Issue: #10

December, 2008

In This Issue

MORTGAGE FRIGHT SPREADS LIKE WILDFIRE

Jack Guttentag
Founder, Upfront Mortgage Broker's Association


The mortgage world has suddenly become very frightening to many people who have no real reason to be frightened.

Their mortgages are in good standing, and they are not having any trouble meeting their payments, yet they are in distress -- in large part, because so many around them are in distress. Fear is contagious. The only antidote I know is good information.

One important thing that people suffering from mortgage fright often forget is that a mortgage loan is a contract between two parties, and it cannot be violated by either without the permission of the other.

If the loan is sold, the purchaser replaces the originating lender as the contracting party and is subject to the contract in the same way. If the servicing of the loan is sold, the servicer as the agent of the owner is required to abide by the terms of the contract, and the same holds if the loan is placed in a pool as collateral for a mortgage-backed security.

The first two letters below are from borrowers who do not have a problem with their current mortgages but are distressed about what might happen in the future to cause them a problem.

"Can whoever owns my mortgage demand immediate repayment of the balance? I know it doesn't make sense, but crazy things seem to be happening ..."

Mortgage contracts do not give the lender the right to demand immediate repayment. Balloon loans require repayment at the end of the balloon period, but that is stated in the contract. Fortunately, there are not too many balloon loans around.

Even if lenders had the legal right to demand immediate repayment, they wouldn't do it because it would only generate more foreclosures. For the same reason, borrowers with balloon loans in good standing who are unable to refinance anywhere else will find that their existing lender will prefer to refinance them than to foreclose.

"When the rate on my ARM adjusts next year, the new rate should be the one-year Treasury rate at the time, plus a margin of 2.5 percent. Last year, however, my lender replaced the Treasury rate on new loans with LIBOR. Because of the crisis, LIBOR is now 2.5 percent higher than Treasury. Can my lender switch my ARM to LIBOR when my rate is adjusted?"

No way, the rate is adjustable but not the index used to calculate it. Your ARM contract stipulates the index and its source, and the only circumstance in which a different index can be substituted is in the event the specified index is no longer available. The different Treasury indexes used by ARMs are compiled by the Federal Reserve and there is zero likelihood that they will disappear.

I wish I could answer the next letter with the same degree of certainty.

"We bought our house just last year with 100 percent financing, now it is worth $40,000 less than we owe. I don't know what to do. Do we keep making mortgage payments or do we stop? A friend has advised us to lock the door and send the key to the lender, but that doesn't sit very well with me. We've always met our obligations and have good credit. What do you advise?"

This letter is typical of many I have received from borrowers who are "upside down" in owing more than their houses are worth. I have a lot of trouble dealing with it because in good part it is a moral issue and my rabbinical credentials are weak.

My right-handed rabbi says that when you borrow money, you should pay it back if you can. During the many years when house prices were rising, he never once heard of a mortgage borrower offering to share the capital gain with the lender. There is no justification in forcing the lender to share the capital loss.

My left-handed rabbi rejoins that very few of the people who are upside down today enjoyed a capital gain on previous homes that they owned. Further, the borrower's major obligation is to his family, not to his lender. If the financial gain from letting the house go to foreclosure more than offsets the pain of having his credit trashed and having to find a new place to live, then that is what the borrower should do.

There is an economic dimension to this quandary. If those who are upside down could be assured that house prices had hit bottom and within a year or two they will be right-side up, there is little doubt that most would elect to stay the course. Unfortunately, no economist in good conscience can provide such assurance today.

Finally, there is a policy dimension. Upside-down borrowers would be encouraged to stay the course if they had some reason to believe that the government will help them get right-side up. Right now, the prospects for this are extremely murky, but don't write it off just yet.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

Loan Type Interest Rate APR
5/1 ARM 5.750% 5.846%
7/1 ARM 6.000% 6.055%
15-yr Fixed 4.875% 4.979%
30-yr Fixed 5.000% 5.078%

Rates are current as of 12-8-08, and are based upon a conforming loan amount, 740+ credit, full documentation, and a loan-to-value of 80% or less.

Click here for a custom rate quote

Upcoming Events & Economic Reports

Helpful Links

WILL PLAN TO AVOID CAPITAL GAINS TAX WORK?

Benny Kass
Attorney, Senior Member of Kass, Mitek & Kass, PLLC


DEAR BENNY: My 42-year-old son will move home next month. I am 65 and thinking of downsizing. I would like to place him on the deed when he moves in and after two years, sell my home. Since he is on the deed, will up to $500,000 be tax exempt? I know that there could be problems with this arrangement. Is this possible and what are the drawbacks with this arrangement? --Richard

DEAR RICHARD: First, what do you mean that you will "place him on the deed"? Will you be selling the house to him, or just adding his name to the deed? If the latter, there are potential tax complications. This would be treated as a gift. The law is quite clear that the tax basis of the person giving the gift (the giftor) becomes the tax basis of the person receiving the gift (giftee).

For example, let's say you bought the house many years ago for $100,000 and now it is worth $500,000. Your tax basis is $100,000, excluding any improvements that you may have made along the way. If you give half of the house to your son, his basis becomes $50,000. If you then immediately sell it for $500,000, your profit is $200,000 (half of $500,000 less your basis). If you have owned and lived in the house for at least two years, you can exclude the entire gain and pay no tax. But your son did not live in the house for two years. His profit is also $200,000, but he would have to pay the IRS $30,000 (based on the current 15 percent capital gains tax rate) plus any applicable state or local tax.

Now let's look at a sale after both you and your son have owned and lived in the house for two out of the five years before sale. You sell it for $600,000. The tax basis for each of you is $50,000. You have thus made a profit of $250,000 each. In this scenario, both of you can claim the $250,000 exclusion of gain and pay no tax.

You have raised an interesting plan, but do the numbers before taking any action.

DEAR BENNY: I used a Realtor to purchase my home 10 years ago. She represented me as a buyer's agent. I liked her very much and plan to use her again in the near future when I decide to purchase a new one. The Realtor, Sally, recently listed a house that I am interested in. The house went off the market for a short period of time and has reappeared with a new listing agent. Is it legal and ethical to hire Sally as a buyer's agent and have her provide me with information on the home I am interested in? Are there any limits as to what she can/cannot tell me about this property and owner's situation? --Eileen

DEAR EILEEN: So long as the property owner now has a new real estate broker, it is acceptable for you to use the other broker as your "buyer's agent." She can discuss everything with you except any personal financial information she may have obtained during the time she represented the seller.

However, I am not a big fan of the "buyer broker" concept. Why not consider asking the agent to assist you, but she can be the "selling agent." In other words, she will continue to be an agent of the seller but will help you in drafting the real estate contract.

This is the way real estate used to be sold. A seller listed the property with a "listing agent" and other agents brought potential buyers to the property. When a contract was finally entered into, the agent who presented that buyer was known as the "selling agent."

My concern about the "buyer broker" concept is that there is always the concern that the agent -- having learned information from the buyer (such as how much the buyer is prepared to pay for a house) -- may telegraph that information to the seller (or the seller's agent), so as to earn the commission. This is not a broad-brush attack against agents (and I know I will get a number of complaints from brokers), but many buyers over the years have had these kinds of problems.

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 benny@inman.com

Copyright 2008 Benny Kass

SHOULD I WORK WITH MORE THAN ONE AGENT?

Dian Hymer
Realtor, Author


Finding a good agent or agents to help you buy or sell a home can vastly improve the quality of your experience. Ideally, you want someone who is professional, trustworthy and diligent.

It's impossible to predict at the outset exactly how a purchase or sale transaction will play out. But, invariably there are bumps along the road. Good rapport and mutual respect make it easier to work through problems should they arise.

Even if you don't run into difficulties, there are a lot of decisions to make along the way. So, select an agent or agents who have good communication skills.

When you find an agent you like, it's tempting to envision using that agent for all your residential transactions. In many cases, that makes good sense. You have an established relationship that works for you.

Repeat home buyers who are selling one home and buying another one in the same location often find it easier to use the same agent for both transactions, particularly if it's someone they had good experience with in the past. Coordinating the two transactions can be easier if you're working with one agent.

However, if you're buying in a new housing development that doesn't cooperate with outside agents, you may have no other option than to use the developer's sales staff. Also, there are agents who work only with buyers. In this case, you'd need to use a different agent to sell your home.

HOUSE HUNTING TIP: Sellers who sell a home in one location and want to buy elsewhere should find an agent who specializes in that area. Some sellers are so attached to their listing agent that they want that agent to represent them in a purchase even though the agent has no expertise in the area. This should be avoided.

Be aware that there are some agents, particularly in the current sluggish market, that will offer to represent you in an out-of-area purchase. If the agent has no past experience selling homes in that area, he or she could be doing you a disservice. Instead, ask your agent to find you a superb agent to work with in the new location.

Usually, it's best to commit to working exclusively with the agent(s) you select. You're likely to get better service from an agent who is 100 percent committed to you, and who knows that you won't use the agent's time and then buy through someone else.

Sometimes, however, the inventory of the kind of home you're looking for is so scarce that you may need to let more than one agent know what you're looking for. Also, you may look in several areas at once and be best served by using more than one agent.

Some agents require buyers to sign a buyer representation contract. Before signing such an agreement, make sure you understand it. If it's an exclusive agreement, you could end up owing the agent a fee even if you were to buy a home through a different agent.

Also make sure that you can cancel the agreement without penalty if it turns out that you made the wrong choice and the agent is not doing a good job for you.

Even if you don't enter into a contractual agreement with a buyer's agent, you could find that what you thought would be a good working relationship turns out not to be. In this case, it's best to have a candid discussion with your agent about what's not working for you.

At that point, you can either end the relationship or you can give the agent a chance to improve the quality of service.

THE CLOSING: Never forget that you are in the driver's seat

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

AS HOME AGES, SOME DEFECTS UNAVOIDABLE

Paul Bianchina
Contractor, Author


Over time, many homes develop little nonstructural problem areas that need to be dealt with, and it seems like the older the house, the more of those little problems that occur. Here's some advice on fixing a few of the more common door and trim situations you might typically encounter.

Out-of-square corners

If you've tried installing trim in a corner and can't get the miter joint to come out right, it's probably because the corner is out of square -- meaning that it's not an exact 90 degrees. To rectify the problem, you need to get an exact measurement on the angle of the corner, then adjust your miter joints to compensate.

The easiest way to do this is with an adjustable bevel gauge, which can be purchased inexpensively at any hardware store or home center. The bevel gauge has a wood or plastic handle with a metal blade that's held in place with a wing nut. To use the tool, simply loosen the wing nut and place the handle in the corner against one of the walls. Move the blade until it's flat against the other wall and tighten the wing nut, accurately duplicating the angle of the corner.

Using a protractor, measure the angle between the handle and the blade then divide that number by two, giving you the angle of the miter cut you need to make. For example, if the angle of your wall corner measures 94 degrees, your miter cuts would each be 47 degrees instead of the standard 45 degrees (94 divided by 2 = 47).

Doors that sag and won't latch

Over time, a door's own weight will have a tendency to make the door want to sag down away from the frame at the top hinge. This can result in a door that rubs against the frame at the top corner, or that doesn't latch properly.

To correct the sag, remove one or two of the screws that hold the upper hinge to the frame and replace them with 2- to 3-inch-long screws that will go all the way through the door frame and into the wall framing behind. Drill a pilot hole first to make it easier to install the screw. As the screw is tightened, you should see the entire door frame pull up tight against the wall framing, eliminating the sag.

Removing the sag is usually enough to correct any problems with the door latching, since it pulls the latch on the door back into alignment with the metal strike plate on the door frame. If the door still won't latch, you'll need to make an adjustment in the strike plate.

Coat the face of the latch where it protrudes from the door with lipstick or crayon, and slowly close the door. When you open it again, you'll see where the lipstick has transferred marks onto the strike plate, giving you a good indication of how much the plate needs to move in order to have the latch fully engage it again. Unscrew the strike plate, and use a sharp chisel to mortise the door frame enough to allow the strike plate to move. Drill out each of the old screw holes and insert a piece of hardwood dowel coated with glue into the holes -- this seals off the old holes so the screws won't wander back into them. Finally, place the strike plate in the adjusted position, drill two new screw holes, and reinstall the screws.

Camouflaging defects

Exposed ducts, surface-mounted pipes, and miscellaneous bumps and bulges are all items you might encounter that you'd like to put under cover. The easiest and cleanest solution in most instances is to simply box over them, and blend them into the surrounding area as well as possible.

Start by measuring the protrusion at the widest point, and then figure how best to construct a cover. For example, if you have a piece of pipe sticking out of the wall an inch or two in one corner, the best solution is to build a small box that's open on one or two sides as necessary -- 1/2-inch or 3/4-inch plywood works well for this -- and slip it over the pipe, securing it with nails, screws or even adhesive, depending on the situation.

If, on the other hand, you have a duct running along the ceiling for three quarters of the length of the room, you'll probably need to construct a framework from 2-by-2s or 2-by-4s to box in the entire duct. Oddly enough, it sometimes looks best to make the box larger than it needs to be -- in this example, the box will probably be less obtrusive if you make it the entire length of the room, rather than stopping it three quarters of the way across where the duct stops.

After the plywood or 2-by frame is constructed, think about how best to cover it. There is often a temptation to cover things with inexpensive paneling, or to just leave the plywood as "good enough," but if the surrounding wall is drywall that's been painted or wallpapered, the new cover will look much better if you do whatever you can to match it to what's around it.

Remodeling and repair questions? E-mail Paul at paul2887@ykwc.net.