Freddie Was the Birthplace of the Restraint on Alienation Affidavit in Common Short Sale Deal Documents

You know the popular lender trend of requiring draconian affidavits with every short sale, essentially promising your first-born that if you are buying a short sale property, you will NEVER have anything to do with the untouchable caste made up of the previous homeowner.  You will not talk to them, lease to them, spit on them, you have never met them in your life.  All of this for the privilege of paying above foreclosure prices to the so-called “lender” aka loan servicer with perverse incentives and with naked collection rights.

Undue restriction: the shortsale leaseback prohibition.  Full article here:

The devil’s in the (shortsale) details

It may come as an unwelcome surprise to even the most inveterate of shortsale experts out there, but this prohibition against a leaseback arrangement with a former owner has suddenly become a mainstay in lender shortsale practice. All the Big Lenders (Bank of America, Chase, Citibank and Wells Fargo), as well as the slough of smaller banks researched by first tuesday had a variation of the above prohibition in their Affidavit of Arm’s Length Transaction (affidavit) form, required to be signed by all brokers, escrow and parties to a shortsale transaction before the close of escrow.

Even worse: the prohibition isn’t merely lender collusion to punish homeowners (although that certainly continues), but a reflection of Freddie Mac’s (Freddie’s) policy of abrasively handling owners seeking approval of a discounted payoff on a shortsale.

The government (Freddie’s) prohibition against leaseback arrangements with shortsale sellers stems from an implicit unwillingness to stray from the old paradigm of protecting lender interests against adverse public expectations. A moralistic concept persists that negative equity homeowners who obtain shortpay approvals are being given a gift, for what the lender perceives as bad behavior by homeowners in taking out these loans in the first place and then not finding a way to pay them. (Of course, the gift has no value since the homeowner’s credit is destroyed by the lender on the giving.)

And, to lenders and their defenders, the idea of allowing homeowners to remain in the property as tenants is completely untenable — if lenders are taking a loss (covered by the U.S. Treasury), then so must homeowners to the full extent permitted. It’s the same backwards idea behind continued lender and government refusal to re-authorize bankruptcy judges to cramdown loan balances so that employed individuals need not lose the place they call home for loss of its value. [For more information about cramdowns, see the November 2011 first tuesday article, Surprise: Frannie says “no thank you” to cramdowns.]

A pound of flesh

Of course, the dyed-in-the-wool lender response is that prohibiting leasebacks helps cut down on shortsale fraud schemes in which the homeowner enters into a leaseback agreement with an “investor” who also promises to later transfer title back to the homeowner once a sufficiently egregious amount of profit has been paid by the homeowner —profit the lender believes it is entitled to (and it is). Make no mistake: these so-called “lease-options” are bad business and the government is right to protect vulnerable and desperate homeowners from entering into these abusive arrangements.

Editor’s note — Shattered promises of housing relief, exorbitant fees strung out over time so as to mask true intentions and a quick and unpleasant wake-up call: this writer can’t help but notice that these predatory sale-leaseback scams have all the hallmarks of a good, now-fashionable temporary loan mod…

But, by that logic, a resale prohibition alone is sufficient to keep these bad actors (private lenders) from plying their nefarious sale-lease-option trade. Why extend it to simple leaseback arrangements? Leaseback arrangements not only allow a homeowner to avoid displacing his family and incurring the costs involved, but create a viable means of spurring investor activity in the market to clear out the delinquencies (by shortsale) and foreclosures — not to mention the business generated for struggling real estate professionals. The restriction is especially baffling given that Fannie Mae (Fannie), the other government-sponsored (owned) entity (GSE), has been offering a deed-for-lease arrangement for two years.

. . .

Advocacy is your business

The government and the people, in conceiving regulations to protect the housing market from abuse, must rebuild with the idea of protecting the population’s housing rights. The nation’s housing policy cannot be allowed to sell the idea of homeownership with one breath, and stand with lenders to declare war on it with the next when the limitations are not reasonable. This all is parallel to the due-on enforcement Congress allowed lenders in 1982 ending an owner’s right to sell a property subject to the real estate loan encumbering it. [For more information about the due-on clause inhibiting California real estate, see the March 2011 first tuesday article, The due-on-sale clause: barricading homeowners since ’82.]

Thus, brokers and agents, as gatekeepers to real estate, must join in with the chorus of those demanding change. Make your voice heard by your Congressional representatives, and get out there and do your part to support the rights of the 99% against rentier oppression! [For more information about joining the movement to even out the power between Main Street and Wall Street, see the October 2011 first tuesday article, Unions occupy Wall Street — where are the Realtors?]

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