This is a guest post by Alex Summers.
Considering the state of the economy and the high number of twenty somethings struggling to find their professional place in the world, a large number of parents are opting to purchase their children homes. Instead of giving their kids a large inheritance years down the road, parents are choosing to pay a down payment or to buy a home for their kids to help them get off on the right foot during their young adulthood.
Reverse Mortgages have been in the headlines for the past few months. Seniors are using reverse mortgages to repair diminished nest eggs, as they try to stave off the damaging effects of this major recession:
Seniors’ portfolios hammered by the stock market decline are getting a boost from reverse mortgages. Such mortgages allow seniors to get monthly payments based on the equity value in their homes – the amount that the value of the home exceeds any mortgage on the home.
Aging has its compensations, at least in figuring a reverse mortgage payout. The older the homeowner, the better, because the payout increases with the homeowner’s age on the date the mortgage begins. For homeowners younger than 70, the payout rate usually will be unattractive. But as age increases to 70 and beyond, the payout rate rises markedly, especially for larger loan amounts.
However the headline this morning states that Reverse Mortgages Leave Seniors at Risk according to the Government Accountability Office (GAO). Meanwhile the Department of Housing and Urban Development (HUD), which usually backs these reverse mortgages, defends such programs’ safeguards.
While these reverse mortgage loans have become more attractive to seniors as the economy has soured and housing values have dropped, reverse mortgages are complex. That is why the FHA has long required that the seniors take part in HUD-approved counseling sessions before these loans are processed. The GAO report concluded that HUD “lacks effective controls” over the counseling programs.
Seniors should therefore consider carefully the reverse mortgage rates before entering into such a loan arrangement. They should consider all eventualities that might arise and use a reverse mortgage calculator to estimate what they might be faced with in the future. It could also be very worthwhile to consider using the AARP HUD Reverse Mortgage Counseling services too.
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Any one in the US or the UK will wonder why such a post is necessary. They all automatically have their mortgage interest payments tax deductible. Not so in Canada. However with a little work, even in Canada you may find that Tax deductible mortgages are worth the hassle. According to Jonathan Chevreau, Financial Post, the Canada Revenue Agency is unlikely to challenge if they are done properly.
Why it should take such effort is unclear. It is accomplished by applying the so-called Smith Manoeuvre, popularized first in British Columbia by Fraser Smith in a book of the same name. It has now spread across the country, apart from Quebec. Smith developed and packaged a variation on the standard tax-permissible strategy of selling off non-registered securities; using the proceeds to pay off the mortgage; then reborrowing to repurchase the securities, thereby creating legally sanctioned tax-deductible debt.
A major competitor to Smith, TDMP or Tax Deductible Mortgage Plan, has been named one of Canada’s fastest-growing companies by Profit magazine. It ranked 88th on the 21st annual Profit 100 ranking.
TDMP has a $39 per month fee charged to homeowners, a fee which is itself tax deductible. For this, TDMP takes on all the back-office work and saves the homeowner the bother of having to move the money around every month in order to make their mortgage payments and purchase securities. The fee is considered a carrying charge for administration of income from investments.
Why Canada does not follow the lead of the UK and the US on tax deductible mortgages is unclear. Such an approach does help the residential housing construction market, which can create large numbers of jobs. However until it does, the TDMP approach seems a good way to proceed.
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According to the President, the housing plan his administration has launched has contributed to a spike in the number of homeowners who are refinancing their mortgages. However critics question his statement that mortgage refinancing can be equivalent to tax cuts.
Tax analysts told FOXNews.com that lower mortgage rates actually reduces tax savings.
“While there could be overall savings by refinancing and lower monthly payments, there also could be reduced tax benefits as less interest is paid,” said Gil Charney, an analyst for The Tax Institute at H&R Block.
For those with significant equity in their home, refinancing may be a way they can ease the budget restrictions caused by the recession. Mortgages are one way in which you can get immediate funds that are repaid over a long period of time. There are many alternatives to consider but by comparing refinance mortgage rates together with all the attendant terms and conditions, a better mortgage package may be obtained.
The US Government website, makinghomeaffordable.gov, provides full information on what is possible through refinancing in making your home affordable. In particular, there is an evaluation form to determine whether the homeowner may be eligible for refinancing. If the owner is current on their mortgage payments but unable to refinance to a lower interest rate because their home value has decreased, nevertheless they may be able to refinance. It is certainly something to check out.
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With all the headlines on the somewhat questionable behavior of bankers, particularly in the US and the UK, you might wonder where on earth you might find a good solid bank you can trust.
Googling trust, bankers and bonuses you tend to turn up items like that in The Herald in the UK entitled Betraying trust, blighting lives, bagging bonuses. That is certainly not an article to give you comfort.
The City of Glasgow Bank debacle of October, 1878, was a catastrophe for Scotland, wiping out 10% of the country’s banking capital at a stroke. In an age of unlimited liability, it also destroyed shareholders.
…
Yet as the writer James Buchan described, the City’s directors had “appeared to be sound men, of a certain age, severe and whiskery of face and sober of dress, pillars of their kirks and Masonic lodges”. On paper, their bank was solid. Paper was its only foundation.
As one of the Vancouver Sun op-ed items this morning signals Wall Street shenanigans put spotlight on bogus bonuses.
But like any good thing, bonus systems are vulnerable to misuse and outright abuse. In 2008, while the global economy was heading south in a hurry, Wall Street bankers and investors pocketed $20 billion in these little extras. Some of this money will come from American taxpayers, who footed the bill for financial industry bailouts.
…The best employees are those who understand the importance of customer satisfaction and also the importance of good judgment and ethical behaviour.
Thankfully there are still apparently some good solid banks that deserve your trust. The Washington Post suggested there were Big Lessons in Finance From a Little Bank You’ve Never Heard Of.
Kim Price is the president of Citizens South, a 104-year-old community bank with about $800 million in assets, 15 offices and 150 employees in Gastonia, N.C. Citizens is among the stronger and more conservative banks in the Charlotte market.
Price came up with the ingenious idea that Citizens would use its federal bailout money to offer below-market mortgage rates with no closing costs to consumers who would buy a house, or a house lot, from builders and developers who had borrowed money from Citizens. Last week, Citizens launched its $20.5 million program, in collaboration with its builder-developer customers, offering 30-year loans with an initial teaser rate of 3.5 percent for the first two years, rising to a fixed 5.5 percent rate (the current market rate) for the balance of the loan.
Citizens wins because it lowers the risk that it will have to write off even more of its commercial loans while taking a modest step to help stimulate the local economy. In truth, Citizens won’t literally be using its federal bailout money to make these mortgage loans. What each dollar of government capital does for Citizens, or any other bank, is give it the ability to go out and borrow another $9 from depositors or the Federal Home Loan Bank at a rate of 2.5 percent or less.
Now that is a good solid bank you can trust, which is thinking of how to best cover your banking needs. What more could you could wish for.
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Minnesota AG, lawmakers are targeting reverse mortgages.
Minnesota Attorney General Lori Swanson and DFL lawmakers are introducing legislation they say will protect senior citizens from aggressive lenders pushing reverse mortgages on their homes.
Reverse mortgages are certainly something that should not be considered lightly. Pam MacKenzie used to be for them but now questions them. She points out some of the pitfalls.
A reverse mortgage is available to senior citizens, 62 years old or older, and the bank lends the senior money against the equity in their home. The loan doesn’t have to be repaid until the seniors move out. If they die before moving out, the heirs pay off the mortgage out of the estate.
…
My advice is to research your options very carefully before you take out a reverse mortgage. It’s okay to spend your heirs’ inheritance, but it’s not okay to waste your equity and net worth on frivolous spending. If people in your family tend to live a long time, don’t start borrowing money on a reverse mortgage when you hit 62. Your equity will be long gone when you hit your 80s and 90s and need that equity to pay for long-term care.
Her wise advice is to consult someone who understands money and have that person review your options with you before you sign on the dotted line. Since some seniors have lost their homes through foreclosure on reverse mortgages, it is not something to enter into without a great deal of thought.
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Predatory lending is a term more often heard in the US, frequently in connection with predatory lending practices in the student loan industry. However it can affect seniors even more disastrously.
Predatory lending comes in a number of different forms:
It is the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against. In addition to predatory mortgage loans, other types of lending sometimes referred to as predatory include payday loans, credit cards or other forms of consumer debt, and overdraft loans, when the interest rates are considered unreasonably high.
Seniors often bear the brunt of such predatory lending practices. The reason why seniors are put at risk is that they are often the targets of predatory mortgage lending.
A particularly ugly aspect of predatory lending is the high incidence of foreclosure on the homes of senior citizens. While at first glance this might seem particularly egregious simply because senior citizens are more vulnerable, have fewer options for rebuilding after losses, and may be losing what they’ve worked all their lives for, a closer look reveals something even more disturbing.
First, few senior citizens are purchasing their first homes with these adjustable rate or other sub-prime mortgage loans. While younger people may enter into questionable mortgage loans in order to be able to purchase a home they would not otherwise be able to finance, senior citizens are much more likely to be refinancing homes they’ve made payments on for years. That means they’re not only losing long-time homes, but that existing equity is being stripped out of the home by the mortgage lender.
According to Consumer Affairs, senior citizens are disproportionately targeted by predatory lenders, and often convinced to take out loans much larger than they need-in some cases, loans in excess of the equity in the home, or even of its total value. With no remaining equity, any minor setback can leave the homeowner without options.
In Canada, the British Columbia Law Institute has a current project on predatory lending issues in Canada.
Predatory lending is closely tied to the concept of subprime mortgage lending, which is the practice of making loans to borrowers who do not qualify for the best market interest rates. In the United States, the expansion in subprime mortgage lending led to a rise in predatory lending. This project examines whether this pattern could repeat itself in Canada and, if it did, whether our laws would be able to assist victims of predatory lending.
The Canadian Center for Elder Law, which is part of the British Columbia Law Institute, may well eventually have useful outputs on predatory lending as it affects seniors.
It may be expected that predatory lending is having an even more damaging effect now given the general state of the economy. One hopes that the current laws are sufficiently strong to prevent the worst excesses.
Footnote: If you are interested in books on Mortgages, then why not visit the Mortgages section of the Money Bookstore.
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The Vancouver Sun proclaims that a pensioner gets stolen house back but that is perhaps misleading. To be precise it is only the house title that has been restored. To get to this point has cost Norman Gettel $10,000-and-counting in legal fees.
The Land Title and Survey Authority of British Columbia wrote: “Further to your story this summer about Norman Gettel, we are pleased to advise you that Mr. Gettel’s land title has been restored in his name.” So it has taken over six months to correct this since the Vancouver Sun headlined the story and almost a year since the LTSA was advised there was a problem.
According to the property records, Gettel sold his property, assessed at $600,000-plus in the summer of 2007, and the buyer had also immediately put a $400,000 mortgage from CIBC on it. The buyer never showed up to claim the property. The identity cards used to get the property transferred included a B.C. driver’s licence and a B.C. CareCard.
Gettel had no idea that his property had been transferred to someone else until his annual property assessment didn’t arrive in the mail. When he went to the land titles office, he was told he didn’t own the property any more.
The nightmare isn’t over for Gettel with a $400,000 mortgage against the house and his legal fees so far of $10,000. He expects the provincial Land Title Office will be dealing with the CIBC which holds the mortgage. I hope he will not have to get involved in the mortgage case as Stan Rule describes in another case of Land Title Fraud.
Dave Watt, president of the Real Estate Board of Greater Vancouver wrote to the Vancouver Sun back in the summer of 2008 pointing out re Title Fraud in B.C. that title insurance protects the lending institution, not the homeowner. He said that REALTORS® have a high level of confidence in the land title system.
That may be so, but it has still cost Mr. Gettel a great deal of time, money and heartache to get this title fraud corrected. It should be easier than this. It is perhaps the most grievous example of what can happen in an identity theft situation.
Footnote: If you are interested in books on Real Estate, then why not visit the Real Estate section of the Money Bookstore.
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100 years after first state pension – and 2.5m older people still live in poverty. That is the headline in the latest issue of the Mature Times. If you are unfamiliar with the Mature Times, it is well worth a read. For example there is a Guide To Retirement available on the website.
The figures it quotes on pensioner poverty are most distressing.
In 2007/8 the number of pensioners living below the official poverty line of £151 a week (60% of median population income before housing costs) rose by 300,000 to 2.5m.
Between 1997 and 2006, the number of people living in severe poverty – defined as living on less than 40% of median population income – increased by 600,000. The poorest quarter of pensioner households saw their incomes rise by less than 1% last year, well below inflation. The poorest single pensioners saw their real incomes drop by 4%.
About two thirds of those pensioners living in poverty are women.
Joe Harris, National Pensioners Convention general secretary is quoted as follow:
We owe the original pension pioneers a great debt of gratitude, but they would be turning in their graves if they knew that after 100 years, 1 in 4 pensioners
was still living in poverty. In fact, today’s state pension is worth even less in relation to average wages than it was in 1908, and next year’s increase in the state pension will be a measly £4.55 a week – at a time when millions of older people will be faced with the unenviable dilemma of trying to heat their homes or eat properly.
The National Pensioners Convention (NPC) and over 15 individual trade unions in October 2008 joined together to call for a higher basic state pension for the over 60s of today and tomorrow.
They stressed that a decent state pension is an issue not just for today’s pensioners, but for future generations as well. This point has taken on extra significance given the recent financial crisis and the weakness of private pensions which have recently lost £250bn in value – adversely affecting up to 5m people who are about to retire.
For decades, the policy of successive governments has been to rely on means-tested benefits for existing pensioners and good occupational pension schemes for future generations, as a way of avoiding paying a decent state pension. But this approach is unravelling: means-testing remains unpopular and ineffective at getting money to the poorest, and many decent company pensions are being replaced by insecure money-purchase schemes. Billions of pounds have been wiped off private pension funds in recent weeks – and up to nine million workers now face an insecure retirement.
Unfortunately the UK Labour government seems unwilling to address this issue. The opposition has been more vocal.
Jenny Willott, Liberal Democrat Shadow Work and Pensions Secretary, spoke out on Pensioner Poverty during a Parliamentary debate on 4th June. She attacked the Government’s treatment of pensioners. Ms Willott called for the immediate restoration of the link between pensions and earnings.
The Conservatives proclaimed that Pensioners are to lose nearly £100.
Within the EU only pensioners in Cyprus, Spain and Latvia are more likely to fall into poverty than in the UK. By official measures there are now some 2.5 million pensioners in the UK living in poverty.
Labour’s increased use of complex means testing of pensioners has resulted in reduced take-up of benefits. Between 1.2 and 1.8 million pensioners in the UK failed to take up their entitlement of pension credit last year. Up to 1.2 million of those were living in poverty.
This Government is tired, weak and hurting the most vulnerable people in the country with its incoherent and counter-productive policies.
Unfortunately pensioners in poverty do not have the powerful lobbyists that other sectors of the economy have. It is critical that we all speak up for them.
Realism might be thought to be an essential property of the Real Estate market, given the similarity in the word roots. However Marketing people often believe their own hype so starry-eyed optimism is often more prevalent than hard-nosed realism. .. except in an economy like that we are seeing now. Hopefully we all learn lessons that stick from the current tragedies all around us.
That certainly is why Washington policy makers are now Taming inflated home appraisals.
When home prices are soaring, appraisers, often pressured by loan officers and mortgage brokers, keep hyping home values. Homebuyers wind up paying more, and the exotic mortgage products needed to finance their purchases subsequently implode setting off the kind of financial and economic turmoil the nation is facing today.
Now, the Federal Housing Finance Agency (FHFA), the government agency created to oversee Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), has announced a plan to curb the influence that loan originators exert on appraisers to overvalue homes. A new Home Valuation Code of Conduct, which will take effect this May, is an attempt to improve the reliability of appraisals for mortgages sold to the two companies. The guidelines prohibit lenders from coercing, extorting, colluding with, intimidating or bribing appraisers into making inaccurate appraisals.
Bringing back realism is long over-due. It applies not only in the real estate market but in every other aspect of budgeting and financial planning. Out with the starry eyes, in with the hard noses. It couldn’t be a better time.
Footnote: If you are interested in books on Real Estate, then why not visit the Real Estate section of the Money Bookstore.
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