RESPA empowers home buyers and consumers

Although the Real Estate Settlement Procedures Act (RESPA) is one of those laws that you don’t hear much about, it’s a consumer protection statue that has been around for while. Enacted in 1974, RESPA was intended to help home buyers be better shoppers by requiring the disclosures regarding the nature and costs related to the real estate settlement process. Keeping RESPA relevant, there have been modifications and clarifications through the years, most notably the change of administration and enforcement in 2011 from HUD to the Consumer Finance Protection Bureau (CFPB).

RESPA is generally known for empowering consumers in the real estate process by allowing consumers (in most cases) to choose service providers, and prohibiting kickbacks (e.g., unearned fees) for referrals. Section 8 of RESPA prohibits real estate service providers from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage. While Section 9 prohibits a home seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale.

RESPA also requires the disclosure of affiliated business arrangements associated with a real estate closing. An affiliated business relationship is considered to exist when there is a direct or indirect referral from a service provider to another provider of settlement services when there is an affiliate relationship or when there is a direct or beneficial ownership interest of more than one percent. The disclosure of such a relationship must specify the following: the nature of the relationship (explaining the ownership and financial interest) between the provider and the loan originator; and the estimated charge or range of charges generally made by such provider. This disclosure must be provided on a separate form at the time of the referral (or at the time of loan application or with the Good Faith Estimate if referred from a mortgage lender). In most cases, you’re not required to use the referred affiliated businesses.

RESPA violations are serious, and penalties can be severe. For example, HUD (hud.gov) lists the penalties for violations of Section 8 “… anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.”

The real estate industry takes RESPA very seriously; the industry educates service providers about empowering consumers, as well as regulation compliance. And although modifications of RESPA are to keep up with the real estate industry; some still claim that there are sections of RESPA that remain vague, as demonstrated by the Supreme Court opinion of Freeman v. Quicken Loans, and further clarifications (such as the RESPA Home Warranty Clarification Act of 2011).

In the past, RESPA violations were pursued vigorously by HUD; resulting in settlements as well as criminal investigations. Today, the CFPB (consumerfinance.gov) has taken over the reins, and continues the pursuit of RESPA violations with the same if not increased vigor. More information and guidance about RESPA can be obtained from the CFBP (consumerfinance.gov).

by Dan Krell
© 2014

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

February 20, 2014November 23, 2021

Growing interest in the use of eminent domain to assist underwater homeowners

As interest increases to use eminent domain to assist underwater homeowners, there is opposition in Maryland.

Eminent domain has not received as much attention since the controversial decision in the 2005 case Kelo v. City of New London. However, the issue could become a hotly debated topic in the current session of the Maryland General Assembly, since the introduction of HB1365/SB850 Real Property – Prohibition on Acquiring Mortgages or Deeds of Trust by Condemnation on February 7^th; the bills propose the prohibition of acquiring mortgages through eminent domain, stating, “The use of eminent domain to acquire mortgages undermines the sanctity of the contractual relationship between a borrower and a creditor.”

The issue of using eminent domain as a vehicle to restructure underwater mortgages became a national conversation in 2012, when a few municipalities began the discussion as a means to assist underwater homeowners. The plan caught the attention of Baltimore officials, who began a discussion last year of doing something similar.

As the housing market slowly recovers, many homeowners are emerging from a negative equity position on their homes. According to the Zillow Negative Equity Report (zillow.com), the national negative equity rate for homeowners with a mortgage dropped to 21% during Q3 2013 (from a peak of 31.4% during Q1 2012); while 14.7% of homeowners who own their home free and clear are underwater. Regional statistics vary depending on the strength of the local markets compared to peak home values.

The Baltimore Sun reports that about 13% of mortgages in the Baltimore-Towson area are underwater; neighborhood percentages vary, and there some with significantly more underwater homeowners (Some call on city to explore eminent domain to combat blight; Program targets underwater mortgages, By Natalie Sherman; The Baltimore Sun; November 25, 2013).

A recent industry article looks at the back story and status such plans, as well as discussing some practical considerations. The article asserts that the concept is “far from dead,” stating that “…Local government and community leaders have legitimate concerns about their constituents, many of whom are struggling with mortgage payments on inflated loans that have made their homes unaffordable, and nearly impossible for them to sell without sufficient equity to pay off the loans…” However, the conclusion states that such a plan at present “…appears wrought with complications and does not appear likely to lead to any significant chance of furthering its stated “public” purpose-economic development…” The result may be “lengthy and expensive legal battles; and possible disruptions or changes to the credit industry, which decrease access to mortgages and/or increase interest rates (Dellapelle & Kestner (2013). Underwater mortgages: Can eminent domain bail them out? Real Estate Issues, 38(2), 42-47).

In response to the effort to implement eminent domain in such a way, the Federal Housing Finance Agency (FHFA.gov), the regulator and conservator of Fannie Mae and Freddie Mac as well as the regulator of the Federal Home Loan Banks asked for public input; and subsequently issued a General Counsel Memorandum on August 7^th 2013:

The General Counsel Memorandum was a summary and analysis of the public comments and input regarding the use of eminent domain to restructure mortgages. The memo discussed a number of legal issues as well as issues that relate to the FHFA. The memo stated the pros and cons of such a plan too: Proponents claimed “…if securities have lost value, then the proper and fair valuation of mortgages backing the securities through eminent domain results in no loss to a securities investor, but permits a restructuring of a loan that would benefit homeowners and stabilize housing values…” while opponents point to “…numerous legal problems with the proposed use of eminent domain; some centered on the proper use of eminent domain itself and others on attendant constitutional issues related to taking of property or sanctity of contract. Opponents noted strong reaction of financial markets that support home financing in terms of upsetting existing contracts but as well creating an unworkable situation for providing and pricing capital based on the uncertainty of such a use of eminent domain…” However, the conclusion states, “…there is a rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are “underwater” on their mortgages presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks as provided in federal law…”

by Dan Krell
© 2014

February 14, 2014December 13, 2022

The magic of 4 to sell a home

For a successful home sale, you need to focus on four areas…

Spring is rapidly approaching – are you one of the many home owners listing your home for sale this year? Sure, last year may have seemed like a breakthrough, but the still recovering housing market is just as quirky as The Doctor’s TARDIS. And unless you consider condition, preparation, pricing, and marketing; your home sale could fall flat.

A home’s condition can affect a home’s sale price (sometimes significantly), and is often overlooked by home sellers and listing agents. It is not uncommon for owners to put off home maintenance, especially after the financial crisis of 2008; housing experts estimate that home improvement spending decreased about 28% between 2007 and 2011. Deferred maintenance can deter some home buyers, while motivating others to make a low offer. You can get an idea of potential cosmetic, mechanical, and structural issues by having a pre-listing home inspection.

Whether or not you choose to address deferred maintenance and repairs prior to listing, preparation is required to get ready for home buyer viewings. One of the most important things to do to prepare your home is to declutter. Decluttering is often overwhelming because sellers expect to make the home immaculate; but really, the purpose to decluttering is to give rooms a neat and spacious feel. Decluttering will make you decide which items to keep, what to throw out, give away, or put in storage.

Home staging is a way to create a “vision” for home buyers. Home staging can get pricey if you hire a staging professional and rent furniture. But it doesn’t have to be expensive; “do it yourself stagers” can often transform a home with little or no money. If your home is vacant, inexpensive rentals can be used as room “place holders,” to help convey a room’s size and use to buyers.

Pricing your home correctly can mean the difference between a successful sale and languishing on the market. A common mistake that occurs in a recovering market is the eagerness to price high; but buyer push back can be an abrupt awakening to the realities of the housing market – making you wonder why your home is not selling. Be careful of the listing agent who intentionally over-prices your home, this is an old technique to persuade you to sign a listing agreement; the flip side is listing with an agent who intentionally prices the home too low, promising a “quick” sale (which only makes the sale easy for the agent).

Marketing a home sale has changed significantly in the last five years. Gone are the days of “set it and forget it.” Creative agents are constantly seeking avenues to publicize and promote listings. A sales strategy can determine the correct positioning for the home; while implantation of a marketing plan can include new and imaginative methods, such as placement in specialty magazines and websites, video, and even open house “parties.”

Many don’t realize that the internet is where a majority of home buyers now congregate, viewing your MLS listing across hundreds of websites. To bolster online appeal, make certain your agent uses professional pictures, inspired home descriptions, and complete MLS information. Be wary of new marketing technology, which often has mixed results; for example: “virtual staging” is a technology than can enhance online appeal by electronically staging a home, but can flop when buyers expect to see what is pictured.

by Dan Krell ©
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. This article was originally published the week of February 10, 2014 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © Dan Krell.

February 7, 2014December 13, 2022

Reclaiming the charm and appeal of old homes

“They don’t build’em like they used to…”

… is often heard by those who praise the virtues of an old home. Many home buyers might talk about the character and charm that exudes from an old home, while others might point to the quality of materials and workmanship that cannot be matched by new homes built today.

In some respects, it’s good they don’t build homes the way they used to because some materials used in the past that were thought to be beneficial have been found to be toxic and/or hazardous. Building materials have changed through the years and continue to evolve for safety, strength, durability, and environmental impact. Many home components are engineered and prefabricated to make installation straight forward, as well as make the home increasingly efficient and environmentally friendly. Floor joists and trusses are engineered to allow for larger and open home designs; while roof and siding components engineered to help reduce heating and cooling costs. Foundation and basement construction techniques and components are designed to be effective in preventing water penetration.

Workmanship has also changed over the years as well. Because engineered materials are typically prefabricated, onsite custom design and installation is not necessary; construction crews are basically required to know how to use and install the pre-manufactured components.

Hazardous materials aside, there is something about old homes that grabs our attention. Because the building materials and components were not mass produced or prefabricated, perhaps it’s the workmanship of the construction that demonstrates that the on-site craftsmen were not just masters of their trade – but artisans.

Although new homes incorporate modern fixtures and appliances designed for comfort, functionality, and efficiency; many are drawn to the antique quality of the old home. Old home parts are highly sought after items for modern homes too. Many are lured by the appeal and personality of vintage home parts, but I also sense there is also something about the durability of the parts that lets them continue in service. Vintage doorknobs, especially the crystal type, are collectible and sought after antique home parts.

Those who appreciate old homes talk about the hearty materials that were used in construction. Compared to the new engineered components manufactured to an exact specification, the craftsmen who built the old home onsite appeared to use ample materials that made the construction feel sturdy and robust. This “over-engineering” is typically frowned upon today; using too much raw materials is expensive and considered wasteful.

Another comparison between old vs. new homes is the lumber that is used in a home’s construction. Some are keen on old homes because they were built from first generation lumber, compared to engineered composites typically used in modern homes. Compared to the wood composites often comprised of glued wood pieces and fibers, first generation lumber is believed to be stronger and more durable. Also known as old growth lumber, first generation lumber refers to lumber that was milled from virgin forests where trees were hundreds of years old. Because of deforestation, old growth lumber is no longer harvested for construction materials.

To incorporate the virtues of vintage and old building materials in modern homes, many reclaim those resources from tear downs. From classic fixtures and hardware to first generation wood, the reclaiming industry has become popular not only to be environmentally friendly – but to reclaim the charm and character of a bygone age.

by Dan Krell ©

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. This article was originally published the week of February 3, 2014 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © Dan Krell.

January 30, 2014July 3, 2019

Could generational differences trigger deflation of housing

As the population ages, could generational differences trigger a housing deflation?

Many understand that there are numerous factors that affect the real estate market. Those who are interested may track the daily ups and downs of the stock, bond, or commodities markets; some look forward to reading the minutes of the Federal Reserve’s Open Market Committee meetings, and others may peruse the Fed’s “Beige Book.” But some economists are suggesting that many are overlooking the most obvious factor that could impact the real estate market for years – the aging population.

As the Baby Boomers make way for Generation X, the generational population size difference will be noticed in a number of ways. There is increasing discussion about the affect of the aging population on assets, specifically real estate and housing. As the population ages, some experts expect a deflationary market due to the shifting generational demographics. And a few imply that the deflationary effects of the great recession might pale in comparison to those of the generational shift.

In an October 2012 Realtor Magazine article, the Counselors of Real Estate® (an affiliate of the National Association of Realtors®) listed the “aging population” as the number one matter affecting real estate. Although an aging population impacts a number of real estate sectors (such as retail and medical); the demand for housing will certainly be affected. They define the shift geographically, where some regions gain over others.

Mary Ludgin, of Heitman LLC, describes the geographic shifts that may be associated with an aging population. In her article “Shifting Demographics: Real Estate Investment Implications,” Ludgin forecasts increasing demand for apartments and offices mostly in downtown areas. However, a population migration is expected to favor the “mountain west,” southwest, and southeast. She expects high amenity cities to do well.

A working paper published by the Bank for International Security (Aging and Asset Prices, August 2010; bis.org), presents the theory and data linking age demographics and asset prices. The paper asserts that because the Baby Boom generation is substantially larger than the preceding Swing generation (the WWII generation) and the subsequent Generation X, asset prices rose substantially during Boomers’ “active years;” and are expected to decrease during the declining years. The data suggests that Baby Boomers home buying activity pressured home prices to increase by as much as 40% during active years; and as the population ages, home prices are expected to decrease by as much as 30% in the next forty years. Yet, some economists and prognosticators are hyping such deflation to occur in the next ten years.

Although the result of an aging population on housing sounds daunting, aging demographics is not the only force active upon home prices. Although Japan is often cited as the poster child of negative influences of generational effects on home value; there are some economies, such as the UK, where home prices have transcended generational effects and made positive gains.

Even though attention focused on an aging Baby Boom generation has been about retirement and/or relocating, some have begun to talk about the generational shift’s effect on real estate and resulting home buying trends by Generation Xer’s and Yer’s, and Millennials. Besides geographical shifts, localized effects that are often experienced include the trend of transformation and/or tear down of older homes that once met the needs of previous generations, to build modern and efficient dwellings to meet the needs of those who are actively purchasing homes.

by Dan Krell
© 2014