Legal or not???

[JOHNNY Q]

THIS IS FROM HUD WEBSITE:
respa protection against
illegal referral fees  
   

Disclaimer


RESPA was enacted because Congress felt that consumers needed protection from "... unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country." Some of the practices Congress was concerned about are discussed below. Most professionals in the settlement business provide good service and do not engage in these practices.

Prohibited Fees. It is illegal under RESPA for anyone to pay or receive a fee, kickback or anything of value because they agree to refer settlement service business to a particular person or organization. For example, your mortgage lender may not pay your real estate broker $250 for referring you to the lender. It is also illegal for anyone to accept a fee or part of a fee for services if that person has not actually performed settlement services for the fee. For example, a lender may not add to a third party's fee, such as an appraisal fee, and keep the difference.

Permitted Payments. RESPA does not prevent title companies, mortgage brokers, appraisers, attorneys, settlement/closing agents and others, who actually perform a service in connection with the mortgage loan or the settlement, from being paid for the reasonable value of their work. If a participant in your settlement appears to be taking a fee without having done any work, you should advise that person or company of the RESPA referral fee prohibitions. You may also speak with your attorney or complain to a regulator listed in the Appendix to this Booklet.

Penalties. It is a crime for someone to pay or receive an illegal referral fee. The penalty can be a fine, imprisonment or both. You may be entitled to recover three times the amount of the charge for any settlement service by bringing a private lawsuit. If you are successful, the court may also award you court costs and your attorney's fees.
 
Please reed it carefully!

[JOHNNY Q]

 From HUD website. IF you commit fraud it is ILLEGAL.



STATEMENT OF
SUSAN GAFFNEY, INSPECTOR GENERAL
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
BEFORE THE HOUSE SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
MARCH 20, 2001
Chairman Roukema and other members of the Subcommittee, it is my pleasure to
testify before you on the Inspector General’s perspective on the health of the Federal
Housing Administration’s (FHA’s) Mutual Mortgage Insurance (MMI) Fund.
Accompanying me is James Heist, Assistant Inspector General for Audit.
Your other witnesses today can better answer technical questions about the
economic value of the MMI fund, what capital reserve level is needed, and, most
importantly, what these figures mean in terms of the future health of the MMI fund. I
will defer to them to make assumptions about the future economic performance of the
MMI fund. Other than pointing out two factors that need to be included in making such
assumptions, I will be talking about Office of Inspector General (OIG) audit and
investigation work in the Single Family Mortgage Insurance Program.
Need to Consider the Impact of Premium Changes and Loss Mitigation on the MMI
Fund
One reason for the financial health of the MMI Fund has been the high insurance
premium structure for FHA mortgages. Prior to 1983, the FHA Mortgage Insurance
Premium was an annual charge of ½% of the outstanding mortgage principal balance.
Today, FHA collects both up front and annual premiums. Until recently, most FHA loans
included a 2.25% up front premium charge as well as an annual premium of ½% of the
outstanding mortgage principal balance. Effective January 1st of this year, the up front
premium dropped by a third to 1.50%, and significant changes were made to premium
refund and cancellation policy. In fiscal year 2000, the FHA MMI fund’s earned
revenue was $ 2,886 million. Unless there is a corresponding growth in FHA activity,
this recent change in the premium structure will have a major impact on future revenue
earnings of the MMI fund.
Another reason for the current health of the MMI fund is the increased use of
foreclosure avoidance techniques. Two years ago we performed an audit of HUD’s Loss
Mitigation Program. We noted that the use of loss mitigation tools by lenders was
growing exponentially. However, because of the newness of the program, there was no
way for us to tell if the tools were working as intended. That is, did the use of the loss
mitigation tool, such as restructuring the mortgage through a loan modification, actually
have the intended effect of preventing the borrower from going into foreclosure? Or, did
the loss mitigation merely delay the foreclosure process? We will be looking to answer
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these questions in an audit scheduled to start later this year. GAO’s report makes this
same observation. If we find the program is not mitigating foreclosures, the future
impact on the MMI fund in terms of future claims will be significant.
FHA Financial Audit
Earlier this month, we issued our report based on KPMG LLP’s audit of the
Federal Housing Administrations financial statements for the year ended September 30,
2000. KPMG expressed an unqualified opinion on these financial statements. However,
KPMG also reported a potential non-compliance with the Anti-Deficiency Act, 31 U.S.C.
1341 (a), that requires additional analysis, as well as a policy or legal determination by
HUD’s Office of General Counsel, OMB and/or the Comptroller General. The report
identifies a material weakness and three reportable conditions on internal controls.
The material weakness involves the need for FHA to improve information technology
systems to better support business processes. The reportable conditions include the need
for: enhanced security over data, improved progress on early warning / loss prevention
activities and better monitoring and accounting for single-family property inventories.
While the same material weakness and reportable conditions were included in
FHA’s fiscal year 1999 audit, we are seeing progress in each of these areas. Four
reportable conditional in fiscal year 1999 are no longer reported in fiscal year 2000.
Also, the fiscal year 2000 financial audit recognizes the potential concentration of fraud
risk in certain geographic areas. The full impact of these fraudulent activities, which have
been perpetrated against FHA, could be recognized as unexpected future claims and
defaults against FHA’s funds. These geographic areas of fraud risk have been identified
by program staff and through an intensive effort by OIG staff to focus on FHA singlefamily
operations over the past few years.
Summary of OIG Audit and Investigative Work
Aside from the financial audit, in the last few years our audit and investigative
staffs have been actively involved in examining many aspects of the FHA single-family
operations. We’ve identified origination frauds, property flipping scams and scandals in
the sale of HUD owned properties. Needless to say, all these problems have an impact on
the soundness of the MMI Fund. There are many factors beyond HUD’s control—such
as interest rates and unemployment rate--that affect the soundness of the MMI Fund. But
assuring that programs are run efficiently and effectively and that programs are
sufficiently managed to minimize the opportunities for fraud and abuse is within HUD’s
control.
As a result of a robust economy, FHA’s MMI fund is financially the healthiest it
has been in many years. But just because the FHA fund is profitable is no reason to
tolerate program fraud. There are always opportunities to make things better. The FHA
is a national treasure, built on a solid foundation. For more than 65 years, this
3
government program has helped real people meet their dream of homeownership. For
many first time homebuyers with little or no credit history or for those unable to make
large down payments, it was the FHA that made their dream possible. The FHA has a
great reputation and many people look at FHA as the government’s “seal of approval”.
Accordingly, we find it scandalous when program abuses result in defaults and
foreclosures, harming the very people that the FHA program was designed to help.
While the present health of the fund is important, its long-term financial health is
critical. FHA should take heed of the many warning indicators we see in our audits and
investigations. It is important to keep in mind that a defaulted or foreclosed FHA insured
mortgage resulting from poor origination practices that is originated today would take
several years before it results in an FHA claim. Conversely, program improvements
made today will take several years before they result in reductions in defaults and claims.
Problems Impacting the Financial Health of the MMI Fund
Flipping- Property flipping has become an increasing problem for the FHA. With flipped
properties the MMI fund often gets saddled with insurance on an overvalued property.
There’s nothing inherently wrong with an entrepreneur buying a fixer upper property,
making repairs and reselling it at a profit. What makes a property flip illegal is when
there is something amiss in the transaction. When we see properties with FHA mortgage
insurance bought and sold the same day for a 50% or 100% profit, we can be reasonably
certain that something is wrong. In most cases, the profit results from false and
fraudulent documentation provided by one or more of the parties to the transaction, such
as the lender and/or the appraiser. In almost every case where we’ve seen a property flip,
that is, a wide disparity between the purchase price and the resale price of a property, and
a short turnaround between the two transactions—something illegal has happened.
Unfortunately, these flips feed on each other, as the inflated value of one flipped property
often becomes the valuation measure for the next property. Before long, these
transactions have a devastating effect on neighborhoods.
We have numerous ongoing investigations involving single-family loan
origination fraud, and specifically property flipping, throughout the United States. In our
Housing Fraud Initiative locations, such as New York, Baltimore, Chicago, and Los
Angeles, massive property flipping schemes involving FHA-insured mortgages continue
to be uncovered. Flipping is increasing and has become a major problem for many
communities. What is similar about these communities is the high volume of older
decaying properties and an eager group of potential, often unsophisticated, low-income
buyers who are anxious to achieve the American Dream of home ownership. In many
cases we find that their dream of home ownership ultimately turns into a nightmare as
their property begins to need major repairs and they discovers that their property’s real
value is only a fraction of its original purchase price.
4
Last fall, in the Central District of California, we had one of our largest convictions
for property flipping. Two co-conspirators were sentenced to a total of 134 months
imprisonment, fined $100,000, and ordered to make over $2.6 million in restitution. The real
estate scheme included duping more than 15 high school and college students, with
previously clean credit records, into becoming buyers of flipped properties. The kingpin of
this flipping scheme purchased at least 30 properties in the range of $80,000 to $100,000
each and then resold them at inflated prices of $200,000 to $300,000 each. These cases
involved the use of forged documents to qualify the buyers for FHA insurance. Some
additional properties were sold conventionally. To date, 28 FHA insured loans totaling over
$6,500,000 have gone into foreclosure. Six other defendants in this case have also signed
plea agreements.
Early last year in Baltimore, Maryland, a property speculator, two loan
originators, an appraiser and a settlement attorney were indicted for engaging in a prolific
scheme to acquire inexpensive homes and fraudulently qualify buyers to purchase the
properties at much higher prices. The vast majority of over 100 settlement statements for
the purchase of these properties contained false information about the buyers’ and sellers’
monetary contributions to the transactions. Appraisals often overstated property values
and misrepresented ownership at the time of the sale. Flipping was so prevalent in
Baltimore that HUD put a moratorium on foreclosures.
Last June in Fort Lauderdale, Florida, a Federal grand jury returned an 11 count
Indictment charging seven individuals with conspiracy to commit bank fraud, HUD fraud
and false statements on more than 120 loan applications, most of them FHA-insured,
totaling in excess of $15 million dollars. The mortgage fraud was predicated on a flipping
scheme. A real estate investor would purchase homes and, on the same day, resell them at
inflated prices to unqualified buyers he had recruited. The buyers of these properties—
almost always unsophisticated, first time home buyers and/or recent immigrants--did not
have sufficient income or assets to pay the required down payment and closing costs, so
the investor would illegally provide funds to them and incorporate these costs into the
price of the over-inflated loans. A variety of fraudulent documents were used to make it
appear that the buyers qualified for the loans.
Lender Oversight- A comprehensive audit of FHA loan origination practices issued early
last year found significant problems with FHA’s reviews of lender underwriting and
property appraisals. Also, the monitoring of lenders by HUD’s Quality Assurance
Division was deficient. We noted problems with the oversight of pre-endorsement
contractors, and the accuracy of information in the automated tracking system. These
weaknesses increase HUD’s risk of losses and can result in inflated appraisals, fraudulent
underwriting, property flipping and other lending abuses. HUD’s procedures for
monitoring both lenders and contractors were less than effective, resulting in an increased
risk of fraud, waste and abuse.
HUD’s mortgage insurance risk depends almost exclusively on the reliability of
work performed by its direct endorsement (DE) lenders that underwrite nearly all FHA
insurance. HUD mitigates its risk through lender oversight. Three important HUD
monitoring tools should be working to prevent the insurance of fraudulent loans: post
5
endorsement technical reviews of loan underwriting documentation, field reviews of
appraisals, and quality assurance reviews of lenders. When used effectively, these tools
can highlight problem loans such as property flips.
Post endorsement technical reviews of underwriting and property appraisals are
key controls in monitoring direct endorsement lenders. These technical reviews are
typically a desk review of FHA case documentation after insurance endorsement. These
reviews assess lender compliance with HUD underwriting and appraisal requirements.
Most of this work is contracted out with contractors paid $15 to $35 per case. If problems
are found during these technical reviews, HUD is to take remedial action. HUD over
relied on the work of these contractors and HUD was not reviewing contractor
performance. The effects of such over reliance were demonstrated by a recent case
where Allstate Mortgage Company fraudulently originated over 400 FHA loans totaling
$97 million. Seventeen of these loans had undergone post-endorsement reviews by a
contractor. Although the 17 loan files showed obvious fraud indicators, the contractor
found no significant problems. None of 17 cases had been re-examined by HUD contract
monitors.
Our re-examination of 151 post endorsement reviews found that, in 70 cases, the
reviews failed to disclose material underwriting errors. Our review found several reasons
why HUD’s controls over the post technical review process were not providing
meaningful results, including:
· inexperienced staff in critical HUD control positions,
· increased loan volume with fewer staff to monitor lenders,
· no clear operating policies or procedures for Homeownership Center operations,
· outdated handbooks,
· emphasis on quantitative goals, and
· financial disincentives for contractors to find problem endorsements.
Another critical control is the systematic testing of property appraisals by HUD.
The direct endorsement lender selects the appraiser that sets the value of the property for
FHA insurance. With the high loan to value ratio of most FHA loans, an accurate
appraisal is critical to minimizing HUD’s insurance risk. HUD’s procedures call for field
reviews of 10 percent of all appraisals. Also, there are additional requirements that assure
oversight of each appraiser’s and each lender’s performance and follow-up when
problems are noted. During our audit we found that these controls were not being
followed. Branch Chiefs at three Homeownership Centers commented that they did not
have enough staff to monitor appraisers or to sanction poor performers. Since completing
our audit, HUD has made significant strides in the area of improved appraiser oversight,
by identifying high risk appraisers for review.
A third important control over direct endorsement lender activity is the on-site
monitoring reviews to identify and correct poor origination practices. While the Quality
Assurance Divisions should focus on lenders with high defaults and foreclosures, many
6
low risk lenders were reviewed in order to meet quantitative processing goals. HUD
needs to assure that limited monitoring resources are used effectively.
REO Properties- FHA contracted for the management and marketing of its single-family
properties in March of 1999. Seven companies received awards for the 16 M&M
contracts to manage its single-family property inventory. The objective of the contracts
was to reduce the inventory in a manner that: “(1) expands home ownership, (2)
strengthens neighborhoods and communities, and (3) ensures a maximum return to the
mortgage insurance fund.” FHA has realized some success from outsourcing. Sales
volume increased and property inventories decreased. Also, contractors implemented
new marketing tools such as bidding through the Internet. Sales of properties in fiscal
year 2000 exceeded $5 Billion.
However, our comprehensive audit of the program found that FHA’s contractors
did not maximize the return to the mortgage insurance fund or maintain properties in a
manner that strengthened neighborhoods and communities. FHA has had numerous other
problems with the contractors, including bankruptcy by one, inability to meet contract
performance deadlines, countless complaints from homebuyers and real estate
professionals, and billings for ineligible costs. We found problems with all seven
contracts reviewed. We computed the outsourcing of program operations to cost the
MMI fund an additional $188 million. We attribute this cost to poor M&M contractor
sales performance and substantially increased program costs. We believe FHA’s failure
to perform a cost benefit analysis in accordance with A-76 contributed to the poor
program performance and loss of funds.
Officer Next Door (OND), Teacher Next Door (TND) Program- While this is a very
small program, with fewer than 4,000 properties sold since its inception in 1997, it
illustrates the difficulty of setting up boutique programs in HUD without sufficiently
considering the staff resources needed to effectively operate them. As you know, this
program allows police officers or teachers to purchase REO properties in designated
revitalization areas at 50% of their appraised value. Our recently issued interim audit
found a high proportion of homebuyers abusing and defrauding the OND/TND program.
Seven of the 29 homebuyers we reviewed violated one or more program requirements,
lenders were not executing second mortgages as required and HUD did not have an
effective method of tracking suspected violations. This program reduces the recoveries
on REO sales, thus impacting the financial health of the MMI fund.
What Are the Causes and Solutions?
When we become aware of a fraudulent transaction, we generally attempt to
determine its cause. That is, what controls were not followed or what additional controls
are needed to prevent it from happening in the future. Our investigations and audits of
FHA-insured single-family loan originations have disclosed a number of common
problems. First, many of HUD’s well established controls were not being performed or
they were performed in such a perfunctory manner as to render them useless. Another
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major contributing factor was HUD’s 2020 Reorganization that 1) moved many HUD
staff into new positions for which they had little if any training, and 2) consolidated all
field operations into four Homeownership Centers. Lastly, in fiscal year 1998, HUD’s
single-family staff was cut in half. During this same time, FHA reached historic records
of insurance activity. All these factors combined to make HUD particularly vulnerable to
fraud.
Our New York Housing Fraud Initiative staff has been dealing with a major
scandal in the 203(K) rehabilitation program in Harlem and Brooklyn. While the 203(K)
program is part of the General Insurance Fund, not the MMI Fund, I bring this up because
the cause of the problem is the same. Several non-profits fleeced HUD by getting
hundreds of federally insured loans well in excess of the property value. The biggest
contributing cause to this scandal was the lack of HUD staff to oversee origination
practices.
FHA Single Family program staff are in the process of taking corrective actions
on most of our audit recommendations. Further, we are pleased to see that the
President’s Blueprint for HUD is recognizing the need for FHA fraud reduction and
improved program controls. The Blueprint will include actions to improve the loan
origination process and provide for better monitoring of lenders and appraisers.
Recognizing that HUD’s single family staff have been through downsizing,
reorganization, and heightened workload expectations, we need to step back and figure
out how we can make the internal control requirements that are on HUD’s books actually
work to prevent fraud and abuse. Internal controls will not work without sufficiently
trained staff to assure that checks and balances are in place. If the Congress and the
Secretary of HUD send a clear message that that’s what they really want, then I am
confident that the single family staff will be able to figure out how to do it. The problem
is, of course, that making internal controls work is generally perceived as a tedious
endeavor. But that’s how real work gets done.
* * * * *
Chairman Roukema, I appreciate the Subcommittee’s concern about the wellness
of the MMI fund. The new Secretary’s team and my staff have had discussions on
improvements needed in the FHA programs and we are eager to work with this new
Administration to make FHA better. I thank you for the opportunity to present the views
of the OIG at this hearing, and I pledge our full support for your efforts to strengthen the
single-family mortgage insurance program.

[Helixpoint]

I guess that is why I am not a lawer. I THINK that all meant that it is not.

[JOHNNY Q]

BINGO!

[yrush2000]

Here in Florida the term Marketing FEE has become very popular among investors flipping preconstruction homes now and realtors selling preconstruction and condo conversions in a state they are not licensed..
I think you can even include a marketing fee on the HUD being paid to you if your not the seller...

[NancyChadwick]

Here, read:

http://www.legalwiz.com/freearticles/7flipping.shtml

Then ask questions.  BTW, 10 seconds on Yahoo search.

Anyone can wholesale a property.  You do not need a RE license to do it.

If you just find a property and pass it to an investor for a fee that could be considered illegal.
It is not illegal to get paid to tell someone where to locate a property.  I cannot go to jail if I charge you $5 to give you directions.  Correctly done, birddogging is the same thing (courtesy of $Cash$).

Raj

My understanding is that in PA, you don't need a RE license SO LONG AS you have an ownership interest in the property. If you don't have a RE license and try to collect money in PA by telling someone about a property in which you don't have an ownership interest, that's brokering without a license and it's illegal.

Nancy

[Helixpoint]

Thank you everyone. I did speak with two lawyers. TOTALLY LEGAL!!!! Just thought I would share. Thank you for all your input. But Nancy. That would seem to me that Bird-dogging would be eligible

[NancyChadwick]

But Nancy. That would seem to me that Bird-dogging would be eligible

Depends on how you define bird-dogging. If you don't have an ownership interest in the property and you just tell someone about the property, you can't get paid for that in PA without breaking the law. If you are on the purchase contract as the buyer and then assign the contract to someone else for a fee, that's OK in PA because you're the equitable owner.

Nancy

[Helixpoint]

I am defining a bird-dog as someone that found a boarded up house and sent me the address. I put the house under contract and assigned it to my buyer. I then paid the bird-dog $500 for finding me the house.

[NancyChadwick]

I am defining a bird-dog as someone that found a boarded up house and sent me the address. I put the house under contract and assigned it to my buyer. I then paid the bird-dog $500 for finding me the house.

Well, that's a no-no in PA -- for you to pay the $500 and for him to receive the $500. But here's the good news: if you refused to pay the bird-dog the $500, and he tried to sue you to collect it, he'd be thrown out of court because the court wouldn't enforce a contract (ie, your agreement to pay the bird dog) that was illegal.

Nancy

[Helixpoint]

So there is no way to compensate people for finding properties for you?

[NancyChadwick]

So there is no way to compensate people for finding properties for you?

If that someone signs a purchase contract and then assigns the contract to you for a fee, that's OK. The point is, in PA the person has to have an ownership interest in order to be paid something. If they just whisper the property address in your ear, you can't pay them and they can't get paid in PA without breaking the law. I don't know what the laws are in other states, but this is the situation in PA.

Nancy

[Helixpoint]

hmmmm. There has to be some loopholes there.

[NancyChadwick]

hmmmm. There has to be some loopholes there.

Well, the "loophole" is that the guy has to either be a partner in the deal with you or he has to have a PA RE license. Simple as that.

Nancy

[Roger J]

Nancy,

Could you please post a link to that specific law for PA, please?

I've yet to see a law that would prevent someone for charging for information, which is ALL that birddogging (or RE jobbing,or scouting, or whatever else that you wish to call it) is supposed to be, if done properly.

I can't see how anyone could be successfully charged with 'brokering without a license' if they weren't doing any brokering.  If you ask me, "do you know of anyone that wants to sell their house" and I say, "yep, my neighbor does.  Here's the address and the phone number.  If you buy it, I want $500 for the lead" where exactly did I do any brokering?  I didn't call up the seller and say that I had a buyer.  I didn't call the buyer and say I have a seller.  I didn't negotiate any terms or price or anything else for that matter.

Now, if someone does birddogging as it's become now, then I'm sure that you can get hit with a valid charge because lately, what I've seen is "birddogs" that do call on sellers, make offers, research the data, make counter offers, etc before the investor actuallys steps in, if ever.  Personally, I think that this is due more to lazy and/or inexperienced investors trying to use the birddog as a RE agent.

However, the term "birddog" comes from hunting.  Hunters use the dog to track the birds.  The dog when he finds them, simply 'points' to the location of the birds.  It's the hunter's job to bag them.  

Raj