Foreclosure delays; HAMP (Home Affordable Modification Program) review;

From Bloomberg.com comes the story that the Obama administration is considering a ban on mortgage foreclosures pending review by the federal government's Home Affordable Modification Program. Such a plan would create lengthy delays in the foreclosure process (even before the bank could get to the point of encountering the normal delays resulting from bankruptcy, the usual sheriff sale process, PHFA, etc.).

The Treasury Department was quick to point out that nothing has been finalized, but even the beginning of discussion of such a program will have a negative impact on lending. Borrowers and investors have already complained that lending standards have tightened tremendously over the past few years. Serious discussion of any plan that would delay and increase the cost of foreclosure will make lenders more skittish about lending in the first place.

Flood potential - March 2010; Pittsburgh; real estate implications; St. Patrick's Day Flood

No discussion of real estate would be complete without a warning about the potential for flooding at the end of a winter that has already brought near record snowfall. The Pittsburgh Post-Gazette warns of the potential for March flooding near Pittsburgh if predicted additional snowstorms arrive. Such an outcome, while far from certain, would have implications continuing far longer than the immediate damage and danger. Local economies, disclosures, misrepresentations, insurance coverage, income streams, appraisals and numerous other aspects would be forever altered by such a cataclysmic event.

If you are buying real estate in the next few weeks, pay particular attention to whether the property is in a flood plain. If you are uncertain about the possibility of flooding, buy flood insurance if you can. Most importantly, make sure the seller disclosure is as clearly and fully completed as possible. Sellers tend to be vague if there is something to hide (especially in the current fraud-prone market conditions). Pay particular attention to all explanations under section 16 (b) of the PAR disclosure form.

Buyers should ask their settlement attorneys now what options they will have if their newly purchased basements take on water during the March/April thaw. Sellers should know that the more they disclose now (before settlement), the fewer remedies the buyers will have in court later on.

According to the Post-Gazette, the worst flood to hit Pittsburgh in the last 100 years occurred in March 1936 ("The St. Patrick's Day flood"). Attached is newsreel footage from the same flood in Johnstown.




In Harrisburg, the most recent winter-related severe flooding happened in January 1996, when ice flows on the Susquehanna River destroyed the Walnut Street bridge.
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Update - 3-14-10 - Click here to find out how the flood situation turned out in Central Pennsylvania.

Real estate title defects in Pennsylvania; Buying property subject to title defects.

I wrote earlier about buyers that purchase real estate with title defects because a settlement company cut corners. Some settlement companies, instead of fixing title defects resulting from tax sales, simply delay settlement for a year:

Keep in mind that the "one year period" has no legal significance. Title defects resulting from a tax sale do not go away after one year. If a buyer purchases a property under these conditions, the buyer will have difficulty selling the property, regardless of the fact that he used a corner-cutting settlement company to do an end run around the title defects.

The same reasoning applies to other title defects, like unpaid judgments, tax liens or unsatisfied mortgages. If you somehow buy a property with such a defect, even if you have purchased title insurance from a corner-cutting settlement company, you will suffer consequences when you try to sell the property.

• Your buyer will refuse to complete the purchase until the defect is cured.
• The settlement company through which you purchased the property may be out of business due to an excess of claims because of similar problems.
• The settlement company through which you purchased the property might have excluded this defect from coverage without you realizing it.

Even if your settlement company covers your defect, you may find yourself in the middle of litigation or negotiation instead of collecting proceeds from a clean and simple settlement.

The point is, when you buy property, make sure any defects are addressed either by obtaining the proper releases from the parties holding the liens or by obtaining an "indemnification" from a nationally based title insurance company. Solve these problems before you complete settlement on your purchase.

I will write more about "indemnification" at a later date.

Harrisburg, PA; Chapter 9 as an alternative to tax increases.

Twice this month, the potential for a bankruptcy filing by the City of Harrisburg has been mentioned in national publications - Bloomberg.com at the beginning of the month and, last Thursday - The Wall Street Journal.

It is by no means clear that a bankruptcy filing is imminent, but similar talk in municipalities across the country recently has caused investors to rethink the safety of municipal bonds as an investment. See the WSJ article for further discussion of this point.

The effect on the local real estate market is uncertain, but my own opinion is that a bankruptcy filing would place less downward pressure on real estate values than the tax increase recommendations made public last month.

Housing Authority of Washington County, Maryland; Rent-to-own

From WHAG-TV in Hagerstown, MD comes the story of the Housing Authority of Washington County (MD) selling single family homes to low income residents on a rent-to-own basis.

The Housing Authority intends to purchase single family homes on the market in the Hagerstown area and resell them to qualified applicants through the program under terms stated here.

[Hagerstown is less than 10 miles from the Pennsylvania border.]

Tax sales; title defects; the arbitrary one-year period.

Click here for a previous post relating to title defects resulting from tax sales:

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. . . . Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

Occasionally I hear about settlement companies that tell buyers that such a property will be insurable "after one year." Details are sketchy because I have heard of this only second hand, but it appears as if some settlement companies have established an arbitrary one year period after which they will purport to insure a former tax sale property - regardless of whether the title defects have been resolved.

Keep in mind that the "one year period" has no legal significance. Title defects resulting from a tax sale do not go away after one year. If a buyer purchases a property under these conditions, the buyer will have difficulty selling the property, regardless of the fact that he used a corner-cutting settlement company to do an end run around the title defects.

Check here for future posts on the consequences of buying a property with title defects (with or without the blessing of a settlement company).

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Update - click here to see some of the consequences of buying property with title defects.

Is Inflation kicking in?

Is this the beginning of the inflationary spiral we have feared since the passage of the stimulus bill one year ago?

Stripping out the volatile food and energy costs, core producer prices rose a faster than expected 0.3 percent last month after being flat in December. The core index, which had been forecast to rise 0.1 percent, was lifted by a surge light motor truck and pharmaceutical prices.

"It does present some upside risks to our call for only modest gains in CPI and also points to some possible upward price pressures in the pipeline," Millan Mulraine, an economics strategist at TD Securities in Toronto.

The department on Friday will release its consumer price report for January. Headline CPI is seen rising 0.3 percent from December and core CPI gaining 0.1 percent, according to a Reuters survey.

H/T Reuters v/a Yahoo news.

Click here for speculation on the coming inflation's impact on real estate prices.

Treasury securities, interest rates and long term real estate trends.

This story will ultimately affect real estate prices more so than this story.

The federal government's reduced ability to sell bonds on foreign markets is far more ominous, with far greater long term consequences, than temporary fluctuations in mortgage rates. But both items point toward reduced availability of credit and more difficult times ahead.

Life Under Rent Control

Last week, I wrote about the connection between rent control and one of the nation's biggest real estate boondoggles for which the taxpayers will be responsible. Stuyvesant Town and Peter Cooper Village ultimately failed because the owners could not escape the rent control laws of New York. American Spectator provides a more detailed look at how rent control works in practice:

In any normal housing market, landlords are focused on attracting tenants, fixing up properties and maintaining a reasonable level of service. With rent control, however, you want to get rid of your tenants. The longer they stay, the further below market their rents sink. There is usually some kind of vacancy allowance, so the longest-lasting tenants have the best deals. That is why so many prominent personalities from the 1960s and 1970s (Mia Farrow, Mayor Ed Koch, Katrina vanden Heuvel, editor of the Nation) had rent-controlled apartments while anyone just arriving in the city would pay $700 a month to sleep on someone's couch.

Deprived of any chance of evicting tenants, the only thing the landlord can do is reduce services. So another layer of law is necessary saying that if landlords don't provide heat or make repairs, the tenant doesn't have to pay rent. Now the tenant has an interest in seeing things fall apart. One of the most common confrontations involved a rent-controlled tenant refusing admission to the repairman sent to fix the leaky sink. In the end, the tenant can just create his own violations -- a missing smoke alarm, graffiti in the halls. "Paying rent in New York is really optional," one landlord after another told me. "It's lucky more people don't know the law."

The stories from this netherworld sometimes sounded like chronicles from the Spanish Inquisition. One Chinese woman, whose property-owning family had been murdered by the Communists, had been running an apartment house in Harlem. After one tenant refused to pay rent for two years, she finally got an order of eviction. The tenant responded by firebombing her office. She took him to criminal court. The judge looked at the case and said, "This isn't a criminal case, it's a housing matter." Back they went to housing court. The housing judge overturned the eviction. For firebombing her office, the tenant got to keep his apartment. "I think I'm going back to China," she told me. "Over there they just kill you and get it over with. Here they torture you first."

As more municipalities adopt more oppressive laws and regulations in Pennsylvania, we have to recognize the possibility that rent control may not be far behind.

Stuyvesant Town and Peter Cooper Village; rent control for upscale apartments; Fannie Mae and Freddie Mac bailout.

In October, I wrote about Stuyvesant Town and Peter Cooper Village in New York, a multi-billion dollar apartment community boondoggle for which some state employee retirement systems are on the hook as lenders.

Politicians in New York are now putting pressure on Fannie Mae and Freddie Mac to guarantee the loan payments.

The main reason that the loan payments are in default and in need of a bailout is that the landlord lost a court battle (in 2009) to "decontrol" the tenants' rents. Middle (and higher) class tenants are living in upscale apartments at rents that are far below the market rate. Those below-market rents are now being subsidized by various teachers' retirement plans from across the country, Fannie Mae and Freddie Mac and, ultimately, the taxpayers.

The American Spectator article linked above is significant not only for its description of the consequences of the government bailout, but for its depiction of life under rent control in New York. As municipalities become more oppressive in their regulation of rental properties, our own reality will get closer to the world that the Spectator describes.

Check back here later for more updates on rent control and the consequences for investors and tenants.

Tax sales and title defects in Harrisburg, PA

I wrote earlier about tax sales, and the likelihood that an increase in property taxes and related expenses would lead to more properties being exposed to tax sales, as owners abandoned their already marginal properties in the face of these new and higher expenses.

Once a property has been sold at a tax sale, that property suffers from a title defect. The former owner can file suit to recover his old property at any time, claiming that he did not receive proper service of process of the then pending tax sale. Service of process is a constitutional issue that can not be eliminated by city ordinance or other local measure.

Once a tax sale takes place, the only way to eliminate with certainty the resulting title defect is to file a quiet title action against the former owner (or have the former owner sign a deed in favor of the buyer). These curative actions are expensive and uncertain. It is impossible to determine how much such an action will cost because it is unknown whether the former owner will fight or whether the buyer can even find the former owner.

For this reason many former tax sale properties sit with title defects unresolved. With unresolved title defects, such a property usually can not be sold or financed. Without financing, the property cannot be fixed or renovated. The properties continue to deteriorate, contributing to blight within the city.

Every year a few investors take the necessary steps and spend the money required to clear their tax sale properties of title defects. They clear these properties one lawsuit (or one quitclaim deed) at a time. Meanwhile, hundreds more properties are exposed to new tax sales (and new title defects) every year. Every year the city gets deeper in the title defect hole, as more tax sale defects are created than are resolved.

The City of Harrisburg owns hundreds of properties that were unsold at prior tax sales. Countless more have been purchased at tax sale and remain burdened with the same title defect(s). Increasing the tax rates will only compound the problems. Fewer investors will attempt to purchase these properties and undertake the expense involved in clearing the title after the cost of such ownership has been drastically increased, as the City's consultant now proposes.

Tax sale title defects will now be made more burdensome, and will contribute more to the downward spiral in the real estate market.

Harrisburg tax increases, tax sales, title defects

I wrote last week of a recommendation by consultants hired by Harrisburg to double the property tax for city properties (plus large increases for trash, sewer and water). I have written of potential consequences from these increases, including increased litigation over property assessment, downward pressure upon prices and values and financial distress for owners.

Another consequence of the proposal would involve local taxes. Investors whose cash flow does not cover a property's expenses will often simply allow the property to be auctioned at tax sale. This is particularly true where the investor cannot sell the property because the property value has declined below the balance on the investor's loan(s). Doubling the property tax will increase the likelihood of properties being sold at tax sale, as more properties will suffer from negative cash flow as a result of the newly imposed tax costs (and related municipal charges).

Contrary to popular belief, an increase in properties being sold for unpaid taxes does not mean that more properties will be available for investors to purchase. It means, instead, that more properties will suffer from title defects. These title defects inhibit sales, financing and repairs, thus contributing to the general decline in the real estate market.

Check this post for future updates on the consequences of tax sales and resulting title defects.
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Update - click here for more detail on title defects resulting from tax sales.