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. Copyright 2008 Jack Guttentag
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| 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
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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
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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. Copyright 2008 Dian Hymer
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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.
Copyright 2008 Inman News
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