QUESTION: I am a puzzled real estate broker. What is going on in the upside-down mortgage market? In our town, fixed-rate mortgages are a little over 11%, whereas adjustable-rate mortgages, after the initial six-month teaser rate around 9%, jump to almost 11%. I thought adjustables were supposed to be cheaper than fixed-rate mortgages, but that doesn't seem to be happening. Also, most of my home buyers who took adjustables preferred the cost of funds index, but now all that seems to be available are adjustables tied to the volatile Treasury bill index.
ANSWER: As you know, local savings and loans, banks and mortgage brokers have been selling most of the mortgages they originate to the secondary mortgage market, such as Fannie Mae and Freddie Mac. But, in the last few months, these major buyers have discovered the cost of funds index is moving very slowly upward, whereas the Treasury bill index changes much faster to reflect rising interest rates.
For example, in the last year the cost of funds index has risen only about 0.5% whereas the Treasury bill index has gone up around 3%. Adjustable-rate mortgage borrowers with loans tied to the cost of funds index (as I have been recommending) need not worry about massive monthly payment increases. But, ARM borrowers whose loans are tied to Treasury bill indexes are often shocked to receive big payment increases.
The result is that lenders have suddenly switched from originating ARMs tied to the cost of funds index to ARMs tied to the faster rising Treasury bill indexed loans.
To complicate matters, a few adventurous ARM lenders now offer loans tied to the LIBOR index, the London interbank rate, which has nothing to do with U.S. interest rates and is not understandable to most borrowers.
Should Option on Land Be Recorded?
Q: I have an opportunity to buy an option on land that I think I can get rezoned for a shopping center. The option price is only $5,000. Do you think I should record the option?
A: Yes. Since you are not living on the property, an unscrupulous owner might sell to another buyer who would not have to honor your option if he was not aware of it. Recording the option, or a memorandum of it, gives constructive notice of your option rights to anyone dealing with that property. Ask your attorney to explain further.
Personal Property in Sale Should Be Listed
Q: At a Sunday open house, the realty agent handed us a listing information sheet about the home. It said stove, refrigerator, washer, dryer, barbecue and drapes were included. After some heated negotiation, we bought the house. But, when we received the keys we were shocked to discover the house was stripped bare. The realty agent refuses to help us get the items we thought were included because they weren't listed on the purchase contract that we signed. However, we presumed they were included since they were on the information sheet. Do you think we are entitled to these items?
A: Yes. Shame on that realty agent for failing to be certain that the personal property items on the information sheet were not listed on the sales contract.
The general rule is that a real estate sale does not include personal property on the premises. From a strictly contractual viewpoint, the seller was correct in removing the personal property because it was not included in the sales agreement. However, as novice buyers, you were relying on the truth of the information sheet and the honesty of the agent to deliver what was promised.
I suggest you try to settle the matter with the agent's broker, but if that is not possible, don't hesitate to go to court. Consult a real estate attorney for further details.
Ask the Right Questions When Buying a Home
Q: My husband and I want to buy a home in an elegant, established neighborhood where the schools are top quality. However, the homes are about 30 years old and some have serious problems, such as the need for new plumbing and faulty additions built without permits. What is the best way to avoid being "taken" by the seller and the realty agent?
A: Just ask the right questions of the seller or the realty agent. My favorite is: "What are the drawbacks of this house?" To be absolutely certain you have been told about any defects, when you make a written purchase offer, make sure it includes a phrase such as: "Seller warrants all material defects in this property have been disclosed in writing to the buyer." If the seller or agent failed to disclose a problem, then you have a basis for legal action later. Please consult your attorney for further details.
Home Seller Should Limit Repair Costs
Q: I am trying to sell my home, but my real estate agent isn't much help, so I am turning to you for advice. Our home is in an out-of-the-way location and is rather unusual, so it is not easy to sell.