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Seasoning Issue Solved
Posted by Verve on October 21, 2008 at 10:43 PM
In Reply to: A Brief Tutorial on Title Seasoning (with references) posted by CC in OC on October 21, 2008 at 5:24 AM
I'm surprised nobody has mentioned using a title holding trust to circumvent the seasoning issue. I've taken title for dozens of props via THT's and never have had a seasoning issue, ever. Thanks Uncle Ward for your Trust class...it's paid off in droves...
: 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!
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