 Jack Guttentag
Founder, Upfront Mortgage Broker's Association
When a presidential election falls in the middle of a financial crisis, it is
not surprising that we are besieged with misinformation. Much of it is
finger-pointing about responsibility for the absence of effective regulation
that would have stopped or moderated the crisis. This article aims to provide
some perspective on this issue.
Political responsibility for inadequate regulation: There are two sectors
where more extensive regulation might have made a difference. These are the
investment banks and the government-sponsored enterprises (GSEs) of Fannie Mae
and Freddie Mac. Both sectors were major players in the events leading up to the
crisis.
In 2004 the U.S. Securities and Exchange Commission (SEC) adopted a rule that
pretty much allowed the investment banks to regulate themselves. While a number
of other factors were involved in this decision, the commission's belief at that
time was that self-regulation would be more effective than SEC regulation. This
policy was consistent with the free market ideology of the Republican
administration.
In 2003, efforts to bring the GSEs under tighter regulatory control were
defeated in Congress. This was primarily the work of Democrats, who feared that
tighter regulation would crimp the ability of the GSEs to meet affordable
housing goals.
I call it a tie. I also hasten to add that had both financial sectors been
subject to regulation, an only slightly less severe crisis would have occurred
anyway, for reasons explained below.
Deregulation, meaning the scrapping of existing regulations, was not a factor
in the crisis. The only significant financial deregulation legislated in the
last three decades applied to commercial banks. Restrictions on where they could
branch and on their involvement in investment banking were both removed. Most
economists, including me, believe that these actions made the banks stronger
than they would have been otherwise.
Regulation in itself is a weak defense against financial crises. One major
reason is that it tends to look backwards, similar to generals fighting the last
war. The savings-and-loan (S&L) industry was subject to very extensive
regulation in the 1970s, but that did not prevent the subsequent crisis. The
problem was that the wrong things were regulated.
The regulatory system was geared to preventing S&Ls from taking on too much
default risk because historically that had always been the major problem. The
exposure of S&Ls to interest-rate risk was not controlled. The associations were
allowed, even encouraged, to make long-term fixed-rate mortgages financed with
short-term deposits. When market interest rates exploded in the early 80s, the
cost of deposits jumped, income from mortgages barely changed, and the industry
began to bleed red ink.
The policy changes that were introduced following the S&L crisis were largely
designed to prevent another crisis of that type. Among other things,
associations were authorized (and encouraged) to write adjustable-rate mortgages
(ARMs) on which rates would adjust with the market. This would make S&Ls as well
as banks less vulnerable to swings in market rates.
However, ARMs carry more default risk than fixed-rate mortgages, and as the
years passed, interest-only and option ARMs evolved that carried substantially
more default risk. As the system became increasingly secure against an
interest-rate shock, it became increasingly vulnerable to a default shock.
Preventing a default shock through existing regulatory tools is extremely
difficult. The core tool is capital requirements: The amount of capital
including reserves that firms are required to have to cover the risk of losses
from future defaults. The problem is that nobody knows how large future default
shocks will be.
Regulators have no better foresight than the firms they regulate. The
statistical models used by both are based on past experience. A change in the
underlying structure of the economy can make such past history irrelevant, which
is exactly what has happened. Nobody anticipated the severity of the current
crisis because, relative to past history, it is off the chart.
But doesn't that simply mean that regulators, who are not motivated by
profit, should err on the side of caution? To a degree, yes, if that were not
the case, regulation would be utterly pointless. But capital requirements that
are higher than needed to meet potential future shocks not only reduce profits,
they also impose social costs, to which regulators are sensitive. Larger capital
requirements reduce loan volume and raise interest rates, a fact well understood
by the congressmen who resisted tightening regulatory controls on the GSEs.
Better regulatory tools are needed. We should take a hard look at applying
the system used to regulate mortgage insurance companies to mortgage lenders.
Under this system, lenders would be required to allocate a portion of every
dollar they receive in interest above some base rate to a reserve account that
would not be touchable for 10 years except in an emergency. The higher the
interest rate, the larger the payment to the reserve account.
Can we prevent it from happening again? Yes, the next crisis will almost
certainly be different.
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 |
5.875% |
6.003% |
| 7/1 ARM |
6.375% |
6.510% |
| 15-yr Fixed |
5.875% |
6.096% |
| 30-yr Fixed |
6.250% |
6.384% |
Rates are current as of 11-01-08, 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: We bought a second home a year ago where we've spent very little time (a few days here and there) until recently. We recently discovered a number of problems including an inadequate radiant floor heating system -- we can't get heat past 60 when its 30 or below outside (this alone may cost $25,000 to fix (seller says he never had a problem); the cooktop vent exhausts indoors in violation of manufacturer specs; the window wall is bowing, and window cracking indicates a load-bearing structural issue; and leaks are visible at almost every rafter-to-wall seam ... we can see outside! What are our rights in this situation? We paid $1.5 million for this 2,200-square-foot home.
--Vikki
DEAR VIKKI: You paid a lot of money and noted that you had an inspection.
Did you see the house yourself before you bought it? Have you discussed the
situation with your home inspector? He may have some culpability if he
missed all of those things.
The seller claims that he never had any of the problems you described.
Most sellers say that; sometimes it's true, and sometimes it's not. But
proving the truth in a court of law is not easy. Furthermore, the fact that
you discovered the problems a year after you took title will be a defense
that the seller's attorney will raise if you file suit. The seller will take
the position that if there are problems in the house, they occurred after
the seller sold the house.
You have to do a lot of investigation. Talk to neighbors -- did they hear
your seller complain about various things in the house? Check with local
repair companies to see if they remember working on the house before you
bought it.
If your state has a "seller disclosure" law, read the disclosure
carefully. If you believe that you can prove that the seller misrepresented
the condition of the house, you may have a stronger case based on the
erroneous statement.
I tell all of my clients that litigation is expensive, time-consuming and
uncertain. Sometimes the better course is to accept the fact that you bought
a lemon and pay the moneys to fix it up.
DEAR BENNY: We sold a rental condo in 2001 via a tax-deferred 1031
exchange replacing it for another rental. We moved into the home in December
2006, making it our primary residence. How long do we have to live in the
home in order to qualify for the Internal Revenue Code 121 exemption? --Mike
DEAR MIKE: Because you obtained the replacement property as part of a
1031 (Starker) exchange, you are not eligible for the up-to-$500,000
exclusion of gain until five full years have passed. If, for example you
acquired the property on Aug. 1, 2001, you could not claim the exclusion
until Aug. 2, 2006.
Clearly, you meet the five-year test. However, you also have to meet the
use test. In order to claim the exemption, you have to use the property for
two years out of the five before sale. Since you moved into the house in
December 2006, if you want to take advantage of the gain exclusion, you must
wait until December of this year (2008) before you sell.
DEAR BENNY: I presently own my home in a homeowners association. The
association has rules that require their approval for most changes a
homeowner wishes to make to the exterior of the residence. They also
prohibit some things such as awnings, storage sheds and basketball hoops
affixed to the building.
In 2001, I added a canvas, remote retractable awning over my deck. No
one from the association contacted me about it until one month ago when I
received a letter advising me the awning must be removed. The letter said
they allow alternatives to awnings such as umbrellas, canopies, trees, arbor
or a permanent roof. None of these appeal to me.
Can an association enforce such prohibition rules? If I refuse to
remove the awning, what action can the association take against me? Their
demand can be appealed, but I feel that would be useless. Is it worthwhile
for me to obtain legal counsel in this matter? --Jack
DEAR JACK: Many community associations (homeowner associations or
condominiums) have architectural control rules and regulations. It is quite
common to require that homeowners obtain approval before making any
additions to the outside of the property.
Whether this is right or not -- fair or not -- is unfortunately
irrelevant. If these rules are valid, every homeowner including you must
abide by them.
However, there are many defenses that you can raise, which means that you
must appeal their decision. I also recommend that you retain local counsel
who understands -- and practices -- community association law.
Perhaps your best defense is the passage of time. There is a concept in
law called "laches"; this means that since the association waited such a
long time before it sent you the infraction notice, they are barred, or
estopped, from trying to enforce their rules at this late date. There may
also be a statute-of-limitation defense.
But it is important to fight the association. If you do nothing, they can
file a lien against your property. Worse yet, they can go to court and ask a
judge to force you to take your awning down.
These control committees have often been called the "local KGB." They
have a lot of power, but must use it properly.
DEAR BENNY: I am a 43-year-old teacher who bought a home with my
mother 12 years ago. Recently my mother has developed health problems, which
caused her to lose her part-time job. Her pension does not allow her to live
on her own. Due to the loss of income she has decided to declare bankruptcy.
She owes more than $30,000 on credit cards. I do not want her credit to
affect mine or to lose my home. Selling at this time is not an option. Would
the best course of action be to have her sign the house over to me? If so,
what do we need to do? If not, what do you suggest? --Rebecca
DEAR REBECCA: My first suggestion is that you immediately retain a local
attorney who understands bankruptcy. I am not a bankruptcy attorney, but do
know that some transactions may be set aside by a bankruptcy trustee if they
are made within a certain period of time. For transactions between
relatives, the trustee can look back one full year. This is known as a
"preference in bankruptcy."
Furthermore, there are tax consequences if the house is transferred to
you.
Is there any way that you can assist your mother with her credit-card
debt? Have you or your mother talked with the credit-card company? They may
be willing to arrange a payment plan, so that your mother will not have to
file for bankruptcy protection.
DEAR BENNY: We are going to build a house for my mother on a separate
lot next to our house. It will be in my husband's and my name. What is the
best way to handle this: treat it as rental property or form a limited
liability company (LLC) and put the house under the LLC's name? --Allana
DEAR ALLANA: I can't provide you specific legal advice, but I like the
idea of taking title to the house in the name of an LLC. You asked if it
should be a rental property or an LLC? It can be both. You title the
property in the name of an LLC, and rent it out to your mother. If you want
to take some tax benefits, you should have a standard lease, whereby your
mother agrees to pay you rent. The rental should be based on the fair market
rental value, but because it is your mother and you will not need a real
estate agent, you can reduce this by approximately 15 percent. If your
mother cannot afford the rent, you can gift her tax-free up to $12,000 per
year from you and the same amount from your husband.
Talk to a local attorney about setting up the LLC.
Copyright 2008 Benny Kass
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 Dian Hymer
Realtor, Author
Negotiation is back in style. It's not uncommon for buyers and sellers to
have many rounds of counteroffering back and forth before they arrive at a
contract that is completely agreeable to all involved. When this is
accomplished, the contract is ratified.
However, there is another important element involved in ratifying a contract.
Until a residential purchase contract is completely signed, and the final signed
documents are delivered back to the other party or that party's agent, the
listing is not sold.
Let's say you decide to offer the sellers less than their asking price. They
don't accept your offer, but issue a counteroffer. Before you respond to the
seller's counteroffer, another buyer makes an offer. If you haven't signed the
sellers' final counteroffer and delivered it back to them, they can withdraw
their counter and sell the house to someone else.
Or they could decide to withdraw the counteroffer to you and issue a new one.
This time it could be a multiple counteroffer if the sellers also decide to
counter the other buyer's offer. You end up in a multiple-offer competition,
which often means paying more or not getting the house at all.
You can't rely on verbal negotiations when you're buying or selling real
estate. To be binding on the parties involved, real estate contracts and the
addenda to them must be written.
HOUSE HUNTING TIP: Timing is critical. If the seller issues you a
counteroffer you can live with and you want the house, sign the document as soon
as possible, even if the seller gives you several days to think about it. During
that time, another buyer could make an offer and your counteroffer could be
withdrawn.
After you sign the counteroffer, make sure that your agent delivers it to the
sellers or their agent immediately. Whoever receives the document should sign to
acknowledge receipt of the document so that there's no question that the
contract is ratified.
Then if another buyer wants to make an offer, you won't have to compete or
risk losing the house altogether. Once you have a ratified contract in place,
the sellers can negotiate with other buyers, but only for backup position
subject to the collapse of your contract.
Don't let yourself be lulled into thinking that because the housing market is
generally slow there's no chance you'll end up in competition. The best listings
-- ones in good condition and priced right for the market -- can sell quickly,
particularly in areas where the inventory is low.
Many buyers have busy work or travel schedules. Often you find the right
house to buy at the least opportune time in terms of what else might be going on
in your life. Make sure that your home purchase contract states that faxed
signatures are binding. This could save you hours of driving in traffic to sign
a critical document in time.
Sometimes faxes aren't the answer. If you'll be available only by phone or
e-mail, consider giving power of attorney -- one specific to buying a house in a
certain area -- to someone that you trust completely. This person should not be
your real estate agent. It should be someone who will be available on short
notice.
Electronic signatures are becoming more popular. But, they haven't become
standard in the home-sale business. If a seller who has had no experience with
electronic signatures is considering a couple of offers -- one with electronic
signatures and one that was signed in person -- he would probably feel more
comfortable accepting the latter.
THE CLOSING: That is, unless the price on the electronically signed offer is
a lot higher.
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 Bianchini
Contractor, Author
High energy prices are taking their toll on just about everyone this
year, so it's important to do whatever you can to create and maintain an
energy-efficient home. Fall is the ideal time for weatherization projects,
so this year's fall checklist is centered around what you can do to create a
warmer home that has less impact on your wallet.
___Check all insulation levels: Improving insulation levels can be
a highly effective way of increasing your home's comfort and energy
efficiency, so make it a point this fall to check the amount and condition
of all visible insulation. This includes the attic, underfloor, kneewalls,
skylight shafts and ductwork. A call to your local utility company will tell
you what levels are considered optimum for your area, and if repairs are
needed and you don't want to undertake them yourself, they can also
recommend qualified insulation and weatherization contractors.
___Check and seal heating ducts: Crawling around in the attic or
crawlspace isn't anyone's idea of a fun afternoon, but it's the only way to
examine and repair your heating ducts. Check for gaps between ducts and
fittings, and seal them with a quality metallic tape -- not regular duct
tape, which doesn't last. Also, check to be sure that all of the ducts are
up off the ground and adequately supported.
___Check weatherstripping: Gaps around doors and windows -- no
matter how small or seemingly insignificant -- allow cold outside air to
enter your home. The result is uncomfortable drafts and wasted energy.
Closely examine each exterior door and window to see that the
weatherstripping is doing its job. There should be no visible gaps, the
weatherstripping should be clean and undamaged, and windows and doors should
operate smoothly and close completely. If any repairs are necessary, you can
find everything you need at your local hardware store or home center, or
contact a qualified weatherization contractor or handyman.
___Seal exterior penetrations: Weatherstripping is not the only
culprit when it comes to air leaks. Spend a day working your way around the
outside of the house with a caulking gun and a couple of tubes of
high-quality, flexible caulking, and seal any gaps around window and door
trim, plumbing and electrical penetrations, flashings and other openings.
___Add outlet gaskets: Shut the power, remove switch and outlet
plates, and add precut foam outlet gaskets, which are available from home
centers, hardware stores and other retailers. Do the interior walls as well
as the exterior walls, and don't forget exterior outlets as well. It's a
small thing, but small things definitely add up.
___Change furnace filters: Fall is always the perfect time to put
in new furnace filters. It's another one of those simple and inexpensive
tasks that can add to your home's efficiency and your family's comfort.
___Upgrade your thermostat: An older thermostat that's a couple of
degrees off can result in a lot of wasted energy, and so can forgetting to
set the thermostat down at night. You can take care of both of those
problems with an upgrade to a programmable thermostat. Programmable
thermostats are digital and typically very accurate, and they allow for
easy, set-and-forget programming of temperatures for different times of the
day, including energy-saving nighttime and workday setbacks.
___Clean and service fireplaces and woodstoves: Make sure that
your gas, wood, and pellet-burning fireplaces and stoves are clean and
operating correctly. Check door gaskets, blower operation, flues and flue
caps, thermostats and all other aspects of these important appliances. If
you're not sure what to look for or how to do any cleaning or repairs, check
with a qualified, licensed fireplace shop or chimney sweep.
___Install a carbon monoxide detector: If you have any gas
appliances in your home, there is always the possibility of carbon monoxide
poisoning should any of them ever malfunction. This is a very real danger,
especially as we close our homes up for the winter, so make it a point this
fall to install a carbon monoxide detector. These lifesavers are
inexpensive, easy to install, and available from most home centers and
hardware stores.
___Check smoke detectors: Same warning every fall -- check to see
that your smoke detectors are operating correctly, and install fresh
batteries. If you have an older home with a limited number of detectors,
install additional ones outside each bedroom, and make sure that you have at
least one on each floor of the house.
Remodeling and repair questions? E-mail Paul at paul2887@ykwc.net.
Copyright 2008 Inman News
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