Property Flipping Training

1. Property FlippingTraining Offered through First Mortgage Corporation Desktop Underwriter is a registered trademark of Fannie Mae. Loan Prospector is a registered trademark of Freddie Mac. This presentation is a summary and is not complete. This information is for mortgage professionals only and should not be distributed to or used by consumers or other third-parties. Information is accurate as of the date shown below and is subject to change without notice. 07/19/2011

2. Agenda • Introduction • Property Flipping • What is Property Flipping? • Red Flags • Double Escrows • Straw Buyers • Property Flipping vs. 90-day rule • Agency Guidelines • FHA • Fannie Mae • VA

3. FIRST MORTGAGE First Mortgage Corporation History First Mortgage Corporation has been around since 1975. Since then, FMC has been opening doors to the American Dream. It’s all we do and we do it well. Discover today why First Mortgage Corporation is your First Time Home Buyer and Down Payment Assistance Headquarters! Introduction

4. History of First Mortgage Corporation • First Mortgage Corporation is an independent residential Mortgage Banking firm with branch offices located throughout the west. • Founded in 1975, FMC is a direct-lending mortgage banker approved as a lender and/or loan servicer by the Federal Housing Administration (FHA); the Veterans Administration (VA); the Federal National Mortgage Association (Fannie Mae); the Federal Home Loan Mortgage Corporation (Freddie Mac); the Government National Mortgage Association (Ginnie Mae); the National Homebuyers Fund (NHF); the California Teachers’ Retirement System (CalSTRS); the California Housing Finance Agency (CalHFA); Nevada Housing Division (NHD); the California Public Employees’ Retirement System (CalPERS); and many other major secondary market institutions. First Mortgage Corporation is currently rated the #5 FHA Lender in CA! • Having funded in excess of $12 billion in residential real estate loans, FMC has assisted more than sixty thousand families with their mortgage needs.  FMC enables families to enjoy the American Dream of Homeownership…“it’s the only thing we do.” • FMC has a longstanding tradition of providing unparalleled customer service and a reputation built on adding value to the home loan process.  That’s why FMC should be considered…“YOUR FIRST LENDING RESOURCE”.

5. FIRST MORTGAGE What is Property Flipping? How does it Work? Samples of Property Flipping Schemes Property flipping

6. Various definitions of Property Flipping… FHA: Property Flipping is a practice whereby a property is resold a short period of time after it is purchased by the seller for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.

7. What is Property Flipping? • Property flipping is a practice whereby a recently acquired property is resold, often for a considerable profit; or a transaction in which a property is purchased and re-sold quickly for a significant profit. • Most property flipping occurs within days or a few weeks of acquisition, and usually with only minor cosmetic improvements, if any. • While there is nothing inherently illegal with selling properties within days of acquisition, some of these transactions are fraudulent because condition of the property is misrepresented and/or the value of it is artificially inflated.

8. Property Flipping cont’d… • The flip typically involves a fraudulent appraisal, which may falsely indicate that renovations were made to the home. • Properties targeted for property flips, generally include properties that can be acquired at lower prices than other properties in the same neighborhood and often include • REO properties • Short sale properties • Distressed properties • Newly constructed properties where a builder or developer must liquidate housing inventory quickly • Properties involved in a flip may be resold on the same day, within days, weeks or months of purchase. • In some cases, the seller of the property flip never holds title to the property, but instead sells or assigns their interest, in a contract to purchase the property, to a third party. 10/14/2014 8

9. Property Flipping cont’d… • Property flips are not inherently illegal, and not all transactions involving a rapid purchase and resale are improper. • “Legitimate” property flips are acceptable transactions. • Some indications of property flips that may be “legitimate” include: • Sales of properties by a GSE (Government Sponsored Enterprise), state or federally chartered financial institution, mortgage insurer, or federal state or local government agency. • Property sales by employers or relocation agencies related to employee relocations. • Sales of properties that have been substantially improved by bona fide and verified renovations since the property was acquired by the property seller, in which any increase in sales price over the property seller’s acquisition costs, is representative of the market, given the improvements to the house. 10/14/2014 9

10. Red Flags… • Red flags common to property flipping are: • Ownership changes two or more times in a brief period • Appreciation of the subject property exceeds that in the normal marketplace • Property seller recently acquired the property for a significantly lower price, or there have been several transfers of the property according to the real estate tax assessment record • No real estate agent is employed (non-arms length transaction) • Property was recently in foreclosure, or acquired at REO sale at a much lower sales price • Parties to the transaction are affiliated or related by birth or marriage • Owner listed on appraisal and/or title may not match property seller on the sales contract 10/14/2014 10

11. Red Flags cont’d… • Red flags common to property flipping are: • Quitclaim deed is used right before and right after closing • Sales contract has unusually large earnest money deposit held by property seller • Unusual fees or credits are found on the HUD-1 • Title commitment references other deeds to be recorded simultaneously • Property seller is a corporation (i.e. LLC) • Comparable sales or listings used in the appraisal report are properties involving the same property seller and/or real estate broker as the subject property in an attempt to create an artificially inflated market 10/14/2014 11

12. Double Escrow… • Double Escrow transactions are not illegal; however, they are considered high risk as they’re often associated with no-money-down purchase transactions, and/or inflated property values. • Parties involved in property flipping schemes often use double escrows in the original acquisition of the property. Eg. of typical double escrow: • A buyer’s offer is accepted to purchase a property for $150,000. • Before escrow closes, the buyer acts as the seller of the property and opens a 2nd escrow using a “straw buyer” who purchases the same property for $185,000. • The “straw buyer” obtains a 90% loan. • With the proceeds from the 2nd escrow transaction, the 1st escrow closes concurrently with the 2nd escrow, resulting in NO exchange of money. • Another sample: • An investor is doing a concurrent escrow and has bank approval on a short sale. • The investor have already negotiated a purchase price at 20% below market, AND • Investor already has a new buyer who will be purchasing this property at full market price. • Investor plans on closing their property and selling it to the new buyer 2-7 days later at full market price. 10/14/2014 12

13. Straw Borrower… • A Straw buyer is a person used to buy property in order to conceal the actual owner. The straw buyer does not intend to occupy the property or make payments, and often deeds the property to the other individual immediately after closing. The straw buyer is usually compensated. • Participants in a straw borrower situation: • Act as a substitute for the actual borrower • Use a quitclaim deed either immediately before or soon after closing the loan • Represent investment property as owner-occupied or a 2nd home • Sign on the actual borrower’s behalf • Red flags common to transactions with straw borrowers are as follows: • First-time Home Buyer, with substantial increase in housing expense • Buyer does not intend to occupy – unrealistic commute, size or condition of property, etc. • No real estate agent is employed (non-arms length transaction) • Power of Attorney may be used • “Boiler plate” contract with limited insertions, not reflective of a true negotiation • Income, savings and/or credit patterns are inconsistent with the borrower’s overall profile • High LTV, limited reserves and/or property seller-paid concessions • Inconsistent signatures throughout the file 10/14/2014 13

14. Property Flipping Example 1 The following examples are illustrations of (2) techniques: Example 1: • Party A executes a written agreement with property owner (Party B) to purchase a property. • Party A executes a written agreement to assign (or sell) his or her interest in the contract for sale to Party C. • Party C executes a written agreement to sell the property to an unsophisticated buyer (Party D) at an inflated price. • Party C helps to arrange the purchase money financing for Party D with a loan originator who knowingly assists with obtaining a misleading or fraudulent appraisal with an inflated property value and uses other misleading or fraudulent documentation. • The closing agent closes the transactions one after the other or “back to back”. • The closing agent records the deeds (from property owners Party B to Party C, and then from Party C to Party D) one after the other at the land records office. • This example demonstrates the use of an assignment of a contract for sale, a fraudulent or misleading appraisal report, and “back-to-back” closings. 10/14/2014 14

15. Property Flipping Example 2 • Example 2: • Party A purchases a distressed property. • Party A executes a written agreement to sell the property to Party B. • Party B executes a written agreement to assign (or sell) his or her interest in the contract for sale to an unsophisticated buyer (Party C) at an inflated price. • Party B helps to arrange the purchase money financing as well as cash out refinance financing for Party C with a loan originator who knowingly assists with obtaining a misleading or fraudulent appraisal with an inflated property value and uses other misleading or fraudulent documentation. • The closing agent closes the transactions one after the other or “back to back”. • The closing agent records the deeds (from property owners Party A to Party C at the land records office • This example involves the use of a purchase and a cash-out refinance transaction supported by misleading or fraudulent appraisals. 10/14/2014 15

16. Recap - How it works? 10/14/2014 • Property Flipping generally starts with the purchase of a distressed property which means seller is motivated to sell at a discounted price. • Individuals: • Briefly hold title (months or days). Eg., • An individual identifies a property that can be acquired at a discounted price, represents his intent to occupy, then resells the property shortly after closing for profit. • Assign or sell their interest in a contract to a 3rd party. Eg., • An individual identifies a property that can be acquired at a discounted price, then assigns the sales contract to an unsuspecting buyer for a profit with an inflated appraisal. • Property flipping becomes illegal or predatory when an immediate resale is accompanied by acts of occupancy misrepresentation, including appraisals with inflated property values and other misleading documentation. • The unfortunate victim of such a predatory property flipping scheme is an uninformed homebuyer who may have paid too much for a property, or a lender who only services the property for a short period of time. • Property flipping through assignment of contract, combined with misrepresentation of occupancy at the time of the original contract commitment can artificially inflate the value of the property and result in losses for the owner and the lender. • Appraisal reports used in these property flipping schemes generally contain inadequate analysis of: • The sale (or transfer) history of the subject property, and comparable sales • The offering or listing for sale for the subject property • The contract for sale for the subject property 16

17. IS PROPERTY FLIPPING ALLOWED? 10/14/2014 NO! no NO! 17

18. FIRST MORTGAGE PROPERTY FLIPPING VS90-DAY RULE

19. 90-day Rule • Ways to avoid property flipping – Agencies invention of the 90-day rule. • Who has a 90-day rule? • FHA • Currently waived for a period of 1 year for purchase contracts dated February 1, 2011 or later • See Waiver of Requirements 24 CFR 203.37a(b)(2) • See FMC’s Policy on HUD’s 90-day waiver • Who does NOT have a 90-day rule? • Fannie/Freddie Conventional • VA 10/14/2014 19

20. FHAPROPERTY FLIPPING GUIDELINES (90-day Rule) FIRST MORTGAGE 10/14/2014 20

21. FHA Property Flipping Guideline FHA GUIDELINE OVERVIEW: • Only owners of record may sell properties that will be financed using FHA insured mortgages. • Any resale of a property may not occur 90 days or fewer from the last sale to be eligible for FHA financing. • For re-sales that occur between 91-180 days where the new sales price exceeds the previous sales price by 100% or more, FHA will require additional documentation validating the property’s value. FHA also has flexibility to examine and require additional evidence of appraised value when properties are re-sold within 12 months. SALE BY OWNER OF RECORD • Property must be purchased from owner of record • Sale or assignment of sales contract not allowed • Sample required documentation: • Property Sales history report • Copy of Recorded Deed from Seller • Copy of Property Tax Bill • Title commitment or binder

22. FHA Property Flipping Continue… RE-SALES OCCURING 90 DAYS OR LESS following acquisition: • Properties sold within 90 days of acquisition is not eligible for FHA financing unless it falls within exceptions to the time restriction. SEE TEMPORARY WAIVER!!! RE-SALES OCCURING BETWEEN 91-180 DAYS following acquisition: • 2nd appraisal is required (by another appraiser) IF the re-sale price is 100% or more over the price paid by the seller when the property was acquired. • 2nd Appraisal must be paid by the lender – may not be paid by the borrower • May also provide documentation showing the costs and extent of rehabilitation that went into the property resulting in the increased value; must still obtain the 2nd appraisal. RE-SALES OCCURING BETWEEN 91 DAYS–12 MONTHS following acquisition: • FHA may require additional documentation on re-sales between 91 days to 1- year if the resale price is 5% or more than the lowest sales price of the property during the preceding 12 months. Important Note: • Sellers acquisition date is the date the seller acquired the property (Settlement Date) • Re-sale date is the date the buyer signed the Sales Contract or Purchase Offer.

23. FHA Property Flipping Exceptions • Exceptions to the 90-day rule: • The following sales are exempt from the time restrictions: • FHA REO Properties sold by FHA • Re-sales of properties purchased by an employer or a relocation agency in connection with employee relocation. • What FHA intends to exempt is bona fide relocation agencies that contract with employers to handle relocation of their employees • A relocation agency DOES NOT include individual RE agents that advertise themselves as relocation experts and who purchase properties from persons who are relocating from the area. • A builder selling a newly built home or building a home for a homebuyer wanting to use FHA financing (eg., A builder selling to another builder prior to the completion of a home would be exempt from the time restriction) • Sales of properties acquired by the seller through inheritance • Seller will not be required to hold title to that property for 90 days before he/she can sell it for FHA insured financing • Seller must still be the owner of record by the 90 day ownership period will not be required • Since there was no previous sale of the property because it was inherited, there is no previous sale price that might trigger the 2nd appraisal requirement. • Single Family REO properties sold by all Federal Government Agencies (excludes Fannie/Freddie

24. FHA Property Flipping Exceptions cont’d • Exceptions to the 90-day rule: • Sales by other US Government agencies of single family properties pursuant to programs operated by these agencies • Sales by Mortgage Companies, their subsidiaries and any vendors hired by these exempt entities • Sales of properties by non-profits approved to purchase HUD-owned single family properties at a discount with resale restrictions • Sales of properties by state and federally chartered financial institutions and Government Sponsored Enterprises (Eg., Fannie/Freddie, HUD, VA, USDA) • Sales of properties by local and state government agencies • Sale of properties within Presidentially-Declared disaster Areas (Upon FHA’s announcement of eligibility in a mortgagee letter specific to said disaster) • NOTE: Properties acquired by individuals, investment groups, REO property re-sellers, or others whose intent is the purchase, repair and reselling of the property are not exempt from the 90-day resale restriction. 10/14/2014 24

25. FMC’s Policy on HUD’s 90-day Flip RuleTemporary WAIVER (Program 07 only) • (Not available for Program 72!!!) • Effective for purchase contracts dated February 1, 2011 or later: • All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. • If the seller is an LLC, corporation or trust, evidence from the department of corporations will be required. • A minimum 12-month chain of title will be required on the prelim to determine no pattern of previous flipping activity exists for the subject. • The appraisal must specify the property was openly and fairly marketed and must disclose any special arrangements which could be a red flag (i.e. sales concessions, assignment of sales contract, etc.) 10/14/2014 25

26. FMC’s Policy on HUD’s 90-day Flip RuleTemporary WAIVER (Program 07 only)cont’d… • Cases in which the sales price of the property is 20% or more over and above the seller’s cost of acquisition, the waiver will only apply if BOTH a second appraisal and a property inspection report are provided. • Two full appraisals will be required. The cost of the second appraisal should be incurred by the *seller and cannot be charged to the borrower. The second appraisal must be ordered *by the branch through our approved AMC services. • 1) The second appraisal must be completed by an FHA roster appraiser. • 2) Do not request a case number for the second appraisal. • 3) Only the information for one appraisal may be entered into the FHA connection appraisal logging screen, which will be the appraisal relied upon to determine the maximum loan amount. • 4) Both appraisals must be included in the case binder submitted for insurance Endorsement. • 5) The cost of the second appraisal should be charged to the seller. The seller may pay for the second appraisal via credit card to the AMC or at loan closing to FMC. If paid by the seller at closing, the cost of the second appraisal will need to be billed to the branch subject to the branch manager’s approval. • 6) The branch should consider holding off on ordering the 2nd appraisal until the 1st appraisal is received and reviewed. Reason being, the appraised value may result to be less than the sales price, and the price may then be adjusted downward. In which case, the sales price versus the seller’s acquisition cost may result to be less than 20%, eliminating the need for the 2nd appraisal. 10/14/2014

27. FMC’s Policy on HUD’s 90-day Flip RuleTemporary WAIVER (Program 07 only) cont’d… • An AVM nor a LARA will be acceptable in place of a second appraisal. • The appraisal must clearly address the completed repairs and/or renovation to substantiate the increased value. • If no repairs or renovation were done, the appraisals must clearly identify the justification of the increased value (i.e. seller bought under market value, etc.). • A property inspection report signed by the buyer will be required. Any health and safety repairs noted on the inspection report, not already called for by the appraisers, will be required to be repaired as a “concurrent with funding” condition, documented with a CIR to include photos. • Additional information and/or documentation may be required by underwriting in order to ensure we are complying with this waiver. This waiver is in effect for one year from February 1, 2011. If any necessary changes should occur by FMC or HUD pertaining to this waiver, a follow up bulletin will be sent. All above required documentation MUST be included in the loan submission package, otherwise it may be determined the waiver does not apply to your specific transaction. Be proactive and read the attached waiver to document your transaction accordingly. 10/14/2014

28. FIRST MORTGAGE FNMAProperty flipping GUIDELINES

29. Fannie Mae Property Flipping Policy 10/14/2014 Fannie Mae does NOT have a 90-day rule… However, they have guidelines with regards to their view of Property Flipping and what is required of each Lender to perform to ensure Property Flipping is not evident! • Different investors have different requirements/overlays with regards to Property Flipping. • Check individual investor guidelines with regards to their specific requirements. • For FMC, all suspected flipped loan files will go through full QC audit as well as FMC Loan Committee review for prior approval. 29

30. Fannie Mae Property Flipping Policy The likelihood of fraud or misrepresentation increases when the lender is not able to confirm that the property seller in a purchase money transaction (or the borrower in a refinance transaction) is the owner of the subject property based on publicly available information. Fannie Mae Revised Policy (May 1, 2005): • Lenders are required to confirm and document in the mortgage file that the property seller in a purchase money transaction (or the borrower in a refinance transaction) is the owner of the subject property when a new appraisal is required. • Sample required documents include but not limited to: • Appraisers analysis and conclusions in the appraisal report • Copy of recorded Deed or Mortgage • Recent property tax bill or tax assessment notice • Title Report • Title Commitment or Binder • Property sale history report These sample documentations is especially important for transactions involving an assignment (or sale) of a contract for sale and/or “back to back”, “simultaneous”, or “double” transaction closings (or double escrows) to support the property acquisition, financing, and closing.

31. Fannie Mae Policy Continued… • As stated previously, when a new appraisal is required, the lender must perform an underwriting analysis of the current contract for sale for the subject property (for both purchase and refinance transactions), and the sale (or transfer) history of the subject property, and comparable sales (for both purchase and refinance transactions). • Lender is also required as part of the Loan Origination process to analyze and review the sale(s) of the subject property and the sale price trend in relation to the appraisers opinion of value to confirm that they are reasonable and representative of the market. • We believe that confirming and documenting the current owner of the property based on publicly available information as part of the origination process will help to ensure a more meaningful analysis of the sale (or transfer) history of the subject property. • This will ensure that the lenders and their appraisers understand the quality and timeliness of their data sources, identify time gaps in, and assess the accuracy of, their data sources.

32. VAPROPERTY FLIPPING GUIDELINES FIRST MORTGAGE 10/14/2014 32

33. VA Property Flipping Policy 10/14/2014 VA does NOT have a 90-day rule… However, different investors have different requirements/overlays to ensure Property Flipping is not evident! • Some investors apply FHA’s 90-day rule to their VA guidelines; eg., Program 72. • Check individual investor guidelines with regards to their specific requirements. • For FMC, all suspected flipped loan files will go through full QC audit as well as FMC Loan Committee review for prior approval. 33

34. FIRST MORTGAGE Property Flipping Overview Required Documentation overview

35. Please note… 10/14/2014 • Property flipping is not illegal per se; however, when an immediate resale is attended by acts of fraud or misrepresentation, including but not limited to, appraisals with inflated property values, and other misleading or fraudulent documentation, it can result in a predatory transaction. 35

36. Property Flipping Overview Our experience and research indicate that: • Property flipping schemes generally rely on sequence of transactions occurring in quick succession. • Predatory property flipping schemes generally involve the assignment (or sale) of a contract for sale. They also tend to employ “back to back”, “simultaneous”, or “double” transaction closings (or double escrows in some states). • The likelihood of fraud or misrepresentation increases when the lender is not able to identify that the property seller in a purchase money transaction (or the borrower in a refinance transaction) is the owner of the subject property based on publicly available information. • Any meaningful analysis of the sale (or transfer) history of the subject property should start with the identification of the current owner of the property based on publicly available information. • Lenders and their appraisers must understand the quality of, and timeliness or effective date of, their data sources for the sale (or transfer) history of the subject property, and comparable sales in order to identify time gaps or lags.

37. Required Documentation • Evidence of required seasoning must be submitted in loan file. We will verify the Seller on Purchase Contract is “In Title” and Owner. If different, loan will be cancelled. • Appraisals must indicate required sales history information as required by regulation. Sample required documents include but not limited to: • Copy of recorded Deed or Mortgage • Appraisers analysis and conclusions in the appraisal report • Recent property tax bill or tax assessment notice • Title Report • Title Commitment or Binder • Property sale history report

38. In conclusion… 10/14/2014 Regardless of whether or not there is a waiting period present, Property Flipping is not an acceptable practice and is not allowed on any First Mortgage Program 38

39. Tips on… Waiver Requirements

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41. FIRST MORTGAGE On behalf of First Mortgage, thank you for joining today’s training and we hope the information provided will help you build your business!