New Freddie Mac Arms Length Affidavit
I wanted to give you some quick short sale industry updates.
With the current state of the economy and the fall of real estate values over the past couple of years, short sales have become a common and routine real estate transaction and constitute a primary part of the real estate industry. As a result, the importance of preventing fraud against the lender and the distressed borrower has increased.
At the request of the National Association of Realtors (NAR) and the American Land Title Association (ALTA), Freddie Mac amended its short sale affidavit policy on November 18, 2011. All servicers are required to implement the new policy changes by January 1, 2012, however they are encouraged to begin implementing the changes immediately.
A short sale transaction must be considered an Arm’s Length transaction. An Arm’s Length transaction is ‘A transaction between parties who are independent of one another, and unrelated and unaffiliated by family, marriage or commercial enterprise, other than the purchase and sale of the Mortgaged Premises between the Borrower(s) and the Purchaser(s) that is the specific subject of the proposed short sale as disclosed to the servicer’. Therefore, the purpose of the Arm’s Length Affidavit was to prevent fraud against the lender receiving the short payoff and the distressed homeowner by having the signatories insure the parties to the short sale transaction were independent parties and had no hidden agendas or outside agreements.
The new policy requires all parties to sign the new Arm’s Length Affidavit. This means that in addition to the buyers, sellers and their real estate agents, the short sale facilitator (if there is one) and the escrow officer must also sign and date the affidavit and all signatures must be notarized.
The Arm’s Length Affidavit now contains more specific verbiage relating the short sale transaction. By signing the affidavit, each signatory is certifying to the best of their knowledge and belief that the following statements are true:
- The short sale of the mortgaged property is an ‘Arm’s Length ‘transaction between parties who are unrelated and unaffiliated by family, marriage, or commercial enterprise.
- The buyer will not resell the property within 120 days unless the substantial improvements were made.
- There are no agreements, understandings or contracts between the parties that allow the Borrower to remain in the property as a tenant or obtain title to the property after the sale.
- Neither the Borrower(s) nor the Purchaser(s) will receive any funds or commissions from the sale, except where the Borrower may receive a payment by the Servicer if it is approved by the servicer, Freddie Mac and reflected on the HUD-1 Settlement Statement.
- There are no agreements, understandings or contracts relating to the current sale or subsequent sale of the property that have not been disclosed to the servicer.
- All amounts paid to any party in connection with the short payoff transaction, including payments made to holders of other liens on the Mortgaged Premises, must be reflected on the HUD-1 Settlement Statement and the amount and recipient of the payments must be clearly identified.
- Each signatory understands, agrees and intends that the Servicer and Freddie Mac are relying upon the statements made in the affidavit as consideration for the reduced payoff amount of the mortgage and the agreement to the sale of the mortgaged property.
- A signatory who makes a negligent or intentional misrepresentation agrees to indemnify the Servicer and Freddie Mac for any loss resulting from the misrepresentation including, but not limited to repayment of the amount of the reduced payoff of the Mortgage.
- The certification will survive the closing of the transaction and
- Each signatory understands that a misrepresentation may subject the party making the misrepresentation to civil and/or criminal liability.
While servicers can add additional verbiage and certifications, the affidavit must contain the above certifications.
While Freddie Mac now requires all signatories to sign one affidavit, another important change in the policy is that the affidavit is no longer allowed to be an addendum to the sales contract.
If any party reveals an agreement, understanding or contract that indicates the transaction is not an Arm’s Length transaction, the buyer intends to re-sell the property in less than 120 without substantially rehabilitating the property, or otherwise indicates bad faith, collusion or fraud, the Servicer must withdraw its agreement to the short payoff of the mortgage and notify Freddie Mac.
The importance of the new policy should not be minimized. Any person who is a party to a short sale transaction who is required to sign an Arm’s Length Affidavit must be aware of the implications and liability that exists if they sign the affidavit with false pretenses. You do not want to find yourself committing fraud.
The information provided in this newsletter was taken from the new Freddie Mac Single-Family Seller/Servicer Guide.
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