Saturday, June 22, 2019

Reverse Mortgages Update

A     In 2015 I explained reverse mortgages in this column.  Recently an article published in USA Today on June 13, 2019 ( basically claimed that reverse mortgages were simply predatory lending designed to steal seniors and the heirs homes without any benefit or knowledge.  The flaw in the article is that it fails to clearly mention several important facts:

          1.       Without the loans, many seniors would have been forced to sell the homes anyway, due to the inability to pau maintenance costs, existing loans or taxes and insurance;

          2.       No one forced these seniors to take the loans and spend the money they received, even if spent frivolously;

          3.       That a majority of foreclosures occur not due to defaults relating to non-payment of taxes or insurance but due to either abandonment of the home (residing in the home is a condition of getting and keeping the loan) or death;

          4.       Claiming that the heirs lost out on getting the home due to the reverse mortgage is a false premise, because it presupposes that the heirs deserve the home even though their parents needed and got to enjoy the benefits of the money; and

          5.       Many foreclosures occur simply because many reverse mortgages were granted before the crash, and the monies given were based on a higher pre-crash value.  Combined with the accrued interest over 10 to 15 years (a key to how these work, seniors pay nothing during the term of the loan) and all the costs of sale (as high as 8% for real estate commissions, taxes, transfer taxes and title insurance), there is little to no equity left to interest the heirs or the estate to consider selling the properties.

     As a Florida HUD Commissioner, I have handled hundreds of reverse mortgage foreclosures for HUD.  In only one instance was a foreclosure based on the failure to pay taxes.  All other cases were either abandonment of the home or death.  HUD is only obligated to wait one year after abandonment of the home or death to begin a foreclosure action, but in all cases, HUD gave the family more time to decide whether to sell or walk away.  In all my years, I have never received a complaint from a senior or beneficiary that HUD has stolen their home.

     As I stated in 2015 there are several criticisms of the reverse mortgage program.  High upfront costs are an issue and frequently not properly discussed with borrowers.  Interest rates are higher than conventional loans.  High pressure sales tactics (including late night tv ads) have encouraged seniors to take out reverse mortgages, spend the money on vacations and gifts, without consideration of the ability to pay and maintain the property going forward. 

    As a result of the number of reverse mortgage foreclosures, there was a revamping of the HUD program in 2017 to address such issues.  First, the mortgage insurance premiums charged to fund the government’s guarantee of the loan has changed.  Instead of a floating premium of up to 2.5% based on the amount advanced at closing and in the loan’s first year, a lump sum of 2% is taken at closing.  This could result in higher premiums for some borrowers.

    However, the monthly mortgage insurance premium has been reduced from 1.25% to 0.5%, saving borrowers on the accrued monthly charges at a rate of about $166 for each $50,000 borrowed.  The new rules will benefit borrowers who use their available funds at closing, but likely cost seniors who open a reverse mortgage as a line of credit for future use without drawing out fund.

     In addition, the new guidelines have reduced the amount that can be borrowed.  The maximum amount is a complicated formula based on the value of the home, the age of the borrower and the interest rate.  Lowering the amount borrowed will likely reduce the number of foreclosures, benefiting both seniors and the guarantee fund.

A reverse mortgage can be a great tool for many homeowners, but it is a program that should be carefully reviewed to insure that it fits an individual’s needs. Discussions with a cpa, your children and a HUD loan counselor are a must before taking out a reverse mortgage.

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  He serves as the HUD Foreclosure Commissioner for the state of Florida.  They can be reached at 561.594.1452 or by e-mail at

Tuesday, March 19, 2019

Trust Basics

            The creation of a trust for estate planning is a valuable tool that can be used to solve many specific needs, such as avoiding probate, reducing estate taxes, creating a charitable legacy, providing for future generations, protection of disabled or spendthrift beneficiaries, obtaining Medicaid reimbursement and other estate needs.  Depending on the issue to be addressed, specific types of trust can be created to provide for these goals.  Trusts can be complex or simple, can combine multiple outcomes, can be standalone or incorporated into a will as a pour over trust.  The most common types of trusts are as follows:

          1.       Revocable Trust.  A revocable trust that holds real and personal property with the creator or grantor of the trust serving as the trustee and initial beneficiary, with the power to terminate the trust at any time.  This is the most common and is used to reduce or eliminate the need for probate after death.  Upon the death of the grantor/trustee, a successor trust takes their place and directs the distribution of the trust assets to the grantor’s beneficiaries as directed in the trust.  A revocable trust does not provide creditor protection for the grantor or the grantor’s assets in trust.

          2.       Irrevocable Trust: An irrevocable trust is similar to a revocable trust that holds real and personal property.  However, the main difference is that the grantor is not the trustee of the trust and does not have the power to terminate or amend the trust after creation. Unlike a revocable trust, a properly created irrevocable trust can provide creditor protection for the grantor’s assets in trust.

          3.       Qualified Terminable Interest Property or QTIP Trust:  QTIP Trusts are used to gift a surviving spouse a lifetime income in an asset or property, and have the remainder pass to a third party (like children from a previous marriage), but gain the benefit of marital exemption from gift or estate tax that usually requires the surviving spouse to obtain 100% title to the asset.

          4.       Credit Shelter Trust:  Allows for the first spouse to place the value of the estate tax exemption in Trust at death with the remaining sum passed tax free to the spouse.  After the death of the surviving spouse, the beneficiaries get the sheltered funds tax free plus the surviving spouse’s funds with a full exemption as opposed to the surviving spouse getting the whole estate and then passing on a large tax bill to the beneficiaries.

          5.       Qualified Personal Residence Trust or QPRT:  A QPRT Trust allows for the owner of a valuable residence to place their home in trust for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary.  The grantor of the trust receives exclusive rent-free use, possession and enjoyment of the residence during the term of the QPRT and any tax deduction benefit for taxes they pay.  The benefit only works if the grantor outlives the term of the trust, when the property must be transferred to the beneficiaries.

          6.       Charitable Trusts:  These are irrevocable trusts that provide charitable benefits for the grantor and/or beneficiary. A Charitable Lead Trust gives the designated charity payments for a fixed term and at the end of the trust term, the remaining funds  go to the designated beneficiary tax free.  A Charitable Remainder Trust gives the trust funds to the charity subject to the charities’ obligation to pay the beneficiary income from the trust funds for up to twenty years with an income spread of not less than 5% or more than 50% of the initial fair market value of the trust’s assets

          7.       Special Needs Trust:  An irrevocable trust that allows the disabled beneficiary to enjoy the use of property that is held in the trust for his or her benefit, while at the same time allowing the beneficiary to receive essential needs-based government benefits such as Medicaid and Supplemental Security Income.

          8.       Irrevocable Asset Protection Trusts for Medicaid:  A specialized irrevocable trust created to allow the preservation of principal to prevent the loss for medical expenses that would otherwise be covered by Medicaid benefits.  The trust must be created and funded at least five years before applying for Medicaid benefits.  A child can usually serve as Trustee, and income from the trust can be paid to the grantor.

          9.       Spendthrift Trust:  A spendthrift trust is a type of trust (or a provision in a trust) that prevents the creditors of a trust reaching the beneficiary’s interest by forcing the Trustee to pay over the claimed sum.  This does not apply to federal and state taxes or an enforceable support order.

        Creation of an appropriate trust can result in substantial benefits to both the grantor and the beneficiary.  While estate taxes are not currently an issue today due to the high exemption (11 million for individuals, 22 million for couples), these exemptions can change so proper planning is still warranted.  Choosing the right attorney, financial planner and tax accountant can assist in creating the proper tools without wasting funds on unnecessary products.

4 Steps To Real Estate Investing (guest blog)

Did You Know that 90% of millionaires have one thing in common? This investment is what
helped countless entrepreneurs into millionaire status.

Real Estate Investing. Many millionaires owe their success to this strategy.

No wonder house flipping has spiked in the last few years!

But real estate investing is easier said than done. With the right tools, you can start real estate
investing and be one step closing to your million.

Step 1: Know Where To Invest

Realtors love to say this: “It’s all about the location.” But there’s a reason why everyone repeats

“Finding the right locations is key to being a successful real estate Investor. In order to
maximize the return on interest of a property it has to be sellable, and if the area is bad, it’s hard
to hit the ROI.” - Loren Howard, Phoenix Hard Money Lender, Prime Plus Mortgages.

How can you find the right areas to invest in?

Thankfully, sites like Zillow and Trulia make it easy to find the right areas. Your ideal investing
locations will have the following:

● Low Crime
● Good Schools
● Room For Growth
● Easy Access To Amenities
● Nearby Business Parks

If your heart is set on a property that does not have some of the following, that is okay. Areas with
strong development promise can be very smart investments, so make sure to keep an eye on
the commercial real estate projections.

2: Know What Kind Of Investment

Know what kind of investment strategy works best for you before you begin looking at properties
will save you a major headache.

The 2 most common types of real estate investing are:

     A. House Flipping
     B. Renting

Similar to the shows, house flipping means that you buy undervalued properties, make crucial
repairs, and ‘flipping’ them for a profit. For first-time investors house flipping can be tricky, as it
requires a lot of capital to not only purchase the property, and fund the repairs. Thankfully Fix
and Flip Loans make funding first-time investments easy.

Some first-time investors find that renting is easy for a first-time real estate investment as it
guarantees a monthly passive income to fuel your other investments. Home Rehab loans are
especially helpful for first-time investors. Home Rehab Loans make upgrading your properties
easy and making it easier to rent your property

3: Pick Your Investing Team

It takes a village. One of the most important real estate tools you can have is a great team
behind you. Here are the top 4 team members you need to have to be a successful real estate

1. Contractor
2. Lender
3. Accountant
4. Realtor

Each of these team members makes real estate investing easy, from building, financing, listing
and keeping the books clean. Finding these valuable team members can be tricky, but a well
oiled investing machine brings you one step closer to successful real estate investing.

4: Fund Your Investments

Many first time investors don’t know where to go for funding. For most real estate investors
finding funds for their first-time investment can be nearly impossible, especially with high credit
scores requirements, proof of income, and other strings attached,

For house flippers looking to fund their first real estate investments, hard money loans say yes,
in a sea of no’s. Hard money lenders use properties After Repair Value (ARV) to determine the
loan amount. That means with a Hard Money Loan you can get funded for the property, and
repairs, and still, make a profit.

Without having to wait for funds, you can purchase more properties and start investing today!

Real Estate Investing can be tricky, but it doesn’t have to be. By having the following knowledge
and tools you can start investing smarter today.

● Step 1: Know Where To Invest. Pick the right locations in your city that you know will
have high market demand, like those with the best schools, or plans for business parks.

● Step 2: Know What Kind Of Investment. Know the ins and outs of your preferred type of
real estate investment and learn what other real estate investors are doing to be more

● Step 3: Pick Your Investing Team. Make your real estate investing A-team that can help
you find, upgrade, list and fund your investments.

● Step 4: Fund Your Investments. Have funding to put down on great properties before
someone else picks up a great property. Hard money loans are fast, don’t require credit
checks, and are more flexible than a traditional mortgage.

What’s the best real estate investing advice you have received?

Catherine Way has never been able to stop talking. She took her love of talking and graduated
from Michigan State University with her Bachelor’s of Advertising with a specialization in
Graphic Design. She spends her free time finding new ways to talk to people, through writing,
designing, dancing, and more. You can see her newest creations here. You can see her new creations here

Condominium and HOA Approval Issues - Part 2

            In addition to the issue of Association and landlord denying approvals based on criminal history, many Associations and landlords are restricting, limiting or outright denying applicants based solely on credit history, employment issues and past bad conduct unrelated to a criminal matter. These restrictions, coupled with the already restrictive criminal matters, has made purchasing and leasing property even more difficult for those people with a previous felony conviction, bad credit, short employment history, or other background matter that, in the past, would not have prohibited the purchasing or leasing of property as long as the prospective buyer or tenant had sufficient funds to consummate the transaction.

            A credit check of a prospective buyer or tenant is now a very common requirement of Associations and landlords. Obtaining the credit score of any prospective purchaser or tenant is an inexpensive way to weed out candidates who may not be financially responsible. The real question is whether or not a credit score is determinative of a person’s ability to pay assessments as an owner or rent as a tenant.

            Much of what determines a person’s credit score is proprietary based on the formula created by the Fair Isaac Corporation.  The company uses credit data included in a consumer’s credit report consisting of the following five elements: payment history; credit utilization; length of credit history; new credit and credit mix.  These five items are then put through a proprietary system by the Fair Isaac Corporation to create a credit score which ranges from 300 to 850 (for the most common FICO8 program). 

            The FICO score does not include a person’s employment, income or bank account information. Therefore, having a low FICO score does not necessarily equate to having low income or low savings. Many people who go through a divorce or a difficult medical issue may have had their credit score fall substantially, either due to a short-term inability to pay past due obligations, the running up of credit to cover substantial medical expenses, or even have issues relating to a spouse or child or issues due to identity theft.

            Fair Isaac provides scoring but does not specifically state the value of each number. However, a typical breakdown of the various scores is as follows:  

580 and below             very poor credit score
580-660                       fair credit score
661-720                       good credit score
721-799                       very good credit score
800+                            excellent credit score

            Utilizing the foregoing system, many landlords and Associations are conditioning approval on a minimum credit score for each occupant over 18. This score generally ranges from 620 to 700 as a minimum for approva,l regardless of an applicant’s other information. In addition, many Associations and landlords impose conditional approval on scores below 700, adding additional requirements that other applicants may not have to address, such as additional deposits or a third-party guarantor. 

            Currently, the average credit score is 695, which is below the threshold that some Associations or landlords have established for approval. In addition, a majority of Americans have a credit score between 660 and 720, and at least 15% have no credit score.  This means many candidates for purchasing or leasing a property may not qualify due to credit score restrictions.  At least one third of all consumers have a credit score below 620. These low scores can make purchasing or leasing a property virtually impossible, and a whole industry has sprung up to help people improve their credit scores due to the debilitating effects that a low score can have.

            Some consumer advocates have stated that imposing restrictions on leasing and purchasing based on credit score is a form of discrimination, but so far no guidelines have been promulgated by the HUD regarding same as they have done for the issues relating to approvals and past felonies. It is possible that such guidelines may arise, or a court may determine that the usage of a credit score to deny an applicant is, on its face, discriminatory.

            In processing any application for lease or purchase approval, it is recommended that the credit score be a factor but not the only determining factor in whether or not to grant approval. Age, employment, income and savings should be used side-by-side with the credit score in order to determine an applicant’s suitability and financial ability. Furthermore, if an applicant is denied as a result of the credit score, it is imperative that the Association or landlord provide adequate written notice of the denial based on credit score and the name and address of the credit reporting agency that provided the credit information.

Sunday, January 27, 2019

Condominium and HOA Approval Issues - Part 1

     A few years ago a client sought to purchase a small cooperative unit on Palm Beach at a price far south of $100,000.00.It was a cash purchase by a very successful independent contractor.  The contract was summarily rejected by the Cooperative Association without any written explanation.  When pushed, they said it was an income issue, they had just completed a large project with high monthly unit expenses, and they were concerned that my client did not have sufficient “regular income” to pay the estimated $1,300 extra per month.

     My client amended the contract to add her daughter as a purchaser, and resubmitted the application, showing that the daughter, a salaried employee made six figures a year.  The revised contract was also summarily rejected by the Cooperative Association, again without any written explanation.  At this point my client called me and after threatening the Association with a lawsuit, they agreed to approve the sale, subject to our client maintaining a three year escrow of assessments of nearly $40,000.  While there was a suspicion of animosity toward my client due to her religion, it was never proven and she has had no further issues.

     This story illustrates a growing problem for certain buyers and tenants looking to buy or rent in many communities in South Florida.  Communities are increasingly adopting tighter rules regarding ownership and occupancy, in order to improve their communities and to reduce the number of investors and renters in favor of family owners who will reside in the home full time.

     The tools adopted by Associations relate to criminal history, credit, employment and past history.  The starting point for any Association is having the actual power to restrict ownership and leasing.  This power must be in the Declaration of Covenants or Declaration of Condominium.  Absent enabling power to regulate sales and leases, the use of simple Board level rules is suspect at best and most likely unenforceable if challenged in court.

     Assuming the power to regulate ownership and leasing is granted in the Declaration, the Board has authority to establish rules regarding such powers (as long as such rules are not unreasonable, discriminatory or exceed the authority granted in the Declaration).

     To enforce these rules, Associations require all applicants for ownership/residency to submit a detailed application about their past living and employment history as well as an applicant’s agreement to submit to a credit and criminal background check. Fees for the application may be charged and are capped by the Condominium Act at $100 per person (husband and wife are considered one person).  Most Associations also charge for the criminal/credit check, which can run $30-$70 per person.

     Many Associations have adopted outright bans on any applicant with a criminal history, regardless of the length of time since the act or the nature and severity of the criminal act.  These restrictions have been challenged successfully based on the grounds that such bans are discriminatory in nature since many felonious applicants are minorities. 

     The US Housing and Urban Development has issued guidelines regarding this issue, after a study showed that the recidivism rate for felons was no greater than non-felons after seven years and the Supreme Court allowed challenges to rental restrictions based on past criminal behavior.  This means that banning someone for a felony more than twenty years ago would, on its face, be deemed discriminatory in most cases.  In addition HUD requires Associations to adopt reasonable rules regarding those with criminal backgrounds, including whether a conviction was obtained, was the criminal conviction for a violent or non-violent crime, how long ago was the crime committed, how old was applicant at the time of the crime and other factors to show that the Association is using the least discriminatory policies possible.

     At least two exceptions exist with regard to the foregoing limitations, a criminal act relating to a felony conviction for drug manufacturing and distribution and a felony conviction as a sexual predator.  It appears that lifetime bans for these actions may be reasonable and enforceable by an Association. 

     In my next post I will address the Associations review relating to credit, employment and life history, and address possible compromises to assist owners and tenants in obtaining approvals.