What's In the news

Read Time: 15 Minutes | January 1, 2023

California law does not permit pre-foreclosure challenges to assignments of deed of trust

On May 11, 2020, the Court of Appeals ruled that California law does not permit preemptive actions to challenge a party’s authority to pursue foreclosure unless a foreclosure has already taken place (Perez v. Mortgage Electronic Registration Systems, Inc. 2020 WL 2312867 (9th Cir. May 11, 2020)).   

The Court’s ruling clarifies a prior case, Yvanova v. New Century Mortg. Corp., 62 Cal.4th 919 (2016), which many litigants use to challenge and enjoin a lender's right to foreclose.  However, such challenges can only be brought subsequent to the property being sold at auction or foreclosed.       

The Court in Perez says Yvanova is limited to post-foreclosure actions for wrongful foreclosure. This single case is contrary to the huge distortion provided by numerous offices and websites offering legal services to homeowners who sue to stop a foreclosure based on the claim the trust deed was not validly assigned to the foreclosing beneficiary.  Perez says such claims are only valid after the foreclosure has taken place.      

At the Rezidential Group, as we assess the factual merits of each client fact pattern.  In many instances, the homeowner comes to our office with mistaken notions that challenges to title are the best vehicle to enjoin an imminent foreclosure, unaware that case law says no such challanges are allowed under the law.   That does not mean there are no challenges prior to auction.  Call us today to find out which  alternatives are best for you.  

Read Time: 20 Minutes | January 1, 2023

Borrower challenges to assignments of their note or deed of trust must assert the defect would void the assignment, and not assert the defect merely renders it voidable.

For nearly three years, one of the rapidly developing areas of California foreclosure law hasfocused on whether a borrower has “standing” to challenge a wrongful foreclosure based ondefective assignments of the note or deed of trust before the foreclosure sale.

A recent opinion from California’s Second Appellate District --Hacker  v. Homeward Residential, Inc.  But first, a recap of how we got to where we are today:

The recent evolution kicked off with

Yvanova.  In 2016, the California Supreme Court published its opinion in Yvanova v. New Century Mortgage Corporation, in which the Court confirmed that a borrower has standing to allegewrongful foreclosure based on a void — but not merely voidable —assignment of a note or deedof trust.  As described in that opinion, a void transaction has no legal effect, and “has no existencewhatsoever.” It cannot be ratified or validated even by the parties to the transaction.

A voidable transaction, on the other hand, is one where either party to the transaction (butusually not an outsider) may elect to avoid, or to ratify, the legal relations created. The transaction can be declared void, but is not void in itself.

In Yvanova, after laying out the framework above, the Court declined to decide the pivotal issueof whether the challenged assignment in that case (an assignment of a note to a securitized trust after the trust’s closing date) was void or voidable, leaving that issue for the lower court todecide.

Yvanova gave wrongful foreclosure plaintiffs hope that they could win by showing that a priorassignment of the deed of trust was “void.” But that hope was soon diminished by a string ofcases limiting the impact of

Yvanova.

Has Yvanova lost its mojo?

A string of cases threw cold water on wrongful foreclosure plaintiffs hoping to use Yvanova in their favor.  Those opinions generally held that, under both New York and California law, an assignment thatis defective based on the timing of a mortgage trust’s closing date

or the fact that it was “robo-signed”

is most likely only voidable, and can be ratified by the lender to remove anytaint on the foreclosure.

Many wrongful foreclosure cases seem to have been based on an assignment of a deed of trustinto a mortgage trust after the trust’s closing date.  In those cases, the assignment was onlyvoidable, not void, and the wrongful foreclosure plaintiff was out of luck.

Some assignments are still void

Amidst the swarm of cases minimizing the impact of Yvanova by holding that assignments were only voidable, not void, one notable exception stood out: Sciarratta v. U.S. Bank NationalAssociation. 

In Sciarratta, the lender assigned a note and deed of trust to one assignee, and then monthslater purported to assign the same note and deed of trust to a different assignee.  The second assignee foreclosed.

The Court of Appeal held that the lender had already assigned the note and deed of trust earlier,and thus its second purported assignment was not just voidable, but void.

Following in Sciarratta‘s footsteps came the Hacker opinion.

Hacker v. Homeward Residential

In Hacker, the fact pattern was similar to Sciarratta.  The borrower obtained an $875,000 loan from Option One Mortgage Corporation. On June 1, 2006, Option One transferred the loan to a securitized mortgage trust called the Option One Mortgage Loan Trust 2006-2.

Two years later, in 2008, Option One’s successor attempted to assign the same loan to DeutscheBank. Deutsche Bank’s successors later foreclosed.

Hacker, who had obtained the property by Grant Deed before the foreclosure, sued for wrongful foreclosure. Hacker alleged that the lender’s attempted second assignment was void, because the lender no longer owned the loan due to its first assignment.

The trial court dismissed Hacker’s case after sustaining a demurrer without leave to amend. But

the Court of Appeal reversed, relying on Sciarratta.

The court emphasized that Hacker’s claim was not based on a violation of the mortgage trust governing documents, which would have resulted in a merely “voidable” assignment because the

beneficiary could still ratify the unauthorized actions.  Instead, the court found, Hacker’s claim was based on the simple chronology of events — the lender had already assigned the loan in 2006, and no longer had anything to assign in 2008.  The court held, “an assignment by a party that never possessed legal title to the property is void.”

Lesson

Based on the two lines of cases that have emerged in the aftermath of Yvanova, an assignment of

a loan that violates the technical provisions of a mortgage trust (e.g., a transfer after the trust’s

closing date) is probably only voidable, can be ratified afterward by the beneficiary, and will not

support a plaintiff’s claim for wrongful foreclosure.

But an attempted second assignment of a loan by a lender who has already assigned the loan

away is likely void and cannot be ratified. A foreclosure by the second “assignee” in that scenario

will be vulnerable to a wrongful foreclosure claim.

Read Time: 15 Minutes | January 1, 2023

Loan Modification Denial Based on NPV Negativity

Among the various tests that lenders/servicers use to review a borrower for a loan modification is the net present value (NPV) test. The NPV test shows how much a loan as an investment is worth today. Lenders use the NPV test to compare what a mortgage is worth today with what a mortgage is worth after a modification. If the modified mortgage has a greater investment value than the unmodified mortgage at its present state, it is likely that the NPV will be positive, and the investor may have to modify the mortgage. 

If the NPV is negative, the investor is not legally obligated to modify the mortgage.  Borrowers applying for non-FHA loan modifications may need to pass the NPV test, which means that the NPV needs to be positive in order to be modified.  

In other words, lenders use the NPV test to determine whether it is more profitable for them to foreclose on a property or to modify the payments. This means that homeowners with a lot of equity in their home may be more subject to loan modification denials based on the NPV test.  And yes, lenders are permitted to render a decision based on the NPV test even during the COVID-19 pandemic.

That being said, I have seen instances where homeowners were approved for a modification even with equity in the property.  It really depends on various other factors, such as the borrower’s source of income, the amount of household income, the amount of the past due balance, years past due, etc. 

It is worth noting here that even though lenders are permitted to deny a modification based on the NPV test, the denial must be in compliance with California Homeowner’s Bill of Rights. Among one of the issues that a foreclosure attorney would explore is whether the denial was in compliance with the various requirements set forth in California Civil Code Section 2923.6(f).

California Civil Code Section 2923.6(f) provides in pertinent part “If the denial is the result of a net present value calculation, the monthly gross income and property value used to calculate the net present value and a statement that the borrower may obtain all of the inputs used in the net present value calculation upon written request to the mortgage servicer.” See Civil Code Section 2923.6(f).

Determining Whether the Lender Used Proper NPV Inputs

In reviewing the inputs used to deny a loan modification as a result of a net present value test, the borrower is able to assess whether the lender has used the proper figures. If proper figures have not been used, the borrower may be able to appeal the decision. 

The Making Home Affordable website provides a handy and user-friendly tool for homeowners to double check the NPV inputs used by the lender:

https://www.makinghomeaffordable.gov/get-answers/Pages/get-answers-tools-NPV.asp

Read Time: 15 Minutes | January 1, 2023

No more negligence claims against lenders or loan servicers

Financial institutions, lenders, and servicers should take note that the California Supreme Court affirmed a Court of Appeal decision confirming there is no duty for a lender to “process, review and respond carefully and completely to” a borrower’s submitted loan modification application .In doing so, California’s highest court resolved a split of authority at the appellate level.  However, the Court specifically disclaimed consideration of negligent misrepresentation or promissory estoppel claims, noting that nothing in the opinion “should be understood to categorically preclude those claims in the mortgage modification context.”

In Sheen v. Wells Fargo Bank, N.A.[1] (March 7, 2022), the California Supreme Court affirmed the decision of the Court of Appeal, which upheld the trial court’s decision sustaining defendant lender’s demurrer to plaintiff borrower’s negligence claim in a case involving a junior lien and a lender’s alleged negligence in failing to respond timely to the borrower’s request to modify a second position deed of trust.

Background

Whether a duty to process, review, and respond to submitted loan modification application sexists in California has long divided the California Courts of Appeal. Typically, in defending themselves against such a claim, financial institutions, lenders, and servicers cite to Nymark v.Heart Fed. Savings & Loan Assn. [2] to confirm the “general rule” that “a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” [3] Even if the general rule of Nymark does not apply, the factors enumerated by Biakanja v. Irving [4] confirm that the courts should not recognize such a duty. 

In Sheen, the borrower defaulted on junior liens sometime in 2008 or 2009. Thereafter, he contacted his lender, defendant Wells Fargo Bank, N.A. (“Wells Fargo”), regarding the possibility of canceling the foreclosure sale so that he could apply and be considered for modification and, subsequently, submitted applications to modify his second and third position loans. Wells Fargo canceled the scheduled sale date, but had not yet responded to the borrower’s application, and sold the loan. The property was ultimately foreclosed upon approximately four years later. Subsequently, the borrower brought suit, asserting a negligence claim against Wells Fargo on the grounds that it “owed Plaintiff a duty of care to process, review and respond carefully and completely to the loan modification applications Plaintiff submitted.” The Court of Appeal affirmed the trial court’s ruling sustaining Wells Fargo’s demurrer.

California Supreme Court’s Decision

In affirming the Court of Appeal’s decision, the California Supreme Court recognized the split of authority amongst the appellate courts and concluded that the borrower’s common law negligence claim fails in light of the economic loss rule and cannot be justified by referencing the Biakanja factors. In a nutshell, the economic loss rule precludes recovery in tort for negligently inflicted purely economic losses in deference to a contract between litigating parties. Because the borrower’s claim arises from, and is not independent of, the mortgage contract, the economic loss rule bars his negligence claim. 

Moreover, the California Supreme Court explained that its rejection of the borrower’s arguments as incompatible with the economic loss rule also harmonizes with the well-established “general rule” of Nymark because the handling of a loan modification application is within the scope of Wells Fargo’s role as lender.  Further, the California Supreme Court confirmed that the multifactor approach articulated in Biakanja does not apply in the mortgage servicing context, where the plaintiff and defendant are in contractual privity.

In addition, the California Supreme Court addressed two important policy considerations.   First, in response to the borrower’s argument that without the ability to bring a negligence claim, he would be left essentially remedy-less, the Court specifically noted that “there are causes of action other than a general claim of negligence,” associated with failing to properly process, review, and respond to a loan modification application, including negligent misrepresentation and promissory estoppel. Second, in response to the borrower’s argument that allowing his tort claim to go forward will prevent future harm, the Court noted that he failed to explain how imposing a duty would “encourage servicers to engage in the modification process rather than simply foreclose.” Ultimately, the Court acknowledged that recognizing such a duty would impose costs and likely involve reforms to the mortgage servicing industry, which are better left to the Legislature to tackle.

Finally, the Court expressly rejected cases balancing the Biakanja factors to determine whether a duty of care exists, including Weimer v. Nationstar Mortgage, LLC [5](borrower sufficiently pleaded servicers had duty of care with regard to processing loan modification application after applying the Biakanja factors); Rossetta v. CitiMortgage, Inc. [6] (complaint sufficiently alleged a negligence cause of action, including a duty of care, against a loan servicer); Daniels v. Select Portfolio Servicing, Inc. [7] (borrower sufficiently alleged defendant breached its duty of care because four of the six Biakanja factors weigh in favor of finding a duty); and Alvarez v. BAC Home Loans Servicing, L.P. [8] (plaintiffs sufficiently alleged a breach of the duty of care by alleging improper handling of their loan modification applications, given that the Biakanjafactors “clearly weigh” in favor of a duty), all cases frequently cited by borrowers, to the extent they are inconsistent with the Court’s ruling.

Conclusion

Although the California Supreme Court confirmed that financial institutions, lenders, and servicers owe no separate duty to borrowers to “process, review and respond carefully and completely to” a borrower’s submitted loan modification application, it emphasized that it was only considering this narrow issue defined by the borrower. Thus, while financial institutions, lenders, and servicers may see a downtick in general negligence claims against them after this decision, they should expect to see an uptick in other causes of action associated with any failure to exercise reasonable care in processing, reviewing, and responding to loan modification applications, as the Court specifically declined to rule on negligent misrepresentation and promissory estoppel claims.

Read Time: 10 Minutes | April 01, 2023

Successor-In-Interest

In California home loans are secured by deeds of trusts. A deed of trust (sometimes called a trust deed as the terms are interchangeable) is a security instrument and functions for all practical purposes just like a mortgage although in California they usually contain a power of sale reposing in the trustee (a third party) in the event of default. With a deed of trust a third party, known as a trustee, has a temporary hold on the title. If the borrower defaults on the loan, the trustee may sell the property and pay off the lender.

In 1982 Congress passed the Garn-St. Germain Depository Institutions Act of 1982, (the “Garn-St. Germain Act”) which determines when a deed of trust can and cannot be assumed by a new owner of the property. If you know your legal rights under this law, the lender won’t be able to push you around.

Suppose an elderly father passes away and leaves his home to his daughter with a recorded deed of trust. Can the daughter take over its low-interest-rate on the underlying debt or will the daughter have to pay it off with a new higher cost home loan?

What if a relative passes away and leaves his or her home to you with a recorded deed of trust and you intend to occupy the residence?

What if you own investment property with a friend in joint tenancy with right of survivorship and the friend dies and the underlying property has a lien secured by a deed of trust? Can the lender insist you pay off the low interest rate indebtedness?

Even if the deeds of trust in the three examples above contain due on sale clauses, under the Garn-St. Germain Act the lenders cannot force a payoff of the indebtedness. Yet many lenders try to mislead borrowers into believing an existing deed of trust cannot be assumed by the new property owner when title is transferred. An existing advantageous deed of trust can often be preserved and loan payoff avoided if the acquiring owner knows the law.

Acquiring California Real Estate With A Recorded Deed Of Trust By Inheritance

Inheriting real property in California such as a home can be a sometimes-uncertain time for its inheritors. And inheriting properties with preexisting deeds of trust on them can be an even more uncertain experience for people inheriting them.

There’s certainly no law that prohibits inheritance of any piece of property or real estate, secured by real property, or not. One of the rights U.S. citizens and California residents have is to bequeath their property to others. The right of inheritance applies to all property, including even properties with deeds of trust attached to them. For those inheriting such a property, though, a number of questions and concerns invariably pop up, including whether the underlying debt can be assumed.

Other than home exceptions for relatives and spouses noted in the Garn-St. Germain Act almost no one else can assume an inherited property’s deed of trust. The reason non-related people inheriting properties can’t just assume their deeds of trust relates to those deeds of trusts’ due-on-sale clauses. Other than home exceptions for relatives and spouses property inheritors generally need to make   arrangements with the lenders to pay off those deeds of trust. Persons inheriting secured properties sometimes sell the properties or instruct the properties’ lenders to just foreclose. No one can be forced to take possession of anything bequeathed through inheritance. 

What you decide to do depends on many factors. Remember, you aren’t legally obligated to accept assets you inherit. If you inherit a home with a deed of trust you cannot or will not pay, you can simply walk away and let the bank foreclose on the home. Legally, you’re not on the hook for the payment, and your credit will remain unaffected.

Assume The Deed Of Trust?

Generally, deeds of trust feature due-on-sale clauses that prevent assumptions or inheritance. However, there are several instances in which an inherited property’s existing deed of trust and underlying loan can be inherited, or assumed, by its inheritors. The Garn-St. Germain Act carved out exceptions to secured loan barriers against assumption or inheritance of deeds of trust.

Joint Tenancy

Under The Garn-St. Germain Act, if one joint tenant co-owner dies, the secured lender cannot enforce the due on sale clause to demand the surviving joint tenant pay off the indebtedness. This applies whether or not the joint tenants were relatives.

In California, if you own property as “joint tenant” with any person (spouse, relative, friend, business partner, life partner), upon the death of the joint tenant you get full ownership of the property by operation of law (i.e.: the property does not pass through the person’s Will, but instead passes directly to you as the joint owner), AND the underlying indebtedness continues, with no alteration to its terms. Beware of attempts by unscrupulous lenders trying to charge assumption fees in surviving joint tenant cases. There have been cases where companies have tried to foreclose deeds of trust even when joint tenants are involved.

Spouses

Many spouses take out secured loans against real property in their joint names. If you hold title to the home jointly in a deed with rights of survivorship, your spouse’s half of the home passed to you automatically at death. If this is the case and your spouse dies, you are still a borrower on the underlying secured loan and you are responsible for continuing to make the payments. However, federal law prohibits the lender from calling the underlying loan due because one spouse has passed away. Although you are now responsible for the underlying loan on your own, you own the entire house.

Surviving spouses who are left homes by deceased spouses with secured loans have the right to pay on their deceased spouses’ loans without fear of foreclosure. Usually, lenders are more concerned with receiving payments than about going through with a foreclosure. Generally speaking, lenders are aware of the regulations contained within the Garn-St. Germain Act and due-on-sale clause preemption. Surviving spouses still must notify lenders of their intent to take over their deceased spouses’ loan as soon as possible 

Relatives

When a relative inherits and occupies a residence, the Garn-St. Germain Act bars the lender from enforcing the due-on-sale clause. In other words, relatives inheriting a home can inherit or assume its secured loan as long as they intend to live in it. However, the inheritance or assumption exception for relatives of deceased homeowners applies strictly to homes only.

Remember, if all regular payments are made and the relative lives in the inherited home, the lender must permit loan assumption. Some lenders will try to coerce the heir into paying an unnecessary assumption fee that may not be necessary. 

Notify The Lender

Spouses and relatives allowed to inherit secured loans without violating due-on-sale clauses must notify lenders of their intentions. For example, a niece inheriting a deceased aunt’s home and assuming its underlying debt should quickly notify the lender of her intent to assume. The Garn-St. Germain Act even allows relatives inheriting loan secured homes to keep those homes’ loans in the deceased borrowers’ names.

Assuming a Loan That is in Default

If a borrower is behind in payments and facing foreclosure at the time of the transfer, then the person who is assuming the underlying loan will have to cure the default to stop the foreclosure. Usually, the new owner will either pay this amount in full or come to an agreement with the lender to catch up on the past-due amounts in a repayment plan or as part of a loan modification under a program.

Read Time: 10 Minutes | April 08, 2020

What Is a Purchase-Money Mortgage?

A purchase-money mortgage is a mortgage issued to the borrower by the sellerof a home as part of the purchase transaction. Also known as a seller or ownerfinancing, this is usually done in situations where the buyer cannot qualify for amortgage through traditional lending channels. A purchase-money mortgagecan be used in situations where the buyer is assuming the seller's mortgage,and the difference between the balance on the assumed mortgage and thesales price of the property is made up of seller financing.

The Basics of a Purchase-Money Mortgage

A purchase-money mortgage is unlike a traditional mortgage. Rather thanobtaining a mortgage through a bank, the buyer provides the seller with a downpayment and gives a financing instrument as evidence of the loan. The security instrument is typically recorded in public records, protecting both parties fromfuture disputes.

Whether the property has an existing mortgage is relevant only if the lenderaccelerates the loan upon sale due to an alienation clause. If the seller has aclear title, the buyer and seller agree on an interest rate, monthly payment andloan term. The buyer pays the seller for the seller’s equity on an installmentbasis.

Types of Purchase-Money Mortgages

Land contracts do not pass legal title to the buyer but give the buyer equitabletitle. The buyer makes payments to the seller for a set time period. After the A lease-purchase agreement means the seller gives the buyer equitable titleand leases the property to the buyer. After fulfilling the lease-purchase agreement, the buyer receives the title and credit for part or all of the rentalpayments toward the purchase price and then typically obtains a loan forpaying the seller.

Purchase-Money Mortgage Benefits for Buyers

Even if the seller requests a credit report on the buyer, the seller’s criteria forthe buyer’s qualifications are typically more flexible than those of conventionallenders. Buyers may choose from payment options such as interest-only, fixed-rate amortization, less-than-interest or a

balloon payment. Payments may mixor match, and interest rates may periodically adjust or remain constant,depending on a borrower’s needs and seller’s discretion.

Down payments are negotiable. If a seller requests a larger down payment thanthe buyer possesses, the seller may let the buyer make periodic lump-sumpayments toward a down payment. Closing costs are lower as well. Without an institutional lender, there are no loan or discount points or fees for origination,processing, administration or other categories lenders routinely charge. Also, because buyers are not waiting on lenders for financing, buyers may closefaster and receive possession earlier than with a conventional loan

Purchase-Money Mortgage Benefits for Sellers

The seller may receive full list price or higher for a home when providing apurchase-money mortgage. The seller may also pay less in taxes on aninstallment sale. Payments from the buyer may increase the seller’s monthlycash flow, providing spendable income. Sellers may also carry a higher interestrate than in a money market account or other low-risk investments.

Read Time: 5 Minutes | November 9, 2022

A Proof of Funds letter is part of the documentation required of home buyers throughout the home buying process. Learn what it is, what’s included in it, and how to provide it.

So, you think the mortgage process is complex? It is, but it really isn’t. The terminology associated with buying a home can often sound more complex than it really is, especially if you’re new to the mortgage process. Whether you’re an experienced homebuyer or just beginning to explore the possibility of your first home purchase, understanding the documentation that could be required of you throughout the process is essential for a smoother, surprise-free path to closing day.

What Does it Mean to Provide Proof of Funds?

When you first meet with a lender to get pre-qualified or pre-approved for a loan amount, you’re typically asked questions about your finances and/or required to provide documents (like tax returns or bank statements). This is so that the lender can verify your ability to repay the loan and get you approved for a mortgage for your home purchase. Now, let’s get into what proof of funds in real estate means:

Instead of a lender requesting information to verify that you have the finances to afford the mortgage, home sellers request proof of funds (POF), or a POF letter, to ensure that you, the homebuyer, have the finances for a smooth transaction.

What is a POF Letter?

On top of requesting a pre-qualification or pre-approval letter, sellers can ask for a POF letter to ensure you have the funds for the sale to go through. If your lender doesn’t require an official POF for your mortgage approval, know that a seller may still want to see one. The POF letter is proof to the seller that you have the funds (including the down payment and closing costs) to afford the home.

Who Needs a POF Letter?

Whether you’re an all-cash buyer, a buyer with a 20% down payment, or a buyer with a 3% down payment and seller-paid closing costs, the bottom line is that anyone buying a home should be prepared to provide POF.

When to Provide POF

There’s not a specific day outlined in the home buying process that marks when the POF letter is submitted to the seller. Typically, homebuyers submit the POF along with the home offer (or within a couple of days after the seller accepts the offer).

What Does a POF Letter Include?

A POF letter typically comes from your bank or other financial institution as an official verification to the seller of your available and current balance. A POF comes in many forms, but the most widely accepted are:

· A signed document from a bank official; or

· A bank statement with the money being used for the home purchase.

How to Provide POF

The first step is requesting a POF from your bank and/or financial institution. It’s important to note that since the information on a POF letter contains personal information, ensure it’s secure and only submitted to the seller. Once you submit a request, a 1–2-day turnaround can be expected. Delays may ensue if your funds are split between different accounts, so making sure funds needed for the home sale are all in one place prior to the request could save you time later.

Now that you know more about proof of funds, you’re likely realizing that the mortgage industry jargon can sound more complicated than it actually is – sometimes a breakdown is all you need to gain the home buying confidence you deserve!

Read Time: 5 Minutes | November 9, 2022

What is Inflation?

When we hear the word “inflation” we usually think about balloons – which isn’t necessarily a bad thing when thinking about what inflation does. Inflation is the word used to describe when prices go up for everything around the same time, like price tags are being pumped up like a balloon.1 It is still the same balloon, it didn’t truly grow in size when it comes to the material, but it did expand. You’ve got the same balloon, just now with air in it.

How Does Inflation Affect Homeowners and Home Buyers?

Inflation helps current homeowners and home buyers in some areas and creates problems in others. Despite some challenges, though, there are plenty of ways to come out on top of inflation.

Home Values Appreciate

Of course, when the price of everything goes up, so do home values. When it comes to selling a home, inflation drives up the cost of building materials, making new home construction prices higher – this opens up the market of already-existing homes and keeps the higher price tags still attractive to homebuyers looking for already-existing homes instead of custom-building.

Anyone selling their home will use this as a time to sell for a bigger profit than before inflation – or homeowners not looking to move can use the boost in the value of their home to do a cash-out refinance to get out some of the equity they are sitting on.

Fixed-Rate Mortgage Payments Stay the Same

Fixed-rate mortgages are simple to understand, mainly because their names are so exact! Fixed-rate mortgages mean that when you sign on the dotted line, your mortgage principal, interest rate, and payments stay the same despite any highs or lows that may happen while the loan is still being paid off.

Of course, this means homeowners who locked in before inflation kicked up will benefit from having done so. This also means that future homeowners looking to get a mortgage loan have the potential of locking in their rates before they could go higher.

Property Taxes Go Up

States and counties will also benefit from rising inflation rates, since when a home’s tax value goes up, the homeowner will get a higher tax bill each year. For home buyers, this is an advantage because it will give you pause to run over multiple case scenarios on your own or with a qualified loan officer in order to figure out your purchase power when it comes to prequalifying or qualifying for a mortgage.

Maintenance Costs Go Up

We all know it – buying or renting, there are always going to be maintenance costs that pop up! The problem, of course, is that when inflation goes up, so do the costs of even the most everyday of repairs like patching a wall or touching up paint. This can be a positive for home buyers, since homeowners who don’t want to pay for repairs that are going to cost more may be willing to cut back on their sale price in order to compensate for the fact new buyers will have to make repairs.

Lower Home Prices

During a period of inflation, sometimes home prices can actually come down! When prices go up and sales cool off, we naturally see home prices going back down as inflation continues on – this isn’t purely just to sell homes, but because mortgage lenders factor in expenses when calculating monthly payments – the same dollar during inflation doesn’t go as far. This opens up the market for homebuyers who weren’t looking to spend during the height of the inflation uptick but are still passionate about financing a new home purchase.

Is Inflation Good or Bad?

On one hand, inflation can be a challenge for prospective homebuyers as prices rise and the market gets more competitive as reasonably priced homes are snatched up left and right. On the flipside, while current homeowners sit in their homes waiting for the market to improve so that they can sell and find a home to move into, they’ll likely make upgrades to their existing home while the time is right, giving potential home buyers a bigger, better stock of homes to buy with fresh upgrades.

Looking at inflation through a long-term lens, there is a positive message. No market same market condition lasts forever, and there is still a bright side in any financial market. If home-sellers and homebuyers strategize and make wise decisions, buying or selling a home is still possible.

The Best Ways to Survive Inflation

The good news is that you may already be pretty good at surviving inflation, because you’re reading this article – you’re staying informed and calculating your next steps even while the market seems a little shaky.

To make it out of inflation in top shape, you’ll need to follow the same rules you likely have in preparation for buying or selling a home – stick to a reasonable household budget, stash away money for home repairs as they come up, and keep an eye on changes happening within the market to know when your next potential buy or sell could be.

Sources:

What is inflation? — Economy (ecnmy.org)

The Effect of Inflation on Home Buying - MintLife Blog (intuit.com)

Inflation in Real Estate: 5 Ways Inflation Affects Real Estate (infinityinvesting.com)

Is Inflation Good for Homeowners? - How Rising Prices Effect Real Estate (moneycrashers.com) 

Read Time: 5 Minutes | April 1, 2023

What Is an Owner-Occupant? 

An owner-occupant is a resident of a property who holds the title to that property.  In contrast, an absentee owner carries the title to the property but does not live there.  An

absentee landlord is a type of absentee owner.

How an Owner-Occupant Works? 

When applying for a mortgage or refinancing, the lender will need to know if the borrower is going to be an owner-occupant or an absentee owner. Some types of loans may

be available only to owner-occupants and not to investors. The application will usually state, “The borrower intends to occupy the property as his/her primary residence,” or some variation thereof when the borrower will be owner-occupant. Generally, for a property to be owner-occupied, the owner must move into the residence within 60 days of closing and live there for at least one year.

Many properties such as stores, malls, restaurants, bars, sporting event arenas are owned real property.

These are when the owner and borrower obtain a non-conventional (not owner-occupied aka

business purpose loans).   

These businesses are well operated, produce great cash flow in normal markets, and but for the unprecedented lockdown of our society would be thriving right now. What these businesses need is shorter liquidity to permit them to survive the next six months until they can resume business as usual. 

There are many government programs and other stimulus plans to help these small business owners, but many

do not have enough time to go through a government loan process. They need money today.

These same business owners are likely to have significant untapped equity in their primary residence. If they are fortunate enough to have a credit line secured by their home, they could pull cash from their home to survive this tumultuous period. Unfortunately, banks are going to be unwilling to provide new financing given the current environment. Therefore, a great opportunity presents itself or private lenders. They can provide much needed liquidity to a small business in need and they can do so with adequate collateral.

A common misconception lender who makes business purpose loans have is whether you can make a loan for business purposes that is secured by the personal residence of the borrower. Most people commonly refer to these as “owner occupied,” “conventional,” or “1-4” loans, and call inquiring as to whether they are okay to proceed with the loan. They are often surprised to hear that the type of collateral securing the loan is largely irrelevant to the initial analysis, and that the real consideration is to determine

what is the primary purpose of the loan, which is typically determined by understanding what the borrower will be doing with the loan proceeds.

The two major federal bodies of law that govern consumer loan transactions are the Truth In Lending Act

(“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). Both TILA and RESPA impose serious

licensing requirements and lending guidelines on lenders that make loans primarily for personal, family, or household (consumer) use, and especially when the loans are secured by the primary residence of the borrower. This makes sense – the government has an interest in protecting everyday people from predatory lending and from losing their homes due to unfair lending practices.

Fortunately, TILA and RESPA both explicitly exempt loans primarily for a commercial, investment, or agricultural(business) use from their regimes. This means that the most important question lenders need to ask of their potential borrowers before making a loan is: “what are you using the money for?” 

As long as lenders have a clearly documented business purpose for the loan proceeds, the collateral securing the loan becomes less important. And in addition, the use of the loan proceeds could also be mixed – partially consumer purpose, partially business purpose – but as long as the primary purpose of the loan is for business purposes(at least 51%!) then the loan is exempt from TILA and RESPA.

For owner occupied properties, confirming the business purpose of the loan proceeds is extremely important. And in this case, lenders will be prudent to ensure that a strong majority of the proceeds (80%+) is used for a business purpose when dealing with mixed use loans. Getting a handwritten explanation of the intent of loan proceeds from the borrower at time of loan application will be crucial to making the determination as to whether you can make the loan.

At time of closing, you will want to include an additional business purpose certificate in your loan document package for the borrower to reaffirm the use of the loan proceeds. And instead of relying on forms with check boxes or pre-populated statements, always have the borrowers handwrite in what their business purpose is with as much detail as they can whenever be possible to help bolster your exemption from TILA and RESPA.

There are some other considerations to keep in mind when dealing with owner occupied business purpose loans as well. First, some states will require lenders to be licensed to make these kinds of loans, even if they otherwise would permit lenders that only make business purpose loans to be unlicensed. There are exceptions of course, but it’s recommended to check in with your lending counsel prior to extending an owner-occupied business purpose loan to make sure you don’t have a state specific licensing issue on

your hands.

Also, some states will be strict with the interest rate you can charge on owner occupied business purpose loans, so make sure you connect with counsel to make sure your rate is compliant with state law. 

Finally, there are often times restrictions on late charges and prepayment penalties on owner occupied loans, so as a general rule we recommend giving your borrowers at least a ten-day grace period before incurring a late charge (capped at 5%), and not imposing prepayment penalties that are longer than six months.

Owner occupied business purpose loans are completely permissible and common, and can often times help small business owners in times of need. For lenders, these loans are a great opportunity to help a borrower access some of their equity in times of crisis. As long as lenders take the time to verify that the loan is indeed for business purposes, there are few restrictions on making these loans.

Read Time: 5 Minutes | December 1, 2022

Did you know that adjustable-rate mortgages are becoming more attractive for homebuyers in today's market? To lock in a lower rate, an ARM may be the best solution.

Should I Get an ARM? 

Are you questioning whether now is a good time to buy? Before you write off your homeownership dreams, know that an adjustable-rate mortgage (ARM) could be the home buying strategy that gets you in your new home. Even better, ARMs give homebuyers access to lower-than-average mortgage rates initially; there are more details to uncover about the relationship between rates and ARMs, so let’s start with the basics.

Fixed-Rate Vs. Adjustable-Rate Mortgage: What’s the Difference?

A fixed-rate mortgage is a type of home loan that features an interest rate that stays the same throughout the life of the loan. This means monthly P&I payments stay the same for the length of the loan term, which is commonly 30 years.

An Adjustable-Rate Mortgage (ARM) is a type of home loan with an interest rate that changes (adjusts) throughout the life of the loan. After a pre-determined fixed-rate period, the payment may fluctuate up or down. So, how does it work?

How Does an ARM Work? 

Although it’s called an adjustable-rate mortgage, it’s important to know that there is a fixed-rate period of the loan. This fixed period is where many homebuyers experience their greatest ARM advantage.

Fixed-Rate Period of an ARM

When you meet with a lender to discuss ARMs, they should explain that typically, ARMs can be beneficial financially because homebuyers are able to lock in a low mortgage for the first 5, 7, or 10 years of the mortgage. (Remember, the lower the rate, the lower the monthly P&I payment.) But how? ARMs generally offer a lower mortgage rate, compared to a 30-year fixed loan term.

Adjustable-Rate Period of an ARM

Now you may be thinking, “If the first 5, 7, or 10 years of the loan features a lower rate and lower monthly P&I payments, what do the rates and payments look like thereafter?” Here’s your answer: When the lower, fixed-rate period of the loan term ends (after 5, 7, or 10 years), the interest rate changes periodically throughout the life of the loan. For example, with a conventional ARM, the rate changes every 6 months based on the market at the time.

When to Consider an ARM. Depending on a variety of factors like the rate environment and your homeownership plans for the future, ARMs could be an ideal loan type for a variety of homebuyers, including:

· A home buyer looking to buy when interest rates are high - If you’re buying a home when mortgage rates are high, an ARM could be a way to secure a lower rate.

· Borrower looking to refinance before the rate changes - Whether you already know you plan to refinance in the future, or you buy when rates are high, refinancing when rates are lower could save you money long term.

· College graduates needing to pay off debt- In those 5, 7, or 10 years of lower monthly P&I payments, student loan repayment may be more feasible.

· Growing families - Need to save up money to financially prepare for a larger family? Saving could be easier during the initial fixed-rate period.

· Someone who plans to relocate - Are you in the military? Planning to move to a new city a few years but still want to own a home? You could benefit from a lower mortgage rate, especially if you plan to sell before the rate adjusts.

Pros and Cons of ARMs

Now that you’re familiar with a few different scenarios explaining when a homebuyer might choose a mortgage option that’s known for having variable payments, let’s weigh the pros and cons. One of its most popular attractions is that the initial rate is typically lower than other mortgage options. On the flip side, the variable rate may cause apprehension for borrowers who prefer stable monthly P&I payments.

Pros:

· Flexible loan terms

· Lower monthly P&I payments upfront

· Lower initial interest rate

· Qualify for a higher loan amount.

Cons:

· Payments could increase with a higher, adjusted rate

· Unexpected income changes may result in financial stress if the rate rises

· Potential prepayment penalties

Can I Switch from an ARM to a Fixed-Rate Mortgage? 

Switching from an adjustable-rate mortgage (or ARM) to a fixed-rate mortgage is one of the most common reasons to refinance. Refinancing to a fixed-rate loan usually makes the most sense when interest rates are low.

Understanding Rate Caps for ARMs

An annual ARM cap is a clause in the contract of an ARM that limits the possible increase in the loan's interest rate during each year. The cap, or limit, is usually defined in terms of rate, but the dollar amount of the principal and interest payment may also be capped. When you speak with your lender, they’ll be able to explain various payment scenarios for you to understand what an ARM could look like for you.