tag:blogger.com,1999:blog-48628365711639383852024-03-13T21:24:49.327-07:00Morrie Erickson's BlogMorrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.comBlogger29125tag:blogger.com,1999:blog-4862836571163938385.post-10212845786564505652014-01-29T07:35:00.000-08:002014-01-29T07:56:14.224-08:00DODD-FRANK, CFPB & SELLER FINANCINGMost of the <b>new rules</b> pertaining to residential mortgage loans went into effect on <b>January 10, 2014</b>. These new rules were issued a year ago in January, 2013, by the Consumer Financial Protection Bureau which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
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Despite the January 10, 2014, start date for the 2013 mortgage rules, lenders don’t have to use the new Loan Estimate (which replaces the Good Faith Estimate) for loan applications until August 1, 2015. Likewise, closings using the new Closing Disclosure Form (which replaces the HUD-1 Settlement Statement & the Truth-in-Lending) won’t go into effect until after lenders begin using the LE. (So if, for example, a loan app is taken in late July, 2015, the lender may use a GFE and the title or escrow company may close with a HUD-1.)
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One of the new rules that went into effect on January 10, 2014, is the <b>loan originator compensation/qualification rule</b>. Under that rule, the definition of <b>"loan originator"</b> is very broad – so broad that seller financing transactions (i.e., seller carry-back loans, a/k/a purchase money mortgages, a/k/a conditional sales contracts) are included. This broad definition will affect any seller-financing transaction otherwise covered by the new rules <b>unless</b> the seller financer qualifies for <b>one of two exemptions</b>. These exemptions are paraphrased as follows:
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<BLOCKQUOTE> a. The 3-Sale Rule [12 CFR Sec. 1026.36(a)(4)]:
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<BLOCKQUOTE> (1) Seller has 3 or fewer sales in any 12-month period
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(2) Seller didn't construct the building or act as general contractor
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(3) Financing must be:<br>
<BLOCKQUOTE> (a) Fully amortizing (no balloon)
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(b) Seller determines Buyer has ability to pay (how this is to be done is unclear)
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(c) Fixed rate or ARM after 5 yrs with changes subject to specific rules for rate increases
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b. The 1-Sale Rule [12 CFR Sec. 1026.36(a)(5)]:
<br> <BLOCKQUOTE> (1) Seller is a natural person, estate, or trust and has no more than 1 sale in any 12-month period
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(2) Seller didn't construct the building or act as general contractor
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(3) Financing must be:
<br><BLOCKQUOTE> (a) No negative amortization (apparently can be a balloon)
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(b) Fixed rate or ARM after 5 yrs with changes subject to specific rules for rate increases
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Because these seller financing rules are in effect now, sellers contemplating carry-back financing should seek legal counsel about the applicability of the new mortgage loan rules to them.
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It is likely that settlement service providers such as TitlePlus! will issue notices and disclaimers regarding the obligations and qualifications of seller financers, as well as require seller financers to certify either that <b>[i]</b> they have complied with all requirements of a loan originator or <b>[ii]</b> are exempt from the requirements. In addition, settlement service providers may require seller financers and their borrowers to sign a disclaimer or release from liability pertaining to the seller-financing transaction.
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<b>NOTE: the above information does not and is not intended to constitute legal advice. Rather, it is intended to inform interested parties of current and upcoming changes to the mortgage lending and closing and settlement processes. As always, parties should consult their own legal advisors for advice specific to them.</b>
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- From TitlePlus!, January 24, 2014Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com1tag:blogger.com,1999:blog-4862836571163938385.post-4725724763319793112011-11-07T07:43:00.000-08:002011-11-07T07:45:17.840-08:00The Offset MortgageThe Offset Mortgage – Borrowing & saving at the same time<br /><br /> Suppose you’re borrowing $100,000 to buy a house and you have $40,000 in a savings account. Wouldn’t it be nice to pay interest only on $60,000 instead of $100,000?<br /><br /> You can do just that in the United Kingdom if the loan on your house is an offset mortgage.<br /><br /> Here’s how it works.<br /><br /> If the interest rate on your loan is 4.5%, you would be paying that rate on the full amount of your loan ($100,000) if you have a conventional mortgage. But if your bank offers an offset mortgage, you would pledge your savings account ($40,000) as additional security and pay interest on the difference ($60,000). So, not only would your savings account earn interest, you would also be “saving” 4.5% on $40,000.<br /><br /> Not bad these days of paltry interest on savings accounts.<br /><br /> But what if you need to use, say, $15,000 from savings? No problem. You simply withdraw the $15,000 and begin paying interest on $75,000 instead of $60,000.<br /><br /> Pretty slick. Makes you wonder why the offset mortgage isn’t offered here.<br /><br /> - Morrie EricksonMorrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com2tag:blogger.com,1999:blog-4862836571163938385.post-68120836301572160912011-06-25T13:32:00.001-07:002011-06-25T13:32:59.484-07:00Same-sex couples – Consequences of co-owning real estate in Indiana<br /><br /> In the May/June 2010 issue of the ABA’s Probate & Property publication, an article discusses the lack of legal benefits, protections, and recognitions experienced by same-sex couples compared to their opposite-sex married counterparts. In part, the differences are based on the so-called Defense of Marriage Act (“DOMA”) (1 U.S.C. Section 7, 28 U.S.C. Section 1738C). This federal statute has two components:<br />1. allowing states not to recognize same-sex marriages legally performed in other states; and,<br />2. allowing the federal government not to recognize any same-sex marriages, civil unions, or other relationship designations.<br />According to the article, the rights not enjoyed by same-sex couples are any of the 1,138 federal benefits of marriage (e.g., filing joint income tax returns, using the unlimited marital deduction for estate and gift taxes, enjoying benefits for employer-provided health insurance). While persons may agree or disagree with whether these distinctions ought to exist, it’s important for co-owners and prospective co-owners (regardless of sexual preference) who are not opposite-sex married couples to check with their legal counsel and/or tax preparer to avoid unintended consequences (such as taxation). But because of DOMA, there’s a special emphasis on same-sex couples, so let’s focus on that.<br />As of the end of 2010, six jurisdictions allowed same-sex marriages:<br />1. District of Columbia<br />2. Connecticut<br />3. Iowa<br />4. Massachusetts<br />5. New Hampshire<br />6. Vermont<br />Note: because of legislation passed in New York on June 24, 2011, same-sex couples will be able to be married in New York in late July, 2011, although New York already recognized same-sex marriages and civil unions performed in other states.<br /><br />Also as of the end of 2010, twelve jurisdictions allowed civil unions or domestic partnerships:<br />1. Colorado<br />2. Hawaii<br />3. Maine<br />4. Maryland<br />5. Nevada<br />6. New Jersey<br />7. Oregon<br />8. Washington<br />9. Wisconsin<br />10. Illinois<br />11. California<br />12. Rhode Island<br /><br />Note: approximately 18,000 same-sex couples are legally married in California, but Proposition 8 in 2009 repealed performing same-sex marriages after its passage.<br /><br />For information about various states’ procedures, see www.lambdalegal.org/states-regions. <br />Indiana does not permit same-sex marriages, civil unions, or domestic partnerships and does not recognize same-sex marriages, civil unions, or domestic partnerships created in other states. See IC 31-11-1-1 et seq.<br />Therefore, because of DOMA, whatever legal relationship has been validated in any of the above jurisdictions has no effect in Indiana or at national level. While the article covers impacts beyond real estate transactions and does not mention Indiana specifically, it highlights issues same-sex couples may run into. For example, before asking an attorney to prepare a deed from one same-sex partner (or any other non-married partner) to the other after a closing (because only one qualified for the mortgage loan, perhaps), the couple should first check with their tax preparer to be sure they understand the potential consequences. (No one needs to presume a gay relationship between the persons; the consequences apply regardless.)<br />What consequences?<br />Usually, attorneys and title companies inquire whether title is to be held as tenants in common or as joint tenants with rights of survivorship. This is all the more important in a same-sex couple relationship, because if the couple was married in, say, Massachusetts the couple may presume putting both their names on the deed in Indiana will mean the survivor inherits upon the other’s death. But in Indiana, for unrelated co-owners, the default ownership is tenants in common rather than joint tenants with survivorship or tenants by the entireties. (For opposite-sex married couples in Indiana, the default is tenants by the entireties.)<br />Likewise, adding a same-sex partner’s name to a deed can cause an unintended tax consequence. Signing the deed creates a gift of half the fair market value of the property as of the date the deed is signed. Similarly, if one partner is employed (and makes the mortgage payments) and the other is not, half the payment may be considered a taxable gift to the other partner. For various tax consequences, see http://escholarship.org/uc/item/25c0n9rx. <br />The potential tax and non-tax consequences of same-sex relationships go on and on (e.g., not being allowed as beneficiaries under retirement plans, not being eligible for dependent coverage under health insurance plans).<br />While title companies are not in a position to advise same-sex couples (in part because title companies don’t represent any parties to a transaction), persons dealing with same-sex couples early-on would be wise to let them know they may wish to look into the situation further. For example, it would be prudent for real estate agents representing same-sex buyers and for lenders working on mortgage loans for same-sex borrowers to suggest a consultation with legal counsel and tax advisors.<br />- Morrie EricksonMorrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com1tag:blogger.com,1999:blog-4862836571163938385.post-30326475397667273302011-04-10T08:25:00.000-07:002011-04-10T08:27:13.908-07:00Libor – How rate-setting works<br /><br />Those of us who deal with real estate realize some loans have interest rates that vary or change. But did you ever wonder how and why the changes take place?<br /><br />In the early 2000s adjustable rate mortgages were common in residential transactions. Interest rates were fixed usually for 1, 3 or 5 years then could change based on so many percentage points above an index, which often was the going rate for certain types of U.S. Treasury securities. In the commercial world, interest rates often varied as often as daily, based on fluctuations in the price of similar U.S. Government debt instruments.<br /><br />The good news in both instances is interest rates followed the market.<br /><br />But as the residential and commercial lending arenas expanded, new loan products were developed to appeal to different tastes. Or, said another way, to take advantage of different appetites for risk.<br /><br />Enter Libor – London Interbank Offered Rates – the rates lending institutions charge when lending to each other. Although Libor got its start in 1986, it didn’t catch on in residential transactions until a couple of decades later. But as an index for residential mortgages, use of Libor – a bank-to-bank lending product – was probably misplaced. Still, variable rate mortgages began to appear using Libor as an index because bank-to-bank lending rates tended to be low.<br /><br />How does Libor work? Each day, the British Bankers’ Association publishes rates in 10 currencies for loans between banks for terms ranging from overnight to one year. The rates are set in the London time zone, so don’t account for market conditions developing later in, say, New York and Asia.<br /><br />A cynic might say Libor emanates from a smoke-filled room, because it’s calculated by a daily morning survey of 20 big banks (the number used to be 16) to determine the rate each bank thinks it would have to pay to borrow money from the others. The BBA throws out the 5 highest and 5 lowest rates and averages the remaining 10 to come up with its rates.<br /><br />According to the Financial Times, more than $350 trillion in financial products are based on Libor. The FT also reported recently that UBS, the Swiss bank, has been subpoenaed by U.S. regulators “…over whether it had made ‘improper attempts’ to manipulate those rates.” If, for example, during the 2008 economic meltdown, a weakened bank predicted a high rate for borrowing, would a competing bank resist lending to it, worried about a Lehman Brothers-style default? Possibly. Which might tempt the weakened bank to misstate its borrowing rate, thereby skewing the Libor rate-setting process.<br /><br />There’s no question the meltdown caused sharp bank-to-bank interest rate spikes as stronger banks grew suspicious of their sister institutions, which meant Libor-based variable rates in turn elevated dramatically. As a result, monthly installments of Libor-indexed residential mortgages shot off the charts, sometimes quadrupling the initial monthly payment. Not only were borrowers shocked; many began to default.<br /><br />Yet another instance of borrowers having no inkling of what they were getting into.<br /><br />- Morrie EricksonMorrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-71286838267426011492011-03-17T13:40:00.001-07:002011-03-17T13:42:22.436-07:00Judgment Liens – Does bankruptcy wipe them out?<br /><br />Suppose you’ve been sued for unpaid medical bills. The court enters judgment against you for $5,000. You own your house but because you’ve lost your job, as more and more bills pile up you throw up your hands and file for bankruptcy relief. The bankruptcy court orders an automatic stay, meaning the judgment creditor, your mortgage holder, and any other lien creditor can’t sue you to take away your property – at least, not until your bankruptcy case is over.<br /><br />So you breathe a sigh of relief because, now, you’re protected and the $5,000 debt will be history, right? Well, not quite.<br /><br />Most people think a bankruptcy discharge wipes the debtor's slate clean. While a bankruptcy discharge DOES cancel the debtor’s personal obligation to pay it, the discharge doesn’t terminate the judgment lien which attached to the house when the judgment was entered – unless the lien is removed by the bankruptcy court.<br /><br />Until the bankruptcy court actually removes the lien (and it’s been my experience that in most cases it doesn’t), the lien sticks to the house like flypaper, regardless of the debtor not being personally responsible for paying it. As a result, the holder of the judgment can foreclose its lien against the house as soon as the bankruptcy case is closed and the automatic stay lifted.<br /><br />When that happens, the creditor is free to enforce its lien through a court-enforced sale of the property. While on the one hand, the debtor has no obligation to pay, if the debtor doesn’t, the property will be auctioned off, the creditor being paid from the proceeds. It’s a case of the creditor forcing the debtor to cough up the money…or else.<br /> <br />The lesson? Debtors should ask their bankruptcy attorneys (during the bankruptcy, not afterwards) to petition the bankruptcy court to have the liens released. Whether they can be depends on several factors, but high loan-to-value personal residences are likely to qualify.<br /><br />What about property acquired AFTER bankruptcy? In Indiana, debts which become judgment liens BEFORE bankruptcy do not attach to property acquired AFTER bankruptcy. Why? The rationale is the old debt ceased to exist before it could attach to the new property. Title underwriters refer to this doctrine as the “fresh start” rule.<br /><br />- Morrie EricksonMorrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-9010173281756965932011-02-21T06:35:00.001-08:002011-02-21T06:35:31.663-08:00Residential Mortgages – A lesson from Canada<br /><br />Thanks to the recent economic meltdown, the U.S. mortgage industry – and its lax standards in residential lending – has been the subject of intense scrutiny. The debate has led to the question: where do we go from here?<br /><br />It might be helpful to look north, given that our Canadian neighbor’s residential mortgage lending industry didn’t get out of whack like ours did here in the U.S.<br /><br />According to an article in the Financial Times on January 19, 2011, Canada’s home-finance system is more conservative than the one in the U.S. For starters, most residential mortgage lending is handled by large domestic banks. When loans are made in purchase and sale transactions, the banks are required to buy government insurance if less than 20% of the purchase price is put down. The result? Subprime and other high-risk mortgages amounted to a small part of the Canadian housing market.<br /><br />Also, the impetus for Canadian homeowners to borrow as much as possible isn’t as great as in the U.S. because interest paid on residential mortgages in Canada is not tax deductible. Although suggesting that kind of revamp in the U.S. might cause an outcry in several quarters, some members of the U.S. Congress have suggested taking away the interest deduction would be a welcome double-whammy by curbing U.S. borrowers’ appetite for debt and reducing the U.S. deficit.<br /><br />Because during the downturn Canada’s economy remained much more robust than the U.S.’s, housing prices have continued to rise despite Canada’s mortgage lending controls. But as of January 17, 2011, the controls were deemed not tight enough. So the Canadian government imposed even stricter lending standards, reducing the maximum amortization term to 30 years.<br /><br />As a further protection to homeowners, home equity loans (which typically have variable interest rates that can spiral upwards) are now capped at 85% of loan-to-value (down from 90%). What’s more, the Canadian government will no longer insure home equity loans, meaning banks are now on their own if they expect to be repaid by borrowers.<br /><br />And that lack of insurance protection, according to the Canadian finance minister, will place risk evaluation squarely on the shoulders of lenders instead of taxpayers.<br /><br />Food for thought.<br /><br />- Morrie EricksonMorrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com1tag:blogger.com,1999:blog-4862836571163938385.post-81355486639782665842011-02-08T07:21:00.000-08:002011-02-08T07:23:45.294-08:00RREAL IN – The form only title agents see<br /><br /> As most people involved in real estate are aware, the past few years have seen the State of Indiana and the federal government focus on mortgage fraud.<br /><br /> As a part of those efforts, since January 1, 2010, Indiana has required closing agents to fill out an electronic form for every closing involving single-family residential first lien mortgage loans whether purchases or refinances (practically all mortgages). The form was developed through the Indiana Department of Insurance (IDOI) which regulates and licenses title insurance and closing agents and is known as RREAL IN, which stands for Residential Real Estate Acquisition of Licensee Information and Numbers Database for Indiana, and is mandated by Indiana Code 27-7-3-15.5. The purpose is to develop an electronic system for collection and storage of information about persons participating in or assisting with applicable transactions.<br /><br /> Some of the information the RREAL IN form calls for must be provided by persons or companies closing agents don’t deal with, which makes filling out the form problematic. For example, closers rarely see appraisals but must report the appraiser’s name and license number, the appraisal company’s name and license number, the amount the property appraised for, and the appraisal completion date.<br /><br /> Here’s a list of other information the closer must enter:<br /><br />1. Name & license number of each:<br />a. salesperson or broker;<br />b. principal broker;<br />c. mortgage loan originator;<br />d. mortgage brokerage company;<br />e. mortgage loan originator company;<br />f. title agent (closer); and,<br />g. title agency;<br />2. Name of each seller;<br />3. Name of each buyer;<br />4. Purchase price;<br />5. Property description by tax parcel number & street address;<br />6. Date closing instructions received; and<br />7. Date of closing.<br /><br /> As mentioned previously, the RREAL IN form is electronic. It’s accessible only online. Unfortunately, it can’t be filled out partially and saved. Long pauses between entries void the form, meaning closers have to start over again if, say, they take a phone call during data entry. Closers chuckle when IDOI says it takes only 2 or 3 minutes to fill out the form; in reality 20 minutes is more likely. Much of the information on RREAL IN is already on the Sales Disclosure Form (another “simple” form title agents have been required to fill out for years), which leads me to wonder whether anyone at state-level considered combining the forms into one. My cynical side says probably not. Of course, double entry adds to the workload and drives up costs. Maybe no one thought of that either.<br /><br /> While we title agents and closers are doing our part in exposing mortgage fraud (we have strict rules on funding, disbursing, anti-flipping, etc.), we hope agencies tasked with combating the problem are looking at data we’re submitting. But if the targets of RREAL IN are fraudsters, why is House Bill 1273 making its way through the 2011 Indiana General Assembly? Curiously, HB 1273 makes RREAL IN applicable to cash transactions. Which raises the question: What is the actual purpose of RREAL IN?<br /><br /> - Morrie EricksonMorrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-50983175069319682572011-01-20T10:29:00.000-08:002011-01-20T10:32:29.486-08:00<span style="font-family:arial;"><strong><em>Buying Foreclosed Property – Risky or not?<br /></em></strong><br />Foreclosures can be treacherous these days.<br /><br />We’ve all read the news about lenders doing a shoddy job handling foreclosures. But what does that mean for buyers of foreclosed property? Can their transactions be set aside? Can they lose the properties they’ve just bought?<br /><br />At this point, it's not clear who bears liability for a bungled foreclosure, but it may depend in part on where the time line is in the process. Certainly, the foreclosing lender should be responsible for not handling it correctly, but what if the sheriff's sale and a subsequent sale have already taken place? In that case, a title company will be involved which is why most title companies have received instructions from their underwriters about how to handle insuring foreclosed property.<br /><br />The risk most lenders and title companies see is a lawsuit being filed after the property has already been transferred to a new buyer. While it’s likely most buyers wouldn't want the house back because they couldn't afford the mortgage payments anyway, there's always the chance that foreclosed buyers (and their lawyers) will smell $$ which will result in a lawsuit being filed (even a class action) to put pressure on a host of parties (principally the old lender and the new title insurer) to throw $$ at them to make them go away.<br /><br />That said, most underwriters require Indiana title companies to take extra steps to clear the way for a valid sale, including (this isn't an exhaustive list):<br /><br />1. Verifying Indiana's foreclosure requirements were met and that it's too late for an appeal.<br />2. Verifying the foreclosed borrower has moved out.<br />3. Verifying no tenants live there.<br />4. Making sure there aren't any rights to redeem the property (especially if agricultural land or if IRS liens were foreclosed).<br />5. Verifying Indiana hasn't filed a lawsuit against the foreclosing lender to stop foreclosures generally.<br />6. Verifying no lawsuit has been filed to attack the foreclosure or to recover damages.<br />7. Making sure the foreclosing lender isn't pursuing a deficiency judgment against the former owner.<br />8. Verifying the amount owed on the foreclosed mortgage is greater than the current sale price.<br /><br />In addition, sometimes the foreclosed owner has to sign a quitclaim deed in favor of the new buyer. Realistically though, quitclaims may be hard to get.<br /><br />If title companies work their way through all these issues - and most of the time they can - buyers can close. So, if the unlikely happens in the future and buyers’ properties are taken away, buyers would have claims against their title underwriters for the face amounts of their policies. </span>Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com1tag:blogger.com,1999:blog-4862836571163938385.post-16392549293768480852010-11-01T11:43:00.000-07:002010-11-01T11:44:11.115-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Walking away from your mortgage – Risk or reward?</i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">An idea has been making the rounds.<span style="mso-spacerun: yes"> </span>That underwater borrowers – owners whose homes are worth less than what’s owed on their mortgages – should stop making payments and let their lenders foreclose.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The thinking is this: because house prices in some markets have declined so steeply it will take years for property to be worth what it was before the economic meltdown, many owners – even those not financially strapped – don’t see the point of continuing to fork out monthly payments, especially if they don’t intend to stay in the house long-term.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But does this so-called ‘strategic default’ really make sense?<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">On the plus side, the strategy of getting out from under heavy debt and not throwing good money after bad amounts to pulling the plug on a lose-lose situation.<span style="mso-spacerun:yes"> </span>Given the months on end it takes lenders to foreclose and repossess property, owners can stay in their houses rent-free while padding their bank accounts with money otherwise thrown down the rat-hole.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Sounds good on the surface.<span style="mso-spacerun: yes"> </span>Trouble is, strategic default has serious consequences.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Deficiencies<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Depending on the state, the defaulting owner may have to pay the deficiency – the difference between the amount owed and the price brought at the foreclosure sale.<span style="mso-spacerun: yes"> </span>So, if you have to pay the balance anyway, what’s the point in walking away?<span style="mso-spacerun: yes"> </span>Sure, the deficiency might be discharged in bankruptcy, but not everyone is that far in the hole.<span style="mso-spacerun: yes"> </span>Bankruptcy, remember, is only for the insolvent – those who owe more than they own.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Keep in mind too that state foreclosure laws vary, especially about whether lenders can go after borrowers for deficiencies.<span style="mso-spacerun: yes"> </span>So, persons contemplating a strategic default need to know what their state allows.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Painting with a broad brush, most states east of the Mississippi (Indiana among them) allow lenders to collect deficiencies, while many western states do not.<span style="mso-spacerun:yes"> </span>It comes down to state law and the papers signed at closing (mortgages in the east, deeds of trust in the west).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">To foreclose mortgages, lenders have to go to court.<span style="mso-spacerun: yes"> </span>When that happens, borrowers usually have the right to redeem (buy the property back) and lenders can go after the deficiency.<span style="mso-spacerun: yes"> </span>Deeds of trust, on the other hand, allow lenders to take property back without going to court, the trade-off being borrowers can’t redeem but don’t have to pay the shortfall.<span style="mso-spacerun: yes"> </span>Then again, some states’ procedures are a hodge-podge of both methods.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">To find out what each state requires, check out <a href="http://www.foreclosurelaw.org">www.foreclosurelaw.org</a>.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Credit scores<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Anytime a debt isn’t paid on time or in full, a borrower’s credit score will suffer.<span style="mso-spacerun:yes"> </span>So whether a borrower is selling short (the lender agrees to take less than owed), or losing the house in foreclosure, or filing bankruptcy, the borrower’s credit score will drop.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Some strategic defaulters rationalize a credit score hit because they don’t plan to buy another house.<span style="mso-spacerun: yes"> </span>They’re over home ownership and perfectly happy to be renters.<span style="mso-spacerun: yes"> </span>But credit scores can keep rearing their heads.<span style="mso-spacerun: yes"> </span>Landlords run credit checks.<span style="mso-spacerun: yes"> </span>So do car dealers.<span style="mso-spacerun: yes"> </span>And interest rates on credit cards may be higher as credit scores plummet.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Taxes<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, the deficiency forgiven by the lender is not taxable as income to the borrower who has defaulted and is being let off the hook.<span style="mso-spacerun: yes"> </span>(The IRS considers debt forgiveness the same as receiving cash, and therefore taxable.)<span style="mso-spacerun:yes"> </span>This law provides welcome relief but is temporary, applying to forgiven debt only in years 2007 through 2012.<span style="mso-spacerun:yes"> </span>And, it’s limited to debt on owner-occupied principal residences, provided the debt was incurred to buy the house, build it, or remodel it (or to refinance that debt).<span style="mso-spacerun: yes"> </span>In other words, debt pertaining to a refinance to take out cash to, say, buy a car isn’t covered.<span style="mso-spacerun: yes"> </span>For more on the MFDRA, see my September 27, 2010, blog, which covers IRS Form 1099-C (‘C’ stands for cancellation) that lenders will send forgiven borrowers and IRS Form 982 that borrowers must file with their federal return (even if the cancelled ‘income’ is excluded).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Remember too, the MFDRA is a federal law applying to federal income tax.<span style="mso-spacerun: yes"> </span>State income tax laws aren’t affected by it.<span style="mso-spacerun:yes"> </span>So, unless a state has enacted a similar law, state income tax on the forgiven debt may still apply.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- </span><!--[if supportFields]><span style="'font-size:10.0pt;font-family:Arial'"><span style="'mso-element:field-begin'"></span><span style="mso-spacerun: yes"> </span>CONTACT _Con-3BC015201 \c \s \l <span style="'mso-element:field-separator'"></span></span><![endif]--><span style="font-size:10.0pt;font-family:Arial">Morrie Erickson</span><!--[if supportFields]><span style="'font-size:10.0pt;font-family:Arial'"><span style="'mso-element:field-end'"></span></span><![endif]--><span style="font-size:10.0pt;font-family:Arial"><o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-86199971629185647422010-10-11T08:36:00.001-07:002010-10-11T08:36:45.730-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Banking – How safe is your money?<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"> </span><span class="Apple-style-span" style="font-family: Arial; font-size: 13px; ">Suppose you sold your house in October, 2010, and netted $300,000 after expenses.<span style="mso-spacerun:yes"> </span>Because you won’t be closing on your purchase for a few weeks, you deposit your net proceeds in a savings account at your bank so it can earn interest in the meantime.</span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Should you be worried whether your $300,000 is protected if your bank fails before your second closing?<span style="mso-spacerun: yes"> </span>Yes, you should.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In response to the economic meltdown in the fall of 2008, the FDIC came up with a temporary liquidity guarantee program (TLGP) which increased the insurance coverage on bank accounts generally (including interest-bearing accounts) from $100,000 to $250,000 through December 31, 2009.<span style="mso-spacerun: yes"> </span>But the TLGP also provided <u>unlimited</u> coverage for non-interest-bearing accounts (so-called transaction accounts) under the Transaction Account Guarantee Program (TAGP).<span style="mso-spacerun: yes"> </span>Within certain time frames in 2008 and later, banks could opt out of the unlimited coverage under TAGP, which some banks elected to do because of the fees charged to them by the FDIC for this extra coverage.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In 2009, the $250,000 limit was extended through December 31, 2013.<span style="mso-spacerun: yes"> </span>However, the unlimited protection under TAGP was extended only through December 31, 2010, with banks being given another chance to opt out after the first half of 2010.<span style="mso-spacerun: yes"> </span>Because the banking sector seemed to be more stable by mid-2010, many banks opted out of TAGP this past July.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Now, back to your $300,000.<span style="mso-spacerun: yes"> </span>Is it or is it not protected?<span style="mso-spacerun: yes"> </span>After your first closing, only $250,000 of your $300,000 deposit was covered because it was in a savings account that earned interest.<span style="mso-spacerun: yes"> </span>The remaining $50,000 in your savings account is not insured, even if your bank didn’t opt out of TAGP (because TAGP doesn’t cover interest-bearing accounts).<span style="mso-spacerun: yes"> </span>To be fully protected, you should move the extra $50,000 in your savings account into a regular checking account and make sure your bank is still participating in TAGP.<span style="mso-spacerun:yes"> </span>If it isn’t, consider switching banks.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But, let’s fast-forward to January 1, 2011.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law on July 21, 2010, banks <u>must</u> participate in TAGP as of January 1, 2011.<span style="mso-spacerun:yes"> </span>No longer will banks be allowed to opt out.<span style="mso-spacerun: yes"> </span>However, under Dodd-Frank, TAGP will have a limited life of two years, expiring at the end of 2012 – unless Congress extends it in the future.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">What this means is during the uncertain economic times we’re in, depositors will need to balance earning interest against protecting principal.<span style="mso-spacerun: yes"> </span>Because interest rates are so low, most may prefer the TAGP safety net.<span style="mso-spacerun: yes"> </span>Ultimately, decisions will be made in part based on the strength of individual depositors’ banks.<span style="mso-spacerun: yes"> </span>A useful tool in finding out your bank’s strength is <a href="http://www.bankrate.com">www.bankrate.com</a>.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">By the way, in addition to making TAGP mandatory, Dodd-Frank made permanent the $250,000 FDIC limit for bank accounts generally, including interest-bearing accounts.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-44524861776605324562010-09-27T16:34:00.000-07:002010-11-09T08:00:56.931-08:00<p class="MsoNormal"><span style="font-family:Arial;"><b><i>Short Sales – Taxes & IRS Form 1099<?xml:namespace prefix = o /><o:p></o:p></i></b></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;"></span><span class="Apple-style-span" style="font-family:Arial;">These days, short sales – selling for less than is owed with the mortgage holder forgiving the balance – are as common as college students sporting tattoos.<span style="mso-spacerun: yes"> </span>In a depressed housing market, sellers getting off the hook on their mortgage loans might seem like a slice of heaven.<span style="mso-spacerun: yes"> </span>But is not having to pay every penny owed really as good as it sounds?</span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">Suppose Carol bought a house a few years ago for $300,000, putting $15,000 down and signing a promissory note and mortgage for $285,000.<span style="mso-spacerun: yes"> </span>Today, she needs to sell but can’t find a buyer willing to pay more than $250,000.<span style="mso-spacerun: yes"> </span>To make matters worse, Carol still owes $275,000.<span style="mso-spacerun: yes"> </span>But because Carol lost her job and is financially strapped, her lender is willing to take $230,000 (sale price minus sale expenses) to release its mortgage.<span style="mso-spacerun: yes"> </span>Carol is bummed about her sale price but ecstatic at getting the house off her back.<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">But are Carol’s financial woes really over?<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">To figure that out, we have to know what really happened between Carol and her lender.<span style="mso-spacerun: yes"> </span>In most cases, there are three possibilities: (1) The lender might expect Carol to pay the $45,000 shortfall later, having agreed to release its mortgage but not cancel Carol’s note.<span style="mso-spacerun: yes"> </span>(2) The lender might have required Carol to sign a new note for $45,000 in exchange for releasing its mortgage.<span style="mso-spacerun: yes"> </span>(3) The lender might have cancelled the $45,000 balance, taking the you-can’t-get-blood-out-of-a-turnip approach.<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">If the answer is (1) or (2), the good news is Carol doesn’t have a tax consequence; the bad news is she still owes $45,000.<span style="mso-spacerun: yes"> </span>If the answer is (3), the good news is she doesn’t owe the $45,000; the bad news is her lender will send her a 1099-C showing debt cancellation to the tune of $45,000, meaning Carol <i>may</i></span><span style="font-family:Arial;"> have to pay taxes on it at ordinary income tax rates.<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">You ask, “What do you mean ‘<i>may</i></span><span style="font-family:Arial;"> have to pay taxes on it’?”<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">Here’s the scoop.<span style="mso-spacerun: yes"> </span>When real estate is sold, the seller may incur tax consequences.<span style="mso-spacerun: yes"> </span>In Carol’s case, she will receive a 1099-S showing the sale price of $250,000 but she won’t owe a capital gain tax because she’s selling for less than her tax basis (in this case, that’s the amount she bought it for).<span style="mso-spacerun: yes"> </span>But she may owe income tax if her lender has cancelled the $45,000 shortfall (resulting in the 1099-C).<span style="mso-spacerun: yes"> </span>Why?<span style="mso-spacerun: yes"> </span>Because to the IRS, debt forgiveness is the same as income, which means the $45,000 forgiven will be treated as if Carol was handed $45,000 in cash – unless Carol qualifies for exclusions recognized by the IRS.<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">In the residential real estate world, special exclusions apply to owner-occupied principal residences.<span style="mso-spacerun: yes"> </span>Best known is the capital gain exclusion, allowing sellers to enjoy a gain of up to $500,000 for married couples filing jointly ($250,000 for individuals) upon sale of their houses.<span style="mso-spacerun: yes"> </span>But there’s another helping hand, thanks to the Mortgage Debt Relief Act of 2007.<span style="mso-spacerun: yes"> </span>The 2007 law provides that debt forgiven or cancelled in calendar years 2007 through 2012 is excluded from income realized as a result of mortgage modification, foreclosure, or short sale.<span style="mso-spacerun: yes"> </span>In other words if you can’t pay off your mortgaged home and your lender cancels some or all of your debt, you don’t have to pay income tax on the amount cancelled.<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">Back to Carol.<span style="mso-spacerun: yes"> </span>If Carol’s house was her principal residence (and she didn’t move out more than 90 days before the debt was cancelled), she won’t have to treat the $45,000 as income.<span style="mso-spacerun: yes"> </span>Otherwise she will, unless she can show she was insolvent (total debts greater than total assets) at the time of cancellation or if Carol’s debts are discharged in a Chapter 7 bankruptcy proceeding.<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">Tread carefully though, because not all cancelled debt is subject to the exclusion – even on a principal residence.<span style="mso-spacerun: yes"> </span>For example, the debt forgiven must have been used to buy, build, or substantially improve the principal residence, or to refinance debt for those purposes.<span style="mso-spacerun: yes"> </span>So, if the seller refinanced the house and took out cash – say, to buy a car – the cash portion would not qualify for the exclusion.<span style="mso-spacerun: yes"> </span>But if the exclusion does apply, up to $2-million may be forgiven tax-free (married, filing jointly; $1-million if filing separately).<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">By the way, the onus to give the 1099-C is on all lenders forgiving debt of $600 or more.<span style="mso-spacerun: yes"> </span>And sellers must report the amount forgiven on their tax returns using Form 982 (even if the income is excluded).<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">What if real estate doesn’t qualify for the principal residence exclusion?<span style="mso-spacerun: yes"> </span>In most cases, short sellers will be taxed on the amount forgiven – unless they fall into the insolvency or bankruptcy categories or their promissory notes are non-recourse (loans in which the lender can <u>only</u> take the property back).<span style="mso-spacerun: yes"> </span>In these cases, the seller will receive a 1099-S in the amount of the forgiven debt, based on the premise that the forgiven debt amounts to the sale price.<span style="mso-spacerun: yes"> For</span> deeds in lieu of foreclosure, the seller should expect to receive either a 1099-C or a 1099-A (Acquisition or Abandonment of Secured Property).<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">In some states, mortgages taken out to buy principal residences are non-recourse by statute (California, for example), but Indiana isn’t one of them.<span style="mso-spacerun: yes"> </span>Even in those states though, non-recourse loans can become recourse in cash-out refinances.<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">As always, sellers should consult their tax advisors for information specific to their circumstances.<o:p></o:p></span></p><p style="LINE-HEIGHT: 200%; TEXT-INDENT: 0.5in" class="MsoNormal"><span style="font-family:Arial;">- Morrie Erickson<o:p></o:p></span></p><!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-73038126551524635692010-08-08T09:17:00.000-07:002010-08-13T16:56:41.497-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial;"><b><i>Indiana’s First Lien Mortgage Lending Act – Death to seller financing<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-family:Arial;font-size:10.0pt;"> </span><span class="Apple-style-span" style=" ;font-family:Arial;font-size:13px;">Recently, many real estate lawyers have stopped preparing purchase money mortgages and land contracts for buyers and sellers of 1- to 4-family dwellings (unless the seller has lived in it) or land on which 1- to 4-family dwellings may be built.<span style="mso-spacerun:yes"> </span>In other words, seller-financing transactions on non-owner-occupied property have slowed to a trickle.<span style="mso-spacerun:yes"> </span></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-family:Arial;font-size:10.0pt;">This radical change is partly because of the SAFE Act, which took effect on July 1, 2010 (see my blog of three weeks ago).<span style="mso-spacerun: yes"> </span>As a reminder, “SAFE” is an acronym for the Secure and Fair Enforcement for Mortgage Licensing Act of 2008.<span style="mso-spacerun: yes"> </span>But seller-financing has also been shut down by Indiana’s First Lien Mortgage Lending Act (IC 24-4.4-1), which dates back to January 1, 2009.<span style="mso-spacerun:yes"> </span>Not heard of FLMLA?<span style="mso-spacerun: yes"> </span>You’re not alone.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-family:Arial;font-size:10.0pt;"><b><i>Double coverage<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"> <span style="font-family:Arial;font-size:10.0pt;">Both SAFE and FLMLA cover the same ground using practically the same wording. When Congress passed the Housing and Economic Recovery Act of 2008 (HERA) which President Bush signed into law on July 30, 2008, HUD was tasked with assisting in revitalizing of the US housing market, preventing foreclosure, and enhancing consumer protection. Title V of HERA is the SAFE Act. The SAFE Act, or something similar, must be enacted in every state. In states failing to act, HUD's model act will control. In any event, Indiana passed its version of the SAFE Act, which took effect July 1.</span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"> <span style="font-family:Arial;font-size:10.0pt;">Interestingly, Indiana already had a law – the FLMLA – which had been in effect for 18 months and which covers the same subject. Nonetheless, two separate provisions now apply, the SAFE Act being a regulation and FLMLA being a statute. The difference is Indiana’s Department of Financial Institutions (IDFI), which enforces SAFE, can change the regulation fairly easily, while the legislature must change the statute.<span style="mso-spacerun: yes"> </span>So, tweaking the two provisions to eliminate unintended consequences (did the legislature <i>really</i></span><span style="font-family:Arial;font-size:10.0pt;"> mean to prohibit casual investors from using seller-financing on their own property?) may be straightforward on the one hand but rather difficult on the other.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-family:Arial;font-size:10.0pt;"><b><i>Land contracts vs. mortgages<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-family:Arial;font-size:10.0pt;">What’s clear is that both the SAFE Act and FLMLA don’t allow sellers of dwellings to deed their property to buyers and take a mortgage back (unless they’re licensed as a mortgage loan originator or have lived in the dwelling).<span style="mso-spacerun: yes"> </span>But some lawyers believe the SAFE Act doesn’t apply if the sale is by land contract instead.<span style="mso-spacerun: yes"> </span>Before you think you’ve found a loophole, though, be sure to take a close look at FLMLA, because it clearly outlaws land contracts as well.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-family:Arial;font-size:10.0pt;">While there are exclusions from both the SAFE Act and FLMLA (such as selling your own house and selling, say, a commercial building or a 5- or more-unit residential building), some exclusions are ambiguous enough to discourage lawyers from taking a chance on being considered a mortgage loan originator.<span style="mso-spacerun: yes"> </span>The definition is so broad, almost anyone involved in a seller-financing transaction runs the risk of being considered a mortgage loan originator.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-family:Arial;font-size:10.0pt;">There is a way out, but not a very good one.<span style="mso-spacerun: yes"> </span>Lawyers could continue drafting mortgages and land contracts on non-excluded transactions by becoming licensed mortgage loan originators.<span style="mso-spacerun: yes"> </span>But I think it’s safe to say (no pun intended) most lawyers (including this one) won’t be doing that.</span></p> <p class="MsoNormal"><span style="font-family:Arial;font-size:10.0pt;">- Morrie Erickson</span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com1tag:blogger.com,1999:blog-4862836571163938385.post-66484783816521175792010-07-21T15:14:00.000-07:002010-07-21T15:15:07.338-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>The SAFE Act – Are the days of seller-financing over?</i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">I got a phone call the first week of July that went something like this:<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">“I’ve sold my duplex near campus and want you to write up a contract,” the caller told me.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">“What kind of contract?” I asked, wondering if the caller meant an offer to purchase.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">“You know, a contract where the buyer pays me monthly installments then balloons in five years.<span style="mso-spacerun: yes"> </span>My buyer has good income but his credit isn’t great, so he can’t get a loan at a bank.”<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">“Have you ever lived in the duplex?”<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The caller laughed before saying, “No, it’s a student rental.”<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">“Are you a licensed mortgage loan originator?” I went on.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Another laugh.<span style="mso-spacerun: yes"> </span>“Of course not.<span style="mso-spacerun: yes"> </span>I manage a pizza place and own student rentals on the side.”<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">“In that case, you can’t sell on contract,” I told him, “or deed the duplex over and take a mortgage back.”<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">“That’s crazy.<span style="mso-spacerun: yes"> </span>I must’ve bought or sold on contract 10 times.”<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">“Can’t do it anymore.<span style="mso-spacerun: yes"> </span>Not since July 1<sup>st</sup>.”<span style="mso-spacerun: yes"> </span>Then I told him about Indiana’s new SAFE Act.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Bad loans, the Feds & HUD</i></b></span><span style="font-size:10.0pt;font-family:Arial"><o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the SAFE Act) is federal legislation growing out of the recent mortgage loan crisis and is a response to the perception that a lack of oversight of mortgage loan originators (not necessarily actual lenders) contributed to the problem.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The Federal SAFE Act requires all states to come up with their own legislation to govern and control mortgage loan originators (MLOs) or to allow HUD’s version of the legislation to control.<span style="mso-spacerun: yes"> </span>Each state’s legislation must be compliant with the Federal SAFE Act, and HUD is responsible for ensuring compliance.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Indiana’s version of the SAFE legislation is contained in Article 9 of the Indiana Administrative Code (750 IAC 9).<span style="mso-spacerun: yes"> </span>This means Indiana’s legislation is a “rule” not a “statute”.<span style="mso-spacerun: yes"> </span>The rule has been promulgated by the Indiana Department of Financial Institutions (DFI) and requires MLO licensure by July 1, 2010.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>What does 750 IAC 9 say?<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">To get a grip on the new limitations on contract sales and seller-created purchase money mortgages, real estate practitioners should read the rule.<span style="mso-spacerun: yes"> </span>Build in some time though, because it’s 20 pages long.<span style="mso-spacerun: yes"> </span>The rule is too comprehensive to analyze here in detail, but the main point is that selling on contract or by taking back a mortgage on a 1- to 4-family dwelling is all but prohibited – unless the seller is a licensed MLO.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Whether this is an unintended consequence is hard to say, but given the wording of the rule, it’s unlikely.<span style="mso-spacerun: yes"> </span>This is because, in the words of the DFI’s FAQs, “An MLO is an individual who, for compensation or gain, engages in taking a mortgage transaction application or offering or negotiating terms of a mortgage transaction.”<span style="mso-spacerun:yes"> </span>Pretty broad, right?<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">And there’s more.<span style="mso-spacerun: yes"> </span>The FAQs go on to say that a “Mortgage Transaction means a credit transaction (loan or credit sale) that is or will be used by the debtor primarily for personal, family, or household purposes and is secured by a mortgage, land contract, or other equivalent consensual security interest on a dwelling or residential real estate.<span style="mso-spacerun:yes"> </span>A mortgage transaction includes a credit transaction secured by a mobile home, and a home improvement credit transaction secured by a mortgage or equivalent security interest on the home.”<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The actual rule goes further, stating that a “mortgage transaction” includes a security interest “…on a dwelling or residential real estate upon which is constructed <i>or intended to be constructed</i></span><span style="font-size:10.0pt;font-family:Arial"> a dwelling.”<span style="mso-spacerun: yes"> </span>(I added the italics.)<span style="mso-spacerun: yes"> </span>So, does that mean a person can’t sell a vacant lot on contract?<span style="mso-spacerun:yes"> </span>Sounds like it.<span style="mso-spacerun: yes"> </span>At least if a residence is going to be built on it.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Exclusions<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Happily, there are situations where Indiana’s SAFE rule doesn’t apply – but not many.<span style="mso-spacerun:yes"> </span>Among them are transactions:<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left:.75in;text-indent:-.25in;line-height:200%;mso-list:l0 level1 lfo1;tab-stops:list .75in"><span style="font-size:10.0pt;font-family:Arial;mso-font-width:0%">-<span style="font:7.0pt "Times New Roman""> </span></span><span style="font-size:10.0pt;font-family:Arial">primarily for non-personal, -family, or –household purposes;<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left:.75in;text-indent:-.25in;line-height:200%;mso-list:l0 level1 lfo1;tab-stops:list .75in"><span style="font-size:10.0pt;font-family:Arial;mso-font-width:0%">-<span style="font:7.0pt "Times New Roman""> </span></span><span style="font-size:10.0pt;font-family:Arial">primarily for business, commercial, or agricultural purposes;<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left:.75in;text-indent:-.25in;line-height:200%;mso-list:l0 level1 lfo1;tab-stops:list .75in"><span style="font-size:10.0pt;font-family:Arial;mso-font-width:0%">-<span style="font:7.0pt "Times New Roman""> </span></span><span style="font-size:10.0pt;font-family:Arial">originated by depository institutions (banks and credit unions) and the Farm Credit Administration;<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left:.75in;text-indent:-.25in;line-height:200%;mso-list:l0 level1 lfo1;tab-stops:list .75in"><span style="font-size:10.0pt;font-family:Arial;mso-font-width:0%">-<span style="font:7.0pt "Times New Roman""> </span></span><span style="font-size:10.0pt;font-family:Arial">involving the government;<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left:.75in;text-indent:-.25in;line-height:200%;mso-list:l0 level1 lfo1;tab-stops:list .75in"><span style="font-size:10.0pt;font-family:Arial;mso-font-width:0%">-<span style="font:7.0pt "Times New Roman""> </span></span><span style="font-size:10.0pt;font-family:Arial">involving family members;<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left:.75in;text-indent:-.25in;line-height:200%;mso-list:l0 level1 lfo1;tab-stops:list .75in"><span style="font-size:10.0pt;font-family:Arial;mso-font-width:0%">-<span style="font:7.0pt "Times New Roman""> </span></span><span style="font-size:10.0pt;font-family:Arial">involving property that was the lender’s residence; and,<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left:.75in;text-indent:-.25in;line-height:200%;mso-list:l0 level1 lfo1;tab-stops:list .75in"><span style="font-size:10.0pt;font-family:Arial;mso-font-width:0%">-<span style="font:7.0pt "Times New Roman""> </span></span><span style="font-size:10.0pt;font-family:Arial">involving attorneys negotiating for clients unless the attorney is paid by a lender, mortgage broker, or MLO.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So, the good news is an owner can sell his or her own residence on contract or by taking a mortgage back.<span style="mso-spacerun: yes"> </span>The bad news is, if the seller hasn’t lived in the property, he or she can’t.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Enforcement<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Who are the mortgage police?<span style="mso-spacerun: yes"> </span>The DFI.<span style="mso-spacerun:yes"> </span>Civil penalties can go up to $10,000 <i>per violation.</i></span><span style="font-size:10.0pt;font-family:Arial"><span style="mso-spacerun:yes"> </span>Restitution can be ordered.<span style="mso-spacerun:yes"> </span>What would restitution amount to?<span style="mso-spacerun:yes"> </span>Nobody knows at this point, but presumably the offending creditor would have to give the debtor’s money back.<span style="mso-spacerun:yes"> </span>Not a good thing, if you’re the creditor.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">At this point, the best thing to do is brush up on the new rule and steer clear of trouble.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-90395891956078642562010-06-27T12:37:00.000-07:002010-06-27T12:38:16.066-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Condos & PUDS – what’s the difference?</i></b></span><span class="Apple-style-span" style="font-family: Arial; font-size: 13px; "> </span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Condos and PUDs.<span style="mso-spacerun: yes"> </span>We hear and use the terms all the time, but does everyone really know what they mean?<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Condos are condominiums, of course, and PUDs are planned unit developments.<span style="mso-spacerun: yes"> </span>And while each may <i>look </i></span><span style="font-size:10.0pt;font-family:Arial">like the other from the street, they’re completely different animals with different rules and laws applying to each.<span style="mso-spacerun: yes"> </span>So, what’s in a name?<span style="mso-spacerun: yes"> </span>Lots, actually.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Misconceptions</i></b></span><span style="font-size:10.0pt;font-family:Arial"><o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Often, the confusion is caused by appearances.<span style="mso-spacerun: yes"> </span>Shared walls, common area, dues, and homeowners’ associations (HOAs) are probably the biggest culprits.<span style="mso-spacerun: yes"> </span>Because condos and PUDs generally feature all of these, and because condos and PUDs are usually called ‘units’ instead of ‘lots’, it’s a small step to conclude that property with some or all of these features are condos.<span style="mso-spacerun: yes"> </span>But that’s not correct.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Condos</i></b></span><b><i><o:p></o:p></i></b></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">When you’re talking condos, you’re talking 3-dimensional space instead of land.<span style="mso-spacerun:yes"> </span>Which is why condos are a legal fiction and created by statute (Indiana's Horizontal Property Law, IC 32-25-1 <em>et seq.</em>).<span style="mso-spacerun: yes"> </span>Why fictional?<span style="mso-spacerun: yes"> </span>Because the statute declares condo units to be real estate even if units are on second and higher floors and don't have ground directly beneath them (thus, "horizontal property").<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The surest way to tell if a dwelling is a condo is to look at the plans on file in the County Recorder’s office.<span style="mso-spacerun: yes"> </span>If the plans show three dimensions (length, width, <i>and</i></span><span style="font-size:10.0pt;font-family:Arial"> height), you’re dealing with a condo.<span style="mso-spacerun: yes"> </span>Condo owners don’t own dirt, bricks, and mortar; they own air space inside the interior walls.<span style="mso-spacerun: yes"> </span>Which means a condo can’t exist until the building is erected so a professional architect or engineer can measure its three dimensions.<span style="mso-spacerun: yes"> </span>Who does own the dirt, bricks, and mortar?<span style="mso-spacerun: yes"> </span>All unit owners together.<span style="mso-spacerun: yes"> </span>So, in a 50-unit condo development, each unit owner also owns a 1/50 share of the land and buildings (common area) or a share based on square-footage.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The condo statute is very detailed about what must be done to create a condo and how condos operate. For starters, condos must be created by a document called a ‘declaration’.<span style="mso-spacerun: yes"> </span>In turn, the declaration must have specific provisions including bylaws of the HOA.<span style="mso-spacerun:yes"> </span>It must also contain a plat (detailed drawing) showing how the building or buildings containing the units are situated as well as a copy of the plans showing the size (length, width, height) and location of each unit. In addition, the declaration must contain all covenants, conditions, and restrictions about its use (CCRs).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So, to be a condo, all the relevant documents MUST be contained in the declaration. Having said that, most declarations (and bylaws) contain general provisions allowing the board of directors to come up with rules and regulations. Often these are implemented at board meetings and documented in the form of minutes. These do not have to be recorded because a proper declaration will say the board has this power, so everyone is on notice.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>PUDs</i></b></span><span style="font-size:10.0pt;font-family:Arial"><o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In contrast to condos, PUD units are 2-dimensional, not 3-.<span style="mso-spacerun: yes"> </span>Significantly too, a PUD unit (lot) owner <i>does</i></span><span style="font-size:10.0pt;font-family:Arial"> own the ground beneath his or her feet.<span style="mso-spacerun: yes"> </span>Although at some point each lot will have a building on it including a wall shared with at least one neighbor, the building may be erected after the PUD exists.<span style="mso-spacerun: yes"> </span>This is because PUDs <i>are</i></span><span style="font-size:10.0pt;font-family:Arial"> traditional real estate (they include land) and don’t have to rely on a legal fiction to exist, although they are controlled by planning and zoning rules.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As with condos, PUD plats show unit (lot) dimensions and locations, and where the common area is.<span style="mso-spacerun: yes"> </span>Not much more is required than that, although most PUDs have CCRs and HOAs created by a document most lawyers call a ‘declaration’ (which adds to the confusion).<span style="mso-spacerun:yes"> </span>But unlike condos, the CCRs and HOA information don’t have to be in a single document.<span style="mso-spacerun: yes"> </span>Also unlike condos, the HOA should (but doesn’t always) own the common area.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Simply stated, the condo statute does NOT apply to PUDs. Still, PUD CCRs have to be recorded to be enforceable, although the simplest PUDs include the CCRs right on the PUD plat. Typically, the CCRs will cover whether there is a HOA (there doesn't have to be) and whether it's a nonprofit corporation (it doesn't have to be). If it is a nonprofit corporation, there have to be bylaws (but not necessarily recorded) because Indiana's corporation law says so. If the HOA is not a nonprofit corporation, no bylaws are needed (but would be prudent).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In other words, PUDs are loose and not governed by statute, although city or county planners may dictate provisions and how they're put together.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But remember the key: check for three dimensions.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson</span><o:p></o:p></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com1tag:blogger.com,1999:blog-4862836571163938385.post-35213188363116110882010-06-06T12:15:00.001-07:002010-06-06T12:15:57.370-07:00Exactly what IS a title search?<b><i> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-family: Arial;"></span><span style="font-size: 10pt; font-family: Arial;">A title search amounts to combing through the public records for documents affecting ownership of and obligations pertaining to a tract of real estate.<span style=""> </span>The search is performed by the title insurance agent, who then issues a title insurance commitment or other type of report, depending on the instructions of the customer.<span style=""> </span>If a title insurance commitment is issued and the transaction closes, a title insurance policy is issued after the closing.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;">Title searches are the core work of any title company.<span style=""> </span>Why?<span style=""> </span>Because each state has its own system of keeping track of records of property ownership so there can be an orderly way of knowing who owns what, who has rights to do certain things on specific property, and who can claim an interest in property – for example, based on using the property as collateral for a loan.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;"><b><i>“Real property” vs. “Personal property”<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;">The idea is that if property records are kept in a central office, it ought to be easier to figure things out.<span style=""> </span>And it is…in a way.<span style=""> </span>But while in Indiana the county Recorder’s office is the place where most property records are kept, other government offices are involved too, including county, municipality, state, and federal.<span style=""> </span>So-called “real property” records aren’t set up like Indiana’s Bureau of Motor Vehicles, which acts as a clearing house for all vehicle transactions.<span style=""> </span>If you sell your car (a specific type of “personal property”), you sign the certificate of title over to the buyer and the BMV issues a new certificate of title in the buyer’s name.<span style=""> </span>Loans on cars show up on certificates of title, too.<span style=""> </span>So the BMV is a one-stop-shop for proving and transferring ownership for all vehicle transactions.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;">Not so with real property, which has no central clearing house to document ownership and property rights and claims.<span style=""> </span>Instead, a host of government offices may be involved.<span style=""> </span>Which is why records in <u>all</u> those offices must be checked to figure out what’s really going on.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;"><b><i>Which offices & records?<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;">To determine ownership rights and claims of real property, we search records in the offices of the Auditor, Assessor, Treasurer, Recorder, and Clerk of the courts in the county where the property is located.<span style=""> </span>In many cases, though, official records outside the county may be relevant, including proceedings in U.S. Bankruptcy Courts and U.S. District Courts.<span style=""> </span>Depending on the transaction and the title product requested by the customer, searches may extend to planning and zoning offices.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;">Usually, we request an owner’s policy from the current owner to start our search.<span style=""> </span>Otherwise, we may have to search backwards for at least 50 years to verify the chain of ownership and other matters affecting the property.<span style=""> </span>Some searches are performed in government offices where we pour through books, microfilm, and computer indices (these searches are called “finger searches”) while others are done on our title plant (our database which replicates records in the county Recorder’s office for a certain number of years).<span style=""> </span>Records found in these offices provide a snapshot of a property at a point in time.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;">Contrary to what some think, unlike the BMV, government offices don’t provide proof of ownership, liens, or other matters.<span style=""> </span>Instead, it is up to the title company to examine all the records compiled over the years – a process called “examination” – to determine who owns the property and who has a valid claim, easement, lease, mortgage (or other lien), or conflicting interest in the property.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;">Only after all that may title to the property be insured.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent: 0.5in; line-height: 200%;"><span style="font-size: 10pt; font-family: Arial;">- Morrie Erickson</span></p></i></b>Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-24543280440778203012010-05-30T08:13:00.001-07:002010-05-30T08:13:46.178-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Underwater borrowers – Non-FHA, -Fannie & -Freddie mortgages</i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Here we go again.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For three weeks now, I’ve been going over Federal programs designed to help underwater borrowers with their delinquent mortgages.<span style="mso-spacerun: yes"> </span>The first installment covered Federal Housing Administration (FHA) loans – the ones supervised by the Department of Housing and Urban Development (HUD), which is an actual Federal agency.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The past two weeks were spent on programs run by the Federal National Mortgage Association (FNMA), commonly called Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac.<span style="mso-spacerun: yes"> </span>You’ll recall that both Fannie and Freddie are U.S. government-sponsored enterprises (GSEs).<span style="mso-spacerun: yes"> </span>Both have been bailed-out by the government which, for all practical purposes, makes both semi-official Federal agencies.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But there are plenty of mortgages out there that aren’t owned or guaranteed by FHA, Fannie, or Freddie.<span style="mso-spacerun: yes"> </span>So, what about them?<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As part of the overall plans to promote economic recovery and resurrection of the housing market, the Federal government came up with three programs to help struggling homeowners with their mortgages.<span style="mso-spacerun: yes"> </span>One facilitates refinances, another modifications, and the third avoiding foreclosure (but still losing the home).<span style="mso-spacerun: yes"> </span>Unsurprisingly, the three programs have acronyms: HARP (Home Affordable Refinance Program), HAMP (Home Affordable Modification Program), and HAFA (Home Affordable Foreclosure Alternatives) program.<span style="mso-spacerun:yes"> </span>Let’s go over all three.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">First, HARP.<span style="mso-spacerun: yes"> </span>Unfortunately, HARP applies only to mortgage loans owned by Fannie and Freddie.<span style="mso-spacerun:yes"> </span>Since we’re talking about non-Fannie and –Freddie mortgages, let’s scratch HARP right off the bat.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">That brings us to HAMP.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">HAMP is designed to help responsible homeowners who have been put in difficulty because of financial hardship, whether caused by loss of income or job, or an increase of the interest rate on an adjustable rate mortgage.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For starters, to qualify for HAMP, borrowers have to be able to document their hardship by proving income and expenses.<span style="mso-spacerun: yes"> </span>They must also meet the following criteria: 1. be the owner-occupant of a one- to four-family home; 2. have an unpaid balance less than jumbo status ($729,750 for a one-family dwelling with higher balances allowed depending on the number of units); 3. have a first mortgage that was originated on or prior to January 1, 2009; 4. have a monthly mortgage payment (including principal, interest, property taxes, homeowners’ insurance, and homeowners’ association [HOA] dues) greater than 31% of gross monthly income; and 5. show that the mortgage payment can’t be made because of the financial hardship.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Still, there can be obstacles, such as junior liens (<i>i.e.</i></span><span style="font-size:10.0pt;font-family:Arial"> second mortgages, judgments, delinquent HOA dues).<span style="mso-spacerun: yes"> </span>It may be that the only way to modify the current first mortgage is to cut the principal balance and base a modified loan on the reduced principal balance.<span style="mso-spacerun: yes"> </span>If so, though, what happens to the reduction?<span style="mso-spacerun:yes"> </span>Is it forgiven?<span style="mso-spacerun: yes"> </span>Probably not.<span style="mso-spacerun: yes"> </span>Instead, it may be lopped back in line as a junior lien, which is why an existing junior lien presents an issue.<span style="mso-spacerun: yes"> </span>Borrowers need to be sure whether the reduced balance is actually being forgiven or rewritten, either as a junior lien or an unsecured note.<span style="mso-spacerun: yes"> </span>Sometimes, these deferred notes may not bear interest for a few years – but they don’t vanish into thin air.<span style="mso-spacerun: yes"> </span>Instead, they hang on, even after the home is sold later by the borrower.<span style="mso-spacerun: yes"> </span>As always, borrowers need to read before they sign.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So if HAMP won’t work, only HAFA remains.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">HAFA procedures help borrowers avoid foreclosure.<span style="mso-spacerun: yes"> </span>But HAFA doesn’t keep borrowers in their homes.<span style="mso-spacerun: yes"> </span>Instead, HAFA amounts to a way of getting borrowers off the hook of their unmanageable loans by letting them off-load their homes without going through foreclosure.<span style="mso-spacerun: yes"> </span>Why should borrowers care?<span style="mso-spacerun: yes"> </span>Because foreclosure carries a stigma and causes serious damage to credit, so avoiding it may be a minor benefit.<span style="mso-spacerun: yes"> </span>How does HAFA do this?<span style="mso-spacerun: yes"> </span>By offering inducements (money) to lenders, borrowers, and junior lien holders and by allowing real estate agents to be paid a commission up to 6%.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The two ways to dodge foreclosure are to convey the home back to the lender (deed in lieu of foreclosure) or to convey the home to someone else for less than is owed to the lender (short sale).<span style="mso-spacerun: yes"> </span>Obviously, for either to happen lenders must be on board.<span style="mso-spacerun: yes"> </span>To be on board, lenders have to be convinced borrowers don’t qualify under HAMP or have failed the trial modification that HAMP requires.<span style="mso-spacerun: yes"> </span>Most likely, lenders will favor short sales over deeds in lieu because lenders won’t have to take back homes themselves if they’re sold to third parties through a short sale.<span style="mso-spacerun: yes"> </span>Lenders’ regulators don’t like REOs (the term for real estate owned by lenders) on lenders’ books.<span style="mso-spacerun: yes"> </span>Plus, in short sales lenders will know their losses up front.<span style="mso-spacerun: yes"> </span>But if lenders take homes back through a deed in lieu, they will then have to list the homes and sell them – maybe for even less.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As with other topics when it comes to owning property and being underwater, be sure to hop on the Internet to check the latest program features.<span style="mso-spacerun: yes"> </span>Programs tend to change and be tweaked.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com1tag:blogger.com,1999:blog-4862836571163938385.post-90865453015222450912010-05-23T09:13:00.001-07:002010-05-23T09:13:41.959-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Underwater borrowers – Freddie Mac mortgages</i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For the past two weeks, I’ve been going over Federal programs designed to help borrowers drowning on their mortgages.<span style="mso-spacerun: yes"> </span>Two weeks ago I kicked off the topic with Federal Housing Administration (FHA) loans, which are supervised by the Department of Housing and Urban Development (HUD) – an actual Federal agency.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Last week we went over what I call a semi-official program run by the Federal National Mortgage Association (FNMA), dubbed Fannie Mae.<span style="mso-spacerun: yes"> </span>Fannie was established in 1938 after the collapse of the housing market in the wake of the Great Depression (sound familiar?).<span style="mso-spacerun: yes"> </span>You’ll recall that Fannie is “semi-official” because it’s a government-sponsored enterprise (GSE) instead of being an actual Federal agency, although because Fannie was bailed out by the Feds, it might as well be a Federal agency.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Fannie’s younger brother, the Federal Home Loan Mortgage Corporation (FHLMC), which was created in 1970 and is commonly called Freddie Mac, is also a GSE and a bailed-out, semi-official Federal agency.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Sometime in the next couple of years, Congress will have to decide what to do about Fannie and Freddie.<span style="mso-spacerun: yes"> </span>Should the Federal government take them over and turn them into Federal agencies?<span style="mso-spacerun: yes"> </span>Should they be privatized and run like large corporations?<span style="mso-spacerun: yes"> </span>Or should they continue as GSEs with the implied promise of being rescued by the Federal government if they fall on hard times?<span style="mso-spacerun: yes"> </span>Tough alternatives with far-reaching implications for the Federal government, taxpayers, and – especially – homeowners.<span style="mso-spacerun: yes"> </span><o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But those alternatives are for another day.<span style="mso-spacerun: yes"> </span>Right now, let’s deal with Freddie.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As I’ve said before, when you talk about loan programs – whether or not you’re mentioning helping underwater borrowers in the same breath – each type of program is lender- or program-specific.<span style="mso-spacerun: yes"> </span>In other words, because HUD runs FHA, HUD decides how FHA borrowers are helped.<span style="mso-spacerun: yes"> </span>Same goes with Fannie and Freddie.<span style="mso-spacerun: yes"> </span>Because Fannie and Freddie buy loans from lenders, each dictates how their respective loans are set up and – critically in today’s perilous economic climate – how their troubled loans are restructured or unwound.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Like Fannie, Freddie has three ways of helping borrowers: refinances, modifications, and short sales.<span style="mso-spacerun: yes"> </span>As is pretty obvious, refinances and modifications are designed to keep borrowers in their homes.<span style="mso-spacerun: yes"> </span>On the other hand, short sales allow borrowers to unload their property for less than what’s owed – a way of letting over-stretched borrowers off the hook and get on with their lives.<span style="mso-spacerun: yes"> </span>Let’s talk about all three.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For borrowers suffering because of the kind of loan they have instead of because of the economic meltdown, Freddie has two options: refinancing through the Same Servicer program or the Open Access program.<span style="mso-spacerun: yes"> </span>Both are explained on Freddie’s website: <a href="http://www.freddiemac.com">www.freddiemac.com</a>.<span style="mso-spacerun: yes"> </span>The concept is that if a borrower has an adjustable or variable interest rate that’s gone up, the payment may now be too high to handle.<span style="mso-spacerun: yes"> </span>Refinancing to a fixed rate may solve the problem.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Freddie’s Same Servicer program has an expedited procedure for qualifying if the borrower refinances through the servicer the borrower is currently making payments to.<span style="mso-spacerun: yes"> </span>On the other hand, Freddie’s Open Access method allows refinancing through any Freddie-approved servicer, but the qualification process is more involved.<span style="mso-spacerun: yes"> </span>Of course, for borrowers who have taken pay cuts, a refinance won’t work if borrowers can’t afford even the revised payments.<span style="mso-spacerun:yes"> </span>Keep in mind that the full balance of the loan is still owed; only the loan <i>terms</i></span><span style="font-size:10.0pt;font-family:Arial"> are changed.<span style="mso-spacerun: yes"> </span>Ultimately, whether borrowers qualify or not depends on the Home Affordable Refinance Program (HARP), a Federal plan encouraging lenders to rework mortgage loans for qualified borrowers.<span style="mso-spacerun: yes"> </span>The key word here is “qualified”.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Modifications work differently, although as with refis, borrowers have to prove they can make the new payment through a 3-month trial period.<span style="mso-spacerun: yes"> </span>Usually though, modification borrowers are in more dire financial straits than borrowers seeking to refi.<span style="mso-spacerun: yes"> </span>Borrowers’ pay cuts are the prime culprit.<span style="mso-spacerun:yes"> </span>So if a loan can be restructured to take into account current income, things might be all right.<span style="mso-spacerun:yes"> </span>Suppose a borrower could afford the loan if the principal balance were $30,000 less.<span style="mso-spacerun: yes"> </span>A modification will lower the loan to the adjusted balance.<span style="mso-spacerun: yes"> </span>Sounds good, but what happens to the $30,000?<span style="mso-spacerun: yes"> </span>Usually, the borrower has to sign a new promise to pay it back (maybe interest-free for a few years) and it’s treated like a second mortgage.<span style="mso-spacerun: yes"> </span>In other words, it will have to be paid off eventually.<span style="mso-spacerun: yes"> </span>But as I mentioned last week in Fannie modifications, if there’s already a junior lien, such as a home equity mortgage, a modification won’t work unless the home equity mortgage moves into third position (behind the lowered first and the new $30,000 second).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So now we’re down to short sales.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">To work out a short sale through Freddie, the underwater borrower must be unable to pay the loan long-term, must be in default or nearly so, and must have tried to sell the home “as is” for at least 90 days.<span style="mso-spacerun: yes"> </span>Proving the attempt to sell requires pricing the house based on an “as is” broker price opinion (BPO), “broker” meaning a licensed real estate agent.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As with Fannie loans, Freddie borrowers can’t pay for repairs and can’t receive cash at closing.<span style="mso-spacerun: yes"> </span>(In contrast, you’ll recall that FHA lets borrowers receive up to $1,000 at closing.)<span style="mso-spacerun:yes"> </span>The short sale won’t be approved until Freddie approves the offer to purchase and a closing date has been set.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As pointed out last week with Fannie short sales, this process seems backwards.<span style="mso-spacerun:yes"> </span>If I’m a potential buyer with a rate-lock and move-in date on my mind, I won’t want to waste time and energy hoping some far-off servicer will approve my deal.<span style="mso-spacerun: yes"> </span>In fact, in our office we’ve found the approval process painfully slow (months!) and convoluted (“You talked to who before and were told what?”) for Fannie and Freddie.<span style="mso-spacerun: yes"> </span>Not that it matters to underwater borrowers, potential buyers, and real estate agents, but the delays are largely because the short sale process has been dumped by Congress on servicers who are under-staffed and ill-equipped to handle the crush of business.<span style="mso-spacerun: yes"> </span>Suffice it to say that programs that pre-approve a sale price make more sense.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As with Fannie, Freddie short sale brokers are allowed a 6% commission (3% if only one broker).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In all short sale transactions, though, beware of unauthorized flips.<span style="mso-spacerun: yes"> </span>A flip occurs when a third party or so-called facilitator acquires the home being sold at a discount (with the seller-borrower’s lender taking the hit) then turns around and sells the home for a profit (which otherwise would have gone to the lender being shorted).<span style="mso-spacerun: yes"> </span>If that situation presents itself, the parties must disclose all terms of the transaction(s).<span style="mso-spacerun: yes"> </span>Over the first weekend in May, 2010, Freddie came out with guidelines for disclosures, making it clear that Freddie must be told all the facts surrounding the transaction so Freddie isn’t mislead.<span style="mso-spacerun: yes"> </span>What the guidelines are saying is: would Freddie make the same decision if it knew all the facts instead of just some of them?<span style="mso-spacerun: yes"> </span>Those who don’t fully disclose can expect to land in legal hot water, thanks to Freddie’s short sale fraud task force.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Regardless of whether borrowers are refinancing, modifying, or selling short, they need to know whether any shortfall is being forgiven or simply deferred.<span style="mso-spacerun:yes"> </span>As with all other serious matters, especially in real estate, the key is to get it in writing.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Be sure to Google Freddie and other program providers regularly because programs are frequently tweaked.<span style="mso-spacerun: yes"> </span>Once again, Freddie’s website is <a href="http://www.freddiemac.com">www.freddiemac.com</a>.<span style="mso-spacerun: yes"> </span>Plan to check it regularly to stay up to date.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-61256237851876525542010-05-16T07:20:00.001-07:002010-05-16T07:20:57.344-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Underwater borrowers – Fannie Mae mortgages<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"> <o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Borrowers of all kinds continue to be up to their necks, or worse, on their mortgages – a problem that isn’t going away.<span style="mso-spacerun: yes"> </span>So, it’s worth coming to terms with borrowers’ options, which vary depending on the type of loan a borrower has.<span style="mso-spacerun: yes"> </span>Last week I kicked off the topic with Federal Housing Administration (FHA) loans – the ones supervised by the Department of Housing and Urban Development (HUD).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">This week, we’ll branch out from an official Federal government program (FHA) and tackle a semi-official program run by the Federal National Mortgage Association (FNMA), commonly referred to as Fannie Mae.<span style="mso-spacerun: yes"> </span>I say “semi-official” because Fannie is a government-sponsored enterprise (GSE) instead of being an actual Federal agency, although thanks to Fannie’s bailout by the Feds, Fannie has become a Federal agency for all practical purposes.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Fannie’s younger brother (it was created later), the Federal Home Loan Mortgage Corporation (FHLMC), commonly called Freddie Mac, is also a GSE and a bailed-out, semi-official Federal agency.<span style="mso-spacerun: yes"> </span>But Freddie will have its day next week.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For now, let’s talk about Fannie.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">If you read last week’s segment, you know that because HUD runs FHA, HUD also makes the rules.<span style="mso-spacerun: yes"> </span>Same goes with Fannie.<span style="mso-spacerun: yes"> </span>Because Fannie buys loans from lenders, Fannie dictates how the loans are set up and – critically in today’s perilous economic climate – how troubled loans are restructured or unwound.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Fannie has three ways of helping underwater borrowers avoid foreclosure: refinances, modifications, and short sales.<span style="mso-spacerun: yes"> </span>Refinances and modifications are designed to keep borrowers in their homes.<span style="mso-spacerun: yes"> </span>Short sales are not.<span style="mso-spacerun: yes"> </span>Let’s go over each in turn.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Some borrowers haven’t been hit especially hard by the economic meltdown but are suffering because of the kind of loan they have.<span style="mso-spacerun: yes"> </span>For example, if borrowers have an adjustable or variable rate and their interest rate has gone up, their payment may now be so high they can’t handle it.<span style="mso-spacerun: yes"> </span>Refinancing to a fixed rate may solve the problem.<span style="mso-spacerun: yes"> </span>But for borrowers who have taken pay cuts, a refinance won’t necessarily work.<span style="mso-spacerun: yes"> </span>Why?<span style="mso-spacerun:yes"> </span>Because refi borrowers – like all borrowers these days – have to qualify for the refinanced loan.<span style="mso-spacerun: yes"> </span>Borrowers with drastic pay cuts will be out of luck.<span style="mso-spacerun: yes"> </span>But whether borrowers qualify or not depends on the Home Affordable Refinance Program (HARP), a Federal plan encouraging lenders to rework mortgage loans for qualified borrowers.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Before going on, a word here about how the secondary mortgage market works, because the first question most borrowers ask is: “Okay, I don’t make payments anymore to the lender where I got the loan, so who do I talk to?”<span style="mso-spacerun: yes"> </span>Answer: the servicer.<span style="mso-spacerun: yes"> </span>Who’s the servicer?<span style="mso-spacerun: yes"> </span>The firm the borrower now makes payments to.<span style="mso-spacerun: yes"> </span>Does the servicer own the loan?<span style="mso-spacerun: yes"> </span>Probably not.<span style="mso-spacerun: yes"> </span>Who does?<span style="mso-spacerun: yes"> </span>Most likely, a whole lot of bondholders who have bought shares of a pool of mortgage loans which generate income as borrowers make their monthly payments of principal and interest.<span style="mso-spacerun: yes"> </span>These are the infamous mortgage-backed securities (MBS) we’ve heard so much about.<span style="mso-spacerun:yes"> </span>Infamous because, when borrowers begin to default on their mortgages – and borrowers have defaulted in spades – the servicers have to kick in the missed payment to the pool.<span style="mso-spacerun: yes"> </span>Not a good deal for servicers unless somebody’s going to reimburse them.<span style="mso-spacerun: yes"> </span>Which is what Fannie does in Fannie loans.<span style="mso-spacerun: yes"> </span>Which, in turn, is why Fannie lost its shirt and needed a Federal bailout.<span style="mso-spacerun: yes"> </span>Which is why we taxpayers are footing the bill.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So there it is: an underwater borrower who wants to refi needs to contact his or her servicer.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Same goes for borrowers who want to modify.<span style="mso-spacerun: yes"> </span>But what’s the difference between a refi and a modification?<span style="mso-spacerun: yes"> </span>In both, borrowers have to qualify to prove they can make the new payment.<span style="mso-spacerun: yes"> </span>But the chief difference is that modification borrowers are in deeper water than borrowers seeking to refi.<span style="mso-spacerun: yes"> </span>Most have taken hits in pay which means they can’t afford their monthly payment, even if they originally could.<span style="mso-spacerun: yes"> </span>But if their loan could be restructured to meet their current income, things would be all right.<span style="mso-spacerun: yes"> </span>Usually, that means knocking off some of the principal balance to a level borrowers can afford.<span style="mso-spacerun: yes"> </span>But the amount knocked off isn’t forgiven.<span style="mso-spacerun: yes"> </span>Instead it becomes a junior note behind the newly reduced loan, and it’s secured by a junior mortgage.<span style="mso-spacerun: yes"> </span>In other words, ultimately it will have to be paid off.<span style="mso-spacerun: yes"> </span>Problem is, if there’s already a junior lien, such as a home equity mortgage – and usually there is – a modification won’t work.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Which leads to short sales.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Clearly, short sales are less favored by Federal programs designed to keep people in their homes.<span style="mso-spacerun: yes"> </span>On the other hand, they’re a practical way for unworkable mortgages to be wound down.<span style="mso-spacerun:yes"> </span>In a nutshell, the lender agrees to accept less than is owed when the house is sold to a new owner.<span style="mso-spacerun: yes"> </span>How much less depends on Fannie.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">To take advantage of a short sale through Fannie, the underwater borrower must have a verifiable loss of income or increase in living expenses and must actually be delinquent on the mortgage loan.<span style="mso-spacerun: yes"> </span>In addition, the property must qualify price-wise based on a broker price opinion (BPO) based on “as is” value.<span style="mso-spacerun: yes"> </span>Borrowers can’t pay for repairs and, unlike FHA short sales, can’t receive cash at closing.<span style="mso-spacerun: yes"> </span>The short sale won’t be approved without a closing date, which seems backwards because a potential buyer won’t want to put out much time, energy, and money unless it’s reasonably sure Fannie will approve.<span style="mso-spacerun: yes"> </span>Programs that pre-approve a sale price make more sense.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The good news for brokers is they’re allowed a 6% commission (3% if only one broker).<span style="mso-spacerun:yes"> </span>Because lenders tried to chisel down sales agents to receive more money themselves, Fannie cracked down on reducing commissions in its Servicing Guide, Part VII, Section 504.02, effective March 1, 2009.<span style="mso-spacerun: yes"> </span>See Fannie’s Announcement 09-03 dated February 24, 2009 (you can Google it).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Also, see Fannie’s Announcement SEL-2010-05 dated April 14, 2010, which tweaked certain procedures.<span style="mso-spacerun: yes"> </span>Be sure to Google Fannie and other programs regularly because they change often enough to be a moving target.<span style="mso-spacerun: yes"> </span>Fannie’s website is <a href="http://www.efanniemae.com">www.efanniemae.com</a>.<span style="mso-spacerun: yes"> </span>It’s a good idea to check it frequently to stay up to date.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-86754990292477576462010-05-09T09:06:00.001-07:002010-05-09T09:06:41.921-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Underwater borrowers – FHA mortgages<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"> <o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Two weeks ago, my blog post covered an overview of options for underwater borrowers.<span style="mso-spacerun:yes"> </span>The alternatives ranged from foreclosures to short sales, with deeds in lieu of foreclosure and modifications in between.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">I mentioned Federal programs such as HARP (for refinances), HAMP (for modifications), and HAFA (for short sales) and that not all struggling borrowers are eligible for all programs because applicability depends on the kind of loan the borrower has.<span style="mso-spacerun: yes"> </span>This is because different types of loans are supervised by different Federal agencies.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Today’s topic is underwater borrowers who have FHA loans.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Because FHA (Federal Housing Administration) loans are supervised by HUD (Department of Housing and Urban Development), it stands to reason that HUD also controls how FHA loans are implemented, modified, terminated, or otherwise unwound.<span style="mso-spacerun: yes"> </span>Keep in mind that FHA doesn’t make loans, it insures them, which is a way of inducing banks and other lenders to make loans to borrowers who have little equity.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In response to the housing crisis and economic meltdown, HUD issued a series of letters to their mortgagees (participating lenders) outlining policies and procedures.<span style="mso-spacerun: yes"> </span>Bear with me now while I list a few citations, but if you check these out you’ll get loads of specifics, so I’ll mention a few for your reading pleasure.<span style="mso-spacerun: yes"> </span>Mortgagee Letter 2008-43 dated December 24, 2008, outlines procedures for short sales.<span style="mso-spacerun: yes"> </span>A second letter – this one called Mortgagee Letter 2009-23 – was issued July 30, 2009, and announced a HAMP program for FHA (appropriately called “FHA – HAMP”) addressing loan modifications.<span style="mso-spacerun: yes"> </span>(FHA loans weren’t covered by the original HAMP.)<span style="mso-spacerun: yes"> </span>In a follow-up on September 23, 2009, Mortgagee Letter 2009-35 clarified modification procedures.<span style="mso-spacerun: yes"> </span>Yet another Mortgagee Letter (this one 2009-52) came out December 16, 2009, and discussed the impact of selling short.<span style="mso-spacerun: yes"> </span>All these letters are public and available online.<span style="mso-spacerun: yes"> </span>All you have to do is Google them and take a look.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Like all Federal agencies, HUD publishes regulations.<span style="mso-spacerun: yes"> </span>For those who like to hear it (or in this case, read it) from the horse’s mouth, check out 24 CFR 203.355 for FHA lenders’ options on default.<span style="mso-spacerun:yes"> </span>For short sale procedures see 24 CFR 203.370 and, for modifications, 24 CFR 203.616.<span style="mso-spacerun: yes"> </span>Google these and you’ll get plenty of hits.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In a nutshell, here’s what you’ll find.<span style="mso-spacerun: yes"> </span>To be eligible for an FHA modification, the borrower must be at least 4 months but not more than 12 months delinquent.<span style="mso-spacerun: yes"> </span>If the money situation improves (but not too much), the borrower may resume making payments but must be unable to catch up the shortage or payments missed.<span style="mso-spacerun: yes"> </span>In other words, the borrower must be suffering from changed circumstances (changed, that is, from the time the borrower originally got the FHA loan).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">If the borrower qualifies and a modified loan is put in place, the arrearage isn’t forgiven.<span style="mso-spacerun: yes"> </span>Instead, the borrower is required to sign a junior promissory note and mortgage for the arrearage which gives taxpayers hope the loan will be paid in full.<span style="mso-spacerun:yes"> </span>This junior note and lien requirement is a problem if the borrower already has a HELOC (home equity line of credit) in place, but with most FHA borrowers putting only 3% down at date of acquisition, there shouldn’t be a HELOC.<span style="mso-spacerun: yes"> </span>But if there is, a modification is probably out.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">That’s when a short sale enters the picture.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">To be eligible for a short sale, the borrower must be in default and have negative equity, but the property can’t be in foreclosure yet.<span style="mso-spacerun: yes"> </span>The borrower also must be the owner-occupant (not an investor, although there are a few hardship exceptions) and have been actively trying to sell the property for 3 months.<span style="mso-spacerun: yes"> </span>So, timing is critical.<span style="mso-spacerun: yes"> </span><o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Generally, for a short sale to be considered, the property must be listed for sale at its “as is” appraised value as determined by an FHA appraiser.<span style="mso-spacerun: yes"> </span>A real estate commission up to 6% is allowed, assuming more than one sales agent is involved.<span style="mso-spacerun: yes"> </span>Otherwise, the maximum commission is 3%.<span style="mso-spacerun:yes"> </span>The seller may not make repairs as a seller concession (with some exceptions), the goal being to maximize the sale price and minimize the shortage to the lender (and, in turn, the cost to FHA and taxpayers).<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The actual sale price allowed (compared to the loan balance) depends on a tiered pricing structure, based in part on how long the house has been on the market.<span style="mso-spacerun:yes"> </span>As an incentive to underwater borrowers, FHA allows the seller/borrower to receive $750-$1,000 cash at closing (for first and last month’s rent since the seller/borrower won’t be buying another house).<span style="mso-spacerun: yes"> </span>Incentives up to $1,250 go to outgoing FHA lenders too, with another $250 thrown in for title searches and recording fees.<span style="mso-spacerun: yes"> </span>There’s more.<span style="mso-spacerun: yes"> </span>Despite senior lenders’ not liking to pay junior liens when they’re not being paid in full themselves, FHA will allow up to $2,500 of the sale price to make junior lienholders go away.<span style="mso-spacerun: yes"> </span>And, up to 1% of the new buyer’s loan may be used for seller’s closing costs if the buyer is obtaining a new FHA loan.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So, the FHA programs are in place, with short sales likely trumping modifications in most cases.<span style="mso-spacerun: yes"> </span>To answer your questions – or at least to get a strong start – read Mortgagee Letter 2008-43.<span style="mso-spacerun: yes"> </span>It contains loads of details.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-76701354277928272242010-05-02T21:30:00.001-07:002010-05-02T21:30:43.638-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>So, you want to close at month-end?<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"> <o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">It’s a request we get month in, month out.<span style="mso-spacerun: yes"> </span>And there are good reasons for it…sometimes.<span style="mso-spacerun: yes"> </span>But month-end closings can present problems.<span style="mso-spacerun: yes"> </span>So, like most choices in life, balance is critical: the upside has to outweigh the down.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">First things first.<span style="mso-spacerun: yes"> </span>Why are month-end closings so popular?<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For buyers getting new mortgages, the nearer to the end of the month a settlement takes place means less interest paid up front.<span style="mso-spacerun: yes"> </span>For example, if closing occurs on March 30, the borrower’s first mortgage payment won’t be until May 1 (which includes interest for April).<span style="mso-spacerun:yes"> </span>Consequently, at closing the borrower will have to prepay interest for only two days (March 30 & 31).<span style="mso-spacerun:yes"> </span>That’s a good thing.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But suppose closing occurs on April 2.<span style="mso-spacerun: yes"> </span>The borrower will have to prepay interest for 29 days (April 2-30).<span style="mso-spacerun: yes"> </span><i>Whoa!</i></span><span style="font-size:10.0pt;font-family:Arial"><span style="mso-spacerun: yes"> </span>That’s a lot more than a measly two days.<span style="mso-spacerun: yes"> </span>But consider this: the first mortgage payment won’t be until June 1.<span style="mso-spacerun: yes"> </span>So, which is better?<span style="mso-spacerun: yes"> </span>Coughing up 29 days interest in advance and putting off your first payment for almost a month more or paying less at closing but starting your mortgage payments a month earlier?<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For borrowers squeezed for cash, closing late in the month makes sense.<span style="mso-spacerun: yes"> </span>But if cash at closing is not an issue, why jockey for a closing date when title companies and lenders are busiest?<span style="mso-spacerun:yes"> </span>It’s no secret that the end of the month is when title companies’ closing schedules get hectic.<span style="mso-spacerun: yes"> </span>Which means closings are stacked up hour after hour.<span style="mso-spacerun: yes"> </span>In turn, efficiency suffers and the chances of mistakes go up.<span style="mso-spacerun: yes"> </span>In fact, if problems do occur, the closing may have to be delayed until the following month.<span style="mso-spacerun: yes"> </span>Meaning more up-front money.<span style="mso-spacerun: yes"> </span>Not a good thing for borrowers who can’t afford it.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">These days, end-of-month (and Friday) closings have another issue to deal with: wire transfers.<span style="mso-spacerun: yes"> </span>In Indiana, all funds of $10,000 or more (per person, per lender, etc.) must be sent to the title company by electronic transfer.<span style="mso-spacerun: yes"> </span>Often, lenders don’t send funds until all closing requirements are met – in other words, at the closing table.<span style="mso-spacerun: yes"> </span>Given that many banks cut off sending wires at 2:00 p.m., afternoon closings probably won’t be funded until the next business day.<span style="mso-spacerun:yes"> </span>Sometimes, the next business day is the following Monday – or Tuesday if Monday’s a holiday.<span style="mso-spacerun: yes"> </span>And it all goes downhill from there, because if sellers haven’t received their money (and they won’t until funding occurs), most sellers won’t let buyers move in.<span style="mso-spacerun: yes"> </span>So, if the buyer has a moving van waiting to unload, the movers will have to cool their heels until funding.<span style="mso-spacerun: yes"> </span>Definitely not a good thing.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">What do month-end closings mean for sellers?<span style="mso-spacerun: yes"> </span>As just mentioned, there’s the downside of waiting for their funds, which can create a domino effect.<span style="mso-spacerun: yes"> </span>If the seller intends to use the money from the sale to buy another home later that day, the seller’s purchase will have to be delayed.<span style="mso-spacerun: yes"> </span>You don’t even want to think about the consequences if it’s the seller’s last day to close or the seller’s (soon to be buyer’s) new mortgage rate-lock expires.<span style="mso-spacerun: yes"> </span>Late funding also means the seller’s outgoing mortgage won’t be paid off as early because the title company can’t wire the payoff until the sale has officially closed, adding extra days of interest and possibly late fees.<span style="mso-spacerun:yes"> </span>Worse, if the seller has an FHA mortgage, the cash outlay racks up even faster because FHA charges interest for the whole month regardless of when payment is made.<span style="mso-spacerun: yes"> </span>So if the closing is pushed back from the end of March until the first of April, the seller will have to pay all April’s interest (even if closing is on April 1<sup>st</sup>).<span style="mso-spacerun: yes"> </span>Most sellers won’t be pleased.<span style="mso-spacerun: yes"> </span>Some April Fool!<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">With the first-time homebuyer tax credit deadline looming (June 30, 2010), savvy sellers, buyers, and their brokers won’t want to risk a late June closing.<span style="mso-spacerun:yes"> </span>The consequence of losing the tax credit because something went wrong at the last minute would be devastating.<span style="mso-spacerun:yes"> </span>This deadline is written in stone, unlike a rate-lock that might be able to be extended.<span style="mso-spacerun: yes"> </span>But Uncle Sam doesn’t extend.<span style="mso-spacerun: yes"> </span>Either the closing occurs on or before June 30, or the tax credit goes down the drain.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The word to the wise, first-time homebuyer or not, is to plan ahead – and conservatively.<span style="mso-spacerun: yes"> </span>Shoot for early or mid-month.<span style="mso-spacerun: yes"> </span>Don’t take a chance on saving money and getting the deal closed.<span style="mso-spacerun: yes"> </span>And remember, not only will title companies be pulling their hair out end of month, so will lenders.<span style="mso-spacerun: yes"> </span>Just as title companies can close only so many sales within a certain period of time (only so many hours in the day), same goes for lenders who can process only so many loans.<span style="mso-spacerun: yes"> </span>Because most lenders will be pulling out all the stops, mistakes can be made which may cause delays.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So get your deal closed early and rest easy while the ones who didn’t plan ahead break into a sweat.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-29169236098706662972010-04-25T08:26:00.000-07:002010-04-25T08:27:13.512-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Options when you can’t pay your mortgage<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"> <o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As everyone knows by now, the economic meltdown has turned the housing market on its head, leaving millions of Americans faced with losing their homes.<span style="mso-spacerun:yes"> </span>Can anything be done to keep people from being put onto the street?<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The Federal government has set up programs such as HAMP (Home Affordable Mortgage Program), HAFA (Home Affordable Foreclosure Alternatives) program, and HARP (Home Affordable Refinance Program), but none has been as effective and far-reaching as hoped.<span style="mso-spacerun: yes"> </span>But before delving into the specifics of HAMP, HAFA, and HARP (which I’ll save for another day), let’s start with the options borrowers and lenders have when borrowers can’t make their payments.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Foreclosure<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">This option doesn’t work for borrowers who want to stay in their homes.<span style="mso-spacerun:yes"> </span>Foreclosure means borrowers are sued and eventually kicked out, and their home sold at public auction.<span style="mso-spacerun:yes"> </span>More often than not, the lender ends up with the house then turns around and sells it – or tries to.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Another downside of foreclosure is that when the smoke clears, the borrower may still owe the lender money – the difference between what the house is worth and how much the borrower owed.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The good news though is that junior liens (like second mortgages) are wiped out.<span style="mso-spacerun:yes"> </span>Still, the borrower ends up on the street looking for a new place to live.<span style="mso-spacerun: yes"> </span>But if a borrower is so underwater (the house is worth far less than the borrower owes), foreclosure may be the only option.<span style="mso-spacerun: yes"> </span>Borrowers who recognize this have been known to turn in their keys and walk away.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Deed-in-lieu of foreclosure<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Foreclosure is avoided when this procedure is used, but the borrower still ends up losing the home.<span style="mso-spacerun: yes"> </span>Deed-in-lieu amounts to a formal way of turning in the keys and walking away.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">No lawsuit is necessary to pull this method off, but the lender has to be on board in order to do it.<span style="mso-spacerun: yes"> </span>Because the public auction orchestrated through the foreclosure lawsuit is what wipes out junior liens, no lender is going to allow a deed-in-lieu if the home is burdened by junior liens because those liens would have to be paid off when the lender sells it.<span style="mso-spacerun: yes"> </span>So for a deed-in-lieu to work, the home can’t have any baggage that comes along with it.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The trade-off the borrower ought to be looking for here is full and complete release from the debt the mortgage secures.<span style="mso-spacerun: yes"> </span>Depending on circumstances, release from most of the debt (instead of all of it) might be acceptable too.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Modification<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Without getting into specifics of HAMP, HAFA, and HARP, these are Federal modification programs designed to keep people in their homes.<span style="mso-spacerun: yes"> </span>Any lender can modify its borrower’s loan, but lenders don’t keep their loans anymore.<span style="mso-spacerun: yes"> </span>Instead, they sell them on the secondary market which packages them as securities and sells them to investors, meaning a borrower’s mortgage may be one in a package owned by a pension fund in East Chainsaw, Oklahoma.<span style="mso-spacerun: yes"> </span>So, who does the borrower talk to about modifying?<span style="mso-spacerun: yes"> </span>Thus the Federal programs.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Some modifications cut the rate of interest.<span style="mso-spacerun: yes"> </span>Others extend the term to, say, 40 years instead of 30.<span style="mso-spacerun: yes"> </span>Still others do both.<span style="mso-spacerun: yes"> </span>Either way though, the full amount has to be paid back.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But cutting through the red tape, there’s no real reason for borrowers to shoot for loan modifications if they’re not able to pay.<span style="mso-spacerun: yes"> </span>Will lenders modify loans for borrowers who’ve lost their jobs and have no income?<span style="mso-spacerun: yes"> </span>No.<span style="mso-spacerun:yes"> </span>Which means borrowers have to qualify for modifications to prove they can pay.<span style="mso-spacerun: yes"> </span>Qualifying means credit scores, income, and debt are checked.<span style="mso-spacerun:yes"> </span>For borrowers trying to modify so-called “liar loans” (borrowers who “stated” their income the first time around without having to prove it), this will be their first real shot at qualifying.<span style="mso-spacerun:yes"> </span>Most programs also require borrowers to show their income, etc. has worsened since they got the loan they want to modify.<span style="mso-spacerun: yes"> </span>But depending on how much they lied the first time around, maybe it hasn’t.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">If a modification is pulled off, the borrower gets to stay in the house…at least until defaulting again.<span style="mso-spacerun: yes"> </span>I’m not trying to be pessimistic here, but statistics say 20-30% of modified mortgages end up in default.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Modification plus note<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">An offshoot of a full modification is re-writing the mortgage by lowering the interest rate and knocking off some of the principal, which has the effect of lowering the monthly payment.<span style="mso-spacerun: yes"> </span>But most lenders won’t be willing to eat the principal they’ve knocked off.<span style="mso-spacerun: yes"> </span>Instead, they’ll require the borrower to sign an unsecured note promising to pay it back over time.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Why do this?<span style="mso-spacerun: yes"> </span>To give the borrower a better chance to sell the home.<span style="mso-spacerun: yes"> </span>If the home is encumbered by less debt, the sale price can be lowered making it easier to sell.<span style="mso-spacerun: yes"> </span>So maybe the borrower will end up losing the home but on more honorable terms than being thrown out.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Short sale<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">If a borrower is underwater but not too far beneath the surface, a short sale may be the ticket.<span style="mso-spacerun: yes"> </span>True, the borrower will be losing the home (by selling it) but will also be off the hook.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In a short sale, a lender agrees to accept less than the full amount owed on the mortgage.<span style="mso-spacerun: yes"> </span>This option is for lenders who are practical – they see the handwriting on the wall.<span style="mso-spacerun:yes"> </span>Usually, the borrower has been missing payments, knows it’s time to get out from under an unsustainable debt, and decides to sell.<span style="mso-spacerun: yes"> </span>The problem is, if more is owed (but not too much more) than the home will sell for, how can the sale take place?<span style="mso-spacerun: yes"> </span>It can’t unless the lender is on board.<span style="mso-spacerun: yes"> </span>But more and more lenders (the savvy and prudent ones) realize it’s better to cut their losses and move on rather than go through the expense of foreclosure, take the house back, and still have to sell it.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In a short sale, a portion of the debt is forgiven.<span style="mso-spacerun: yes"> </span>That’s good, right?<span style="mso-spacerun: yes"> </span>Yes, but there’s a catch.<span style="mso-spacerun: yes"> </span>To the IRS, forgiven debt amounts to income received.<span style="mso-spacerun: yes"> </span>Which means the borrower will have to pay tax on it.<span style="mso-spacerun:yes"> </span>And to be sure that happens, the forgiving lender will be sending the borrower a Form 1099.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"><b><i>Short sale with note<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">This option is like any other short sale except the amount the lender is shorted isn’t forgiven.<span style="mso-spacerun: yes"> </span>Instead, the borrower signs an unsecured note promising to pay it back over time.<span style="mso-spacerun:yes"> </span>Another good news, bad news situation.<span style="mso-spacerun: yes"> </span>There’s no income tax to pay because the debt isn’t forgiven, but that means the debt doesn’t go away.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As with the modification with note procedure, this option allows the home to be sold, getting the borrower off most of the hook.<span style="mso-spacerun: yes"> </span>But the “forgiven” debt still has to be paid.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<b><i><o:p></o:p></i></b></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-77342076978597443582010-04-18T08:23:00.000-07:002010-04-18T08:24:03.169-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Why title companies are picky – Recording<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial"> <o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">This is the first of a series explaining why title companies are fussy about details.<span style="mso-spacerun: yes"> </span>For example, when we insist that documents be set up a certain way, we’re not trying to be technical for the heck of it.<span style="mso-spacerun: yes"> </span>Instead, we’re being picky for a reason: compliance.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">It’s true that our underwriters have rules based on risk assessment and loss avoidance.<span style="mso-spacerun:yes"> </span>But more often than not, compliance means bowing to the law itself, whether Federal, state, or local.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Let’s start with names on documents.<span style="mso-spacerun: yes"> </span>If Susan owns a house and her deed reads “Susan J. Blake”, that’s how her name must appear on the deed when she sells.<span style="mso-spacerun: yes"> </span>But what if her name changes?<span style="mso-spacerun: yes"> </span>Suppose Susan marries Alonzo Martin and becomes Susan B. Martin.<span style="mso-spacerun:yes"> </span>Fine, but the deed will have to explain the details.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The practical reason for linking the two names?<span style="mso-spacerun: yes"> </span>Making it clear the true owner is the seller.<span style="mso-spacerun: yes"> </span>But the legal aim is to satisfy recording requirements under Indiana Code 36-2-11-16.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">This statute dictates how documents such as deeds and mortgages must be drafted and signed.<span style="mso-spacerun: yes"> </span>If not followed, the county recorder may refuse to record them.<span style="mso-spacerun: yes"> </span>Obviously, if the closing has occurred, the title company will be up a creek if the deed and the buyer’s new mortgage can’t be recorded.<span style="mso-spacerun: yes"> </span>Why?<span style="mso-spacerun:yes"> </span>Because the title company must issue (or has already issued) insurance policies, which is the equivalent of saying recording has taken place.<span style="mso-spacerun: yes"> </span>To avoid that problem, title companies have to make sure recording requirements are met.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Let’s look at a couple of examples.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">If you’ve watched documents being signed, you’ve probably noticed the signature line is always <u>above</u> the typewritten name.<span style="mso-spacerun: yes"> </span>Why?<span style="mso-spacerun: yes"> </span>Because IC 36-2-11-16(b) says it has to be.<span style="mso-spacerun: yes"> </span>The statute also says the signature (seller’s on the deed, buyer/borrower’s on the mortgage) can’t obscure the typed name or <i>vice versa</i></span><span style="font-size:10.0pt;font-family:Arial"> (the tail of a signed <i>y</i></span><span style="font-size:10.0pt;font-family:Arial"> or <i>g</i></span><span style="font-size:10.0pt;font-family:Arial"> can’t make the typed letters unreadable).<span style="mso-spacerun: yes"> </span>This is a rule of legibility, and it applies to the notary clause as well.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">The statute goes on to say the name of the signer must appear the same way throughout the document.<span style="mso-spacerun: yes"> </span>So, if Susan’s name appears with her middle initial in the body of the deed, it’s got to show up the same way below her signature line and in the notary clause.<span style="mso-spacerun:yes"> </span>If for some reason it doesn’t, the inconsistency may be explained by an affidavit, provided the affidavit is presented to the county recorder along with the incorrect document.<span style="mso-spacerun:yes"> </span>This is why title companies commonly have buyers and sellers sign a “name affidavit” which lists their name variations and states that all the names on the list refer to the same person.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But what if the signature doesn’t resemble the spelling?<span style="mso-spacerun: yes"> </span>We’ve all seen signatures so scribbled (straight lines, crooked lines, flourishes, curlicues) they could belong to Susan B. Martin or a complete stranger.<span style="mso-spacerun: yes"> </span>That’s where the notary comes in.<span style="mso-spacerun: yes"> </span>It’s also one reason we check photo IDs.<span style="mso-spacerun: yes"> </span>If the signature on the photo ID matches the version on the deed, we’re good to go.<span style="mso-spacerun:yes"> </span>Let’s face it, people sign the way they sign; legibility doesn’t enter into it.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Fortunately, the statute gives the recorder plenty of wiggle room.<span style="mso-spacerun: yes"> </span>If it’s clear who the document’s referring to, the recorder can let it pass.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">An off-shoot of this consistency requirement is linking the names on the deed and mortgage.<span style="mso-spacerun: yes"> </span>The recorder won’t care about that, but title companies and lenders do because it must be clear the owner of the house is the one mortgaging it.<span style="mso-spacerun: yes"> </span>So, title companies and lenders have to stay alert.<span style="mso-spacerun:yes"> </span>Here’s why.<span style="mso-spacerun: yes"> </span>Unless told otherwise when an order is placed, title companies take the spelling of buyers’ names from the purchase agreement.<span style="mso-spacerun: yes"> </span>But loan processing follows a separate track, meaning buyers’ names may appear differently on the loan paperwork.<span style="mso-spacerun: yes"> </span>Because the title and loan tracks don’t converge until the loan documents arrive at the title company (usually late in the game), corrections are made on the fly.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Savvy real estate agents ask buyers how they want their names to appear on the title documents.<span style="mso-spacerun: yes"> </span>Savvy lenders do the same thing.<span style="mso-spacerun: yes"> </span>Hopefully, both get the same answer.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-45017080269272458212010-04-10T20:47:00.001-07:002010-04-10T20:47:21.670-07:00<!--StartFragment--> <p class="MsoNormal"><span style="font-family:Arial"><b><i>Trusts & companies – How entities own, buy & sell<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="line-height:200%"><span style="font-size:10.0pt;font-family:Arial"> <o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Human beings aren’t the only persons who own, sell, buy, and mortgage real estate.<span style="mso-spacerun:yes"> </span>So do firms and businesses.<span style="mso-spacerun:yes"> </span>And don’t forget to add trusts, not-for-profits, and unincorporated associations.<span style="mso-spacerun: yes"> </span>Taken together, these groups are often referred to as <i>entities</i></span><span style="font-size:10.0pt;font-family:Arial">.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">To legally exist, most entities must be formed according to state law.<span style="mso-spacerun: yes"> </span>In many cases (in Indiana, at least), that means filing organizational documents with the secretary of state.<span style="mso-spacerun: yes"> </span>Some would-be entities get forms online at the secretary of state’s website.<span style="mso-spacerun: yes"> </span>Others hire lawyers to handle the particulars.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Among the types of entities that have to file with the secretary of state’s office are corporations (both for profit and not-for-profit), limited liability companies, and limited liability partnerships.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Entities that don’t have to file with the secretary of state to exist legally are partnerships, unincorporated associations, and so-called grantor or living trusts.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But, when it comes to entity-owned real estate, keep in mind that the entity itself is the owner, as opposed to the people who make up the entity.<span style="mso-spacerun: yes"> </span>Human beings who are entity-owners (members, shareholders, managers) often forget this, thinking the entity they created is a mere formality.<span style="mso-spacerun: yes"> </span>It isn’t.<span style="mso-spacerun:yes"> </span>It’s the <i>owner</i></span><span style="font-size:10.0pt;font-family:Arial">.<span style="mso-spacerun: yes"> </span>So, for the entity to act officially, it must play by the rules it made for itself as outlined in its entity documents.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">That means if an entity is borrowing or is selling, buying, or mortgaging real estate, title companies will ask for documents they don’t otherwise ask human beings for.<span style="mso-spacerun:yes"> </span>For example, if Jim Jones is selling his house, the title company will be satisfied that Jim can sign the deed over to the buyer if Jim proves he’s Jim by showing a valid, government-issued photo ID.<span style="mso-spacerun: yes"> </span>Jim won’t have to prove he exists (we can see and talk to him, after all, and match him up to his photograph).<span style="mso-spacerun: yes"> </span>All he’ll have to do is link his physical person as the signer of the deed in this transaction to the name on the deed by which he took title to the house.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Not so with an entity.<span style="mso-spacerun: yes"> </span>Unlike Jim, amorphous entities don’t have a physical existence.<span style="mso-spacerun: yes"> </span>The entities’ owners do, but not the entities themselves.<span style="mso-spacerun:yes"> </span>So, title companies need to verify the entities actually exist and can do what the entity is trying to do.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">That means title companies ask for proof.<span style="mso-spacerun: yes"> </span>For entities formed by filing papers with the secretary of state, title companies will want copies of those filed papers with the secretary of state’s seals and filing dates clearly visible.<span style="mso-spacerun: yes"> </span>Because entities which file must renew their filings periodically or automatically cease to exist, title companies will need proof of that too.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">There’s more.<span style="mso-spacerun: yes"> </span>Because entities can’t do more than their official papers allow them to do, entities must prove they have the right to do what they plan to do (sell, buy, borrow, mortgage).<span style="mso-spacerun: yes"> </span>And because entities can’t sign papers themselves – people involved with the entities must do that for them – title companies must have proof who the authorized signers are.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So, when a title company asks for copies of various documents and for an official entity resolution that authorizes the transaction and who can sign the documents, please don’t be offended or put up a fight.<span style="mso-spacerun: yes"> </span>The title company isn’t trying to meddle in the entity’s affairs, only to verify that the transaction can proceed as planned.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Trusts are a little different, although the concept is the same.<span style="mso-spacerun: yes"> </span>Most of the trusts title companies run into are formed by individuals and are revocable – meaning they can be cancelled at any time.<span style="mso-spacerun: yes"> </span>These trusts spring to life with a trust agreement which doesn’t have to be filed anywhere (secretary of state, county recorder, or anywhere else).<span style="mso-spacerun: yes"> </span>Usually, the reason trusts are created is to avoid probate.<span style="mso-spacerun: yes"> </span>Although I’m painting with a broad brush here, when a person who owns real estate dies, heirs may have to go to court to determine who inherits the property.<span style="mso-spacerun:yes"> </span>Trusts avoid this issue because the person (grantor) who forms the trust designates a beneficiary who becomes the owner automatically at the grantor’s death.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">These trusts are a lot like wills and are not filed publicly.<span style="mso-spacerun: yes"> </span>Unfortunately, what many owners (grantors) forget, is that once the real estate has been put into the trust, the grantors no longer own the property.<span style="mso-spacerun: yes"> </span>Instead, the trust owns it (actually, according to Indiana Code 30-4-1-1, the trustee owns it).<span style="mso-spacerun: yes"> </span>And, of course, what the trustee can and can’t do with the property (sell, buy, borrow, mortgage) depends on what the trust says.<span style="mso-spacerun: yes"> </span>Which is why title companies have to see it.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Often, when title companies ask for copies of the trust, the trustee (who usually is the grantor) resists, thinking the trust provisions – who gets what when the grantor dies – are private and confidential.<span style="mso-spacerun: yes"> </span>But, as with other types of entities, title companies need to know that the transaction is permissible and who is authorized to sign.<span style="mso-spacerun:yes"> </span>Title companies don’t care who gets what at death, only that the i’s have been dotted and the t’s crossed so the transaction they’re handling will be valid.<span style="mso-spacerun: yes"> </span>And, keep in mind that title companies need the whole trust, not just snippets here and there that the trustee thinks are pertinent.<span style="mso-spacerun:yes"> </span>Because some clauses can override others, title companies need to see the whole shebang.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As for unincorporated associations – like some small churches – their existence may not be blessed by the secretary of state (although can be if the association files as a non-profit).<span style="mso-spacerun: yes"> </span>But they still must have an organizational structure with rules about who governs, what types of actions the group can take, how decisions are made, and who can sign.<span style="mso-spacerun: yes"> </span>So, title companies will ask for the same kind of paperwork, minus the official part from the secretary of state.<o:p></o:p></span></p> <span style="font-size:10.0pt;font-family:Arial;mso-ansi-language:EN-US;mso-fareast-language:EN-US">- Morrie Erickson</span><!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-34774608637912300192010-04-04T12:51:00.001-07:002010-04-04T12:51:27.053-07:00<!--StartFragment--> <p class="MsoNormal" style="line-height:200%"><span style="font-family:Arial"><b><i>Title – What it is & how to hold it<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">If you’re new to real estate ownership or an experienced hand who wants to brush up, it’s a good idea to go over what “title” means and how buyers should hold it when they buy a house.<span style="mso-spacerun: yes"> </span>If you’re a lender or real estate agent, you’ve probably heard all this before.<span style="mso-spacerun:yes"> </span>Still, it never hurts to confirm what you already know or be reminded of what might have inched to the back of your brain.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">First, a little clarification.<span style="mso-spacerun: yes"> </span>I’ve referred to holding “title” in connection with buying a <i>house</i></span><span style="font-size:10.0pt;font-family:Arial">.<span style="mso-spacerun: yes"> </span>The same rules apply to buying commercial property, although non-residential property often is acquired in the name of a firm (<i>i.e.,</i></span><span style="font-size:10.0pt;font-family:Arial"> partnership, corporation, limited liability company).<span style="mso-spacerun: yes"> </span>That’s a separate topic we’ll save for later.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For now, let’s think residential.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Title companies who prepare deeds and insure ownership always ask how buyers want to take title.<span style="mso-spacerun: yes"> </span>But that’s actually the second issue.<span style="mso-spacerun: yes"> </span>The first is what sort of title are the buyers getting.<span style="mso-spacerun: yes"> </span>Do I mean there’s more than one kind of title?<span style="mso-spacerun: yes"> </span>Yes, although in residential transactions, owning less than what might be called full ownership is rare.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Let’s look a little deeper.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In real estate, “title” to property means ownership of a specified interest in that property.<span style="mso-spacerun: yes"> </span>The ownership interest can take several forms, including “fee simple” (full or outright ownership), “life estate” (ownership limited to the length of someone’s life), and “leasehold” (long-term tenant’s rights under a lease for a specified period, often 30 or more years).<span style="mso-spacerun: yes"> </span>It’s unusual for buyers of houses to acquire less than full or outright ownership or to share ownership with somebody else.<span style="mso-spacerun: yes"> </span>That’s because most buyers want total control and because their lenders require it.<span style="mso-spacerun: yes"> </span>How many lenders would be willing to lend money to buy a house if the buyer’s ownership ends when the buyer’s 80-year-old grandmother dies?<span style="mso-spacerun: yes"> </span>Or when the buyer dies?<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But, assuming buyers are acquiring full ownership (as mentioned above, the legal term is “fee simple”), do lenders care how title is held?<span style="mso-spacerun: yes"> </span>Probably not, so long as the buyers are creditworthy and qualify for the loan.<span style="mso-spacerun: yes"> </span>If one of a pair of buyers has credit problems, though, lenders may require that only the qualified buyer hold title.<span style="mso-spacerun: yes"> </span>This is because regulators (or upstream purchasers of loans in the secondary market) don’t want a person with bad credit on the loan.<span style="mso-spacerun: yes"> </span>There are reasons for this too, having to do with loans being packaged and sold in the form of mortgage-backed securities (MBS).<span style="mso-spacerun:yes"> </span>Unless you’ve been hiding under a rock during the recent economic meltdown, you’ve undoubtedly heard of MBS.<span style="mso-spacerun:yes"> </span>In any event, who holds title may be credit-driven instead of buyer’s preference.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Does who holds title (whose names are on the deed) really matter?<span style="mso-spacerun: yes"> </span>Read on and decide for yourself.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">As mentioned above, an owner holds “title” to whatever interest in the real estate is being acquired.<span style="mso-spacerun: yes"> </span>Usually, that interest is “fee simple”.<span style="mso-spacerun: yes"> </span>Full or “fee simple” ownership can take several forms if the real estate is co-owned (tenancy in common, joint tenancy with the right of survivorship, tenancy by the entireties), each form having different attributes and consequences.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Ownership as “tenants by the entireties” is reserved for married couples, so let’s save that for last.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">First then, “tenants in common” and “joint tenants with right of survivorship”.<span style="mso-spacerun: yes"> </span>Simply put, if two people own as tenants in common and one of them dies, the surviving co-owner does not inherit the decedent’s share.<span style="mso-spacerun: yes"> </span>Instead, that share goes to the decedent’s heirs (among whom could be the co-owner but not necessarily).<span style="mso-spacerun: yes"> </span>In contrast, if two people own as joint tenants with right of survivorship, on the death of one co-owner (sometimes co-owners are called “co-tenants”) the surviving co-owner becomes the owner of the decedent’s share.<span style="mso-spacerun: yes"> </span>Casual friends who are co-owners may opt to own as tenants in common because each prefers for his or her share to end up in the hands of his or her heirs.<span style="mso-spacerun: yes"> </span>On the other hand, co-owners who have more than a casual relationship (family members, domestic partners) may prefer the survivor to take it all.<span style="mso-spacerun: yes"> </span>As mentioned above, typically lenders don’t express a preference how title is held unless the creditworthiness of one of the co-owners rears its head.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Now, “tenants by the entireties”.<span style="mso-spacerun: yes"> </span>Unlike the other two forms of co-ownership, tenants by the entireties must be spouses.<span style="mso-spacerun: yes"> </span>As with joint tenants, the surviving spouse inherits from the deceased spouse automatically.<span style="mso-spacerun: yes"> </span>However, tenancies by the entireties provide other protections of marital property from the folly or misfortune of either spouse.<span style="mso-spacerun: yes"> </span>For example, except for the lien of taxes filed by the IRS, in Indiana the debts of one spouse will not become a lien against property owned as husband and wife.<span style="mso-spacerun: yes"> </span>This is because in Indiana a magic shield ring-fences spousal property.<span style="mso-spacerun: yes"> </span>Conversely, neither tenants in common nor joint tenants enjoy similar protections.<span style="mso-spacerun: yes"> </span>Most deeds conveying real estate to spouses refer to them as “husband and wife” instead of “tenants by the entireties”.<span style="mso-spacerun: yes"> </span>But both terms mean the same thing.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">What about states in which so-called domestic partners are allowed to marry?<span style="mso-spacerun: yes"> </span>Are those domestic partners allowed to own real estate as tenants by the entireties?<span style="mso-spacerun: yes"> </span>Probably so in those states, although a real estate lawyer in the particular state should be consulted to be sure.<span style="mso-spacerun: yes"> </span>Having said that, I’m unaware of any Indiana court case which has addressed this issue.<span style="mso-spacerun: yes"> </span>So, for a same-sex couple legally married in another state to expect Indiana (which has not blessed same-sex marriage) to honor tenancy by the entirety rules for Indiana property is risky.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So, boiling all this down, here’s where we end up.<span style="mso-spacerun: yes"> </span>In a typical house sale, “title” is transferred by the seller to the buyer when the seller signs the deed and the deed is given (“delivered”) to the buyer.<span style="mso-spacerun: yes"> </span>Deeds are then filed in the county Recorder’s office.<span style="mso-spacerun: yes"> </span>In turn, the “title” is insured by a title insurance policy.<span style="mso-spacerun:yes"> </span>The official owner is the person whose name is on the deed.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Let’s close with a practice tip.<span style="mso-spacerun: yes"> </span>Say two people (married or not) want to co-own a house but one of them doesn’t qualify for the loan because of credit problems.<span style="mso-spacerun: yes"> </span>Is there still a way for them to co-own?<span style="mso-spacerun: yes"> </span>Yes.<span style="mso-spacerun: yes"> </span>At the closing, the creditworthy person can take title alone and sign all the loan papers.<span style="mso-spacerun: yes"> </span>Then, after closing, the creditworthy buyer can sign a deed to the two of them (which designates how title is to be held: tenants in common, joint tenants with right of survivorship, or tenants by the entireties) then record it.<span style="mso-spacerun: yes"> </span>Most lenders don’t have a problem with this, but before doing it be sure to check.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">And don’t forget to tell the title insurance company so it can change the name of its insured to the creditworthy buyer and his or her co-owner.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0tag:blogger.com,1999:blog-4862836571163938385.post-22757587451839119722010-03-28T10:40:00.001-07:002010-03-28T10:40:23.180-07:00<!--StartFragment--> <p class="MsoNormal" style="line-height:200%"><span style="font-family:Arial"><b><i>The New RESPA Rule – The rest of the 1100-series<o:p></o:p></i></b></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">In the last few issues we’ve covered the meat of the 1100-series of the new HUD-1 – mainly lines 1101, 1102, 1103, and 1104 – and how each ties in with Blocks 4 and 5 of the GFE.<span style="mso-spacerun: yes"> </span>To summarize, line 1101 and Block 4 cover title services and lender’s title insurance; line 1102 addresses settlement or closing fees (and is rolled up into line 1101 and included in Block 4); and line 1103 and Block 5 pertain to owner’s title insurance.<span style="mso-spacerun: yes"> </span>Line 1104 isolates the lender’s title insurance premium outside the columns, the charge being rolled up into line 1101 and included in Block 4.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">While these four HUD-1 lines and two GFE blocks constitute the meat of the charges having to do with title insurance and closing/settlement services, the remaining lines in the 1100-series provide useful information for sellers and borrowers, some of which hasn’t been seen before in the world of residential real estate transactions.<span style="mso-spacerun: yes"> </span>Having said that, the numbers on lines following 1104 are shown outside the column because they don’t figure in to the totals that either the seller or borrower has to pay.<span style="mso-spacerun:yes"> </span>In short, the numbers seen on lines 1105 through 1108 are for information only and may be a HUD effort in transparency.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So, let’s see what these lines are all about.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Line 1105 sets out the dollar amount of coverage of the lender’s title insurance policy being issued to the borrower’s lender.<span style="mso-spacerun: yes"> </span>Policy specifics (long-form or short-form ALTA 2006 policies) aren’t detailed here, only the level of coverage.<span style="mso-spacerun: yes"> </span>Usually, the face amount of the lender’s policy is the same as the loan amount.<span style="mso-spacerun: yes"> </span>In most cases, the loan amount is less than the purchase price, although some loans may be the same as or exceed the purchase price.<span style="mso-spacerun: yes"> </span>Given the sub-prime and other high-risk loan program issues from past years, however, and the consequent financial meltdown, we’ll probably see fewer loans equal to or higher than the presumed value (sale price) of the property.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Similarly, line 1106 confirms the dollar amount of coverage of the owner’s title insurance policy being issued to the borrower/buyer.<span style="mso-spacerun: yes"> </span>And, as you might expect, neither the <i>type</i></span><span style="font-size:10.0pt;font-family:Arial"> of policy (usually, ALTA 2006 or ALTA 2008 Homeowner’s – the latter sometimes referred to as an <i>enhanced</i></span><span style="font-size:10.0pt;font-family:Arial"> policy) nor the name of the title insurance company (underwriter) is revealed here either, only the policy limits.<span style="mso-spacerun: yes"> </span>Normally, the coverage amount equals the purchase price.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Taken together, lines 1105 and 1106 don’t add much value to the HUD-1 because the title insurance commitment previously issued and circulated to the parties, including the lender, have already dished out that information.<span style="mso-spacerun: yes"> </span>So, about the best that can be said for repeating the information is that the HUD-1 is validating the policy coverage stated earlier.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">Now, on to lines 1107 and 1108.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For some reason, HUD decided it was pertinent for the settlement statement to reveal the compensation details between the title insurance underwriter and its agent.<span style="mso-spacerun: yes"> </span>This is what appears to be HUD’s effort toward transparency.<span style="mso-spacerun: yes"> </span>What the parties are supposed to do with this information is unclear.<span style="mso-spacerun:yes"> </span>In most cases, though, these lines will show that the agent keeps the lion’s share of the premiums collected.<span style="mso-spacerun:yes"> </span>Several conclusions could be drawn from that, the most obvious being the agent does all the work.<span style="mso-spacerun:yes"> </span>A second might be that the risk being undertaken by the underwriter is comparatively small, given that the premium being paid is small as well, especially when it’s digested that, unlike homeowner’s and car insurance, the premium is paid only once.<span style="mso-spacerun: yes"> </span>And, for those who see HUD-1s over and over, a third might be that not all splits are the same, meaning not all title agents’ contracts with underwriters have the same terms.<span style="mso-spacerun: yes"> </span>For what it’s worth, Indiana’s Department of Insurance is looking into some of these issues, but that’s a discussion for another day.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">So, the splits.<span style="mso-spacerun: yes"> </span>Line 1107 shows how much of the total premium (owner’s, lender’s, enhanced coverage, endorsements, etc.) goes to the title insurance agent.<span style="mso-spacerun: yes"> </span>And, as you would expect, line 1108 shows the amount going to the underwriter.<span style="mso-spacerun: yes"> </span>Interesting to some, I suspect, but probably not a real attention-getter.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">What about lines after 1108?<span style="mso-spacerun: yes"> </span>Often, none will be needed.<span style="mso-spacerun: yes"> </span>The basic HUD-1 form stops with line 1108, although HUD-1 software programs are designed to expand to line 1199 if necessary.<span style="mso-spacerun: yes"> </span>(Let’s hope it isn’t.)<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">But, when might additional lines be used?<span style="mso-spacerun: yes"> </span>If either the seller or buyer/borrower hires an attorney to represent them during the transaction and the attorney is paid at closing, an additional line would be used to collect for these charges.<span style="mso-spacerun: yes"> </span>Or, if the buyer/borrower wanted a land survey (which wasn’t required by either the lender or the title agent), an additional line would be used.<span style="mso-spacerun: yes"> </span>These charges themselves would be shown inside the column of whichever party is incurring the charge with the name of the payee service provider shown outside the column.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">To make a point, though, let’s tweak the land survey charge.<span style="mso-spacerun: yes"> </span>Suppose the borrower didn’t want a survey, but the title agent required one to issue the title insurance.<span style="mso-spacerun: yes"> </span>What happens then?<span style="mso-spacerun: yes"> </span>The survey bill would be shown outside the borrower’s column in, say, 1109 along with the surveyor’s name, while the amount of the bill would be rolled up into line 1101 (because by the title agent requiring it, the survey bill becomes part of “title services and lender’s title insurance”).<span style="mso-spacerun: yes"> </span>To take this a step further, if the lender knew of the title agent’s survey requirement, that amount should be included in Block 4 of the GFE.<span style="mso-spacerun: yes"> </span>On the other hand, if the lender didn’t know and didn’t disclose accordingly, there may be a tolerance issue, depending on the cost of the survey.<span style="mso-spacerun: yes"> </span>Most likely, though, the lender can claim a change of circumstance and issue a revised GFE, eliminating the tolerance issue.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">For now, that’s it for the 1100-series of the HUD-1.<span style="mso-spacerun: yes"> </span>See you next week, if not sooner.<o:p></o:p></span></p> <p class="MsoNormal" style="text-indent:.5in;line-height:200%"><span style="font-size:10.0pt;font-family:Arial">- Morrie Erickson<o:p></o:p></span></p> <!--EndFragment-->Morrie Ericksonhttp://www.blogger.com/profile/15730433954671856043noreply@blogger.com0