New Proposal Aimed At Housing Crisis

On September 29 the U. S. House of Representatives rejected a plan proposed by the President and Secretary of Treasury designed to free up frozen credit and stabilize panicking financial markets. The plan is now known as the Emergency Economic Stabilization Act of 2008, or EESA, a somewhat euphemistic moniker for the now unpopular and politically dangerous notion of financial bailout.

Immediately thereafter, the stock market plunged by about 750 points.

This seemed to signal a mistake had occurred. Legislators, spooked by what seemed a violent reaction, went back to the drafting table. This time the Senate, knowing how to get bills passed or make sausage (take your pick), loaded up what started out as a 3-page proposal with an additional 448 pages of “pork.”

The stock market in the meantime attempted a modest recovery. Was this a sign we are back on the right track?

On Friday, October 3, the fattened and sweetened Senate version was easily digested by the House and was signed into law by the President within hours of its passage.

The next trading day (Monday, October 6) saw overseas markets tanking and the NYSE lose 8% of value to bring the Dow Jones Industrial Average to its lowest level in over 4-years.

Does this signal that we are not on the right track after all? Perhaps the markets’ reactions tell us that we may only be attacking one aspect of a failing system (or the markets just don’t have as much an appetite for pork as Congress does).

Two noted economists from prestigious Columbia Business School strongly suggest that the place where we should begin to address the vicious downward cycle in financial markets is housing. The cycle started with falling housing values which caused losses in securities backed by housing units. Those losses reduced bank capital. Tightening of credit markets ensued, which caused housing values to fall still further.

In an October 2, 2008 piece written for the Wall Street Journal. professors R. Glen Hubbard and Chris Mayer have articulated a bold yet simple plan to underpin the slide in housing values. Allow homeowners to refinance mortgages on their primary residence into 30-year fixed rate mortgages at 5.25%. For those with property worth less than the outstanding balance of their mortgage, the government could “write-down” the amount owed in exchange for an equity position in the property. This would allow the taxpayers to recover the subsidies and even profit from them when the housing market rebounds. Hubbard and Mayer contend that this program is clearly feasible and may be implemented immediately and at little cost due to the fact that the US government now controls about 90% of the mortgage market.

Now, before jumping to any conclusion and painting these guys as just another two wacky, wild-eyed socialists from academia, note that Dr. Hubbard was Chairman of the Council of Economic Advisors under President George W. Bush.

This may be a plan worth pursuing. I wonder if anyone in Congress has the energy or drive to engage in studying this proposal. Or are they just too groggy from all that pork? What do you think?

Anti-predatory lending database

Since July 1, real estate transactions in Cook County have been subjected to a little added bureaucracy thanks to the Illinois General assembly. On that date, the predatory lending database program commenced. This new law (which is actually an older law redux) requires a certificate to be attached to every mortgage presented for recording. The certificate must either state that the mortgage is in compliance with the program or that it is exempt from the program. Without either an exemption certificate or a compliance certificate, the mortgage is not recordable.

The stated purpose of this program is to reduce instances of predatory lending through increased awareness by borrowers of loan terms. Perhaps this explains why the law was added to the Residential Real Property Disclosure Act and not the Mortgage Act or the Residential Mortgage License Act.

As stated, a mortgage must have a certificate attached to be recordable. Whether the exemption certificate is appropriate or whether the compliance certificate is required depends on when the application was taken, who originated the loan, the type of loan, and the type of property. The following factors would permit the use of a certificate of exemption:

• The application was taken prior to July 1, 2008.
• The loan was originated by an exempt entity. An exempt entity is one that is not required to be licensed under the Residential Mortgage License Act.
• Commercial, vacant, or mixed use property.
• Property containing more than 4 residential dwelling units.
• Investment property (non-owner occupied).
• Government property.
• The loan is a reverse mortgage; or a home equity line of credit not made with a new first mortgage.

All other mortgages will require a certificate of compliance.

So far, there has been little or no experience with the production of compliance certificates simply because of the recent inception date for the program. The closers at Prairie Title report that the process of generating exemption certificates is quite straight forward; and has not been time-consuming. Of course, as more compliance certificates are required, the database will certainly become increasingly burdened. This may result in significantly more time needed to complete closings. Data requirements for compliance certificates are far more extensive.

Because of the increased duties and potential liability imposed on settlement agents, many are charging additional fees or increasing their closing fee for Cook County transaction. Although this may be justified, Prairie Title has decided against assessing any extra costs upon the parties to the transaction at this time. We believe that to fairly determine the impact on our processes and procedures, we need the experience of working under this new program for a while. It is our hope that the database will work so flawlessly and efficiently that no additional charges will ever be necessary. Nonetheless, by working with the program for a while, we will be confident that our fees will be appropriately reflective of the burdens and responsibilities imposed upon us by this new law.

F. Y. I. on the J. L. P.

Many lenders are opting for the Junior Loan Policy (“JLP”) as opposed to the standard ALTA loan policy for their second mortgages and home equity lines of credit (“HELOC”). The principal reason is cost. In competing for borrowers, junior lenders regularly assume all costs associated with these loans. A JLP is significantly cheaper than a standard ALTA loan policy; and, hence, its popularity.

Not surprisingly, however, with the lower cost comes reduced coverage. Care should be taken in deciding in favor of a JLP and lenders should be aware of the limitations on title insurance protection associated with this policy. While certainly appropriate for most junior loans, the expectations of many insured’s may be higher than the coverage actually delivered.

The basic insuring provisions of the JLP provide coverage for loss or damage sustained by reason of only the following:

• The grantee on the policy is not the same person as the grantee on the last recorded document purporting to vest title;
• The land described in the policy is not the same as that described in that same document;
• Any monetary lien recorded in the public records before the date of the policy which affects title;
• Ad valorem taxes or assessments imposed by governmental taxing body constituting a lien on the property and which appear on the official public record of where the land is located.

The JLP also provides coverage over costs of defense, but only to the extent that the insurer does not exercise options under the policy to pay or settle thereby terminating its obligation to defend.

It is most important to note that a JLP does NOT insure that the subject mortgage constitutes a valid lien on the property. The first “exclusion from coverage” on the policy itself states: “Any invalidity, unenforceability or ineffectiveness of the insured’s mortgage.”

This means that the lender is on its own with respect to the documentation it utilizes to create its lien. It should quickly be added, however, that given the extent of standardization in such documents, any concern over validity of the lien is not great. Nonetheless, no coverage exists, even for the very rare instance.

In conclusion, the JLP is a very economical alternative to a full ALTA loan policy for seconds and HELOCS. However, lenders must be aware of the limitations on the coverage provided which underlie the low cost.

Reverse mortgages - tapping into equity for liquidity

This posting is a followup to last week's post about reverse mortgages.

For most seniors, their home is their greatest financial resource. It represents years of hard work and prudent savings. Wouldn't it be great if the value that has built up in the home could be applied to other needs or for well-deserved rewards for a lifetime of hard work?

It used to be that the only way to access that equity was to sell the home. For many, selling the home is not a desirable choice. However, in recent years we have seen the growth of a very viable alternative for those seeking access to the savings accumulated in their homes. A reverse mortgage provides the opportunity to convert the equity in the home into immediately available funds.

As the name infers, this mortgage works in a manner opposite to that of those we are used to. That is, instead of the borrower paying the lender, the lender pays the borrower. As in traditional mortgages, the home is still collateral for the loan.

To qualify for a reverse mortgage, you merely need to be 62 years old and own your home. Credit considerations are very relaxed. The greatest restriction lies only in the percent of the property’s total equity that can be accessed.

Great flexibility exists as to how the proceeds of a reverse mortgage can be paid out. A senior may wish to be paid in one lump sum; or in monthly installments (like an annuity). The loan amount may also be treated as a line of credit which can be accessed only when desired and in varying amounts.

The key is that the reverse mortgage does not have to be repaid until the property is sold or the borrower no longer lives there. The magazine of the AARP offers an easy to follow analysis of reverse mortgages and even provides an interactive calculator to assist interested borrowers in their consideration of whether a reverse mortgage is right for them.

Reverse Mortgages: Turning Equity Into Liquidity

As of July 1, 2006 the U.S. census bureau reports that the resident population of persons age 65 and over was 37.2 million. By 2015, that number is expected to rise to 46.8 million; and by 2020 to 54.6 million.

Residents of Illinois over age 65 on July 1, 2006 numbered 1.5 million (or about 12% of the state’s total population). By 2015, their numbers will grow to 1.78 million (or 13.6% of total population).

Nationwide, almost 81% of persons 65 and older own their home. As of the fall of 2005 that number was 17,818,000. Of those, over 12 million own their homes free and clear. That is, they enjoy 100% equity in their real estate. When you consider that between 2005 and 2006 The National Association Of Realtors placed the median sales price for existing homes at around $220,000, this group of Americans have amassed collective unencumbered wealth of 2.64 trillion dollars.

For most, their home is the single largest plank in their investment platform. They have worked hard, saved, paid off their debt and now sit (literally and figuratively) on an unquestionably secure and valuable asset. The trouble with it is it is not liquid. You can’t chip out a few bricks or take part of the porch to buy a new car, take a vacation, or make a gift to the grand kids.

But what if you could take that otherwise illiquid asset, convert it to cash, and still live in it? Too good to be true, you think. Not so. A reverse mortgage allows these frugal seniors to do just that. It allows them to enjoy the fruits of their hard work and judicious saving without having to deal with selling the property and uprooting themselves from their home of so many years.

Current County Effective Dates

The effective dates at Cook and surrounding counties, as of today, are as follows:

Cook - 4/28/08
Will - 4/1/08
Dupage - 4/25/08
Mchenry - 4/24/08
Lake - 4/24/08
Kane - 4/18/08
Kendall - 3/18/08

Current County Effective Dates

The current effective dates at Cook and surrounding counties are as follows:

Cook - 4/21/08
Will - 3/31/08
Dupage - 4/18/08
Mchenry - 4/21/08
Lake - 4/17/08
Kane - 4/7/08
Kendall 3/7/08