About Dan Krell

July 4, 2008November 23, 2021

HUD’s mortgage for seniors

by Dan Krell
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Many people are blessed to live a long and healthy life. Unfortunately, the longer you live the higher the probability that you may run out of money in your old age. One solution for many senior homeowners is to tap into their home equity through a reverse mortgage. Although now a mainstream mortgage option, the reverse mortgage (sometimes known as an annuity mortgage) has had a rich and uncertain history.

According to the National Center for Home Equity Conversion (reverse.org), the first reverse mortgage was created in 1961. Over the years various forms of the annuity mortgage were developed and assessed through various studies conducted by savings and loans, non-profit organizations and the Federal government. The FHA reverse mortgage program was created in 1988 by President Reagan’s signing of the Housing and Community Development Act of 1987.

Although other sources for reverse mortgages existed in 1988, the FHA reverse mortgage program offered more benefits to borrowers and beneficiaries that most other programs did not. Presently, applying for the program is easy and has few qualifying restrictions. Additionally, when it’s time to repay the loan, if the loan balance exceeds the home value the FHA mortgage insurance will cover the shortage that is not met by your the selling of the home (which is not usually offered by other reverse mortgages). Repayment (by yourself or your estate) occurs when you no longer live in the home (for any reason).

While qualifying is easy, not everyone meets the underwriting criteria for a loan. Underwriting restrictions include a minimum age and home equity requirements. Applicants must be at least 62 years old as well as having the minimum equity requirements in the home you live in (meaning that your mortgage balance must be below a pre-determined percentage of the home’s value). Unlike traditional mortgages where you have to qualify for a monthly payment based on income and credit, the amount borrowed for a FHA reverse mortgage depends on your age, the amount of equity in your home (based on an appraisal), and prevailing program interest rates.

Unlike traditional mortgages that require a monthly payment, the FHA reverse mortgage does not require any payment at all while you reside in the home (although you must pay your real estate taxes, utilities and other home related items); and although you are not making payments on your FHA reverse mortgage, HUD will not foreclose.

The FHA reverse mortgage, also known as the Home Equity Conversion Mortgage (HECM), (offered through The Department of Housing and Urban Development; HUD.gov) is one of the most misunderstood mortgage programs available today. The equity conversion to annuity payments along with repayment responsibilities often gets mixed reviews due to the HECM’s affects on estates and other tax implications. Fortunately, HUD requires counseling for HECM applicants, to educate them of the implications of obtaining a HECM.

For more information about reverse mortgages, HUD recommends that you contact a HUD approved counseling service. Additionally, HUD will assist you in finding a HUD approved FHA reverse mortgage lender (this information is free of charge). HUD also recommends contacting the AARP (AARP.org) and the National Center for Home Equity Conversion (reverse.org) for more information on making an informed decision about obtaining a reverse mortgage.

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 June 30, 2008. Copyright © 2008 Dan Krell.

June 30, 2008November 23, 2021

Maryland General Assembly says "Show us the money…"

by Dan Krell
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The MD General Assembly does not literally want to see your money, however you are now required to disclose your income on all mortgage applications.

In an attempt to limit future foreclosures, avoid vacant eyesores in our communities, and spare the taxpayers of future bailouts, the Maryland General Assembly passed a law that requires all mortgage applicants to provide supporting income documentation when applying for a mortgage. In doing so, the state legislature has basically eliminated all stated income and “no-doc” loans; which are popular with self employed individuals.

Maryland is not the first state to eliminate these low documentation loans; Maryland joins Minnesota, North Carolina, and Illinois to require borrower income documentation for all mortgages. Stay tuned, other states will soon follow the trend.

Several weeks have passed since the implementation of Maryland HB 363 (aka Senate Bill 270), however the only mention of the new legislation comes from bloggers who complain that the income documentation portion of the law is unfair to the self employed. Many mortgage professionals feel that the across the board income requirement is an overreaction, and that such requirements are unnecessary as mortgage lenders have already changed their underwriting guidelines.

For those of you unfamiliar with the new legislation, here is brief synopsis of the entire law (which you can view at mils.state.md.us): Lenders are prohibited from charging prepayment penalties for mortgages; the Commissioner of Financial Regulation is to set mortgage lender licensing fees and examination requirements; expands the licensing requirements for mortgage lenders and mortgage originators; and lenders are to verify a borrower’s ability to repay a loan.

Unfortunately, there were many home buyers whose homes went to foreclosure because they could not afford the monthly mortgage payment at the time they purchased their home. Many of these foreclosures were “first payment defaults,” meaning they never made their first payment. By making the lender collect supportive income documentation from the borrower, the lender is now accountable for ensuring the borrower can afford the mortgage (by meeting debt to income guidelines).

If you are self employed, you may know that fully documented your income is much more complex than just providing a W-2 – but it can be done. Lenders are now required to collect third party documentation to support income (W-2/1099; income tax returns; payroll receipts; financial records; OR other third–party documents that provide reasonably reliable evidence of the borrower’s income or assets). In other words, “Show us where the money is coming from to pay the mortgage.”

Critics claim that self employed home buyers are penalized because they cannot provide the documentation to support their income. These critical claims that self employed home buyers have the income to support a mortgage payment but cannot provide documentation is suspect; it may suggest that the home buyer is not reporting their income (which is an entirely different matter), or is claiming that the amount that they deduct as legitimate business expenses will be used for paying their mortgage (which is also a different matter). I am not an accountant, but the critics’ logic against such legislation does not stand up.

If you are self employed and worried about obtaining a mortgage, don’t worry. Many mortgage options exist; and although not as prevalent, stated income loans are still available – but you should be prepared to present documentation to support your income.

June 20, 2008November 23, 2021

Buying vs. Renting

by Dan Krell
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Is buying a home right for you?

A home owner recently told me that he had no idea that he would be able to sell his home for more than double his purchase price. When he purchased his home eighteen years ago, he recalls having kept to a strict budget so he could afford his mortgage payments and other related housing costs. Now, he will have a sizeable profit from the sale to purchase his dream home. This home owner’s story is like many other home owners’ stories of wealth building through home ownership.

Unfortunately, due to recent market fluctuations, some home buyers have questioned the value of home ownership. Decreased consumer confidence along with almost daily stories of foreclosure might make you wonder if any homes are selling.

Additionally, some renters feel that home prices continue to be too expensive for them to make the jump into home ownership. Economic commentator, Barry Ritholtz (bigpicture.typepad.com), believes that too; although the rent to buy cost ratio for the Washington area has dropped significantly from an all time high of 21.4 to around 16.6 (according to Moody’s economy.com), he feels that home prices are still too high nationwide as compared to the rent to buy cost ratios of the 1980’s and 1990’s (when the average ratio ranged from 10-14). However, even with a decreased consumer confidence, many understand the benefits to home ownership.

Many analysts and commentators agree that owning a home is typically better than renting. For example, Suze Orman has stated in a Yahoo Finance exclusive (biz.yahoo.com/pfg/e10buyrent) that “there’s no better investment.” Although Ms. Orman does strongly suggest having your financial matters in order as well as making certain that you can afford all the housing related costs before you make a move, she does state that “home ownership is a great achievement and a terrific investment.”

Although the benefits of home ownership are touted by many in the industry, owning a home is not for everyone. Renting does offer limited maintenance and the flexibility if you need to move, but home ownership offers tax incentives (tax breaks and deductions) as well as a chance to build equity.

Before you buy your first home, you might consider how long you intend to live in it before selling. For example, the National Association of Realtors reports that the typical home owner intends to stay in their home for ten years (although the actual time of ownership varies). Financial and affordability factors to consider before buying a home include interest rates and market conditions. However, some considerations are not financial but emotional; for example, some renters are concerned about their security deposit as well as dealing with an obnoxious landlord or management company.

Freddie Mac (FreddieMac.com) offers the following benefits to homeownership: Owning a home can facilitate your participation within a community, the home can be passed through many generations as a source of security, the tax benefits typically offset the amount you might otherwise pay for rent, your monthly payment won’t increase if you have a fixed rate mortgage, and building equity through home ownership “is the single greatest source of financial security and independence for the majority of people who’ve taken this step.”

June 12, 2008November 23, 2021

Realtors Unknowingly Practice Law

Do you expect your real estate agent to be the real estate legal expert and provide you with the best real estate legal advice on the sale or purchase of your home? If you do, you’re not alone. Even though licensed real estate agents in Maryland are required to take continuing education on new and/or changed real estate related legislation, the fact remains that providing legal advice goes beyond the scope of practice for a licensed real estate agent.

Consumers often ask about the scope of practice for a licensed real estate agent. After all, the agent facilitates real estate contracts as well as facing legal issues every day. Does a licensed real estate agent have the ability to advise clients on real estate legal matters? When should a real estate agent draw the line and tell their client to seek the advice of an attorney?

To be clear, a license to practice real estate is NOT a license to practice law (however, there are agents who are licensed attorneys). In fact, the Code of Maryland (09.11.05.03 ) offers guidance in supervising licensees indicating that “(C) Written procedures and policies which provide clear guidance in the following areas:(x) The unauthorized practice of law by a licensee;”

Additionally, Article 13 of the National Association of Realtors code of ethics states (Realtor.org), “REALTORS® shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it.”

Given the strong positions of regulatory bodies, it should be clear that a real estate agent cannot act as a legal advisor or provide legal advice. Some lines are well defined and should not be crossed; however other lines are gray and sometimes confuse real estate agents and consumers alike as to the legal implications and consequences.

For example, some agents feel that it is necessary to alter a listing or sales contract to fit the needs of the transaction. Rather than having an attorney review the contract and make any necessary changes, some agents will eliminate or add wording to a contract on their own. This may sound harmless, however many agree that this can be the unauthorized practice of law.

Recent market trends provide this timely example: As many home owners are facing legal and financial challenges, some real estate agents are advising home owners to undergo the short sale process. Unfortunately, they do not consider the consequences as well as other available options. Again, many agree that giving such advice may be construed as the unauthorized practice of law.

Besides being resourceful and knowledgeable, real estate agents are trained to be experts in the marketing and selling of homes. Real estate agents are not attorneys nor should they pretend to act like one. In real estate transactions, sometimes the consequences to seemingly obvious solutions can turn into legal nightmares. So, don’t be offended the next time your real estate agent suggests you talk to your attorney; always consult your attorney whenever you seek guidance on your legal responsibilities to any real estate transaction.

Original published at https://dankrell.com/blog/2008/06/12/do-realtors-unknowingly-practice-law/

By Dan Krell
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June 3, 2008November 23, 2021

Signs of Recovery or Anomalous Blips of Activity?

by Dan Krell
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As President Bush officially proclaimed the month of June as National Home Ownership Month this year, many wondered about the future of the housing market. As the national media continues to portray the housing market as a financial black hole by telling stories of dread and dismay, it is a wonder if any of the industry initiatives have actually helped to stimulate the market. Generally the bad news is that the market continues to be slow; however the good news is there are signs of recovery.

National real estate sales numbers continue to slide, as reported by the National Association of Realtors (Realtor.org). The recent report indicated that home sales were down again for the month of April 2008 (as compared to sales from the same time the previous year). Additionally, the NAR reports that the national median home price for all types of housing fell to $202,300 (from $219,900 the same time a year ago).

However, the NAR reported positive news about localized markets, such as Greenville, SC and Springfield, MO, where strong home value increases are attributed to healthy local economies. Additionally, markets in areas such as San Diego, CA and Fort Meyers, FL have experienced increased home sales after significant price reductions, which is an indication that these localized markets have found their equilibrium.

Locally, there are micro markets rebounding as well. Sales statistics compiled and reported by the local MLS (Metropolitan Regional Information Systems, Inc.; MRIS.com) indicate that there are localized market increases even though Montgomery County, as a whole, continues to post decreased sales numbers. And even though the county average sales price has lowered to $575,513 (as reported by the Greater Capital Area Association of Realtors; GCAAR.com), sales statistics within specific zip codes (such as 20814, 20815, 20816, 20854, 20852, 20833, 20878, 20882) indicate increases in sales prices as compared to the same time last year. Some of these areas had slight sales price increases, while others had moderate gains; the average sale price for the zip code 20854 (Potomac, MD) increased over 30% in April 2008 as compared to the same time last year!

Along with these signs of recovery, a March 2008 announcement by the Office of Federal Housing Enterprise Oversight, Fannie Mae and Freddie Mac indicated that there will be an increase of $200B to increase the liquidity of the mortgage industry. Analysts explain that the liquidity will reduce restrictions on high loan-to-vale mortgage programs. Restrictions on these loans were imposed to minimize further losses to Fannie and Freddie after foreclosure related losses increased as the housing market declined.

As much of the secondary mortgage market has all but shriveled and died, the importance of Fannie Mae and Freddie Mac is now underscored. With an additional $200B, Fannie and Freddie have committed to increase the availability of low down payment mortgage programs that have been the center of home ownership programs for years.

While many housing and economic indicators are down, there are many signals that the economy as well as the housing market is seeking its equilibrium. While some economists feel these signs are anomalous, others remain optimistic that stronger economic growth in the second half of 2008 will assist in stabilizing the housing market.