Mortgage workout or workover?

by Dan Krell

Earlier in December, a new mortgage relief program was announced as the Bush-Paulson Mortgage Plan. The plan, although not yet approved nor agreed to by all parties involved, is intended to help those home owners who have sub-prime mortgages with interest rates that will adjust significantly higher. Proposed details, as revealed in a December 5th, 2007 Financial Times article, include a five year interest rate freeze for sub-prime adjustable rate mortgages that were dated between 2005-2007 and whose rates are to increase between 2008-2010. Lender participation will be voluntary. Additional borrower qualifications include having less than three percent equity in their home, not being more than sixty days behind on their mortgage payment, as well as demonstrating an inability to afford any mortgage increase (

Many Wall Street investors have criticized any workout plan as excessive government intervention in a market that is already correcting itself. Some in the industry have described such intervention as delaying the inevitable for those in foreclosure, explaining that many home owners who can not afford a rate increase now would possibly not be able to afford a delayed (five year) rate increase. Other critics include self described “responsible“ home owners who feel they work hard to maintain their credit and pay their mortgage timely; they claim that any government intervention to help those in foreclosure sends the wrong message.

Others, including Presidential candidates, have criticized the President for not doing enough to help those home owners already in foreclosure. For example, Senator Hillary Clinton (as posted on her website criticized President Bush’s plan and proposed an alternative plan that includes immediate foreclosure moratoriums and across the board rate freezes. Although well intentioned, many proposed alternatives also have market and socio-economic consequences.

Unfortunately, many home owners who are facing foreclosure don’t know that a workout plan (know as a “loan modification”) may already be possible with their present lender. Of course the home owner must request it. Additionally, the proposed workout must make sense and the home owner must demonstrate a need as well as the ability to afford the modified payments. In many cases, lenders would rather work with financially troubled borrowers than foreclose; the foreclosure process is costly – for both the lender as well as the borrower.

The key to initiating a workout plan is for the home owner to communicate with their lender. Among the many reasons why home owners facing foreclosure do not communicate with their lender include lack of information of their options, misinformed of their options, and psychological stress (including apathy and feelings of hopelessness). The latter being the most prevalent because of the psycho-social complexity, which include the events that brought the home owner to their present financial problem as well as the time and effort involved in attempting to resolve any mortgage issues.

In an effort to assist home owners who are presently facing or at risk for foreclosure, Treasury Secretary Paulson and Housing Secretary Jackson created the Hope Now Alliance as a step in President Bush’s initiative to help American families keep their home. The Hope Now Alliance was created to facilitate communication between borrowers, lenders and housing counselors. For more information on loan work outs you can visit or

This article 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 December 24, 2007. Copyright © 2007 Dan Krell.

Single Family Home vs. Townhome?

by Dan Krell

As list prices of many single family homes have been reduced, many home buyers find themselves weighing the option of purchasing a townhome versus purchasing a single family home. The numerous options create a dilemma for home buyers, requiring them to think twice about their home requirements, lifestyle and long term goals. When faced with such a decision, home buyers often need to clarify their beliefs and misconceptions between townhomes and single family homes.

Given the selection between a single family detached home versus a townhome, what would you choose? The answer may not be as easy as you may think. There are reasons why a single family home may be competing with a townhome. Often times, the single family homes may be in fair to poor condition, needing obvious repairs or requiring immediate attention from the home buyer. Sometimes the homes may be a pre-foreclosure or short sale requiring third party approval, which has its own subset of considerations (dealing with a third party and trying to keep your interest rate lock through the lengthy wait). However, some single family homes may be well cared for but have prices reduced because of an atypical floor plan or style that does not fit the typical home buyer’s lifestyle.

Is it about the size? One misconception that home buyers have is that townhomes are inherently smaller than single family homes. However, many townhomes have living areas that are comparable or superior to that of single family homes; many townhomes are built with over 2,000sf gross living area and have a 1 or 2 car garage! Of course, depending on your lifestyle, the size may be secondary to the floor plan or layout of the rooms and amenities. Although townhome living has been described as vertical living, larger townhome interiors have high ceilings and open floor plans making it feel like a single family home.

Another misconception that home buyers have is that single family homes are not bound by a Home Owners Association (HOA). Although the chances are very good that the townhome you are considering is governed by the rules, restrictions, and covenants of a Home Owners Association (HOA); however, many single family homes are also under the authority of a HOA. Additionally, there may be restrictions even if there is no HOA. A home that is located within a protection area, which is imposed by the county or locality, has land use restrictions that may prohibit building, additions and/or tree removal. If you would like to research land usage for a specific home, you can visit the Maryland-National Capital Park and Planning Commission in Silver Spring (the staff is friendly, helpful and knowledgeable).

A common belief is that maintenance costs are higher for singe family homes than townhomes; when comparing homes, it is important to examine costs for upgrades as well as monthly operation costs. Repairs and maintenance vary on the home’s materials and systems. Additional maintenance considerations include painting, roof replacement, landscaping as well as daily expenses that include heating and cooling.

Home buyers will be surprised this spring as homes come to market; they will be surprised by their home buying options as well as prices.

This article 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 January 7, 2008. Copyright © 2008 Dan Krell.

Before you buy- First time home buyer fundamentals

by Dan Krell © 2007

Don’t let your first time home buying experience be overwhelming. Before you plan your Sunday trip to open houses, it’s important to review the fundamentals and make sure you are going into your home purchase fully aware of the responsibility you are about to take on, as well as prepare you for the process and pitfalls that may come your way.

The first item on the list is to determine how much you can afford. Affordability is determined by your financial state and interest rates. Your financial state includes factors such as your income, debt, savings, and expenses. Interest rates impact on your ability to purchase a home because your monthly payment is based on the rate you lock into; the higher the rate, the higher your payment.

Once you know how much you can afford, make a housing budget. Making a housing budget can help you understand your expenses, which included utilities, maintenance, and other expenses such as cable and internet. Additionally, take into account any interest rate adjustment (if you have an adjustable rate mortgage) and increasing real estate taxes. Many first time home buyers get into trouble because they underestimate their monthly housing expenses, as well as not accounting for rising mortgage payments and real estate taxes.

As a first time homebuyer, you will want to be aware of any special programs that are available to you. There are many local home buyer programs that offer special financing and/or closing assistance through the county, the Housing Opportunities Commission, as well as through banks and organizations.

Talking to a lender can help you understand your credit and how much you can afford. You should compare lenders for interest rates and fees. Lender fees vary significantly and by choosing the right lender, you can possibly save several thousand dollars at settlement.

Knowing your rights as a home buyer can help you prevent problems that may occur. As a homebuyer, you are affected by federal and local fair housing laws, RESPA (Real Estate Settlement Procedures Act), Equal Credit Opportunity Act, Fair Credit Reporting Act, and the Truth in Lending Act. Your real estate agent should be aware of these laws and can help you understand them. You can get more information about these laws at the HUD website,

As a first time home buyer it is important to know that you have the right to choose your service providers, such as real estate agent, lender, title company, insurance company, etc. Additionally, you have rights specific to obtaining a loan and credit, such as the right to a good faith estimate of settlement charges and interest rate and other disclosures. A list of these rights can be found at the HUD website (

Your next step will be to choose a real estate agent. It is recommended to interview several agents before choosing as your agent will be your trusted guide through the home buying process. A good real estate agent will know and protect your rights, as well as know what home buyer programs are available to you.

Finally, HUD recommends that first time home buyers attend housing counseling to assist in learning these and other fundamentals. It is clear that doing your homework and choosing the right professionals to assist you can make the difference in your home buying experience.

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 9, 2007. Copyright © 2007 Dan Krell.

Hard Money Lessons

by Dan Krell © 2007

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 (, 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 (, 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.