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Q. 
We have a membership in a stock coop and are having great difficulty in refinancing our apartment. Are Banks and Savings and Loan Associations permitted to make loans on coops?

A. 
Yes. They are authorized to do so, but most will not make such loans. Comparable condominiums are worth substantially more money and are easier to sell. Consequently, lenders prefer condominiums to coops.


Q. 
What is the difference between a mortgage broker and a mortgage banker?

A. 
A mortgage broker is a real estate broker that represents either a mortgage lender, loan applicant, or both.  A mortgage banker is a mortgage lender that sells closed loans to investors in what is referred to as the secondary mortgage market.


Q. 
I often see ads by mortgage brokers that indicate “no income verification - no tax returns . I never see this type of loan offered by direct lenders. Can mortgage brokers legally originate loans that direct lenders are unable to originate?

A. 
Direct lenders can originate any type of loan that mortgage brokers can originate.


Q. 
I intend to refinance my home in the near future and have not yet decided whether to go directly to a lender or to a mortgage broker.  What are the legal requirements to be a mortgage broker?

A. 
A mortgage broker must simply be licensed as a real estate broker by the California Department of Real Estate.  There are no other legal qualifications or requirements.


Q. 
I am in the process of purchasing a condominium that I intend to lease to a friend.  The bank’s loan application asks whether I intend to occupy the property or not.  Is there any harm in saying that I intend to occupy the property when I actually intend to lease it?

A. 
Making an intentional misrepresentation to a mortgage lender that is insured by a government agency, or to a mortgage broker or banker that sells loans to or originates for a government insured bank or savings and loan association, is a serious crime punishable by a fine and/or imprisonment.  In addition, the lender can call the loan due and payable.


Q. 
Our mortgage broker has a “no income verification - no tax returns required” loan program available.  He says it’s safe to exaggerate our income on the loan application.  How safe is it?

A. 
It’s not safe at all.  Don’t do it.  Lenders have the right to verify reported income with the IRS and other sources after a loan has closed.  You and your broker can be held liable for fraud and numerous violations of the law if you are found to have submitted a false loan application.  You should also get another loan broker.


Q. 
A friend recently had a bad experience with a mortgage broker.  He claims that the broker increased the loan fees and other charges immediately prior to closing.  I am in the process of applying for a home loan with another mortgage broker.  What do you suggest I do to protect myself?

A. 
I suggest you do the following:

When you retain the mortgage broker, require that he or she commit in writing to a maximum brokerage fee and costs regardless of what happens to interest rates.  For example, if the broker commits to a one percent (1%) brokerage fee plus $500 regardless of how rates change, you will be protected against the broker.

In addition, ask for three references.  These should be clients who have closed loans with the mortgage broker within the last thirty (30) days.  If the broker cannot produce three current references, it means that he or she does not have much loan volume.  This is not a good sign that the mortgage broker has clout with the actual lender.


Q. 
Recently, I submitted a mortgage loan application to a lender that included false financial information.  The loan payments are paid current but the loan is being reviewed by the lender’s compliance department.  Do I have a potential problem?

A. 
You may have a big problem.  If a real estate lender finds that the application package included false information that was material to their decision to make the loan, three things can happen:

Under federal law, (18 U.S.C.981 (a) (1) (c)), if the loan affects a financial institution, (even if the loan is not in default), the United States Government may file suit against the borrower in federal court for forfeiture of the property given as security for the loan.  While forfeiture is not automatic or mandatory, defending such an action would be a living nightmare;

The lender can start a foreclosure action requiring the borrower to scramble for another loan; and

Under federal law, (18 U.S.C. 1014), the submission of a false loan application to a financial institution is a federal crime.  Substantial fines as well prison sentences or both, can be imposed

Note that nearly all mortgage brokers and mortgage bankers utilize the funds of financial institutions.

Recently, a member of a local City Council was sentenced to 21 months in federal prison for submitting false tax returns and misrepresenting the source of his down payment to a lender.  The lesson is clear.  Don’t misrepresent anything to a lender, and if your loan agent suggests that you do so, find someone else to represent you.


Q. 
What is a wraparound loan?

A. 
It is a form of junior financing.  Typically, it is a second trust deed loan.  Technically, it is called an all-inclusive trust deed (AITD) loan.

AITD’s are usually used when a property is being sold with a low interest rate, assumable first trust deed loan and the seller is willing to carry back junior financing.

An example would be as follows:

Sale Price                             $200,000

Existing 1st TD @ 6.5%            $90,000

Seller Financing                        $60,000

Down Payment                        $50,000                                   

The AITD consists of the existing $90,000 loan plus the new $60,000 extension of credit for a total of $150,000.  If the seller charges 8.5% interest on the $150,000 AITD loan  and pays 6.5% on the “underlying loan”, his or her net yield will be 11.5% on the $60,000 extension of credit.

AITDs can be good for both buyers and sellers.  However, these loans are complex requiring that both the buyer and seller be represented by knowledgeable attorneys.


Q. 
We recently learned that our mortgage broker accepted a rebate of $3,000 in connection with our home loan that she did not disclose to us.  She claims rebates are normal and that disclosure of rebates is not required.  Is she correct?

A. 
Disclosure of rebates is required by law.  The broker should immediately write you a check for $3,000.  You should report this matter to the California Department of Real 
Estate and the local board of Realtors if the mortgage broker is a member.


Q. 
Are mortgage brokers required by law to disclose all the money they make on transactions to their clients?

A. 
Absolutely. Regardless of whether a mortgage broker is receiving compensation from its client or the lender, the broker must disclose all compensation received.  The receipt of any secret profit would violate the law.







Permission to reprint our HOA Questions and Answers is granted provided Michael T. Chulak & Associates (MTCLaw.com) is credited as the source.




 



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