Hard Money Lessons

by Dan Krell © 2007
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The Federal Reserve System (the Fed) has offered advice about mortgage lending for many years. Just last week, the Fed met to discuss ways to address abusive lending practices. The Fed wants to get busy and try to create restrictions to change the sub-prime industry through what one board member called its “rule making authority” under the Home Ownership and Equity Protection Act of 1994 (HOEPA).

The Fed’s most recent action was initiated to thwart poor lending practices that have created a crisis in the housing industry due to the unusually high foreclosure rate. Although the Fed is on the right track, their authority with the HOEPA may have limited impact on the current crisis because many current foreclosures are due to purchase money mortgages rather than refinancing.

HOEPA was enacted in 1994 to address unfair and deceptive practices in mortgage lending. According to the Federal Trade Commission (FTC.gov), HOEPA does not cover mortgages to purchase or build a home, reverse mortgages, or home equities line of credit that are revolving (not closed ended).

When HOEPA was enacted, the mortgage industry was being abused by unscrupulous characters that made their fortunes by equity stripping. By targeting homeowners who had considerable equity in their home, the equity strippers would give the homeowner the cash they needed for home improvements, debt consolidation, or anything else they needed. The money did not come cheap, however, as the mortgages were usually high cost with rates that adjusted in two or three years.

Not only did these loan officers charge heavily for their service; they would come back every month or so to refinance the homeowner to a better rate. This was done until there was no equity left in the home.

The recent abuses in the mortgage industry that the Fed is reacting to are again one of deception and fraud, not for refinancing but in purchasing a home. In the fast paced buy at any cost recent “sellers’ market,” many home buyers were put into precarious mortgage situations with assurances and promises of low interest refinancing and rapid equity.

A lesson learned from “hard money” lenders. Hard money loans are typically private loans that are made against the property’s value, and sometimes do not take account for the borrower’s credit or income. To limit their risk, hard money lenders usually charge very high interest rates and limit the loan to about 60% to 70% of the value of the home. Additionally, the terms are kept short and usually have a final balloon payment. Each loan is “underwritten” based on the merits of the deal; basically if it makes sense the loan is approved.

Hard money is commonly used in commercial transactions, but is also used in residential lending. Many home buyers use hard money loans when traditional lenders will not lend, such as in purchasing a unique home or if the home buyer has very poor credit.

The mortgage industry is under pressure to make rapid changes while licking its wounds from recent foreclosure losses. Change needs to take place where the abuse is occurring. Rather than shaping a loan package to have the appearance of fitting the underwriting guidelines, why not have the loan originators take more responsibility in determining if the loan makes sense in the first place.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of July 2, 2007. Copyright (c) 2007 Dan Krell.

How Protected is your home?

by Dan Krell
© 2007

Have you thought about home security lately? According to the National Burglar & Fire Alarm Association (alarm.org), a Temple University study indicated that homes without a security system are almost three times more likely (2.2 to 3.1 depending on value range of home) to be broken into than homes with a security system.

The study also indicated that 81% of the intrusions into residential properties occurred into the first floor. Of these first floor intrusions, 34% occurred through the front door, 23% occurred through a first floor window, 22% through the back door, 9% through a garage, and 4% through an unlocked entrance. In another study, 41% of homes with alarm systems were burglarized because the system was not activated.

If you haven’t noticed, security systems have changed significantly over the years. What were once unsightly additions of window tape, boxes and other equipment to protect your home are now cleverly designed apparatus that appear part of the décor or at the very least inconspicuous. Older systems needed to be hard wired, meaning that actual wires and connections were installed behind the walls and onto windows to create a circuit throughout your home; when the circuit was broken the alarm was activated to alert the police.

Some newer systems include closed circuit TV. Some systems even have CCTV that is activated by motion sensors and have thermal imaging capability. Some newer technology is being implemented to not only deter burglars, but to identify them for prosecution.

When older systems were activated, police were notified by loud alarms and/or monitoring stations. Monitoring stations were once only notified by alarms through telephone lines, however, internet technology has allowed security monitoring via broadband connections. Additionally, newer systems can not only notify police electronically, but can send you a notification to your work or cell phone.

Many new homes are pre-wired for sophisticated security systems. If your home is not pre-wired, it can be costly to install a hard wired system because technicians need to cut dry wall and feed wire through your home.

If your home is not pre-wired for a security system and/or you don’t want to spend a lot on the installation of the system – don’t worry. Home security systems have many wireless options. In fact, wireless systems offer flexibility that hard wired systems do not, such as mobile panic buttons that you can carry in your pocket.

If you are considering a security system here are some tips to get started: get at least three estimates and compare all the equipment that will be included; get a detailed list of equipment being installed; determine whether the estimate is a purchase or a lease; ask for credentials from the sales representative and the installation technician; find out if the monitoring company notifies you or the police first; get clarification on the warranty and what it actually covers; make sure the alarm system has adequate instructions and support; find out who is responsible for repairs or upgrades; make sure you have a telephone company approved alarm jack if the system is to be connected to line.

Although we are protected by one of the best police organizations in the country, having a home security system can add a layer of protection that gives you peace of mind.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 25, 2007. Copyright © 2007 Dan Krell.

Considerations in choosing a real estate agent

by Dan Krell
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So you’re thinking of moving. If you are going to buy and/or sell a home you may be thinking of hiring a real estate agent to assist you. If you have bought or sold a home in the past, you know that there are thousands of real estate agents to choose from.

Choosing a real estate agent should be an objective as well as subjective process. You want an agent with experience and expertise, but you also want to make sure they listen to your needs and are patient with you. Additionally, you want to feel comfortable enough to trust them.

Choosing the right real estate agent is important because the agent that is chosen to represent you will have a fiduciary responsibility to you. As many home buyers and sellers don’t know, a fiduciary is someone who acts as a custodian for your rights and/or assets. The fiduciary has a responsibility to act with honesty and integrity, as well as act in your best interest and not exert influence on you or pressure you for their own or others interests. So, if the agent seems impatient, pushy or desperate you may need to look elsewhere.

Some people advise that your first step in choosing a quality real estate agent is to choose a broker or real estate firm first. However, the quality if an agent is not dependant on the firm. The quality of real estate agents varies from agent to agent; real estate firms have very good agents as well as agents that are less than perfect.

Whether you are interviewing an agent that was recommended or one you found in the paper, you should ask many questions about their knowledge, experience and expertise. You should also ask them if and how long they have been licensed.

Ask where the agent is licensed; not all agents are licensed in all jurisdictions. If your intention is to look at homes in Maryland, Virginia, and DC, make sure the agent is licensed in all three jurisdictions. If you are only looking in Maryland then they only need to be licensed in Maryland.

Once you have determined where the real estate agent is licensed, you can get an idea of their experience by asking how long they have been licensed. Someone who just received their license may not be as experienced in negotiating as someone who has been licensed five or ten years. If you are considering a novice agent, make sure they have some type of mentor that is training them. If the agent does have mentor, meet and interview them as well.

Additionally, you may want to consider working with a real estate agent who is a Realtor®. A Realtor® is a member of the National Association of Realtors® (NAR) and follows the NAR code of ethics. It has been said that the NAR code of ethics exceeds the ethics requirements of many state laws.

Finding the right agent is a process much like home buying. Through interviewing real estate agents you can find out the agent’s professionalism, training, and knowledge base. Additionally, you can find out if the agent’s personality clicks with yours, as you will spend time together selling or buying your home.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 18, 2007. Copyright © 2007 Dan Krell.

Why Litigate when you can Mediate?

by Dan Krell

You may find it odd that a Realtor is talking about mediation; after all I am not an attorney. Although a majority of real estate transactions close without incident, many are very happy endings indeed (no pun intended); disputes do arise.

Many disputes between home buyers and home sellers get resolved through normal lines of communication. However, communications can break down and a resolution far off.

If you do have a real estate dispute of any kind, please consult your attorney. But before you sue in court, discuss mediation with your attorney an alternative vehicle to resolve your dispute.

For those who don’t know, mediation is a process of bringing the parties together in an attempt to communicate differences and reach an agreement through a trained and neutral third party (the mediator). The mediator does not make judgment nor does the mediator pass any binding decisions. The mediator is trained in special techniques to facilitate the process of mediation.

The Maryland Association of Realtors (MAR) describes the benefits of mediation as follows (MDRealtor.org): mediation is faster than litigation, as litigation can take as long as several years for resolution while mediation can take as long as sixty days; mediation is less expensive than litigation as both parties split the cost and no one pays an excessive amount; mediation is non-adversarial and focuses on a win-win result, while litigation focuses on the disagreement and has a win-lose outcome; mediation results in an agreement that is mutually agreed upon by the parties;

Another benefit is that the parties who decide to pursue mediation retain the right to use other legal remedies. If mediation does not work the parties involved can pursue arbitration or litigation as if the mediation never took place.

Although mediation is not appropriate for every situation, common disputes that have been successfully resolved through mediation include repair and inspection issues, costs for repairs, missing fixtures, earnest money deposits, and claims of misrepresentation about property and appliance condition. Certainly, criminal allegations should be pursued by legal means not through mediation. Similarly, unethical behavior by Realtors should be referred to the real estate commission.

As a service to consumers, the MAR offers mediation as a means to resolve real estate disputes in Maryland. The MAR has established uniform procedural guidelines to maintain standardization and homogeneity in the process. These guidelines can be obtained through the MAR Mediation Service Provider, as indicated by the MAR.

Before mediation begins, the parties must have a written agreement to mediate. The agreement can be signed before or after disputes may arise. In fact, if you use the MAR purchase contract, there is a clause that states you agree to try mediation before litigation as means to resolve any dispute that arises from the transaction.

The next step is to submit the potential disputes to mediate and have a mediator selected. Although the mediator is selected by the mediation service, all parties involved must agree to the selection. All mediation sessions are typically held in the county where the dispute arose and are private and confidential.

I was once told that litigation results in unhappy parties regardless of the result. As a faster and inexpensive alternative, mediation is a means to resolve real estate related disputes agreeably.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 11, 2007. Copyright © 2007 Dan Krell.

Home Ownership Month

by Dan Krell

June is here! For many it means that summer is around the corner, school is ending, and trips to the beach. For Realtors and community groups, June is National Homeownership Month.

Since 2002, President Bush has declared June as National Homeownership Month. By doing so, the goal has been to increase minority home ownership to 5.5 million new home owners by the end of the decade. Despite a declining real estate market, home ownership is at record highs. The White House reports that there were 75 million American homeowners during the fourth quarter of 2006, while the homeownership rate was close to sixty-nine percent.

In keeping with the goal, the President and the Congress have passed a number of laws to promote home ownership including The American Dream Downpayment Act, HOME Investments Partnerships Program, and the Self-Help Homeownership Opportunity Program.

In 2003, The American Dream Downpayment Act was signed into law. The program was designed to offer down payment and closing cost assistance to low income home buyers. According to the White House, the program has helped over 21,000 families since its inception. Information for local participation and qualification can be obtained through the Montgomery County Department of Housing and Community Affairs.

The HOME Investment Partnerships Program, which was part of the Title II of the Cranston-Gonzalez National Affordable Housing Act, is a federal block grant that allocates almost $2 Billion annually to create affordable housing for low income families. This program has been so successful that it is reported that more than 143,000 families used this program to purchase a home during the 2006 fiscal year.

In keeping with the spirit of home ownership, the Self-Help Homeownership Opportunity Program was created. This program provides non profit organizations, such as the Habitat for Humanity (habitat.montgomery.md.us), the funds necessary to purchase home sites for the purpose of building or renovating by sweat equity and volunteer-based homeownership programs for low-income persons and families. Local programs, such as Habitat for Humanity, offer the resources to families to own affordable homes as well as retaining home ownership by making repairs that they could not otherwise make.

Looking ahead, the 2008 Federal budget includes funding for the “modernizing” of FHA (see my column from the week of May 17, 2007). The expansion of FHA will provide financing alternatives to sub-prime loans for home buyers while offering additional protection from and assistance for those in foreclosure.

Home ownership is the American dream. However for many families, it is still out of reach. Locally, the Maryland Association of Realtors, in conjunction with a coalition with home owners and those who want to be home owners, has created the League of Maryland Homeowners (leagueofmarylandhomeowners.com). The group is committed to making affordable housing available by searching and implementing solutions to the affordability crisis in housing.

There are many opportunities to assist others in their pursuit to home ownership. For example, the Tikvat Israel Congregation of Rockville is sending a contingent of high school students to New Orleans, LA later this month to assist the Habitat for Humanity effort in the still ravaged region.

Although we celebrate home ownership in June, we can make a difference year round from volunteering manual labor to as little as voicing your support for affordable housing initiatives.

This article was originally published in the Montgomery County Sentinel the week of June 4, 2007. Copyright © 2007 Dan Krell.