- Big Players Call On OFHEO

- Convenants and Restrictions

April, 2008

 Convenants and Restrictions may Restrict Options For Your Castle Sunday, Just because your home is your castle doesn't mean you can build a moat! Before purchasing raw land, a home, or a condo check what you can and cannot do with it. Virtually every piece of real property has some type of restriction or covenant that may limit development or usage. Many of these are restrictions imposed by local government. For example, most communities have zoning or building regulations for setbacks, i.e. the distance that must be maintained between any structure and the property lines. If this could spell the end of your dream to add a sunroom off the side or an attached garage, better you know this up front. Communities often restrict home businesses. It is doubtful you would ever get in trouble running a website out of the family room, but a home beauty shop, real estate office, or any business that would generate unusual traffic are verboten in many areas that are residentially zoned. While it isn't common, some communities limit lot coverage or floor area ratio (FAR). This has generally been a restriction on commercial building in order to alleviate congestion and improve street level light and ventilation. However a type of FAR has been invoked recently in an attempt to control mansionization in residential areas. You might want to know this if you envision a big addition or plan to tear down an old structure and rebuilt. These types of restrictions are generally found in local government publications such as the building code or zoning ordinance and a good real estate attorney should be very knowledgeable about them. However, the attorney you hire to review your real estate contracts and certify the title on your new property may not suspect that you plan to add a wing to or open a doggy day care in your home and thus should not be expected to warn you that you can't. Ask specifically if your plans can be accomplished without extensive and expensive legal expense or even at all. Any towns with historic districts the district commissions can be both powerful and vicious. Their mandates may allow them to control all exterior changes to the structure including new windows, siding, even paint color. Sometimes these restrictions apply beyond the actual district to homes that are visible from it. Another type of covenant may be found in your deed. Developers often put in protective covenants when building a subdivision or condominium project. People buying condos are generally aware that there will be restrictions on ownership and these are generally contained in the master deed, individual unit deeds, or both. But subsequent actions by the homeowners association (HOA) might have added others so it is important to check HOA minutes. Condo restrictions commonly include what can be done to or on the exterior of individual units but they may also impact on usage. For example balconies are a frequent target and grills, birdfeeders, or any kind of storage such as for bicycles or strollers may be forbidden. Putting in a greenhouse window or skylight, parking a boat or an RV, or buying a dog may run an owner afoul of the HOA and the latter example can be devastating if the condo owning pet owner is caught off guard. Buyers may not be aware, however, that individual subdivisions often have covenants put in place by the developer. Architectural covenants are common, perhaps requiring minimum square footage for new building or limiting new homes or renovations to a certain style or requiring that all exterior changes be reviewed by an architectural committee. Subdivision covenants can require a timeline for trash barrels to be brought in from the curb or for garage doors can be open, or the kind of fences that can be erected. This is also a place where usage can be regulated, from allowable businesses to the number and type of animals that can be kept, to what can be parked in the driveway and for how long. Developers move on, and in the case of single family developments, the HOA may do the same, no longer enforcing covenants or the additional rules and regulations they may have adopted when the subdivision was young. Under certain conditions a totally dormant HOA can arise from the dead to the dismay and sometimes financial detriment of persons who bought into the area with no knowledge there had been such an entity. True story. In 2004 a woman bought a small vacant lot, one of the last remaining, in a 1960's development of 400 homes. No one seemed to notice the cinderblock foundation being built on the land but everyone noticed when two flatbeds moved down the street, each carrying half of a manufactured home. What ensued must have been worthy of U-Tube. It was the middle of the day but there were enough neighbors around to physically block the flatbeds, the police were called and settled everyone down, and the HOA, last heard from in the 1980s, was reestablished in less than a week. It is now an organized and highly efficient group which has made enormous improvements to the appearance and cohesiveness of the neighborhood. But one new homeowner who had bought property weeks before this happened was told he could not build a home for his sister on a second, non-conforming lot included in his purchase. He subsequently sold at a loss and moved on. The manufactured home violated several town restrictions as well as the subdivision covenants, but once in place it is doubtful anything would have been done. These covenants and restrictions are largely a good thing. They were enacted in the first place to keep communities and neighborhoods attractive and livable (what could be worse than having your new neighbor hauling an engine at 7 a.m. in his make-shift driveway auto repair business). But before you buy, you need to make sure that what you want to do with your property can be done. If you have a plan for immediate changes, even if it seems straightforward, make it a condition of your offer so that you and your attorney have time to check out its permissibility on the site. Make sure your attorney reviews not only town ordinances (a local real estate attorney should know them by heart) but also your deed, any master deed that may apply to your condo or subdivision. As to the HOA that arises like Lazarus, there may be nothing you can do but accept it for its virtues and take the hit.

Feb. 19, 2008 - Study Assesses Possible Risks and Impacts of Mortgage Resets

April, 2008

In the midst of the upheavals surrounding the subprime market a new study has emerged that appears to quantify the problem and, at the same time, offer hope that it isn't as bad as it seems. Christopher L. Cagan, Ph.D., Director of Research and Analysis of First American CoreLogic recently released Mortgage Payment Reset: The Issue and the Impact. Dr. Cagan utilized two large databases to conduct his study: information on over 32 million single-family homes and condominiums and townhouses in 694 counties and 41 states plus Washington, D.C and including over two thirds of the nation's population; and a database consisting of 25.9 million active first mortgages from all fifty states and the District. Each of these loans was originated between 2004 and 2006 and totaled $5.38 trillion. Both data sets are proprietary to First American and its subsidiaries In the midst of the upheavals surrounding the subprime market a new study has emerged that appears to quantify the problem and, at the same time, offer hope that it isn't as bad as it seems. Christopher L. Cagan, Ph.D., Director of Research and Analysis of First American CoreLogic recently released Mortgage Payment Reset: The Issue and the Impact. Dr. Cagan utilized two large databases to conduct his study: information on over 32 million single-family homes and condominiums and townhouses in 694 counties and 41 states plus Washington, D.C and including over two thirds of the nation's population; and a database consisting of 25.9 million active first mortgages from all fifty states and the District. Each of these loans was originated between 2004 and 2006 and totaled $5.38 trillion. Both data sets are proprietary to First American and its subsidiaries The study looks at the possible results as adjustable rate loans adjust and payments on those loans reset to long-term levels from several different perspectives. How much will mortgage payments change on a national basis? How will these reset payments impact on homeowner default and foreclosure? When will the impact actually...impact? How will changes in the real estate market mitigate or magnify the impact of mortgage rate resets? The study analyzed the data using techniques to classify market segments on both a payment and an equity axis. On the payment side loans were quantified as relatively safe or vulnerable under the pressure of mortgage payment reset and according to its initial and fully reset rates to find the proportional increase in monthly payments. Loans were put into a laddered arrangement with adjustments for time and the type of loans. On the equity side a laddered arrangement was established for time and loan type to classify each loan into one of five levels of equity; assigning to each an associated probability of equity risk and level of influence upon possible default. By examining both the risk of reset and the risk of equity Cagan was able to build projections of overall default that arise when borrowers cannot make payments after reset and there is insufficient equity to allow them to sell or refinance the property. The highest reset impact is among those loans with the lowest initial rates; generally the teaser loans with artificially low initial rates often under 4 percent; even as low as 1 percent. The second greatest impact is with market rate adjustable mortgages. Payment increases in this group can be sizeable, but these borrowers more often have the financial capabilities to survive the impact. Sub-prime loans may have resets that are actually proportionally lower than market rate loans but these borrowers are likely to have fewer financial resources or they would not be in the subprime category in the first place. Mortgage payments are expected to change by $42 million per year. This amount, however, represents only 0.36 percent of the $12-trillion dollar economy. Thus, reset will not break the national economy but it will affect the subset of loans subject to adjustment. The study found that the risk of default due to rate reset will result in some 1.1 million foreclosures, but they will be spread out over a total period of six to seven years. This number represents 13 percent of all adjustable-rate mortgages originated for purchase or for refinancing from 2004 to 2006 and will total $326 billion in debt It is further projected that an additional $112 billion will be lost post foreclosure and resale to remaining equity, lenders, and investors, again spread over several years. "These losses represent less than one percent of the total mortgage lending projected for that period. Thus, mortgage payment reset will not break the national economy or the mortgage lending industry." This impact, however, will not be spread evenly. It will be the teaser-rate and sub-prime mortgages originated in the last three years that will bear the brunt of the reset. These loans will begin the reset processes earlier than market-rate adjustable loans and are more likely to default. The study projects that 32 percent of teaser loans will default due to reset as will 12 percent of sub-prime loans while only 7 percent of market rate adjustable rate loans will do so. But these projections of foreclosure are sensitive to changes in home prices. Because the default risk is a combined effect of higher payments and lower equity even a small increase in house prices will lift homes into a positive or near positive equity position and allow potentially defaulting buyers to escape difficulty through refinance or sale. Conversely, a small decrease in housing prices will have the opposite effect, increasing the risk of default. In fact, each one-percent rise in national prices will result in 70,000 fewer homes lost to reset-driven foreclosure while a one-percent fall in prices will cause an additional 70,000 homes to enter foreclosure. The study also looks at remediation. External remediation such as might come from government or another type of outside intervention is likely to happen only after problems begin to occur. Therefore, regulators, lenders, and investors should be aware that teaser-rate and subprime loans will be the "canary in the coalmine." Marketplace remediation has, according to the study, already begun. Borrowers are, on their own refinancing out of risky loans and lenders are working with clients to modify or refinance loans to avoid default. One can assume from the results of the study that rate resets may cause a lot of individual pain and some market discombobulation but that the overall economy is strong enough to withstand the fallout which will represent only a small percentage of the mortgage market.