DEAR BENNY: I own a house worth approximately $400,000. The current mortgage is $25,000. A company in Florida took over the mortgage about six months ago. The mortgage company handles the tax and insurance payments through an escrow account. Given the current schedule of payments, the account has had a positive balance during all of 2012 and will average at least a $1,000 balance during the 12 months. The mortgage company wants to double the escrow payments so that the minimum balance is $1,000, the maximum is $3,000 and the average account balance is $2,000.
What, short of paying off the mortgage, are my options? Can the mortgage company legally demand such payments? I have owned a number of homes, vacation homes and rental homes over the years and never experienced anything this outrageous. --John
DEAR JOHN. The great majority of residential mortgage loans in the United States are "federally related." This means that they are either insured by or purchased by a federal agency or an organization such as Fannie Mae or Freddie Mac. And all such federally related mortgages are covered under the Real Estate Settlement Procedures Act (RESPA).
Section 10 of RESPA controls the amount of money a lender may require to be held in escrow for the payment of real estate taxes and hazard insurance. And contrary to what lenders may tell you, federal law does not require lenders to escrow.
Under RESPA, a lender may not require borrowers to pay monthly more than one-twelfth of the total amount of all escrows calculated for one year. However, lenders are permitted to maintain a cushion equal to one-sixth of the total amount of items paid out on a yearly basis. In other words, to ensure that lenders will have sufficient funds to timely pay the real estate taxes (or the insurance), the law does allow a cushion of two months per year.
In your case, without doing the math, it appears that you are overcharged. If your lender is not prepared to refund you the excess, I suggest that you complain to your nearest HUD office.
DEAR BENNY: I am selling my home, and it is under contract. However, I will not be able to personally attend the closing, since a business trip requires me to be out of the country. What options do I have? I don't want to lose the sale. --Jordan
DEAR JORDAN: There are a number of options. First, contact the settlement company (or title attorney or escrow company) where the closing will take place. They should be able to prepare the deed and other papers that you will have to sign, in advance of closing, so that you can sign before you leave for your trip.
However, things don't always go smoothly at house closings, and besides, you will have to sign the settlement statement (called a HUD-1), which typically is not available until just before the settlement date.
Accordingly, you should also sign a power of attorney. This is a document whereby you, as principal, give authority to someone you know and name to act on your behalf. That person, usually referred to as your "attorney in fact," will have full authority to sign any and all legal documents as if you were physically present.
There are a number of different powers of attorney. There is a specific power, one that is limited in scope: "I give my daughter, Jane, the power only to sign the settlement documents but not to negotiate the settlement check."
There is a general power of attorney, whereby Jane has absolute authority to do everything on your behalf.
There are durable powers of attorney, which, in my opinion, everyone should have. This enables your attorney in fact to step into your shoes if and when you are physically (or mentally) not capable of handling your own affairs. For example, if you have a stroke, who will sign checks to pay your mortgage?
Your durable power can be drafted to take effect on the date you sign and have it notarized, or it can take effect at a later date on specific situations, such as when two doctors certify that you are incapacitated. This is called a "springing power of attorney."
State laws differ on the form requirements for powers of attorney. So make sure that your form complies with your state law. Your attorney or the title (escrow) company can assist you with this.
DEAR BENNY: My sister and I inherited our parent's family home a couple of years ago. It is free and clear of any mortgage, and even though my sister now lives in the house (rent-free), we have both contributed equally for upkeep, real estate taxes and insurance.
I want to sell, but my sister wants to keep the house. I offered to let her buy me out, but she does not have sufficient moneys for this. What suggestions do you have to resolve this for both of us? --Karl
DEAR KARL: If it is any consolation, you are not alone. I have represented too many brothers or sisters with the exact same facts.
There are a number of suggestions -- some that require consent from both of you and some that only one of you can do.
Let's take the first category. You can arrange to rent the house to your sister, whereby she will pay you rent at half the market rates. Why half? First, because she is your sister, but more importantly, she owns half of the house and clearly will be more concerned about taking good care of it than if she were just a regular tenant.
Another suggestion: She can buy you out by giving you a promissory note and a deed of trust (called a mortgage in some parts of the country). You can make the monthly payments conform to her budget, and have a balloon note whereby the entire balance comes due on a date mutually agreed upon.
Of course, if she cannot afford to rent or buy, then in my opinion, she should not be living rent-free in the house. You should both agree to sell it, and divide the proceeds equally. Keep in mind that your basis for tax purposes is the stepped-up basis; namely, the value of the property on the date that your last parent died. So if it was valued at $300,000 on that date, and you sell it for that amount, neither of you will have to pay any capital gains tax. Of course, if you can sell it for more, then there will be tax to pay on that profit.
Interest rates are at an all-time low, and the housing market is gradually recovering from the mortgage meltdown. This is a good time to sell.
In the final analysis, if you are unable to get your sister to cooperate with one of the suggestions above, you can file what is known as a "partition lawsuit." This means that you file a lawsuit in the local court where the property is located, and ask the judge to force a sale.
Case law throughout the nation is clear: If two or more people own property and one wants to sell, the courts will force the sale.
I have been involved in many partition lawsuits, and tell all of my clients that the only winners are the lawyers, the trustees who arrange the sale and the speculators who buy. In other words, litigation should be the absolute last resort.
Both you and your sister should retain your own attorneys and have the lawyers try to work it out.
DEAR BENNY: We have been reading about reverse mortgages. We are in our early 70s, and our house, which is worth approximately $400,000, has a very low mortgage remaining. Can you provide us with the pros and cons of such a mortgage? --Tim
DEAR TIM: Reverse mortgages are not for everyone. I am especially concerned that younger homeowners (the so-called baby boomers who are now age 62) are starting to obtain these reverse mortgages. Because of the high costs of these loans, these seniors may end of having little or no equity (no money) as they get much older. According to a recent study reported by the Consumer Financial Protection Bureau, in 2011 almost half of reverse mortgage homeowners were in their 60s.
That is perhaps the biggest negative. A reverse mortgage carries high costs -- both when you first obtain the mortgage as well as on a continuing basis. For example, the federally insured home equity conversion mortgage (HECM) allows the lender to charge an origination fee that –depending on the value of your home – can exceed $5000. Additionally, the borrower has to go through the normal settlement (escrow) proceedings, paying such costs as title search, title insurance, appraisal and closing fees.
On the plus side, however, it can provide a homeowner with a sum of money (which can be taken out in one lump sum or in periodic installments) and that money does not have to be repaid until (1) the home is sold, (2) the borrower(s) move out or (3) the borrower(s) die.
I suggest you do a lot of homework before you make your decision. One good source of information is AARP at www.aarp.org.
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 firstname.lastname@example.org.