Update (3/24/10): SJC Accepts Ibanez Case
For those of you following the controversial U.S. Bank v. Ibanez case, which invalidated potentially thousands of foreclosures across the state, both sides last week asked the Massachusetts Supreme Judicial Court to take the case — as I originally predicted. The SJC’s acceptance of the case would cut months to years off the normal appellate process. This would be great news for everyone eagerly awaiting a final decision.
Click here for Ibanez’s petition to the SJC. Click here for my post on the first ruling and here for my post on the second ruling in the Ibanez case.
The SJC should decide whether to take the case within 30 days or so, and I predict they will take it on. However, I still think the SJC will ultimately affirm Judge Long’s ruling against foreclosing lenders, a bad decision from a title and conveyancing standpoint in my view.
Meanwhile, in the aftermath of Ibanez, some lenders are re-doing foreclosures and some are just waiting it out. Most title insurance companies are unwilling to touch an Ibanez afflicted property with a ten foot pole.
I recently assisted a buyer of a foreclosed property who was initially rejected by two title insurers. We fortunately convinced one title company to insure over an Ibanez issue, so the client could close. But I have another client who is stuck, and we’re trying to track down the original owner of the property to obtain a deed. It’s a tough situation all around.
My Boston.com fellow blogger, buyer’s agent Rona Fischman, has fielded several questions recently regarding the Massachusetts Lead Paint Law. Prospective renters have called apartment listings only to be hung up on abruptly with a “It’s not deleaded!” if they hear a child in the background or if they answer truthfully about having children. Mothers have received termination notices when the landlord discovers they are pregnant – usually of course for tenancies at will. Finally, there is a listing this week in a local paper for an owner occupied 2 family rental which states “Unit Not Deleaded” right in the ad.
The short answer is these are all likely violations of the Massachusetts Lead Paint Law, and could expose the offending landlords to stiff penalties and damages.
Under the Massachusetts Lead Paint Law, whenever a child under six years of age comes to live in a rental property, the property owner has a responsibility to discover whether there is any lead paint on the property and to de-lead to protect the young children living there. A property owner or real estate agent cannot get around the legal requirements to disclose information about known lead hazards simply by refusing to rent to families with young children. They also cannot refuse to renew the lease of a pregnant woman or a family with young children just because a property may contain lead hazards. And property owners cannot refuse to rent simply because they do not want to spend the money to de-lead the property. Any of these acts is a violation of the Lead Law, the Consumer Protection Act, and various Massachusetts anti-discrimination statutes that can have serious penalties for a property owner or real estate agent.
As the stories above show, landlords routinely flaunt, or are just plain ignorant of, the law. The issue becomes what to do about it and is it worth the time and aggravation? I guess that depends on your situation. Certainly, if you are being threatened with a discriminatory eviction, your first step should be to contact the Massachusetts Commission Against Discrimination (MCAD) and your local Fair Housing Commission. In a recent case, the MCAD hit a property owner with $25,000 in damages and fines for evicting a young family to avoid de-leading. Next consider hiring a housing discrimination attorney. If you are low on funds, the attorney may agree to take the case on a contingency because violations of the lead paint law and discrimination laws provide for the reimbursement of attorneys’ fees and enhanced damages.
As for the “Unit Not Deleaded” ad, while may be truthful, it might as well read “Children Under 6 Not Wanted.” I would advise a landlord to avoid this sort of indirect discriminatory preference.
Lastly, the law is conflicting regarding owner occupied two family homes. Chapter 151B, the state anti-discrimination law, exempts owner occupied two family homes from the prohibition of discrimination against children. However, there is no such exemption written into the lead paint law. So if a child is born into a owner occupied 2 family, it must be de-leaded. Vacation/recreational rents and short term (31 days or less) rentals are also exempt from the lead paint law.
Yesterday the Boston Globe reported on a controversial lawsuit by Alyssa Burrage, a condominium buyer, against a realtor over the disclosure of second hand smoke emitting from downstairs neighbors. Click for the story: Suit Over Second Hand Smoke Targets Real Estate Broker. As the hundreds of comments to the story indicates, this lawsuit raises a host of legal and public policy issues. I’ll focus on the legal issues.
Under Massachusetts consumer protection regulations governing real estate brokers, a broker must disclose to a buyer “any fact, the disclosure of which may have influenced the buyer or prospective buyer not to enter into the transaction.” This is somewhat of a subjective standard; what may matter to one buyer may not matter to another. If a broker is asked a direct question about the property, she must answer truthfully, accurately, and completely to the best of her knowledge. Further, a broker cannot actively avoid discovering the details of a suspected problem or tell half-truths.
With that legal backdrop, let’s review the facts of this case. Ms. Burrage, who suffers from asthma, claimed that her broker failed to disclose the existence of the heavy smokers downstairs—despite the fact that she admittedly smelled “the unmistakable stench” of cigarette smoke at several visits to the unit. The broker – who worked for the same company as the listing broker (which may raise some thorny conflict of interest/agency issues) – assured her that the smell would dissipate once she painted and renovated the unit, the suit claims. Ms. Burrage claims that she wouldn’t have purchased the unit in the first place if she had known about the smoke problem.
The case boils down to the appropriate scope of a broker’s duty to disclose potentially adverse property conditions, not only within the property itself, but off-site. The Massachusetts Supreme Judicial Court has held that off-site physical conditions may require disclosure if the conditions are “unknown and not readily observable by the buyer [and] if the existence of those conditions is of sufficient materiality to affect the habitability, use, or enjoyment of the property and, therefore, render the property substantially less desirable or valuable to the objectively reasonable buyer.”
This case has all the makings of a very slippery — and dangerous — slope for real estate brokers. If Ms. Burrage’s claim is accepted, realtors would be conceivably obligated to investigate every neighbor to determine whether their smoking (or other bad habits) will negatively affect the particular buyer’s use or enjoyment of the property. That’s patently unrealistic. Where then does the law draw the line? If it’s not smoking, it’s smelly food preparation (don’t laugh, I’ve dealt with those cases), marijuana smoking, loud parties, floor stomping, or other “noxious” behaviors. Buyers of condominiums have to accept that they aren’t buying into a pristine, sanitary bubble.
I’m not unsympathetic to Ms. Burrage’s plight. I’m not a smoker, and I cannot stand the smell of cigarette smoke. But to me, this is really a neighbor-to-neighbor issue. The realtor should have no liability in this type of case.
Lenders have been using the new Good Faith Estimate for a little over one month now. Gauging from the vociferous complaining in the lender blogosphere, it is an understatement to say that many lenders believe HUD really blew it with this new form. One would think that the new 3 page GFE would provide everything a borrower needs to know about what she’ll pay at closing, yet the new GFE inexplicably fails to provide at least 5 critical pieces of information for home buyers:
the total monthly mortgage payment (including escrows, taxes and insurance)
total cash needed to close
escrow amounts for real estate taxes, hazard insurance, and PMI
seller paid closing costs
Loan-to-value ratio/down payment
The GFE’s failure to provide this essential data about the loan is why one mortgage lender called the new GFE “the single worst government form dumped on the real estate industry.”
Surely, every borrower wants to know their total monthly mortgage payment month and how much cash they’ll need to bring at closing. Borrowers also want to know ahead of time how much the tax and insurance escrows will be since they have to pay several months in advance at the closing. Since the new GFE doesn’t provide this important information, lenders are filling in the gaps with their own custom made loan worksheets.
Some have complained that these worksheets are a work-around the new rules, but lenders have an obligation to provide borrowers with the full financial picture of the loan. The criticism is unfair, in my opinion, if the intent is to fill in the informational gap of what the GFE fails to provide.
The new GFE may be an overall improvement to the hodge-podge of good faith estimates previously used by lenders, but it’s certainly not the Messiah that HUD billed it out to be.
I’m pleased to welcome back guest blogger, David M. Gaffin, a licensed Loan Officer with Greenpark Mortgage Corp. of Needham MA. You can visit him at Greenpark Mortgage or through his LinkedIn profile.
Dave is here to talk about USDA loans which are, surprisingly, available in such *rural* areas of Massachusetts such as Hopkinton, Sudbury, Ashland, South Shore, Cape Cod and many other communities.
Due to the mortgage meltdown that has plagued our county for the past couple of years, lending guidelines have tightened significantly and obtaining a home loan has been more akin to giving birth. In fact, it seems that many lenders want your first born in order to complete the transaction. Low down payment and no down payment loans vanished from the landscape, unless you really knew who to speak with. FHA became the buzzword and savior to those with less than a 10% down payment in a declining real estate market.
Now that FHA is more mainstream (requiring only a 3.5% down payment and having very generous credit and debt tolerances), many think this is the only alternative to the traditional Fannie/Freddie loan.
However, there are some little known loan programs available from the United States Department of Agriculture (USDA) that could benefit borrowers in many parts of Massachusetts and beyond. Known as the Guaranteed Rural Development Housing Section 502 Loans, these programs are designed for low to moderate income individuals or households purchasing a property in a “rural” community. The definition of rural is surprising, as you will see from the list of eligible communities in Massachusetts.
Massachusetts communities eligible for the rural loan include: Ashland, Hopkinton, Sherborn, Sudbury, Maynard, Littleton, Harvard and most of central and western Mass. Most of the South Shore and virtually all of Cape Cod are considered “rural” for this program as well. To see an interactive map of eligible Massachusetts communities follow this link.
There are some exceptional features to these programs, as well as some needed conservative features. Program Features include:
No Down-payment
No Monthly Mortgage Insurance
Unlimited Seller Contributions
The ability to repair certain aspects of the property and build in those costs into the total loan.
To be eligible to purchase a home with a Rural Housing loan, borrowers must meet income eligibility requirements. Here is the link for Massachusetts. For example, in the Boston-Cambridge-Quincy MSA (which includes most of Middlesex, Norfolk and Suffolk Counties) for Moderate Income a 1-4 person household’s income cannot exceed $95,100. For a 5+ household income cannot exceed $125,550.
Like FHA, the USDA programs requires an upfront fee of 2% that will guarantee the loan for the lender. FHA will allow the borrower to finance the upfront mortgage insurance premium (MIP) (currently 1.75% of the base loan, but scheduled to rise to 2.25% in April). In addition FHA will be reducing the allowable seller contributions from 6% to 3%. USDA will allow the upfront fee to be financed only if the appraised value of the home is greater than the purchase price.
Let’s look at the differences between FHA and USDA loans side by side:
USDA v. FHA
FHA
USDA
Appraised Value
$200,000
$200,000
Purchase Price
$175,000
$175,000
Down Payment 3.5% FHA
$6,125
$0
Upfront Fee 2.25% FHA 2% USDA
$3,800
$3,500
Monthly Mortgage Insurance
$77
$0
Allowable Seller Contributions
$6,000
$25,000
*Assumes $200 monthly taxes and $50 monthly homeowners insurance. Interest rate of 5.50%, $400 monthly consumer debt
As you can see, with the upcoming FHA changes, the USDA loan requires less out of pocket, a lower guaranty fee and greater flexibility in managing the closing costs associated with the transaction.
The USDA loan is more conservative in qualifying than FHA, but that is probably a good thing. FHA, with its looser guidelines, is in trouble and may need the dreaded taxpayer bailout. FHA’s overall percentage of loan activity has increased from roughly 3% of closed loans to about 40%. With no minimum credit score and debt to income limits of 55%, the fact that folks are defaulting on these loans and FHA has tightened its requirements is not surprising.
David Gaffin, Greenpark Mortgage
USDA qualifies borrowers with more traditional debt ratios of 29% for housing and 41% for overall indebtedness. This is good for the borrower, who will not bite off more than they can chew, and for the taxpayer as the default rate on these loans is less than FHA. However, you will need to earn a higher income to qualify for the same house with USDA than FHA.
So, what do you do if you want more information about these loans? Start by visiting the USDA program page.
You may also contact me with any questions you may have at [email protected].
Greenpark Mortgage Corp. is licensed to originate USDA loans in Massachusetts, Maine, New Hampshire, Vermont, Connecticut, Rhode Island and Florida.
Wow, what a great post Dave. I never knew about this program and its availability in some of the most toniest “rural” towns in Massachusetts.
I’m happy to welcome guest blogger, Patrick Maddigan, Esq.,the Director of Operations and Business Development at our new entity, TitleHub Closing Services. Pat is writing today on the new FHA lending changes.
On January 20th, the Federal Housing Administration (FHA) announced it would tighten certain lending requirements and guidelines with the purpose of reducing risk and improving its weakening financial health. The changes include:
Borrowers must pay an increased upfront mortgage insurance premium (MIP) of 2.25% of the loan amount (increased by 50 basis points from 1.75%). FHA has also requested legislative authority to increase the maximum annual MIP so it can reduce upfront costs for prospective home buyers.
For borrowers with poor credit (credit score of below 580), they must make a minimum down payment of 10% (up from 3.5%).
Seller credits for closing costs are cut by 50% and cannot exceed 3% of the purchase price.
FHA will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.
With the current recessionary economic state, constricting mortgage availability, and general credit crunch, FHA loans have become extremely popular. FHA loans, which feature low down payments, competitive interest rates, and more forgiving credit requirements, have proven the loan of choice for many first time home buyers and those with marginal credit scores. In 2009, approximately $290 billion in FHA loans were issued, up nearly 500% from 2007. Despite the housing downturn and credit crunch, FHA mortgages have continued to grow, thanks in part to incentives like the First Time Home-Buyers Credit. In anticipation of the continued increase in interest and demand for FHA mortgages, HUD is requesting $400 Billion for the expected flood of FHA loan applications in 2010. The dramatic rise in FHA backed loans, however, has caused the steady depletion of FHA reserves, putting the agency at greater risk of financial distress and even collapse. Regulators proposed the changes outlined here as to ensure its long-term financial integrity while positively impacting the ailing housing market.
Two of the recently announced changes in FHA loans will have a clear effect upon buyers in the more immediate future- the rise in upfront mortgage insurance premiums (UFMIPs) and the FICO/minimum down payment adjustments.
Up-Front Mortgage Insurance Premiums Increased To 2.25%
The first change that will immediately impact borrowers is the FHA’s increase of the required up-front mortgage insurance premium by 50 basis points to 2.25% of the base loan amount. This change is effective beginning April 5, 2010.
FHA requires two types of mortgage insurance premiums (known in the industry as a MIP): an up-front and an annual. The MIP is similar to private mortgage insurance, or PMI, for borrowers investing less than a 20% down payment. The MIP amount is based on a percentage of the remaining debt on the FHA loan, so as the mortgage is paid down, the MIP will decrease. Unlike private mortgage insurance, FHA borrowers are able to finance the MIP into the loan, thereby spreading the cost over many years. The “annual” MIP is termed annual but paid monthly as part of the loan payment.
For a $300,000 loan, the increase in the MIP fee would add approximately $1,447 to the loan amount, not a huge amount, but nothing to sneeze about when financed over a 30 year loan term.
Minimum FICO Credit Score/10% Down Payment for New Borrowers
New borrowers will now be required to have a minimum FICO credit score of 580 to qualify for FHA’s 3.5% down payment program. Borrowers with a credit score below 580, while still able to qualify for a FHA loan, must now put down at least 10% of the purchase price–an amount that may be prohibitive for many borrowers with poor credit.
Until now, there has been no minimum FICO score requirement imposed by FHA, however some lenders who fund FHA loans have previously imposed their own requirements (often lenders would not work with credit scores under a 620), so the net effect of this change may not be that significant. While this will preclude some of the underserved community the FHA is seeking to help, it will better balance the FHA’s risk levels and still continue to allow borrowers who have historically performed well to access the benefits of an FHA loan.
Patrick Maddigan, Esq.
Impact Of The Changes
The FHA is making an effort to lower its overall risk and improve the financial soundness of its insured loans, which in turn allows for the continued support of home buying in the United States. In doing so the FHA must find a way to keep their insurance fund’s capital ratio returns above the Congressionally mandated 2%, while continuing on their overall mission of aiding borrowers in underserved communities and facilitating the recovery of the housing market
These changes, along with the other FHA reforms (including a reduction in allowable seller concessions and significant changes and oversight for lenders) will have varying effects on borrowers interested in a FHA loan. For borrowers with low credit scores, some of these changes, such as the higher down payment percentage, will significantly affect their ability to buy a home. In the short term, the changes may motivate borrowers to lock into the old FHA guidelines before the new changes become effective.
My post on lenders using loan cost worksheets and estimates was the featured post on ActiveRain yesterday, spawning over 140 comments by last count. It turned into quite a lively discussion by mortgage lenders about how frustrated they are with the new Good Faith Estimate and RESPA rules. After digesting all the comments, I have to say that I completely understand mortgage lenders’ frustration, and that worksheets are a necessary evil, if you will, due to HUD’s failure to get the new GFE right.
As my mortgage lender friends point out, the new GFE inexplicably fails to provide some of the most important information for homebuyers: (1) the total monthly mortgage payment (including escrows, taxes and insurance), (2) total cash needed to close, and (3) seller paid closing costs. Every borrower wants to know how much they are paying a month and how much they’ll need to bring at closing. Since the new GFE doesn’t provide this important information, lenders are filling in the gaps with loan worksheets. This why one mortgage lender called the new GFE “the single worst government form dumped on the real estate industry.”
Here are a few of the comments from mortgage lenders:
We are a company that does provide a worksheet/ summary of the costs but that is before the triggers take effect (Quoting stage). Our worksheet is actually based off all the costs that we input into the file and we are in compliance to the new rules. Once the triggers are set we immediately send them the new GFE.
The problem with the new GFE is that it doesn’t provide any uniformity to the quoting stage of the conversation between lender and client. This causes almost all lenders to create their own idea of what constitutes a quote or a GFE. I have seen a bunch of them and I can say that many of them are deceitful as they do not come close to disclosing the actual costs that the client, ultimately, will have to pay.
Richard, Nice post. I can’t figure out if I 100% agree or disagree with you.
I 100% agree with your position against the homemade comparison charts. I saw a mock excel worksheet yesterday from one of the two big bailout recipient banks yesterday. It had costs that did not pass through on the =sum() function and the rates were .5% higher than market. It was deceptive at best.
I am not going to contend that the new rules are not without fault. I agree that, if it was issued, the new GFE would be a fantastic apples-to-apples comparison. As a lawyer, if XYZ Bank was your client, would you advise them to issue a GFE when they don’t have to and can’t reasonably measure their exposure?
Personally, I think they missed an opportunity to create a standardized preliminary document. I think the best part of the GFE is that it won’t vary in form or function between lenders. Yet the preliminary estimate sheets will vary infinitely and that defeats the entire spirit of the changes.
As for the complaints about cash-to-close and monthly payment, that is simply not the purpose of the document. I’d argue that information should not be on the GFE. It is a GFE “of settlement costs” not “of everything you’d want estimated all rolled up onto one page.”
An overpriced lender can no longer redirect the consumer’s attention by talking about the monthly payment or cash-to-close. I don’t see how that is bad.
I agree with most of the comments about the new GFE. While the intentions were good and warranted, it does fall short of simplifying all the fees to the borrowers. It seems like it’s even more confusing for borrowers, lenders and realtors. I had lunch with a very experienced, extremely intelligent broker friend of mine last week and he said that some lenders aren’t even allowing them to send out GFE’s because they are completely confused on the correct way to have them completed correctly and they are also afraid of the potential liability.
At Bank of America our Closing Cost Worksheet (CCW) DOES DISCLOSE the total closing costs broken down individually, the seller credit (if any), the cash to close and the total PITI mortgage payment. This is what we send to the borrowers when they are qualified to buy a home prior to the disclosures being mailed out by our processing staff. You can be completely confident that working with a B of A loan officer that your client will get a great loan! We have low rates, we never, ever charge origination fees, low lender fees and we can’t get overage/rebate at all. (you can’t selll the borrower a higher rate and get paid on this overage/rebate- if there’s any at all, it goes back to the borrower to pay closing costs).
It does no one any good to just gripe about the new form. It’s here in it’s present form and the best policy is to do what we can to live with it and to understand what it is and what it isn’t all about.
Lenders, what are your thoughts about the new GFE? How has it changed the manner in which you assist borrowers with pre-approvals, if at all? What should HUD fix next go-around with the new forms?
The Los Angeles Times and other media outlets are claiming that lenders’ use of loan cost worksheets and estimates are a “sidestep” of the new RESPA mandated Good Faith Estimate which went into effect on January 1. HUD officials say they plan to conduct a review of the growing use of “worksheets” and “fee estimate” forms by mortgage lenders providing quotes to home buyers and refinancers. Lenders vehemently deny that they are doing anything wrong; in fact, they argue, cost worksheets are necessary because of several glaring deficiencies with the new Good Faith Estimate. This is all part of the shake-out during the first 30 days of the new RESPA reform which went into effect on January 1.
The new closing cost rules under the Real Estate Settlement Practices Act (RESPA) significantly changed the manner in which lenders are required to estimate loan and closing costs. Many charges cannot deviate at all, or at most by a 10%, from the Good Faith Estimate to the closing. That’s in stark contrast to earlier rules, which essentially allowed some lenders to quote low estimates of total costs, with no responsibility for the final dollar charges at closing, HUD contended.
Lenders — many of whom are feel the new GFE is the single worst government form ever to hit the real estate industry — respond that since the new GFE has a number of major deficiencies, such as not providing a total monthly cost payment, seller paid items and most importantly cash-to-close, it justifies the worksheets/estimates. (And if you can believe this, there’s no place on the GFE for the borrower to sign!).
Lenders, what are your complaints with the new GFE? (Try to keep them under 10!). Do you think providing these worksheets will ultimately help consumers? Are the criticisms about the worksheets unfair? Did HUD get it wrong with the new GFE? (I think I know the answer to that!). What can HUD do to improve it?
There is nothing explicit in the new RESPA rules prohibiting the use of these cost worksheets/estimate. Since this practice is on HUD’s radar, my recommendation to lenders is to explain clearly to the customer, preferably with a written disclosure right on the estimate, that this is not binding and not a substitute for the new GFE. That way, if HUD comes knocking on the door, you’ve covered yourself.
My goal with this post is to get the conversation going on the new GFE, not to rail against the mortgage industry. I’m on your side! As Jerry Maguire said, “Help me, help you…help me, help you!”
On a related note, as buyer’s counsel I now insert a rider provision into the P&S providing that the seller agrees to an extension (up to 7 days) of the closing date due to any RESPA/GFE related delays.
I’m pleased to welcome another guest blogger, David M. Gaffin, a licensed Loan Officer with Greenpark Mortgage Corp. of Needham MA. Dave is licensed to originate in MA, NH and FL. You can visit him at Greenpark Mortgage or through his LinkedIn profile.
The new 2010 RESPA rules are all the rage right now. So I’m especially pleased to have a mortgage industry veteran like Dave to offer his views on the new rules, especially the new Good Faith Estimate (GFE).
So, you thought getting a home loan for purchase or refinance before was confusing? Well, I’ve got GREAT NEWS for you. Your government has heard you and has come to help! (Insert Sarcastic Mental Voice.) The federal Housing and Urban Development agency (HUD) has dismantled the previous 1 page Good Faith Estimate that itemized most of the settlement charges for your loan and created a new 3 page “simplified” GFE to “help borrowers understand and compare the costs associated with obtaining a mortgage.”
In my opinion, HUD is trying to do at least 2 things for consumers:
1. Protect the consumer from dealing with shady mortgage companies that will disclose certain fees on the GFE, and then charge higher or additional fees at the closing table and
2. Encourage consumers to use the GFE as a shopping tool to ensure a fair deal.
An informed consumer will typically make better choices than an ill-informed one, so the premise behind the changes to the new GFE is a worthwhile one. However, there are several areas where a consumer may not be able to compare the costs of loan programs on an equal basis and thus make the most appropriate loan choice.
Page 1 of the new GFE groups together all of the “Adjusted Origination Charges” (e.g. processing and underwriting fees, points, doc prep, etc.) as one figure and the Charges for All Other Settlement Services (e.g. closing attorney fees, title insurance, recording fees, etc.) associated with closing your loan as another figure and adds them together to come up with the Total Estimate Settlement Charges.
The new GFE also spells out your loan amount, loan term, interest rate and the initial monthly payment for principal interest and any mortgage insurance.
However the new GFE does not include expected expenses for monthly real estate taxes, homeowners insurance, or home owner’s association dues. Nor does it inform the borrower about expected funds needed to close the loan. Because all the origination charges are lumped together, the new GFE is not specific in disclosing the number of points required to close the loan. It also does not include the Annual Percentage Rate, or APR.
Escrow funding for reserves of real estate taxes, home owner’s insurance and mortgage insurance are included on page 1.
However, despite the fact that this total sum should be uniform across lenders, the new GFE allows the lender to quote whatever number of months of reserves they choose, resulting in a variance of hundreds or thousands of dollars when comparing GFEs. This is not a borrower savings from lender to lender. At settlement these charges will be the same for all lenders. This could result in the borrower unexpectedly bringing additional funds to the closing. Some mortgage companies will try to gain a competitive advantage by initially disclosing lower escrow totals. This would be an unfair and deceptive trade practice to the consumer.
Page 2 breaks into sections the charges for All Other Settlement Services which will include such newly disclosed charges as Owner’s Title Insurance, (which is an optional, but recommended purchase) and Transfer Taxes. In many states, the Transfer Taxes are disclosed as a borrower–related cost, even though the borrower may not be responsible for this cost, thereby inflating the Total Charge Estimate.
Page 3 gives the consumer information about which expense items on the GFE cannot increase at settlement, which one’s can have a total increase of a 10% increase and which ones can change without limit. The origination charges cannot change at settlement.
Lenders who allow borrowers to choose settlement service providers will receive a Page 4 to the new GFE which will list those providers.
Analysis: Does the new GFE Help Consumers Or Is It Just Another Complicated Form?
I have been in the mortgage industry for many years and have advanced educational degrees. I have passed my required national and state licensing exams and even I find this form to be confusing and not very helpful when comparing loans. My job as a loan consultant is to inform and educate my clients so that we arrive at the best loan program for them with the least costs based on their needs. I use different tools to compare programs, including cost/benefit analysis, total interest paid comparisons, length of loan term reviews, etc., but, with the new GFE rules, I must disclose 1 loan program within 3 business days of collecting 6 points of entry for an application. If I fail to do so, even if the borrower and I have not determined the best program for them yet, I am in violation of the law. I do not see how this helps the borrower determine the best loan program.
I will give HUD credit for trying, and as this is now the law of the land it is what we must all work with, however, given the vast departure from the look and feel of the previous form, it is going to take a lot of education on the part of loan officers, realtors and attorneys to establish a comfort level with the borrower’s understanding of the form.
When a borrower chooses a lender, they should be referred by someone they trust, should check out the lender’s and loan officer’s reputation by reviewing its website or other public information and feel comfortable that the loan officer is knowledgeable, understands their needs and has the borrower’s best interests in mind. Then a GFE received from that company can be viewed as a Good Faith Accurate, and not just a Good Faith Estimate.
Dave, thanks so much for your insightful analysis! This is a great post and a boon for our readers. This underscores why borrowers must have an experienced and knowledgeable loan officer such as David Gaffin on their team.
I have certainly spend a fair amount of time digesting the new changes, but perhaps that is because I am so used to the old forms. The irony may well be that many consumers will be seeing the new GFE for the first time and may not be as confused as some of us industry veterans. Adjusting to major changes to long standing practices is always difficult.
I’m pleased to welcome guest blogger, Leslie Mann, a Realtor with Hallmark Sotheby’s International Realty who specializes in the Dover-Sherborn area of Massachusetts. Leslie is here to talk about geothermal technology, which is growing in popularity in Massachusetts.
Geothermal technology is a great way to heat and cool your home. It costs far less to run and maintain than conventional heating/cooling systems—and reduces your carbon footprint!
According to the EPA, geothermal heat pumps can save homeowners more than 70 percent over conventional air conditioners and up to 44 percent over traditional heating systems. Plus you can take advantage of federal tax credits for new and existing homes using geothermal heat pumps.
Instead of using fossil fuels like oil or gas, geothermal systems use the earth’s natural warmth to heat your home. In the winter, geothermal systems use the earth’s natural heat to heat your house, and in the summer they draw excess heat out of your home and allow it to be absorbed into the earth. A geothermal heat pump doesn’t create heat by burning fuel, like a furnace does. Instead, it collects the earth’s natural heat through a series of pipes, installed below the surface of the ground. Fluid circulates through the loop and carries the heat to the house.
Here are some additional homes for sale in Greater Boston’s Metrowest area that feature geothermal technology:
9-room contemporary home for sale in Carlisle on 4+ acres with in-law suite featuring geothermal heating and cooling $1,055,000.
Five-bedroom Doeskin Hill estates contemporary home for sale in Framingham features four-zone FHA heating/geothermal cooling $1,099,000.
Described as “eco-chic” this new 4800 square foot center entrance colonial for sale in Wellesley featuring geothermal heating and cooling. $1,950,000.
These stylish contemporary townhomes for sale in Newton feature solar panels and geothermal
heating and cooling. $1,789,000
Thanks Leslie for the informative post! Check out Leslie’s great blog, Real Estate In Metrowest for more good tips.
By my own research, a 3 ton geothermal system costs about $7,500. But with the tax credits and energy savings, homeowners will quickly recover the added cost compared with a conventional fossil fuel system. It will be interesting to see whether Massachusetts homeowners, many of whom are environmentally conscious, will consider the benefits of geothermal heating and cooling systems. If I had the extra cash or was building a new home, I certainly would!
In this post, I’ll discuss a very important issue to lenders, closing attorneys and borrowers alike: how the new RESPA rules handle the disclosure of closing attorney fees/costs and title insurance.
The new RESPA rules significantly change the way lenders must disclose settlement services, in particular closing attorneys’ fees, and title insurance. Generally, under the new rules, closing costs are divided into one of three “buckets”:
(2) those subject to a 10% tolerance–that is, those which cannot increase by more than 10% from the GFE to the closing, and
(3) those that can change, i.e., increase without limitation.
Here is how the GFE (page 3) shows the 3 buckets:
For closing attorney fees (which HUD now calls “title services”) and title insurance, bucket #1 does not apply, and whether the cost belongs in bucket #2 or #3 will depend on whether the lender recommended the service provider on a written list of preferred providers. If the borrower selects a provider from the list, such as a closing attorney, their charges cannot increase by more than 10% from the GFE to the closing.
Thus, lenders have an incentive to recommend trusted providers whose charges are standard and predictable. If the borrower wants a particular attorney or title insurance provider not on the preferred list, he/she is free to select one, but their charges are not subject to the 10% tolerance and can go up (or down) by any amount.
Also remember that lender’s title insurance is universally required by every public mortgage lender, and in Massachusetts the borrower pays that premium at closing (except for no closing cost loans). A lender’s title insurance policy, however, does not protect the homeowner. As HUD and I always advise, borrowers should always get their own owner’s title insurance policy. (See HUD’s Shopping For Your Home Loan Booklet and my post, Title Insurance Demystified for some horror stories about what happens when you don’t purchase an owner’s title insurance policy).
Here is how the new GFE (page 2) discloses closing attorney fees/title services and title insurance:
Note that lines 3 and 4 represent a huge change from prior practice for closing attorneys. Now closing attorney fees must be disclosed as a single, lump sum charge, plus the cost of the required lender’s title insurance policy. The old GFE itemized such closing costs as courier fees, discharge tracking fees, and the like, but the new GFE is intended to simplify the disclosure of attorney closing costs in favor of one standard charge that consumers can compare across the board.
From the GFE, these fees and costs are ultimately carried over on the new HUD-1 Settlement Statement, with reference to the new GFE lines:
At the closing, the borrower can now simply compare the GFE with the new HUD to ensure that the quoted charges have carried over to the closing table. Remember though that selected costs from a “preferred provider” may deviate up to 10% under the tolerance rules. Also, for the first time the new HUD mandates disclosure of the closing attorney’s share, or split, of the title insurance premium.
In the spirit of the New Year, let’s look back at the top legal issues of the past year and peer into the crystal ball for a glimpse at 2010.
Top 5 Posts For 2009
#1. The Catch-22 Impact of New Fannie Mae Condominium Regulations. In January, Fannie Mae was the first government agency to drop a big bucket of cold water on condominium lending underwriting practices which some say contributed to the condominium market meltdown. FHA and others would follow later in the year. The new guidelines had condominium developers and associations, buyers and sellers in a tizzy, as Fannie Mae imposed much tougher pre-sale requirements, condominium financial guidelines and the imposition of unit owner HO-6 insurance policies, among other requirements.
#2. New FHA Condominium Lending Guidelines Sure To Slow Financing and Chill Sales. The Federal Housing Administration (FHA) followed Fannie’s lead in tightening condominium lending requirements. Originally proposed over the summer, FHA delayed implementation of the new guidelines until earlier in the month and watered down some of the most stringent requirements, after major lenders and community association groups complained.
#3. There’s Nothing Standard About The Massachusetts Standard Purchase and Sale Agreement. Great to see a post about buying a new home ranking so highly. An indicator of the recovery of the Massachusetts real estate market perhaps? Check out this post for the ins and outs of the very seller friendly standard form P&S and how to level the playing field if you are a buyer.
#4. Massachusetts Land Court Reaffirms Controversial Ibanez Decision Invalidating Thousands of Foreclosures. If you were following the foreclosure mess, you couldn’t have missed this judicial bomb dropped by Massachusetts Land Court Judge Keith Long. The so-called Ibanez ruling invalidated thousands of foreclosures across the state because the lenders did not record their paperwork up to date at the registries of deeds. Lenders have appealed the ruling, but hundreds of foreclosure titles remain unmarketable in the wake of this controversial decision. More to come in 2010.
#5. Short Sales Get Boost From New Obama Treasury Guidelines. On December 1, the Obama administration set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed.
All signs are pointing to a real estate rebound for the Bay State in 2010, with home and condominium sales surging over 50% from last year in November. I have definitely seen an uptick in new purchases on my end and we are preparing for a busy 2010. Along with good news from the real estate market, however, comes higher interest rates as the bond market reacts to positive news. My friend mortgage consultant Brian Cavanaugh at SmarterBorrowing.com does a good weekly mortgage market update and is presently advising borrowers to lock into current rates as he predicts rates will rise in 2010 to close to 6% for a 30 year fixed. Of course, when rates go up, buying power goes down, thereby cooling the market a bit.
Regulatory
Hopefully we’ve seen the end of increased regulation of the condominium market from the government giants. Let’s toast that they can let the market take its course with the new guidelines in effect.
Stimulus/Home Buyer Credit
As the economy continues to recover, you can probably bet that the Obama administration is going to let up on the stimulus/credit throttle for 2010. So take advantage of all the credits available now, because this is probably the last you will see of them for awhile.
Lastly, technology, the internet and social media will play an even bigger role in how realtors, lenders and real estate attorneys do business. The National Association of Realtors says that 87% of home buyers use the Internet to search for homes. I tell all my Realtor friends they must have a strong Internet presence and to take advantage of blogging, social media and Active Rain to boost their online presence.
For attorneys, in 2009 we saw the tip of the iceberg for electronic recordings and closings as well as online transaction management. Our office just set up an online transaction management system where buyers, sellers, loan officers and realtors can view the status of the loan whenever they want through a secure online portal. It’s a fantastic tool. While electronic closings are a way’s away from gaining the necessary critical mass of lender acceptance, many Massachusetts registries of deeds are now e-recording, and that will continue to rise. The next decade will certainly bring electronic closings and paperless transactions into the norm.
Well, let’s clink our glasses to a very happy, healthy and fruitful New Year!
With 11 days and counting until all lenders and closing attorneys must be in compliance with the new RESPA requirements and the new Good Faith Estimate (GFE) and HUD-1 Settlement Statement, HUD has released two helpful documents:
The booklet encourages retaining a competent real estate attorney in the transaction:
Before you sign a sales agreement, you might consider asking an attorney to review it and tell you if it protects your interests. If you have already signed your sales agreement, you might still consider having an attorney review it. (Ed. You definitely want an attorney to review and mark up the purchase and sale agreement, or else you’ll wind up signing the standard form and getting burnt).
If choosing an attorney, you should shop around and ask what services will be performed and whether the attorney is experienced in representing homebuyers. You may also wish to ask the attorney whether the attorney will represent anyone other than you in the transaction. (Ed.: You definitely want to choose an attorney who specializes in real estate, as opposed to an attorney who dabbles in it. Residential real estate practice, once considered fairly basic, has rapidly changed into a complex maze of regulations, disclosures and standards. You need someone who does this every day.)
In some areas, an attorney will act as a settlement agent to handle your settlement. (Ed.: In Massachusetts, it is fairly common that the same attorney will represent a buyer and close the loan for the lender. This is called a dual representation and often saves the home buyer money on closing costs. The buyer’s and lender’s interests are aligned as both parties must have clear and marketable (and insurable) title to the property).
The booklet also provides very helpful encouragement for buyer’s to purchase title insurance, which I always recommend:
Title Services and Settlement Agent
When you purchase your home, you receive “title” to the home. Certain title services will be required by your lender to protect against liens or claims on the property. Title services include the title search, examination of the title, preparation of a commitment to insure, conducting the settlement, and all administration and processing services that are involved within these services. Many lenders require a lender‟s title insurance policy to protect against loss resulting from claims by others against your new home. A lender‟s title insurance policy does not protect you.
If a title claim occurs, it can be financially devastating to an owner who is uninsured. If you want to protect yourself from claims by others against your new home, you will need an owner’s policy.
Kudos to HUD for finally advocating the benefits of title insurance!
Whenever a home is sold in Massachusetts, the smoke detector law requires that the local fire department issue a certification that the smoke detectors are working properly and are in the correct location. The new smoke detector regulations go into effect on April 5, 2010. The new regulations require that certain properties be equipped with the latest photoelectric smoke detectors which are not as prone to false alarms as older ionization based detectors.
Detectors Must Have New Photoelectric Technology (Except Near Kitchen or Bathroom)
Currently, there are two primary detection methods used in modern smoke detectors: photoelectric and ionization. Ionization detectors are often faster to alert than photoelectric detectors. But they are prone to false alarms such as when steam from a shower or other source interrupts the current. Photoelectric detectors emit a beam of light. They are less sensitive to false alarms from steam or cooking fumes but can take longer than ionization detectors to alert.
Since the introduction of detectors using the photoelectric technology, there has been an ongoing debate as to whether to require property owners to replace their ionization detectors with photoelectric detectors. Fire departments generally favor the new photoelectric technology. The new regulations were enacted to resolve this ongoing debate.
Under the new regulations, a smoke detector utilizing both technologies is required in all living levels and the basement, except within 20 feet of a kitchen or a bathroom containing a bathtub or shower. Compliance can be achieved by installing two separate detectors using these technologies, or by installing one detector which uses both technologies. For the area within 20 feet of a kitchen or bathroom containing a bathtub or shower, a photoelectric smoke detector alone is mandated. An ionization detector is prohibited in these places due to their tendency to be set off by steam.
Who Must Comply?
The new regulations will apply to all single family homes sold on or after January 1, 2010. If you are not selling your home, you don’t need the new smoke detectors, but it’s a good idea for safety reasons. The new rules will also apply to all apartment buildings sold or transferred after January 1, 2010, which are less than 70 feet tall, have less than six units, or have not been substantially altered since January 1, 1975. Larger apartment buildings or those that were substantially altered since January, 1975 were already required to upgrade their fire safety systems under other existing laws.
If you question whether your property is in compliance, your best bet is to contact your local fire department.
Here’s a great Guide to the smoke detector law put out by the Department of Fire Services. A very informative bulletin from the Boston Fire Department can be downloaded here.
Also remember that under “Nicole’s Law,” carbon monoxide detectors are required for homes using fossil fuels.
I’m getting pretty tired of all the condominium developers and realtors out there claiming and clamoring that the new FHA condominium guidelines which went into effect this week are the next coming of the Apocalypse. The fact remains that the new guidelines will ensure that condominiums are financially sound and well-run, and that’s good news for everyone: lenders, consumers, buyers, unit owners and realtors alike.
David Fletcher, a Florida real estate broker and former developer who has survived every recession since the 1970’s, gets it. In an article in Realty Times yesterday, he outlines 10 benefits of the new rules, especially from a sales and marketing perspective:
More buyers will enter the market because they can afford the lower down payment.
No single investor can purchase more than 10% of the units, so the idea of a controlled association by one or two investors is no longer a threat.
More inventory will offer wider choices tending to keep prices in check, as “FHA approved’ condominiums come on line.
More real estate agents will be willing to show condominiums to their buyers, because the lender who provides the mortgage will have to approve not only the condo documents, but the condo association’s budget, reserve account and its fidelity insurance policy.
New construction developers have the guidelines needed to create urgency in their pricing strategies, which is key to building and maintaining momentum.
Commercial lenders will have a more comfortable level with developers. While the 50% presale requirement may look obtrusive, it is actually a benefit to the developer, because it will create urgency for buyers to purchase.
Established associations that have dragged their feet to get their finances in order, now have a valid value-based reason to become “FHA Approved.”
Real estate agents will show FHA approved condominiums with confidence in the association’s finances, not just because the down payment is low.
Forward thinking lenders will hustle to become a “an approved lender’ in resale and new communities alike
Knowing the property already has approved lenders will make competition for listings tighter and will attract more buyers and more prospects to the listing.
David believes — and I agree with him — that “FHA Approved” will become one of the most sought after seals of approvals for condominiums in 2010 and beyond. Let’s hope that all the realtors, lenders, and condominium developers out there realize the benefits that can be gained from obtaining FHA approved status.
Today, the controversial Federal Housing Administration (FHA) condominium mortgage rules go into effect. I’ve written about them extensively on this blog here. The new FHA rules, in summary, require that condominiums undergo a much more rigorous financial review prior to being accepted into FHA mortgage programs. Sort of like a cardiac stress test for condominiums.
I was interviewed this morning by Associated Press real estate reporter Alan Zibel about the impact of the changes. I said that despite the short term hurt on lenders and the extensive underwriting required, I believe they are a good thing for consumers and condominium buyers because they require condominiums to get their financial collective acts together. Mr. Zibel graciously quoted me in the article:
While the rules could be tough for builders, they will protect consumers because lenders will be forced to be more careful about which projects they fund, said Richard Vetstein, a real estate lawyer in Framingham, Mass. “On the whole, it’s a good thing,” he said. “Financially sound condominiums make better investments.”
Here’s a direct link to the AP story as reprinted in the Los Angeles Times.
The AP article also touched on the difficulty new condominium developers face with the tougher rules. A Utah condo developer, who shelved a 300 unit project in favor of free standing homes, characterized the new rules as a “debacle.” But the FHA already watered down the new rules from those previously proposed, so builders could be dealing with far worse. On the whole, I think the rules are fair, balanced, and unfortunately necessary in light of the condominium meltdown in states such as Florida and California.
Divorce, unfortunately, often plays a major role in real estate transactions and decisions. The tough economy has added insult to injury for those unfortunate souls facing divorce in Massachusetts.
Quincy, Massachusetts Divorce and Family Law Attorney Gabriel Cheong offers great advice on his blog, the Massachusetts Divorce Lawyer Blog, about what to do if you are getting a divorce and the marital home is “underwater.” That is, when the balance on the mortgage is more than the fair market value of the house:
You’re divorcing and you need to sell your house that you own jointly with your spouse but with the recession, your house is now worth less than the mortgage that you have on it. You’re under water. You’re upside down on your mortgage. Whatever you call it, you’re stuck and don’t know what to do.
Well, here are your choices:
You stay in the house with your divorced spouse until either one of you can afford to move out or refinance. You might be thinking to yourself that that is ridiculous. Who would ever live with their divorced spouse AFTER the divorce?! More and more people are doing so in this new economy because there is simply not enough money to go around. It’s a sucky situation but it’s a reality.
You and your spouse continue to co-own the house together until someone can refinance the property. Either you live in the house or your spouse lives in the house. You could have a situation where only the person who’s living in the house pays for everything or everything is split 50/50. Either way, you two will still own a house together.
You refinance. If you try to refinance, know that you will have to put up the money to make up the difference between what you owe and what your house is worth. That would be tens of thousands of dollars if not more. Some people have that kind of money but most do not.
You do a short sale. A short sale is when you get the permission of your mortgage lender to sell the house for less than what you owe on the mortgage and hopefully, you negotiate that you won’t have to make up the difference. Know that most lenders will not extend the option for a short sale unless if you’re behind on your mortgage payments by several months. At that point, your credit would’ve taken a hit already.
You let the home go into foreclosure. This is not an ideal situation and it’s not generally recommended.
You try to negotiate a modification or an assumption of the current mortgage. This is very difficult and very lender specific. Some will let you modify the loan or do an assumption whereby you don’t have to refinance the house and yet be allowed to remove a spouse’s name off the mortgage. It’s worth a try.
Those are all your options. The important thing to remember is this: do not ever sign over a deed to the house over to your spouse’s sole name without also being off [released from] the mortgage. If you do so, you will have no equity interest in the property yet be liable for the mortgage (debt interest).
As Attorney Cheong outlines, it’s a tough pill to swallow for those in the unfortunate predicament of divorcing in this recessionary economy. I’ve heard stories of divorcing spouses creating separate living quarters in a house, akin to an in-law suite with separate entrances, etc.
From a real estate perspective, preserving the value of the property is paramount and in the best financial interests of both spouses (and the children). With the enactment of the new Obama short sale regulations, a short sale may be a good option for divorcing couples who are “under water.” The new regulations require that the lender agree to waive the outstanding loan balance on an approved short sale, so both spouses can wipe their credits clean of the mortgage obligations and move on with their lives.
If you are in the middle of a divorce, feel free to contact me, Richard D. Vetstein, and I can work with your divorce attorney to ensure that you’ll be protected in any refinance, short sale, loan modification, or foreclosure situation.
The Obama administration on Monday set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program (HAFA) provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed. The announcement can be found here. A complete set of the guidelines can be found here.
The new federal guidelines address barriers that have often sidelined short sales by setting limits on the time it takes a bank to approve an offer, freeing borrowers from debt and capping claims of subordinate lenders. New financial incentives for completing short sales or similar “deed-in-lieu” transactions — in which the deed is simply transferred to the lender — include a $1,000 payment to servicers, and a maximum of $1,000 to go to investors who sign off on payments to subordinate lien holders, the Treasury said. Borrowers would also receive $1,500 in relocation expenses.
While a short sale may be preferable to a foreclosure, they have been frustrating for borrowers, buyers and realtors, because they are often hung up by lengthy negotiations with multiple lien holders and mortgage insurance companies. Realtors have complained that sales fall through as lenders bicker over the sales price, what they should receive from the proceeds, and whether the borrower will be held accountable for the debt in the future.
Under the new rules, mortgage servicers have 10 days to approve or disapprove a request for short sale, and when done the transaction must fully release the borrower from the debt. The rules also prohibits mortgage servicing companies from reducing real estate commissions on the sale, a practice that has dissuaded many agents from taking short sale listings.
This may help, but by how much remains to be seen.
After several revisions and delays, the Federal Housing Administration (FHA) has finally issued major changes to its revised guidelines on mortgage insurance requirements for condominium projects. FHA first proposed the revisions back in June (under Mortgagee Letter 2009-19). The new guidelines are effective December 7, 2009; however, some of the requirements are phased in through January 31, 2010.
There has been a considerable amount of controversy involving HUD/FHA’s proposed requirements for obtaining FHA mortgage insurance for condominiums. The newest guideline revisions are in response to the strong reaction from condominium associations and mortgage industry representatives who saw many of the FHA requirements as counter-productive and burdensome to condominium associations and owners.
The latest guidelines are described in two separate HUD/FHA documents:
Mortgagee Letter 2009-46B (the revised guidelines for FHA approval of residential condominium projects)
Mortgagee Letter 2009-46A (temporary guidance for condominium approvals).
Under the Temporary Guidance:
The “Spot Loan” approval process will continue through February 1, 2010, after which it will be replaced by the new Direct Endorsement Lender Review & Approval Process (DELRAP); and
The 30% cap on FHA loans per condo project will be expanded to 50% until December 31, 2010. Concentrations may be increased to 100% if certain additional conditions are met. After January 1, 2011, the cap reverts back to 30%.
The highlights of the New Guidelines are as follows:
Condominium project approval is not required for condominiums comprised of single-family totally detached dwellings (no shared garages or any other attached buildings).
Until December 31, 2010, at least 30% pre-sale level must be reached before any FHA mortgage can be granted on any unit. After 12/31/10, 50% pre-sale level must be reached.
50% owner occupancy rate for the entire project.
No more than 15% of unit owners can be delinquent (over 30 days late) on their condominium fees.
Capital reserve funding: The reserve study requirement has been eliminated, along with the requirement of at least 60% of the fully funded reserves. The new requirement requires merely that at least 10% of the association’s annual budget be set aside for reserves.
Budget review: Lenders must review the condominium budget to determine that the budget is adequate and: (i) includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; (ii) provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and (iii) provides adequate funding for insurance coverage and deductibles.
No more than 25% of space allocated to commercial use.
No more than 10% of units held by a single investor.
The 1-year waiting period for conversion condominiums is eliminated.
Unit owners must obtain individual HO-6 insurance policies if the master policy doesn’t cover unit interiors.
Fidelity insurance must be obtained for 20+ unit projects.
Re-certification required every 2 years.
Transition Strategy:
FHA will move all currently approved condominium projects to the new approval list and FHA Connection database.
Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2009.
Projects that received approval between October 1, 2008 and December 7, 2009, will be “grandfathered” and will have to follow the new guidelines’ recertification process (recertification required every two years).
Analysis:
Although the condominium association and mortgage lobby were successful in watering down some the more onerous requirements, the new revised guidelines will still represent a major change in how lenders underwrite condominium mortgages. Lenders will have to perform much more extensive due diligence on condominium projects than before.
The new guidelines will also force existing condominium associations to really get their acts together, especially with their unpaid condominium fees, budgets, insurance and capital reserve accounts. FHA mortgage programs are becoming the first choice for first time home buyers, and condominium units are particularly suitable for first timers. I have already seen situations where condominium trustees feel no obligation to comply with FHA (and Fannie Mae) guidelines in connection with a proposal sale of a unit, and it is not a good situation. Condominium trustees and association can certainly open themselves up to liability if they don’t cooperate and maintain the marketability of the units which they govern. Trustees owe unit owners a fiduciary obligation to get their associations in compliance with all new FHA/FNMA guidelines, in my opinion.
For condominium associations, the Community Associations Institute has published this helpful “Head’s Up” and FAQ.
New, sweeping changes regulating how lenders, closing attorneys and title companies disclose loan and closing costs are set to go into effect January 1, 2010. The new regulations are part of a long awaited reform to the 30 year old Real Estate Settlement Practices Act known as RESPA aimed at providing greater transparency and fostering better consumer choice in loan and closing costs. The changes are so significant that HUD recently took the unusual step of giving lenders a 120 day reprieve in enforcing the new regulations.
The major components of the new RESPA reform are the new and substantially revised Good Faith Estimate (GFE), in which lenders disclose loan and closing costs to borrowers, and the HUD-1 Settlement Statement, which is a detailed financial breakdown of the entire real estate transaction signed at closing.
Highlights of the new changes include:
Borrowers must receive a standard GFE disclosing key loan terms, including the loan’s terms; whether the interest rate is fixed or otherwise; any prepayment penalties and/or balloon payments; and total closing costs.
Lenders must provide borrowers with a standard origination charge for the loan which must include all points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees
Lenders have the option of providing borrowers with a list of approved service providers such as closing attorneys and title insurance companies.
A tolerance range has been specified for various categories of loan/closing costs to prevent unnecessary escalation of promised vs. actual charges.
Fees quoted for lender origination charge cannot change.
Fees for title and closing costs where the lender selects the provider or where the borrower selects the provider from the lender’s approved list cannot change by more than 10%.
Fees that borrowers can shop for themselves can increase (or decrease) by any amount.
The final page of the GFE contains worksheet-like charges to compare different loans and terms that the borrower can use to shop pricing.
Controversial lender payments to mortgage brokers, known as yield-spread premiums, must be disclosed in a standard manner.
The charges quoted on the GFE are then carried over to the HUD-1 Settlement Statement to ensure that the prescribed tolerances are met.
I think that overall the changes will provide consumers with greater disclosure and transparency of the myriad loan closing fees and costs in a typical real estate purchase. It also creates an incentive for lenders to assemble a competitively priced team of preferred settlement service providers, so it can guarantee to its customers that the price of the preferred vendors’ settlement services will never increase by more than 10% at closing. If borrowers aren’t happy with that, they are free to shop and find a better deal themselves.
I plan to do a series of upcoming posts on this important RESPA reform, highlighting the salient sections of the new GFE and HUD-1. As always, contact Richard Vetstein with any questions.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 26 years in practice, he is a five time winner of the "Top Real Estate Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
