Archives For mortgage

An INTERESTing History

November 14, 2012 — Leave a comment

Interest Rates are at historically low levels.  In an effort to revitalize the housing market, the Federal Reserve has been using tools of monetary policy to keep costs low for would-be home buyers and help home owners whose interest rates shot-up in the wake of the 2007-09 financial crisis.  Why?  Because the housing market remains the biggest drag on the US economy – residential investment is 49% below what it would be normally, resulting in an estimated $370 billion loss in economic activity.  However, mortgage rates continue to drop in response to monetary policy actions such as QE3, which guaranteed the Fed’s purchase of $40 billion worth of mortgage backed securities/month indefinitely.  While rates may continue to decline, the process will be gradual; if banks slashed mortgage rates too fast, they would be unable to handle the demand from Americans seeking to buy or re-finance their home.  Still, today’s rates are unprecedentedly low, as shown by the infographic below:Note: As of 11/14/12, the average 30-year fixed mortgage rate was 3.41%.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

On Dec. 31st, 2012 the Mortgage Forgiveness Debt Relief Act (MFDRA) will expire unless the lame-duck Congress renews it.  The act was signed into law five years ago, immediately after the housing bubble burst, in an effort to provide financial relief to impoverished homeowners by allowing them to short-sell their properties without having to pay taxes on the amount of forgiven debt.  For example, if you owe $400,000 on  your home and sell it for $300,000 you do not have to pay taxes on the $100,000 difference, which the IRS would traditionally count as income.  The IRS offers this provision for forgiven debt of up to $2 million from calendar years 2007 – 2012.  If the MFDRA is allowed to expire, any amount of forgiven debt on a short sale would be taxed again, placing a huge burden on the 24% of homeowners (11.3 M people) who are still underwater (owe more then their house is worth) and have a collective $692 billion in negative equity. It’s worth noting that young people are bearing the grunt of the burden; almost half of borrowers under age 40 are underwater.  Check out the breakdown from Zillow’s latest real estate report below:
The housing market has undoubtedly improved in the last half-decade, and all signs point to a continuance of that trend.  The  Fed recently announced a third round of quantitative easing, QE3,  where they will purchase $40 billion a month of mortgage backed securities for as many months as needed.  This action is intended to support the housing market and allow banks to cut interest rates modestly, which should allow more people to keep their home.  Moreover, Corelogic, an independent research firm, reports that home prices are rising in 19 to of 20 big cities and home prices increased by 5% on year over year basis in September, 2012 compared to September, 2011.  Still, the situation for those 11.3 million homeowners is unlikely to improve before the MFDRA expires.

It is still unclear whether or not an extension will be passed.  President Obama has publicly supported such a measure, but congress is not feeling very charitable right now (a 2-year extension would cost the treasury $2.7 billion) and an extension would have to be approved by both the House and Senate.  There has been bi-partisan support for an MFDRA renewal, but bringing it to the top of congress’ priorities is its biggest impediment.  This should be reason for underwater homeowners to worry, and may push them to sell their houses while they can still find some tax relief on a sale.  If an extension is not passed, they may have to wait a long time until the value of their property improves enough to account for the reinstated tax.  Of course, for most homeowners, the decision to move is not something that they can do anytime they like.  Even without the MFDRA, many homeowners find themselves stuck waiting for the value of their largest asset to improve to pre-crisis levels.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

The following Infographic shows the two candidates major economic policy stances, focusing on real estate and mortgage re-financing issues:


JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

Can You Imagine?

October 31, 2012 — Leave a comment

If Only...JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

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If you want a better loan rate than your mortgage lender is offering, you might be able to buy it down via points. Each point is one percent of the mortgage amount and points are offered on both original home loans and refinancings. And in both case, the points are tax deductible. However, the precise method of deducting them does differ.

On your first mortgage, you can deduct the points in full on your tax return for the year the points are paid. But with a refi loan, rather than deducting the full amount of refi points in the tax year in which you paid them, you must amortize them over the life of the loan.

So instead of deducting, for example, $1,500 in full refi points on a 15-year loan, you deduct $100 worth of points on each tax filing for 15 years — or until you pay it off, at which time you can claim the remaining points on the return for that tax year. And remember, the other home-related tax breaks that you’re used to taking are the same for your newly refinanced loan.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

We have all seen them, the commercials late at night, a stately gentleman, graying hair perfectly parted speaking of the virtues of a reverse mortgages and how they can benefit older Americans entering retirement. Once the pitch is completed the closing image is that of the typical American family surrounding grandma or grandpa on the porch enjoying what appears to be a beautiful day thanks the reverse mortgage. The reality however is often very different.

What is a reverse mortgage? A reverse mortgage is a home equity loan that unlike a conventional loan disburses the monies borrowed to the borrower in monthly installments over a period of time. The reverse mortgage is secured by a deed of trust on the property for an amount which usually includes not only the money borrowed but also an additional amount sufficient to cover the interest payments on the loan until the borrower passes away. The reverse mortgage becomes due and payable to the lender when the borrower passes. Thus the borrower or their estate at the time of the borrower’s death may end up owing the reverse mortgage company a significantly larger amount of money than the borrower initially borrowed or received. If the property is the principle residence of a least one surviving borrower the loan will not become due and payable until that surviving borrower passes as well.

Once the borrower passes their estate is typically given four options: One, the estate can elect to pay off the reverse mortgage with proceeds from the estate; Two, the estate can refinance out the reverse mortgage with a conventional loan, which in effect is paying off the reverse mortgage; Three, the estate can elect to sell the property, whereby the reverse mortgage will be satisfied from the proceeds of the sale and the balance of the equity will be paid to the estate; Four the estate can issue a deed in lieu of foreclosure to the lender to avoid the lender from initiating foreclosure proceeding against the property. Typically, the lender will make a request of the estate shortly after the borrower has passed and will give the estate 30 days to elect which of these options it wishes to pursue or face foreclosure. A far cry from the beautiful day the commercial depicts.

There are benefits to a reverse mortgage. The borrower has the tax free use of their home equity as long as they continue to live in their home. However, that’s right if you have to go to a nursing home or assisted care facility and cannot return to your home because you require constant care, that may trigger repayment of the reverse mortgage. While the money is tax free, as the old saying goes nothing in this life is really free. The reason the money is tax free is because it is your equity in your home, which you already paid taxes on when you earned it and paid your mortgage to accumulate equity in the Property.

While withdrawing the equity from your residence while you are alive through a reverse mortgage can be a way an effective means of passing a portion of your estate to your loved ones while you are alive without tax penalties, the costs to your estate in the form of interest on the reverse mortgage loan and related fees and obstacles the reverse mortgage process involves, often exceed the benefit for most Americans.

It’s important to remember that in order to qualify for a reverse mortgage the lender will often require that your property be free and clear of any other lien in order for your property to qualify as security for a reverse mortgage. In some instances the lender may wrap the balance of your existing mortgage into the balance of your reverse mortgage. However, as they say, “the devil is in the details”. A reverse mortgage is typically not for the full value of your home. The amount of loan that you will qualify for is based on the lowest selling margins for your areas.

For example, if your home is worth $431,000 in today’s market, the value limit the lender places on the property may reduce your home’s value for the purpose of computing the reverse mortgage to $362,790 which would result in loan principal limit of approximately $259,395. This would be the absolute maximum the reverse mortgage lender would lend on a house worth $431,000. Remember the reverse mortgage lender is going to subtract all of the lender’s fees upfront, let’s say approximate, $17,125 to give you $236,621 as your net principal limit. However, when the reverse mortgage company records their deed of trust on your property, they are going to record it for the $362,790 amount. Thus, your property is significantly more encumbered than the amount of money the borrower received. These assumptions are based on the borrower taking monthly payments; the situation is even direr if the borrower elects to take a lump sum payment.

So while the reverse mortgage commercial may seem enticing, a way to provide for your golden years, beware, that the sunny day the commercial promises may cause more agony and trouble for your heirs then you ever intended.

Jeffrey D. Katz Esq. is the founding partner in the law firm JDKatz, P.C. Formerly with KPMG’s Mid Atlantic tax practice, Mr. Katz’s practice focuses on tax, estate planning and real estate matters. Mr. Katz is admitted to practice in the State of Maryland, US Tax Court, US District Courts for Maryland and the District of Columbia, and before the United States Fourth Circuit. Mr. Katz routinely lectures on estate and corporate law issues in Washington, DC and suburban Maryland. Mr. Katz lives in Montgomery County, Maryland. He may be reached at 301-913-2948.

Countdown to Closing

January 27, 2012 — Leave a comment

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In our tax practice we are frequently called on to opine on real estate transactions. Recently we came across this Due Diligence Checklist, which is utilized in conducting a closing on a real estate acquisition. Clients, who routinely ask what happens before closing…. Here is your answer….

1. Verify Address and Legal Description of Property.

2. Determine if acquisition is fee, leasehold estate or both.

a. If leasehold estate review carefully to cover assignability, mortgageability, non-disturbance for leasehold mortgage and estoppels. If the lessor has mortgaged the fee, a non-disturbance from the fee mortgage is required.

b. Determine if improvements are owned by lessee (typically in a ground lease situation); in that case a deed of improvements and waivers from lessor and/or fee mortgagee is required respecting improvements, fixtures and equipment.

3. List and copies of recorded and unrecorded operating agreements, equipment leases, construction contracts, options to purchase, subleases, license and concession agreements, franchise agreements, labor agreements, and any other agreements.

a. Review; check for assignability, for unusual provisions, and for situations in addition to default which would require an estoppel. If franchise agreement, check on any upgrade requirements for transfer.

4. Existing Financing.

a. Determine What will be paid off and what will remain.

b. Get copies of all Notes, Loan Agreements, Mortgages, UCC’s, etc

c. If debt is to be paid off:

(i) Check for repayment restrictions, advance or post notice requirements and prepayment penalties;

(ii) Review Document for other problems;

(iii) Coordinate with Lender;

(iv) Procure payoff letter and, at closing, cancelled Note, release of mortgage.

d. If not to be Paid off

(i) Determine if to be assumed or taken “subject to”;

(ii) Determine requirements of release of Seller and/or assumption by Purchaser;

(iii) Coordinate with Lender and Title Company forms and recording requirements;

(iv) Determine whether any notices required;

(v) Determine if any consents required;

(vi) Estoppel Certificate;

(vii) If Leaseholds are being acquired, see Paragraph 2 above.

5. Transfer Payment Requirements: Review statues any verify with Title Company, local counsel and recorders for fee transfers, leasehold transfers and mortgages:

a. State: Form and amounts.

b. City: Form and amounts

c. County: Form and amounts.

d. Other: Inquire of local counsel.

6. Confirm with Title Insurer, local counsel, am recorders:

a. Evidence of water bill or other utility payments required for recording.

b. Tax number required on deed.

c. Notarization format.

d. Form of deed.

e. Other.

7. Physical Condition.

a. Check Lender Requirements.

b. List and copies of building code, OSHA, etc. notices.

c. Inquire of ongoing work or disputes with contractors.

d. Get copies of engineering, etc reports; review for problems.

e. Inspections by engineer and/or architect.

8. Licenses, Permits and Certificates of Occupancy:

a. Verify number of units on Certificate of Occupancy with listing and walk through of the property.

b. Procure copies.

c. Confirm that what is supplied is all that is required, including:

(i) Certificate of Occupancy

(ii) Environmental

(iii) Elevators

(iv) Business

(v) Pool

d. Confirm with city that a transfer of property does not trigger a building inspection or require any new permits; if permits can or must be assigned, check as to the timing of applications therefore and what then happens.

9. Copies of Guaranties and Warranties; check for assignability; determine importance

10. Insurance

a. Determine if Purchaser will be assigned Seller’s Insurance policies or procure its own.

b. Confirm with client that it has reviewed Seller’s insurance or procured insurance satisfactory to it.

c. Note Lender insurance requirements – get Lender copy of the policy and certificate ahead of time. Most lenders want the “New York” or “standard” form endorsements for those items. Be alert for problems respecting blanket coverage, deductibles, basic coverage and amounts.

11. Environmental Matters

a. Find out who at Purchase is covering this.

b. Include in Inquiry:

(i) Notices, permits, reports, and correspondence to and from environmental regulatory authorities, including notices of violation.

(ii) Environmental consultant reports and correspondence.

(iii) Financial estimates and reserves for environmental liabilities.

(iv) List of site historically used and currently being used for waste disposal or recycling.

12. Corporate Due Diligence

a. Certificate of Incorporation and all amendments thereto (or comparable organization documents) – Purchaser and Seller.

b. By-laws (or comparable documents) – Purchaser and Seller.

c. Is Purchaser qualified to transact business in the state of property.

d. List of officers of Purchaser and Seller; certificates of incumbency. At closing, match these names and signatures to executed documents.

e. Minutes of meetings of board of directors and shareholders meetings pertaining to the purchase and sale, and Purchaser’s financing.

f. Seals.

g. Certificate of good standing.

13. Title Insurance Commitment and Policy.

a. Match legal to survey. If no survey, order Alta Survey.

b. Check name of insured.

c. Add easement parcels and other benefits to Schedule A.

d. Get copies of all documents identified – and of all documents identified within such documents; locate on survey; review for problems such as

(i) Zoning or PUD requirements

(ii) Building lines, easements, etc. violated by improvements.

(iii) Contingencies or requirements.

(iv) Consents required upon transfer of property.

e. Make sure taxes and tax parcel numbers are identified’ confirm current payment; confirm the tax bills cover only the subjected property; for prorations, note if the last ascertainable tax bill was on property which has since been improved.

f. Endorsements to title policies

(i) Zoning (3.0 or 3.1) – confirm use;

(ii) Extended coverage, including survey, mechanics, liens and rights of parties in possession;

(iii) Mineral and water rights;

(iv) Roads and highways limited to those shown on survey;

(v) Access – as shown on survey, abutting the public way;

(vi) Address and location; and the property shown on the survey is the property insured;

(vii) Tie-in;

(viii) For lender:

1. Usury

2. Comprehensive Endorsement No. 1;

3. Future Advances, revolving credit, variable rate;

4. Doing business;

5. Any others requested by Lender.

g. Check to see if the utility letters are required; if so, check timing and begin processing.

h. Check to see if fraudulent conveyance exception is present; make inquiry of Title Company

i. Check with Title Company to see that equipment leases and operating contracts do not have to be included in ALTA – they will want a list and perhaps copies.

j. Determine the amount and nature of ongoing work at the site; ask the Title Company whether it will require mechanics’ lien waivers, sworn statements, etc, for this work

k. Confirm a gap undertaking is acceptable; get form; limit to matters caused by our client; confirm that order side will also execute a cap.

l. Determine valuation of each property: taxes; appraisals; rents; allocation in purchase and sale contract.

m. Re insurance:

(i) Direct Access;

(ii) Check title insurers’ limits and financials.

n. Match exceptions in title commitment to those in purchase and sale contract.

14. Survey.

a. Have client (often, property manager) confirm that the property shown on survery is the subject property

b. Certification.

(i) Current;

(ii) To Purchaser, Lender and Title Insurer;

(iii) In form acceptable to Title Insurer for purposes of issuing extended coverage endorsement.

c. Locate all matters identified in title commitment and policy.

d. Locate all improvements, including

(i) Building;

(ii) Parking:

(iii) Driveway cuts to road.

e. Confirm that the survey shows property abuts public road at point of driveway entrance

f. Flood and wetlands certification.

g. Check for any violations or encroachments over building lines, easements.

15. Zoning.

a. Title endorsement.

b. Match actual use of property to title endorsement

c. Determine if 3.1 is required; if so, procure necessary plans, etc. and pass through Title Company.

d. Special concerns of client for development of the property.

e. Review architect’s site development plan/drawings for compliance with current zoning regulations. Opinion to client regarding steps that may be required for compliance or change in zoning.

16. Usury.

a. State law – check.

b. Local counsel opinion.

c. Title Endorsement.

17. Estoppel Certificates.

a. Ground lessor.

b. Lessees

c. Mortgagees.

d. Equipment lessors.

e. Operating agreement parties.

f. Contractors.

g. Others – check with lender

18. UCC Searches

19. Appraisals

20. State and local sales and other tax clearances. Verify tax amounts.

21. Utilities

a. Identify: Electricity, gas, phone, sewage, power, cable, others.

b. Deposits.

c. Requirements upon transfer.

d. Availability.

e. Sufficiency

22. Proratable Items:

a. Determine what they are and how they work:

(i) Taxes: See if assessment notices are out.

(ii) Utilities.

(iii) Contracts.

(iv) Lease rentals.

(v) Insurance premiums.

(vi) Mortgage indebtedness.

(vii) Deposits.

(viii) Supplies.

(ix) Guest ledger.

(x) Employees.

(xi) Other.

b. Review loan agreements for contrary provisions or escrows.

23. Lender requirements; get lender checklist.

24. Financial information, including balance sheets, income statesments, tax returns, and other financial statements.

25. Employee lists and information regarding salaries, wages, benefits, length of employment, etc.

26. Proceed to Settlement.