Monthly Archives: March 2011

Update: Quirks of buying FNMA foreclosure

This month I did four closings for clients buying foreclosed homes owned by Fannie Mae (FNMA). FNMA mortgages account for well more than 50% of the mortgages in the universe and its Homepath website lists all of the FNMA foreclosures currently for sale. Many of the foreclosed homes on the market (also known as “real estate owned” (REOs)) are FNMA owned, so if you are buying a foreclosure, its likely that it is FNMA owned. 

Buying a FNMA home is easier than buying a short sale, but harder than buying from a seller who’s not in foreclosure.  In October 2009, I wrote about the quirks of buying a FNMA foreclosure. Buying a FNMA is still as quirky as Napoleon Dynamite on a first date, but it’s a little easier than it was in 2009. Here’s an update on what to expect if you buy a FNMA foreclosure:

1.The infamous addendum still exists. This is a rider that goes on the standard real estate contract.  The addendum is hard to understand. It still takes about one week from the time the offer is submitted to get the final signed contract and addendum back from FNMA. Most of the time, we get the final signed contract back faster now than we did in the past.

2. Acknowledgement Date Confusion. The FNMA Addendum still  has a weirdo clause that says the inspection contingency starts on the date of verbal “acknowledgement” of acceptance of the offer by FNMA. No other REO sellers do this, only FNMA.   Be sure to set up your inspection right away, or ask in writing for an extension of the inspection contingency, so that you don’t accidentally blow the contingency date. I really wish they would get rid of this and just start from the date of acceptance of the contract.  I have not had any problems with this, but you have to be on top of scheduling the inspection and do it right away.

3. Dewinterizing for Inspection. All REO sales are winterized, meaning the water and utilities are shut off. You need them turned on to inspect the property. Back in the good old days of 2009, FNMA often forced the buyer to dewinterize the property which was a hassle because you had to have a plumber there to plug the two thousand leaks that sprung when the water was turned on. Thankfully, FNMA now almost always dewinterizes the house before the home inspection instead of passing it off on the buyer, which is good. In my experience, you are unlikely to get any credits after the inspection and FNMA will not agree to repair anything. Unfortunately, clients rarely listen to me on this and insist on bringing up a long list of repairs that FNMA always rejects.

4. Title Insurance, Transfer tax and survey. FNMA used to try to get the buyer to pay for seller’s title insurance and often tried to get the buyer to pay for the village transfer tax. I find that they don’t do this much anymore. FNMA will not provide a survey and never has. They now always pay for title insurance and usually pay for the state, county and municipal transfer tax. I always confirm that they will pay for these in my attorney approval letter.

5. Penalties for closing late. The addendum has some wicked penalties for closing late. Generally, the reason one would close late is because the mortgage approval is delayed. As long as the mortgage contingency extension has been requested there will not be any penalties. Recently, I have not had any client pay a closing delay fee, so FNMA seems to have lightened up. FNMA attorneys often randomly say “the house is going back on the market if you don’t close by Friday.”   All extensions, whether for the closing date or the mortgage contingency, have to be signed by the Buyer and have to be on the FNMA form. This is annoying, but it’s just how it’s done.

6. Keys at closing. FNMA homes supposedly are all “keyed” the same with one master key. So the addendum said that no keys will be given at closing and a few times the listing agent demanded back all keys at closing. The poor buyer closed on the home and couldn’t get in without calling a locksmith. Now they are supposed to charge a $120.00 re-key fee to the buyer, but they do furnish a key at the closing.

7. Other issues.

-Like most REO closings, no seller’s representative attends closing and it can still take up to 48 hours to get the seller to sign the closing statement. The buyer cannot move in until the seller signs the closing statement. This is pretty obnoxious, but lately the seller has been signing the closing statement within a few hours of closing.

-Be sure to check the water bill because it is often missed and should be paid in full by FNMA at closing.

-If you are buying a condo from FNMA, be sure to ask them to pay the 6 months dues from the prior foreclosed owner. Even though this can be passed to the buyer under Illinois law, FNMA will usually pay it. It often takes up until the closing date to resolve this issue. Don’t give up on it.

Garbage can charges morph into loan origination fee

I’ve had several buy closings in the last few weeks and it’s surprising  to see how much closing costs have increased since the new Good Faith Estimate (GFE) rules began in January 2010.

It used to be that all lenders charged several “garbage can charges” (my cracker barrel, semi-derogatory  term for excessive closing costs) on the RESPA.

In the old days, common charges were a tax service fee of $70, flood plain check fee of $29 and some sort of document preparation fee of $200 or so.  Standard, non-gouging garbage can charges usually added up to about $300.  There were exceptions to this and many times we would see ridiculous add-ons like “table funding fee” and “loan administration fee” from $300 to $1200.00.

When the new GFE law started, all the garbage can charges were bundled into one “Loan Origination Charge” on line 803 of the RESPA closing statement.  The charges are no longer broken down separately, but  all appear as one lump sum. Buyers have no control over title charges and the other costs on the RESPA. Line 803 is really the only item that a buyer can control.  But,  Line 803 costs have risen over the last year, mostly because buyers don’t questions the cost. Here is a summary of what I have seen over my last few closings:

1. Buy of Rolling Meadows foreclosure                  Origination charge  $1749.00

2. By owner buy of Palatine condo                           Origination charge $1295.00

3. Buy of Northbrook home                                        Orgination charge $1580.00

4. Buy of Carpentersville foreclosure                      Origination charge $3131.00

5. Buy of Palatine home                                                 Origination charge $650.00

If I were buying a home, I don’t think I would pay more than about $600 for origination fees. I have no idea why origination charges have become so inflated.  The average of the above five closings is  over $1600.00 and I think that is way too high.  There is no reason or purpose for these charges other than extra income for the lender. (Note: If your lender is a mortgage broker, there is a complex interplay of the “yield spread” paid to a mortgage broker from the underlying lender into the line 803 costs, but in the risk of boring you to tears, I’m not going to torture you with an explanation of that here. But, it’s not the yield spread that is making these costs higher.)

Closing number 4 above is a case of  classic  overcharging with a whopping  $3131.00 origination fee. I always suggest that clients send me the GFE to review before they go ahead with the loan.  My clients did not send it to me in that case. The first time I saw it was at the closing. The loan officer told them it was his “standard charge on an FHA mortgage.”  Being trusting souls, they agreed to the overcharge and the lender made an extra $2k.  FHA places  no limit on how much can be charged for an origination charge. It is strictly up to the lender to charge what they want on an FHA and it is negotiable.

So if you are refinancing or buying, beware of the origination charge and try not to pay more than $600.00.