Homeowners facing foreclosure could enjoy greater access to short sales and less confusion about the foreclosure alternative, thanks to new federal regulatory relief for real estate brokers and agents.
The Federal Trade Commission (FTC), on July 15, announced it will immediately stop enforcing most of the provisions of the “MARS” rule against real estate professionals representing homeowners in short sales.
A short sale occurs when the bank allows the sale of a home for less than the existing mortgage balance, provided the seller finds a qualified buyer. Such homes are often held by homeowners struggling with “underwater” mortgages — mortgages with balances larger than the value of the home.
MARS, the federal “Mortgage Assistance Relief Services (MARS)” rule, protects homeowners from fraud by forcing mortgage assistance relief services to disclose information about their services. It also mandates certain business practices.
The FTC ordered the stay of enforcement because real estate brokerages’ distinctive relationship with homeowners selling short conflicts with many of MARS disclosure requirements.
Regulators wrote MARS largely to protect homeowners from the predominate form of foreclosure rescue fraud, mortgage modification fraud. Such fraud came hot on the heels of honest efforts to help homeowners facing foreclosure when the housing market crashed in the mid- to late-2000s.
While modification fraud is the MARS rule’s primary target, the regulation clearly states the rule also governs anyone also offering services to help a homeowner obtain a “forbearance or repayment plan; an extension of time to cure default, reinstate a loan, or redeem a property; a waiver of an acceleration clause or balloon payment; and a short sale, deed-in-lieu of foreclosure, or any other disposition of the property except a sale to a third-party that is not the loan holder.”
MARS eclipses agent-seller relationship
As the feds rolled out MARS, from Dec. 29, 2010 to Jan. 31, 2011, real estate brokers and agents helping consumers with short sales lobbied the FTC for special consideration because the required disclosures confused and misled homeowners more than it protected them.
For example, most MARS regulated firms are banned from collecting fees until the homeowner agrees with a written plan approved by their lender or loan servicer, but must disclose the cost of the service, upfront.
Disclosing costs and removing upfront fees from the equation was designed to cripple many fly-by-night mortgage modification operations who, without other services to generate cash flow, didn’t have the capital to resume operations.
MARS firms must also disclose to homeowners that they have a right to reject the offer for services without any charge.
First, real estate agents typically don’t collect upfront fees for acting as a listing agent selling a home, the same role they play in a short sale. Agents are paid a commission based on a percentage of the home sale price and the commission can’t be known or effectively disclosed until the home is sold.
“Most of the local short sale specialists advertise this as a free service to our sellers and understand that the cost of the professional negotiations will be paid out of the hired Realtor’s commission,” said Julie Larsen Wyss, broker associate, Intero Real Estate Services, Los Gatos, CA.
Confusing signs from MARS
FTC attorney Evan Zullow said under the enforcement stay the FTC ruled agents no longer have to disclose their cost for services or the consumer’s right to reject that offer because the two disclosures are “verbatim,” that is, they must contain an exact dollar amount. Again, the commission, the cost of the service, won’t be known until the home is sold.
Brokers and agents also now don’t have to disclose what other mortgage assistance relief services must disclose: That the lender can reject any change to the homeowner’s loan, language that targeted mortgage modification services.
“This is another verbatim disclosure. Servicers must tell the consumer that, even if you accept this offer and agree to use this service, the lender may not agree to the loan. In the context of offering a loan modification, referring to a change in a consumer loan makes sense, but agents pointed out, in a short sale the context is a sale and not a change in a loan,” Zullow explained.
Agents also don’t have to adhere to another requirement: Disclose to homeowners that they could lose the home and damage their credit rating if they follow the servicer’s advice to stop paying their mortgage.
Agents argued, making such a disclosure when an agent hasn’t offered such advice could baffle the homeowner into pondering, “Is the agent telling me to stop making payments.”
Also, agents aren’t likely to offer such advice. Homeowners looking to sell short could risk foreclosure if they stopped making payments. That would jeopardize the short sale.
MARS better aligned with home sellers
The FTC stay says while it won’t enforce MARS disclosure rules for real estate brokers and agents, unfair and deceptive practices remain prohibited, as they are for all foreclosure relief service providers.
The stay of enforcement applies to real estate brokers and agents offering short sale assistance who are also state licensed and in good standing and who comply with state laws. Zullow said state laws can supersede the stay and related federal regulations.
The stay does not apply to real estate agents when they perform foreclosure relief services that are not short sales.
“The stay is two-fold. Make sure the rule is protecting consumers of loan modifications (and other related services) from deception and harm and to allow consumers access to helpful avenues for potentially avoiding foreclosures. More specifically, in this instance, (the rule is) trying to ensure consumers seeking to sell homes in a short sale receive information that is helpful and not information that could confuse them,” said Zullow.