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Mortgage insurance, length of ownership can reduce advantages
Jack Guttentag
Inman News
"Does the assumability option on FHA loans offset their high mortgage insurance premiums?" That is a great question and very timely. The value of assumability right now is as high as it is ever likely to go because of the broad consensus that interest rates in future years will be higher than they are now. Loans insured by the Federal Housing Administration (FHA) are assumable, while conventional loans, with a few exceptions, are not. That means that a home purchaser today who finances the purchase with an FHA-insured loan and who sells his house later when interest rates are higher will be able to offer a potential buyer the right to assume his low-rate FHA loan. After approval of the buyer by FHA, on sale of the property the buyer will assume all the obligations under the mortgage, just as if the loan had been made to her, and the seller will be relieved of liability. The major driving force behind assumptions is the lower interest rate on the assumed mortgage relative to current market rates. If the home seller has a mortgage with a rate below the current market rate, both buyer and seller can be better off if the buyer assumes the seller's loan. The buyer enjoys a lower rate and also avoids the settlement costs on a new mortgage. Assume a home purchaser today taking a $200,000 mortgage on a $250,000 house who is offered the choice between a conventional 30-year fixed-rate mortgage at 5 percent with no mortgage insurance and an FHA loan at 5 percent with mortgage insurance, and, of course, assumability. The FHA has an upfront mortgage insurance premium of 1.5 percent of the loan, and a monthly premium of 0.5 percent. The purchaser expects to have the house for five years, at the end of which the mortgage balance will be $183,657. Let's assume for the moment that the market rate at that time will be 10 percent. I have a spreadsheet on my Web site that values the 5 percent mortgage to a buyer relative to the 10 percent mortgage available in the market. In addition to the factors in the preceding paragraph, the spreadsheet requires an assumption about how long the buyer expects to have the mortgage (six years), and on the "investment rate" -- the rate the buyer could earn on her savings, which I set at 4 percent. On these assumptions, the value of the assumable 5 percent loan, relative to the alternative 10 percent loan, is $49,012. The present value at 4 percent is $40,141, without considering the savings in settlement costs on a new loan. The cost of the FHA mortgage insurance is the upfront premium of $3,000, plus the present value of the monthly premium discounted at 4 percent, which is $4,525, for a total of $7,525. This suggests that the value of the assumability option on an FHA loan could outweigh the mortgage insurance cost by a wide margin. For a number of reasons, however, this calculation overstates the value of assumability. First, we ought to be more conservative in our interest-rate assumptions. If we assume a future market rate on a new mortgage of 8 percent, rather than 10 percent, and a discount rate of 8 percent as well, then the assumable mortgage will be worth $23,166 in five years with a present value of $15,549, and the mortgage insurance cost will be $7,110. That is still more than 2 to 1, and it does not include the savings in mortgage settlements costs to the buyer. Second, the savings to the buyer from assuming the existing mortgage would be reduced if the buyer has to supplement the existing loan balance with a new second mortgage at a higher rate. This could well be the case if the house has appreciated during the period since the mortgage was taken out. The value of assumability to a buyer strapped for cash would be much lower than to a buyer who has the cash to pay the difference between the sale price and the balance of the old loan. The borrower today has no way to anticipate the financial status of the person who buys his house years later. Third, the borrower today cannot expect that when he sells and offers an assumable loan with the house that the price of the house will include the full value of the assumable mortgage. In their negotiations, the value of the assumable mortgage will be shared in some unknown proportions. This further increases the uncertainty in the value of assumability to a borrower today. In sum, the assumability of FHA mortgages could have significant value to borrowers today, in some cases equaling or exceeding the cost of FHA mortgage insurance. In other cases, however, assumability could be worth little or nothing. If the borrower has the house for 10 years before selling, the larger paydown of the balance plus property appreciation could sharply reduce the value of the low-rate mortgage to the buyer at that time. Furthermore, whatever value is there would be further reduced by the longer discount period. The borrowers today for whom assumability has the greatest potential value are those who expect to sell their house within three to seven years. Short of three years, it is not clear that interest rates will be significantly higher than they are today, and after seven years it is not clear that assumability will have significant value to homebuyers. The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2010 Jack Guttentag
02/08/2010 04:00 AM
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Mood of the Market
Tara-Nicholle Nelson
Inman News
I recently watched the 2008 documentary "Man on Wire," a literally breathtaking retelling of Philippe Petit's illegal 1974 tightrope walk between the twin towers of the World Trade Center. At 110 stories -- a quarter-mile above the streets of New York City -- Petit walked back and forth about eight times over 45 minutes, only stopping after the Port Authority threatened to pluck him off the wire via helicopter. With inhuman agility, Petit lay down on the rope, he danced on the rope, and he glided back and forth on the rope as though he relished every second of his time up there (which, it seems, he did). Even at nearly 60 when the documentary was filmed, Petit simply glided across his backyard practice rope, taking each next step as though there was simply no other thing to be doing. By contrast, it is with very human, halting fear and trepidation that today's real estate consumers take their next steps in the tightrope-esque balancing act of decision-making contexts presented by today's real estate market. No frolicking on the ropes for them, buyers and sellers alike are constantly faced with resolving matters of which value, priority, threat or danger is weightier before taking whatever next step is necessary to move their transaction forward. The New York Times just ran an article illustrating one such dilemma faced by condo buyers nationwide. Is it wiser to buy a unit before the building even goes up, with the prospect of saving thousands and thousands of dollars, but risk problems if the building has construction defects or the other units don't sell well (in which case buyers might not be able to obtain financing and risk forfeiting thousands in deposit money)? Or is it wiser to wait until after the building is done, limiting your choice of unit and risk having to throw money at the developer to buy one of the last few units? Is it wiser to extend yourself to buy as much house as possible right now, while prices are good, rates are low and loans are still accessible to get? Or buy conservatively now, knowing that your move-up might be much more difficult and costly? Buy with an FHA loan, saving your cash cushion but risking not having your offer accepted by sellers who frown on FHA-financed offers, or buy with a conventional loan, sinking all your cash into a home you know might have some depreciating left to do? It's no simpler for sellers. Sell now to get the move-up home on the cheap and collect the move-up tax credit, but also get less than "peak pricing" for your current home? Or sell later when prices for both your current home and your next one might be higher? Determining your offer price is a tightrope act, walking the line between appraisable fair market value, avoiding "overpaying" and being sufficiently aggressive to best other offers. Same with setting your list price: Sellers crave to lure buyers in with the prospect of a good value without selling their home short or setting the stage for lowball offers. So often, buyers and sellers cast desperately about to find the "right" answer to these dilemmas of balancing various factors before taking their next real estate step. However, when it comes to their perspectives and mental approaches to walking these real estate market tightropes, often there is no one answer that is "right" for every buyer, seller, building or situation. Rather, there are simply right approaches -- many of which can be learned from Petit's approach to his crazily gorgeous tightrope walk between the twin towers, which will never be duplicated by another human being. Buyers and sellers must be mentally nimble and agile -- they must be able to move easily and gracefully to take account for the rapidly changing scenery of facts about their intended home, their transaction, their mortgage and the market. This takes flexibility: the ability to wrap their heads and their decisions around new information. But it also takes certainty -- to be bold, agile and flexible decision-makers in this rapidly changing market, buyers and sellers must have a clear vision of the outcome they want, the "after" picture they are trying to create of their lives once they've made their real estate move. Interestingly enough, Petit's seemingly insane tower walk was actually planned with meticulous precision and the involvement of numerous expert advisers over a six-year period of time -- starting before the towers were even constructed. And that sound preparation freed him to relax and enjoy the precious moments of the walk itself, knowing he was prepared for every humanly imaginable contingency that might arise. The clear parallels for homebuyers and sellers abound -- who should also plan their house hunts and home sales with precision and thoughts toward course correction around predictable obstacles, with the advice of their own expert advisers. Of course, the unexpected dangers of Petit's walk are also instructive for real estate consumers. You just can't plan for everything. The most dangerous portion of his escapade was when the police threw him down the stairs after he came down. As Petit himself might say in his native tongue, "c'est la vie" (French for "such is life") when it comes to walking tightropes -- both literally and those of the real estate variety. Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2010 Tara-Nicholle Nelson
02/08/2010 11:45 AM
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Mortgage assistance not just for those who need it?
Steve Bergsman
Inman News
I always assumed the Obama administration housing platforms such as the Home Affordable Refinance Program (HARP) were intended for people who were having trouble staying in their homes due to sucker mortgages, home devaluations and/or loss of employment. I also inferred from panicky news presentations that the incidents of foreclosures were so vast, numbering in the multimillions, that the banks were having trouble just getting to everyone who needed help. As one e-zine article noted about HARP and loan modifications, "many homeowners have complained that this path of hope is virtually a dead end. Many people are not getting the help they were promised due to specific qualifying criteria and lengthy turnaround times for processing modifications. Unfortunately, the government can't afford to bailout everyone." So, I was very surprised when I picked up my telephone one day in early November and noted a voice-mail message from Wells Fargo Home Mortgage telling me that I qualified for a HARP loan and asking whether I wanted to see about refinancing. Now I do have a Wells Fargo mortgage, but it's not on my primary residence. I live in Arizona and own a condominium in Concord, N.H., which I rent to my sister. When she decided to move to New Hampshire from Florida because her two daughters lived in the state, it was easier for me to buy the condo than for her because she was retired and it would have taken a lot of her savings. Wells Fargo Home Mortgage was a good company to work with and the process went smoothly. The condo wasn't very expensive and, if I remember correctly, I put down almost 25 percent of the total purchase cost. That was about three years ago. Fortunately for me, the Concord condominium market wasn't very intensive or overbuilt so the value of the condo unit has been maintained (no appreciation), but my investment wasn't imploding either. In short, the mortgage wasn't in trouble and neither was I, the borrower. So, why was Wells Fargo Home Mortgage contacting me about a HARP loan? Actually, the bank was very aggressive about communicating with me because a few days after the call I received a letter from the bank as well. The letter opened this way: "If you think you can't refinance and you're concerned about missing out on today's historically low mortgage interest rates, now may be the time to act. The Home Affordable Refinance Program is helping more homeowners like you refinance, even if your loan balance exceeds the present value of you home -- up to 105 percent." I was curious why Wells Fargo was contacting me about all this, so I called the person who left me a voice mail. After exchanging pleasantries, I asked, "What makes me available for a HARP loan?" The answer was very simple: My loan was backed by Freddie Mac. If a loan is a Fannie Mae or Freddie Mac vehicle, you are almost always eligible for HARP, said my telephone correspondent. To show the Wells Fargo employee I knew something of what was going on in the world, I said something to the effect, "Obviously, with the government taking over Fannie and Freddie this type of mortgage seems pretty darn secure, which means most any bank would want to deal with it." Oh no, she added, "Just because a loan is Fannie Mae- or Freddie Mac-backed, it doesn't make it automatic. To make it eligible for HARP there are some other criteria factored into it, such as what was the initial loan to value." After the conversation I looked over the form letter from the bank. The current interest rate on my loan was 6.375 percent. If I got a new loan it would be 4.875 percent, with an annual percentage rate (APR) of 5.32 percent. According to this calculation, my monthly payment would drop from $623.87 to $516.53. It was enticing yet not altogether accurate, because when I spoke to the Wells Fargo employee she asked if I wanted the numbers crunched. I said sure, and she was coming up with an interest rate of 5.5 percent. Once I threw closing costs and fees into the pricing, the difference between my old monthly payment and the new one would be less than $60. Not really worth it. Nevertheless, something bugged me about the whole experience. Through the first half of 2009, Wells Fargo refinanced approximately 750,000 customers' mortgages using the HARP program. In July, Mike Heid, co-president of Wells Fargo Home Mortgage, issued this statement: "We continue to strongly support the Administration's efforts, adding HAMP (Home Affordable Modification Plan) and HARP to the existing programs Wells Fargo already had in place. "We are committed to continuing to work with the federal government, consumer counselors, nonprofit agencies and others to keep Americans in their homes, whenever possible." And that included me? The loan on the property the bank targeted not only wasn't my primary residence but it wasn't even close to failing. When I spoke with the Wells Fargo person she said to me, "The original intent of HARP, when it was rolled out by the government, was to allow people to refinance where values dropped on their properties." I wasn't even sure if that qualification applied to me. As much as I liked working with Wells Fargo to get my loan, something about this whole business of using the HARP program to refinance "750,000" customers' mortgages and working "to keep Americans in their homes" sounded wrong to me. Based on my experience, perhaps Wells Fargo (and what about the other big banks?) may not have been targeting only the people in need. The people who really need this program are probably still in need. Meanwhile, the safely middle-class may be getting opportunities to make their existence easier, financially. I just don't think this was the reason HARP was created. Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade." *** What's your opinion? Leave your comments below or send a letter to the editor.
02/05/2010 04:00 AM
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3 basic themes, dozens of possibilities
Paul Bianchina
Inman News
If you look closely at homes with beautiful windows, you'll typically find one thing in common: wood trim. No matter what the style of the window is or what material it's made out of, a painted or stained wood surround enhances the beauty of the window far more than the inexpensive "drywall wrap" that's common on a lot of today's homes. Creating wooden surrounds for your windows is enjoyable, fairly inexpensive, and can be done by anyone with a few finish carpentry skills. And you can do one or two windows at a time, which is a lot less invasive to your home life than a lot of remodeling projects. First, a couple of definitions In the world of finish carpentry, there are a couple of terms that are helpful to know: - Window surround: A window surround consists of the four pieces that wrap the inside of the window frame, between the face of the window and the face of the wall.
- Stool and apron: A window stool is the same as a window sill. It's the horizontal board at the bottom of the window surround. The trim board beneath the stool, which covers the joint between the bottom of the stool and the face of the wall, is the apron.
- Drywall wrap: A type of surround in which all four sides of the surround are done with drywall instead of wood.
Three ways to trim the window There are basically three options for how you can trim out a window with wood. The simplest is to wrap the two sides and top of the window surround with drywall, and then install a stool and apron at the bottom. The drywall pieces are installed first and finished, prior to installation of the stool. If you already have drywall-wrapped windows, all you need to do is remove the bottom piece of drywall from the surround, to expose the rough framing underneath. The stool is cut from finish-grade lumber. You can use oak, maple, fir or other clear grades of wood if the wood is to be stained. If you'll be painting the stool, consider poplar or medium-density fiberboard (MDF), both of which paint out very nicely. The stool is typically ripped to a width that's 1 inch wider than the distance from the face of the window to the face of the wall, and 1 inch longer than the distance between the two side pieces of the surround. The stool is then simply notched on each end to fit into the opening in the window surround. It will overlap the wall face by an inch, and there will be two "ears" that extend past the edge of the surround by 1/2 inch on each side. The apron, which is a piece of trim of any desired size and style, is cut 1/2 inch shorter than the overall length of the stool, and is installed below the stool to finish things off. Method No. 2 is to make a wooden surround with no stool, which is done by building a box. You need four pieces of lumber ripped to the same width as the distance from the face of the window to the face of the wall, then cut and assembled into a simple box that's slightly smaller than the inside dimensions of the window frame opening. Slip the box into the opening, shim it until it's centered, then nail it in place. The installation is completed by installing four pieces of matching trim on face of the wall, sized so as to cover most of the edge of the wooden box and mitered at the four corners. The third method is a combination of the first two. In this case, you would construct a three-sided box -- two sides and a top -- then cut a stool as described above and use it as the fourth side (the bottom) of the wooden box. Install the box in the opening and shim it into place. Now install three pieces of trim on the face of the wall -- a top piece and two sides. The trim is mitered at the two top corners, and extends down on the two sides to rest on top of the stool. An apron, installed below the stool as described above, completes the installation. There are dozens upon dozens of variations on these three basic themes. Before you get started, take some time to peruse a few architectural and carpentry magazines and books and you're sure to find a look that's perfect for your home. Remodeling and repair questions? E-mail Paul at paulbianchina@inman.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
02/05/2010 11:40 AM
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Home Sale Hindsight
Tara-Nicholle Nelson
Inman News
Q: As a single woman a couple of years ago, I bought a loft with a 5/1 adjustable-rate mortgage (ARM) and no money down. My mortgage will start adjusting in about two years, and I am now about $50,000 upside down. In the meantime, though, I've gotten married (my husband is not on the loan) and we'd like to have a child soon, which won't work in the loft. We are thinking of walking away from the loft and getting some closure on it, so we can move into a home that makes sense for our family. We're also thinking about trying to get a loan modification, although I'd really rather not hold on to the loft. And some people we know have recommended a short sale. I feel like my past decision to buy the loft with that ARM trapped us in this situation. But I also want to know what to do now so we don't get trapped again. A: Between putting no money down and the depreciation in value, you now find yourself, like almost 30 percent of your fellow Americans who own homes, owing more than your home is worth. Somewhat more rare about your situation, though, is the fact that you also are having a major change in lifestyle situation that renders your home less feasible to hold onto, even if you were willing to do so to wait for the value to rebound. You might have found out that it's very tough now -- and impossible, for many -- to qualify for an additional mortgage for a more suitable home, unless you have income (rental and otherwise) to more than offset the expenses of owning both homes. Hence, you feel trapped: You need to move on, but can't sell the home for what you owe on it. Whether walking away is the right decision for you is not something I can tell you -- it depends on your personal situation, including what state your home is in and the resulting ramifications of foreclosure, which do vary by state. Foreclosure is a traumatic experience, emotionally and otherwise, and walking away implicates the ethics of going back on your word to the bank. However, there is a countervailing point of view to the effect that, in the words of a colleague of mine, your highest ethical obligation is to your family, not the bank. In my latest, free white paper, "REThinking the Walk Away," I deeply explore the issues you should consider before deciding to walk away. Here's my advice. Reflect on how you got trapped in the first place, and how there were some things in your control (your downpayment, loan choice, etc.) and other contributing factors (like the market's dramatic decline) that were not. The point of this analysis should be to scrape every single lesson out of your experience. The point is not to create a guilt complex, chastise yourself or fixate mentally on what you would have done differently. In fact, many homeowners I know have conducted this analysis and concluded that, if they could do things over again, they would probably not do a whole lot differently, but in the future they might operate more conservatively with their real estate and mortgage decisions (or not!). So, get the lessons out of this thing, and then keep it moving. The primary thing I want you to take into your current decision process is that the various options you've been considering are not mutually exclusive. In fact, many real estate professionals counsel homeowners that the first step to all three of your options (i.e., short sale, loan modification and walking away/foreclosure) is the same thing: ceasing your mortgage payments. If you decide to go that route, before you stop making your mortgage payments be very clear ahead of time that your intention is to dispose of the property, in one way or another. Also, make sure you fully understand and are truly comfortable with the implications of walking away or losing the loft to foreclosure before you miss a single payment. I've seen too many people stop making their mortgage payments, hoping it will nudge the mortgage company into offering them a loan modification so they can keep their home, and end up losing the home when their arrearages spiral out of control. And the reverse is true: Around 26 percent of homeowners who apply for and receive a loan modification end up redefaulting on their mortgages, most winding up in foreclosure. Before you apply for a loan modification, which is not a simple, fun process, be aware that the chances you'll receive principal reduction are very low (around 1-2 percent). If you're disinclined to hold onto the home anyway, you might be better off to simply sell the place on a short sale (assuming your lender will allow it) and get closure, rather than missing some payments to get a loan modification, (predictably) outgrowing the loft and then circling back around for some more late payments and credit damage in six months or a year when you decide to do a short sale or walk away. Developing certainty and clarity about your vision and dreams for your family for the next few years, and using that to drive your decisions, will keep you from setting yourself up for failure this time around. If you do decide to stop making your mortgage payment, there's no reason you can't submit applications to your bank's loss mitigation department for both a loan modification and a short sale. (If you do this, please be honest with your broker/agent about it, so they are aware and can make prospective buyers aware that a loan modification is a possibility, in which case the house will not be sold.) Walking away and foreclosure should be your very last resort, not your first one. Whatever decision you make should be with full information about the financial, credit and tax consequences you face. Please consult a local real estate broker or agent, a mortgage pro you trust (who can advise you about the impacts of your next move on your ability to buy again in the future) and a tax adviser. Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2010 Tara-Nicholle Nelson
02/05/2010 11:43 AM
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Economist sees hope in first-time buyers, pent-up demand
Tom Kelly
Inman News
While most housing analysts believe there will be no double-dip recession, the number of foreclosures will continue to hound the industry in 2010. "The only guys predicting a double-dip recession are guys who want to make a name for themselves," said John Tuccillo, national residential consultant and the former chief economist of the National Association of Realtors. "If they can call this one right, everybody will remember them. But, in reality, it will be a long, grinding, slow recovery. Banks are sitting on too much cash now for a double dip, and I don't think most people see that happening." Lawrence Yun, the present NAR economist, expects the $8,000 first-time homebuyer credit extension to continue to stimulate the lower end of the market, influencing the entire housing ladder. As more first-timers move in, others move up. About 47 percent of all home sales in 2009 involved first-timers, up from 41 percent in 2008 and 36 percent in 2006. Yun believes that number will continue to rise because of an estimated 16 million renter households making enough money to qualify to buy homes. Demand should remain strong in 2010 and restore confidence for all potential buyers. "I don't think the fear factor will be at play in 2010," Yun said. "We're seeing price stabilization on a month-to-month basis." Yun's numbers show the pool of first-time buyers is 5 million more than in 2000, and thus represents pent-up demand. In his opinion, if the credit continues to have the same impact on demand in 2010, overall house prices will rise 3-5 percent this year and sales will be up "conservatively" 15 percent. It remains to be seen if the first-time homebuyer program -- plus the new $6,500 credit for existing homeowners -- will generate enough energy to eliminate the fear factor this year. People simply postpone a buying decision if they believe home prices will continue to go down. The stewing pot is the number of foreclosures heading to the market. Some lenders, deluged with active foreclosures, are way behind with some borrowers who are 16-20 months behind in their payments. These properties have yet to hit the market as foreclosures. Yun predicts 2.2 million foreclosures this year; RE/MAX Real Estate is anticipating approximately 5 million, while another study suggests 7 million. To compound the foreclosure problem, the loan modification program, or "Mods in a Box," that puts borrowers into affordable, long-term mortgages while adjusting an improved return for bankers and investors compared to the return on a foreclosure, has not been as successful as hoped. The latest survey shows more than 40 percent of the loans that were modified have headed back into default. That statistic comes as no surprise to some economists, like Stewart Title's Ted C. Jones. "It's real simple," Jones said. "If you are a person of such a character and are not making your loan payments prior to the mod, even with the reduction you still will not make your payments. "Leopards do not change their spots and zebras do not change their stripes." The Federal Deposit Insurance Corp. initiated a systematic and streamlined loan modification program for delinquent primary residence borrowers at IndyMac Federal Bank. It was hoped that by setting mortgage payments that were both affordable and sustainable that the bank would expect to reduce future defaults, improve the value of the underlying mortgages, and cut servicing costs. The results simply did not meet expectations. The outcome of Mods in a Box does not bode well for the new Fannie Mae lease program. The government-controlled entity, through its "Deed for Lease" program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that. According to Jay Ryan, Fannie Mae vice president, the program will "eliminate some of the uncertainty of foreclosure, keep families and tenants in their homes during a transitional period, and help to stabilize neighborhoods and communities." Unfortunately, I don't think Fannie Mae is going to get many takers. I believe that many delinquent property owners have "given up" on retaining the home but are riding out the whole succession of forbearance, postponement and rental plans to maximize their income by not paying while residing in the home. Let's hope that fear factor is quickly eliminated in 2010. Let's hope people will regain the confidence -- and guts -- to make their payments or seek a realistic, honest solution. Tom Kelly's book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
02/04/2010 04:00 AM
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Rent it Right
Janet Portman
Inman News
Q: Our daughter found a notice of default on her front door last week, telling her that foreclosure was imminent. She called the owner, who straightened things out with the bank, but we're really worried that our daughter will eventually be displaced by a foreclosure. What can we do to protect her interests? If she moves, what can we do to make sure she won't end up with a home that gets foreclosed? --Peggy M. A: Until recently, protecting the interests of in-place tenants when their rental is in foreclosure was strictly a matter of state law. In most situations, the mortgage predated the lease, and the tenants lost their leases when the bank foreclosed. Some states gave tenants a longer notice period than they'd otherwise receive, but the bottom line was that the lease was over. Now, thanks to 2009 federal legislation that took effect in May, tenants have more protection, nationwide. In every state, a lease will survive if the bank takes over after a foreclosure. If a buyer at the foreclosure sale intends to occupy the unit, that buyer must give at least 90 days' notice before ousting the tenant. Your daughter can hardly monitor the landlord to make sure he's current on his payments. No laws require banks to fill you in predefault. But some states have passed laws requiring a notice of default to be sent to any occupying tenants as well as the owner. Getting one of these is not good news, but at least it gives tenants a heads up and the opportunity, for example, to forego renewing a lease if renewal is imminent. Tenants who fear the worst may even decide to break their leases and move out, taking the risk of being sued for the rent on the balance of the lease in exchange for the opportunity to move at their own pace. Tenants who are in the process of looking for rentals may have better ways to avoid a foreclosure down the line. In many states, new laws require landlords to disclose to tenants whether the property is at risk. In Minnesota, for example, once a landlord has received notice of a deed cancellation or notice of foreclosure, the landlord may not enter into a periodic tenancy where the tenancy term is more than two months, or a lease where the lease extends beyond the redemption period -- other restrictions may apply, too. (See Minnesota Statutes, Section 504B.151.) In Oregon, a landlord must disclose in writing the existence of any notices of default or pending foreclosure suits before signing a rental agreement. (See Oregon Statutes, Section 90.310.) You can also do some sleuthing on your own. Check out a potential landlord's financial situation by going to the local courthouse or its Web site and searching the records for evidence of any foreclosure judgments or actions against the landlord. How about records showing financial problems, like bankruptcies? Call your Better Business Bureau and find out if they have records of complaints against the owner. Finally, don't neglect the obvious: a conversation with the current tenants, in which you can ask about any default notices these tenants may have received, and deferred or neglected maintenance (a sure sign of financial distress). If the property appears run-down, that's a red flag, too. Q: I'm renting to a couple of college students and have both sets of parents as lease guarantors. Last month, the tenants had an accident in the kitchen that resulted in several hundred dollars' worth of repairs. I notified the guarantors and asked them to repay me, but they refused, saying that they're obligated only if the tenants can't pay, and because I hold a security deposit, it's clear that the tenants' money (the deposit) should pay for the damage. Am I required to use the security deposit before turning to the guarantors? --Ann N. A: Like many landlords, you're doubtless concerned about depleting the deposit before the end of the tenancy, when you may need all of it to cover unpaid rent or needed repairs (beyond normal wear and tear). To protect the deposit, you could have your tenants pay now for repairs required during the tenancy. Or, you could use the deposit to pay for the repairs and then demand that the tenants top it off to the original amount. If they refused to do so, you could look to the guarantors, or you could serve a pay-or-quit notice. It's far better to get reimbursed up front. But to whom may you look for reimbursement? Your ability to demand payment from the guarantors instead of the tenants depends on your lease guarantee clause. A thorough, unconditional guarantee will have these elements: - The clause should clearly make the guarantors "jointly and severally" liable, with the tenants, for all monetary obligations under the lease.
- Your clause should warn the guarantors that they are not entitled to notice should the tenants fail to pay. It's up to the guarantors to keep track of the tenants' performance under the lease.
- Finally, your clause should state clearly that you're not obligated to get the money first from the tenants. Practically speaking, that means you can send the bill directly to the guarantors.
Here's an example of a clear lease guarantee: "Co-signer agrees to be jointly and severally liable with tenants for tenants' obligations arising out of this lease, including but not limited to unpaid rent, property damage, and cleaning and repair costs. Co-signer further agrees that landlord will have no obligation to give notice to co-signer should tenants fail to abide by the terms of the rental agreement. Landlord may demand that co-signer perform as promised under this agreement without first using tenants' security deposit." Take a look at your lease guarantee and see how it measures up. If your clause simply makes the parents guarantors of the lease, without more, you will need to learn whether a "typical" guarantee, in your state, is unconditional and contains all of the elements noted above. Next time, make it clear in the lease from the outset. Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord's Legal Guide" and "Every Tenant's Legal Guide." She can be reached at janet@inman.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2010 Janet Portman
02/04/2010 10:11 AM
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REThink Real Estate
Tara-Nicholle Nelson
Inman News
Q: I'm 71. How hard will it be for me to get a mortgage? A: There is absolutely nothing about your age that should interfere with your ability to obtain a mortgage. There can be some complications with income, but let's get you up-to-speed on your rights and give you some thoughts on how to approach this lifestyle transformation. Need-to-Knows In fact, the federal Fair Housing Act of 1968 was implemented with the express intent to prevent discrimination -- it protects your right to own, sell, purchase and finance a home without the fear of being discriminated against because of your age or source of income. Any of the following are unlawful, under the Fair Housing Act, if based on age (or any other of a long list of protected classes): - Refusal to make a mortgage loan;
- Refusal to provide information regarding loans; or
- Imposing different terms or conditions on a loan, such as different interest rates, points or fees.
In fact, one of the only forms of housing discrimination that is legal is the exclusion of permanent residents under 55 in senior housing communities. If you're interested in living in such a complex or subdivision -- some people love the idea, others think it's awful -- you might consider talking with their in-house real estate and/or mortgage professionals, who might offer special expertise and loan programs that are well-suited to the complicated income documentation challenges some seniors face. The bigger issue people in your age bracket often run into is the ability to document sufficient income to buy anything worthwhile in your area, especially if you're trying to stretch a fixed income on the reduced debt-to-income ratios we're seeing these days. You don't mention where your income comes from, but here are some general rules. If you're still working, then nothing about your mortgage application is any different than any other mortgage applicant who has similar qualifications. If you are retired and your income includes a pension, veteran's benefits or Social Security, these are also valid income sources for a loan application. The Fair Housing Act not only prohibits discrimination based on age, it also prevents real estate professionals, mortgage brokers and lenders from treating your loan application differently based on the source of your income (so long as your income is legal, verifiable and paid to you). With that said, you can be refused a mortgage or have your loan amount limited if you don't have sufficient income -- just like any other mortgage applicant. If you feel you are being discriminated against by a real estate or mortgage professional on the basis of your age, contact a legal aid nonprofit in your town for low- or no-cost help. And one more thing: You didn't specify whether you're looking for a mortgage to buy a home or to refinance your existing home. If you have a home with abundant equity in it and you need to pull cash out but are concerned about creating a new payment, look into a reverse mortgage -- a loan available only to seniors. There are many strong opinions pro and con about these loans, which will give you the cash you need, with no payments, in exchange for title to the property after you pass away -- even if that's 40 years from now. Nevertheless, some people have found reverse mortgages to be a godsend, so it's worth looking into if it makes sense for your situation. Mindset Management I've worked with buyers/borrowers your age and older who met with resistance from those around them at the prospect of making real estate moves. My opinion? Nine times out of 10, these objections are hogwash -- they have more to do with the limiting thinking of the objector than they do about you. If you can't do exactly what you want and need to do at 71, when will you ever be able to?! A friend of mine who is an insurance agent recently told me that her company had just revised all of their policy contracts because so many of their insureds were living way past 100 years, which was the former contract cutoff. If you're planning on buying a home, I'd encourage you to check out Barbara Corcoran's latest book, "Nextville: Amazing Places to Live the Rest of Your Life" (Grand Central Publishing, 2008). It offers smart, off-the-grid guidance on planning your next home purchase to manifest whatever your vision of the next phase of your life is. Action Plan The only discrimination I want you to experience is to be discriminating in your choice of professionals. If you work through these suggestions and still have a hard time, or just want someone to chauffeur you directly to the resources you need, contact a local real estate agent who has earned the Senior Real Estate Specialist designation at SRES.org. Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2010 Tara-Nicholle Nelson
02/04/2010 10:48 AM
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Restoring garage, removing addition may be required
Barry Stone
Inman News
DEAR BARRY: The home I'm planning to buy has an unpermitted garage conversion and an unpermitted addition. Can the city or county require me to bring those portions of the building up to code? --Sandra DEAR SANDRA: Municipal building departments have absolute authority to enforce code compliance. They don't always exercise that authority, but they definitely have the power to do so at any time. This means that they may never bother you about the unpermitted work, or they might suddenly decide to order removal of the addition and restoration of the garage. This could occur if a neighbor complained about the lack of permits, if you took out a permit for other improvements to the property, or if the authorities decided to do a clean sweep of the community to eliminate existing violations. Before you purchase the property, visit the local building department and discuss this with the building official or one of the inspectors. Ask for clarification of their official policy regarding existing work that is not permitted. Another option is to ask the sellers to apply for "as-built permits" for the altered portions of the property. This would allow the building department to inspect those changes and officially approve or disapprove them. In such cases, they usually call for correction of code violations. But they might disallow the alterations entirely. If so, it would be better to know now than to be surprised after you become the owner. DEAR BARRY: Our Realtor has advised us to hire a home inspector before listing our home for sale. We know there are problems with the house, and we were planning to repair them before putting the property on the market. Since we will be repairing these defects, what's the point in having a home inspection? --Terri DEAR TERRI: Your intention to repair the defects is good, but the belief that you are aware of all of the defects is erroneous. No matter how much you know about the property, there are defects that you have not discovered, and these can be revealed by a competent home inspector. In most home-sale transactions, buyers are the ones who hire the home inspector. When that happens, buyers typically renegotiate for repairs or a reduced sales price. An alternative to this routine is to hire your own home inspector before listing the property. Essentially, there are four advantages to this approach: 1) You decrease the likelihood of liability for undisclosed defects that might be discovered after the close of escrow. 2) You demonstrate an uncompromised willingness to disclose everything about the property. 3) You provide the basis for an as-is sale by disclosing all known defects at the outset of the transaction. 4) You avoid the need to renegotiate the terms of the deal after the buyers hire their own inspector. All of these advantages depend, of course, on one vital variable. You must find the most thorough home inspector in your area. So shop around. Look for a home inspector with many years of experience and a reputation for uncompromised detail. This is how sellers can make the most of home inspection. To write to Barry Stone, please visit him on the Web at www.housedetective.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2010 Barry Stone
02/03/2010 04:00 AM
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Discount prices drum up profits, aid environment
Mary Umberger
Inman News
Ruthie Mundell helps to run a resale store. Her merchandise isn't the predictable overcoats and baby strollers and slightly dented toasters that most people associate with resale. Instead, at the Community Forklift in Edmonston, Md., they're selling oak doors and kitchen cabinets and clawfoot tubs. "We are a thrift store for home improvement," says Mundell, outreach director for the 6-year-old store in the Washington, D.C., area. "Picture a Home Depot warehouse run by a nonprofit." It's one of hundreds of community-based retail operations around the country that have latched on to the green movement's coattails by finding a way to keep tons of unwanted building materials out of landfills. And though the housing industry has been enduring some bad-to-horrendous years, many secondhand building suppliers say the recession has stoked demand for their products. "The economy as a whole has been positive for us," said Mundell. "Not a lot of our customers are new homebuilders. A lot are contractors doing renovations or repairs. People have less money, but homes still need repairs." She said prices at Community Forklift for such things as vintage sinks and salvaged flooring -- even many brand-new, donated items -- typically are 50 to 90 percent below retail. The store expected to have $750,000 in sales in 2009. Business isn't driven just by bargain-hunting, she said. The "reduce, reuse, recycle" mantra has finally sunk in, and "landfill" has become a dirty word. And building materials are a natural target. The United States generated 143.5 million tons of building-related construction and demolition debris in 2008, but only 40.2 million were reused, recycled or sent to waste-to-energy facilities, according to a November report from McGraw Hill Construction. In 2005, the Building Materials Reuse Association in Beaverton, Ore., estimated that up to 360,000 tons of the unwanted materials were finding their way back into the community through resale operations. Mundell and others say they expect the numbers to be much higher today, given the proliferation of stores such as her group's. The association maintains a nationwide database of such businesses at www.bmra.org. Builders and remodelers have always grappled with the problem of perfectly good materials that are either unwanted or unsuitable for particular jobs. Now, says Matt Knox, there are both lots of places to put them and a motivation to get them there. "Most contractors have what they call their bone yard," says Knox, an entrepreneur who co-founded DiggersList.com, an online classified-ad company that specializes in construction materials for contractors, suppliers and do-it-yourselfers. "I was an insurance broker for contractors for 20 years," Knox said. "I would talk to them and would hear them say after every job they have excess materials and they get thrown away or they store them. They can't bear to throw it away because it's still new, or it may be a one-of-a-kind item like a fireplace mantle or a neat piece of distressed wood." These days, Knox says, the builders may be more inclined to post their excess inventory on a site such as his as a way to generate some income. Or they may shop through the sites just to find deals, he says. DiggersList.com recently formed a partnership with Habitat for Humanity of Greater Los Angeles and Habitat for Humanity of Orange County (California) to create "online storefronts" for their retail building materials operations, known as Habitat ReStores. These ReStores' Web sites will use the DiggersList.com widget to syndicate their inventory online, Knox said. Mundell said that even with the homebuilding downturn, Community Forklift staff is seeing an uptick in donations, making two to six pickups a day of materials from construction sites. "Builders and renovators love to donate to us because they're able to realize a tax deduction instead of having to pay a fee to landfill it," she said. At the same time, though, a shift in the overall building market has changed the nature of some donations, Mundell said. The day of the teardown is over, at least for the moment, she said. "We're seeing fewer donations of whole structures," Mundell said. "Two or three years ago, there were a lot of small, older homes that were being taken apart and replaced with McMansions. "From those homes, we were getting a lot of heart-pine lumber and floor joists," which aren't seen nearly so frequently now, she said. While those items may be scarcer, Community Forklift founder Jim Schulman says he's seeing a boom in kitchen and bath cabinets within the business' 40,000 square feet of inventory. "We figure it's probably people who have decided to renovate instead of buying a new home," he said. Mary Umberger is a freelance writer in Chicago. *** What's your opinion? Leave your comments below or send a letter to the editor.
02/03/2010 04:00 AM
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