How a Sick Economy Contaminates the Housing Market

By Ilyce R. Glink with Samuel J. Tamkin

If you don't have a job, you're not going to be able to buy a house these days -- at least not unless you're paying cash.

The credit crisis continues to grow in scope and scariness. Add rising unemployment and a hotly contested U.S. presidential election, and it's no wonder that even the most optimistic real estate agents are quaking in their shoes.

You can say what you want about the economy, but all real estate is local. If your local economy has the sniffles, the local real estate market is likely to catch them, too.

More than 750,000 jobs have been lost in the United States in 2008. The unemployment rate last month was officially 6.1 percent. But some experts believe that the true unemployment rate is approaching 10 percent -- if you factor in those making less money than they were two years ago, those working part time but want to work full time, those who are underemployed, and those who have just given up looking for a job and have fallen off the rolls.

The connection between unemployment and a faltering real estate market is strong because lenders won't give you a mortgage now if you don't have a job with enough income to cover the payments.

The credit squeeze has reminded banks and mortgage lenders that credit scores, while perhaps good predictors of whether people have the desire and financial stability to repay a mortgage, don't actually pay the bills. They don't take into account whether someone has a lot of cash on hand for emergencies or is just making ends meet. A medical emergency, job loss, divorce or death can disrupt the best-laid plans.

However, if you have a job and have maintained a good credit score, the time is coming when you may want to talk to your lender about refinancing.

First, for those who have adjustable rate mortgages tied to U.S. Treasurys, your ARM may reset lower than its current rate, perhaps even in the 4.5 percent range. (Yes, you read that right -- around 4 percent.) How could this happen? If one-year Treasurys are at 1.5 percent and you have a three-percentage-point margin attached to your loan, that adds up to a 4.5 percent interest rate.

If you have an ARM tied to some other indexes or an interest-only loan, some lenders are offering to lock in rates for a small fee of $250 for the life of the loan, or for the next five years. Find out when and at what interest rate your loan will adjust, and then see what it would cost you to convert your ARM to a fixed-rate loan. This could be a great deal, especially if you're sick of not sleeping at night.

Q. I'm wondering if it would be easier to sell our house if we offer owner financing. How risky is that? What about all the legalities? We have a real estate lawyer. Will we need anyone else to help us with the documents?

A. You can arrange owner financing through your lawyer or through a loan-management Web site such as VirginMoney.com.

To determine your risk of default with your potential buyers, you need to interview them and determine what kind of people they are, what type of a jobs and income they have, and the odds that they will continue to be employed. You need to look at their credit histories to see if they have a record of paying their bills on time. Once you sell the home, you will be like their bank. If they default, you will have to foreclose on the home to get it back.

Obtain a credit report on the buyers from at least one, and preferably all three, of the major credit reporting bureaus. You will want complete credit information on each buyer (husband and wife, or partners) who will be listed on the mortgage.

What you have to think about is this: People with bad or even mediocre credit can't get loans easily at the moment. But interest rates are still low. If you want to take on someone with a perfectly awful credit score and not charge that much in interest, you might want to instead find someone good who is just momentarily down on his or her luck.

Or you might get someone who does the deal, moves in, trashes the house, strips it clean and moves out. Yes, you get back the property, but now you have to clean it and find someone else to buy it.

This kind of thing works if your buyers have cash to put down on the home. Ask for a big enough cash down payment that the buyers would be unwilling to walk away. Sometimes you'll want 30 percent or even 40 percent of the purchase price. (The lower your buyers' credit score, the higher the down payment you should require.)

But in many cases, sellers don't ask for a large down payment or buyers don't have it. Now you have to assess a new risk: If your buyers put down very little money, your risk in having a buyer with almost no skin in the game in the current market environment might be quite a bit higher than the buyers' risk of losing a small down payment.

Your real estate lawyer can walk you through the process if you decide to move forward, but I would tread carefully.

Q. I have been renting a house for seven years. The owner has refinanced the house two times as owner-occupied. Is this against the law?

A. When you fill out a mortgage application, the lender asks you if this is going to be an owner-occupied property. If you answer yes, you are telling the lender that you intend to move into the property and live there as your primary residence. If you answer no, then you are signaling that this will be either a second home or an investment property.

Owner-occupied properties can get financing at a lower interest rate than investment properties, which typically are charged not only a higher interest rate but also additional fees. Some of the millions of investors who bought investment properties in recent years tried to save money by claiming that the homes were going to be owner-occupied -- even though they knew they weren't going to live there.

You're supposed to fill out the application truthfully. Any time you put anything down on a mortgage application that isn't true, you may be committing fraud.

However, even if you indicate that the property is going to be owner-occupied, plans can change. Just because you get an owner-occupant mortgage doesn't mean you cannot move into that home and later rent it out. It just means that when you close you are supposed to move into the home and treat it as your primary residence. You are usually required to move into the home within 30 to 60 days of the settlement.

It would seem that if the owner lives in part of the property and you rent out another part, then he would be entitled to refinance with an owner-occupied loan. If you have lived there for seven years and the owner doesn't live on the property or in another part of a two- to four-unit building, then perhaps not.

I wonder how you know that the owner has been refinancing and under what circumstances, and how you know that he told the lender that he was obtaining financing by claiming the property was owner-occupied. Still, if the owner has been paying his mortgage on time and in full each month, most lenders won't care. They have a lot of other things on their plates.

It's tough to say whether the owner broke any laws in claiming that the property is owner-occupied when he knew it was not. That would depend on the documents signed by the borrower, the laws in the state in which the property and the owner are, and the federal banking and mortgage laws.

Q. We have lived in our house since 1989. My husband was recently disabled. I have become his full-time caretaker, which means I'm not able to work as much. We're having trouble paying our mortgage.

My daughter suggested assuming the mortgage to our house. She has been paying the mortgage since spring and will continue to do so. We checked with my mortgage company, and they said we can do a "simple assumption."

What do you think about that? If we do a simple assumption, her name can be added to the deed and the mortgage. Right now, only my husband's name is on the deed. We wonder what we need to do to take his name off the deed (I have power of attorney for him because he can't make decisions any more) and add myself and my daughter.

What do you think? We are not sure if this would be the right way to go. I was advised not to give the house to her.

A. Typically, it's best not to give a major asset such as a house to a child because there are tax ramifications on both sides. On your side, you may have to file a gift-tax form with the IRS, and the value of the gift (in this case, the value of the house) is subtracted from your and your husband's lifetime gift-exemption total of $1 million. On your daughter's side, she would receive the gift at your cost basis. That means that when she sells it, she will pay taxes based on the difference between the price at which you bought the home and the sales price down the line. Depending on what long-term capital gains taxes are at the time, the tax could be hefty. (Right now, long-term capital gains taxes are capped at 15 percent plus state tax; they were once as high as 28 percent.)

But you're in a difficult situation. If I were your daughter, I would want to make sure that my name were on the house if I were assuming the mortgage. But this may limit her ability to buy another property down the line because her credit would be tied up with this property. Moreover, the lender may not allow her to assume the loan without putting her name on the deed as some security.

Another option might be to have her continue to pay down the loan, and transfer a percentage of title to her in chunks over time.

One issue that occasionally comes up in these circumstances: A child who gains title to the property turns around and evicts her parents. For this reason, I would not have her replace your husband on the title. Instead, you and she should be added to the deed so that she owns at most one-third of the property and you and your husband retain ownership of the rest.

You should really talk with an estate planner or estate attorney who can help you sort through these circumstances and figure out how to make this work. There may be other options that suit your needs and the needs of the family much better than just adding your daughter to the title.

Q. I'm a contractor who has completed repairs on a house that was damaged by fire. The homeowner's insurance company sent the insurance-proceeds check to the owner's mortgage company. The mortgage company has paid me for the first part of the work.

I was almost through with the job, and the mortgage company sent out its inspector, and he wrote that the job was 95 percent complete. The only thing needed was the carpeting. The mortgage company said that it would release the final balance of the money to me.

But the house is in foreclosure, and now the mortgage company refuses to pay me the money that the insurance company gave for the repairs. How do I go about getting my money?

A. As a contractor, you may have rights under state laws. Those laws generally give you the right to a lien on the home for unpaid money due or work performed on the home. Those laws are generally referred to as mechanic's-lien laws.

In addition, all states have foreclosure laws that govern the process that a lender must take to sue a homeowner for amounts that are unpaid on a home loan. Those foreclosure laws in turn dictate what a lender must do and how a lender will get paid. This process also will include a mechanism to take care of other lienholders.

The first question to answer is "Who hired you?" Were you hired to make the repairs to the home by the owner of the home or the mortgage company?

If the mortgage company hired you, you can file a mechanic's lien against the home for the unpaid balance owed to you for the work you completed. You may also have to sue the lender for payment for the services rendered to the lender.

If the homeowner hired you, you may have a bigger problem. While you can file a mechanic's lien against the home, you will have to protect your interests in the value of the improvements you put into the home by joining in the foreclosure proceedings to claim your money.

When a mortgage lender gives a buyer a loan (or a current owner refinances), the lender wants to make sure that its mortgage is a the top of the food chain when it comes to liens. That way, in the event of a foreclosure, the lender can get all or much of the proceeds from the sale of the home to pay off the loan.

However, in certain circumstances -- and you may fall into this category -- foreclosure laws can have exceptions, particularly where a contractor has improved the home and the judge decides that the contractor should get paid for that work ahead of the lender.

You should immediately consult with a lawyer who has plenty of foreclosure and lien experience to protect your interests in the foreclosure case. Depending on your state, you may come out fine.

Q. My father bought three acres of land that he paid for with his own money. The property was titled in his name as a "single person" along with my cousin and my cousin's wife as "a married couple." Everyone was listed as joint tenants with right of survivorship.

My father later severed the joint tenancy to tenancy in common. Recently, he quitclaimed his interest to me. I bought a title insurance commitment on the lot, and it was reported to the county by stating that I, my cousin and my cousin's wife own the property as tenants in common.

Do I own one-third of the lot or one-half?

A. Unless the documents specifically designate the percentage owned by each of you, under many state laws, you will all be deemed to own the property in equal shares. That would mean that your father, your cousin and your cousin's wife might have all owned one-third shares of the property.

You, in turn, would own a one-third share in the land.

However, if the documentation shows that your cousin and his wife got a one-half share of the property in the document that severed the joint tenancy, you would own a one-half share.

In general, joint tenancy with rights of survivorship assumes that each owner of the property is an equal owner. That said, later documentation can break joint tenancy and the parties can decide how to hold title to the property and in what shares.

The key to your question will be how your father broke the joint tenancy. If the owners all got together and broke the joint tenancy by signing a new deed, you need a copy of that deed to see what language they used to convey title from all of them to all of them.

At that point you can determine if you own one-third, one-half or some other percentage.

These are tough times. We have to be creative in getting more income to be able to afford necessities such as housing.

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