The problems the title industry had with Freddie Mac’s short sale affidavit might be over. In its Nov. 18 Single-Family Seller/Servicer Guide, Freddie Mac made amendments to those short sale affidavit requirements that should lessen the liability the previous requirements imposed on settlement agents — making them party to the transaction and assuring everything was at arm’s length.
“By clarifying its guidelines, Freddie Mac removes an unfair liability that was imposed on closing and title agents,” said Michelle Korsmo, chief executive officer of the American Land Title Association (ALTA), which worked to have the changes made. “It is unreasonable to have the closing agent certify that a transaction is arm’s length because in most cases they cannot know if any of the parties are in collusion to flip property.”
In the bulletin, Freddie Mac said it is revising the short sale affidavit requirements to “clarify that statements made in the affidavit are made to the best of the signatory’s knowledge and belief and that each signatory is liable for his or her negligent or intentional misrepresentations, but not those of other signatories to the affidavit.”
Freddie instituted the affidavit requirement as a way to help prevent short sale fraud, which is a growing problem in the country. The affidavit was designed to protect Freddie from instances when the buyer, seller, real estate brokers, escrow/closing agent, and any transaction facilitator were involved in short sale fraud by making various certifications and indemnifications.
Unfortunately, the well-intended concept was a bit of an overreach and members of the title industry were concerned that they would be put on the hook for fraud, that the agent would be required to affirm the transaction is arm’s length, there are no side deals, there are no familiar transactions and that the agent would be held liable if anyone lied.
These concerns were brought to the attention of ALTA and the National Association of Realtors (NAR) who worked to get the revisions made. These revisions clarify that:
- Statements made in the affidavit are made to the best of each signatory’s knowledge and belief;
- Each signatory is liable for his or her negligent or intentional misrepresentations, but not those of other signatories to the affidavit; and
- Guidance with respect to the short sale affidavit as well as the information that must be included in the affidavit.
“We are very pleased with the changes announced in Freddie Mac’s recent bulletin,” Korsmo said. “ALTA has been heavily engaged in trying to get Freddie Mac to understand our members’ concerns regarding the short sale affidavit, which inappropriately transferred liability of fraud to closing and escrow agents.
“Like Freddie Mac, ALTA has zero tolerance for fraud,” she continued. “Under existing practices, closing agents already take on the duty of disclosing known or suspected fraud in appropriate circumstances. These duties provide protection for Freddie Mac to ensure that the closing agent will report known fraud to the servicer. ALTA believes industry standards and best practices should be developed as industry partners work together to combat mortgage fraud.”
However, ALTA did note that Freddie retained the requirement that a signatory indemnify the servicer and Freddie Mac for losses if they made “a negligent or intentional misrepresentation.”
“While we believe that the addition of the knowledge standard should significantly reduce this liability, we are aware that the indemnification may still cause problems for title companies and closing agents,” Korsmo said.
All of the changes go into effect Jan. 1, 2012. Each servicer doing business with Freddie Mac must update its forms to comply with the revised policy. ALTA noted that at that time, agents should be sure they are signing the updated form, and if it’s not the updated form, be sure to request the updated affidavit or make modifications.