Real Estate in Steamboat

Q: I‘m a renter in a condo complex. My neighbor, who is also a renter, has two large American flags flying from his balcony and front entrance area. I‘d like to show my support of my native country by flying its flags, but when I put them up, the homeowners association told me to take them down. Why the double standard — isn’t this a violation of my freedom of speech? –Miriam W.

A: Yes, it’s a double standard, but in your situation, it’s probably legal. Under federal law, condominium associations, homeowners associations and residential real estate management associations may not forbid the display of the American flag (Freedom to Display the American Flag Act of 2005, 4 United States Code Annotated, Section 3). These associations may, however, enact other rules concerning outdoor displays, and regularly do. A prohibition against the display of foreign flags would probably not be thrown out by a judge. As for your First Amendment rights, remember that the Bill of Rights concerns what government may and may not do with our individual liberties. Since this is a private landowners’ rule and there’s no government involvement, the Bill of Rights won’t help you.

By the way, the outcome might be different if you and your neighbor were not renting in a planned community. The Flag Act applies only to these communities, and not to other properties. In a non-planned-unit-development setting, if the two landlords forbade the flying of any flags, you both would have a hard time successfully challenging that rule.

Q: My brother passed away recently, and I needed to get into his apartment to get his address book, so I could notify friends and family. I also wanted to get my tools, which he had borrowed. His landlord wouldn‘t let me in, even though I had ample identification. This is a bit much, isn‘t it? –Juan G.

A: Your brother’s landlord was probably worried about liability. How could he be sure that your removal of the address book would be something your brother’s estate would condone? And what about the tools — suppose the estate later claimed that these tools really belonged to the deceased tenant, or to someone else entirely? The landlord probably imagined a lawsuit alleging that he improperly facilitated these unauthorized takings, and he may have been worried about other disappearances being laid at his door.

The landlord might have approached your request for the address book a bit differently, however. He might have asked you to sign an indemnification agreement, in which you promised to cover any expenses the landlord might incur as a result of allowing you to take the book. For example, if the estate later sued the landlord over the book’s disappearance, this agreement would mean that the landlord’s attorney fees and any settlement or judgment would be covered by you. As for the tools, however, your landlord may not have had much leeway. Some states require that you make a formal claim on the estate for the return of any property that the deceased person possessed but did not own.

Q: I‘ve been receiving annoying junk faxes just about every week since I began renting at my current address. This stuff has nothing to do with my rental situation — it‘s from the management company but contains mostly advertisements for other businesses. I‘m sick of receiving it; is there anything I can do? –Lawrence Y.

A: It’s not hard to stop those faxes. In 2005, the Junk Fax Prevention Act gave consumers some important protections. The Act prohibits fax transmissions to anyone who hasn’t given the sender express permission, or to anyone with whom the sender doesn’t have an “established business relationship.” You have such a relationship if you gave the management company your fax number, but this doesn’t mean you’re doomed forever to receive their faxes. Follow these steps:

1. Check the first page on every fax — it should include conspicuous “opt out” information, including a telephone number, fax number and cost-free ways (including a toll-free phone number, local number for local recipients, toll-free fax number, Web site address, or e-mail address) to opt out of faxes. These numbers and the free opt-out mechanism must accept opt-out requests 24 hours a day, seven days a week.

2. In your opt-out request, include your fax number or numbers, and simply state that you want no future faxes. Use one of the cost-free methods mentioned on the fax advertisement.

Senders have to honor your request within the shortest reasonable time, but in no event later than 30 days. If you later change your mind, you can give the sender permission to send future faxes. Now, suppose the sender doesn’t honor your requests? Use the Federal Communications Commission’s online complaint form (available on the FCC Web site; search for Fax Advertising: What You Need to Know). The FCC can issue warning citations and impose fines, but cannot award you money damages. For that, you’ll have to file a lawsuit, which exposes the sender to having to pay your actual damages or $500 for each violation, whichever is greater (the court can triple the damages if it concludes that the sender intentionally violated the Act).

Finally, understand that this process is separate from the steps you take to avoid receiving unwanted telephone solicitations. To get on the Do Not Call list, you’ll need to sign up (take a look at “Unwanted Telephone Marketing Calls” on the FCC Web site).

Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of “Every Landlord’s Legal Guide” and “Every Tenant’s Legal Guide.” She can be reached at janet@inman.com.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2007 Janet Portman

Q: Are gutters on homes necessary? Our last home, built in the 1950s, didn’t have gutters and seemed to be fine during the 10-plus years we lived in it. Now we live in a tract home, built in the ’70s, and the gutters are in very bad shape.

We’re tempted to remove them rather than replace them but don’t know if the need for gutters depends upon the style of the home. Both homes are boxes, essentially. We certainly don’t want to do anything that would damage the house. What do you think?

A: Why have gutters at all? The answer depends less on the style of the house and more on the grounds surrounding it. Virtually all houses are boxes, if you think about it.

The purpose of a gutter and downspout system is to channel rainwater landing on the roof away from the foundation. If a house is surrounded by concrete patios, sidewalks or driveways sloping away from the foundation, a gutter system really isn’t necessary.

Kevin’s home in Eagle, Idaho, has no gutters and he doesn’t miss them. Concrete walkways surround his house, and the amount of rain in Eagle averages only about 12 inches per year — not enough for water to seep under the foundation footings.

On the other hand, if there is no hardscape surrounding the house to channel water away from the foundation and rainfall is greater than in the semi-desert region of southwest Idaho, gutters and downspouts are indispensable.

Another practical use for a gutter is to catch the water coming off a roof over a doorway and channel it so that rain falling on the roof doesn’t fall on your head as you enter or leave the house. Additionally, gutters can provide some architectural interest to the eaves. Most of the gutters installed on 1970s tract homes were metal shaped in the form of an ogee, a multicurved profile that breaks up the straight line of the eaves.

So the answer to your question really depends on the amount of rain you receive, the nature of the area around your foundation and how you want your house to look.

Although your gutters are in bad shape, unless they crumble at a touch they can be saved. Most ugly gutters just need some scraping and sanding and a good coat of paint to rejuvenate them.

The renewal process is similar to any other exterior paint job. The looks and longevity of the job are directly proportional to the quality and effort of the preparation. Do a thorough prep job and your gutters will look and perform like new. First, scrape off the loose paint. Next, feather the remaining paint so that the new coat blends in and you don’t get unsightly ridges. A palm sander, a wire wheel attached to a drill motor or a combination of the two will do this job.

Next, apply a coat of primer. We’ve used red oxide primer in the past. Today, we recommend you go to the local paint store that sells to painting contractors and take their advice as to the right product. We also strongly suggest cleaning the inside of the gutters and giving them a coat of primer too. Seal any seams that might have opened with silicon caulk. After the primer and caulking dries, two coats of latex paint finish the job.

Occasionally, if the gutters haven’t been cleaned regularly, leaves and debris build up and trap water, and, over time, the bottom of a metal gutter rusts through.

Gutters like these can also be salvaged. Thirty years ago, when Kevin was making a living with the tools, he did a job for neighbors in San Leandro, Calif. The bottom of their gutter looked like Swiss cheese — lots of little pinholes. Kevin went to a local sheet-metal shop and had them cut strips of sheet metal to fit the flat bottom of the gutter, which he affixed to the inside of the gutter with caulking.

He caulked the edges of the patches and primed the inside of the gutters and patches so that no water could penetrate. No more pinholes, and the useful life of this gutter system was prolonged by many years.

If your gutters are this far gone, that is an alternative to new gutters — or no gutters at all.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2007 Bill and Kevin Burnett

Buyer wants to purchase REO property while conditions are soft

DEAR BENNY: When do you see the bottom of the real estate market happening? When do you think we will have appreciation again? What is the best way to buy REO properties? –Tom

DEAR TOM: That’s the $64,000 question. In an answer to another reader, I said that I now have two crystal balls on my desk, and they remain cloudy and uncertain. Honestly, your guess is as good as mine. As you probably know, not every community in the United States is facing housing problems; I have been reading that in some parts of the country, real estate sales and prices are strong.

You asked about buying REO properties. For my readers who do not know what this means, it stands for “real estate owned.” When a bank forecloses on a mortgage — or when the bank takes back a homeowner’s property by way of a deed in lieu of foreclosure (commonly referred to as a “deed in lieu”) — the bank owns that property, and it is called REO. Most banks do not want to own REO properties because it impacts on their financial status, and more importantly they have to start paying insurance and real estate tax.

So, banks want to sell those properties as quickly as possible. How do you go about buying them? Many real estate agents and brokers have relationships with banks, and may be able to assist. You can also talk to the banks directly to inquire.

However, you should retain legal counsel to assist you. You want to make absolutely sure that should you be successful in buying such REO properties that you will get good, clean, insurable and marketable title.

DEAR BENNY: I am considering buying a distressed property. What should I look for when choosing a contractor and in negotiating the contract? I would like renovations to be completed within 12-18 months. Can I enforce this timeline? –Cyril

DEAR CYRIL: Whether you are buying distressed property — or any property for that matter — and want to do construction/renovation, there are several things you should do.

Check with your county or state licensing office. Do home-improvement contractors have to be licensed? If so, insist on seeing a copy of the contractor’s license, and confirm with the agency that issued it that it is valid.

Do not sign what I call a “one-page special” — in other words, a contract that is only one or two pages, especially if your renovation job will be at least $5,000 or more. The American Institute of Architects has a number of sample contracts, which I believe you can obtain (perhaps even purchase) online. They also may assist you in locating a licensed architect in your area, should you need one.

Your contract should have at least the following: a complete description of what work will be done; the total cost; a payment schedule (do not overpay and keep between 10-15 percent in reserve to pay when you are completely satisfied that the job is finished and acceptable to you); and a termination provision should you find that the contractor is not showing up on the job or not doing a good job. The AIA contract contains these requirements, plus a lot more.

You asked if you can enforce your timeline. The answer is yes. I generally recommend that you agree to pay the contractor a bonus (to be determined between the two of you) for early delivery — say $100/day up to a cap of 10 days. Furthermore, include in the contract a provision that if the contractor does not complete the job on time, that you will deduct $100/day, but with no cap.

Some contractors will accept the bonus-penalty concept, and that is clearly your right to insist on such a provision.

DEAR BENNY: My neighbors bumped out their house from the back, which affects the privacy we used to enjoy from our quiet backyard. Is it legal to put up a fence between our two houses? This may partially block their view of the woods behind our houses. –C.P.

DEAR C.P.: Despite the fact that our homes are supposed to be our castles, there any many governmental restrictions that may impact your ability to erect that fence. The answer should be available from your county or state zoning office. You may need to obtain a permit to build the fence. And to try to keep a decent relationship with your neighbors, you should discuss your plans with them. They may even be willing to share the cost of the fence.

By the way, I have never heard of a house being “bumped.” I like that word and plan to use it in the future.

DEAR BENNY: I live in a condo in Maryland. The bylaws were amended by the HOA council, before our ownership, to restrict rental of units to family members only. Is this allowed? –Dennis

DEAR DENNIS: The laws relating to community associations (including condominiums and homeowner associations) are very clear: Anyone who lives in the community is subject to the rules and regulations of the association, including any properly amended regulations — such as a rental restriction. When you bought your unit, I must assume that the rental restriction was part of the condo documents that you received before you went to settlement. Since I am familiar with the laws in the state of Maryland, before any owner can sell his or her unit, the prospective buyer must be provided with what is known as the “resale package,” which includes the legal documents. You had a number of days in which to review all of those documents and cancel your contract if you had any concerns. Since you decided to buy, you are bound by those rules and regulations — including the rental restrictions.

Many states have this “resale package” requirement. Every potential condominium or homeowner association purchaser must carefully read all of the legal documents of that association before going to settlement.

It should be noted, however, that court case law throughout the country makes it clear that for a rental restriction to be valid, it must be incorporated into the declaration or the bylaws of a condominium — which means that these legal documents have to be amended by a super-majority vote of the members, It is not sufficient merely for a board of directors to enact such a restriction through a rule change.

By Benny L. Kass
Inman News

A look at paying points, securing second loan

Interest rates on jumbo mortgages jumped about 3/4 percent in mid-August. Before settling for higher rates or giving up altogether, consider the following ways you might lower your financing costs.

Even though jumbos increased in price, conforming rates — for mortgage amounts up to $417,000 — decreased. On Aug. 20, for example, it was possible to find a 30-year fixed-rate conforming mortgage for 6.25 percent and one point. At the same time, jumbo mortgages over $417,000 were going for 7.25 percent and one point.

“Points” is a term lenders use for a mortgage origination fee that’s paid by the borrower one time only at closing. One point equals 1 percent of the loan amount. By paying more points upfront, a borrower can lower the mortgage interest rate for the term of the loan.

Points are tax-deductible on purchase mortgages in the year of purchase for those borrowers who itemize deductions. Restrictions apply, so be sure to check with your tax advisor to see if paying points will lower your overall cost of financing. Usually, the longer you plan to keep paying on the mortgage, the more worthwhile it is to pay points for a lower rate.

HOUSE HUNTING TIP: Buyers who don’t have the extra cash to pay points could ask the seller to pay points for them. Most lenders permit a seller to credit cash to buyers at closing for their nonrecurring closing costs. Points are a nonrecurring closing cost — they are paid once at closing, unlike mortgage payments or homeowners insurance that is paid for on an ongoing basis.

Lenders have limits on how much a seller can credit a buyer. It’s usually 3 to 6 percent of the purchase price. Before you write an offer, find out your lender’s limit. Then ask the seller to credit you a dollar amount that falls within the lender’s guidelines. This way you won’t raise a red flag with the lender that could cause your loan to be denied.

Also be aware that appraisers are taking a hard look at seller credits to determine if they affect the market value of the property. If you inflate your offer price to cover the cost of points and this puts the price out of line with current market value, the lender could lower the appraised value. In this case, your mortgage amount might also be lowered, leaving you short on the funds you will need to close.

No one knows the future direction of interest rates. But, if you believe that interest rates will come down soon and that you’ll refinance into a lower-interest-rate mortgage, you might be better off paying a higher rate now and no points.

Another way to reduce your mortgage interest rate on jumbo financing is to create a blended rate by combining a low-interest-rate conforming loan with a second mortgage. Secondary financing is available in amounts up to $500,000 for buyers with a 20 percent cash down payment, a good credit score (over 700 with some lenders) and verifiable income.

By combining a conforming $400,000 fixed-rate first mortgage at 6.25 percent with a fixed-rate $400,000 second mortgage at 7.4 percent, you end up with a blended rate of 6.8 percent. So, you create jumbo financing for under 7 percent in an over-7 percent first-mortgage market.

Most conventional second mortgages have payments that are amortized over 30 years, with a due date in 15 years. This means that there is a balloon payment when the loan is due, unless you pay the principal down substantially during the term of the loan.

THE CLOSING: Make sure that there is no prepayment penalty on the second mortgage so that you can make pay-downs or pay the loan off at any time without penalty.

By Dian Hymer
Inman News

Dear Barry,

We bought our home about two months ago. Since then, we’ve found that the exterior siding is warped and crumbly in several places. None of this was disclosed by our home inspector. In fact, his report refers to the siding as “wood,” even though it’s some kind of particle board. And now, we’ve learned from our neighbors that the siding is the subject of a class-action lawsuit, something the sellers should have disclosed but did not. When we called our inspector about this, he said the warping must have occurred since he inspected the building, just eight weeks ago — clearly a lame and irresponsible excuse. Don’t you think that he and the sellers should have disclosed these conditions and should now accept some liability? –Kelly

Dear Kelly,

The acceptance of liability by the home inspector and the sellers seems fair, reasonable and appropriate — the sellers for concealment of significant issues and the home inspector for what appears to be professional negligence.

Experienced home inspectors recognize composite siding as distinct from wood siding and are aware of the problems that commonly occur with this material — mainly warping, swelling and decomposition. It may be that your inspector is not at the top of his game or was simply having a bad day. Either way, his defense is embarrassing at best.

The basic standard of care for a home inspector is to report conditions that are visible and accessible at the time of the inspection. Damaged composite siding clearly fits that definition and should have been disclosed by the inspector and the sellers.

The inspector’s claim that the siding became damaged since the day of the inspection is ludicrous. There is no way that warping and decomposition of composite siding occurs during a two-month period, unless the siding is submerged in water for most of that time, as might be the case in the aftermath of a hurricane or flood. The inspector’s half-baked excuse smacks of liability avoidance and unwillingness to admit to an error.

The big question now is what other property defects remain undisclosed. If an obvious condition such as damaged siding was missed by the inspector, one can only wonder what remains unknown. It is recommended, therefore, that you hire a more experienced, more thorough inspector to conduct a second, and more complete, evaluation of the property. Once you have a comprehensive picture of significant issues, you can raise these matters with the first home inspector, as well as with the sellers.

Dear Barry,

I need to know the cost per square unit for installing tile roofing in the aftermath of our recent hurricane. My insurance company says that my three estimates are too high. –John

Dear John,

If the insurance company thinks three bids don’t reflect the market price, ask if they can recommend some local roofing contractors whose fees are acceptable to them. If they are unable or unwilling to do this, a complaint to the state agency that regulates insurance companies would be in order.

To write to Barry Stone, please visit him on the Web at www.housedetective.com.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2007 Barry Stone

DEAR BENNY: When do you see the bottom of the real estate market happening? When do you think we will have appreciation again? What is the best way to buy REO properties? –Tom

DEAR TOM: That’s the $64,000 question. In an answer to another reader, I said that I now have two crystal balls on my desk, and they remain cloudy and uncertain. Honestly, your guess is as good as mine. As you probably know, not every community in the United States is facing housing problems; I have been reading that in some parts of the country, real estate sales and prices are strong.

You asked about buying REO properties. For my readers who do not know what this means, it stands for “real estate owned.” When a bank forecloses on a mortgage — or when the bank takes back a homeowner’s property by way of a deed in lieu of foreclosure (commonly referred to as a “deed in lieu”) — the bank owns that property, and it is called REO. Most banks do not want to own REO properties because it impacts on their financial status, and more importantly they have to start paying insurance and real estate tax.

So, banks want to sell those properties as quickly as possible. How do you go about buying them? Many real estate agents and brokers have relationships with banks, and may be able to assist. You can also talk to the banks directly to inquire.

However, you should retain legal counsel to assist you. You want to make absolutely sure that should you be successful in buying such REO properties that you will get good, clean, insurable and marketable title.

DEAR BENNY: I am considering buying a distressed property. What should I look for when choosing a contractor and in negotiating the contract? I would like renovations to be completed within 12-18 months. Can I enforce this timeline? –Cyril

DEAR CYRIL: Whether you are buying distressed property — or any property for that matter — and want to do construction/renovation, there are several things you should do.

Check with your county or state licensing office. Do home-improvement contractors have to be licensed? If so, insist on seeing a copy of the contractor’s license, and confirm with the agency that issued it that it is valid.

Do not sign what I call a “one-page special” — in other words, a contract that is only one or two pages, especially if your renovation job will be at least $5,000 or more. The American Institute of Architects has a number of sample contracts, which I believe you can obtain (perhaps even purchase) online. They also may assist you in locating a licensed architect in your area, should you need one.

Your contract should have at least the following: a complete description of what work will be done; the total cost; a payment schedule (do not overpay and keep between 10-15 percent in reserve to pay when you are completely satisfied that the job is finished and acceptable to you); and a termination provision should you find that the contractor is not showing up on the job or not doing a good job. The AIA contract contains these requirements, plus a lot more.

You asked if you can enforce your timeline. The answer is yes. I generally recommend that you agree to pay the contractor a bonus (to be determined between the two of you) for early delivery — say $100/day up to a cap of 10 days. Furthermore, include in the contract a provision that if the contractor does not complete the job on time, that you will deduct $100/day, but with no cap.

Some contractors will accept the bonus-penalty concept, and that is clearly your right to insist on such a provision.

DEAR BENNY: My neighbors bumped out their house from the back, which affects the privacy we used to enjoy from our quiet backyard. Is it legal to put up a fence between our two houses? This may partially block their view of the woods behind our houses. –C.P.

DEAR C.P.: Despite the fact that our homes are supposed to be our castles, there any many governmental restrictions that may impact your ability to erect that fence. The answer should be available from your county or state zoning office. You may need to obtain a permit to build the fence. And to try to keep a decent relationship with your neighbors, you should discuss your plans with them. They may even be willing to share the cost of the fence.

By the way, I have never heard of a house being “bumped.” I like that word and plan to use it in the future.

DEAR BENNY: I live in a condo in Maryland. The bylaws were amended by the HOA council, before our ownership, to restrict rental of units to family members only. Is this allowed? –Dennis

DEAR DENNIS: The laws relating to community associations (including condominiums and homeowner associations) are very clear: Anyone who lives in the community is subject to the rules and regulations of the association, including any properly amended regulations — such as a rental restriction. When you bought your unit, I must assume that the rental restriction was part of the condo documents that you received before you went to settlement. Since I am familiar with the laws in the state of Maryland, before any owner can sell his or her unit, the prospective buyer must be provided with what is known as the “resale package,” which includes the legal documents. You had a number of days in which to review all of those documents and cancel your contract if you had any concerns. Since you decided to buy, you are bound by those rules and regulations — including the rental restrictions.

Many states have this “resale package” requirement. Every potential condominium or homeowner association purchaser must carefully read all of the legal documents of that association before going to settlement.

It should be noted, however, that court case law throughout the country makes it clear that for a rental restriction to be valid, it must be incorporated into the declaration or the bylaws of a condominium — which means that these legal documents have to be amended by a super-majority vote of the members, It is not sufficient merely for a board of directors to enact such a restriction through a rule change.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. Questions for this column can be submitted to benny@inman.com.

***

What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2007 Benny L. Kass

Interest rates on jumbo mortgages jumped about 3/4 percent in mid-August. Before settling for higher rates or giving up altogether, consider the following ways you might lower your financing costs.

Even though jumbos increased in price, conforming rates — for mortgage amounts up to $417,000 — decreased. On Aug. 20, for example, it was possible to find a 30-year fixed-rate conforming mortgage for 6.25 percent and one point. At the same time, jumbo mortgages over $417,000 were going for 7.25 percent and one point.

“Points” is a term lenders use for a mortgage origination fee that’s paid by the borrower one time only at closing. One point equals 1 percent of the loan amount. By paying more points upfront, a borrower can lower the mortgage interest rate for the term of the loan.

Points are tax-deductible on purchase mortgages in the year of purchase for those borrowers who itemize deductions. Restrictions apply, so be sure to check with your tax advisor to see if paying points will lower your overall cost of financing. Usually, the longer you plan to keep paying on the mortgage, the more worthwhile it is to pay points for a lower rate.

HOUSE HUNTING TIP: Buyers who don’t have the extra cash to pay points could ask the seller to pay points for them. Most lenders permit a seller to credit cash to buyers at closing for their nonrecurring closing costs. Points are a nonrecurring closing cost — they are paid once at closing, unlike mortgage payments or homeowners insurance that is paid for on an ongoing basis.

Lenders have limits on how much a seller can credit a buyer. It’s usually 3 to 6 percent of the purchase price. Before you write an offer, find out your lender’s limit. Then ask the seller to credit you a dollar amount that falls within the lender’s guidelines. This way you won’t raise a red flag with the lender that could cause your loan to be denied.

Also be aware that appraisers are taking a hard look at seller credits to determine if they affect the market value of the property. If you inflate your offer price to cover the cost of points and this puts the price out of line with current market value, the lender could lower the appraised value. In this case, your mortgage amount might also be lowered, leaving you short on the funds you will need to close.

No one knows the future direction of interest rates. But, if you believe that interest rates will come down soon and that you’ll refinance into a lower-interest-rate mortgage, you might be better off paying a higher rate now and no points.

Another way to reduce your mortgage interest rate on jumbo financing is to create a blended rate by combining a low-interest-rate conforming loan with a second mortgage. Secondary financing is available in amounts up to $500,000 for buyers with a 20 percent cash down payment, a good credit score (over 700 with some lenders) and verifiable income.

By combining a conforming $400,000 fixed-rate first mortgage at 6.25 percent with a fixed-rate $400,000 second mortgage at 7.4 percent, you end up with a blended rate of 6.8 percent. So, you create jumbo financing for under 7 percent in an over-7 percent first-mortgage market.

Most conventional second mortgages have payments that are amortized over 30 years, with a due date in 15 years. This means that there is a balloon payment when the loan is due, unless you pay the principal down substantially during the term of the loan.

THE CLOSING: Make sure that there is no prepayment penalty on the second mortgage so that you can make pay-downs or pay the loan off at any time without penalty.

Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2007 Dian Hymer

(This is Part 1 of a two-part series.)

A loan modification is a change in the loan contract agreed to by the lender and the borrower. The modifications of major concern today are those designed to reduce the payment burden on borrowers faced with impending rate increases that will make the mortgage payment unaffordable to them. Many are subprime borrowers.

Homeowners faced with this prospect, whether they are already delinquent or not, should request a modification. They are very unlikely to get one if they don’t ask, and they should make the investment required to make their case. The stakes are very high: They can save their house and their credit.

The Decision Process: In most cases, the decision on a modification is not made by the firm that owns the loan. It is made by a firm servicing the loan under contract to the owner. The owner could be a single lender, or it could be a group of investors who own pieces of a mortgage-backed security collateralized by a pool of loans.

Whoever the owner, the servicing firm is contractually obligated to find the solution to payment problems that will minimize loss to the owner. If the lowest-cost solution is a contract modification, great — everyone involved prefers a modification to a foreclosure. But if a foreclosure would generate lower costs for the owner, the decision will be to foreclose. The cost of foreclosure to the borrower does not enter the decision.

Yet the decision is far from cut and dried, and it can be materially affected by whether and how the borrower presents his case. On this issue, I have benefited from an exchange with Warren Brasch, an attorney who represents borrowers seeking loan modifications.

Equity: Perhaps the most important factor affecting the modification decision is the amount of equity the borrower has in his property. If the borrower has enough equity in the property to pay any deferred interest plus foreclosure expenses, foreclosure is almost bound to be the lower-cost solution.

Equity depends on property value, which the borrower is much better positioned to know than the servicer. The borrower knows or can easily find out how many houses in the neighborhood are for sale and what the trend has been in recent sale prices. In a weakening market, it is easy for the lender to overestimate value, and the borrower must prevent that.

Moral Hazard: Servicers fear that if they are liberal in granting modifications, borrowers who don’t need a modification will seek one anyway. They protect themselves against this by entertaining modification proposals on a case-by-case basis, while placing the burden of proof on the borrower.

Borrowers must accept the burden of proof. In addition to the data on property value, they need to document that they cannot afford the payment increase that is pending, and they must document exactly what they can afford.

For this purpose, borrowers should calculate their total debt ratio: the sum of mortgage payment, other debt payments, property taxes and homeowners insurance as a percent of their gross (before-tax) income. This number should be calculated now, what it will be after the rate adjustment, and what they will be able to afford. On the last, Brasch suggests that a servicer may be willing to accept 45 percent as a reasonable maximum.

Servicing Cost: Servicers have a self-interest in minimizing modifications because they add to costs. They try to minimize costs by computerizing the servicing process to the maximum degree possible, and standardizing customer support procedures so that low-paid and easily trained employees can perform them.

Modifications must be handled by a special group who are more highly trained and better-paid, and the increased costs from expanding their number cuts into the bottom line. Hence, there is a tendency to be nonresponsive in the hope that the borrower will go away.

Borrowers have to be persistent. According to Brasch: “If a servicer says they will call you back … forget about it. You need to call them and call them constantly. They will lose your paperwork, fail to return calls, put you on hold, and then hang up. It’s what they do. Keep fighting, calling, faxing. This does work!”

In making their decisions about whether a modification would be less costly than a foreclosure, servicers usually ignore an asset possessed by the borrower that could tilt the balance toward modification. This is the right to future appreciation in the value of the borrower’s house. In exchange for a modification that might otherwise be more costly to the owner than a foreclosure, the borrower could pledge a percent of the future appreciation, which could shift the balance to modification. This will be discussed in the second article in this series.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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Copyright 2007 Jack Guttentag

All U.S. interest rates have broken lower. The mortgage-defining 10-year T-note is trading at 4.4 percent, down from 4.7 percent last week, but mortgages will be slow to follow. Even agency loans are stuck in credit fear, but are likely to approach 6 percent soon.

Fed-defining short-term rates have dived almost a half-percent, a sure sign of renewed credit panic. A Fed cut on Halloween, doubtful on Monday, is now a sure thing.

What the hell happened so fast?

(As I recite developing misery, a note on morale to people near real estate markets, civilians and pros: Bad news is the only way for us to get the lower rates that our markets need. As Mom said, keep your eye on the doughnut, not the hole.)

The market sea-change has been driven by a change in awareness, not data. A one-week pop in new claims for unemployment insurance may turn into a trend, but is not yet; and anyone surprised by the new report of plunging in sales of new homes has been vacationing on another planet.

Since the August Crunch, global markets have been lost in the exuberance of cash pouring in from oil and trade, behaving like a bunch of teenage boys with elevated expectations for Saturday’s dates, misunderstanding the real distance of hand from promised land. American economy weak, its rates going down … Sell dollars! Buy euros! Rupees! Buy oil! Gold! Commodity anything! We don’t need America to buy exports — the world has de-coupled! Buy stocks, stocks, stocks, here there everywhere!

Finally, two months after the initial grip of the Crunch, the word is out: There is no relaxation at all. We are in a two-part systemic event: Several trillion dollars’ worth of trash lies where it was, value and ultimate disposition unknown; and worse, the impaired holders have dramatically reduced extension of new credit.

Reported losses at financial institutions, at first thought to be overstated (“kitchen sink” write-offs) are not. More will come. The institutional embarrassment is a greater impediment to new credit than the numbers: The losses are formal confessions by management and directors of personal incompetence. That’ll make you risk-averse.

PMI and MGIC, mortgage insurers who avoided the worst of the mortgage party by shrinking their market share — that’s what they said — announced huge losses.

The best black comedy: Citi led a parade of giant banks to the Treasury, trying for official blessing to keep $400 billion in off-balance-sheet trash from being forced back on (where it belongs) or into disorderly liquidation (Eeeeek! Might find out what it’s really worth!). Why Treasury Secretary Henry Paulson let them in the building is beyond me. He loaned them a conference room and bought sandwiches (day-old, I hope), and the bankers left without even a lipstick-on-a-pig deal among themselves.

Federal Reserve Chair Ben Bernanke delivered his best speech in office, a somber affair acknowledging the reinforcing-spiral risk in a credit meltdown, using the same phrase as Vice-Chair Donald Kohn last week: “… Tighter credit could presage a broader weakening in economic conditions that would be difficult to arrest.”

After the speech, in Q&A, asked about the structured-finance deals presently evaporating, he said this: “I’d like to know what those damn things are worth.” The next day, John Mack, CEO of Morgan, volunteered, “It will take at least a year” to come up with proper valuations.

We don’t have a year without new credit, and there is no way to restore the supply of new credit without recognition and breakup of the dead-loss clog. I’m sure Mack would like to defer loss recognition indefinitely, but his remark indicates abject failure as a public steward, joined by his senior colleagues on The Street.

For all the awareness displayed this week by Bernanke and Paulson, they have not presented a single useful idea. Gentlemen, it is time to grasp the nettle: Force the sale or adequate capitalization of this stuff; if the losses are too big for markets or capital to absorb, get on with loss isolation by government guarantee.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2007 Lou Barnes

Remember how hot your attic was when you went up there to check the antenna wire last summer? Remember that ice dam on the roof? Proper attic ventilation can help with both those problems, but how do you know how much you need — and just as importantly, how much do you already have?

Determining what you need is simple — all you need is the size of your house and a calculator. Attic ventilation should equal approximately 1 square foot of vent area for every 300 square feet of attic, so figure out roughly how many square feet the footprint of your attic is, and then divide by 300. To ensure effective air movement throughout the attic, the total vent area should be split approximately evenly between high and low vents, so now divide that number by two to get a rough idea of how much low ventilation and how much high ventilation your home needs.

Finally, since vents are measured and sold based on square inches, you’ll want to convert from square feet. To do that, take the total amount of ventilation you need in square feet and multiply by 144 to convert it to square inches.

DETERMINING WHAT’S EXISTING

In order to determine how much ventilation you currently have, you need to measure the sizes of the existing vents, and then make a few adjustments in order to figure out exactly how much air is able to actually get through them.

Let’s say you have a 12-inch-by-18-inch gable-end vent. That equals an area of 216 square inches (12 x 18), and that’s how much ventilation area you would have if you left the hole wide open. However, to prevent animals, insects and rain from getting into your attic, you would need to install a gable-end vent, which has a screen and louvers on it. You have now reduced the amount of area that the air can pass though by the amount of area taken up by the screen, the louvers and the framework of the vent. The remaining open area that the air can actually pass through is called the net free area (NFA), and that is how vents are rated.

If you are purchasing new vents, the NFA should be printed right on the vent itself. If it isn’t, or if you are trying to figure out how much vent area you currently have with your existing vents, here are some common vents and their approximate net-free area:

For other types of vents, you can calculate the NFA using the following formula: Gross vent area / area factor = NFA. The area factor is how much of an adjustment you need to make for the screen and other obstructions, based on the following approximations:

So, using that formula, let’s say you have a big 12-inch-by-24-inch gable-end vent with 1/8-inch screen and louvers. The gross size of the vent is 288 square inches (12 x 24), and the area factor for 1/8-inch screen with louvers is 2.25. Divide 288 by 2.25, and you can determine that your vent has approximately 128 square inches of net free area.

ADD MORE VENTS AS NEEDED

If, after all this math, you determine that your attic does not have enough ventilation, you need to give some serious thought to adding more.

Separate what you need into high and low, and decide how many of each type of vent you need. Remember that the half and half ratio of high to low is only an approximation — if you have almost enough low vents and are short on high vents, you can add a little more high-vent area than you need to make up the difference.

Hardware stores, home centers and lumberyards all carry a wide variety of vents for different applications. You can install them yourself, or contact a licensed roofing contractor to have it done for you.

Remodeling and repair questions? E-mail Paul at paul2887@ykwc.net.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2007 Inman News

Distributed by Inman News

Copyright 2007 Inman News