About Dan Krell

July 1, 2009November 23, 2021

What Cap and Trade (HR 2454) will require of home owners

by Dan Krell © 2009
www.DanKrell.com

A National Building Code

Get the facts, read the bill. View HR 2454 here:
http://www.govtrack.us/congress/billtext.xpd?bill=h111-2454

If you have heard of H.R. 2454 you may not have thought much about it. Yes, this is the famous (or infamous) American Clean Energy and Security Act of 2009 also known as “cap and trade.” What many home owners may not realize is that H.R. 2454 is not only directed toward commercial uses, it is aimed toward home owners as well.

Title II Energy Efficiency, Subtitle-A: Building Energy Efficiency Programs establishes that effective on the date of enactment, new buildings must meet a national building code to meet a thirty percent reduction of energy use relative to a baseline code. By January 1, 2014 new residential buildings must meet a fifty percent reduction in energy use; energy use reduction in residential buildings will be required to increase five percent every three years thereafter.

This legislation establishes National Energy Efficiency Building Codes for commercial and residential buildings “to meet each of the national building code energy efficiency targets.” The Secretary of Energy is given the duty to create and amend the National Energy Building Codes by determining the percentage of energy improvements that would be achieved by proposed improvements and to propose the improvements necessary to meet or exceed the target (Title II, subtitle A, section 304(a)).

Once the National Energy Efficiency Building Codes are established, state and local jurisdictions have one year to adopt the national code. If after the one year, a state and/or local jurisdiction fail to adopt the national building code, “the national code shall become the applicable energy efficiency building code for such jurisdiction” (Title II, subtitle A, section 304(d)”APPLICATION OF NATIONAL CODE TO STATE AND LOCAL JURISDICTIONS”).

If a building is out of compliance with the national code, a violation may be determined by state, local, and/or federal authorities. Enforcement of the national building code will be enforced by the state (if law is adopted) through random inspections of buildings. (Title II, subtitle A, section 304(e)”STATE ENFORCEMENT OF ENERGY EFFICIENCY BUILDING CODES”).

If a state does not adopt the national building code, then enforcement falls to the Federal level, where the Secretary of Energy will create rules for building code violations and penalties. The Secretary will create “an energy efficiency building code enforcement capability” (which will conduct building inspections). Fees will be collected to “cover costs” of the enforcement procedures (Title II, subtitle A, section 304(f) “FEDERAL ENFORCEMENT AND TRAINING”).

The legislation also creates the Retrofit for Energy and Environmental Performance (REEP) program. The goal of the program is to “facilitate the retrofitting of existing buildings across the United States to achieve maximum cost-effective energy efficiency improvements and significant improvements in water use and other environmental attributes.”

Additionally, the Act creates the Building Energy Performance Labeling Program to provide the public the necessary efficiency information of a building. The information would be made accessible to “owners, lenders, tenants, occupants, or other relevant parties who can utilize it.” Buildings will be labeled at the time of sale, when retrofitted, or by inspection.

Although the Act is well intentioned, specifics are lacking that leave many rules and procedures (including inspections, violations, and penalties) to be decided at a later time at the discretion of the Secretary of Energy and/or state and local officials. Unfortunately, you may not hear much more about how “cap and trade” affects home owners; however, unclear legislation may have unintended consequences to home ownership and the real estate market.

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 29, 2009. Copyright © 2009 Dan Krell.

July 1, 2009October 5, 2019

Option Arm resets- the coming crisis

by Dan Krell &copy 2009
www.DanKrell.com

The Next Foreclosure Crisis

As the real estate market appears to be stabilizing, another wave of foreclosures poised and to interfere with a recovery. No, the expected wave of foreclosures is not a forgotten portfolio of subprime loans; rather the expected defaults are expected to come from Alt-A mortgages, the bulk of which are to come from resetting option arms.

The Federal Reserve (federalreserve.gov) describes the option arm (also known as a payment option mortgage) as an adjustable rate mortgage with several monthly payment options. The typical payment options include the traditional principal and interest payment, the interest only payment, and the minimum payment. The traditional principal and interest payment is the payment that you would typically make to have an amount applied to the principal amount of the mortgage to pay down your mortgage as amortized. The interest only option only pays the interest for the month without applying anything to the principal, which does not pay down your mortgage. The minimum payment option is typically less than the interest option and applies the month’s unpaid interest to the principal. Not only does the minimum payment not pay down your mortgage, but using the minimum payment over a short period of time will shortly have you owing more than the value of the home (which is called negative amortization) due to the increasing principal.

When the option arm mortgage was first conceived, it was initially used by sophisticated and affluent home owners mostly to assist with cash flow. However, the option arm became increasingly attractive to home buyers who wanted to purchase the maximum home they could qualify for during the market buildup earlier this decade. The option arm allowed the home buyer to be qualified at the very low initial interest rate (do you remember those 1% teaser interest rates?). The interest rate initially resets (or recasts) to market rates after three to six months, and again in three or five years.

When the interest resets, the payments increase. If you used the minimum payment option, then the monthly payment increases significantly due to the increased principal amortized at the new interest rate. Because of the potential for negative amortization, the lender can adjust the mortgage before the recast period if the principal amount grows beyond a predetermined number (usually 110% to 125% of the original principal loan).

Some financial experts have called the expected foreclosure crisis (which will peak in 2010 and carry through 2012) a tsunami as compared to the recent foreclosure wave. Fortunately, due to low interest rates, option arm defaults have remained relatively low after the recast. However, as interest rates begin to rise, we will see the foreclosure wave swell. Prashant Gopal reported in Business Week (Good News: Option ARM Resets Delayed; April 16, 2009) that the problem will increase beginning in spring of 2010 and peak in 2011. Gopal stated that (according to Barclays) there is a 4% to 5% default rate for option arms originated in 2006-2007.

The increased default potential is sure to overwhelm the already over burdened system. Home buyers looking for bargains will likely have another large pool of foreclosures in the next two years. Home sellers will have increased competition for home buyers. If you have an option arm, weigh your options now – before it’s too late.

June 23, 2009November 23, 2021

What are the risks of owning a home?

Accepting the Risks of Home Ownership
by Dan Krell © 2009
www.DanKrell.com
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For many, owning a home is part of their long term financial and personal plan. Unfortunately for some, the responsibilities and risks of home ownership are not well thought out; many first time home owners are unprepared. The benefits of home ownership are often presented to first time home buyers, how about the risks?

During the recent real estate market boon, it seemed as if there were no risks to home ownership. Homeowners, who felt that their home was too much of a financial burden, were able to sell their home quickly and sometimes made a profit. However, when home values began to depreciate, it become all too clear that there are inherent risks to being a home owner, which include decreasing property values, increasing home related expenses, and poor home maintenance.

The real estate market, like other financial markets, is cyclical. There have been escalating market cycles, like the recent “seller’s” market; and there have been depreciating market cycles, some down cycles being much like what we are currently experiencing. Many first time home buyers, who bought homes as a commodity often analyzing their purchases as if it were a mutual fund, are now finding that (unlike mutual funds) selling a home may not be as easy as previously thought. Selling a home in a down market has many considerations, such as an increased marketing time and the possibility of owing more on a mortgage than the value of the home.

During an escalating market, it is easy for people to talk about home value appreciation as one of the benefits of home ownership. Unfortunately, in the recent boon market, many home buyers were caught up in the exuberance of rapid appreciation such that they believed that home value appreciation is guaranteed- no matter the type or condition of the home. Some home buyers are now lamenting their purchases because they bought homes they did not much care to live in but rather for the perceived “investment” value.

Many first time home buyers are also not prepared for increasing monthly housing expenses. Keep in mind that a first time home buyer’s monthly mortgage payment is already more than their monthly rent. Because of rising property tax and increasing utility costs, home buyers need to consider that the associated cost of home ownership will most likely increase over time. Although some of the initial increase may be offset by an interest tax deduction, the increases often add more to monthly expenses than the savings of the deduction.

Maintenance is an ongoing expense that is often overlooked by home buyers; all homes, including new homes need regular maintenance. Lack of home maintenance becomes a threat to anyone’s home leaving the home’s systems, walls, and foundation vulnerable to the elements, which can erode the home’s value.

Be prepared to take on the risks of home ownership. Take into account the reasons for owning a home as well as the financial responsibility you place upon yourself. Although long term home ownership has proved to be a good investment for many, value appreciation is not guaranteed. Additionally, the cost of home ownership along with future increases should be anticipated. You can get more information about the benefits and risks of home ownership by visiting HUD (HUD.gov), Fannie Mae (FannieMae.com) and Freddie Mac (FreddieMac.com).

June 17, 2009October 5, 2019

Downsizing is the new real estate trend

Looking to lower expenses, homeowners are looking to downsize

by Dan Krell, Realtor &copy 2009
www.DanKrell.com

When you think of downsizing, you might think of empty nesters trading down from a suburban home to a smaller, more convenient condo. The downsizing stereotype has long gone by the wayside as downsizing isn’t just for older adults; downsizing has become the focus of anyone wanting to pare down their expenses.

Looking for ways to save money in the current economy, many home owners are re-evaluating their expenses- including their mortgage. The rally cry of “bigger is better” is no longer heard from home buyers. Even home owners are discovering that “less is more;” the less the mortgage payment, the more cash they have at the end of the month for such items as savings, travel, or paying down debt.

The benefit of downsizing is not just the potential of lowering your monthly mortgage obligation; the property tax, maintenance and utility bills are typically scaled down along with the home. In order to gain the financial benefits of downsizing, finding the right home to meet your needs is important. When searching for your new home, considerations in size, style and location will not only affect your financial picture but your lifestyle as well.

Your first thought might be to look into condos because of the low maintenance and convenient living. Nevertheless, the low maintenance and convenient amenities come at a price in the form of a condo fee, which can sometimes negate the savings of downsizing. Additionally, downsizers often experience “size shock” due to the limited living area and scant storage that a condo offers.

Other downsizing options may include a townhome or a smaller single family home. You might find these options more appealing because there is no condo fee associated with this type of housing (although there may be a HOA fee). Even though you are seeking to reduce your “housing footprint,” these options seem roomier than most condos; however, these homes typically have higher maintenance and utility costs than a condo.

Another consideration of downsizing is that you will most likely have to downsize your possessions as well. The first step, as with any home sale, is to reduce your clutter. Going through all your items in storage and throughout your home to dispose, sell, or donate items that you do not use and will most likely not use. A widely accepted de-cluttering tip is to identify and discard items you have not used in a year or more. Items once thought of as collectibles and keepsakes may now seem just a token of a forgotten time. As you soon realize that items such as pieces of furniture, forgotten collections, and tacky beach gear won’t make the trip with you to your new home, you will most likely feel the ambivalence of holding on vs. freeing yourself from the past.

It is important for you to discuss downsizing with your financial adviser, accountant and/or financial planner to see how it fits into your larger financial picture. After looking at the numbers, you may realize that downsizing may not be for you because there may not be enough savings from downsizing, you may not be able to net enough from your sale, or you simply owe more on your mortgage than the value of your home.

June 8, 2009October 5, 2019

Imported Chinese Drywall Investigation – Update

by Dan Krell (c) 2009.
www.DanKrell.com

If you missed the flood of media reports late last year about imported drywall possibly emitting toxic and corrosive fumes, the story has not gone away. Although initially, some of the problematic drywall was reported as being imported from other countries, imported Chinese drywall has become the focus. The growing number of health complaints along with financial losses (due to the abandoning of suspected toxic homes) has prompted an intensive multi-agency investigation, recent congressional action, and an increasing number of class action suits.

The imported drywall problem drew national attention in 2008, when throughout the year reports of home owner complaints of severe respiratory ailments, oxidized jewelry, and corroded pipes were highlighted. Although the bulk of the reports of problems associated with the imported Chinese drywall emanate from Florida, the Consumer Product Safety Commission (CPSC) has collected over 365 reports from eighteen states and the District of Columbia. A majority of the complaints reported that affected homes were built in 2006 and 2007; which coincided with a time when building materials were in high demand due to a considerable increase in construction and the rebuilding of hurricane-damaged states (cpsc.gov).

An Associated Press release (By Cain Burdeau; May 19, 2009) estimates that the defective drywall was installed in “more than 100,000 homes.” Problems become evident in hot and humid environments, so there is a potential for additional complaints from homes in cooler climates.

In testimony given on May 21, 2009 to the Senate Subcommittee on Consumer Protection, Product Safety, and Insurance, Acting Deputy Director of Superfund Remediation and Technology Innovation of the U.S. Environmental Protection Agency, Elizabeth Southerland, stated that the EPA completed the initial analysis of drywall samples, and detailed further analyses from affected areas by the EPA, CDC and the CPSC. The initial analysis compared two samples of Chinese drywall from homes in Florida to four samples of U.S. manufactured drywall. Ms. Southerland cautioned that because the sample was small, the results “may not be representative of all drywall products” (epa.gov).

The results of the initial EPA analysis detected compositional differences between the sampled Chinese drywall and the U.S. manufactured drywall. Among the significant differences were higher levels of sulfur and strontium found in the Chinese samples. The analysis also detected organic compounds associated with acrylic paints in the Chinese samples (but not in the U.S. samples).

The health and financial aspect of the imported drywall problem has also attracted the attention of lawmakers. A bi-partisan amendment to assist affected home owners was presented by Florida Congressmen, Robert Wexler (D-FL) and Mario Diaz-Balart (R-FL). The amendment was added to the Mortgage Reform and Anti-Predatory Lending Act and passed the House of Representatives on May 7th. The amendment required a study to determine the effects of the Chinese drywall problem on regional foreclosure rates, as well as studying the availability of insurance for homes containing Chinese drywall (wexler.house.gov).

The drywall problem has become a national priority prompting the CPSC to create an informational website (www.cpsc.gov/info/drywall/index.html). The CPSC is committed to provide home owners with a resource to understand the problems and common health symptoms associated with the imported drywall, updates on the drywall investigation, directions on how to handle a suspected drywall problem, and the ability to report suspected problems in a home.