale."

First time I have come across this. Seller pay the difference outside of closing for a release of future liability????? Or tell CCO tough take the $1,554.40 and be happy???

Anyone encountered this?

Any input appreciated.

Thank you,

Bonnie Milstead, CRS, GRI

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Replies

Joseph Brooke February 19, 2012 at 4:14am

CCO will draw up two letters. One for the first lender and one for your seller to pay 10 days in advance of closing as a principle payment. If you want the deficiency waived it will cost you 20% of the balance.

Thanks
Joe
Michael Schneider February 17, 2012 at 4:45am

Yes, this is an ever topical issue. At the same time, the 2nd has the right to collect, and if a payment is made prior to settlement or after settlement, then there is a judgment issue on what constitutes a "settlement cost". I think the only really clear statement on this is that it really isn't clear. If a seller is effectively "forced" to make a payment, that could be considered circumventing the "clearly prohibited" in RESPA, and such payment is reasonable and results in settlement of the obligation, I really doubt that anyone is going to be subjected to litigation. Could be wrong on that, of course.

"We are going to sue you for making/accepting a $2,000 payment for full satisfaction of a $20,000 obligation." Kinda doubt this. CFPB is too busy with really important matters, such as the clarity of mortgage statements.
- Drew Ludlow > Michael Schneider February 17, 2012 at 3:48pm
  
  Awesome tangents... thanks for posting. Just before I read this, I had a moment where I seriously doubted my tactic of the seller simply paying the HOA a few extra bucks before closing to reduce the amount due, so they could be paid in full at closing.
  
  I questioned whether or not this was a RESPA violation and thought whether or not it was worth it. It is good to know that others see these things as gray areas.
Michael Schneider February 17, 2012 at 3:42am

RESPA violation is a common claim in real estate settlement. People often assert that a specific practice is a violation. And, they may indeed be.

So, about a year ago I wrote the HUD, the then enforced for RESPA, now CFBP. I was asking specific questions about paying for sale sale negotiation. Go to the source. I received a call back from an attorney at HUD. Very good guy, very knowledgeable, very informative. I was impressed.

As I recall, virtually every question I was asking was in what he described as the fringe or the gray area. Meaning, practices that are neither explicitly permitted by RESPA not prohibited by case law, HUD opinions, or declaratory rulings.

In short, again as I recall, this expert attorney was basically stating that there is virtually no clear direction one way or the other for most of the settlement practices specific to the handling of short sales.

Sound judgment must be used.
- Joseph Alfe > Michael Schneider February 17, 2012 at 4:21am
  
  Good answer. Recall a recent article and news cycle regarding lenders demanding off RESPA payments. It was a big deal for awhile and they are sensitive about it, so when you use the tacktic I mentioned you can usually get results.
Michael Schneider February 16, 2012 at 8:42am

So, when are Freddie and Fannie going to be aligned. Wasn't that suppose to have happened by now?
- Joseph Alfe > Michael Schneider February 16, 2012 at 5:40pm
  
  never. They are and always will be separate. What I think you will see is Freddie going away and Fannie either absorbing some of their paper or a new completely government (not private) controlled entity emerging.
  - Michael Schneider > Joseph Alfe February 17, 2012 at 3:33am
    
    I mean the plan stated last summer under which Fannie and Freddie would align their collection's processes, which presumably includes short sale guidelines.
Drew Ludlow February 15, 2012 at 3:08pm

This is standard FNMA policy. No one can contribute to the release of a junior lien beyond what the 1st offers. This is in writing (somewhere... I've read it) and it has been recounted to me time and time again by others in the business.

BUT... I was successful (once) in breaking this tradition. I sent an email to ssad_information@fanniemae.com. I explained the situation. Lo and behold, about 21 days later, it was approved.

FNMA has a helpdesk somewhere in Timbuktu that actually tries to resolve these situations.

Check out this link: https://www.efanniemae.com/is/reprofessionals/pdf/ssadfaqs.pdf It says that your local MLS has to subscribe... but mine doesn't and I was still able to get help.
- Joseph Alfe > Drew Ludlow February 15, 2012 at 3:17pm
  
  not quite. FNMA policy is to not allow any contribution from seller proceeds. Freddie certainly has language that restricts any contribution from any source. On HUD, you list as buyer contribution to..." and FNMA will approve it.