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Penner Law Firm Home > Blog Home > Owner Occupation of Property: Primary Homes, Second Homes, Investment Properties

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1. Owner Occupation of Property: Primary Homes, Second Homes, Investment Properties

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   March 1, 2010 by Daniel Hamad under Mortgages, real estate

   People purchase properties for various reasons.  Some people need a first home, or a new home.  Some want a vacation house.  Others live part time in different places.  Think of the so-called “snow birds” for an example of this, where they live summers in the north and winters in the south.  No matter the intended use of the property, purchasers can find loans.  But depending on the intended use, the requirements of lenders may vary.

   Properties break down into three large categories: 1) primary homes; 2) second homes; and 3) investment properties.  Each carries various risks and therefore lenders put various requirements on them.

   Primary Homes

   Primary homes (also known as primary residences) are just what they sound like – the home that the homeowner lives in.  The homeowner must live there the majority of the time, and must not use it as a rental property.  A loan granted on this type of property will likely be significantly lower priced than a loan granted on any other type of property, for reasons we will get into later.  Lenders are also more likely to grant this type of loan, for the same reasons.

   Loans approved as primary home loans generally require that the homeowner have the intention of either moving into the property (in the case of a purchase) or of remaining on the property (in the case of a refinance) at the time of the loan closing.  If the homeowner knows that they will not be living in the property, they cannot assert to the bank that they will be, and they will not be obtain a primary home loan for the property.  In fact, at the time of closing, they will be required to certify that they intend to live on the property.

   Second Homes

   Second homes is a somewhat nebulous category which includes seasonal homes and homes for people that, for example, live half the week in one location and half the week in another.  This category is stuck between primary home loans and investment properties because though many people own multiple properties, they don’t always own those properties for the purpose of making money off of them.

   Investment Properties

   This is the second most common type of property, after primary homes.  Investment properties are those which, for example, you would rent out to offset part or the entire purchase price.  Whether you plan on actually making a profit or not, the property may be considered to be an investment property, depending on how you use it, and how much you use it personally.

   Investment property loans are more expensive than primary home loans, and are more difficult to get.  Why?  Well, let’s think about this logically.  Let’s say a homeowner is having trouble meeting all of their obligations.  What are they going to stop paying first?  The mortgage on the home they actually live in, or the property they see only a few times a year, if at all?  The answer must be that they will do everything they can to retain their actual home, and will let the investment property go.  This translates into investment property loans being given a higher risk rating than are primary home loans.  Therefore, interest rates are higher.

   Nothing requires you to be the occupant of a home.  But if the owner will not be the occupant, they must inform the lender.  The lender will determine whether they are still willing to lend on the property, and at what interest rate.  A lender may also consider different factors in granting an investment property loan, such as the possibility of rental income.  Under no circumstance should the owner misconstrue their intent with regards to the property.  If they are caught doing this, it will only cause trouble down the line.  This is not to say that just because a property is purchased as a primary home, it can only ever be used as one.  However, at the time of the closing of the loan, there can be no intent already formed to use it in a way inconsistent with the terms of the loan.

   Remember, no matter your property type or where you live, Penner Law Firm and Hartford National Title can assist you!

   Tags: investment property, lending, mortgage, primary home, real estate, second home | Comments (0)

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2. Upside Down Mortgages: Loan Modification, Short Sales, Deeds in Lieu, and Foreclosure

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   February 15, 2010 by Daniel Hamad under Foreclosure, real estate

   In today’s housing market it is not at all unusual to find homeowners holding property which has been significantly devalued.  In many cases, the remaining amount owed on the mortgage is now significantly above the actual value of the home.  In other words, the loan-to-value ratio is now over 100%, despite months or years of payments.  This is known as being “upside down” or “under water” on the mortgage, and results in the homeowner being unable to pay off your mortgage just by selling the property.

   In addition to this, based on the economic conditions and job markets of today, many borrowers find themselves behind on their mortgage payments.  When these two conditions combine, homeowner’s choices begin to narrow rapidly.

   While the particulars vary by property owner, generally there are four options available for getting out from under an upside down mortgage, which include:

   1. Loan modification and/or payment plan
   2. Sell the property and/or short sale
   3. Deed in Lieu of Foreclosure
   4. Foreclosure

   A loan modification or payment plan is the most straightforward method of solving a problem of falling behind on payments.  These options also have the added benefit of enabling the homeowner to stay in the home.  In order to obtain a payment plan or loan modification, the homeowner would contact their lender and work directly with them.  No attorney needs to be involved.  The lender would lay out the requirements that the needs to meet and it would be the homeowner’s responsibility to show that they meet the requirements.  If you have a temporary lack of funds, they may be able to set up a payment plan where you pay less for a few months and make the difference up later.  Payment plans are most common with issues of temporary unemployment, illness, or other issues which result in a short-term lack of funds.  If, by comparison, a homeowner is not expecting to be able to make up the payments later, a true loan modification may be necessary.  This is an option where the bank agrees to lower the interest rate or make some other change to the loan, in order to make it more affordable to the homeowner.  The bank would do this if they believe they would make more money in the long run by reducing the interest rate or balance, than they would if the loan failed and went into foreclosure.

   If the homeowner’s financial situation is more serious and a reasonable reduction in monthly payments will not help, it may be difficult to stay in the property.  The question then becomes how to best leave the property.  How will the homeowner leave with the most money, the least debt, and best credit rating, possible.  A homeowner will want to get the property on the market as soon as possible.  The best idea is to get the property on the market before the lender starts sending notices of default or of foreclosure.  Recognizing that the mortgage is under water, the home will likely have to go through the short sale process.  The homeowner will again have to work with the bank, making them aware of the situation.  If a deal has been made with a purchaser, the sale price will not cover what is owed on the mortgage, and the money is not available to cover that difference, the bank will have to be convinced to forgive the remaining debt.  This is the very definition of a short sale.  A homeowner will most certainly want to have an attorney assisting you at this point, as negotiating with the bank can be a long and complicated process, requiring the homeowner to submit significant personal and financial information to the bank.

   Finally, if the bank will not agree to a short sale, or if a purchaser is unable to be found, a homeowner may decide to consider a Deed in Lieu of Foreclosure, or the Foreclosure process itself.  A Deed in Lieu of Foreclosure is, in short, a process in which the homeowner turns the home over to the bank voluntarily.  The bank would then forgive the remaining amount owed under the mortgage.  This also avoids the long and hassle-filled process of dealing with an actual foreclosure, and may not harm your credit to the same extent.  The foreclosure process itself can be long and draining to both a homeowner and their credit report.  Please check back later for a future article detailing the foreclosure process.

   No matter what process a homeowner chooses, they should not delay in making or enacting their plans.  Homeowners should contact experienced attorneys as soon as possible to discuss the best course of action in any particular case.

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3. Splitting After a Split: Divorce and the Consequences of a Short Sale

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   January 18, 2010 by Beth Grassette under Divorce, real estate

   A divorce can oftentimes exert considerable stress on a couple’s financial situation, resulting in the need to make important decisions about the distribution of assets and satisfaction of liabilities.  Where a couple is faced with a property valued under what is owed on a mortgage or the prospect of foreclosure due to nonpayment, a short sale may be preferential.  A short sale is the sale of real estate in which the sale proceeds equal less than the amount owed towards the mortgage or mortgages on the property. A short sale requires that the lender, or holder of the lien on the marital property, agrees to a discounted or reduced repayment of the loan.

   In these circumstances, when a short sale is considered, there are frequently many benefits associated with retaining a qualified and knowledgeable real estate attorney. A competent attorney will be able to provide answers to all of your questions regarding the short sale process, as well as review your agreement with the lender and realtor in order to ensure that all potential ramifications of the short sale are accounted for. Important considerations may include tax consequences, credit score and reporting activities on behalf of the lender, and the potential for a deficiency judgment (an amount that may be owed to the lender representing the difference between the loan balance and the proceeds of a short sale).

   The first important consideration, in deciding whether to utilize a short sale to solve a financial problem, is the potential effect of a short sale on the couple’s credit report and score. While a short sale will almost inevitably cause a decline in an individual’s credit score, a short sale’s impact on a borrower’s credit score will often depend on the timing of the short sale and will almost always be less than the decline resulting from a foreclosure. In most cases, the longer a borrower is in arrears and is unable to pay amounts owed to a lender, the worse the impact is on the credit score. If a borrower is able to remain current on mortgage payments during the short sale process, the decline in the credit score will be less significant. Understanding the resulting implications of a short sale and the way in which these implications will impact a couple in the future is an important step in making an informed decision regarding the disposition of the marital home.

   The next issue to consider is whether the lender will have recourse against the borrower for the difference between the sale price of the property and the amount owed on the mortgage loan.  A deficiency judgment is a judgment awarded by the court which allows a creditor to recover the unsatisfied portion owed on a loan after the sale of the mortgaged property fails to repay the debt owed in full. In order to assure that the lender will not pursue payment of the amount owed after a short sale, it is imperative that an attorney negotiate and draft a forbearance agreement on the borrower’s behalf. Such agreement will outline the terms of repayment and specify that the lender agrees to withhold their right to pursue payment for any amounts owed after the sale. Without the help of an educated attorney, practiced in contract negotiation, drafting, and real estate law, divorcing couples seeking to utilize a short sale may find themselves owing the lender money for years after the conclusion of the short sale transaction.

   Lastly, it is important to determine the possible tax consequences of a short sale transaction for a couple investigating the use of a short sale in the distribution of assets during a divorce.  The U.S. tax code taxes individuals based on income or gain. Income is defined as all income from whatever source derived whatsoever. According to American tax law, this definition of income includes cancellation of debt, because it is considered a freeing of assets under the case of U.S. v. Kirby Lumber Co., 284 U.S. 1 (1931). The tax code outlines specific cancellation of debt income which does not need to be included in an individual’s gross income in 26 U.S.C. § 108(f). These exclusions include:

   • If the discharge of indebtedness occurs in a title 11 bankruptcy case;
   • If the discharge of indebtedness occurs when the taxpayer is insolvent;
   • If the indebtedness discharged is qualified farm indebtedness; and
   • If the indebtedness discharged is qualified real property business indebtedness

   The tax consequences are some of the most important and significant ramifications of a short sale transaction. The Mortgage Forgiveness Debt Relief Act of 2007 added another exemption to the above referenced list, known as the qualified principal residence exemption, in an attempt to provide relief for qualified taxpayers who were not covered by the traditional exemptions. The Act provides relief from taxation on cancellation of debt income, such as that experienced in a short sale situation, so long as the forgiven or cancelled debt was used to buy, build, or substantially improve a borrower’s principal residence, or to refinance debt incurred for those purposes and the debt was secured by the home. This new exemption may offer assistance to many individuals facing the possibility of a short sale; however, it is important to note that the exemption does not apply to second homes or investment properties. Due to the complicated nature and intricacies of the tax code, as well as the manner in which the tax code can be applied to different individuals in a variety of situations, an attorney can be an invaluable asset in determining whether a short sale is a desirable solution to a divorcing couple’s financial woes.

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4. Foreclosures: Stress and Money

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   January 14, 2010 by Daniel Hamad under Foreclosure

   Being foreclosed on is stressful.  In today’s economy, banks are foreclosing on large numbers of homes every day.  It’s important to remember that you’re not alone.  More than that, the banks don’t like doing it.  If they (or you) can come up with a profitable (or loss-mitigating) alternative to foreclosure, they’ll jump at it.  But what you may think is a good alternative may not be the same as what they think.

   Anytime you’re facing foreclosure, you should contact an attorney immediately.  There’s enough stress in your life without trying to handle the bank, and the law, alone.  If you can’t afford an attorney, there are programs out there to assist you.  If you can, or if you know someone who can pay for you, you can find an attorney dedicated to your interests, willing and able to represent you.

   In Connecticut, the security instrument usually used to secure a loan is called a mortgage (or “mortgage deed”).  This mortgage is recorded in the land records of your town, unlike in many states, where the mortgage or alternative security instrument may be recorded at the county level.  Recording this document alerts others that your home is not owned only by you, but also by the bank – and that the bank has certain interests in it.  The mortgage spells out these rights, and allows the bank to take the home (foreclose) if the requirements of the loan are not met.

   All foreclosures in Connecticut go through a judicial process.  This is not necessarily true in all states in which Penner Law Firm does business, but in Connecticut, there is no alternative process.  This is both a benefit and a burden.  It tends to slow the process down, as the banks are forced into overcrowded courts and face clients with attorneys able to delay the process further.  But it also means additional cost to you, in order to appropriately protect your interests.

   The process in Connecticut can be carried out through either a strict foreclosure, or a decree of sale.  “[T]he determination of value is a major factor in the decision whether to allow a foreclosure by sale rather than a strict foreclosure.” Farmers & Mechanics Bank v. Arbucci, 24 Conn.App. 486, 487, 589 A.2d 14, cert. denied, 219 Conn. 907, 593 A.2d 133 (1991).  In the case of strict foreclosure, the process does not actually end in an immediate foreclosure auction or sale.  Rather, title to the property is transferred directly from you to the lender.  The court will give you a certain amount of time to make payments on the loan current, in order to protect your interest in the home.  If you fail to do so, the lender will (and must) record a certificate of foreclosure listing certain information.  If a decree of sale is used instead, the court will establish certain guidelines for holding a foreclosure sale.

   Throughout this process, the borrower may usually pay off the loan and retain title to the property – right up until the process is completed in full.  This is also known as a borrowers equity of redemption.  There are also many opportunities a skilled attorney can take advantage of to delay the process.

   Due to the fact that most lenders lose money in the foreclosure process, a lender is often open to alternative processes to avoid foreclosure.  Talk to an attorney immediately upon receiving notice of foreclosure to learn about short sales, deeds-in-lieu of foreclosures, and other alternatives.  In fact, do not wait until you receive notice.  The moment you start to fall behind on your mortgage, contact an attorney.  The earlier you start, the more you can be helped.  Attorneys’ fees can be more reasonable than you think.  More importantly, the earlier you contact an attorney, the more money they can save you in the long run.

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5. Cooperative Living in Connecticut

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   January 8, 2010 by Daniel Hamad under real estate

   Cooperative associations are not common in Connecticut, and the difference between condominiums and cooperatives escapes many.  Both are forms of living in a community, be it in apartment-style buildings, townhouse-style buildings, or some other form of construction.  Both can offer very similar benefits and privileges.  But the legal set-up of the associations and land which lay behind these developments is significantly different.  In this blog, we will discuss primarily cooperative living arrangements, also known as “co-op’s,” whose setup is governed primarily by Chapter 828 of the Connecticut General Statutes, also known as the Common Interest Ownership Act (“CIOA”).

   By its very nature, and contrary to the thinking of most, the individual units of a co-op are not real estate.  One corporation (or other legal entity), usually titled something like “XYZ Cooperative Association,” owns the land and all property upon it, including the individual units.  This is the only real estate that truly exists – the unit “owners” do not own any real estate.  There is then propriety leases signed between the unit owners and the association.  This is the way it was, at least, until CIOA.

   Not owning actual real estate has certain serious implications.  For example, ownership of the unit would not be recorded in the land records of your town (or county).  There would therefore be no way to record a lien against only one unit.  This means that, for instance, a loan could not be secured by a mortgage deed against only one unit.  To be clear, the association could still mortgage property and have liens filed against it, but the unit owners could not.  It also means that real estate taxes could not be levied against the property.

   CIOA changes some of this.  In exchange following certain formalities, which a good real estate attorney could handle, co-ops (and their individual unit owners) can now treat everything as individual real estate.  Transfers are now accomplished by deed, rather than simply corporate records.  Therefore mortgages and others liens can be recorded against the individual units.  But still, real estate taxes are levied against the corporation and not against the individual.  This means that your association fees still pay your taxes, and that you get no separate tax bill.

   In addition to the benefits inherent in organizing as a co-op rather than a condominium association, such as the bundling of taxes, co-ops are supposed to offer a form of living where the owners more closely work together.  Co-ops may bundle other fees, such as heat, sharing furnaces and the like, rather than requiring each other to buy and maintain their own furnace.

   In the end, it’s up to each individual association to decide both how to organize, and what to allow.  A co-op can act basically as a condominium association, or can be quite different.  There is a great deal of choice in the matter.

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6. Sweeping Changes to the Closing Process: Dr. StrangeHUD, or How I Learned to Stop Worrying and Love the New HUD

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   January 5, 2010 by Jamie Feigelson under RESPA

   This article is part three of a three part series by Attorney Jamie Feigelson.

   The final chapter of the three part blog is here. At closing, one of the most important documents a borrower will sign is the HUD-1 settlement statement (“HUD”). The HUD-1 is critical, because it contains all the expenses associated with the transaction, cumulating in how much the borrower must pay. The old HUD was two pages; the new one is now three. The primary improvement to the new HUD is that it clearly shows how the numbers on the HUD should match the numbers you were given on your Good Faith Estimate (see previous blog), and the new third page illustrates the comparison for borrowers to review.

   The big change for 2010 is this: most of the entries on the HUD direct you to the specific line on your Good Faith Estimate (“GFE”), for the corresponding number. In the past, lenders did not always require a GFE to be signed at closing. Now, however, not only must a GFE be signed, but it also must be compared side-by-side to the HUD at closing. Borrowers must sign both at closing; brokers and lenders alike must provide these documents for a borrower at closing.

   The new HUD also has a section that reconciles any differences between the final numbers and those provided on the GFE. It is now easier to see if the lender might owe a refund to a borrower because of an inaccurate estimate. Plus, the final page of the HUD includes a summary of the loan terms, so there’s no confusion about the loan terms when a borrower reaches to closing table.

   In summary, the changes HUD has made to these important lending and settlement documents appear to be positive for borrowers and banks alike. Everyone involved in a closing process is now fully informed of all fees before closing. At Penner Law Firm, we now have “guarantees closing costs” for our clients and service providers, thus ensuring costs for all parties.

   My prediction: there are always those borrowers out there who seem to find some sport in trying to subvert the system. This also will create a learning curve, as HUD begins to deal with people who try to resist the new requirements. However, having worked with a new HUD, I see a positive change that will help consumers be better informed. We now have uniformity for the real estate closing process; something we all can agree is a good thing.

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7. Enforcement of RESPA 2010

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   January 4, 2010 by Beth Grassette under RESPA

   Slated to go into effect on January 1, 2010, the amended Real Estate Settlement Procedures Act (RESPA), promises borrowers new found freedom in the ability to comparison shop when seeking a home mortgage. The 2010 amendments to RESPA change the way in which lenders must complete disclosures required under the Act, allowing for no more than a ten-percent (10%) difference between many amounts initially quoted on the Good Faith Estimate (GFE), a document showing the costs that a lender will charge the borrower in conjunction with the loan, and those listed on the Settlement Statement (HUD-1), a document that provides an itemized listing of the funds that were paid at closing. These new and more stern requirements have been enacted with the hope that forcing lenders to be more upfront with borrowers about possible costs associated with the origination of a mortgage will allow borrowers to compare the settlement charges of numerous lenders and result in lower overall costs to the consumer.

   An important aspect of any piece of legislation, essential to its success or failure, is the manner in which it will be enforced. The U.S. Department of Housing and Urban Development’s (HUD) Office of RESPA and Interstate Land Sales is responsible for enforcement of the new RESPA amendments. The HUD Reform Act of 1989 created the Mortgagee Review Board (“MRB”), which functions to provide administrative sanctions to HUD/FHA-approved mortgagees or lenders who knowingly and materially violate legislation such as RESPA. On November 13, 2009 HUD announced a delay in the enforcement of the new RESPA rules for 120 days on FHA loans for all mortgage professionals making a good faith effort to comply with the new requirements. In addition, HUD requested that other enforcement agencies exercise the same restraint with respect to non-FHA loan originators and settlement service providers. The delay in enforcement will offer a small reprieve for the lending industry, however, the four month period will not delay potential civil litigation based on RESPA 2010 violations.

   The enforcement mechanisms of RESPA 2010 were more clearly articulated in HUD’s informational pamphlet called the “New RESPA Rule FAQs” (FAQs). The FAQs address many questions posed by the lending industry regarding the new legislation, including enforcement provisions. One such question addressed by the FAQs, and particularly relevant during the infancy of the new requirements, is the result in the event of an inadvertent or technical error on a required document. The FAQs provide a rather relieving answer to this question, stating that as long as a revised copy of any error-ridden documentation, such as a HUD-1, is provided within thirty days of closing, a lender will not be in danger of receiving reprimand for violation of the new RESPA requirements.

   The FAQs also allow settlement agents, such as Penner Law Firm, to breathe a sigh of relief in regards to potential RESPA violations. The FAQs dictate that a lender is the responsible party for curing tolerance violations, such as differences of more than ten-percent (10%) between figures listed on the GFE and HUD-1. The FAQs also dictate that a settlement agent is under no obligation to stop a closing when a toleration violation is recognized, because it is the duty of the lender to cure the potential violation within 30 days of the closing. These safety valve provisions in the new legislation, as well as the temporary enforcement reprieve, will hopefully serve to lessen the delay in closing loans after the January 1, 2010 effective date of RESPA 2010.

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8. Sweeping Changes to the Closing Process: Gotta Have Faith, Good Faith

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   December 31, 2009 by Jamie Feigelson under RESPA

   This article is part two of a three part series by Attorney Jamie Feigelson.

   As we last discussed, the new HUD rules are set to go into effect on January 1, 2010, but the enforcement of such rules will not be implemented until April 2010 to give time to settlement agents and lenders to adjust to the changes. The changes to both the Good Faith Estimate (“GFE”) and HUD settlement statement will have a tremendous impact on the entire settlement process.

   To begin, the first change is that all residential lenders and mortgage brokers will be required to use a new GFE that clearly discloses loan terms and closing costs. Settlement agents and attorneys will also be using a new settlement statement for all residential loan closings. The statement will mirror the GFE and disclose any variances from the original figures. The main differences between the new and old GFEs are the standardization of the form; the grouping of fees; and the tolerance for variations from the GFE amounts at settlement.

   The new GFE is a three page standardized document (as opposed to the old four-page version) that gives loan terms and an estimate of settlement charges.  The consumer should easily be able to compare GFEs from various lenders when shopping for loans. On a new third page, there is a comparison of the original GFE figures and the settlement statement figures, with an explanation of the tolerances. There is also a summary of the loan, including amount, term, rates, initial monthly payment, prepayment penalties and other loan terms.

   In addition, on the new GFE, certain fees have been grouped together.  This allows the consumer to see a total cost for each category, rather than a random list of fees. The fees are broken down into four categories:

   1. The “Origination Charge” is the total of all fees incurred for originating the loan.  Only one origination charge is disclosed and includes all service charges (charges paid to the lender/broker, including the YSP, and all junk fees lumped into one amount) and the charge or credits for the interest rate chosen is added to or subtracted from the service charge to arrive at one lump origination charge.
   2. “Required Services Selected by the Lender”, such as appraisals, credit reports, and flood certifications and tax service fees are grouped, but each charge is listed separately.
   3. “Title Services” includes the settlement agent’s charges for lender’s title insurance, the settlement fee, title searches, title examinations, commitments, and ALL other charges payable to the settlement agent.  There is a separate line item for Owner’s title insurance, since this is an optional purchase.
   4. “Required Services that You Can Shop For”, which includes surveys, home warranties, pest reports, etc.

   In addition to these groupings, there are separate line items for “Government Recording Charges”, “Transfer Taxes”, “Initial Escrow Deposit”, “Daily Interest” and “Homeowner’s Insurance”. This process will allow the borrowers to fully understand their fees during the application process, and it will help to eliminate junk fees.

   Lastly, the new rules mandate that the final charges on the settlement statement can vary from those on the GFE only as follows:

   1. For the Origination Charge and Transfer Taxes:  Zero Tolerance.  The GFE and settlement statement must match exactly.
   2. For Required Services selected by the Lender, Title Services, Owner Title Insurance, Required Services That You Can Shop For (if you use companies identified by the lender) and Government recording charges:  There is a tolerance for a 10% increase for the total of these charges.
   3. For the Initial Escrow Deposit, Daily Interest and Homeowner’s Insurance:  There is an unlimited tolerance for increases from the GFE.

   NOTE – There are no restrictions on decreases of fees. Borrowers must love the sound of that.

   After this GFE is completed, it is given to the borrower for review. At closing, the settlement agent or closing attorney will be required to put together a HUD which matches the GFE (see variances above). There should be no surprises by the time the closing happens, unless borrowers decide to not read the GFE at all. But HUD is here to protect the borrowers, and it appears they will achieve that. As for the closing agents and attorneys, that will be covered on the next blog. Part III of the blog will discuss the HUD form and the changes to it (tentatively entitled “A Rock and a HUD Place”).

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9. RESPA 2010 and Reverse Mortgages

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   December 30, 2009 by Beth Grassette under RESPA

   A reverse mortgage, also known as a reverse-annuity mortgage or a home equity conversion mortgage, is a special type of home equity loan for individuals age sixty-two (62) and older. Reverse mortgages allow owners to convert a portion of the equity in their homes to cash, in order to subsidize living expenses and other monetary needs. Typically, the loan proceeds do not have to be repaid during the homeowner’s lifetime, are not counted as taxable income, and do not affect the homeowner’s eligibility for Social Security or Medicare benefits.

   Reverse mortgages were created as a mechanism to reduced financial stress on aging Americans who seek to convert the equity in their homes into a stream of income without having to sell their residence or relocate. A reverse mortgage functions similarly to a line of credit, with the lender making payments to the home owner, only instead of requiring repayment during lifetime, the lender receives a claim to the homeowner’s property after death.

   For many elderly individuals within the United States this system is particularly attractive as a means for securing an enjoyable retirement and ensuring that all lifetime needs are met. Certain protections are afforded to homeowners electing to utilize the benefits of a reverse mortgage, including the security that the lender may never force the sale of the property, and the homeowner and their heirs may never be forced to repay additional sums to the lender which exceed the value of the property.

   The 2010 amendments to the Real Estate Settlement Procedures Act (RESPA) change the way in which lenders must complete disclosures required under the Act, affording lenders less wiggle-room in their estimation of costs to the borrower, in an attempt to ease the mortgage shopping process for consumers. Traditionally, RESPA has required that a lender provide all borrowers with a Good Faith Estimate (GFE), a document showing the costs that a lender will charge the borrower in conjunction with the loan, as well as a Settlement Statement (HUD-1), a document that provides an itemized listing of the funds that were paid at closing. Under the new legislation, the GFE and the HUD-1 forms must essentially match, as the new RESPA amendments allow for no more than a ten-percent (10%) difference between many amounts initially quoted on a GFE and those listed on the HUD-1 at the closing table.

   The unconventional nature of a reverse mortgage, in addition to the new more stringent reporting requirements under the 2010 amendments, have caused many lenders to question how the costs should be reported on the GFE and HUD-1. On November 16, 2009, in an attempt to quell industry anxiety over the new requirements, the U.S. Department of Housing and Urban Development (HUD) released its “New RESPA Rule FAQs” (FAQs).

   The informational pamphlet attempts to address many questions regarding completion of the GFE and HUD-1 in the case of reverse mortgages. For instance, unlike conventional mortgages, a reverse mortgage does not have a traditional “loan amount,” which is a required figure on both the GFE and HUD-1. The FAQs dictate, that on the GFE and HUD-1, lenders must list the initial principal limit calculated for the reverse mortgage, as opposed to a traditional loan amount. The FAQS also reveal that the unforeseen nature of many occurrences affecting a reverse mortgage, such as the loan term conditioned on the lifespan of the homeowner, will not be a hindrance to the proper completion of the GFE and HUD-1, because the lender may list “Not Applicable” or “N/A” for these required line items under which a reverse mortgage does not seem to fit.

   In the face of the apprehension harbored by many lenders over compliance with the new RESPA requirements, these FAQs are extremely helpful in reducing noticeable industry tension. While these answers ease worries about compliance with the new RESPA amendments, they do little to forecast how helpful the changes will be in protecting homeowners seeking to utilize the benefits of a reverse mortgage. With so many sections of the GFE and HUD-1 settlement statement clearly not applicable to the unique circumstances surrounding a reverse mortgage, it remains to be seen how helpful these documents will actually be in protecting consumers and allowing borrowers to shop for the lowest loan costs.

   For additional information, please see the U.S. Department of Housing and Urban Development’s “New RESPA Rule FAQs” at: http://nhl.gov/offices/hsg/ramh/res/resparulefaqs.pdf

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10. Sweeping Changes to the Closing Process: Time To Adjust

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    December 29, 2009 by Jamie Feigelson under Disclosure, real estate

    This article is part one of a three part series by Attorney Jamie Feigelson.

    It is widely understood that on January 1, 2010, there will be very big changes to the ways that real estate closings function. The U.S. Department of Housing and Urban Development (HUD) announced in November that it will not enforce for a 120-day period these new, sweeping regulatory changes to the Real Estate Settlement Procedures Act (RESPA). The new regulations will still go into effect on January 1, 2010, but the board overseeing enforcement of these new rules will “exercise restraint in enforcing” them.

    This is very good news for closing attorneys and settlement agents. Our office at Penner Law Firm is equipped to adhere to the new RESPA rules; our technology has been updated for over a month. However, some settlement agents and closing attorneys may need some additional time to fully adjust the new forms and procedures. Having been to a RESPA seminar in early November, I can tell you that these changes will be difficult for some attorneys and closing agents.  Attorneys will have to alter the way they prepare HUD statements and fees, including sample HUDs for mortgage brokers and lenders. Banks and closing attorneys will have to work together to ensure all fees have been properly disclosed to a borrower/buyer on the GFE (good faith estimate). New software will be required for all closing attorneys to comply with the new HUD 3-page requirement. If a GFE (good faith effort – get it?) is made by the closing attorney, but the attorney fails to fully comply with the new law, HUD will advise the attorney on how to correct the problem. This could lead to problems for some attorneys in January and February.

    But since RESPA says closing attorneys get a 120 day reprieve, why not prepare for the inevitable; when the new rules take effect, Buyers will need some patience in the closing timeline. One of the main changes to RESPA is that when a lender has to make changes to the terms of the loan such as rate, or closing costs, etc they have to reissue the good faith estimate (GFE) and the buyer must take 3 business days to review the new GFE. So if for some reason there was a change at the closing table, the closing would be automatically pushed back 3 days. You can see how this could potentially cause big problems at closing, especially for short sale transactions. Be prepared, Connecticut, for delays in the closing process.

    Penner Law Firm will not have such problems, as we have already implemented our new software systems for RESPA and HUD statements. But the closing process involves multiple parties, and the 120-day break-in period should assist all parties to ensure a proper closing. In the end, things should work out better for buyers and borrowers, as these changes were made specifically to protect consumers.

    The next two blogs will deal with the nuances and changes of the new HUD laws, and the effect it could have on brokers and lenders.

    (Stay tuned for Part II of the “Sweeping Changes” series tentatively entitled “The Good, the Bad, and the HUD-ly”)

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