It's a Jungle Out There

Lots of buyers looking, not a lot of inventory.  Bidding wars, multiple offers, lost opportunities.  The March 20, 2016 Business section of the Sunday Boston Globe has much to say about this topic.  Take a look.  Home Buyers' Blues.

When Your Appraisal Comes In Low

First in a series of articles addressing mortgage lending challenges...

You find the house of your dreams.  You sign a purchase and sale agreement containing a mortgage contingency, which allows you to get out of the deal and get your deposit back if you are unable to secure a mortgage commitment by a certain date.  You apply for your mortgage with a lender who has no doubt told you "no problem" and may even already have given you a pre-approval letter.  You think the process is just a formality.  Well, beware, my friends, because in today's residential mortgage lending industry, there is no such thing as an easy process.  One of the pitfalls along the way could be the scourge of the low appraisal.  If the appraisal comes in lower than the purchase price, and you intended to borrow 80%, your loan amount will be reduced in order to maintain an 80% loan-to-value ratio, meaning you have to come up with more cash to close.  You may not have the extra cash, or you may have earmarked it for some other purpose.  Yet, your lender has issued a loan commitment letter (though for the lower amount), so the seller argues that the mortgage contingency is satisfied.  What are you to do?
This article http://www.nytimes.com/2013/09/15/realestate/when-appraisals-come-in-low.html?emc=edit_tnt_20130912&tntemail0=y&_r=0 in the New York Times talks about your options with the lender.  As a buyer's attorney, I would always try to include in the purchase and sale agreement some language requiring that the property appraise for no less than the purchase price.  I also include language stating that if the appraisal is lower than the purchase price, the seller has the option to reduce the sale price to the appraised value or some other amount mutually acceptable to the buyer, and if they are unable to come to terms, then buyer can terminate and recover the deposit.  Without this protective language, a buyer might find themselves in a squeeze. 

Borrowing From Your Parents

Interesting article in today's New York Times about borrowing money from family members as an alternative to an institutional mortgage.  http://www.nytimes.com/2010/11/05/business/businessspecial5/05MORTGAGE.html?emc=tnt&tntemail1=y

Mortgage Interest Rates are Down Again

Besides being the most amazing assistant any professional could ask for, my intrepid sidekick Lynna Henderson is a news junkie. Thanks to her for pointing out this article in today's Wall Street Journal http://online.wsj.com/article_email/SB10001424052748704269204575270554112427046-lMyQjAxMTAwMDIwNzEyNDcyWj.html . If you missed the last refinancing wave, now is your opportunity!

Unemployed? Mortgage Relief May Be Available

The Obama administration recently announced modifications to the Home Affordable Modification Program (HAMP) in an effort to promote stability for the housing market and offer further assistance to unemployed homeowners having difficulty making mortgage payments. Under these modifications, mortgage holders are required to offer forbearance plans to all qualified jobless borrowers for at least three and as long as six months. Under the plan, monthly payments can be reduced to 31% of income or less, or even suspended entirely. Borrowers must meet HAMP eligibility requirements as well as submit evidence that they are receiving unemployment benefits. They must also be in their first 90 days of delinquency. For details on the current program, click here: http://makinghomeaffordable.gov/docs/HAMP%20Improvements_Fact_%20Sheet_032510%20FINAL2.pdf.

Jumbo Mortgages

If you have been in the market for a jumbo residential mortgage loan (over $417,000, with some exceptions) in the past year, you know how difficult it is to get that type of financing, and the rates have been most unattractive. Good news-- the New York Times is reporting that the stranglehold on jumbo mortgages is loosening up, and those loans are becoming more available at more attractive rates. Read all about it at http://www.nytimes.com/2010/04/04/realestate/04mort.html?emc=tnt&tntemail1=y. The article focuses on the New York tri-state area, but if it's happening there, it's bound to be happening in Massachusetts as well.

Good News for Boston Area Borrowers

The residential mortgage market has long made a distinction between two categories of mortgage loans depending on the amount being borrowed. “Conforming loans” are those up to a stated ceiling amount (currently $417,000) and “jumbo loans” are those in amounts above the conforming limit. Rates have historically been higher for jumbos than for conforming loans, and for some time now the differential in rates between conforming and jumbo loans has been substantial, making it significantly more expensive to obtain mortgages in high loan amounts.

As part of the 2008 economic stimulus package, Congress increased the ceiling amount for conforming loans in certain high cost areas around the country. In the Boston area, the conforming loan ceiling was raised to $523,750 for 2009. This has allowed borrowers to obtain higher mortgages at conforming rather than the higher jumbo rates. Congress recently passed legislation extending the increased ceilings through December 31, 2010. So for another full year, the conforming loan limits in the Boston area for single family homes and condominiums will remain at $523,750.

This is good news for those of you in the Boston area looking to purchase or refinance, as it remains possible for another year to obtain that higher loan amount at lower cost.

Attorney Representation in Residential Purchase and Mortgage Transactions

I represent many buyers of residential real estate, and I am often asked by clients whether or not I can, or should, represent the mortgage lender as well. This is a good question, and one worth spending a moment to discuss.

In Massachusetts, a residential mortgage loan must be prepared and closed by an attorney. In this context, the attorney represents the lender, but it is fairly common for a buyer to ask the mortgage lender to permit their own attorney to close the mortgage loan as well. Although a technical conflict, it is a conflict that is regularly waived by both buyer and lender because the interests of both parties are largely the same. Both want clear title, proper documents and all other matters to be in order for closing. It is extremely rare that the interests of buyer and lender become adversarial, but in those rare cares, an attorney acting in dual representation would be required to withdraw. In over 25 years of practicing real estate law, and in representing both buyer and lender in a majority of those cases, I have never been required to withdraw due to a conflict between the parties.

In my view, there are two compelling advantages to a buyer in having the buyer’s attorney close the mortgage loan: quality control and cost savings. From a quality control standpoint, most buyers feel there is comfort in knowing that the attorney they have engaged is also the one responsible for the important pieces of due diligence and preparation needed to get to closing, rather than an attorney other than the one they selected and with whom they may not be familiar. As to cost, regardless of who represents the lender, one of the buyer’s closing costs will be an attorney's fee to the lender's attorney to close the loan. This is generally a fixed fee determined by the lender and the attorney and quoted to the buyer on the good faith estimate of settlement charges. Because an attorney representing only the lender generally will not be involved with any matters outside the scope of the loan closing, a prudent buyer will also engage an attorney to handle the negotiation of the purchase and sale agreement and and any other matters that may arise strictly between buyer and seller. Depending on the buyer’s wishes, this personal representation may end upon execution of the P&S or may continue through and including the closing, and naturally, the buyer will pay a separate fee to the attorney for these services. If two attorneys are involved, there is a probability of overlap in the effort to reach the closing table, and the buyer may feel he or she is paying twice for certain services. Instead, if the buyer’s attorney closes the loan as well, all preparation is consolidated into one effort, thereby reducing any duplication of effort and thus reducing the total legal fees in the transaction.

Most, but not all, lenders will honor a buyer’s request to have their personal attorney close the loan, so long as that attorney is qualified, but remember that this request must be made early in the process before the lender assigns the transaction elsewhere. If you are buying residential real estate financed by a mortgage loan, and your attorney is experienced in the representation of mortgage lenders, I encourage you to consider asking your lender at the time of application to use your own attorney to close the mortgage loan as well. The odds are you will be quite satisfied with the outcome.

More new federal lending regulations

The federal government has been staying busy in its efforts to revamp the mortgage lending industry. In addition to the new regulations previously reported here, an article in today's New York Times explains additional limitations on lenders making high-cost mortgage loans to borrowers who cannot demonstrate a clear ability to repay the loan in the conventional manner. Borrowers with low credit scores or no ability to fully document their income will find it far more difficult to obtain mortgage financing. The full article may be found at http://www.nytimes.com/2009/09/27/realestate/27mort.html?emc=tnt&tntemail1=y.

Significant Changes to Mortgage Lending Disclosure Rules and Their Impact on Your Closing

The Mortgage Disclosure Improvement Act, which affects all residential mortgage loan applications submitted on or after July 30, 2009, imposes substantial additional compliance obligations on the part of mortgage lenders, in an effort to provide more transparency and fairness and to better protect consumers in making choices about mortgage financing. These new regulations are likely to lengthen the time it takes to close a mortgage loan. It is important that all parties involved in a real estate mortgage transaction understand these new regulations and consider their impact on the timing of the process. Following is a summary of the changes and how they may impact you:

1. A lender is now required to provide a good faith estimate of closing costs (GFE) and an initial Truth In Lending Disclosure Statement (TIL) within three business days after receiving a mortgage loan application. The lender may not collect any up-front fees from a borrower, except for a credit report fee, until the initial GFE and TIL are received by the Borrower.

2. No mortgage loan may close less than seven business days after the date on which the borrower is issued the initial GFE and TIL.

3. A home buyer must be provided with a copy of the appraisal not less than three business days prior to closing.

4. If the Final Truth-In-Lending Disclosure form (TIL) indicates an increase of .125% or more in the Annual Percentage Rate from the APR stated in the initial TIL, there is a mandatory 3 day waiting period before the loan can close in order to give the borrower an opportunity to review and agree to the new numbers.

These new regulations have the potential impact of delaying the timing of closing a mortgage loan. The ordering of appraisals may be delayed until the lender is able to collect the appraisal or application fee. A delayed appraisal may result in a longer time between application and when the lender issues a commitment letter and clears a loan to close. All of this means that the closing date set in a purchase and sale agreement between a buyer and seller may no longer be certain, since it is possible that the lender will be required to delay the closing in order to meet these new disclosure and timing requirements. In certain circumstances, these waiting periods may be waived by the borrower if it is determined to be "necessary to meet a bona fide personal financial emergency". It remains to be seen what constitutes "a bona fide personal financial emergency" and whether individual mortgage lenders will permit waivers as a matter of policy.

As a buyer, realtor or buyer’s attorney, you would be well advised to include a clause in your purchase and sale agreement which grants an extension of the stated closing date if required by the mortgage lender in order to satisfy these new regulations. Without that, a buyer might be caught in that no-man’s land between having a contractual obligation to close on a stated date or forfeit a deposit, but not yet having mortgage funds available from the lender. Query whether such a circumstance will qualify as a "bona fide personal financial emergency" which permits a waiver of the notice periods.

New Rules For First Time Home Buyers

When I started this blog, I was told that the first rule of blogging is to keep up with posting so readers stay interested. Somehow, that advice fell to my deaf ears over the summer. I won't try to make any unusual excuses, but instead will just renew my efforts to go back to regular postings, so that my loyal readers will again be kept informed of interesting developments in areas of the law that might affect them.

I will start by encouraging all potential first-time homebuyers to read Ron Lieber's terrific article in the September 11, 2009 issue of the New York Times, "Seven New Rules for the First -Time Home Buyer". Mr. Lieber has excellent advice on this topic in our current economic climate. Check it out at http://www.nytimes.com/2009/09/12/your-money/mortgages/12money.html?_r=1&emc=eta1.

More Trouble In Mortgage Land

The Boston Globe reports today what I have been seeing to be true: property appraisals are coming back at very conservative (read: low) values, and this is having a chilling impact on both sales and refinances of residential properties. A low appraisal may have the impact of reducing the dollar amount the mortgage company will permit you to borrow. Moral: whereas it used to be enough protection for a buyer to include a general mortgage contingency in an Offer to Purchase, these days it is prudent to include a specific additional contingency that the appraisal performed by the bank must indicate a value in at least the amount of the proposed purchase price.

The full text of the Globe article can be found here: http://www.boston.com/business/articles/2009/06/10/appraisal_discrepancies_put_some_home_sales_at_risk/

More In The Scam World

Continuing on the theme of the last post, it seems that regulatory bodies are starting to crack down on the companies taking advantage of homeowners in trouble. The New York Times reports today that Andrew Cuomo, state attorney general, is going after loan modification companies who are charging high up-front fees and delivering no results. Good work, Mr. Cuomo! Here is the link to the article: http//www.nytimes.com/2009/06/10/business/10loan.html?emc=tnt&tntemail1=y

... And The Scams Just Keep On Coming

For some unscrupulous types, troubled times represent an opportunity to take advantage of people when they are at their lowest. In today's Boston Globe, reporter Eileen AJ Connelly reports on yet another type of scam that is being perpetrated against homeowners in financial trouble. This new industry of "foreclosure rescue companies" purports to offer troubled mortgagors assistance in working out loan modifications. They disseminate written materials which look like official IRS or governmental communications but in fact are not. These companies prey on unsophisticated homeowners who may be grasping at any way to keep from losing their homes. The full article can be found here:
http://www.boston.com/business/personalfinance/articles/2009/05/29/if_youre_in_trouble_with_your_mortgage_beware_of_those_who_offer_to_help/

Once again, let the buyer beware. Don't be fooled!

Thinking of Buying a Condo?

Secondary mortgage market lenders have implemented a new and stricter set of lending guidelines which may make it more difficult for some buyers to purchase a condominium. Some of the new regulations include:

1. At least 70 percent of units in a new complex must be sold or under contract for purchase as a principal residence or second home.

2. No more than 15 percent of units in a complex may be 30 days or more past due on condo fees.

3. Insurance requirements have been made stricter.

4. Buyers must make a down payment of at least 25 percent to avoid a higher fee or interest rate.

Read the full report in the May 23, 2009 issue of the Boston Globe at http://http://www.boston.com/business/personalfinance/articles/2009/05/23/new_rules_on_condo_loans_hindering_some_buyers/.

So You Want To Buy A House?

Whether you are a first-time or repeat buyer, the process of purchasing real estate can be daunting. Following is a basic step-by-step primer of the components of closing on your new home.

When you are ready to begin looking seriously for a property to buy, it will be to your advantage to have a pre-approval letter in hand from a mortgage lender which verifies the purchase price you can afford and the amount of mortgage for which you will qualify. A pre-approval letter will make your offer more attractive to a seller since it affirms your ability to consummate the purchase. You may obtain a pre-approval letter from any mortgage lender, and while you are not then obligated to use that lender for your actual purchase, if you establish a relationship with a lender at an early stage, the loan officer can be an additional resource for you throughout the process.

Pre-approval letter in hand, you find the house of your dreams and you want to submit an Offer. Many buyers feel that this is the time to engage the services of a qualified real estate attorney; others work with the realtor and wait to hire the attorney until the Offer is accepted. The realtor or attorney will assist you in preparing an Offer, most likely on the standard "Offer to Purchase Form" customarily in use. The Offer will contain the business terms, such as price, amount of deposit, and dates, should include a contingency for satisfactory home inspection, and may also include contingencies for mortgage financing and other matters. The assistance of an experienced realtor or attorney is indispensable in preparing an Offer which contains all of the appropriate protections for a buyer. Negotiations may ensue until the parties come to agreement on the final terms and execute the Offer document.

In Massachusetts, unlike in some other states, the Offer to Purchase is a preliminary document which is later superceded by a more comprehensive Purchase and Sale Agreement. Do not, however, be fooled into thinking the Offer is not a binding contract; courts have enforced executed Offers to Purchase even in cases where the parties failed subsequently to enter into a Purchase and Sale Agreement. Most Offers contemplate a period of one to three weeks to finalize and sign the P&S. If you have not already hired an attorney, now is the time to do so. In the period between Offer and P&S, you should have the property fully inspected by a qualified home inspector. The inspector will give you a written report and flag any items of concern; you may then elect to negotiate price adjustments or repairs with your seller as a condition of closing. If you are not satisfied with the results of the inspection or cannot reach resolution with the seller, under the inspection contingency you have the right to terminate the Offer and recover any deposits paid to that point. It is important that you address any and all concerns regarding property condition during this time, and that any terms you negotiate with the seller be incorporated into the P&S. With certain exceptions, once you sign the P&S, you are essentially agreeing to accept the condition of the property "as is" and may not thereafter raise issues relating to property condition except to the extent that it represents a change since the date of the Purchase and Sale Agreement.

So you now have an executed Purchase and Sale Agreement – congratulations! If you have not already settled on a choice of mortgage lender, you should do that without further delay and submit a complete mortgage application by any applicable deadline in your mortgage contingency, if any. At the time of application, your lender should give you a Good Faith Estimate of Settlement Charges, setting out the closing costs you will expect to pay. That document, and the Truth In Lending Disclosure Statement, allow you to compare loan products among various lenders. Your lender will process your application and issue a Loan Commitment Letter. If you have a mortgage contingency deadline in your P&S, be sure you receive your written Loan Commitment Letter before that deadline expires.

In Massachusetts, closings are conducted by attorneys rather than by title or escrow companies. The attorney who represents the lender and acts as settlement agent may be your attorney, or it may be a different attorney selected by the lender. It is quite common that one attorney represents both the buyer and the lender, and although this does technically constitute a possible conflict of interest, this conflict is regularly waived by the parties because the interests of the buyer and lender are very much the same. For a buyer, I believe there are two advantages to having your attorney handle the entire transaction. The first is for peace of mind—you no doubt have shopped carefully for a qualified and recommended attorney to represent you, so it only makes sense to have that attorney handle the important roles of examining title, preparing documents, and acting as settlement agent. If the lender chooses another attorney for those responsibilities, you have no input on quality control. The second advantage is lower cost. One of the closing costs customarily paid by a borrower (unless you get a "no-closing-cost" loan) is the attorney’s fee for the lender’s attorney. If two attorneys are involved, there is a certain amount of overlap which is likely to result in some duplication of fees paid. If your attorney also represents the lender, you eliminate that duplication of effort, which results in a lower total legal fee. In selecting a lender, it is always worth requesting, or even requiring, that your attorney also be permitted to represent the lender and serve as settlement agent.

Once your loan application is submitted, you can take a bit of a breather, as most of the work from then on belongs to the attorneys. The one exception is that you must procure homeowners insurance coverage to take effect as of the closing date. You will be required to pay the premium for the first year in full, and to provide the lender prior to closing with an insurance binder evidencing the coverage and naming the lender as an additional insured.

Prior to closing, the attorney will arrange for a title professional to search and examine the public records for information related to the property's title. The attorney will notify the seller of any defects in title, and those must be dealt with before the property can change hands. Closing will not occur until title to the property is clear. The one exception is that outstanding current mortgages taken out by the seller from institutional lenders may be paid off out of sale proceeds with the Mortgage Discharge to be recorded after the closing. It is the attorney’s responsibility to attend to this and follow up to record the proper Discharges.

Finally the day of closing will approach. The settlement agent will prepare the HUD-1 Settlement Statement. The "HUD", as it is known, outlines all of the costs for both the buyer and seller associated with the closing. Your costs will include those items shown on the original Good Faith Estimate (with possible modifications), as well as costs originating out of the attorney’s office. You will be offered the option to purchase an Owner’s Policy of Title Insurance, which I do recommend (see previous blog entry on this topic). You will be provided with a copy of the HUD in advance of closing and asked to obtain one bank check for the total amount due. It will not be necessary to bring multiple checks to closing; instead, it is the job of the settlement agent to divide your funds and disburse them in accordance with the HUD.

On closing day, all parties will meet at the office of the lender’s attorney or at the applicable registry of deeds. You will sign a seemingly endless number of documents that will be explained by your settlement agent, including, most importantly, a Promissory Note, which is your promise to the lender to repay the funds being advanced, with interest, and a Mortgage, which puts a lien on the property to secure your obligations under the Promissory Note. The seller will deliver a Deed which transfers title to your name. Following signing of all documents, the attorney will arrange for the recording of the Deed and the Mortgage at the applicable registry of deeds. The recording of the documents is the final step in the process and represents the moment when everything is completed. Upon recording, you become the new owner of both a house and the debt that you incurred to purchase it. Welcome to the American Dream!

Short Sales

In today’s economy, it is not so uncommon that a homeowner may have more mortgage debt on his property than the property is worth. If the homeowner is unable to afford the payments and is forced to sell the property, he must negotiate a "short sale" with the mortgage lender. In a "short sale", the lender agrees to accept net proceeds of a sale which are lower than the outstanding loan obligation, and forgive the rest of what is owed on the mortgage. By accepting a short sale, the lender avoids a lengthy and costly foreclosure proceeding, and the homeowner is able to pay off the loan for less than what he owes.

Lenders’ policies differ with respect to accepting "short sales". If you are in a situation where a "short sale" might be an option, before you put your property on the market, you should contact your lender to explore whether they will consider accepting a proposal for a "short sale".

Generally, in order for a lender to agree to a "short sale", the following must pertain:
1. The homeowner must be in or near default under the mortgage.
2. The lender will do an appraisal of the property to verify that the value of the property has fallen below the outstanding loan balance.
3. The lender will request financial information from the owner to support his argument that he cannot afford the payments and does not have sufficient assets to pay off the loan in full. The homeowner must prove that a serious hardship exists, such as loss of employment, illness, death divorce or bankruptcy.
4. If the lender approves the "short sale" based on the appraisal and the homeowner’s financial documentation, the property should be marketed for sale subject to approval of the mortgage lender. The lender must review and approve the terms of the sale and the purchase contract as a condition of closing.
5. As a further condition of approval, the lender will also require the submission of a proposed closing settlement statement. This statement should set out the closing costs to be paid out of sale proceeds and the projected net proceeds which the lender will receive.

"Short sales" are not for the faint of heart. The process can be fraught with peril, beginning with the challenge of even identifying the correct person in the correct department of the lender's operation to whom to submit a request. The paperwork can be substantial, and the lender is likely to move only at its own pace regardless of the time frame to which buyer and seller may have agreed. Nevertheless, for a homeowner in a substantial hardship situation who cannot afford the payments and does not have assets to pay off the loan in full, a "short sale" can be the way out of a very difficult situation.

Good News for Buyers

Not such good news for sellers, but CNN reports a record 18% drop in home prices over the last year: http://money.cnn.com/2008/12/30/real_estate/October_Case_Shiller/?postversion=2008123009. Prices are down, interest rates are at their lowest level in 37 years... what better market conditions could exist for a potential buyer? If you have been thinking about a new home purchase, this is a great time for you, especially if you don't have a property to sell. So go ahead, do your part to give our ailing economy a shot in the arm. It's patriotic!

One Story that Explains The Mortgage Crisis

Thanks to my assistant, Lynna Henderson, for pointing me to the attached article in the International Herald Tribune recounting the activities of Washington Mutual over a several year period. Amazing stuff! http://www.iht.com/articles/2008/12/28/business/wamu.php?page=1

More on the refinance craze...

CNN reports a frenzy of refinancings! Should you join in? Read this special report at CNNMoney.com: http://money.cnn.com/2008/12/24/real_estate/when_to_refi/?postversion=2008122414.