Yesterday, several mortgage lenders issued three separate “rate sheets” in response to the changing mortgage market. 

It was the fourth time in the last 6 trading days that mortgage lenders issued multiple rate sheets in a day, and continued the trend that started in mid-January.

The yo-yo nature of mortgage rates underscores the importance of making mortgage rate comparisons within a limited time frame. 

Multiple quotes should be gathered with an hour of each other and, even then, it’s prudent to ask your lender: “Has there been a mortgage rate reprice in the last hour?”

The current market volatility is in contrast to the “normal” environment of one-rate-sheet-per-day to which mortgage rate shoppers have been accustomed.  But with the changing economy, we all have to adapt.

Mortgage rate quotes from this morning won’t necessarily be valid this afternoon so if you’re in the market for a home loan, be sure to do your shopping in a limited timeframe and don’t forget to ask about the reprice.

(Image courtesy: City of Peterborough)

A lien is defined as a claim against a property for repayment of a loan or other judgments. 

This sounds like a very boring topic, but it’s one of vital interest to you as an investor. This is because of one very important fact–a lien affects the ability to transfer ownership of a property!

Believe me, it gets very exciting (and unpleasant) when a lien pops up and causes a very profitable deal to fall through. Failure to do due diligence on properties can cost you a lot of money!

So, my advice is to study closely the information in this article. It can keep you on the path of profitability and save you considerable heartache.

Categories of Liens

As I said earlier, liens are a claim against a property. In general, there are two categories of liens—voluntary and involuntary. 

A voluntary lien is a mortgage or deed of trust lien. In other words, when you buy a property, you agree that the lender has a claim on that property until the mortgage or deed of trust is paid in full.

An involuntary lien is the result of legal action. Hopefully, you won’t have to deal with every type of lien I describe below, but, if you do, you’ll be forewarned and forearmed and can deal with the situation in the most effective way possible. 

Types of Liens
Bail bond lien
A bail bond allows a person arrested on criminal charges to be released on bail pending his or her trial. One way to get a bond is to pledge capital in the form of real property (a home, etc.).

Child support payment
When a property owner fails to make court-ordered child support payments, the state government places a lien against the property’s title.

Code enforcement lien
This type of lien occurs when a property owner is fined for failing to correct code violations and fails to pay the resulting fine. The local enforcement board then places a lien on the property’s title.

Corporate franchise lien
This lien can occur within states that have a corporate franchise tax for the right to do business within those states. If a corporation fails to pay the tax, the state places a lien against any corporate real property within the state.

Federal judgment lien
This lien involves debtors who’ve defaulted on federally guaranteed loans (SBA loans, student-guaranteed loans, etc.). When default occurs, a lien is placed against the property title.

Federal tax lien
When a person fails to pay federal income tax, the Internal Revenue Service has the statutory power to place a lien against the title of any real property belonging to that person. Needless to say, you don’t want to fall into the swamp of legal entanglement that comes from dealing with the IRS.

Homeowners’ association lien
This lien occurs when a member of a homeowners’ association fails to pay his or her dues as per the deed to the property. The lien is placed against the property title.

Judgment lien
This type of lien occurs when lawsuits award monetary damages to the plaintiff against the property owner. In this case, a lien is placed against both personal and real property of the defendant until the judgment is made. 

Marital support lien
A lien is placed against a property’s title when a property owner doesn’t pay court-ordered marital support. This can be done on the local, state and federal levels.

Mechanic’s lien
This is a statutory lien which allows architects, contractors, engineers, mechanics, surveyors, etc. to take legal action against a debtor who’s failed to pay for furnished work or material for the improvement of real property. The lien is placed against the real property being worked on.

Mortgage and deed of trust lien
As I mentioned earlier, this is a voluntary lien created when real property is pledged as security for the repayment of the debt.

Municipal lien
A lien is placed against a property’s title when a property owner fails to pay for municipal services (e.g., water, electricity, etc.). 

Public defender lien
When a property owner fails to pay for a court-appointed public defender, governments place a lien against the property title. 

Real property tax lien
When a property owner fails to pay his or her property taxes, liens are placed against the property by local authorities.

State inheritance tax lien
This is a tax levied against the estates of deceased individuals. If the tax is not paid, a lien is placed against the estate for the amount owed. 

Welfare lien
The local, state, and federal governments can place a lien against the property’s title when a property owner fraudulently collects welfare payments.

Sources of Information About Liens

There are many local, state, and federal sources for getting detailed information on liens. In terms of state and local agencies, the names vary with the region, but, in general, you can get information from the following offices: 

Circuit court office
Check for tax liens on state income, state inheritance, state franchise taxes, etc. Also, check for liens against estates of deceased persons, guardianship of minors and incompetents, termination of joint tenancies, etc.

County clerk’s office
Check for the same items as in the circuit court office. 

Country recorder’s office
Look for judgment liens, property tax liens, federal tax liens, etc. Check for conditional sales contracts (contracts for deed, land sales contracts, etc.). Also, look for notices of “lis penden.” This is a notice filed or recorded for the purpose of warning all persons that the title or right to the possession of certain real property is in litigation. The Latin term literally means “suit pending.”

Municipal clerk’s records
Analyze the records for any liens for failure to pay for municipal services like water, sewer, and trash removal services. Also, check for any code enforcement fines.

United States Court
Look for any federal judgments against the title holder. These could include federal tax liens and liens resulting from defaults on FHA, Department of Veterans Affairs (DVA), SBA, and student loans.(see http://www.pacer.psc.uscourts.gov )

Key Point: Always, always perform due diligence in regard to liens! A little investment of research time can make the difference between a nice profit and a financial and legal nightmare!

It’s not often that a mainstream media publication taunts renters into buying homes, but that’s exactly what Smart Money does in its latest issue.

The Smart Money Web site “lead-in” reads 5 (Lame) Excuses for Not Buying a Home.  That’s a forceful title!

It’s unfortunate that renters could feel antagonized by the author’s tone because the article raises very good counter-points to the more popular reasons why renters avoid homeownership.

Owning a home is a serious responsibility and does require commitment.  However, a renter should not feel bullied or hurried into buying because for as much as personal economics are at play, personal emotions are at play, too.  Both deserve respect.

So, renters: Put your blinders on and give the Smart Money article a read.  There’s good advice in there once you get past the author’s bias.

Retail Sales measures total receipts at stores that sell tangible “things” and — aside from weak demand for automobiles and automobile parts — Retail Sales displayed surprising strength in April. 

So much strength, in fact, that many experts are changing their predictions about the U.S. economy’s fate.

Several months ago, most pundits declared that a economic recession was all but inevitable.  Today, a growing number are changing their views.

Not only are stock and credit markets improving, but data such as April’s Retail Sales figures suggest that their fears were overblown.

The takeaway from a story like this is that “experts” do a much better job of interpreting the past than predicting the future.  A person can make an educated guess, but it’s impossible to know what the future holds for the economy, or for housing, or for mortgage rates.

Even when the outcome is “inevitable”.

Source
Recession? Not So Fast, Say Some
Kelly Evans And Justin Lahart
May 14, 2008, The Wall Street Journal Online
http://online.wsj.com/article/SB121068163716188223.html

According to the FBI 2007 Mortgage Fraud Report, more than 46,000 cases of suspected mortgage fraud were reported last year.  This led to bank losses exceeding $813 million.

If you’re looking for reasons why mortgage underwriting is measurably more difficult in 2008 — add “mortgage fraud” to the list.  Lenders now perform extra scrutiny on each home loan application to protect against additional losses on all levels.

Mortgage fraud is a federal crime and exists in two basic varieties:

1. Fraud for Housing — Misrepresentation by a mortgage applicant for purposes of buying a home, usually related to income, assets, or debts.  The applicant intends to repay the loan as agreed.
2. Fraud for Profit — Coordinated misrepresentations by a group of people related to applicants, appraisals, loan documents and relationships between buyer and seller.  The applicant does not intend to repay the loan as agreed.

Although both are illegal, Fraud for Profit is most concerning to law enforcement officials and mortgage lenders.  That’s because Fraud for Profit tends to incorporate multiple loans for multiple homes in a single neighborhood. 

In other words, the bank’s potential loss is larger with Fraud for Profit schemes.

The photo above (from the FBI report) is from a Fraud for Profit home appraisal.  It indicated that the “recently renovated condominium” included Brazilian hardwood, granite countertops, and a value of $275,000. 

Clearly, this is untrue.

Despite increasing 31 percent, mortgage fraud growth slowed in 2007 as law enforcement agencies and mortgage lenders increased their efforts to identify and arrest perpetrators.

(Image courtesy: Federal Bureau of Investigation)

Just like real estate markets differ from town to town, so does the Cost of Living.

Courtesy of CNNMoney, this helpful calculator measures the change in living expenses a person would face when moving between any two major cities in America.

The key expenses compared are:

• Groceries
• Housing
• Utilities
• Transportation
• Healthcare

The comparison data is provided by C2ER which, on its own Web site, charges $4.95 for each city-to-city comparison.

At CNNMoney.com, the exact same C2ER data is licensed and available for free.

With little economic news to influence trading and despite a late-Friday afternoon spike, mortgage rates edged lower last week.

Two weeks ago, when it lowered the Fed Funds Rate by a quarter-percent, the Federal Reserve noted two things:

1. The economy was stabilizing
2. High energy costs threatened inflation

In the days that followed, though, the U.S. dollar strengthened and crude oil prices fell. 

This positive reinforcement of the Fed’s outlook spurred the stock market at the expense of the bond market. 

Mortgage rates rose during that period.

But, starting last Monday, the dollar started to soften and oil touched another all-time high.  At $126 per barrel, crude oil is now close to double its May 12, 2007 price of $69.

High oil prices are inflationary and speak directly to the Federal Reserve’s concerns: Too much inflation can derail a fragile, recovering economy.

The stock market gave up its prior gains last week and that is why we saw mortgage rates improve — it was the unwinding of the economic optimism.

This week, optimism (or pessimism) about the economy will be swayed by a number of factors including Tuesday’s Retail Sales report and Friday’s Consumer Sentiment survey.

The most important data point to watch, though, will be Wednesday’s Consumer Price Index report.  We know we should watch it Ben Bernanke told us to watch it.  Keeping inflation in check, remember, is one of the Fed’s major focal points for the economy.

In addition, this week will feature 14 public speaking appearances by Federal Reserve members.  Expect each speaker to speak plainly about the economy, its future and the Fed’s current rate-cutting cycle.

When Fed speakers stump, markets listen closely so expect mortgage rates to be jumpy all week long.

(Image courtesy: The New York Times)

There are several ways to hold the title to a property. Some are simple; some are complex. Each has its advantages and disadvantages, so you have to decide which one is right for you. In this article, I’ll describe the most common forms of title holding and the advantages and disadvantages of each.

Sole Proprietorship

This is most common form of ownership. All you need is a title of the property vested in your name (or other designated person). A sole proprietorship has several advantages:
·         It’s the easiest and cheapest form of ownership.
·         You have complete control and decision-making power over the business.
·         The sale or transfer of property can take place at your discretion.
·         There are no corporate tax payments.
·         There are minimal legal costs to forming a sole proprietorship.
·         There are few formal business requirements.As with any form of title holding, a sole proprietorship also has its disadvantages:
§         You can be held personally liable for the debts and obligations of the business. This means you have no protection against lawsuits or other claims.
§         All responsibilities and business decisions fall on your shoulders.
§         There are no significant tax advantages.
·         All your income and expenses are reported directly on your personal tax return.
·         In the event you die, there is no favorable tax treatment or avoidance of probate.

Joint Tenancy

This is a form of ownership by two or more individuals together. It’s different from other types of co-ownership in that the surviving joint tenant immediately becomes the owner of the whole property upon the death of the other joint tenant. This is called a “right of survivorship.”  A joint tenancy between a husband and wife is known as a tenancy by the entirety. This form has some characteristics different than other joint tenancies, such as the inability of one joint tenant to sever the ownership and differences in tax treatment. A joint tenancy requires a unity of time, title, interest and possession.“Unity of time” means that all the joint tenants must take title by the same deed at the same time. Each tenant must own an equal interest or percentage of the property. So, if you have two joint tenants, they each own 50%; three joint tenants 331/3%; and so forth. If the percentage or interest is unequal, then it’s not a joint tenancy. By law, each joint tenant is entitled to the right of possession and can’t be excluded by the others. A judgment lien or bankruptcy can terminate a joint tenancy. A new joint tenant can be added by executing a new deed. Here are the advantages of a joint tenancy: 

• You get a stepped-up basis on your deceased joint tenant’s portion of the property. “Stepped up” means that the taxable basis is increased for the portion of the property owned by the deceased joint tenant to the current market value at the time of death. This means that the surviving joint tenants may be able to sell the property with much lower taxes.
• Married couples often hold title to investment properties in a joint tenancy. If one spouse dies, this can result in a step up in basis to the fair market value at the time of death rather than just a step up for the portion owned by the deceased joint tenant. Laws on this subject vary from state to state and may include additional options.

 There are also disadvantages to a joint tenancy:
·         The co-owners may disagree or quarrel. If they do disagree, an expensive and time consuming law suit may be required for the original owner to exercise his or her intentions for the asset.
·         If an asset is owned prior to marriage, the original owner may lose part of the asset in a divorce.
·         A jointly owned asset will be subject to judgments against every owner and may be lost in the bankruptcy of any owner.
·         The financial management advantages of trusts are eliminated, especially where aged parents or minor children are involved, as are the possible tax-savings features of trusts and estates.
·         Assets may not be available to the executor of a deceased joint owner’s estate. In such a situation, it may then be necessary to sell other assets, possibly at a loss, in order to meet tax payments or other cash needs to settle the affairs of the deceased.
·         The one who originally owned the property, and subsequently places it in a joint tenancy, is no longer the sole owner.
·         If the original owner later desires to dispose of the property, in many cases he or she can sell only his or her part interest unless the other joint tenants agree and cooperate.
·         If both joint owners die in a common accident or disaster and it cannot be determined who died first, serious legal problems and an increase in the cost of probate may result.
·         If a conservator is appointed for the original owner, the probate court’s authority may be required to use the asset for that owner, increasing the cost of the conservatorship.
·         If minors or legally disabled adults are involved, expensive conservatorship proceedings may be necessary.

Tenancy in Common

This is an arrangement in which several owners each own a stated portion or share of the property. It has the following advantages:

• Each owner can own a different percentage, can take title at any time, and can sell his or her interest at any time.
• If you’re an owner, you also have complete control over your part of the property and can sell, bequeath or mortgage your interest as you decide without any need for permission of the others.
• Upon your death, your share becomes part of your estate, and you can will it as you see fit.

 Here are the disadvantages:

• If another owner dies, you may find that he or she has left their interest to someone you dislike or can’t get along with.
• Another owner can sell or borrow against his or her property.  This can create conflicts.
• Financial difficulties of another owner or owners can badly affect your interest in the property.
• If an owner had a judgment leveled against him or her, it could lead to foreclosure on their interest in the property.
• Or a bankruptcy proceeding could order the forced sale of the property to satisfy creditors, unless you and the other owners are willing to pay off the creditors and buy out the owner in question.
• Different owners may have different plans for the property.  This can lead to strife among the tenants in common. Some may want borrow money using the property as collateral; others may want to sell the property, etc. If no one can agree, a business feud can erupt into legal action and the resulting nastiness and expense.

Partnerships

As the name suggests, partnerships consist of two or more partners who join together to acquire, operate and hold real estate. It’s an effective way of pooling capital and talent. A key feature of a real estate partnership is that the investors don’t actually have the title or ownership directly in acquired properties. Instead, they own a partnership interest. Partnerships usually take two forms—general and limited.

General partnerships

In this setup, each partner possesses the right to fully participate in property management and operations. General partnerships have the following advantages:

• They’re easy to set up and maintain. You don’t have to register with your state and pay fees, as you do to establish a corporation or limited liability company (LLC).
• You can file income tax returns with relative ease. This is because a general partnership is normally a “pass through” tax entity. This means the partners, not the partnership, are taxed.
• Unlike a regular corporation, there’s no need to file separate tax returns for the corporate entity and its owners.
• General partnerships offer flexibility. Partners are able to set their responsibilities and benefits as they see fit or as the needs of the business dictate. The flexibility extends to distribution of profits and losses. So, for example, an individual partner can reap higher profits for taking on more financial risk.
• A partnership is considered a “discrete’ asset. Because of this, it can be transferred to other people, heirs, or estates unlike a sole proprietorship. Transference is usually limited by the terms of the partnership agreement.

 There’s one primary disadvantage of general partnerships:

• One business-related act of a partner can make all partners legally liable for that act. So it’s important that you enter into partnerships only with people you trust. Then back up that trust with a written partnership agreement that establishes the following: each partner’s share of profits or losses, day-to-day duties, and what happens if one partner dies or retires.

Limited partnerships

This ownership form differs from a general partnership in the role and responsibilities of the partners. It consists of one or more general partners and one or more limited partners. Typically, the general partners run the operations of the business while the limited partners provide capital and help arrange financing while not taking an active role in running the business. In return for their investment, they receive a share of the profits for their involvement as limited partners.  Statutes regarding limited partnerships vary by state so you’ll have to check with the appropriate government agency for a definition of the obligations and responsibilities of partners in this type of business arrangement. The partnership is required to file with the secretary of state and must also file various reports. A key feature of a limited partnership agreement lies in the area of liability, which falls on the general partners, and typically not on the limited partners. For this reason, individuals are reluctant to be general partners. The general partner of a limited partnership can itself be a corporation or LLC to lessen liability issues. However, this doesn’t mean that a limited partner can’t be part of, or have a vote in, major decisions that affect the partnership. Here are the advantages of a limited partnership:

• As a limited partner, you can invest even though you don’t have expertise or the time to devote to being a hands-on part of the business.
• You can take on the financial risk but not the liability risk.
• Partners are able to allocate profits, losses and gains as they see fit, regardless of the equity interest of a specific partner, subject to compliance with tax laws. The general partners prepare an IRS Form 1065 for the partnership. Each partner then prepares his or her own tax form listing all profits, losses and depreciations.
• It’s a “pass-through” operation with profits passing through to the partners who then include their allocated income on their personal tax returns.
• It’s much easier to attract investors as limited partners.
• It allows general partners to use their expertise, make key decisions and manage the business.
• Limited partners can leave the business or be replaced without the need for the limited partnership to be dissolved.

 Disadvantages of a limited partnership include the following:

• Filings, formalities and state requirements mean a lot of paperwork.
• If you’re a general partner, you assume personal liability.

Limited Liability Companies (LLCs)

This is hybrid form of ownership that combines the properties of a corporation and partnership. It has several advantages:

• It provides the flexibility and tax advantages of a partnership while maintaining the limited-liability benefits of a corporation.
• Like a corporation, an LLC is a separate legal entity that limits the liability of its members. However, it has the tax benefits of a partnership.
• LLCs are also free of many of the legal requirements that govern corporations (including annual reports, director meetings, shareholder requirements and so on).
• LLCs are a “pass through” tax entity, which means company profits and losses are passed through the business and taxed solely on the members’ individual tax returns.
• Members can hire a management group to run the LLC. This group can consist of members, nonmembers, or a combination.
• Members can split profits and losses any way they wish.
• Dividend distribution is nontaxable, unlike an S corporation, where dividends are taxable.
• An unlimited number of members may join a single LLC, and most states allow single-member LLCs.
• An LLC may affiliate with other businesses, unlike an S corporation, where that ability is limited.

 Disadvantages of LLCs include the following:

• Costs can be greater. Some states impose income or franchise taxes on LLCs or require LLCs to pay annual fees to operate in that state.
• Lack of legal precedent. Because LLCs have existed as legal business entities only since 1996, there’s not much legal precedent available to help owners predict how legal disputes may affect their businesses.
• Every state has its own requirements so check with an attorney who specializes in LLCs before deciding to form or join a limited liability corporation.

Corporations

Corporations are a legal entity owned one or more shareholders. They can be private or public like Ford, Microsoft, Federal Express, etc. As a real estate investor, you can create your own private or closely held corporation by filing articles of incorporation and bylaws with the appropriate state agency. Requirements for incorporation will vary from state to state. The primary advantage (among others) is limited liability for share holders. Since the owners of a corporation actually own stock and not the real estate, the most shareholders can lose is their equity investment. The disadvantage of a corporation relates to initial expenses:

• It costs money to have an attorney draw up the organizational documents.
• There are also costs to cover extensive reporting requirements at state and federal levels for maintaining corporate status.
• If these requirements aren’t meant or if there’s lack of capitalization, creditors or lien holders can seek personal liability from individual shareholders.

 There are two types of corporations:

C corporations

One advantage of this type of corporation is that it has continuity (it continues in the event a shareholder dies). It has two disadvantages:

• The major disadvantage of a C corporation is that it’s taxed twice–once when the business makes a profit and then a second time when those profits are distributed to shareholders.
• Another disadvantage is that if the corporation has losses, it has to carry them over to the next tax year because the shareholders can’t use C corporation losses on their personal returns.

S corporations

This type of corporation has the advantage of avoiding double taxation by passing all tax liabilities onto shareholders. As such, S corporations are only taxed once. However, they’re seldom used in real estate ownership because their primary disadvantage is that the liquidation of an S corporation is a taxable event. This means that even if the shareholders agree to an equitable distribution of assets, the Internal Revenue Service will consider the liquidation as taxable. The shareholders will then be forced to pay capital gains taxes and possibly sell some of the assets.  In addition, there’s the issue of material participation. This is an IRS term that indicates whether an investor worked and was involved in a business activity on a regular basis. It has a series of tests to determine material participation which affects the tax benefits you may or may not receive. Generally speaking, incorporation is an expensive choice for holding real estate assets if you’re an average real estate investor. You must be willing to pay for the professional, legal and accounting advice not only at the beginning but also on a continual basis. These expenses can mount up. You also have to deal with the hassle of ongoing technical requirements and the possible expensive possibility of double taxation. 

Key Point: Know your investment objectives and state and federal laws concerning title holding; then, select the form that best meets your investment needs.

According to the Bureau of Labor Statistics, the U.S. economy shed 20,000 jobs in April 2008.  The labor force now counts at 146 million people as employed.

Normally, a loss of jobs would foretell economic weakness and would be a good thing for mortgage rate shoppers.  Today, though, traders had been expecting a larger loss of 70,000 jobs.

In other words, today’s jobs report looks surprisingly strong. 

The stock market is now rallying on optimism that “the worst is over” for the U.S. economy and evidence supporting the Federal Reserve’s remarks that its rate cuts were starting to take hold. 

The stock market’s gains are the bond market’s losses.

Mortgage rates are up today because the cash that is fueling the stock market is coming from the sale of all types of bonds — including mortgage bonds. 

This is unwelcome news for people doing mortgage comparisons today, or buying a home this weekend.

In general, interest rates on adjustable-rate mortgages are increasing more than on fixed-rate mortgages.

The Federal Open Market Committee adjourns from its two-day meeting at 2:15 P.M. ET today. 

Markets expect the Fed to lower the Fed Funds Rate by 0.250 percent in its press release but it’s not what the Fed does that matters to economy right now. 

It’s what the Fed says.

If the Fed states that future rate cuts are needed to stabilize the economy, mortgage rates should rise because rate cuts tend to create inflation.  Inflation is the enemy of mortgage rates.

By contrast, if the Fed states that it will “pause” before making additional rate cuts (or hikes), mortgage rates should fall.

We’ll dissect the message in full late this afternoon but the most important message to remember is this:

The Federal Reserve does not directly control mortgage rates. 

The Fed only controls the Fed Funds Rate, the interest rate on a very specific type of loan made from one bank to another.  The Fed Funds Rate, however, is directly related to a consumer-focused interest rate called Prime Rate.

Prime Rate is the basis of interest rates on credit cards and home equity lines of credit.

If the Federal Open Market Committee votes to lower the Fed Funds Rate by a quarter-percent, it means that the interest rate on Americans’ collective credit card and home equity line debt will fall by a quarter-percent, too.