Thursday, June 21, 2012

Pittsburgh Urban Chicken Coop Tour

I have written previously about "urban farming" (especially in Pittsburgh) - the trend in many large cities to encourage farming of abandoned or empty lots and even to incorporate such plans into the larger goal of urban consolidation.

In Pittsburgh last week, hundreds attended the "Pittsburgh second annual chicken coop tours."
This story is more significant than it might appear. The City of Pittsburgh and local residents have made a concerted effort for several years to devote more space to urban farming. This trend may grow as more properties become abandoned due to tighter lending restrictions on investors, title defects resulting from tax sales, municipal regulations and fees, and the collapsing real estate bubble in general. We may see a time when the most profitable use of certain urban space will be agricultural.

The following video is from the 2011 Pittsburgh Urban Chicken Coop Tour (courtesy of Transition Pittsburgh).

Monday, June 18, 2012

Rent or Buy?

The Wall Street Journal included a column on Saturday about a dilemma facing many potential homebuyers in recent years - a dilemma made worse by the collapse of the real estate bubble - whether to rent or to buy:
The worst part of the house hunt, however, isn't the real-estate agents repeating, "Now is a great time to buy!" Nor is it the multiple offers anything half-decent seems to attract. It's the arguing between Alejandro and me whenever we broach the topic of whether it is technically smarter to rent a house or to buy one.

"Renting is just throwing your money away each month!" Alejandro declares.

"Only a moron buys in a place where it's cheaper to rent! How can you not see something so obvious?" I answer, charmingly.

While the columnist lives in Los Angeles, the same considerations apply throughout the country.

CNN Money posted an article last year summarizing the calculations for making such a decision.

Sunday, June 17, 2012

Foreclosures on the rise.

Reuters reports that foreclosures were up in May 2012.  This increase results from settlement of litigation over foreclosure practices and also may tend to hold down real estate prices:
By moving houses out of the so-called "shadow inventory" and onto the market, the increase in foreclosures could be a drag on the fragile U.S. housing recovery. The S&P/Case-Shiller index of home prices in 20 metropolitan areas inched up February and March, in monthly terms.

Increased foreclosures might only alleviate the glut of defaulting properties.  There remain many defaulting properties on which the banks have delayed foreclosure.

Friday, June 15, 2012

Core Settlement Services; Jami Braafhart; updated Court stipulation

Click here for the previous post on the Core/Chelsea/Braafhart title insurance scandal

The hearing set for June 14th was postponed and the Court's previous Order (June 1, 2012) has been allowed to continue in effect with certain modifications. On June 13, 2012, the parties entered into a Stipulation placing limitations on the Defendants' ability to write checks on two accounts (Defendants' other accounts remain completely frozen by the Court's June 1 Order).  The title company [Stewart] that brought this action against Core and Jami Braafhart will now have certain veto power over Core's and Ms. Braafhart's daily spending.  The Stipulation provides the following rules for check approval:
The procedures to process and clear checks drawn on those two accounts shall be as follows. When a check drawn on either account is presented for payment before honoring or dishonoring that check Mid Penn Bank shall first email or fax a copy of the check to Plaintiff's [Stewart Guaranty Title Company] representative  . . . . .
After reviewing the copy of the check [Stewart] in [its] sole discretion shall promptly determine whether a check shall be honored or dishonored. [Stewart] shall then promptly notify Mid Penn Bank in writing (if Mid Penn Bank shall require the notice to be in writing) that a particular check shall be dishonored or honored.  If [Stewart] determines that a check shall be honored Mid Penn Bank shall honor and pay the check so long as there are sufficient funds in the account to cover the amount of the check If [Stewart] determines that a check shall be dishonored Mid Penn Bank shall dishonor and refuse to pay the check . . . .

Braafhart shall be permitted to write checks drawn on the Mid Penn Personal Account to fund personal expenses (e.g. mortgage payments cell phone bills utilities automobile payments food purchases house repairs and maintenance etc.) Any check drawn on that account in excess of $ 3,000.00 shall require Plaintiff's prior written approval.
The Court docket number is 12-3471.  The full Stipulation is available at that docket number.  All Orders and pleadings are available online.   The  Stipulation does not say whether there is a procedure in place to alert, in advance, vendors or individuals that do business with these Defendants that certain checks might later be disapproved by Stewart.   Investigation and litigation remain ongoing. 

Thursday, June 14, 2012

Gasoline prices spiking again?

Click here for previous analysis of how inflation may affect the housing market.

Click here for an explanation of how one can monitor fuel (and other commodity) prices to get an indication of the direction of inflation and the health of the economy.

On May 7th, 2012, I wrote (quoting CNBC) that fuel prices were in "free fall." Since that post, gasoline prices have fallen roughly 75 cents a gallon in Central Pennsylvania. But today gasoline prices appear to be spiking again, with a 12 or 13 cent a gallon jump appearing at certain stations overnight.  If the "free fall" has stopped, and if prices return to $4.00 (or more) per gallon, the effect on the economy and the real estate market will be even more devastating than the impact we have seen thus far.

Wednesday, June 13, 2012

Title Insurance kickback litigation; Fidelity National Title Insurance

As we have seen in the past week with the Core/Chelsea/Braafhart scandal, title insurance fraud is common enough to justify examining the causes and sources of difficulties in title transactions. One example occurs with "kickbacks."  It has long been illegal for title insurance companies to provide "kickbacks" in exchange for business referrals. Despite this prohibition, this practice occurs regularly.

A new class action lawsuit in California makes "kickback" allegations against Fidelity National Title Insurance and six other major title insurance underwriters. The lawsuit alleges that real estate agents received payments from title insurance companies for selecting those insurance companies to close particular transactions. The real estate agents performed no additional work for those referrals.

Such referral fees are prohibited by the Real Estate Settlement Procedures Act (RESPA) in federally backed transactions. This lawsuit follows a $4.5 million settlement between HUD and Fidelity last year resulting from the same allegations.

Tuesday, June 12, 2012

Real estate tax incentives and a potential new skyscraper in Pittsburgh

The City of Pittsburgh has provided tax breaks for real estate development in recent years, but that program is now in jeopardy because City Council has delayed the extension of those tax incentives. In response, residents and the Mayor have publicly attributed much of Pittsburgh's recent development to this abatement program:
Delilah and Randy Rains gave up their Mt. Lebanon home to move downtown to a once vacant but now rehabilitated condo along Penn Avenue in the Cultural District — with a special 10-year reduction in property taxes.
“The basic attraction for us down here was to live in the Cultural District and to be downtown, but the incentive or the benefits of having the tax abatement just made the decision that much easier,” said Randy Rains.
The Otto Milk Building in the Strip, now 60 condo units, is another example of why [Mayor] Ravenstahl hopes council will extend these tax breaks.
“They’ve been critically important. The tax abatement program, for example, has allowed 13 developments to happen,” added [Mayor] Ravenstahl.
Maybe other municipalities should learn the relation between tax reductions and economic activity.

In related news, Oxford Development will make a major announcement on Thursday. Observers have speculated that the announcement will involve a new skyscraper in downtown Pittsburgh, according to KDKA TV. Another possibility is that an existing large building will be renovated.

Sunday, June 10, 2012

Escrow fraud; Title insurance fraud; Demotech, Inc.

In light of the ongoing scandal involving Core Settlement Services, Chelsea Settlement Services and Jami Braafhart, it might be useful to review the fundamentals of title insurance and escrow fraud. Follow this link to an online book from Demotech, Inc. entitled Escrow Theft: Today's Challenge in Title Insurance. This book contains reference to the laws of Pennsylvania and other states. This book might be worth reviewing for those who have trouble following the Core/Chelsea scandal or who have questions about their own transactions. Here is an excerpt:
Parties to a real estate transaction often entrust title agents or other settlement professionals with the transaction. Problems can arise when these professionals violate that trust and breach their duties to hold the purchase money and deed to property in a fi duciary capacity and disburse the funds appropriately. Most alarmingly, this violation of trust comes in the form of escrow theft, which occurs when an agent embezzles or misappropriates funds held in a fiduciary capacity.

Wednesday, June 6, 2012

Core Settlement Services; Chelsea Settlement Services; Jami Braafhart; Preliminary Injunction issued by Court; Stewart Title Guaranty Company;

A lawsuit is proceeding in Cumberland County that reveals the seamier side of the real estate business and the risks to innocent purchasers from settlements. 

On June 1, 2012, the Cumberland County Court of Common Pleas issued a "Temporary Restraining Order and Special Injunction" against Core Settlement Services, Chelsea Settlement Services and Jami Braafhart.  The lawsuit and Order are docketed at 12-3471.  A hearing is scheduled for June 14, 2012.  In the meantime, the Defendants are prohibited from engaging in real estate transactions or selling assets.

Core/Chelsea are settlement companies that issue title insurance and disburse funds in connection with real estate purchases and refinances. The companies are owned/managed by Jami Braafhart.  The companies serve(d) as title agents for Stewart Title Guaranty Company.  The Defendants were required to collect the proceeds from real estate settlements, pay the sellers and pay the liens, taxes and old mortgages and insure title to the properties in each transaction.  These are the typical duties and functions of any title agency/settlement company.

Stewart has filed suit against all Defendants, alleging essentially that for a period of several years, they have failed to pay liens and mortgages from properties for which they conducted settlement. Stewart's lawsuit accuses the Defendants of keeping the settlement proceeds instead of paying liens and mortgages.  The lawsuit claims that the agencies' escrow accounts have a negative balance in excess of one million dollars and have had a negative balance for some time.  Stewart discovered this conduct in May 2012.

Escrow accounts are not supposed to have negative balances at all, as the accounts do not belong to the title agents, but exist solely to collect the sale proceeds and then pay the sellers, the old mortgages and liens, taxes, etc. 

Paragraph 25 of Stewart's Complaint alleges that the Defendants' account balances have been negative since 2007.  Paragraph 31 alleges that the shortage in the accounts exceeded 1.1 million dollars as of May 29, 2012.  To the extent that these allegations are true, Stewart (as the underwriter) is ultimately responsible to pay off unsatisfied mortgages and other liens on numerous real estate transactions - even though Stewart committed no wrongdoing.

This matter is of concern to more than Stewart Title Guaranty Company and the Defendants. The Defendant companies operated at very high volume for a number of years. There are possibly numerous transactions and properties that now suffer from defective title because liens may not have been paid off. Indeed, paragraph 20 of the Complaint alleges that some customers have complained that prior mortgages have not been paid off. Those customers can seek redress through Stewart Title, but the story does not end there. 

Customers that obtained title policies through Core/Chelsea/Braafhart will someday seek refinance through other agencies.  It has been the policy of many title companies in recent years to search the title only so far back as the last mortgage, instead of searching the previous 60 years (as the practice used to be).  The theory for this shortcut is that if a mortgage was placed on the property five years ago (for example), there must have been a title search at that time and the new title company can rely on the fact that someone did their job 5 years earlier and corrected any liens.  But now that whole practice becomes suspect - especially in light of the large volume that Core/Chelsea handled.  If Core/Chelsea failed to pay old liens (as they were required to do), other title companies should not rely on the fact that a settlement occurred in which Core/Chelsea was involved. Once a new title company insures title (defective or not) with a new purchaser, the old title company is off the hook, as the old title company did not insure that new purchaser.

Other title companies need to be concerned, as Core/Chelsea's high volume has created a potential nightmare scenario in which thousands of purchasers/owners unknowingly spread Core/Chelsea's problems to new title companies.  Title companies should decide whether to stick with the recent policy of searching only back to the last mortgage or resuming the old policy of searching the previous sixty years. 

The insurance commission may want to rethink the rate schedule, in which properties that have been insured within the last two or three years are eligible for deeper discounts.  Due to situations such as Core/Chelsea's as well as the general real estate collapse of the past four years (with the resulting increase in short sales, foreclosures, tax sales, unpaid contractors, etc.) properties that have been sold or financed in the past two or three years involve greater risk than those that have seen no transactions for 10 or more years.

Property owners should be cautious also, especially those that used Core or Chelsea for their transaction.  Even though a buyer is covered by the title insurance policy, there still exists a certain amount of aggravation and stress in dealing with an unpaid lien.  Those who merely refinanced (instead of purchasing) through Core/Chelsea are at greater risk. In that scenario, only the mortgage company was insured and only the mortgage company can make a claim through the policy.  As long as the owner is current on the mortgage, the mortgage company suffers no loss, even if an old mortgage remains unpaid or unsatisfied. 

The bottom line is that buyers should not be comfortable with just any settlement company that a mortgage broker or Realtor sends them to for settlement on their purchase or refinance.  Core and Chelsea were favorites for referrals among many Realtors and mortgage brokers.  Those same Realtors and brokers will now begin sending unsuspecting buyers to other settlement companies, about whom the buyers know or understand little.

If you are a buyer or property owner, use your own attorney for settlement. 

Update - here is a link to the Patriot News article from June 7, 2012.

Tuesday, June 5, 2012

EPA MACT rule; S.J. Res 37; Increased electric utility costs throughout the Northeast by 2015

Electric utility rates are set to increase tremendously over the next three years in Pennsylvania and throughout the northeast, according to PJM Interconnection:

Last week [mid-May 2012] PJM Interconnection, the company that operates the electric grid for 13 states (Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia) held its 2015 capacity auction. These are the first real, market prices that take Obama’s most recent anti-coal regulations into account, and they prove that he is keeping his 2008 campaign promise to make electricity prices “necessarily skyrocket.”
The market-clearing price for new 2015 capacity – almost all natural gas – was $136 per megawatt. That’s eight times higher than the price for 2012, which was just $16 per megawatt. In the mid-Atlantic area covering New Jersey, Delaware, Pennsylvania, and DC the new price is $167 per megawatt. . . .
Why the massive price increases? Andy Ott from PJM stated the obvious: “Capacity prices were higher than last year's because of retirements of existing coal-fired generation resulting largely from environmental regulations which go into effect in 2015.” . . .

These are not computer models or projections or estimates. These are the actual prices that electric distributors have agreed to pay for new capacity. The costs will be passed on to consumers at the retail level.
emphasis added

Just as importantly, these increases will make it much more expensive to own and operate real estate. Landlords should factor these costs into any long-term leases, unless the tenant is solely responsible for all utility costs. Even so, landlords should anticipate the effect such an increase will have on their tenants' ability to stay in business or on the ability of residential tenants to afford the rent. Purchasers should factor these increased costs into the cash flow projections for prospective properties.

These increased costs will place downward pressure on real estate prices and rents.  These increased costs should also provide an additional factor in support of owners' tax assessment appeals.

The U.S. Senate is currently considering S.J. Res 37, which would disapprove many of EPA's recent regulatory requirements that have created these costs. Specifically, Resolution 37 would strike down EPA's Maximum Achievable Control Technology (MACT) rule that has or will force the shutdown of so many coal fired generation plants throughout the northeastern United States.

Monday, June 4, 2012

Foreclosure relief money diverted by states

In February, 5 large banks (with the intervention of the Obama administration) negotiated a $25 billion settlement with the states requiring the banks to provide foreclosure relief to distressed homeowners. But the New York Times reported last month that at least 15 states are diverting the money for their general budget. Pennsylvania is not among those states listed by the Times as among the 15, but the Times' list was incomplete. This is another example of the government's solutions to the financial crisis missing the mark and failing to address the real issues.

Of course, in those states where the money actually reaches distressed homeowners, the money is merely reinflating the bubble and preventing prices from reaching the point where they should be in order for houses to be marketable again.

Sunday, June 3, 2012

Philadelphia LGBT housing project receives 19 million dollars in public financing; dmhFund; Pennrose Properties

Catching up on April's news, we see the CBS Philadelphia affiliate and with the story of a publicly financed housing project for the benefit of elderly LGBT seniors.

The Pennsylvania Housing Finance Agency (PHFA) voted on Thursday, April 12 to provide a reservation of Low Income Housing Tax Credits --an official "green light" that now will generate up to $11 million dollars for the LGBT-friendly affordable senior housing facility co-developed by the dmhFund and Pennrose Properties. This new public-private housing initiative, conceived in the heart of Philadelphia's downtown lesbian, gay, bisexual and transgender neighborhoods, is considered among the first such elder housing facilities of its kind in the U.S.

This critical stream of funding will allow the $19 million project to move forward and break ground as early as September 30th. The co-developers had already raised $6 million from the Commonwealth's capital development program and $2 million from the City's Office of Housing and Community Development.

"For years, developing a unique facility in the heart of Philadelphia's gayborhood where our most vulnerable LGBT elders could live out their golden years was our pie-in-the-sky idea," dmhFund President Mark Segal said. "But today, we can say for certain, that pie-in-the-sky idea will become a reality."

The Marketwatch article goes on to say that the project will not exclude those who are not LGBT. (If it were exclusive to LGBT, I do not know how such a policy would be enforced.) It is legal to create housing exclusively for seniors under certain circumstances.

Saturday, June 2, 2012

Elizabeth Warren - real estate flipper

The Boston Herald reports that Massachusetts Democrat Senate candidate Elizabeth Warren has reaped large profits from the purchase and sale of foreclosed homes in Oklahoma, despite attacking such practices in her campaign. The newspaper lists a number of transactions where Warren either purchased foreclosed homes and sold them quickly for large gains or lent money for others to purchase and eventually sell those homes.

Aside from Warren's hypocrisy and the political implications from this story, there are lessons regarding house flipping that the newspaper did not pick up and that apply to Pennsylvania as well as other regions where these practices take place. The bottom line is that the profits were not necessarily as high as the raw numbers reported in the Herald.

  • Most likely these homes required repair and renovation (as do most foreclosed properties) - unless Warren unloaded homes with hidden defects on unsuspecting buyers.
  • Real estate taxes accumulated during the period of Warren's ownership, all of which cut into her profits. Utility and financing costs also accumulated - unless Warren found tenants to rent the properties while she waited to sell them.
  • Unresolved title issues may have forced Warren to incur expenses so that she could convey clear title - unless she unloaded homes with clouded title on unsuspecting buyers.
All of these points would make for good followup questions to determine the true nature of Warren's investments, although it is virtually certain that this followup will not take place.

Also, the Herald article referred to Warren "giving" mortgages to her family members so that they could buy and flip houses. In fact, Warren lent the money.  Those who lend money do not give mortgages - they receive mortgages.  The borrowers give the mortgages to the lenders.  Most newspaper writers do not understand this point. 

The final lesson is that a politician that takes part in real estate investment is not necessarily a friend to other such investors. Investors should not count on Warren acting in a way that supports investment if she reaches the U.S. Senate.