Another phrase has been added to the real estate lexicon: “mortgage meltdown.”
Many of us used to call some of the practices that led to the meltdown “predatory lending.” But because most of the people who were preyed upon were poor, uneducated and often minorities, our national leaders largely ignored the problem. We kept hearing that no one really could define the concept of “predatory.”
But now that millions of Americans are facing foreclosure, governments at all levels are trying to find solutions. Recently, President Bush announced that his administration has brokered a deal with the mortgage industry whereby certain loans would be frozen for up to five years. Certain adjustable-rate mortgages that were originated between Jan. 1, 2005, and July 30, 2007 — and were scheduled to be increased between Jan. 1, 2008, and July 31, 2010 — would remain at the original rate. According to Bush, the government “should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could never afford. Yet there are some responsible homeowners who could avoid foreclosure with some assistance. …”
Accordingly, a private-sector group of lenders, loan servicers and mortgage counselors have created the “HOPE NOW Alliance,” whose function is to help “struggling homeowners find a way to refinance” their existing subprime or adjustable-rate mortgage. (For more information call 1-888-995 HOPE, or visit www.hopenow.com.)
The tax code has been a major problem facing homeowners who arrange with their mortgage lender to forgive a portion of their debt. To add insult to injury, our tax laws required those taxpayers to pay income tax (called “phantom income”) on the money they did not have to pay their lender.
Congress finally got its act together and on Dec. 20, President Bush signed into law a temporary change to the tax code. For the period Jan. 1, 2007, through Dec. 31, 2009, homeowners will not have to pay tax on any debt that is cancelled.
The law does not protect speculators or investors. It applies only to principal residences — that is situations where the taxpayer has owned and lived in the house for two or more years. And only the original loan can be cancelled debt free; if you have a second deed of trust (mortgage) the “phantom income” tax will still apply.
The law also extended the right to deduct private mortgage insurance for three more years.
All of these actions will help solve the current “mortgage meltdown” crisis. But as we enter into a new year, there are other real estate issues confronting consumers. Here are some New Year’s resolutions I am recommending for legislators, lenders, appraisers, title companies, and — most important — consumers.
Are you are in the market to buy a house (whether it is a single-family, condominium or cooperative)? Shop around for your mortgage. Many new-home builders will offer you a cash discount if you use the lender’s “preferred lender” and its “preferred title company.” Sometimes these discounts are worthwhile, but sometimes the extra charges imposed by that lender and the title company exceed the amount of the discount. You may be able to save more money by using your independent lender and title company — even without the discount.
Are you thinking about buying into a community association — whether it is newly developed or an existing property? Read the legal documents carefully. In many jurisdictions, a seller of a condominium unit or homeowner-association house must provide you with a package of documents, including the operating rules and regulations, the budget, and an updated financial accounting. This is important information. Especially today, when delinquencies and foreclosures are on the rise, you want to assure yourself that the association is in good financial shape. The last thing you want is to learn — shortly after you become a member of the association — that there will be a large special assessment to cover any shortfall.
Are you planning to capitalize on the financial problems of others? There are a lot of people who are looking to buy homes either from a bank that has taken title by way of foreclosure or directly from homeowners who are desperate to sell so as to avoid foreclosure. Indeed, many speculators and investors are starting to show up at foreclosure sales hoping to get a good deal.
If this is something you are considering, you must do your homework very carefully. Make sure that you carefully inspect the house. If the current owner is reluctant to give you this opportunity, move on to another property. I have recently been contacted by several investors who bought a house sight unseen, only to learn that the occupants are refusing to move or that when they left the property, they took a lot of the major appliances with them. There is nothing that I can do to help these new homeowners.
You also have to have a complete title search done before you go to closing — even if you plan to pay all cash. Distressed properties can carry a lot of problems — such as tax liens, unpaid assessments, or judgments against the current owners.
Are you planning to buy a new-built home from a developer? Is the home ready for occupancy or will the builder complete the house only after you sign a sales contract? If the home has not been finished, your contract must contain an absolute, firm settlement date. Many new-home sales contracts contain what is known as a “force majeure” clause, which basically is a catch-all phrase for developers to say, “Sorry, your house won’t be ready for several more months, because of matters outside of my control.” I recommend deleting that concept from all new-home (or condominium) sales contracts.
Additionally, most new-home contracts are, in my opinion, completely one-sided in favor of the developer. For example, although the house may not be ready for settlement for several months, you are obligated to get firm financing immediately. Should interest rates increase — as they may very well in the coming year — you may be stuck with a monthly mortgage payment that you did not anticipate or cannot afford. You should be required to get a mortgage loan commitment only when the builder is ready to sell it to you. You can, however, get a preliminary letter from your lender (I call it a “comfort letter”), which will satisfy the seller that you are a serious buyer; but this is not a firm loan commitment.
Are you on the board of directors of your community association? If so, is your money secure? This past year, there have been several cases throughout the country where the property manager embezzled millions of dollars of association funds. There are a number of steps that must be taken to protect those funds, such as:
- all checks over a certain amount must be co-signed by a board member;
- all reserve accounts can be accessed only by two board members, and not the property manager, and
- proper insurance coverage must be in place. You should consult your insurance agent for more details.
Finally, I have to repeat my longstanding plea to mortgage lenders. Please simplify your legal documents so that every consumer can understand the terms and conditions that are imposed by the promissory note and the deed of trust. And why not go back to the good old days when potential homeowners had to sign only four documents: the note, the mortgage, the settlement sheet (called a HUD-1) and the Truth-in-Lending statement?
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.