DEAR BENNY: My grandmother is in her home, already at the breaking point: It’s a question of food or medicine. Her house payment is $400. She’s usually a bit late paying the property tax. This month she signed papers to let the mortgage company set up an escrow account. The lender paid taxes and insurance to the tune of $1,800, and now they’ve jacked the payment up by $270 each month, which is more than $3,200 extra a year!
Can the lender really do that? They’ve loaned her too much against the house, and they do not want the note to go bad. How could they be so stupid as to price someone out of a home that’s not worth anything near the note? What are these dead-brained morons trying to do here?
How can we get the lender to understand that she simply does not have the extra $270 to pay each month? If she pays it, her utilities go off. –Fred
DEAR FRED: I understand your frustration. Lenders have the right to escrow for taxes and insurance, unless your state law either prohibits it or puts limitations on this right. But federal law (the Real Estate Settlement Procedures Act — commonly known as RESPA) does put a limit on the amount of money a lender can hold above and beyond the actual payment obligation. A lender cannot hold a yearly cushion of more than two months’ escrow.
But I have a real problem: While I certainly do not want any homeowner to be kicked out of his/her house, from what you have written your grandmother is financially on the edge; right or wrong, she has to pay insurance and taxes, and usually it is easier to escrow on a monthly basis rather than coming up with the entire amount when the payments are due. For most people, I don’t like the concept of escrow — but in your grandmother’s case, I believe it is necessary.
I recommend the following: (1) ask the lender why it appears it is violating RESPA; (2) ask whether there are senior citizen real estate tax breaks in the state (or county) where your grandmother lives; and (3) have your grandmother look into a reverse mortgage.
DEAR BENNY: I plan to take out an equity loan on our house in order for our daughter and her husband to buy a house that is in foreclosure. Her husband is asking his parents to supply the same amount of money. Besides the remote possibility that they might not be able to repay the loan, can you tell me of the legal pitfalls that might occur taxwise in a situation like this? –June
DEAR JUNE: Sounds like a good plan to help your daughter and son-in-law. Yes, one pitfall is that they may not be able to repay the loan and you (and your son-in-law’s parents) could lose this investment.
One possible pitfall — which I am sure no one wants to consider but we must be realistic — is that there could be a divorce in the future. I suggest that you enter into a written agreement with all parties (including the parents of the son-in-law), which will spell out the priorities of payment in the event of a divorce or legal separation. Additionally, if your daughter’s lender does not object, both sets of parents should insist on having a second deed of trust placed on the new property. Your attorney can assist you in drafting the appropriate document.
One more pitfall: Does your home equity line of credit have a variable interest rate that can increase over time? If so, can you afford to make the higher payments? …CONTINUED
DEAR BENNY: I am recently divorced. In the divorce decree the home was quitclaim deeded over to my ex-wife as part of the settlement. The decree states that I pay off the existing loan, and I am making monthly mortgage payments.
Once the quitclaim deed was processed and given to my ex-wife, I cancelled the property insurance and taxes from the escrow account assuming that she was now responsible for the insurance and taxes, since my sole responsibility was for the mortgage loan.
My ex-wife made a land agreement with another party, with the agreement of that party to make monthly payments to her until the purchase price of $53,000 has been made. The house was valued at around $130,000. The mortgage company has told me that a covenant was broken and the ex cannot sell the property. The mortgage company wants to add its own insurance to protect the structure and charge me for this.
The mortgage company has offered to transfer the loan to my ex for $900 assuming she qualifies for the loan. However, she has bad credit and probably won’t be able to assume the loan.
My ex says she has talked to an attorney, and they think I am trying to scam her. What legally does the quitclaim deed offer? Can the house and property be sold under a quitclaim deed? Am I responsible to maintain insurance on the structure? I know I am responsible for the loan and to pay it off per the decree. I don’t have the cash to pay it off, and the loan is at 5.35 percent. What are my options? –Paul
DEAR PAUL: I have not seen your divorce decree agreement and cannot provide you with specific legal advice. However, I believe the lender is claiming that your ex-wife — by entering into that agreement with a third party — has violated the due-on-sale clause in the mortgage. Oversimplified, that clause says that if the borrower sells or otherwise transfers the property to a third party, the lender has the right to call the entire loan balance due.
I can’t answer your question about whether you are obligated to pay for the insurance under your agreement, but you are obligated to do so from the loan documents you originally signed.
My suggestion: Have your ex-wife’s attorney deal directly with the lender. This way you won’t be accused of trying to take advantage of her.
DEAR BENNY: At this time of rampant foreclosures, I am about to receive a commercial property that I lent money on and had to foreclose on. Two questions: Since there is a current lease-option on the property, do I have to honor this document if I get the property? How much time must I give the previous owner to remove his personal property and if he does not remove it, may I sell or otherwise dispose of it? –Richard
DEAR RICHARD: Each state law is specific and you really have to discuss your questions with a local lawyer. And although residential landlord-tenant law often favors the tenant, from my experience, the law is neutral with regards to commercial tenant issues and tries to rely on the lease document itself. …CONTINUED
If your mortgage (deed of trust) was recorded prior to the lease-option, (which I suspect it was) in my opinion the option will be eliminated by virtue of your foreclosure.
As for removing the personal property of the previous owner, you may have to go to court to get an eviction order. Again, this is state-specific. But have you discussed this with the owner? Perhaps an amicable arrangement can be reached so that both of you can avoid the expense of litigation.
DEAR BENNY: I read with interest one of your responses to a reader who asked why mortgage applications take so long. You had written that you prefer to have direct contact with a local lender. I also felt more comfortable dealing with a local lender when I purchased my present house. However, soon after closing, the mortgage was sold. The same thing happened when I refinanced a few years ago. Is there any way to insure that a mortgage stays with the original lender? –Ed
DEAR ED: That’s probably the "trillion dollar" question — since our current financial crisis, in part, was caused by lenders selling their mortgages to the "savvy" investors, many of whom subsequently needed bailout money.
Unfortunately, the answer is no. Lenders sell their mortgages in order to have more cash to make more loans. Some large banks will keep their mortgage loans in their own portfolio, but to my knowledge, most loans are sold to a third party.
Lenders are required by law to disclose when you go to settlement (escrow) the percentage of loans that they do transfer to others, but that is only interesting information. You really can’t do anything about this.
However, I always recommend that when a lender is escrowing for real estate taxes and insurance, borrowers should at least once a year write a letter to the current lender demanding proof that those taxes and insurance payments have in fact been made.
I have had too many clients where the lender "forgot" to make the necessary payments on a timely basis.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@sandbox.inman.com.
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