Today's Top Real Estate News Provided by Inman News 1/6/2009  10:57:00 PM

The short-sale nightmare Think twice before tapping IRA, buying insurance Ilyce Glink Co-written by Samuel J. Tamkin Inman News Q: We've worked for the last six months to buy a home that was a short sale. Our offer was accepted by the banks, and the house was taken off the market. I've been living month-to-month at my complex paying an additional $200 per month in order to be flexible when closing came around. I incurred a $2,000 penalty for early withdrawal of my IRA funds for the down payment, and I imagine I'll be tapped again when I file my taxes. We also paid $400 for the appraisal on the house. We had approval from both our first and second lenders, and the closing was set. We even purchased homeowners insurance on the house, but the seller backed out of the sale six days before closing! Our houses are packed up and we have nowhere to go. Do we have any recourse to get these lost funds back? Can we place a lien on the house? A: With the uncertainty in the marketplace, one of the lessons homebuyers are learning is that you can spend a ton of time chasing a property with nothing to show for it when you're done. These days, a fair number of homes being sold are "short sales," defined as properties that are worth less than the remaining mortgage balance. In this situation, the seller is short the funds needed to sell his or her home, hence the phrase "short sale." In a short sale, the owner of the home must get the lender (or lenders) to agree to take less than they are owed to release the lenders' liens on the home. If the seller gets his or her lenders to agree, the seller can go through with the short sale. At the closing or the close of escrow, the seller transfers title to the home to the buyer. The lenders are partially paid off (or perhaps don't receive any funds at all), but allow the closing to take place, and at the closing release their liens on the property. It's terrible that you have gone through all that time and expense only to find out that the deal has gone sour. If your seller had the contractual right to back out of the deal, you may be out of luck. You ask if you have any recourse to get any of your money back. That recourse would be set forth in the purchase and sale agreement you signed with the bank, and might allow you to be reimbursed for your out-of-pocket expenses, or recover your damages from the seller. If your seller defaulted under the contract, you may be entitled to recover your damages, which would be outlined in the contract for purchase. If your seller got cold feet or decided to take a better deal for the sale of the home, you may have a legal claim against him for the failure to sell the home to you, particularly if you satisfied all of your requirements under the contract, including getting the seller's lenders to agree to the short sale to you. You might also be able to sue the seller to force him to sell you the home. Unfortunately, some legal options can be expensive. In many short-sale situations, you might be dealing with a seller in financial distress who has little to lose if he defaults on his contract with you. Suing could be a minefield, and you might not wind up with the house. Back at the ranch, you've made some mistakes that are already costing you. Without the assurance of a sale you shouldn't have liquidated your IRA. You had no assurance as to when you would close, but once you liquidated your IRA and you did not redeposit those funds back in within 60 days, you were subject to the 10 percent early withdrawal penalty. In addition, the entire amount withdrawn is taxed at your ordinary income tax level, and could kick you into a higher tax bracket. In general, no one should withdraw money from their IRA or other retirement account without an understanding as to the costs involved in the withdrawal. There are very limited times that you can take money out without penalty, and only some accounts let you take funds out without paying tax on the money invested. When it comes to liens, you'll generally be permitted to place a lien against the seller's property only if you have a court judgment against the seller. But even if you could get it, it's of little benefit: There's no equity in the property. If the seller fails to sell you the property, it's likely to go into foreclosure (and your lien would be behind the lenders' liens against the property). You might want to spend an hour or so with a real estate attorney who can help you figure out your next best course of action. To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2009 Ilyce R. Glink and Samuel J. Tamkin

Some loan mods better than others Why interest rate is more likely than loan balance to be reduced Jack Guttentag Inman News "Do borrowers have any say over the type of loan modification they get? What kind of modification should they look for?" Mortgage modifications are changes in the terms of a mortgage loan designed to make it more affordable to the borrower. Generally, modifications are available only to borrowers in default or in imminent danger of default. The purpose is to cure or avoid the default, thereby avoiding foreclosure. In general, borrowers must take the modification they are offered, as they have very little bargaining power. Their only card -- the implicit threat that if they don't receive an adequate modification, they will default -- is one they can't play, at least not explicitly. However, borrowers can indicate what they can afford to pay, without it being perceived as a threat. The major types of modification are discussed below in order of their cost to the investor and their value to the borrower. Capitalization of arrears: The past-due payments and perhaps late fees and other charges arising out of past delinquencies are added to the loan balance. A new payment is then calculated, which will be a little higher than the previous payment. This is the most common type of modification because it has very little cost to the investor. Its only value to the borrower is that it provides a new start by making him current. It works for a borrower who has hit a temporary rough patch and is now back on track, but not for a borrower who needs a lower payment. Extension of the term: A term extension is the payment-reduction modification that is least costly to the investor. However, if a loan was originally 30 or 40 years and it is now only a few years old, the payment can't be reduced very much this way. If the loan was originally for 10 or 15 years, a term extension to 30 years will reduce the payment materially, but 10- and 15-year loans comprise a very small share of loans in distress. Reduction in interest rate: This is a more effective way to get the payment down. Cutting the interest rate on a 30-year loan from 6 percent to 3 percent will reduce the payment by about 30 percent, whereas extending the term to 40 years reduces it by only 8 percent. Rate reductions are flexible, since they can be adjusted to the needs of each individual borrower. They are more costly to the investor than a term extension, and correspondingly more valuable to the borrower. To minimize the cost, rate reductions in some cases are made temporary. The modification may call for the original rate to be phased back over five years, for example. This presumes that the borrower's payment capacity will grow over the same period. Freeze the interest rate: On adjustable-rate mortgages (ARMs) that are close to a rate reset date, where the new rate and payment will be well above the one the borrower is now paying, a modification can freeze the rate and payment at the current level. Many subprime loans have been modified in this way because they carried margins of 5-7 percent, which when added to the current value of the rate index, would have resulted in substantial increases in rates and payments. Reduction in loan balance: The mortgage payment declines in tandem with the balance. A 20 percent drop in the balance, for example, results in a 20 percent drop in the payment. Unlike a cut in the interest rate, however, a cut in the balance can't be temporary, which makes it the most costly modification for investors and the best modification for borrowers. Balance reductions do have one major advantage for investors: They reduce the borrower's negative equity, which increases the borrower's incentive to do everything possible to keep the house. It is very plausible that re-default rates on loans that are modified with a balance reduction are materially lower than on other types of modifications. New data compiled by the Office of the Comptroller of the Currency show that about half of all modified loans re-default within six months. I am told that breakdowns of re-default rates by type of modification will soon be available. Modification decisions are made not by investors but by servicing agents under contract with investors, and the agents generally view balance reductions as a last resort. It is not in their own financial interest to cut balances because their servicing fees are based on the loan balance. A 20 percent cut in the balance also means a 20 percent cut in the fee. Probably more important to their decision process, the initial cost of balance reductions is higher than that of rate reductions, which imposes a burden of proof on servicing agents to justify balance reductions to investors. Their argument has to be that a balance reduction has a materially lower probability of re-default, but so far only sketchy data have been available to support it. Hopefully, this will soon change. The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2009 Jack Guttentag

Signs you need a better home inspector Buyers stunned when defects found after purchase Barry Stone Inman News DEAR BARRY: When we bought our house, our home inspector said that everything was in good condition. Since then, our basement has leaked, some of our circuit breakers became so hot they had to be replaced, and a chimney sweep told us that the fireplace is not usable. All of these issues should have been disclosed to us, and now we are saddled with one expense after the other. Who do we blame for these problems: the home inspector, the Realtor who recommended the inspector, or the previous owner? --Rena DEAR RENA: All three share some blame for the unfortunate lack of disclosure. The home inspector apparently did not do a thorough job. When a basement is prone to leaking, there are usually some signs of past leakage. If breakers are prone to overheating, there are usually some observable symptoms or evidence of faulty installation. When a fireplace is not usable, it is either because of substandard construction or material deterioration. Such conditions are typically identified by qualified home inspectors. If the Realtor recommended your home inspector, there could be some liability on the basis of "negligent referral." Agents usually know which home inspectors are more or less qualified and thorough. Unfortunately, some agents are not inclined to recommend the best home inspectors. In some real estate offices, the best inspectors are labeled as "deal killers" or "deal breakers" and summarily dismissed from referral lists. The sellers may or may not have known about the problems with the electrical panel and fireplace. Evidence of such conditions is not always apparent to homeowners. However, they probably knew about the leaking basement and should have disclosed that condition. To hold a home inspector liable, you should give notice of the problems before they are repaired. Once the defects are altered from the way they were at the time of the inspection, it is difficult to raise issues of liability. Some home inspection contracts specifically require that you notify the inspector before making repairs. At this point, you should give notice to the inspector, the agent and the seller that these problems have been discovered. If no one is willing to address the matter, you can seek legal advice regarding disclosure liability. DEAR BARRY: I have a gas log fireplace. If I remove the gas logs and keep the gas turned off, is it safe to burn Duraflame logs? --Fanny DEAR FANNY: Before you make any changes to your fireplace, you need to determine the type of fixture that you have. If it was originally built as a wood-burning fireplace and then converted to a gas log set-up, then you can safely remove the gas logs and burn Duraflame logs. However, if the fixture was originally manufactured as a gas log appliance, you should not burn anything other than gas in it -- no exceptions. Altering the intended use of a gas fireplace could damage the unit and might cause a fire in your home. Check with the manufacturer or a fireplace specialist before altering the use of this fixture. To write to Barry Stone, please visit him on the Web at www.housedetective.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2009 Barry Stone

Think twice before buying REO, short sale Deferred maintenance, lender approval among key issues Dian Hymer Inman News Buyers want bargains. Some even limit their search to REOs and short-sale listings. REO, or real estate-owned, refers to a property that a mortgage lender acquired through a foreclosure. It's owned by the bank. A short sale refers to a situation where the sellers still own the property but they can't sell for enough to pay off the mortgage(s) and costs of sale. There are pros and cons to buying distressed sale properties. They often sell below market price. However with REOs, there is usually very little information about the property and no seller disclosures. Banks that hold REO properties usually have an infrastructure in place to deal with these transactions. Lenders are motivated to get REOs off their books so they can put the money to better use. But, there's no emotion involved. What's important to the lender is the bottom line. So be prepared to negotiate. Save a concession or two to add to your offer, like a higher price or a quicker close. Unless the listing agent convinces the bank to do fix-up before selling, the property could need work. If so, it won't appeal to as many buyers and could be a good opportunity for buyers with vision. Short-sale properties also tend to have a lot of deferred maintenance. If the sellers are having trouble making the mortgage payment, there may be no funds for fix-up. A big frustration for buyers and agents working short-sale transactions is that many lenders don't have systems in place to deal with them. This situation is improving as more short sales move through the pipeline. Some lenders are easier to deal with than others. Lenders who hold mortgages in their own portfolio are usually quicker to make a decision. Lenders who sold their loans may need investor approval before accepting an offer. HOUSE HUNTING TIP: Buying a listing that's subject to lender approval requires patience on the part of the buyers, sellers and their agents. It can take three to four months to get an answer. There's no guarantee that a short-sale offer will be approved, and it's not uncommon for lenders to reject a purchase offer without giving a reason why. Most lenders won't even consider taking less than they're owed until there is a signed purchase agreement and the buyer's deposit has been placed in an escrow or trust account. The lender needs a settlement sheet prepared by the closing agent before they'll consider the package. Bank approval usually depends on the net price, the buyers' ability to pay under the terms of the contract and a bank ordered appraisal of the property. Short-sale properties that have more than one loan secured against them can be problematic. They require approval from more than one lender. In some cases, the market value is so low that the sale won't generate enough money to pay off the first loan and nothing at all to pay to the second mortgage holder. Sometimes lenders will grant conditional approval. For example, approval might be conditioned on the seller converting an amount owed to the lender(s) to an unsecured loan that would be paid off over time. If the seller won't agree, the transaction fails. An offer to buy a short-sale property should include a provision that allows the buyers to withdraw from the contract without penalty if the seller is unable to verify lender approval by a certain date. Be aware that until a deal is approved, the lender will review other offers that might be made. THE CLOSING: One benefit of a short sale over an REO listing is that the buyers may be able to obtain more information about the property, particularly if the sellers are still living there. Dian Hymer is a nationally syndicated real estate columnist and author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2009 Dian Hymer

Catching a falling knife? Some say now is bad time to invest in real estate Eric Tyson Inman News Q: A friend of mine advised me not to invest in real estate. He thinks real estate prices will be depressed for many, many years. The stock market scares me and I don't understand it. In the past, I've bought and sold several houses and know how to fix them up. Is investing in real estate a good thing? A: I mean no disrespect to your friend, but I wouldn't place much value on his opinion unless he's been involved in and has expertise with the real estate market and economy in general. The other problem that I have with his opinion is that he is forecasting what he believes will happen with real estate prices many years into the future. I say that real estate investing is worthwhile, especially for an experienced property buyer like yourself, but not for all investors. Inexperienced real estate investors often are not aware of all the time and energy required to buy, improve and manage property. Of course, just because someone hasn't bought an investment property before doesn't mean that they aren't up to the task. Everyone has to start with a first investment purchase. Real estate has produced comparable long-term returns to the stock market. Of course, as recent events have demonstrated, both can lead to significant losses in the short term! Real estate and stocks don't always move in tandem, so investing in real estate may help diversify a stock portfolio and vice versa. Consider that when the stock market tanked in the early 2000s, for example, real estate continued to do well in most parts of the country. Real estate should continue to produce solid returns for the long term. Why? For many reasons including the following: First is limited land. The supply of land here on Earth is fixed, thanks in part to water covering about 70 percent of our globe. And because people are prone to reproduce, demand for land and housing continues to grow. Consider that the population of the United States was just 100 million in 1915, 200 million in 1968, 300 million in 2007, and is expected to approach 400 million by middle of this century. Real estate is different from most other investments in that you can generally borrow up to 80 percent of the value of the property. Thus, your relatively small investment can be used to purchase, own and control a much larger investment. Of course, you hope that the value of your real estate goes up; if it does, you make money on your investment as well as on all the money that you borrowed. Here's a quick example to illustrate. Suppose you purchase a property for $200,000 and make a $40,000 down payment. Over the next three years, suppose that the property appreciates to $240,000. Thus, you've made a profit of $40,000 on an investment of just $40,000. In other words, you've made a 100 percent return on your investment. (Note that this scenario is a simplified example because you have expenses from the property that may exceed the rental income you collect. If the property's income just covers the expenses, then your return is 100 percent.) Leverage is good for you if property prices appreciate, but leverage can work against you as investors who bought in recent years have experienced. If your $200,000 property decreases in value to $160,000, even though it's dropped only 20 percent in value, you actually lose 100 percent of your original $40,000 investment. If you have an outstanding mortgage on this property of $160,000 and need or want to sell, you'd have to pay money into the sale to cover selling costs, in addition to losing your entire original investment. Another reason real estate is a popular investment is that you can make money in two major ways from it. First, you hope and expect over the years that your real estate investments appreciate in value. The appreciation of your properties compounds tax-deferred during your years of ownership. You don't pay tax on this profit until you sell your property -- even then you can roll over your gain (through a 1031 exchange) into another investment property and avoid paying tax. In addition to making money from your properties increasing in value, you can also make money from the annual cash flow. You rent out investment property to make a profit based on the property's rental income exceeding your expenses (mortgage, property taxes, insurance, maintenance, and so on). In the early years of rental property ownership, your monthly operating profit may be small or nonexistent, although the increasingly good buys in many housing markets are changing this. Over time, your operating profit, which is subject to ordinary income tax, should rise as you increase your rental prices faster than your expenses. During soft periods in the local economy, however, rents may rise slower than your expenses (or the rents may even fall). Unlike investing in the stock market, you may have some good ideas about how to improve a property and make it more valuable. Perhaps you can fix up a property or develop it further and raise the rental income accordingly. Perhaps through legwork, persistence, and good negotiating skills, you're able to purchase a property below its fair market value. Relative to investing in the stock market, it is easier for persistent and savvy real estate investors to buy property below its fair market value. You can do the same in the stock market, but the scores of professional, full-time money managers analyzing stocks make it harder to find bargains. Eric Tyson holds an MBA and is a best-selling co-author of "Home Buying for Dummies" and "Real Estate Investing for Dummies." *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2009 Eric Tyson

Grandson seeks comeuppance at probate Can he get back cars, house that Grandma gave away? Ilyce Glink Inman News Q: My father passed away in March. About a year before he died, he gave me the keys to his house and cars. My dad then moved into my grandmother's house. She was his power of attorney until his death. At the time he died, the house and the cars were all legally in my name. My grandmother is telling me I don't have legal rights over the house or cars. But she does not have the power of attorney anymore. She gave my father's cars to my uncle even though I paid all of the expenses for the cars, did the maintenance and made sure the title was in my name. The house has my name on the title and I've put about $20,000 into the plumbing, painting and maintenance of the house for my family and me. My brothers want to tear the house down and get the money for the land. We're going to probate court in February. I want the house because I've taken the time to clean it and fix it up. What do I do? A: My condolences on the loss of your father. You need to hire an estate attorney or real estate attorney who can help you figure out what you own at this point. Just because your father left you the keys to his house and cars doesn't mean you own them. If your father not only gave you the keys to the home and cars, but also transferred the title to the cars and home to you, you should be the legal owner of the home and cars. Your grandmother may be under the mistaken assumption that the power of attorney she had gave her the power to undo actions taken by your father. She would be incorrect. However, if your father was unable to handle his affairs and your grandmother had power of attorney, or had been assigned the right to manager your father's affairs, the transfer of the cars and home to you could be undone by your grandmother. At this point, you really need the help of an estate attorney to tell you whether your grandmother has any reasonable basis for taking the actions she did. If she did not, those cars are yours and whoever has them should be unable to transfer title to them without getting title from you. You would be entitled to retrieve the cars from them. In all of this it's critical to know whether your father owned the cars and home when he transferred them to you, whether he had the capacity to transfer them to you, whether he took the necessary actions to actually transfer title to the cars and home to you, and whether there are any other factors that would entitle a third party to contest the transfer of the cars and home to you. Once you answer these questions, you'll have a better clue of how to proceed with your grandmother and other family members. Even if it turns out that your father did not properly transfer title of the cars and home to you, you might have rights in probate court to part of your father's estate. Once in probate court, you can make your claim to whatever improvements and maintenance expenses you have made to the home and seek reimbursement for them. You should expect to be asked to document the expenses (try to hang onto your receipts) so you can prove what you paid for. Your attorney should be able to help you further. Q: I'm a 56-year-old widow. I have good credit and plan to sell my home and buy a smaller home next year. I have recently gone through and closed all my open but unused credit cards, including a department store charge and two Visa cards). I was thinking this would look better on my credit report when I seek a new mortgage. But my friends are telling me that I've done the wrong thing. They say I should have left these accounts open. Is this true? The only debt I have is my mortgage and line of credit. I use three major credit cards regularly, mostly for the benefits like cash back, and all are paid off at the end of the month. Am I on the right track? A: With so much confusing information out there about fixing your credit history and raising your credit score, it's no wonder that you're getting caught in the cross breeze. While much of your credit score depends on your available lines of credit, you can cancel some cards as long as the credit accounts you leave open are your longest-standing accounts. You get a bump to both your credit history and score the longer you have been able to successfully manage your accounts. For example, I have a credit card account that has been open for 20 years. I don't carry a balance on that account (or on any of my accounts), and I wouldn't close it because it is my oldest piece of credit. On the other hand, I have a few store credit cards that I could close and not take much of a hit on my credit history and score simply because this 20-year account is still active. If you've canceled your oldest accounts, then you may have caused some damage to your credit history. But if the three credit cards you use are your oldest accounts, you probably haven't hurt your credit history or score at all. Here's one way to tell: Go to AnnualCreditReport.com to get a free copy of your credit history (you're allowed at least one free report from each of the three credit reporting bureaus each year). At the same time, you should opt in to purchase a copy of your credit score from Equifax for less than $10. The Equifax score is most closely tied to the credit score used by mortgage lenders. If you're thinking about applying for a mortgage or home equity line of credit this year, you'd want to pull a copy of your credit history and score anyway, so this is a good time to do it. Once you have them, check your credit history carefully for errors to be sure that there's nothing else that's pulling down your credit score. From what you've written, my guess is that you'll be pleased with what you find on your credit history and the corresponding score. The best thing you have going for you is that you're paying all of your bills in full and on time each month. This goes a long way toward giving you a solid credit history and score. You can't reopen accounts you've already closed, but if you pay your bills on time and in full each month and maintain your oldest credit accounts -- even if you don't carry balances on them -- your credit history and score should stay in good shape. To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2009 Ilyce R. Glink

Buyers cancel purchase for odd reasons Can seller keep deposit if reason isn't specified on contract? Benny Kass Inman News DEAR BENNY: I had a few acres of rural property that I put on the market. I received an acceptable offer along with a deposit. Before the closing, the buyer withdrew the offer for a reason that was not listed on the contract. The buyer's Realtor requested the deposit back, and my Realtor told me it wouldn't be worth fighting, so I followed her advice. Later, I received another acceptable offer, but the same thing happened, as the buyer withdrew for a lame reason. Again the listing had been removed, and the deposit was returned. I thought that a contract was legally binding, and that if a buyer withdraws an offer for a reason not specified on the contract, he or she will lose the deposit. Am I wrong in my thinking? If not, what can I do to make sure this doesn't happen again? --Paul DEAR PAUL: In order to have a valid and binding legal contract, three elements are required: (1) an offer, (2) acceptance of that offer, and (3) consideration. Usually, the earnest money deposit will satisfy the third requirement, but consideration can also be where the seller takes the property off the market in reliance on the contract. Often, buyers will place contingencies in the sales contract -- such as the ability to get appropriate financing; making sure the house appraises at least to the contract price; or the buyer must sell his or her house first. These contingencies should have a time limit imposed, whereby if the buyer cannot remove the contingency, the contract can be declared void at the option of the seller. (Note: In today's market, a seller may not want to lose a sale and will agree to extend a contingency for a reasonable period of time.) If the buyer wants to back out of the contract using excuses that are not listed in the signed contract, I would consider this a default and (depending on the terms and conditions of the contract) you would be entitled to keep the earnest money deposit. Your real estate agent advised you to release the deposit to the buyers. Did you ask why -- other than it would not be worth the fight? Obviously if the buyer does have a valid reason, you probably would not want to have to go to court to litigate who gets the money. Keep in mind that although the buyer may be in default, unless he signs a release authorizing the holder of the deposit (called an escrow agent) to give it to you, the moneys cannot automatically be released. A basic rule of law is that when money is held in escrow (such as the earnest money deposit) the escrow agent cannot release the funds unless the parties agree or a court gives its authorization. In my opinion, you should have challenged your agent, and perhaps even discussed the situation with an attorney. How do you protect yourself? First, make sure that the deposit is large enough to make the contract buyer hesitate about trying to walk away from a contract. Second, should someone want to back out of another contract, make sure that you know the specific reasons, and that those reasons are specifically stated in the sales contract. DEAR BENNY: If your home is foreclosed on by your mortgage lender: (1) Will the lender go after you if the house sells for less than you owed? and (2) If there are two loans on your house, what is the role of the second mortgage (trust) holder? --Jefry DEAR JEFRY: Because my column is national in scope, I can give you only a general response. Foreclosure law is based on state, not federal, laws, and different states have different laws. Your first question involves what is known as a "deficiency." If, for example, you owe the lender $150,000, but the home sells at the foreclosure sale for $125,000, there is a deficiency of $25,000. Some lenders when they pursue foreclosure will start the bidding process at the amount of the outstanding balance, while others will set a minimum bid at less than the balance. Some states do not allow the lender to go after you for the deficiency, while other states do. You have to get the answer about your state from a local attorney. You also asked about the role of a second trust lender. In general, if the first trust holder forecloses, it wipes out the security of the second lender. On the other hand, if the second lender forecloses, anyone who buys at the foreclosure sale takes ownership subject to the first mortgage. In other words, the buyer steps into the shoes of the homeowner who was foreclosed upon and owes the money on the first trust. But even if the second trust holder's security (the deed of trust or mortgage document) is wiped out, you are still obligated to pay that lender. Keep in mind when you borrow money to buy or refinance a home, you signs two important legal documents: the deed of trust (called a mortgage in some states) and a promissory note. The second trust note remains valid even if the trust has been eliminated. DEAR BENNY: I have a problem and I can't find the solution. Back in the early 1990s, I purchased land to build a house. Unlike more recent times, I couldn't get bank financing to do the actual construction so I got private financing. I paid it off, and got a satisfaction-of-mortgage letter, but my county will not accept that for recording. The original deed of trust was recorded, and named a title company as trustee and a husband and wife as the beneficiaries. The county told me to contact the title company. Well, I visited the title company and they said they don't know what to do as the husband died and the way they are listed on the document is just their names, not joint tenants, etc. Any suggestions as to how to proceed? The widow of the couple that loaned us the money (which was paid in full) is over 80 years old. --John DEAR JOHN: Does the trust allow substitution of trustees? Most trust documents anticipate that a named trustee may die or not be able to function, so the beneficiaries would have the authority to select new trustees. If the widow is mentally competent, she should have the right to appoint substitute trustees who should be able to release your trust from land records. I would also retain local counsel. The lawyer may be able to convince the title company to release the trust, especially since you have proof of payment in the mortgage satisfaction letter. In the final analysis, however, you may have to go to court and file a quiet title action. This means that you are asking the judge to "quiet title" into your name. The judge will require that you make a concerted effort to notify (and serve) everyone named on the trust, and you may even have to advertise the lawsuit in your local newspaper. The judge, upon reviewing all your evidence and concluding that you have paid off the mortgage, will quiet the title into your name and extinguish the trust. If that happens, don't forget to record the judge's order on the land records where the trust is recorded. Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2009 Benny L. Kass

The truth about loan mods REThink Real Estate Tara-Nicholle Nelson Inman News Q: When I'm driving to work, it seems like every five minutes I hear another advertisement for loan modification services on the radio. I'm not behind on my mortgage, but it is set to adjust next year -- will my mortgage company actually work with me to stop that from happening? I'm also upside down by about $75,000 -- will they reduce the amount I owe, too? If so, will they charge me points like when I refinanced? Can I do it myself or do I need to hire one of those services? A: Believe me -- we've all heard those ads! And they are not all scams. Loan modification is a legitimate possibility, and there are do-it-yourself options as well as legitimate loan modification consultants with successful track records at helping their clients obtain modified mortgage terms that work for them. Mindset Management Getting your mortgage modified might very well be possible for you, but I don't know anyone who would call it simple, easy or painless. But the upside potential -- saving your home -- is good enough to warrant the pain. Part of the pain I see would-be loan modifiers experience is shattered expectations. So let's create some realistic expectations. First things first -- I do not see many people successfully obtaining principal reductions, that Holy Grail of loan modification in which the lender simply forgives a big chunk of the debt you owe, because your home is upside down. There is little to no incentive for a mortgage lender to do this, as it locks in their losses from the down market and allows you to reap 100 percent of the benefits when the market recovers. If your home is upside down and you don't want to own it unless you have positive equity in it, then loan modification may not be for you. If, on the other hand, you would like to keep your home for a long period of time and are OK riding out the bumps in the market, a modification might give you the relief from a mortgage payment adjustment that makes keeping your home feasible. Also, I think we have all heard the party line that lenders do not want to own more foreclosed properties due to the expense of maintaining them, the fact that they are not in business to own properties, the costs of foreclosure, etc. This mantra, while true, has caused many of us to expect that when we call up a lender, express that we'd like to keep our home and request a lower rate or payment, the lender will trip over themselves in their haste to help us avoid foreclosure. Suffice it to say, this is not exactly the case. The process of applying for and obtaining a loan modification takes the average homeowner somewhere between 30 and 90 days, filled with preparing detailed financial statements and packages; writing letters; calling for status checks; wondering why on earth your calls haven't been returned; again providing the same financial statements and letters you submitted to get the process going in the first place; getting a negotiator assigned; waiting for a new negotiator to be assigned when your first one quits to go work for a loan modification consulting firm; and so forth. Eventually, the lender offers a loan modification that provides a payment the borrower can live with. Or not, but there's no real way to know until you go through the process. Fortunately, applying for a loan modification directly from your lender does not cost anything, but if you use a consultant, you can expect to pay anywhere from $1,500 to $4,000 for their services. So, go into it expecting the loan modification process to be one of the least fun experiences you will ever have. Educate yourself about what loan modification involves so that you can make yourself as strong a candidate for loan modification as possible, and so that you can propose and negotiate a modification with long-term sustainability. And, again, stay mindful that the potential outcome of keeping your home is well worth it. Oh -- and if you lack the energy, the resilience, the fearlessness or the time to do this process, and you have a few thousand dollars to invest in saving your home, consider hiring a reputable, ethical loan modification consultant. Need-to-Knows According to HUD, a loan modification "is a permanent change in one or more of the terms of a mortgagor's loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford." Reality-check time -- lenders don't just prepare loan modifications to order. The loan terms they are willing to modify, as a rule, include the following elements, which are designed largely to reduce the borrower's mortgage payment: Loan term -- Lenders will often add months or years to the term of a mortgage, to give an owner more time to make up for missed payments, or to lower the amount of monthly payments; Loan type -- Negatively amortizing loans and fully adjustable-rate mortgages (ARMs) can be converted into interest-only and/or fixed-rate loans; Interest rate -- It is very common for a lender to reduce the interest rate as part of a loan modification; Scheduled or past rate/payment adjustments -- The interest rate and payment on a loan that has adjusted or is set to adjust can be "fixed," either extending the fixed-rate period before adjustment or converting the loan into a fixed-rate mortgage for the remainder of the loan term. The loan terms they are unlikely to modify? Principal loan amount, as discussed earlier. The exception is a government program called Hope for Homeowners, through which participating lenders agree to allow you to refinance your mortgage and reduce the principal to 90 percent of the fair market value of your home. I do not personally know anyone who has navigated this program successfully, but a number of lenders claim they are willing to make these exceptions to the no-principal-reduction rule on a case-by-case basis. Hope for Homeowners is, strictly speaking, a refinance program, not a loan modification; get more information at HUD.gov/HopeForHomeowners. Good candidates for modification are homeowners who (a) have a valid reason they fell behind in the first place, like a change in their income or a change in the payment amount, and (b) can document sufficient income to make the agreed-upon post-modification payments. Lenders don't modify loans for people who can't afford to make the payments they are agreeing to. Loans that have adjusted or are set to adjust are good candidates for modification. Unfortunately, it turns out that lenders seem to be more likely to modify loans for borrowers who are late on their mortgages (but not so late that the foreclosure auction is set for tomorrow!), and the companies most likely to grant modifications (in my experience) are the lenders who have gone under and been bought out. Also, loan servicing companies seem to be tougher to secure mortgage modifications from than mortgage banks. There are numerous self-help options for obtaining a loan modification. You can contact your mortgage holder directly, or find a free HUD-approved housing counselor at HopeNow.com. However, many borrowers I know have attempted this process solo and grown so frustrated with the lender's unresponsiveness and time-consuming false starts that they look for other assistance. If you don't have the time or energy to manage your own loan modification, or you just aren't getting anywhere with your lender, you might consider hiring a loan modification consultant. I know this is controversial advice, because there are charlatans galore in this field. With that said, there are reputable, ethical loan modification consultants who (a) offer money-back guarantees, (b) will not take your money until they have given you an accurate idea of what modifications they are likely to be able to help you secure, and (c) are actually helping people save their homes. I know attorney-assisted loan modification firms who have more than a 90 percent customer satisfaction rate and are able to complete modifications in about half the time it would take the borrower to do it themselves. Keep in mind that their services are not cheap, though -- expect to spend up to $4,000 for a good loan modification consultant. For that reason, you might want to give it a try yourself or with a HUD-approved housing counselor first, especially if you meet the above-described criteria for being a good candidate for mortgage modification. Action Plan 1. Gather all your financial documentation together, including: income and expense information and documentation; your most recent mortgage statement(s) from all mortgages; and bank statements. Your lender will need these items, and they will help you get clear on what you can and can't afford. 2. Write a hardship letter detailing why you are in mortgage and financial distress, and why you feel you will be able to get and stay current on your mortgage, if modified. 3. Find a HUD-approved housing counselor at HopeNow.com. 4. Contact your lender's loss mitigation department and apply for a loan modification. 5. If push comes to shove, ask your Realtor for a referral to a reputable loan modification consultant. Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2009 Tara-Nicholle Nelson

Big-name lenders come tumbling down Top real estate story of 2008 Tom Kelly Inman News What is the top real estate story of 2008? Fannie Mae? Lehman Brothers? Washington Mutual? A year ago, we discussed how the excessive extension of credit that led to defaults, foreclosures, home prices and more expensive mortgage money was the most talked-about story of 2007. Everyone in the home buying and refinancing process was complicit, including brokers, bankers, securitizers on Wall Street, wide-eyed consumers and real estate agents. Clearly, lenders made loans far too available, bowing to the pressure of Wall Street funds willing to securitize any instrument secured by a home. Yet home buyers and investors did not use caution. While genuine buyers determine what they can afford by measuring their borrowing costs against their income, many others were blinded by the dollars signs of potential appreciation and stretched themselves to the maximum. This year, the demise of the once-revered players who extended that credit is the story of the year. The big names have come tumbling down. Four short years ago, when housing still was the bright light in the economy, who would have expected the two biggest providers of mortgage money -- Fannie Mae and Freddie Mac -- to be pulled into government supervision? Who could have predicted that Lehman would file for bankruptcy protection after 158 years of doing business? Or that WaMu, which built its reputation on vanilla, 30-year, fixed-rate loans with down payments of at least 20 percent, would be derailed by an option adjustable-rate mortgage (ARM) whose most desirable option had owners owning more than they originally borrowed? What to do about all of this? The National Association of Realtors, the largest trade group in the world with 1.2 million members, recently offered a solution. NAR presented Congress with a Four-Point Housing Stimulus Plan to help stabilize the housing and mortgage markets. The crux of the package suggests using $130 billion of the $700 federal billion bailout funds on housing, specifically earmarked for an interest-rate buydown and more tax credits. That buydown would be a one-percentage-point, interest-rate buydown on fixed-rate loans for all buyers. The reduction reportedly would result in approximately 840,000 additional home sales and reduce the inventory of homes by as much as 20 percent. Inventories currently at a 9.9-month supply would decrease to approximately a 7.5-month supply. The buydown offer would be available for a specific time period. What about the homeowners who lived within their means, who did not try to buy more house than they could afford, who did not take a vacation with funds from a home equity loan they could not afford to repay? Insurance companies offer lower life insurance premiums to nonsmokers -- individuals deemed to be lower risks for not smoking. Why not offer a lower interest rate to borrowers who have toed the line? "In a situation like this," said Lawrence Yun, NAR's chief economist, "not every situation is going to be as equal or as fair as others." Ironically, the best rates used to be saved for borrowers with good credit who had saved enough for a 20 percent down payment. (What a concept!) They got fixed-rate loans -- the conventional mortgages WaMu was famous for. Then, WaMu and other lenders discovered a lot of money could be made in not-so-conventional loans. WaMu got into the subprime mortgage business full throttle in 1999 along with promoting its option ARM. Subprime lenders got hammered for the current state of the housing market, but the original concept filled a needed niche. The traditional subprime borrower did not conform to standard credit, down payment, income or job standards, and some lenders specialized in making those loans with higher rates and fees. There were unfair accusations and a lot of inaccurate information about subprime mortgages. First and foremost, a subprime loan is not any loan that comes with a balloon payment. Adjustable-rate mortgages with balloons have been around for years and are not new. The same goes for option ARMs, yet they all have been lumped into the subprime category. What WaMu did not do was pull back on its option ARM when loan brokers had no idea how to properly explain the potential fallout to consumers or were captivated by the money they could make by putting marginal borrowers in the loan. Consumers were to blame, too, betting that future appreciation would cover greedy decisions. The fallout occurred -- big-time -- bringing down the 119-year-old bank and several of its banking teammates. Big names, big problems. Such was 2008. To get even more valuable advice from Tom, visit his Second Home Center. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2008 Tom Kelly

Get ready to buy in 2009 New Year's resolutions for homebuyers Ilyce Glink Inman News As we get ready to say goodbye to 2008, it's worth looking back at the year that was for home buyers, sellers and homeowners. Frankly, I wouldn't be surprised if this year goes down as one of the worst ever for housing since the Great Depression. Housing values fell by double digits in many metropolitan areas. Housing starts virtually stopped. Inventories of new and existing homes grew dramatically. Mortgage interest rates remained relatively high, even as the short-term federal funds rate plunged to nearly zero by the end of December. Foreclosures reached record numbers, and lenders found themselves literally buried under stacks of short-sale proposals, foreclosure filings and loan modifications. Late in the year, Fannie Mae announced it would stop tossing renters who paid on time out of houses that had been foreclosed upon. Of those loans that had been modified, more than 50 percent went delinquent, reflecting the increasing number of jobs lost and diminished paychecks. The old lender's maxim holds true: If you don't have a job, you probably won't make your mortgage payment. Sometime around the middle of the year, when Fannie Mae and Freddie Mac were taken over by the government, lenders realized that having a real job with a real income is central to assessing someone's ability to make monthly payments of principal, interest, taxes and insurance. Having a great credit score simply isn't a good enough predictor on its own, which is why "no-doc" loans have entirely faded away. Lenders also rediscovered the beauty of having some skin in the game. Except for the USDA's rural loan program and a VA loan, zero-down-payment mortgages have virtually dried up. Sellers aren't happy. But there are plenty of deals to be had, as the economy is expected to get worse at the beginning of 2009. Higher rates of unemployment mean more foreclosures, driving down the price of homes. As we ended 2007, I wrote that some were comparing the 2007 housing market to the Great Depression. Looking back on this year, most housing markets took a turn for the worst. The silver lining for homebuyers: If you're looking to buy a house, 2009 could be a great year to close on a deal. If you're planning to buy a house this coming year, here's my annual list of New Year's resolutions you should consider making: As a buyer, I resolve to: 1. Get my credit and finances in shape. Put a lid on your spending, perform "plastic surgery" on your credit cards, and don't max out any one card (in fact, never charge more than 25 percent of your maximum credit limit) or your credit score will suffer. If you're going to cancel an account, do it in writing, but remember that you get bonus points on your credit score the longer you maintain a credit account. So a credit card account that you opened in 1984 is worth a lot more than one you opened last month. Don't forget that good credit also means job stability. Most lenders require that you work for the same employer for at least a year, and maybe two, before they'll approve your home loan application. If you're self-employed, they'll want to see at least two years of tax returns before you'll qualify for a conventional loan. If you're offered a better job in your field, by all means take it. But if you want to buy a home, try not to jump from job to job to job within a relatively short period of time, particularly if the job changes are in different industries. If you want to buy a house next year, pull a copy of your credit history and credit score. Try to reduce the amount of personal debt you have, including credit card debt, student loans and auto loans. While having personal debt doesn't mean you can't qualify for a loan, it will lower the amount of the mortgage a lender might be willing to give you. And, given the current mortgage crisis, lenders are paying close attention to your credit history and credit score. If you keep one resolution this year, choose to clean up your credit. One of the best things you can do to prepare for buying a home is to make your monthly debt payments on time. Even if you have a lousy credit history, lenders will be more forgiving if they see you've gotten your act together in the last six to 12 months. Federal law now requires each of the three main credit reporting bureaus (Experian, Equifax and Transunion) to give you a free copy of your credit history once a year. To get yours, go to Annualcreditreport.com. At the time, buy a copy of your credit score from Equifax. The cost is under $10, which is still less than buying it through MyFico.com. 2. Know how much I can afford to spend before shopping for a home. You have three options when it comes to figuring out how far your down payment and income will take you: (1) you can guess; (2) you can pay a visit to your local lender, who will prequalify or preapprove you for a loan; or (3) you can go online. Your lender will look at your income, debt, assets and liabilities, and come up with the maximum amount you can spend on a home. Once you know how much you can afford to spend, you'll avoid making a common, heartbreaking, homebuyer error: looking at homes you can't afford to buy. Too busy to visit a lender? There are several Web sites that offer good mortgage information. Try Bankrate.com for a state-by-state look at current interest rates from lenders who work in your area, including online lenders. Every major mortgage lender has a Web site. And, don't forget to check the rates at your local credit union -- it's often the cheapest place to get a loan. 3. Know my neighborhood, and be comfortable with it, before I buy a home there. Everyone wants to live on the best block in the best neighborhood. Unfortunately, that location may not be in your budget. You might be able to afford the smallest home on the best block, but that won't do you much good if you need four bedrooms and that home has only two. Balancing affordability with location means you will have to compromise. While you may be willing to compromise on the size garden you have, you may not be willing to change your children's school districts. Start looking at various neighborhoods and the amenities they offer. Is there a park? Shopping? Transportation? A house of worship? Do your friends and family live close by? Be careful not to limit your choice of neighborhoods too early on in the process. Explore new areas and the housing stock and amenities they offer. Make sure you spend time during different parts of the day and night in the neighborhoods you like. Walk the streets, and go into local shops. Visit the neighborhood police department and local schools. Stop by the local park district offices and see what programs and classes are available. Drive the commute from prospective neighborhoods to your job during rush hour. Get to know the neighborhood and its residents inside and out before you buy. 4. Interview at least three brokers before hiring one. There are traditional agents, buyer agents, exclusive buyer's agents (who never represent sellers) and discount agents. There are large brokerage firms and small neighborhood shops. You can even choose not to use a real estate agent, although as a buyer, you won't be out of pocket for the cost, so there's no reason not to use one. Many buyers today opt to use buyer agents, or buyer brokers, who represent the interests of the buyer rather than the seller. One older study showed that buyers using buyer agents or exclusive buyer's agents paid less for their home than those who use traditional agents. Choosing which agent to use -- or choosing not to use an agent -- can be critical to your successful purchase. Look for an agent whose philosophy and mannerisms are compatible with yours. Look for someone you can trust, with whom you wouldn't mind spending a lot of time. Look for an agent who has ample experience, and who is knowledgeable about the neighborhoods you've selected for yourself. 5. Read and understand all documents before signing them. So many folks don't even bother to read either their purchase contract or loan documents. That's unfortunate, given the enormous legal implications of a home purchase. But it's a bigger deal this year if you're buying a home in a short-sale transaction or a property that's been foreclosed upon. Before you put down any money towards the purchase of a home, understand the process that you will need to go through to buy the home. With a foreclosure or short sale, the home-buying process is stretching out from days to weeks or even months. Understand what it will take to get out of the deal in case it doesn't work out and exactly when you must make the decision to pull out of the deal before you lose any money you put down to buy the home. Take the time to read all documents thoroughly. Ask an attorney or broker to explain things that don't seem to make sense. It's important that you understand what promises have been made and what warranties have been granted, and what implications these documents have for your personal financial and emotional well-being. Even if you live in a state where attorneys are not generally used to close residential transactions (I'm not talking about the lender's attorney, who the buyer typically pays for, but someone who actually represents the buyer's interests in the deal), it's extremely important to hire a knowledgeable real estate attorney to walk you through a short sale or foreclosure. NEXT WEEK: If you're trading up, you've probably got a home to sell before you can buy. How can you sell in a slow market? How can you compete against 10 other homes for sale in your neighborhood? Next week, we'll continue our look back on 2008 and I'll have your home seller resolutions for the New Year. To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2008 Ilyce R. Glink

Settlement cracks concealed by sellers Is recourse possible or are buyers stuck with repairs? Barry Stone Inman News DEAR BARRY: Since purchasing our home, numerous cracks have appeared in the walls. Some are as wide as half an inch. We've also noticed that patching has been done at many of these cracks, indicating that the sellers of the home were aware of the problem but had attempted to hide it. None of this was reported by our home inspector when we were in escrow. How serious do you think this problem is, and what should we do about it? --Thomas DEAR THOMAS: Cracks as wide as half an inch indicate a major structural problem with the foundation system and/or instability of the soil. The fact that so much movement has occurred since the cracks were patched warrants immediate attention and concern. When symptoms such as these are intentionally masked in order to sell a property, some home inspectors are able to see through the concealment. But when cosmetic repairs are effectively done, it is sometimes possible to prevent discovery of building settlement by a home inspector. Your first course of action is to notify all parties to the transaction by certified mail. Inform the home inspector, the sellers, their agent and your agent that there are serious, undisclosed problems with the home and ask that they all come to the property to see what is taking place. And don't perform any manner of repair work in the meantime. Inform all parties, particularly the sellers, that you want a detailed structural engineering report on the home. The sellers should accept whatever costs are necessary to repair the structural defects, as determined by the engineer. If no one is willing to cooperate, you should enlist the aid of an experienced real estate attorney. DEAR BARRY: I bought a small commercial building about four years ago. Recently, I discovered evidence that there was once a fire in the basement. This was never disclosed by the seller. Now the seller says that the tenant in the building had the fire, but the seller provided no details. I have just listed the property for sale and don't know what I should disclose to buyers. What do you recommend? --Mary DEAR MARY: If the fire was a substantial one, the fire department was probably called, and an insurance claim may have been filed. In that case, the fire department would have an official report of the event. Therefore, you should check with the local fire authorities to see what their records show. If they have a fire report on file, it may indicate whether the owner of the building was aware of the situation. You should also ask the seller provide the name and policy number of the insurance company so that you can learn what claims may have been made. If the fire department and the insurance company were never notified, then the fire may have been small and the damages cosmetic in nature. In that case, you should disclose to future buyers of the property as much as you know about the situation and about your unsuccessful attempts to learn more. You should also hire a professional inspector to evaluate the condition of the property, including the fire evidence in the basement. To write to Barry Stone, please visit him on the Web at www.housedetective.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2008 Barry Stone

Pay off mortgage with IRA money? While it can be a last resort, huge tax bite likely Ilyce Glink Inman News Q: I would like to pay off my mortgage with an IRA distribution. A friend told me that you have some advice on your Web site about the best time of the year to do this. The amount on my condo is only about $40,000, but of course my IRAs and regular mutual funds are shrinking daily. Can you tell me if I should do something before the end of the year or should I wait until next year? A: I don't think I'd pay off my mortgage with an IRA distribution for a few reasons. First, when you withdraw cash from your IRA, you'll pay income taxes at your marginal tax rate on the distribution. If you're under the age of 59 1/2, you'll pay a 10 percent tax on the distributed amount on top of the taxes. How much do you need to withdraw to pay off the house? Assuming that you need $100,000 in order to pay off the house, it will look on your federal tax return as if you added that amount in income, which is likely to push you up to the highest federal and state tax rates. It'll cost you another $10,000 if you're under 59 1/2. That means you might have to withdraw as much as 45 to 50 percent more than you need to pay off the loan, or $145,000 to $150,000 from the IRA. Next, if you withdraw this cash from your IRA, you'll be selling assets at their lowest price in years. Unless you think that the United States and world stock markets will never recover or won't recover for many years to come, you'll be selling at a low point and miss out on the gains you'd earn back as the stock market rises. If you can't afford your mortgage payment, you should certainly consider refinancing your mortgage. If you can't refinance (perhaps because the house is worth less than your mortgage amount), only then consider using an IRA distribution to pay off the mortgage loan. Lastly, you have to really decide why you would want to pay off your mortgage in this manner. If you are able to refinance today or in the coming weeks, interest rates on home loans appear to be heading lower. If you are able to refinance at 5 percent or 6 percent, that interest rate is quite low and you would be able to preserve the money invested in your IRA for future use during retirement. If you're bound and determined to withdraw the cash, you should do it in smaller amounts so that you're less likely to add to your income tax burden the following April 15th. Also, if you withdraw your money early in the year, your obligation to pay any tax on that money won't occur until April 15th of the following year. The company holding your IRA will, in any event, withhold the 10 percent penalty (if you owe one) at the time of the withdrawal. Your tax preparer or accountant can guide you further. Q: My husband and I are getting divorced. The house is in my father's name and in mine. My father put down $35,000 at the closing seven years ago. The house payment came directly out of my paycheck (I work for my dad). I left the house due to spousal abuse, and my soon-to-be ex-spouse is living in the house. The judge ordered him to start paying half of the mortgage until the property settlement is done. My dad has been paying the other half of the mortgage. What is the portion that each of us will get in the divorce settlement? Remember that my father and I are the only ones on the note. A: If the property was purchased before you were married, then your ex-spouse might not be able to make a successful claim of ownership to the property. However, if you were already married when your father purchased the house, it's possible that the divorce court will find that your half of the property is actually marital property. That means it could be an asset on the line when it comes down to dividing things with your spouse. If the property was purchased half by you and half by your father and the law deems that your half falls within marital property, then your spouse might be entitled to a quarter share of the property. If that's the case, your soon-to-be ex-husband would also be obligated for his share of the expenses for the home. Since he is living in the home, the judge has already ordered him to pay half of the expenses for the home. The question is whether the judge feels that he needs to pay only half the expenses because your father owns the other half of the home. Your father could make the argument that he is not getting any of the benefit of the home and that the person living in the home should actually pay all of the expenses of owning the home until the divorce settlement is final. You and your attorney will need to strategize on a plan of action to deal with the many issues involved in your case. Just because your father owns part of the home won't mean that the judge won't consider your half share part of what you and your husband own. At the same time, if there is a mortgage on the property, your husband would have to assume part of that debt. When you take into account the debt and the value of the home, your husband may be entitled only to a small amount of money for what his interest in the home might be worth. In dividing up all of your assets, the amount he might be deemed to own in the house is considered with all other assets. If you want to keep the home, you might be entitled to keep the home, or your father might then be entitled to force the sale of the home should your husband be unwilling to negotiate giving up any interest he may have in the home during the divorce proceedings. Q: Can I buy a house with no money down and truly awful credit? A: It would be extremely difficult to do so these days, if it was possible at all (and I'm not sure it is). You should spend the next year or two cleaning up your credit and saving up for a down payment. Then, you can buy a house with confidence, knowing that you'll really be able to afford it. To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2008 Ilyce R. Glink

Downsizing the down payment REThink Real Estate Tara-Nicholle Nelson Inman News Q: I just learned that I qualify for my city's first-time homebuyer's program. I thought it was a grant, but it's actually a second mortgage. Is this a good deal or not? Is there anything I need to watch out for? A: Congratulations! The current market has presented the odd paradox for a buyer's market of having lower prices, but increased down-payment requirements. Many first-time homebuyers who would never have been able to afford a home a couple of years ago have been frustrated in their efforts to take advantage of lower home prices because they do not have a large chunk of money for a down payment. One of the last remaining sources of down-payment assistance for hard-working homebuyers are city first-time homebuyer down-payment assistance programs (DAPs) -- if you qualify for your city's DAP, kudos! Mindset Management Did your parents ever tell you that nothing in life is free? Same goes for money from your city to help you buy a home -- it seems like free (or cheap) money, but there are some intangible costs. Participating in a DAP adds one more party to the transaction -- another lender, really, who likely has additional restrictions and guidelines that must be followed. Incidentally, many times the DAP staffers are government employees who are burdened by bureaucracy and red tape; as such, their "piece" of your purchase transaction may take longer to get decisions, get loan commitments and get funded than the elements of your transaction that are handled by commission-paid real estate and mortgage professionals. With that said, government DAPs are an incredible resource of down-payment funds, usually at low interest rates and on flexible and favorable terms, in an otherwise credit-crunched market. The upside is usually worth every second of added work and stress. In my experience DAP staffers will work more quickly and decisively if they are asked to, nicely, by the buyer/borrower directly (rather than only ever speaking to the buyer's Realtor and mortgage broker). It behooves you to establish and maintain a pleasant working relationship with the administrators of your DAP. Need-to-Knows Government DAPs have various formats. Some offer only homebuyer education and counseling. Others offer grants or actual properties for sale at a below-market price. Most frequently, though, government DAPs offer second mortgages that you can use to cover some or all of your down payment or closing costs. In a mortgage market where zero-down loans are all but nonexistent, the funds offered by government DAPs empower buyers to own homes who otherwise would not be able to buy. How do these DAPs work? Often, the city requires prospective participants to take a homebuyer education course. Usually, the buyer must first qualify for a first mortgage from a regular mortgage lender. The vast majority of mortgages that will allow buyers to get their down payment from a government DAP are government mortgages, like FHA- (Federal Housing Administration) or state-insured loans. Fortunately, these government-insured first mortgages generally have a very low down-payment requirement, mandating as little as 3.5 to 5 percent down -- some or all of which you can get from the DAP. The DAP/second mortgage provides you with a certain number of dollars that you can apply toward either down payment or closing costs, or both, depending on the program. I've seen them range from $5,000 to $75,000. There are some common characteristics you do need to be aware of and take into account when deciding whether to participate in a DAP: First-time buyer. Most programs define a first-time homebuyer as someone who (a) hasn't owned a home, (b) in the state, (c) in the last three years. That's right -- you can own a home in another state and still possibly qualify. Also, people who owned a marital home, then were divorced and haven't owned since the divorce are often considered born-again first-time homebuyers. Equity sharing. It is not uncommon for a DAP to require that you share some percentage of the equity you have built up when you sell the property. For example, if the DAP provides you with a 5 percent down payment, the program may require that when you sell it, you repay the DAP loan plus 5 percent of the appreciation your home experienced during the time you owned it. Resale restrictions. Most DAPs are designated to help low- and moderate-income households, as defined by a limit on income specified as a percentage of the average household income for your metro area, parsed out based on how many people are in the household. Some DAPs have similar resale restrictions -- you may only sell your home to someone who falls within the same income limits. This is one restriction to be really careful about -- it significantly limits the pool of prospective buyers to whom you can sell your home, and may make it much harder to get your home sold when you want or need to move on. Deferred or silent payments. Many DAP second loans defer payments for five or more years, so that you don't have to make any payment on the second mortgage for a good period of time. Others are actually "silent" -- you make no payment on them at all for 30 years or until you trigger another repayment event. Repayment triggers. Most DAP mortgages require the borrower to pay the mortgage back in full when any of the following events takes place: (1) the property is sold, (2) the property is refinanced and cash pulled out against home equity, or (3) the property is no longer owner-occupied or becomes used as an investment property. Low interest. Interest rates on DAP seconds are usually very favorable -- sometimes extraordinary in how much lower they are compared to market-rate second mortgages, which usually have higher interest rates than the going rate for first mortgages. Currently, many DAP second mortgage rates are running as low as 2 or 3 percent up to 5 percent. Adjustable-rate mortgage DAPs are generally tied to a buyer-friendly index and may have no added margin. Additional restrictions. DAPs usually add some restrictions (directly or indirectly) to the transaction -- hurdles you must leap if you are relying on a DAP for your down payment. For example, DAPs are compatible only with government-insured loans; these loans have fairly low debt-to-income ratios and have property condition requirements, so you probably can't use your city's DAP to buy a major fixer-upper. Also, many DAPs have their own condition requirements, purchase price limits, debt-to-income-ratio maximums (which may be lower than those imposed by the guidelines of the first mortgage), and requirements that the buyer put in a certain amount of money (e.g., 1-3 percent of the purchase price) from their own funds. While these restrictions might seem burdensome, they are all imposed to ensure that buyers who use city money buy homes in good condition, and don't overextend themselves -- minimizing the likelihood you'll end up in foreclosure. Action Plan 1. Run a search for 'Your City's Name' and 'First Time Homebuyer Program' or "Down Payment Assistance Program" to see what's available in your town. Look closely at the income limitations to get a very rough and dirty idea of whether you might qualify. 2. Ideally, select a Realtor and mortgage professional (whether a broker or an in-house lender representative) with a track record of successfully closing transactions involving city DAPs. 3. Attend your DAPs homebuyer education workshop -- you'll learn lots about real estate and mortgage basics, your particular DAP, and other information to stack the decks in favor of successfully obtaining DAP funds for your home purchase. 4. Stay involved -- make an interpersonal connection with someone at your DAP office, and maintain it -- you may need to call on it if you encounter any glitches with the DAP during escrow. Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2008 Tara-Nicholle Nelson

Owner fears losing house while in prison Can creditors legally come after real estate? Ilyce Glink Co-written by Samuel J. Tamkin Inman News Q: Can a company put a lien on your house or property if you're incarcerated? My brother has been in jail for 10 years. He returned his car to the finance company and it in turn auctioned it off for $4,000 less than what he owed on it. Can the finance company sue or take his house? A: Whether a person is incarcerated or not isn't the issue. If a creditor is able to get a judgment against the person that owed it money, that creditor can try to satisfy that judgment anyway it can. One of those ways is to go after assets owned by the debtor: his bank accounts, cars and even real estate. The simple answer to your question would be that your brother's house is at risk if the creditor has a valid judgment against your brother to force the home to be sold. In some circumstances, the home may be protected depending on how the title to the home is held and whether your brother's family lives in the home. But you'll need to talk to an attorney to go over these specific issues. Most states have time limits for judgments. You should try to determine whether the creditor still has the right to pursue the judgment against your brother. Ten years is a long time. The creditor might have had to go back to court to keep the judgment against your brother active. If the creditor did not follow the proper procedures in keeping the judgment against your brother alive, the creditor may have lost its right to continue to go after your brother. Q: I have a long driveway that I share with two neighbors. My neighbors have more frontage acres on the road but no driveway. My home is quite old and their homes are about 10 years old. My seller was too cheap to put in additional driveways when he had the other homes built. Can I make them put a driveway in and prevent them from using my driveway? A: Before you try to force your neighbors into building their own driveways, you're going to have to do some homework and understand a little about the legal rights your neighbors might have to use your driveway. Your homework will be to search your files to see if you can find your title insurance policy from the purchase of your home. A title insurance policy discloses issues that affect the title to your home. That policy will show what mortgages, real estate tax issues, easements, and other legal documents that affect your home and land. Look for a document that shows if your seller created a homeowners association for your home and your neighbors' homes. Your seller also could have created an easement agreement for the shared use of the driveway. Either one of these documents could outline the rights your neighbors have to use your driveway but may also outline the costs they might have to share to maintain the driveway. Finding those documents -- if they exist -- might be the easy part. If you do find them, you'll know whether you're stuck with your neighbors using your driveway and whether they will have to share in the costs of maintaining it. But what if you don't find any documents that allow your neighbors to use the driveway? Your situation becomes quite tricky. In some cases, easements can be created due to specific circumstances involving the land and the way it was developed. If local municipal officials prohibit access to the main road except for the continued use of your driveway, your neighbors effectively would lose all access to their land if you cut them off. Therefore, when your seller subdivided the land and used your driveway to allow access for your neighbors, your seller's actions might have been sufficient to create that easement right. But if the need for that easement later is eliminated, you might be able to claim that your neighbor's right to use your property ended at that time. Easement rights differ somewhat from state to state so you would need to consult with a local real estate lawyer further to see what circumstances apply to you and your neighbors. While the legal issues here might give you reason to terminate your neighbors' rights to use your driveway, you might also want to consider neighborly issues. If you have a community that gets along and you enjoy living in that community, think about why you are determined to terminate the easement. Are your neighbors doing something that disturbs your use and enjoyment of your home? If you can terminate their right to use your driveway, but decide not to go that route at this time, you could still allow them continue to use the driveway and give yourself the right to cancel the agreement at some future date if circumstances change. For example, if your neighbors build their own driveways, don't share in the maintenance and costs of your driveway, or if your home or their homes are sold, the easement could end. This way, you might maintain your right to terminate their rights in the future while being neighborly today. To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2008 Ilyce R. Glink and Samuel J. Tamkin

Surprise loan irks condo buyer Why HOA's payment demands may not be justified Benny Kass Inman News DEAR BENNY: I bought a condo just over a year ago. It was difficult to get a certificate for the sale, because there was no operating HOA. However, when the Realtor finally got it from an interim property manager, everything was clear; there were no encumbrances on the property. After I bought the property, a more active HOA began making decisions. I then found out that there was a large loan that was taken out for repairs on the property several years before I bought my condo. It was initiated and signed by the property manager at the time (who no longer lives there), and there was no HOA approval in writing. The loan was, in essence, a signature loan between the property manager and the bank. The property owners have been paying interest only on the loan, and now the principle is due. The HOA is asking each owner to pay his or her portion of the loan. Am I required to pay my portion of this loan since I was unaware of its existence when I bought the condo? If I am not required to pay my portion, who is? I have considered going back to the seller, but I doubt if she would be willing to pay off a loan on property she no longer owns. The title company is also not responsible because the property was not used as collateral on the loan. --Sylvia DEAR SYLVIA: Welcome to the wonderful world of community association living. I strongly suggest that you immediately retain counsel to assist and advise you. There are many parts to my answer. First, does your state require that sellers provide you with certain disclosures about the condition (both financial and physical) of your association? Many states specifically require such disclosures, which would have (should have) disclosed the existence of the loan. Second, your lawyer -- and perhaps the association's attorney -- should carefully review the loan documents. It is possible that the loan was not authorized by the association in the first place, and thus could be challenged in a court of law. Third, was the loan recorded on the land records in the county where the property is located? If so, then your title company should have alerted you to this. Finally, your lawyer should look at the loan documents to determine if, in fact, you as a new owner are responsible to make any payment at all. The general rule of community association law is that a new owner is bound by all legitimate obligations of the association. In this case, however, the loan documents may not "run with the land" and may not apply to you. Incidentally, in the future don't call a condo a homeowner association (HOA). There is a difference. DEAR BENNY: Not only is our association suffering foreclosures but here's the twist: Many unit owners are paying their mortgage but not the dues and a special assessment. Also, we have a published fine schedule for individual unit problems, but one person now refuses to pay her fine. What is the best way to make sure we collect our dues and fine payments? --Theresa DEAR THERESA: Your association has a set of legal documents, whether it is a condominium or a homeowner association. Those legal documents should spell out the rights and obligations of the owners to pay their assessments on a timely basis. The documents will also provide you guidance on what legal rights the association has to pursue legal action against any delinquent owner. I also suspect that your documents provide that if collection efforts are taken, the association can collect reasonable attorney's fees in addition to the delinquent assessments. Your association should immediately retain legal counsel who understands community association law. I have often said that if the delinquency is one month late, it's hard to collect. If it's two months late, it's harder to collect. And if it gets to three or more months, it may be impossible to collect. Associations should adopt a "zero-tolerance" approach to delinquencies. Act quickly. It sends a clear signal to all other owners that the association will not allow delinquencies to mount. DEAR BENNY: I live in a gated deed-restricted community in Florida. There is a homeowner association, but the developer controls the voting by having two-thirds of the outstanding votes until he sells 90 percent of the lots and then transitions the homeowner association to the property owners. My question is regarding changing the declaration of covenants, conditions and restrictions for the community. Can the developer, because he controls votes of the association, substantially alter the CC&Rs to make them very restrictive as far as existing homeowner rights? I purchased my home with a given set of CC&Rs in place, and it doesn't seem fair or legal to have the developer place further restrictions on me. Some of these new restrictions are quite arbitrary. Would these new restrictions apply to my existing home? --David DEAR DAVID: I don't practice law in Florida so I can provide you only with a general response. You -- and other owners in your community -- should consider talking with local counsel for specific answers. The general rule of community associations is that an owner is legally bound to the terms of the existing legal documents and as they are properly amended from time to time. So, yes, because the developer retains control of your association, he has the right to amend the CC&Rs -- so long as he follows the rules relating to amending those documents. You should organize the 10 percent of owners and retain an attorney to assist you. Perhaps if the developer realizes that you have concerns -- and will take all appropriate action to try to stop him from making changes -- he will agree to rescind his changes. The developer wants to sell lots, and as you know, this is a very difficult real estate market. If you mount a publicity campaign to let the world know of your concerns, the developer may be unable to sell more lots. Of course, your attorney should be consulted to make sure that you are not violating any local laws -- or the CC&Rs. DEAR BENNY: I recently bought a home where entire streets consist of houses for sale. The home was bank-owned (in foreclosure) and was priced right. I bid $10K less, thinking that the bank would be happy to get rid of the property. The bank counter-offered at $2K less than the selling price. While I was thinking about responding, my real estate agent told me that the bank had received another bid, and that if I didn't accept the counteroffer, I'd probably lose the house. What could I do? I accepted the bank's counter offer. In the back of my mind, though, I wondered where this second buyer mysteriously came from. With the large number of houses available and the small number of buyers, the odds of two people bidding on the same house (which incidentally had been on the market for six months without a nibble) seemed small. And then I found out the seller's agent works for the same real estate company as my agent. That increased my suspicion. I mentioned my concern to my agent, and he said he had seen the second offer, and it was indeed valid. Is there any way to find out if I was deceived? And if I was, do I have any recourse against the Realtor? --George DEAR GEORGE: You should have asked your agent for a copy of the second bid before you accepted the bank's counteroffer. It is not too late, however. Your agent has advised you that he saw the second bid. I would demand from him -- or his manager -- that he obtain and produce a copy for your review. Although they have the right to delete the name and other personal information from that other offer, you have the right to see what your agent saw. If your request is rejected, I would file a complaint with your state real estate commission. You also have the right to file a lawsuit against the agent if he refuses to provide this information to you, but that route can be expensive. The difference between your original bid and your final purchase price was $8,000. A lawsuit may cost you that much -- if not more. DEAR BENNY: I paid off the loan for my house in May of this year. I received a letter from the mortgage company stating the loan has been satisfied and I am now responsible for homeowner insurance. At this time they also returned accumulated escrow funds. Is there anything else I have to do? --Ingrid DEAR INGRID: You have to make sure that your mortgage (usually called a deed of trust) is formally released from the land records in the county where your house is located. Ask your former lender to confirm that they arranged for this release. Some lenders will do this on their own, while others will not. You should get your original promissory note and deed of trust returned to you, marked "paid and cancelled." If you are having trouble determining whether the release was filed, the local recorder of deeds may be of assistance. Otherwise, you should contact a local attorney who should be able to quickly find the answer. Don't forget to advise your county real estate tax office to start sending you the real estate tax bills. And one other suggestion for those of you who had automatic bank withdrawals to pay your mortgage: Make sure you stop these payments immediately. You would be surprised at the number of people who forget to do this, and suddenly wake up to learn that the former lender is still receiving the monthly mortgage payment. Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com. *** What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story. Copyright 2008 Benny L. Kass