Short Sale Blog

Practically everyone. Let’s examine things:

The term “Distressed Home Consultant” went into effect in Washington State on June 12, 2008. It is part of the new “Distressed Properties Law” created during the 2008 Washington State Legislative Session and signed into law by Governor Christine Gregoire on March 30, 2008.

The purpose of the law was to protect vulnerable homeowners from being targeted by ‘equity-skimmers’ and ‘lease-option’ investors. For example, a homeowner with a substantial amount of equity, who faced difficulties in making their mortgage payments would be approached by an investor who would offer to make their mortgage payments in exchange for the deed to their house.

After a period of time, say 12 to 24 months, the homeowner would have the option of buying back their house. In reality, the homeowner would have little chance at either staying current on the rent, and face eviction or come to the end of the rental period and be in no situation to qualify for a loan and buy the house back. Either way, the investor ends up with the house and a lot of equity.

If the law focused narrowly on that issue, it would have been helpful. Unfortunately, the way it was drafted makes it even harder now for homeowners in distress to find help. Clearly a case of overreach by lawmakers who don’t fully understand the situation.

At the heart of the law is the idea of all parties to a transaction with a distressed homeowner needing to exercise ‘fiduciary responsibility’ towards the homeowner. Imagine a homeowner who has decided to sell their home. The buyer, and the buyer’s agent, under the provisions of this law, are now classified as Distressed Home Consultants. Buyer’s do not typically have to take into consideration the financial situation of the seller. They are simply making a purchase decision for their own account. This law may have the effect of scaring away buyers, when a buyer is exactly what the homeowner needs at that moment.

In addition, any real estate agent who engages with a homeowner who is in financial distress will automatically be labeled a Distressed Home Consultant.  Many agents will not want to expose themselves to the  liability  and choose to not represent these homeowners in need. Again, this law, while having good intentions, suffers from overreach, and serves to reduce the amount of qualified help for homeowners.

According to a study prepared for the Department of Housing and Urban Development, the home-mortgage industry takes advantage of lower income, lesser educated borrowers to charge higher fees.

The following article is from the May 30, 2008 Wall Street Journal article by James R. Hagerty:

The study by Susan Woodward, a former chief economist for HUD, also found that loans arranged by brokers typically carried higher fees than those obtained directly from lenders.

The report, released Thursday, is based on an analysis of 7,560 fixed-rate home-purchase loans completed in May and June 2001 and insured by the Federal Housing Administration, an arm of HUD.

The study says lenders typically make better offers to borrowers in neighborhoods with higher general levels of education.

Total fees paid to the lender and broker averaged nearly $3,400 on loans with an average initial principal balance of $105,000, the report said. For brokered loans, the average fees were $4,000, compared with $3,150 for loans made directly by the lender. Those fees are a combination of upfront charges and additional funds brokers and lenders get for selling loans with relatively high interest rates.

For brokers, these additional payments are known as yield-spread premiums. Brokers often defend yield-spread premiums as a way for borrowers to reduce their upfront fees in exchange for paying a slightly higher interest rate. But the study found that the yield-spread premiums mainly benefited the brokers. For every $100 extra they paid in higher rates, the borrowers on average received only a $7 reduction in upfront fees. Banks also typically kept most of the benefit when borrowers paid above-market interest rates, the study said.

Borrowers who paid “discount points” to lower their interest rates typically didn’t benefit from a corresponding savings in their interest costs, the study said. It found that borrowers who chose “no-cost” loans — in which all fees are built into the interest rate — typically paid the lowest effective fees.

Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said that the study relies on “stale” seven-year-old data and that other studies have shown consumers save money by obtaining loans through brokers.