|
Home
Discussion Board
"Hands-On" Training
Title Holding Trust
Annual Reunion
Speaking Schedule
Store
Foreclosure Fundamentals
Code References
50 State Foreclosure Basics
Foreclosure Glossary
Foreclosure Statistics
70+ Yrs Interest Rates
Fillable Forms
Archived Articles
Dingbat Retirement Plan
Links
Contact / Map
About Us
Home
|
[ Follow Ups ] [ Post Followup ] [ The Forum Board ] [ FAQ ]
A Brief Tutorial on Title Seasoning (with references)
Posted by CC in OC on October 21, 2008 at 5:24 AM
There continues to be much confusion about title seasoning among homebuyers,
loan originators and even flippers, as evidenced by this article posted on a
discussion board whose raison d’etre is flipping houses. The author of this article
frequently puts the em-PHA-sis on the wrong syl-LA-ble. http://www.flippinghomes.com/articles/readarticle.aspx?artid=37 Nonetheless, the author makes some good points, so I’ll address them in order of
importance. Here’s an example of loan originators discussing title seasoning ad nauseam at a
broker discussion board. You can readily see the confusion among them as to how
to interpret Agency guidelines. http://forum.brokeroutpost.com/loans/forum/2/238672.htm It will be helpful to establish some nomenclature for the real estate industry. LOAN ORIGINATOR: Independent mortgage brokers and loan officers at retail
banks. FLIPPER: Wholesale buyer of real estate who intends to resell the property to an
owner occupant soon after purchasing it. INVESTOR: The ultimate entity that’s loaning the money. Until their demise,
“investor” included some of the largest investment bankers on Wall Street: Merrill
Lynch, Bear Stearns, Lehman Brothers, etc. AGENCY: The Big Kahuna of investors is, of course, Fannie Mae and Freddie Mac.
They own the loans covering half the nation’s $14 trillion in housing stock. They’re
quasi-governmental agencies of the United States Government, so loans that
conform to their underwriting guidelines are called “Agency” or “conforming” loans. SECONDARY MARKET: Here’s a detailed explanation of the secondary market, so I’ll
just post the link here. http://www.finweb.com/mortgage-loan-education/secondary-market.html CONFORMING: Loans that conform to the loan limits and underwriting guidelines of
Fannie Mae and Freddie Mac. Loans sold in the secondary market—that is, not held for an investor’s own
portfolio—can be either conforming or non-conforming. If conforming, the loan
amount cannot exceed guidelines as determined by the Office of Federal Housing
Enterprise Oversight (OFHEO) and established yearly pursuant to the cost of living
and census data. The 2009 conforming loan limits will be announced on November
7, 2008. You can read about it here... http://www.OFHEO.gov Other investors include local banks and credit unions. Even if an investor holds a
loan for its own portfolio, they generally underwrite according to Agency guidelines.
This is because they may want to sell to Fannie/Freddie at some time in the future,
so they underwrite in a manner that allows them to do so. VA: Veterans Administration. Loans are available only to owner occupants who
served in any branch of our armed services. FHA: Federal Housing Administration. FHA loans are available only to owner
occupants. FHA loans aren’t conforming loans and conforming loans aren’t FHA
loans, although they share many characteristics, such as “automated underwriting”
(AU) and mortgage insurance. In fact, FHA adopted Fannie/Freddie’s automated
underwriting systems in toto--that is, if a borrower receives AU approval, many
FHA lenders will accept that decision and add no other conditions to the loan
approval. On the other hand, if a borrower doesn’t conform to Agency guidelines, an FHA
underwriter may be empowered to manually underwrite the file—that is, use his/her
best judgment or, as they like to call it, “common sense underwriting.” Many
lenders promote manual underwriting as a plus to attract loan submissions by loan
originators whose borrowers are not approvable through DU. DU: Desktop Underwriter, the automated underwriting decisioning algorithm
adopted by Fannie Mae. LP: Loan Prospector, the automated underwriting decisioning algorithm adopted by
Freddie Mac. Both these decisioning algorithms consist, literally, of artificial intelligence, even
though the decisions generated by them sometimes seem less than intelligent. AU
isn’t going away soon, however, so knowing how a prospective borrower achieves
AU approval is time well spent by the flipper, in my opinion. Of course, the flipper’s
preferred lender should know this stuff like the back of his/her hand. For example, some risk factors of a particular borrower may suggest that approval
will be easier to get from Freddie Mac. An experienced loan originator knows how
to initially evaluate a borrower so as to select a lender that uses an AU system
(some lenders offer both) that is most amenable to the borrower’s risk
characteristics. Both DU and LP access the three major credit bureaus and use the mid-score of
both borrowers for qualifying purposes. The best way to stay abreast of rapidly changing developments in INSTITUTIONAL
lending is to visit the websites of the lenders themselves. Most of these websites
are accessible only to loan originators via username/password, but Agency and FHA
guidelines can be accessed by anyone. In my opinion, it’s a good idea for flippers to
bookmark these sites so they can read for themselves what’s happening—lately on a
near-daily basis! Warning--Fannie Mae and Freddie Mac websites are vast! It’s often difficult for the
layperson to locate specific guidance by surfing these websites. Lenders’
underwriters, of course, have hotlines and top-tier contacts to whom they can turn
when they’re unsure about something. Loan originators, who are the boots on the
ground, typically turn to lenders’ wholesale reps, who often don’t know the
guidelines themselves. Combine that with unclear writing (especially by FHA) and
you have the recipe for the confusion I cited at the beginning of this post. It’s not
uncommon for a bulletin or announcement to contradict another, with the
subsequent “clarification” being not much better! FHA Handbook 4155.1, Revision 5 (underwriting requirements for single family [1-
4] units)
http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/index.cfm FHA Mortgagee Letters
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee Fannie Mae Single Family [1-4 units] Guides
http://tinyurl.com/6d8r5q Fannie Mae Announcements and Letters
http://tinyurl.com/6d8r5q Freddie Mac Single Family [1-4 units] Seller Servicer Guide
http://www.freddiemac.com/singlefamily/# Freddie Mac Bulletins and Industry Letters
http://www.freddiemac.com/sell/guide/bulletins REPS AND WARRANTIES: The short answer is that investors require lenders to
adhere to specific representations and warranties when selling loans to them in the
secondary market. If the lender funds a loan outside the reps and warranties AND
THE LOAN GOES BAD, the lender must buy the loan back—which is definitely
something they do not want to do. If lenders must buy back very many loans,
they’re out of business. If you’d really like to read about this dry but fascinating subject, here’s a book about
“asset based lending.” http://tinyurl.com/59zwab RISK OVERLAYS: In addition to adhering to reps and warranties imposed by their
investors, lenders may impose additional conditions to further insulate themselves
from the possibility that they may have to buy back a loan. Lender risk overlays
have emerged as a result of the credit crisis. For a loan originator, they’re hard to
keep up with. One may think they have DU approval, only to learn that the
particular lender also has risk overlays with which to contend. Here’s an article that
partially explains risk overlays in a cynical but humorous way. http://calculatedrisk.blogspot.com/2007/03/ficos-and-aus-we-will-add-
your.html Also, the Calculated Risk blog is worthy of bookmarking, in my opinion. Now…moving on to title seasoning. It’s my opinion that seasoning requirements by
lenders as a way to insulate themselves against fraud are well-deserved. While I’m
sure no one on this board would buy a house, get in cahoots with an appraiser to
inflate the value and resell it to an unsuspecting homebuyer, exactly that is done
routinely. In fact, the FHA 203(k) rehab program was closed to flippers because they ruined it
with fraudulent “rehabs” that never occurred. For this reason, it’s unlikely to return
for non-owner occupants, even though it would be beneficial at this time for
clearing the nation's housing stock. FHA has been burned too badly in the past to
ever open the program again to flippers. I have no doubt that if re-opened to
flippers, FHA would again experience enormous losses from flipper fraud. From
FHA’s point of view, it’s just not worth the risk. Title seasoning for end buyers using an FHA loan is 90 days. A flipper may not enter
into a contract with an end buyer until the 91st day of his/her ownership. An
appraisal may not be dated until after the contract date. A flipper can’t shorten
his/her holding period by submitting a loan for processing or underwriting before
the 91st day because the Truth-in-Lending and other mandatory Federal
disclosures can’t be dated before the 91st day of the flipper’s ownership. Title seasoning for end buyers using an Agency loan varies from lender to lender;
typically 6 to 12 months. Here’s someone who says 90 days but I don't know any
such lenders. http://activerain.com/blogsview/367410/New-things-to-be The reason the title seasoning period varies is that Fannie and Freddie have no
specifically stated seasoning requirements for new buyers (that I can see); however,
they have very specific seasoning requirements for refinances by current owners.
Here’s an example. http://tinyurl.com/6oac9o When you think about it, this makes sense. If a person buys a home in January with
a 20% down payment, and does a cash out refinance in March, the homeownwer has
essentially juiced the lender’s collateral of the lender’s security for the loan; that is,
the equity in the property. Therefore, Fannie/Freddie have strict guidelines
regarding cash out refinances. To lenders’ collective thinking, the same stripping of equity occurs when a flipper
buys a property in January for $100,000 and sells it in February for $150,000. How
was this new higher value derived? Flippers reason, “Well, through good old
fashioned ‘buy low sell higher’ investment strategies.” In some cases, a flipper-
seller can provide rehab receipts, etc. sufficient to convince a lender that he has, in
fact, added value to the lender’s collateral. Mainly, however, lenders, as a collective consciousness, say, “We’ll just apply Agency
guidelines regarding cash out refinance title seasoning to new purchases, too. That
way, we won’t have to put on our thinking caps and possibly run afoul of Agency
title seasoning guidelines. We sure don’t want to buy any loans back!” Right or wrong, when the flipper’s end buyer obtains Agency financing, title
seasoning becomes an issue 98% of the time. At this writing, Citimortgage is the
only large Agency lender I know of that doesn’t impose title seasoning requirements
for new buyers. As my wholesale rep said, however, “that could change at any
time.” “No seasoning” is a strong selling point, then, for lenders that have no title
seasoning requirements for end buyers. An example of one such lender is located
locally. This is not an endorsement of this lender; only an example of a lender that
responded in the affirmative to my many inquiries to lenders concerning title
seasoning. Trimark Funding, Inc.
5101 E. La Palma Ave. Ste. 101
Anaheim, CA 92807
Mark Reynolds
Cell #: 714-336-0835 I’m sure there are other lenders, and it would benefit a flipper to do some research
of his/her own to determine who they are. Otherwise, you may get to the end of the
loan approval process only to hear “insufficient title seasoning” as a loan approval
condition. All lenders require a 24-month chain of title to be included in the preliminary title
report. Most lenders will at least consider, from thorough documentation of the value
added by the flipper, allowing the new buyer’s loan-to-value calculations to be
based on the new (higher) appraised value. To anyone who says, “title seasoning on resale isn’t an issue for me,” I would
request that you list the lenders who funded such loans and shorten the research
for your fellow flippers. That's all for now!
Follow Ups:
Post a Followup:
|
