Tag Archives: Brooklyn Law School

Buying after Bankruptcy

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Realtor.com quoted me in Buying a House After Bankruptcy? How Long to Wait and What to Do. It opens,

Buying a house after bankruptcy may sound like an impossible feat. Blame it on all those Monopoly games, but bankruptcy has a very bad rap, painting the filer as someone who should never be loaned money. The reality is that of the 800,000 Americans who file for bankruptcy every year, most are well-intentioned, responsible people to whom life threw a curveball that made them struggle to pay off past debts.

Sometimes filing for bankruptcy is the only way out of a crushing financial situation, and taking this step can really help these cash-strapped individuals get back on their feet. And yes, many go on to eventually buy a home. Only how?

Being aware of what a lender expects post-bankruptcy will help you navigate the mortgage application process efficiently and effectively. Here are the steps on buying a house after bankruptcy, and the top things you need to know.

Types of bankruptcy: The best and the worst

There are two ways to file for bankruptcy: Chapter 7 and Chapter 13. With Chapter 7, filers are typically released from their obligation to pay back unsecured debt—think credit cards, medical bills, or loans extended without collateral. Chapter 13 filers have to pay back their debt, only it’s reorganized to come up with a new repayment schedule that makes monthly payments more affordable.

Since Chapter 13 filers are still paying back their debts, mortgage lenders generally look more favorably on these consumers than those who file for Chapter 7, says David Carey, vice president and residential lending manager at New York’s Tompkins Mahopac Bank.

How long after bankruptcy should you wait before buying a house?

Most people applying for a loan will need to wait two years after bankruptcy before lenders will consider their application. That said, it could be up to a four-year ban, depending on the individual and type of loan. This is because lenders have different “seasoning” requirements, which is a specified amount of time that needs to pass.

Fannie Mae, for example, has a minimum two-year ban on borrowers who have filed for bankruptcy, says David Reiss, professor of law and academic programs director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. The FHA, on the other hand, has a minimum one-year ban in place after a bankruptcy. The time is measured starting from the date of discharge or dismissal of the bankruptcy action. Generally the more time that passes, the less risky a once-bankrupt borrower looks in the eyes of a lender.

Mooting The CFPB Constitutional Challenge

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Law360 quoted me in DC Circ. May Skip CFPB Fight After Cordray’s Exit. It opens,

The legal battle over who will temporarily lead the Consumer Financial Protection Bureau comes as the D.C. Circuit is considering whether the bureau’s structure is constitutional, and experts say the fight over its leadership could lead the appeals court to punt on the constitutional question.

The full D.C. Circuit has been considering an appeal filed by mortgage servicer PHH Corp. to overturn a $109 million judgment entered by former CFPB Director Richard Cordray over alleged violations of anti-kickback provisions of the Real Estate Settlement Procedures Act. PHH’s argument is that the agency’s structure, which includes a single director rather than a commission along with independent funding not appropriated by Congress, is unconstitutional.

But now that a political and legal fight has broken out over who should temporarily lead the CFPB since Cordray has left the bureau, the D.C. Circuit may be even more inclined to find a way to decide the underlying arguments about the CFPB’s enforcement of a decades-old mortgage law without touching the constitutional questions.

“If the D.C. Circuit wants to avoid this question, they certainly have plausible means to do it,” said Brian Knight, a senior research fellow at George Mason University’s Mercatus Center.

The battle over the CFPB’s constitutionality waged by PHH in some ways opened the door for the current conflict over who should serve as the bureau’s acting director.

PHH’s fight with the CFPB stems from Cordray’s decision to jack up a RESPA penalty against the New Jersey-based mortgage company in June 2015.

A CFPB administrative law judge had originally issued a $6.4 million judgement against PHH over alleged mortgage kickbacks, but on appeal Cordray slapped the company with a $109 million penalty.

PHH then took its case to the D.C. Circuit, arguing that the single-director structure at the CFPB, which allowed Cordray to unilaterally hike the penalty, was a violation of the Constitution’s separation of powers clause.

Ultimately, a three-judge panel led by U.S. Circuit Judge Brett Kavanaugh found that the CFPB’s structure was unconstitutional but declined to eliminate the bureau and invalidate its actions. Instead, the panel elected to eliminate a provision that only allowed the president to fire the CFPB director for cause, rather than allowing the director to be fired at will by the president.

The original, now vacated, D.C. Circuit decision also overturned the CFPB’s penalty against PHH. That portion of the decision was unanimous.

The CFPB then sought an en banc review of the decision, with oral arguments held in May. Since then, the CFPB and the industry have waited for a decision.

In fact, the wait for that decision may have allowed Cordray to hang on as long as he did at the CFPB. Trump was expected to fire Cordray soon after taking office, but that never happened, and instead Cordray waited until November to depart the bureau for what many believe will be a run for governor in his home state of Ohio.

Many predicted the D.C. Circuit would go the route of U.S. Circuit Judge Karen L. Henderson, a member of the original panel that ruled in the PHH litigation. Judge Henderson dissented on the constitutional question but supported the decision on RESPA enforcement.

“You arguably don’t have to reach the constitutional question,” said Christopher Walker, a professor at Ohio State University’s Moritz School of Law.

But the D.C. Circuit’s decision comes as two individuals argue over which one of them is the CFPB’s rightful acting director.

Cordray last Friday promoted his chief of staff, Leandra English, to be the CFPB’s deputy director just moments before he formally announced his departure. Cordray and English argue that the 2010 Dodd-Frank Act, which created the CFPB, made the deputy director the acting director in his absence.

Hours later, Trump appointed Office of Management and Budget Director Mick Mulvaney, a fierce CFPB opponent, to be the federal consumer finance watchdog’s acting director under a different federal law.

English sued to block Mulvaney’s appointment, and although the case will continue, a judge on Tuesday rejected her request for a temporary restraining order.

Against that backdrop, the D.C. Circuit may have more of an incentive to lie low on the constitutional questions, said Brooklyn Law School professor David Reiss.

“My reading would be that if they reversed the agency on the RESPA issues, then they may be able to moot the constitutional issues,” he said.

Investing in Homes

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photo by Pictures of Money

TheStreet.com quoted me in Investing In Your Home Remains a Sound Financial Decision for 2018. It reads, in part,

Homeowners are still pouring money into their homes as renovations and upkeep are generating a large portion of sales for Home Depot as demand for purchasing homes rose in September and the three massive hurricanes in the U.S. boosted revenue.

Home Depot’s third-quarter sales surged in the aftermath of a robust hurricane season that spanned from Texas to Puerto Rico, increasing demand from homeowners who faced immense rebuilding as homes were destroyed by relentless floodwaters.

The Atlanta-based home improvement retailer reported an impressive 7.9% increase in comparable-store sales in the third quarter, which exceeded the Wall Street estimate of 5.8%. Home Depot also beat on earnings, reporting $1.84 a share, 2 cents ahead of forecasts. The company’s total revenue was $25.03 billion, up 8% from the same period last year.

 Home Depot’s third-quarter earnings rose 15% from a year ago and its comparable sales in the U.S. increased at a 7.7% clip.

“Though this quarter was marked by an unprecedented number of natural disasters,” said CEO Craig Menear in a statement, “the underlying health of our core business remains solid.

The company was able to raise its fiscal 2017 guidance due to its stellar earnings and now estimates comp sales growth of 6.5% and earnings per share of $7.36, which reflects its $8 billion buyback program this year.

Home Depot shares rose 2.7% to $168.06 on Nov. 14.

 Interest from first-time home buyers remains strong and home sales rose in September — new home sales increased to a seasonally adjusted rate of 667,000, which is up 18.9% month over month and 17% year over year.

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“When an individual buys a share of stock they can monitor the value of the investment on a minute-to-minute basis,” Johnson said. “People can see the fluctuation in value. With real estate, however, no one is quoting you a price instantaneously on your real estate purchase. Absent a market price, people tend not to worry about the value of their real estate purchase and assume that it is very stable in the short run.”

Millennials tend to be conservative with their investment choices and are “drawn to this seeming stability in the value of residential real estate,” he said.

Nevertheless, purchasing a home can often be a very poor financial decision and potential home buyers need to be aware of the additional costs and potential pitfalls.

“People fall prey to the stories of individuals realizing substantial gains by buying a home and selling it at a much higher price years down the road,” Johnson said.

Noble laureate economist and Yale University professor Robert Shiller had made a compelling case that real estate, especially residential homes, are a much inferior investment when compared to stocks. He found that on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years.

The stock market’s average return on a large stock index such as the S&P 500 has been about 10% while inflation has averaged around 3% from 1926 through 2016 while the inflation adjusted return of the stock market over the past 90 years has been approximately 7%.

The rate of homeownership still remains much lower than the 1998 rate of 9.5% and the rate has remained stable since the commencement of the financial crisis — hovering around 5% since 2008.

So should you own or rent?

Renting can be a better deal for many consumers, depending on the city and region, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“This is a better question to ask yourself than whether owning is a sound investment choice because you are going to need to live somewhere no matter what,” he said. “It is not too helpful to look at national numbers to answer this question – you should look at the figures in the communities you are considering living in.”

Understanding Private Mortgage Insurance (PMI)

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photo by David Hilowitz

LendingTree quoted me in Guide to Understanding Private Mortgage Insurance (That’s PMI). It opens,

Part I: Basics of private mortgage insurance (PMI)

What is PMI?

If you’ve ever purchased a home without a large down payment, you may have faced the possibility of paying PMI, or private mortgage insurance. This financial product is a type of loan insurance typically bought by consumers when they purchase a house. However, the premiums paid toward PMI aren’t intended to protect the consumer. Rather, they provide protection for the lender, in case you stop making payments on your home loan.

As the Consumer Financial Protection Bureau (CFPB) notes, PMI is typically arranged by your lender during the home loan process and comes into play when you have a conventional loan and put down less than 20 percent of the property’s purchase price. However, private mortgage insurance is not just associated with home purchases; it can also be required when a consumer refinances his or her home and has less than 20 percent equity in it.

Generally speaking, PMI can be paid in three different ways — as a monthly premium, a one-time upfront premium or a mix of monthly premiums with an upfront fee.

There are also ways to avoid paying PMI altogether, which we’ll address later in this guide.

PMI versus MIP: What’s the difference?

While PMI is private mortgage insurance consumers buy to insure their conventional home loans, the similarly named MIP –  that’s mortgage insurance premium — is mortgage insurance you buy when you take out an FHA home loan.

MIP works kind of like PMI, in that it’s required for FHA (Federal Housing Administration) loans with a down payment of less than 20 percent of the purchase price. With MIP, you pay both an upfront assessment at the time of closing and an annual premium that is calculated every year and paid within your monthly mortgage premiums.

Generally speaking, the upfront component of MIP is equal to 1.75 percent of the base loan amount. The annual MIP premiums, on the other hand, are based on the amount of money you owe each year.

The biggest difference between PMI and MIP is this: PMI can be canceled after a homeowner achieves at least 20 percent equity in his/her property, whereas homeowners paying MIP in conjunction with a FHA loan that originated after June 13, 2013, cannot cancel this coverage until their mortgage is paid in full. You can also get out from under MIP by refinancing your FHA loan into a new, conventional loan. However, you’ll need to leave at least 20 percent equity in your home to avoid having to pay private mortgage insurance on the refi.

Which types of home loans require PMI? MIP?

If you’re thinking of buying a home and wondering if you’ll be on the hook for PMI or MIP, it’s important to understand different scenarios in which these extra charges may apply.

Here are the two main loan situations where you’ll absolutely need to pay mortgage insurance:

  • FHA loans with less than 20 percent down – If you’re taking out a FHA loan to purchase a home, you may only be required to come up with a 3.5 percent down payment. You will, however, be required to pay both upfront and annual mortgage insurance premium (MIP).
  • Conventional loans with less than 20 percent down – If you’re taking out a conventional home loan and have less than 20 percent of the home’s purchase price to put down, you’ll need to pay PMI.

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Part V: Frequently asked questions (FAQs)

Before you decide whether to pay PMI – or whether you should try to avoid it – it pays to learn all you can about this insurance product. Consider these frequently asked questions and their answers as you continue your path toward homeownership.

Q. Is PMI tax-deductible?

According to David Reiss, professor of law and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School, PMI may be tax-deductible but it all depends on your situation. “The deduction phases out at higher income levels,” he says.

According to IRS.gov, the deduction for PMI starts phasing out once your adjusted gross income exceeds $100,000 and phases out completely once it exceeds $109,000 (or $54,500 if married filing separately).

Renters and Natural Disasters

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Avvo quoted me in What Do Renters Need To Know in A Natural Disaster? It opens,

From hurricanes in the East to wildfires in the West, the past few months have seen an on-going slew of natural disasters in the United States. Fires and floods don’t care whether a property is inhabited by owners or renters. However, most states have laws that  address how landlords and tenants deal with a rental property in the aftermath of a natural disaster.

Renters’ recourse in a natural disaster? Leases and local laws.

Check the lease first

The first source of authority on the obligations of landlords and tenants is found in the lease agreement, which should spell out the terms of what happens in case of a natural disaster. But not all leases clearly address this situation. According to Michael Simkin, managing partner of Simkin & Associates in Los Angeles, in cases where the lease is “burdensome or unfair,” local or state laws will govern what happens.

Landlord and tenant responsibilities vary by state

Every state has different laws regarding landlord and tenant obligations after a natural disaster strikes. Here are examples of answers to common tenant questions from some of the states recovering from recent natural disasters.

Can a lease be terminated if a natural disaster makes a rental property unusable?

California: If a rental property is destroyed in a natural disaster, the lease is automatically cancelled. The landlord must refund the rent for that rental period on a prorated basis.

“Many times, the city can come in and condemn the property and effectively force out tenants in unsafe situations. It is also the landlord’s responsibility to terminate a lease when they have knowledge that their rental property is unusable or unsafe,” notes Monrae English, a partner at Wild, Carter & Tipton in Fresno.

Florida: If the premises are “damaged or destroyed,” the tenant may terminate the rental agreement with written notice and move out immediately.

Louisiana: According to the Louisiana attorney general, if a natural disaster damages a property to the point that it is completely unusable, the lease is terminated automatically.

New York: If a rental becomes unfit for occupancy due to a natural disaster, the tenant may quit the premises and is no longer liable to pay rent. Any rent paid in advance should be returned on a prorated basis, according to David Reiss, law professor at Brooklyn Law School.

Texas: Either the tenant or the landlord can terminate the lease with written notice. Once the lease is canceled, tenants’ obligation to pay rent ceases and they’re entitled to a prorated refund of any rent paid during the time the home was not usable.

If the lease is terminated due to a natural disaster, does the renter get the security deposit back?

California: The landlord must return the security deposit within three weeks of the tenant vacating, with any deductions accounted for in writing. The landlord is not allowed to deduct disaster damage.

Louisiana: The landlord is required to return security deposits within one month, as long as the tenant fulfilled the lease obligations and left a forwarding address, according to Brent Cueria, an attorney with Cueria Law Firm, LLC in New Orleans. The landlord cannot deduct for natural disaster damage.

New York: The security deposit must be returned to the tenant, according to Reiss.

Texas: The security deposit must be refunded.

Selling Yourself When You Have A Broker

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image by Russellprisco

Realtor.com quoted me in Selling Your House Privately If You Have a Listing Agent: OK or a Big N-O? It opens,

So your home is for sale, and you’ve signed a contract with a real estate agent, but you were actually able to nab a buyer through your own efforts. Maybe it was through word of mouth or your aggressive push on Facebook (you should really apologize to your friends for posting so many pictures of your house!), but someone is writing you an offer and really wants to buy your house. Having found a buyer on your own, are you still legally obligated to pay real estate fees or commission? Here’s how to know if you’re on the hook.

Read your listing agreement

In most states, a seller and an agent draw up something called a listing agreement. The listing agreement details the rights and responsibilities of the seller and the broker, and usually outlines the circumstances when a broker is due a commission.

“If it is an open listing or an exclusive agency listing, the seller can sell the property and not have to pay the broker a commission,” says David Reiss, professor of law at Brooklyn Law School
.

Things get tricky if the listing agreement confers an exclusive right to sell. This means the real estate agent has the sole right to sell the property. All offers must go through him or her, and for any sale, you’re obligated to pay the agent the commission spelled out in the contract, according to Marc D. Markel, a board-certified Texas attorney in residential and commercial real estate law. Agents rely on these exclusive listing agreements to avoid putting in what can be months of free work without seeing a payoff. For this reason, the agreement outlines the many ways an agent earns a commission, including what happens if the seller breaches the exclusive agreement.

The loopholes

If the sellers do find a buyer on their own, despite having a contract with an agent, they may be able to negotiate a reduced commission with the agent. But the sellers should be up-front about their potential to find their own buyer when drawing up the exclusive-right-to-sell listing agreement, says Markel. Maybe they know of a friend of a friend who is looking for a house, or they plan on marketing their home on social media.

If the sellers feel as if they are doing all the work, they might also be able to modify the existing agreement and add a termination if the broker doesn’t meet certain obligations, like selling the home within a certain time frame, says Sandy Straley, a real estate agent in Layton, UT. Other obligations for the listing could include organizing open houses, creating and distributing printed materials, and even the posting of videos shot by drones, says Markel.