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Tough new rules limit refinancing options

National Mortgage Professional
Sep 26, 2007

Relocation conveyanceBruce M. Perlmantax considerations, variations in implementation, precautions, benefits of awareness A special case driven by tax considerations What's wrong with this picture? Until now, the transaction looked like every other deal. The borrowers had satisfactory credit and a reasonable downpayment. The property was a single-family home in a nice residential section of town, and the mortgage appraisals were more than adequate to support the requested loan amount and completely in line with the proposed sales price. The buyer's inspections didn't yield anything unusual, and the file was proceeding toward closing without a glitch. However, you've just gotten an urgent phone call. It seems that the title search shows that the record title holder is not the same party as the seller in the contract. The title is in the name of Mr. and Mrs. Smith on the local land records; however, your borrower is proposing to buy the home from the XYZ Relocation Company. Clearly this is a scam ... or is it? With increased scrutiny on lending practices by government regulators and the press, a prudent lender would pull the plug on this deal, right? Most likely, the lender would rely on the commitment letter's requirement that a buyer convey to the lender a valid first lien on the property. Logically, how can the borrower deliver a valid first lien when he's not buying the property from its "true" owner? Before reflexively pulling the plug on what might otherwise be a legitimate, lucrative loan for you and your investor, and doing a disservice to your borrower (possibly even leading to liability for refusal to fund), it's important to determine whether this is a scam or completely in line with government guidelines for relocation company operations. Conveyance in the relocation arena Relocation companies are typically engaged by corporations and government agencies to assist them in moving their employees from one job location to another. Among other services, the relocation company will often be asked to assist the employee in selling his current home, freeing up the family to move to the new location. There are numerous IRS rulings that govern the operation of these programs, and most employers require their relocation companies to operate their programs in accordance with these IRS guidelines. In many cases, a relocation company actually buys the employee's home from the employee. It then resells the home to a buyer (your borrower). Under Revenue Ruling 2005-74, the IRS has eliminated any federal requirement that the relocation company record the deed evidencing the relocation company's purchase from the employee. This leads to the circumstance where your title searcher might find that the employee is still in title, but the contract identifies a relocation company as the seller. Under this circumstance, how can you assure your investor that you have obtained a valid first lien at the closing? When the relocation company has purchased the employee's home, it obtains a signed deed from the employee. In that deed, the grantee's name is left blank. When the relocation company is preparing for its closing with your borrower, it will insert your borrower's name as the grantee. Once recorded on the land records, it is a conveyance to your borrower. Once your mortgage is recorded, it creates the required lien. Most of the larger relocation companies have language in their sales contracts that states, "Buyer acknowledges that seller may provide a deed from another party at closing." Under this language, the borrower has already contractually agreed that the deed from the transferring employee is adequate. A lender's insistence upon a different arrangement may put the buyer in breach of his obligations or even cause the buyer to quickly secure a mortgage loan from a new lender who is more familiar with relocation transactions. Variations in implementation Even though two deeds are no longer required nationally, there are several states that have laws requiring their use in certain states. The Washington, D.C.-based Worldwide Employee Relocation Council is the industry trade group for the relocation industry. It has established a list of the states where two deeds continue to be required. All of the major relocation providers adhere to this list. If your primary lending territory is in one of these states, you may never encounter the situation described above. Additionally, several large employers continue to utilize two deeds in all transactions, even though there is no longer any requirement to do so. Finally, even employers with programs that rely on one deed may elect to use two deeds in special circumstances. They may direct the relocation company to use two deeds where the employee is leaving the company or the country or in other unusual circumstances. Important precautions From a lender's perspective, it is critical not to take any of the above at face value. There are those who will unscrupulously attempt to take on the guise of a relocation company in order to avoid having their names in the chain of title or even take advantage of the relocation exemptions to the Federal Housing Administration anti-flipping rules (24 CFR Section 203.37a[c][2]) or commit some other variety of fraud. The lender or the lender's title representative should prudently obtain information from the relocation provider to ascertain its legitimacy; it may even want to get an advance photocopy of the proposed deed or other representations from the relocation company to assure itself and the investor that the transaction is going to follow the template described in this article. If the seller is not one of the nationally known relocation companies, it would even be wise to get some form of proof from the seller. The benefits of awareness The deed-in-blank transaction sanctioned by the IRS has been employed by the relocation industry since 1972. Literally millions of homes have changed hands using this form of conveyance. A full understanding of the special circumstances and potentially confusing details surrounding these transactions is an important step in completing them in a way that is timely and avoids unnecessary stress for the individuals relocating under its terms. Bruce M. Perlman is senior vice president and general counsel of Danbury, Conn.-based Cartus Corporation. He may be reached at (203) 205-6550 or e-mail [email protected].
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