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T.O.'d with FHA

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Posted On: 10/22/2008

Q:The new FHA reform bill will bail out some 400,000 borrowers who want better loans. This is unfair. Why should my tax dollars go to help people who in many cases lied on their loan applications and bought homes that they knew they couldn't afford. Why should I help lenders who offered lousy loan products or didn't property underwrite borrower applications? I pay my mortgage and would like a lower rate, but there's no government program to help me. How is any of this fair?

A: This is a comment that I hear frequently, and it's not an unreasonable view. In practice, though, there are good reasons to favor the Housing and Economic Recovery Act of 2008.

First, lenders offered "stated income" loan applications to many borrowers, applications where the lender did not verify income claims. Such applications are widely known as "liar loans" - with good reason.

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Second, lenders did offer option ARMs and other loan products that were bound to fail in large numbers because the terms were preposterous - low start rates, foolish qualification standards, negative amortization, huge payment resets and big prepayment penalties.

Third - and most importantly - the Federal Reserve did not use the authority it has had since 1994 under the Home Ownership and Equity Protection Act to ban "unfair and deceptive acts or practices." In effect, the Fed could have forced lenders to verify loan applications and it could have banned high-risk mortgages by simply defining them as unfair. Had the Fed acted in 2003 or 2004, we simply would not have today's mortgage meltdown.

So why should you favor help for some borrowers who may have lied and lenders who dumped traditional standards? The answer is self-interest.

The value of your home will not increase as long as your local market is swamped with a huge inventory of unsold properties. The marketplace has to absorb such homes because until it does supply will greatly outstrip demand - and that means lower prices, reduced property tax collections and less equity.

The bottom line: The faster we get rid of unsold homes the sooner real-estate values will stabilize. It may be galling - and it may be unfair - but it's the reality.

Q: My wife and I purchased a home four years ago. We are now separated, and I would like to buy her out. Once we agree on a price what documents are involved and which folks should we contact to make this possible? I would also like to maintain my current loan and have a third party pay half to lower my monthly payments.

A: If you and your wife can agree to a purchase price, and if your respective attorneys agree, then the property is yours. (And, if you can arrange a sale for "good consideration" - love and affection - you both may be able to avoid big transfer taxes.)

However, if you can buy the property then two other central issues arise: First, the fact that your wife has sold her interest to you does not mean she is no longer on the existing mortgage. It may well be that as a condition of the sale you will be required to refinance the property so that she's no longer responsible for the debt.

Second, speak with lenders to see how the income from someone else can be treated with a loan application. There will be a difference depending on the individual's status - renter, resident co-owner or non-resident co-owner. This is a discussion to have before you make a purchase offer to your wife.

Q: What is a "rent concession" lease and why is it good or bad?

A: At first, a rent concession sounds like a discount and that's something tenants should welcome. However, "rent concession" leases are actually banned in some jurisdictions and here's why:

Imagine that a landlord offers to rent a property for $1,500 a month but if you pay by the 5th then you get a discount and only need to pay $1,200.

So what's the catch? Isn't a rental discount a good deal?

If there was a discount the answer might be yes, but in this situation like units nearby routinely rent for $1,200. In other words, at $1,200 you're already paying the fair market rent for the property. If you're late in this case you're actually paying a $300 penalty - plus a late fee.

Many jurisdictions limit late fees to a given percentage of the rental amount, thus a rent concession arrangement can easily exceed the allowable penalty.

For specifics, contact your local housing office or state attorney general.

(c) CTW Features

Need real estate advice? Peter G. Miller, author of "The Common-Sense Mortgage," would like to hear from you. Send your questions to peter@ctwfeatures.com. Due to the volume received, not all letters may be answered.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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