New rules taking effect Oct. 1 that will prohibit brokers and agents from representing both buyers and sellers in FHA short sales will only make it harder for the government to get the most bang for its buck, the National Association of Realtors argued this week in a letter to Federal Housing Commissioner Carol Galante.

The Department of Housing and Urban Development issued a letter to mortgage servicers in July outlining a number of new anti-fraud requirements for short sales and deeds-in-lieu of foreclosure.

They include the use of a “deficit income test” to prove that a homeowner is experiencing a hardship that may qualify them for a short sale or deed-in-lieu of foreclosure, and documentation requirements for verifying the homeowners assets, income and expenses.

To ensure that short-sale transactions are conducted at “arm’s length,” HUD said “brokers and their agents may only represent the buyer or the seller, but not both parties.”

In other words, NAR said in its letter to Galante, “HUD will no longer allow ‘dual agency’ agreements in short-sale transactions.”

NAR said it’s been told the policy was implemented because HUD’s inspector general “detected fraud and abuse in the pre-foreclosure sales process.”

While NAR said it takes fraud “very seriously,” it complained that “no statistics or reports were provided to NAR detailing short-sale fraud by real estate agents.”

While HUD’s inspector general has noted that short sales aren’t meeting “minimum net sales proceeds requirements,” the new restrictions on real estate brokers and agents are “only going to make this problem worse,” NAR maintains.

That’s because some brokerages could decide to stop representing sellers in FHA short sales, because they won’t want to restrict their agents from representing buyers of those properties.

“Some real estate brokers have hundreds of agents across multiple offices,” NAR said. “If one of those offices chooses to list a short sale, under HUD’s new policy none of the other agents can bring a buyer to that property.”

One broker with more than 2,000 agents in multiple offices “has buyer’s agents and listing agents work on the same transaction in over 30 percent of their sales,” NAR said. “In rural areas, where there are fewer real estate firms and agents to choose from, the percentages are even higher.”

NAR member brokers are also worried that they would have to provide a disclaimer when listing a short sale in the multiple listing service that none of their agents could represent a buyer on that listing — a potential violation of MLS guidelines.

NAR said HUD’s policy also conflicts with state laws that allow dual agency as long as it’s disclosed and accepted by the parties involved.

“Most state licensing laws have standards for how to function as a dual agent and there is a formal complaint process through the respective real estate commissions in the event of suspected fraud in a transaction,” the trade group said. “NAR feels there are other ways that HUD could address concerns about the short-sale process without restricting such a significant number of real estate agents from participating in pre-foreclosure transactions.”

Fannie Mae allows dual agency on short sales, requiring that all properties being considered be listed as active in an MLS for a minimum of five consecutive calendar days.

Fannie Mae also provides anti-fraud training and a phone number and email for reporting potential short-sale fraud.

“We strongly urge you to reconsider the implementation of this policy and consider other options that could more positively impact the pre-foreclosure program,” NAR said.

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