HUD Reneges on the No Dual Agency Rule
Just like in the movie, Poltergeist, with it’s famous line, “They’re back,” dual agency on FHA short sales is also back. Set to be prohibited as of October 1, 2013, HUD postponed this ban on dual agency as a result of some fancy footwork by the National Association of Realtors®.
The dual agency restriction came out as part of Mortgagee Letter 2013-23, a July letter from the Department of Housing and Urban Development (HUD) which set out to achieve some positive changes in FHA short sales.
Among those changes was the following statement with respect to dual agency:
“No party that is a signatory on the sales contract, including addenda, can serve in more than one capacity. To meet the PFS Addendum requirements, brokers and their agents may only represent the buyer or the seller, but not both parties.”
Agents across the nation noted that this language meant no more dual agency. Not only was a single agent prohibited from representing both buyer and seller, but also two agents from the same brokerage were not permitted to represent both sides of the transaction. This regulation (particularly the latter part) infuriated the National Association of Realtors®. According to a letter sent by the President of NAR® to the Assistant Secretary of Housing, this policy could have an extremely negative impact on borrowers in certain parts of the United States where a single brokerage may have the bulk of the market share.
Why Prohibit Dual Agency?
It appears as if the original intentions behind this ban were probably pretty good: to prohibit fraud. When a single agent represents both sides of a transaction, HUD may wonder whether the property was placed on the MLS, and whether it was exposed to the mass market, which may in turn increase the price and the bank’s net. Since we are talking about short sales, FHA is looking for the highest net possible since they are already taking a loss.
The problem is that most of the United States is currently in a seller’s market and buyers at certain price points in some areas are having trouble locating properties. Some agents are writing 10, 20, or even 30 offers for a single buyer. When agents have suitable listings, they may be inclined to sell them to one of their own buyers instead of placing the property on the MLS (commonly known as taking a pocket listing).
Because it is not on the MLS, a pocket listing does not have exposure to other real estate brokers, and frequently not even the public. When a property is on the MLS, this can mean multiple offers, a higher price, and better terms or a buyer who is better positioned to close the deal.
If more people are exposed to the listing, there is a higher probability of sale. Additionally, buyers may bid against one another, and the higher the price will go. This is not only good for sellers with equity but short sale sellers, too. A bidding war may net the short sale lender a higher amount.
Fully 26 percent of the homes that sold in the state of California in the first quarter of 2013 were not even listed on the MLS. HUD is aware of statistics like these across the United States and wants to make sure that the pocket listing is not causing them to lose big bucks.
The alternative, as recommended by Gary Thomas, President of the National Association of Realtors®, is to adopt the policy already in place with Fannie Mae: all short sales must be on the MLS for five days (including one weekend), and the agent must provide a copy of the MLS printout when submitting the short sale package.
While there is always someone that can figure out how to work around the rules, this Fannie Mae policy does require proof that the property was open to the public. It seems to be a better option than a complete ban on dual agency for FHA short sales.