Disclosure of Commission Rebate

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FHA’s Waiver of the Property Flipping Regulation is Scheduled to Expire

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Can a Lender Require You to Obtain Flood Insurance Above the Amount Required by Federal Law?

Faez v. Wells Fargo Bank, N.A., et al., 745 F.3d 1098 (11th Cir. 2014)

According to a recent decision by the United States Court of Appeals for the Eleventh Circuit, lenders can require borrowers with a federally-insured mortgage to obtain flood insurance above and beyond the amount required by the Federal Housing Administration (FHA).

In the case of Faez v. Wells Fargo Bank, N.A., et al., 745 F.3d 1098 (11th Cir. 2014), the borrower, Farie Faez, obtained a $61,928.00 FHA-insured mortgage. Ms. Faez then secured $63,000.00 in flood insurance, an amount greater than the loan’s principal balance, but less than the home’s replacement value. Wells Fargo, after having acquired Ms. Faez’s mortgage, demanded that she increase her flood insurance to cover the replacement value of her home. Ms. Faez declined to do so; at which point, Wells Fargo force-placed the increased insurance, passing the premium cost along to Ms. Faez. Thereafter, Ms. Faez filed suit against Wells Fargo claiming that the lender breached the mortgage contract by forcing her to obtain more insurance than federal law requires.

Because the Secretary of HUD requires flood insurance coverage in the lesser of $250,000.00 or the loan’s principal balance, Ms. Faez argued that Wells Fargo could not require her to obtain more flood insurance than her loan’s principal balance, which is less than $250,000.00. Wells Fargo countered by asserting that the regulation sets a floor, rather than a ceiling, on the amount of flood insurance that a borrower must obtain.

After examining the subject regulation and the mortgage contract, the Eleventh Circuit ultimately agreed with Wells Fargo, holding that “the only reasonable interpretation…is that a mortgage lender may require the borrower to have more flood insurance than the HUD-determined minimum.” In reaching this conclusion, the Court noted that the mortgage contract between Ms. Faez and Wells Fargo allows the lender to “do and pay whatever is necessary” to “protect the value of the property,” which extends to the replacement value of the home. The Court additionally cited FHA’s goal of encouraging affordable home ownership and cited concern that a ruling in favor of Ms. Faez could result in lenders declining to offer FHA-insured mortgages in high risk flood areas, or passing the expense of their increased risk of loss along to the borrower. Consequently, it is now clear that lenders can require borrowers with FHA-insured loans to obtain flood insurance in an amount equal to the home’s replacement value.

Why This is Important to Your Clients

“Flood Damage” is not covered by your homeowners or business policy and is the leading cause of property loss from natural disasters. In recent years Arizona wildfires have made more Arizona residents vulnerable to flooding.

Important features of the National Flood Insurance Program (NFIP) are:

  • Everyone can and should have flood insurance. Even if you do not live in a designated flood zone you can purchase flood insurance if your community participates in the NFIP. Anyone can get flooded. More than 90 percent of all Presidentially declared disasters involve flooding.
  • You can insure your home for up to $250,000. Contents coverage, up to $100,000 is separate. Renters can insure their belongings, too.
  • Flood insurance pays even when no disaster is declared. Statistically, federal disaster declarations are issued in less than 50 percent of flooding incidents. An NFIP policy will pay for flood damage whether or not there is a federal disaster declaration.

Source FEMA – http://www.fema.gov/news-release/2002/07/26/arizona-residents-are-urged-buy-flood-insurance

New HUD Regulations Concerning pre-foreclosure Sales Impact Listing Agents and Brokers

Updated Requirements Issued for FHA Pre-Foreclosure Sales and Deeds in Lieu of Foreclosure

On July 10, 2014, the U.S. Department of Housing and Urban Development (HUD) released a new Mortgagee Letter, 2014-15, addressing updated requirements for pre-foreclosure sales and deeds in lieu of foreclosure. While the letter restates many previously implemented criteria, it does include new regulations. Although these new regulations can, in some cases, be immediately implemented if participating lenders choose to do so, the new rules must be in effect for all lenders by October 1, 2014.

One of the most important new sections of Mortgagee Letter 2014-15 addresses when a borrower may be eligible for a deed-in-lieu or a pre-foreclosure sale.  In the event that none of FHA’s loss mitigation home retention options are applicable to the borrower, the FHA has prioritized the non-home retention options that must be offered by FHA approved lenders. First, a borrower in default or at imminent risk of default must be evaluated for a pre-foreclosure sale option. If unable to qualify for this form of relief, the lender must then consider the borrower for a deed-in-lieu of foreclosure.

By way of its new mortgagee letter, HUD carefully distinguishes standard pre-foreclosure sales and streamlined pre-foreclosure sales. Notably, a standard pre-foreclosure sale is available only to owner occupants experiencing a hardship as determined by the Deficit Income Test (DIT). Under this test, DIT is calculated by subtracting the borrower’s total monthly expenses from total monthly net income.  A DIT yielding a negative amount would indicate a financial hardship justifying a standard pre-foreclosure sale. While some borrowers have shied away from non-home retention options based on credit concerns, the letter specifically states that mortgagees must not report pre-foreclosure sales or deeds in lieu to credit bureaus as foreclosures.

As for streamlined pre-foreclosure sales and deeds in lieu of foreclosure, these options are available to both owner occupants and non-owner occupants and can be processed without verification of the borrower’s hardship and without review of a complete mortgagor workout packet. However, lenders can only approve these options if: (1) the borrower is 90 days or more delinquent on their FHA-insured loan; and (2) each borrower has a credit score of 620 or below.

Of interest to real estate licensees are new requirements imposed upon listing agents and listing brokers. First, the property must be listed in the Multiple Listing Service for 15 calendar days before offers are evaluated. Second, if multiple offers are being evaluated, listing agents and brokers “must forward to the mortgagee or its designee the offer that: (1) yields the highest net return to HUD; and (2) meets HUD’s guidelines regarding bid requirements detailed in ML 2008-43 or successive MLs.”

Of additional importance is that portion of the letter that expressly permits dual agency in all pre-foreclosure sales. As explained by Sara Young of the National Association of REALTORS®, “Dual agency includes transactions in which two agents are working for the same broker and one agent represents the seller and the other agent represents the buyer. Dual agency also applies to a single agent who represents both the buyer and the seller in a short sale transaction.”

To reflect the changes implemented by Mortgagee Letter 2014-15, revisions have been made to HUD’s Sample Pre-Foreclosure Sale Addendum. Among the changes, the name of the listing broker and the buyer’s broker are to be identified in the addendum. Language has also been added by which the parties acknowledge that real estate agents and brokers are permitted to serve in more than one capacity, such as a dual agent. Finally, by way of the addendum, the listing agent and broker must now certify compliance with: (1) the 15-day listing requirement; and (2) their obligation to submit the offer that yields the highest net return and meets HUD’s bid requirements.

Additional information concerning Mortgagee Letter 2014-15 can be found at www.hud.gov/answers and questions can be directed to the HUD National Servicing Center at (877) 622-8525.

Fair Housing’s Disparate Impact

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HUD Debuts Fair Housing Mobile App

The U.S. Department of Housing and Urban Development (HUD) has created a free mobile app that allows users to instantly file housing discrimination complaints.

“Having this first fair housing mobile application equips people everywhere with the information they need to combat housing discrimination,” says John Trasviña, HUD assistant secretary for fair housing and equal opportunity. “We are maximizing the latest technology to make the process for filing fair housing complaints faster and easier and arming our fair housing partners with the information they need to understand their fair housing rights and responsibilities.”

The app, available for the iPhone and iPad, includes information about the Fair Housing Act, HUD’s fair housing toll-free discrimination hotline, and information on housing rights following a natural disaster.

Source: “HUD rolls out fair housing mobile app,” Inman News (March 5, 2013)

Fair Housing Case Goes to Supreme Court

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