Had a crazy closing yesterday defending a FHA lender against a real estate broker who doesn't get it.

Any FHA veteran underwriter remembers the "why" behind the HUD-1 Addendum. The FHA does not want the borrower to receive money from the seller directly or indirectly.  WHY?  Because forensic auditing of defaults and foreclosures show that borrowers who put their own money up for the minimum investment have a better chance of avoiding default.

Over the decades the FHA has refined rules to define what constitutes acceptable sources of cash for the minimum investment that must come directly from the borrower.

While the FHA does allow seller assistance for closing costs, this assistance is limited so that the minimum investment rule is maintained.

Back in ye old days scofflaw seller and real estate brokers would do things like silent seconds, fake hand money and fake gifts to skirt the FHA rules.  The FHA thus created the HUD-1 Addendum that requires the seller, buyer and settlement agent to sign off that they are not aware of any money moving to the buyer directly or indirectly.  The language of the addendum reminds signors of stiff penalties for making false statements.  Lying to the FHA is criminal.

Carefully using the phrase "directly or indirectly" the document covers on HUD-1 money transfers and off HUD-1 money transfers.  It also covers any circuitous route that the creativity of the parties might birth thinking that they are getting one over on the FHA.

Granted lots of people negotiate transfers of money without intending to commit a crime.  The most common is the repair credit.  Something is discovered in an inspection and the easy fix is for the seller to just give the buyer some money - on or off HUD.  WRONG. No can do on the FHA mortgage.

If you are involved in a FHA transaction and you want to be sure that you aren't going afoul of the rule, then simply present the facts in writing to the FHA underwriter and request a written response.  If the FHA underwriter says it's okay then you get a pass even if the FHA auditors disagree with the FHA underwriter.  You see, the FHA underwriter has the authority to make decisions and takes responsibility for the transaction meeting eligibility standards for the FHA insurance.  If the FHA auditors later decide that a mortgage lender didn't follow the FHA rules, then the mortgage lender is in trouble.  Conversely, if the FHA auditors find a problem that YOU created unknown to the FHA underwriter, then YOU are in trouble with possible criminal charges and you might even receive a demand for payment in full on your mortgage.

So, what happened yesterday?  Well, on Thursday, while creating the HUD-1 Settlement Statement I noticed a notation on the real estate brokerage commission statement referencing a referral fee to be paid by the selling agent.  I called the agent because I didn't have enough information to know if this referral fee should be on the HUD-1.  The agent explained that we didn't need to put it on the HUD-1.  The buyer's wife is a licensed agent and they would be paying her a referral fee after closing.

The old FHA red flag flew up in my mind.  Sure that the real estate agent had no knowledge of the FHA rule, I explained that we need to get lender approval for the off HUD payment of the referral fee since it was going back to the buyer's wife. I can't sign the HUD-1 Addendum because I have knowledge of an indirect transfer unless the FHA lender approves.

I contacted the lender who checked with the FHA underwriter.  The answer was an absolute NO WAY.

I contacted the buyer and explained that the referral fee would not be an issue if he switched to a conventional loan or paid cash for the property.  I asked if he wanted to postpone his transaction and switch loan programs.  He said no.

The buyer's wife and her broker were not happy and they contacted the selling agent's broker and insisted that the referral agreement was between the two agencies and it had nothing to do with the FHA mortgage.  The selling agency broker called me for an explanation and once he understood how the FHA rule works, he agreed and told the wife and her broker that he could not pay the fee without lender approval.

Yesterday, a couple of hours before the closing, we received a letter from the wife's broker asking the underwriter to reconsider if they agreed to keep the fee and not give any portion to the wife of the buyer. I forwarded that letter to the lender.  The FHA underwriter took the matter to the president of the mortgage company for a formal decision.  The president - who I found out used to be a DE underwriter, said that not only could they not pay the referral, she also wanted us to get a letter from the selling agency broker stating that he would NOT pay the referral fee. She agreed with my concern and said she wouldn't sign the HUD-1 Addendum either given the knowledge of this indirect fee even with his promise to not give it to the wife.

I obtained the required letter from the selling agent broker and spoke with the buyer who then told me that his wife's broker would still pursue the matter after closing.  I then explained that since he decided to use the FHA program that he had to live within the rules and they need to drop the matter.

As the closing started, I contacted my closer and told him I was sending a statement for the buyer and his wife to sign that included a number of affirmations including that he had been given the chance to postpone and change programs, that he understands the grounds for acceleration of the debt as described in the mortgage instrument.  Since it was the wife who had signed the original referral fee agreement on behalf of her agency, I asked the selling agent to present the agreement and mark it voided and have the wife sign acknowledging the void.  I told the selling agent and my closer that if we did not get both signatures on the affirmative statement and her signature on the voided referral agreement, that we would not close.

The wife called me and said she refused to sign for the void and I told her to contact her broker and have him sign.  She called him and he gave her the authority to void the referral contract.  We closed.

Got a big thank you from the selling agent and she did infer that the referral broker was still going to have his attorney review the paperwork.

This was a very interesting transaction because at every level 2 old DE underwriters - the president of the lender company and me - got to train some youthful participants in the nuances of the how and why of the HUD-1 Addendum and what it means to stay vigilant and keep a transaction honest.

Trust me.  You do not want to ignore an indirect transfer of money to the buyer in a FHA transaction unless you're willing to face criminal prosecution.

buyer didn't want home warranty

Last month we closed a transaction - conventional loan with a large down payment.  On the HUD-1, pursuant to the sales contract, the seller paid for a home warranty.  We remitted the fee to the home warranty company.

Today I received a call from the buyer who said he had contacted the home warranty company and cancelled it.  They told him they would be sending our check back to us.  He was calling me because he wanted that money.  I told him I couldn't redirect the money to him.  I would be refunding it to the seller.

He then explained that he never wanted the home warranty and had asked the real estate agent to change the contract and have the seller give him a credit for the fee.  There was no seller assist in the contract so there wouldn't have been any problem, I think, getting approval from the lender to do this.

For some reason his agent told him to just take care of it outside of the closing.  This is how people get into trouble.  There is no way the consumers would know that doing things outside of closing isn't kosher.

query: how much are tax service fees that FHA won't pay

Tax service fees are a one time charge collected at closing by a mortgage lender.  What a tax service does is a bit iffy to me.  I always thought that once a mortgage loan was set up in servicing that the tax service would monitor and oversee the tax payments for that property.

That appears to be partially true in some cases, because we do see instructions for the future billings going to tax services for some lenders.  However, in most cases the lenders are issuing instructions that the tax bills go to their servicing department.  In either case, if the tax bill isn't routed to the correct address, the tax doesn't get paid and so that makes me wonder what consumers are really paying for when they pay these fees.

Most tax service fees range between $70 and $150.  Many are companies owned in whole or part by the mortgage lender.  When a mortgage lender has an ownership interest in a company like this they are not permitted to require use.  That means a consumer could insist that they be able to shop for tax service.  I have never seen a consumer do this, but under our regulatory structure it is an option.

Under current FHA and VA rules, the buyer is not permitted to pay a tax service fee presumably because the FHA and VA believe this is a cost that lenders should provide without charging a separate fee to borrowers.  A few lenders will waive the fee upon request but most will insist that the seller pay it.

If you are a seller and your contract did not include a seller assist, meaning you did not agree to pay for any of the buyer's closing costs, you can refuse to pay for the tax service fee.  That  might result in a classic game of chicken.  Nobody wants to lose the transaction over such a small fee.  If the lender won't budge, who will?  Sometimes the real estate agent pays for it in cases where it is clear that they should have known this was an issue when they drafted a contract including a FHA or VA mortgage contingency clause.  Savvy real estate agents will be sure to include a minimum seller assist in any FHA or VA transaction to cover miscellaneous charges that might be prohibited on the buyer side.

query: seller assist versus credit

Most mortgage loan programs prohibit direct credits of cash from the seller to the buyer.

Most mortgage loan programs will allow the seller to assist the buyer with all or part of the closing costs.

Money is money, agreed, but in the world of mortgage loan underwriting they have to account for all sources and the buyer may only use their own cash for a down payment and so you have the restriction.

Most seller credits are for repairs. We suggest that you simply have the work done prior to closing.