According to officials in Stanislaus County in California, the entire region is at risk economically, educationally and in terms of employment thanks to short sale investors[1]. Stanislaus county is the mortgage fraud capital of the country, and many in the media and in the local government are drawing a direct correlation between the laying off of hundreds of city workers and slashing educational budgets and government services and short sales. Why? Because short sales impact property values, and property values determine taxes. And taxes, as we all well know, impact the growth of government and related services.

Some real estate agents and brokers are jumping in on the mud-slinging as well, targeting lenders as well as those rotten short sale investors. “[Bank’s] motivation has nothing to do with the best value for the property,” asserted Scott Abell, an associate at Century 21 in Oakdale, CA. “They’re trying to rid themselves of bad mortgages, converting rotten assets into cash. And the collateral damage is impacting us all.”

Two of every three homes purchased in the area are purchased via short sale, and the local media has determined that this, in conjunction with the fact that a recent report by CoreLogic deems one in every 200 short sales “suspicious,” warrants a witch hunt. The local DA agrees, blaming lenders right along with the short sale investors: “Taxpayers have bailed them [banks] out, and they’re going to keep bailing them out. As long as [lenders] can keep passing the loss along, they don’t want to talk to me about their losses.”

Do you think that this negativity about short sales is fair? Aren’t they helping hundreds of thousands of people? Do you think that non-federal short sales are going to continue to be a viable investing option?

Thank you for reading the Bryan Ellis Real Estate Letter! Your comments and questions are welcomed below.

[1] http://www.sacbee.com/2010/09/04/3007034/stanislaus-county-short-sales.html

A U.S. District Judge has ruled that a California woman licensed as a realtor in California promoting and selling Nebraska properties can continue to do so, even though she is violating changes to the Nebraska Real Estate License Act that would require her to be licensed in Nebraska in order to advertise and sell Nebraska properties though her website[1]. The judge ruled in this manner because the new changes to the NREL Act are, according to him, unconstitutional because they give the Nebraska real estate commission jurisdiction “beyond Nebraska.”

The judge temporarily blocked the enforcement of the changes in NREL and scheduled a hearing for August 3. In the interim, the woman can continue to offer “advertising to homeowners who wish to sell their properties without the use of a commission-charging realtor.” She charges a flat fee for her realtor services instead of a commission.

Do you think that real estate agents should be allowed to advertise and promote properties outside of the states in which they are licensed? How do you think this type of ruling might affect you (if at all) as a real estate investor?

Thank you for reading! Your comments and questions are welcomed below.

[1] http://www.msnbc.msn.com/id/38490074

Earlier this week we continued our series on the projected effects of the new Arizona legislation designed to prevent and punish illegal immigration in that state. Specifically, we focused on the lenders, brokers and real estate agents in that state who believed, rightly or wrongly, that they were not responsible for determining whether or not their homebuyers were legal residents of the United States. There were a variety of responses from readers, including people who felt that everyone involved in the purchase or sale of a home was responsible for the due diligence regarding the new borrower to people who appeared to believe that most loans to “illegals” are “100% legal.” The latter group also believed that it was unlikely that illegal residents were defaulting on their loans in large numbers, and requested that we investigate this hypothesis. So we did.

First, we researched the assertion that it is possible to make a legal loan to an illegal alien. We found that this debate went on throughout the real estate boom, but that while it is against federal law to “violate borders, overstay visas and recruit, harbor and encourage illegal aliens,” there were and are a number of loopholes in the U.S. lending process that make the “illegal alien home loan” perfectly legal[1]. This is because no proof of citizenship is required for a home loan – only proof of identification. And anyone can own a home, regardless of criminal background, which is seldom checked, making it possible for an illegal resident to use an Individual Taxpayer Identification Number (referred to as ITIN or just TIN) to secure a home loan. While ITINs are “not valid identification outside the tax system,” there is no specific prohibition against using them as identification in other ways, a situation of which lenders have taken advantage to issue loans to illegal immigrants without a social security number[2]. Recently, the application process for ITIN numbers has been revised by the IRS to help “ensure ITINs are used for their intended tax administration purposes.”

So, we have established that the lenders were not breaking the letter of any laws by issuing loans to illegal aliens, but what about the number of illegals defaulting on their mortgages? Not surprisingly, these numbers are difficult to come by since the entire identification process is somewhat difficult. Particularly in light of recent stabs at immigration reform, illegal residents of the United States that have put down roots and purchased homes are not rushing to fill out surveys about how, why and how long they plan to pay their mortgages. However, we were able to find some information on the topic. According to an interview conducted by NPR in 2007, Jason Madiedo, president of Venta Home Loans, declared that making home loans to illegal immigrants is “good business strategy” in addition to “giving you the warm fuzzies” because homeownership plays a major cultural role in a family’s financial security and illegal aliens are a “not a market that’s really being tapped”[3]. The interviewer noted that as of the date of the interview, only one-tenth as many illegal immigrants default on sub-prime loans. Leonardo Simpser, managing director at the time of the Hispanic National Mortgage Association, cited “careful screening” practices of scrutinizing late payments on utilities, remittance of money to other countries and ownership of a cell phone as methods that they use to identify good illegal alien borrower risks. Venta Home Loans is still doing business in Nevada, Texas and California.

Hard numbers on illegal immigrants and foreclosure rates, however, are difficult to find from an objective source. No one seems interested in touching this delicately vague topic. Foreclosurelistings.com published an article in 2008 stating that “the approximate estimation is that among those with ITIN who had taken loans the default rate was lower by 1.15% compared with 3.5% of other loans in 2006,” but they do not cite their source of information and go on to attribute this difference to the “strong family base, grit and love for the home that was not just a house of bricks and mortar”[4]. Heartwarming, but not particularly helpful – and the data was, at best, outdated. Since then, there have been some studies of lending abuse and mortgage fraud schemes targeting illegals, but no careful scrutiny of the “legal” method of accepting an ITIN number – which is explicitly declared by the IRS as not being anything other than a taxpayer I.D. – as proof of identification.

If we were to hypothesize about the state of illegal residents’ legal mortgages, however, it would stand to reason – pleasant homilies on the importance of family and integrity aside – that they would go to great lengths to keep them in good standing both to avoid the attention and because it is becoming increasingly unlikely that the former method of procuring such a mortgage will work again in the future. However, in a situation like the one in Arizona, wherein it is going to be far less probable that an illegal alien can easily live, work and navigate the local area without scrutiny anyway, it seems likely that strategic and forced defaults would, of necessity, rise as illegal immigrants were forced to abandon the geographic area. As yet, however, these foreclosures are still prediction rather than fact. Only time will tell what impact Arizona’s new bill will have on its housing market and whether or not the net result will be an influx of new, legal residents or an exodus.

[1] http://www.capitalismmagazine.com/politics/immigration/3051-Home-Loans-for-Illegal-Aliens.html
[2] http://www.immihelp.com/newcomer/itin.html
[3] http://www.npr.org/templates/story/story.php?storyId=17597739
[4] http://www.foreclosurelistings.com/content/foreclosures/illegal-immigrants-avoid-foreclosures.htm

Yesterday, we covered the potential problem that the state of Arizona stands to encounter in its real estate market as tens or hundreds of thousands of illegal immigrants flee the state in response to the controversial new law requiring all people in Arizona to carry proof of U.S. citizenship[1]. Real estate experts and market analysts predict that the mass departure could spur a wave of foreclosures as those people leave empty houses and unpaid mortgages behind them, or are unable to continue making payments on those mortgages as their sources of (illegal) employment dry up. Lenders are not likely to be particularly inclined to work with illegal immigrants on short sale options, either, even if they were not at all reticent about making the loan in the first place without documentation.

Interestingly, neither lenders nor real estate agents who sold properties to illegal aliens appear to feel much responsibility for the problem. Some argue that they sold the property to a legal-illegal combination buyer, situations in which one spouse is legally in the country while the other entered illegally[2]. Still others state simply that “We didn’t feel like it was our job to be an enforcement agency,” as one Phoenix real estate agent put it[3]. Some described the issue as a “don’t ask, don’t tell” approach, or detailed how they might recommend against purchasing a home if neither owner was legally in the United States, but would not actually refuse to do the deal[1]. The Arizona Republic reported that “lenders eager to make loans did not check for documentation [or] in others, there may have been fake documentation.” Either way, all signs indicate that these lenders were happy to take payments as long as someone was making them, but are not willing to stick their necks out further under new, more stringent supervision and negotiate short sales with these illegal owners who legally should not have been able to obtain loans in the first place.

The Department of Homeland Security estimates that more than 100,000 illegal immigrants left the Phoenix area in 2008 thanks to the state’s increasingly strict employer sanctions that prohibit hiring illegal aliens, causing a dramatic increase in foreclosures and apartment vacancies then. If only a portion of that population exited at that time, imagine the impact of a new wave of exits, particularly considering that people tied to homes might have been less likely to leave in the previous exodus.

What do you think?  Are real estate agents and mortgage brokers responsible for “doing their part” to curb the illegal immigration problem - particularly since their silence on the issue can have such devastating impact such as is happening now?

Thank you for reading the Bryan Ellis Real Estate Letter - your comments and questions are welcomed and encouraged.

[1] http://www.azcentral.com/arizonarepublic/news/articles/2010/06/14/20100614arizona-immigration-real-estate-foreclosures.html

[2] http://www.myfoxphoenix.com/dpp/news/housing_market/immigration-law-housing-market-6-14-2010

[3] http://www.upi.com/Top_News/US/2010/06/14/Immigration-law-could-hit-home-values/UPI-35611276556763/

If you currently engage in that newly-demonized yet highly-productive, profitable and essential-to-market-recovery practice of buying properties via short sale and then (gasp) selling them off for a profit, then get ready for some more bad press. In Connecticut, two real estate agents are going to be sentenced in federal court in the next two months for fraud.

The fraud in question? Negotiating short sales with lenders without disclosing all offers on the property to the lenders. Once the properties were sold, the agents then flipped the houses quickly for a profit.

As real estate agents, these two parties absolutely could be argued have additional obligations to the lenders to disclose offers. After all, they are the agents and part of being an agent on a property is to disclose “all relevant, known information.” However, it is unclear for whom the agents were working – in this case, it looks like they were representing themselves as buyers rather than working for the bank. This makes things far grayer for real estate investors, who may be aware that they can sell a property with the proper repairs, marketing and time involved for a higher price than a lender can, but may not feel that it is necessary, appropriate or even demonstrative of any type of business acumen whatsoever to basically outline their action plan to the competition.

For now, if you flip – or flop – short sales, be very sure that you understand each and every aspect of your role in the deal. Whether you are negotiator, buyer, seller or all three, you must be able to demonstrate that you disclosed the increasingly high volume of information that you are legally required to disclose in any given geographic area before you did the deal and ultimately generated some type of wealth or profit.

Are you steering clear of short sale flipping, or have you figured out how to deal with these new issues?

Thank you for reading the Bryan Ellis Real Estate Letter. Your comments and questions are welcomed below.