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Housing Bubble

Everyone knows that housing prices are down from the past two years. Houses on my street in Baldwin were selling for a high as $500,000 approximately two years ago. That lasted for about three months, when the prices started going down steadily.

What’s causing all the foreclosures is the lending practices of the subprime lenders. Some of the practices were fraudulent, where mortgage brokers did creative lending, not giving the true picture to the banks and ultimately the investor who purchased the loan. A person with marginal credit and income would be given a one hundred percent loan, to cover both the purchase price and closing costs, but the mortgage would be extremely onerous to the borrower. For example, usually a first and second mortgage would be given. The first mortgage would be a thirty year fixed with a reasonable intrest rate, but the second would be adjustable with a very high rate. Also, because of inflated appraisals, the mortgage would be higher than the actual market value of the house. With no investment and no equity in the house, it would be easy for such a person to walk away from the house and just let it fall into foreclosure. The owners could actually live there for a couple of years, without paying anything, until the foreclosure was complete, and a further eviction procedure was commenced. It could be tied up in court for a long time. It doesn’t seem fair to the bank, but they are the ones who convinced the buyer to take one or more mortgages he or she couldn’t afford. Add that to the fact that real estate taxes are so high on Long Island, and keep going up each year. Plus the high cost of utilities.

The inflation of appraisals is bad for the neighborhood, because it artificially inflates market value. When someone next door to you buys based upon an inflated appraisal, and cash out the phantom equity, that information gets reported to the local assessor’s office. This can cause your real estate taxes to go up. However, now try to sell your property for that amount.

Many mortgage brokers selling subprime mortgages have gone out of business, but I am sure there are still many out there. As a seller, don’t be a party to the fraud by allowing your contract to be amended to a price well above the real purchase price. This is a way for a purchaser to get a higher mortgage (practically one hundred percent of equity or more). The seller doesn’t receive the money, and it is couched as a “gift of equity” or a promise to make repairs, or whatever the mortgage broker comes up with creatively. I consider this to be a fraud on the lender. A seller’s concession may be okay depending upon the circumstances. According to the New York State Bar Ethics Committee is it only okay if it is totally legal, it is disclosed to all parties and on all documents, and no party is prejudiced. That seems like it would be difficult to determine under all the circumstances.

Cynthia M. Burke, http://www.nyrealtylaw.com

Categories: Real Estate Law