I got a question about “what does it mean if my loan is not funded after right of rescission?”
It likely means your loan provider lied to you, probably from day one. Once you have signed documents, there shouldn’t be anything but procedural matters left. Things that cannot be taken care of earlier. Things like final payoff coordination, the escrow officer using funds to pay homeowners insurance. Every once in a while, a good loan officer will get a subordination moved to prior to funding because it’s on the way, but it is necessary to start the three day right of rescission now in order to fund on time under the lock.
Every once in a while, it’ll be because of something happening to you in the meantime. Lenders who are risking hundreds of thousands of dollars don’t just sit there and presume nothing has changed since the first time they checked it out. They are going to check again, right before they put the money to the loan, to make certain that nothing the loan was based upon has changed. So sometimes while they are doing a final Verification of Employment (making certain you still work there), the answer comes back that the borrower doesn’t. The final credit check comes back with a score that no longer qualifies under that program. These are not the loan officer’s fault, except inasmuch as they didn’t warn you not to do whatever it was. Whether you quit your job or were fired, the result is no loan. So I always tell folks not to change anything about their life or credit without checking with me first. Neither I nor they can really do anything about layoffs, of course, but the point is not to voluntarily do anything that messes up your loan.
The vast majority of the time, however, what’s going on is that the loan officer never had the loan. There’s some condition holding it back that you, the borrower, can’t meet. They have a choice between hoping to get around it or going out and actually finding a loan that you can qualify for and telling you about that instead. I shouldn’t have to draw you a picture as to which choice they will likely make. Many times, they were teasing you with a loan that you had no hope of qualifying for as an incentive to get you to sign up. This is a standard “trick”. They get you wanting that loan, which sure sounds good, and you apply. Unfortunately, that loan was never real, or never something you had a chance of qualifying for, but now they’ve got you signed up. Now you’ve done their paperwork, and you’re mentally committed to their loan.
Now if it’s an honest mistake, they are not going to have you sign documents. They’re going to come back and tell you as soon as there is a condition they can’t meet on loan qualification. But the question was about when you have signed documents and the loan doesn’t fund. They can keep stringing you along, hoping it will happen, or they can come clean and tell you they can’t do the loan. In the first instance, they might still get paid. In the second, they likely won’t, because if you’re smart you’ll go elsewhere. Needless to say, this can waste a lot of time getting “one more document” from you or jumping through one more hoop. If the loan doesn’t fund at the end of the rescission period and you are not certain as to why, you’ve probably been had. This is why I always tell people to ask for a copy of all outstanding conditions on the loan commitment before you sign final loan documents. Ask them to explain them, too. You see, once you sign loan documents and the rescission period expires, you’re stuck with that loan provider. You can’t go elsewhere unless and until they give up. Even if you have a back-up loan waiting to go, they can’t do anything until the other loan funds or gives up, which could be weeks. Not a bad situation for an unethical loan provider to be in. In the meantime, the seller cancels your purchase and you’re out the deposit. Or the rates go up and you’re not getting a refinance on anything like the terms you might have really qualified for at the start of the process.
Caveat Emptor
When The Loan Underwriter Makes A Mistake
“challenging underwriters mistakes in housing loan paperwork” was a search that I got.
You can’t challenge them. Butting heads with an underwriter is stupid and counterproductive. There’s only one person who gets a vote, and it’s not you, whether you are an applicant, processor, or loan officer. The underwriter may not be the original application of the saying “a majority of one,” but it certainly fits the situation.
Now keep in mind that as an applicant, you will never communicate directly with your underwriter. It is an anti-fraud measure constant throughout the industry. If someone tells you that you are talking to your loan’s underwriter, either they are lying or the loan has just been rejected on procedural grounds.
If a loan officer believes that the underwriter has made a mistake in the underwriting of the loan, it is far more constructive to find out what it was – on what grounds the client was rejected. Actually, loans usually are not flatly rejected, they simply come back with conditions the client cannot meet. A loan that actually gets rejected usually has further adverse consequences for the borrower’s credit, and is usually pretty good evidence that the loan officer was promising something they couldn’t deliver.
Now it happens that underwriters, like loan officers miscompute things, miss things, and misconstrue things. This is one of the hardest lessons for a loan officer to learn: NEVER tell the underwriter anything that they do not absolutely have to know in order to approve the loan. The client has a rich uncle that gives them $10,000 every year? The client makes millions in the stock market as well as their salary? The client simply has millions in assets and they could buy the property for cash if they wanted? I wouldn’t breathe a word of any of this to the underwriter. Not a peep, if I had my druthers. The underwriter will start asking all kinds of questions, asking for all kinds of documentation, both on the existing assets or income and on the likelihood of it continuing. If you’re familiar with how the stock market works, you might have an appreciation for how hard it can be to prove that you’re going to have income from it in the future. That underwriter isn’t interested in trends or suppositions or even the fact that it’s happened the last twenty years in a row. They want proof it’s going to happen in the coming years. When accountants won’t write a testimonial (trust me, they won’t), you’re probably out of luck.`
Now sometimes the underwriter comes back with conditions that are beyond the bounds of reason. Dealing with this is part of my job, but it’s more akin to a negotiation than a confrontation. I’ve got to get them to tell me what has them concerned, and see if there isn’t some other way to reassure them. Remember, if the loan goes sour, both the underwriter and I are going to hear about it. It may cost them their job, and I may have to come up with thousands of dollars to pay the lender. Not to mention that the client isn’t exactly happy. The underwriting process, properly used, is as much for the protection of the client as the lender.
So what I’ve got to do is find out what concern caused the underwriter to place this condition on the loan, and then a more reasonable alternative may suggest itself. If you ask in the right way, conditions can be changed if the request is reasonable. But you’ve got to know what you’re doing. If the alternative you suggest does not adequately address the underwriter’s concerns, they are within not only their rights, but also in full compliance with regulations where you are probably not, to refuse to make the change. Sometimes the underwriter and the loan officer disagree as to the computation of income, for example. By definition, the underwriter is right – unless I can persuade them that my way is better. Just human nature, you can’t do that by challenging them, you have to persuade.
Now it is possible to run into an intransigent underwriter. That’s one reason why brokers have the advantage over direct lenders, who are stuck with the same group of underwriters all the time. I can pull the loan and resubmit it elsewhere. Given that particular lender isn’t going to approve the loan anyway, they won’t fight too hard, although on several occasions I have had the lender come back and issue an exception on their own when I do that, but the ability and willingness to actually take it elsewhere is essential to this. And it is sometimes possible to go over a given underwriter’s head and get an exception from the supervisor, but it tends to poison the well when you attempt this, whether it is successful or not. When you’re asking for special consideration for your clients, they tend to look much harder at all of your clients. I’ve seen a couple loan officers talk themselves into one approval through an exception with the supervisor, only to have their other loans that were going through smoothly kicked back out for further underwriting. So you have one happy client, and three or four that otherwise would have been happy and who now are not. Sounds great if you’re that one client, but how would you like to be one of those three or four others? Not a good situation for anyone to be in. Taking the approach of collaboration works better.
Caveat Emptor.
The Pin That Pops the Housing Bubble?
This was originally published in Jun 2006, and what it describes was indeed that pin.
The housing bubble is not the primary focus of this website, but to pretend it does not exist is plainly wishful thinking. One of the ongoing phenomenon that have been driving the bubble is the “Stated Income”loan, where the lender does not verify that the prospective borrower actually makes enough money to qualify for the loan, only that they have a source of income that could generate enough income. If you’re working the night shift at 7/11, they’re not going to believe you make $90,000 per year, but if you’re a in a profession where some folks do make $90,000, you may be able to qualify “stated income” regardless of whether you actually make it or not.
Lest I be unclear on this subject, despite being known as “liar’s loans” because people use them to lie about their income in order to qualify, it is not what they are intended for. Nor is “stated income” intended to help shifty or incompetent loan officers shaft lazy borrowers by not bothering to document income. They are intended for those who really do make the money, but because of the way that the income tax laws work and the way that lenders qualify people for loans based upon income, do not appear to. Business owners and the self-employed and people on commission get to legitimately write off a lot of expenses that the hourly or salaried employees do not. For instance, I write off a large percentage of my vehicle miles, office expenses, etcetera. I’m paying for business related expenses with pretax dollars, where most folks generally do not get to take this deduction. Being self-employed, if I was silly enough to want the home office deduction it would be easy enough to justify. Not to mention asset depreciation. All of these don’t have much effect upon the money I have to spend, but they do have an effect on my tax forms, where it looks like I make a lot less than I effectively do. So instead of using my tax forms to qualify for a loan, sometimes I need to do a stated income loan in order to qualify for the loan, because the tax forms show a lower number than people making comparable amounts who are salaried. This is what stated income is for.
On the other hand, I’m sure that most of the adults reading this have seen the potential for abuse. When I can just tell the lender how much I make and they agree not to verify it, a certain number of people are going to say they make more than they do, and indeed, both stated income and NINA loans are often informally known as “liar’s loans”. Furthermore, since if the person getting the loan does not qualify, there is no loan and the loan officer does not get paid, there’s a certain amount of pressure on the loan officer to get the loan done even if the prospective borrower does not qualify. Let’s say they don’t qualify, but the loan officer wants to get paid. So the loan officer puts them in for a stated income loan, says the clients make more than they do, and voila! funded loan. Clients get the loan where they would not have qualified by documenting their income, loan officer gets paid, bank gets a loan, and if it was a purchase, real estate agents get paid for their transaction and the seller goes happily on their way because they got their money.
A few years ago this kind of practice was an occasional thing. Of late, however, it has become endemic. And although if the clients really do make the money there is nothing wrong with it, if they don’t make the money to qualify but they get the loan they are still going to have to make the payments. This reflects the reason for the rise of the negative amortization loan, where the minimum payment does not cover the interest charges. Either one of these is something a good loan officer does with a trembling hand and a lot of care. I always make certain that these folks really can make the payment they’re going to have to make, but the vast majority out there do no such thing.
Well, it looks like everyone is going to have to, because of IRS Form 4506. Form 4506 is an item the clients sign, usually at the end of the loan process, that gives the lender and anyone they may sell the loan to access to your tax returns. IRS form 4506-T is basically the same thing, except that it gives access to a transcript (the numbers) rather than an actual copy. Signing form 4506 is mandatory. No signature, no loan. It’s that simple.
Now it take the IRS about sixty days to respond to this request, so this has zero effect upon funding your loan. If your loan isn’t funded within thirty days of you signing the loan application, there’s something wrong with that loan unless something external to the loan is holding them back and you should go apply for a back up loan. But for later on, it can have an effect.
One of the ways it can have an effect is on the loan provider’s subsequent business. Traditionally, as long as the borrower made the first three payments on time, a loan broker was off the hook as far as borrower default. Lenders who have recently become much more nervous about their loan portfolios have recently started to change this, whereby a broker who put through a stated income loan (or any loan, for that matter) which is not subsequently borne out by the evidence of form 4506 is liable for the loan for the loan’s full duration. Since form 4506 is never borne out by any stated income loan, else the client should be getting the better rates for full documentation, this means that every time any broker puts through a stated income loan, they are liable for the consequences to the lender.
Well, it shouldn’t take much of an imagination to figure out the effects this is having upon the loan market. With the shifting of the consequences to the broker, the brokers are having second thoughts about doing stated income loans. Make no mistake, stated income was way out of control over the last couple of years. I’ve always been religiously careful about them, but that made me a member of a tiny minority of loan officers. Most of the loan officers out there have no clue as to what is an appropriate stated income loan, which has to a large extent put the brakes on stated income here locally. I’m not certain what effect this is having upon loan officers at direct lending houses, and there are a certain percentage of broker loan officers that are too clueless to understand what this means to them so they are going to keep right on doing them until the lawsuits pile up, but it’s really starting to put the brakes on stated income loans here locally.
Now stated income loans have been a large proportion of what drove home prices upwards. It was an easy way for loan officers and real estate agents to get people into loans, and therefore properties, that they really could not afford and did not qualify for. Both easier sales and bigger commissions, as people want the better house with the higher price and tend to reward the agent and loan officer who can get them in, regardless of whether they can really afford it or not. People who did not really qualify, but this gets them the loan, and therefore that beautiful McMansion they’ve got their heart set on, despite the fact that they cannot really afford it. It really is easy to sell people on too much house, and very few of them really understand the implications. I’ve sat people down, taken them through the math, and they still signed up with the agent who promised to get them into the McMansion because they wanted it so much.
Well, with the lenders getting aggressive about enforcing financial consequences, every loan officer with the brains to understand that heavy objects fall is suddenly taking a hard look at their business practices. Now it’s not just a question of “Get paid or don’t get paid,” it’s a matter of whether the money they get paid right now is enough to balance out the money they are going to have to pay later to buy the loan back, and the answer is largely coming back “No!” Furthermore, there could be actions taken against licenses by lenders and not just by clients. That brings a completely different trade-off into the picture, and a lot of loan officers aren’t liking what it says.
Now because the prevalence and easy availability of “stated income” loans has been one of the things driving the increase in the price of housing, essentially killing the stated income loan is not going to have a beneficial effect as far as sellers are concerned. It decreases, by some amount, the potential market of people who can afford to buy your property. Where before, the bottom line with most agents and loan officers was that anyone who wanted the property could probably be qualified for the necessary loan and was therefore a legitimate potential buyer, that is now changed. Since anytime you constrict your market of potential buyers, the equilibrium price of the market is going to fall, expect this to have a further deflationary effect upon property values. Indeed, there are a lot of factors that are conspiring against highly appreciated property values right now, but this one small item could well be what starts housing prices more notably downwards. Because it attacks a way of doing business that was at the heart of the run up in prices, this relatively small measure may be the pin that pops the housing bubble.
Caveat Emptor
The Effects of Divorce on Real Estate
The bottom line on this question is always, “Whatever the courts say.” Divorce law is complex, and different from state to state, and even when you think you’ve got a clear message in the law as written, the courts may interpret it differently, or there may be precedent that says otherwise, or even just some overarching concern you are not aware of. Even if the law is clear, it can usually be gotten around by the agreement of the parties. Consult your attorney.
With that said, there are a few rules of thumb to go over, valid in broad for most states in most situations.
Real Estate is usually owned by both partners in a marriage equally, even if one spouse acquired title prior to the marriage the second will be added by default when the marriage happens. The only thing that is usually held separate are inheritances – things that were inherited by one spouse or the other from relatives, and even those can often become joint property. Sometimes gifts to one spouse can also be held separate. One of the phrasings your learn from reading title reports are is “John Smith, who acquired title as a single man, and Jane Smith, husband and wife as joint tenants.” This tells you John bought it before they were married, and Jane got added to title upon marriage by the effects of the law.
There are trusts and the like to frustrate this from happening, and most states have rules and law permitting them, but you have to talk to the lawyer, get the trust created, and most importantly, as it’s the step that is most often omitted, transfer the assets to the trust in a timely fashion. I don’t know how many folks I’ve seen who spent a couple of thousand dollars creating a trust and then didn’t transfer the assets to it. Every penny they spent on that trust was wasted money.
Now, if Jane does not wish to be added to the property title, she may quitclaim it back to “John Smith, a married man as his sole and separate property.” However, quitclaim deeds have this curious limitation in many states (California among them) that they only function with respect to the interest you have in the property as of the time you sign them. Since the new spouse has not yet been given the claim upon the property until the marriage takes place, the quitclaim cannot be signed until after the marriage in order to accomplish the desired goal, as Jane has not yet acquired the interest in the property. Jane can say she’ll sign it after she’s married, but if she changes her mind, that’s a whole different legal struggle. If she signs it before the marriage, then since she subsequently acquired a claim to the property through the marriage, she now has an interest in the property through the eyes of the law. Let’s even say John and Jane are ninth cousins, the only surviving family inheritors, but for whatever reason Jane quitclaims the property to John, but then they later get married. Jane now has a married woman’s legal interest in the property. The quitclaim only applies to Jane’s interest in the property at the time of the quitclaim, and has no effect upon any claims she may acquire later. The only way I am aware, in general, to deed away any rights you may acquire in the future is with a Grant Deed, and each state has its own laws as to how this may and may not be accomplished. On the other hand, a Quitclaim is a handy document if you may have the intention of acquiring some interest in the property back at a later time, as it generally doesn’t make, for instance, buying the historic family homestead back from your wastrel brother problematic.
Now suppose John and Jane Smith get divorced, and the property was held jointly. Both John and Jane still have an interest in the property, and continue to hold an interest, even if the court orders them to sign a quitclaim, until they actually have done so. This is why it is better to get a court award of actual title rather than a court order for the other spouse to sign a quitclaim. Unfortunately, for some reason, most divorce courts are unwilling to award actual title rather than order the ex-spouse to sign the quitclaim. So whoever gets the title or possession is not able to do anything with the property without the ex-spouse’s approval, unless and until that ex-spouse signs the quitclaim or the court awards the spouse in possession with clear title. I could tell stories of ex-spouses that disappeared, or pretended to disappear for years leaving the ex-spouse in possession unable to sell, unable to refinance, even unable in some circumstances to sign a valid lease. Not infrequently, the ex-spouse pops up years later wanting a better deal (that is, more money) as inducement to sign the quitclaim deed.
Until the ex-spouse signs the quitclaim, title companies will not insure either loans, either in support of refinancing or a sale, or actual sales transactions. No lenders policy of title insurance, no loan (in most states), and that kills the refinance, or the loan financing any sale. No policy of owner’s title insurance, and I certainly won’t pay my money for a property, and advise my clients in most stringent terms not to do so.
Now, let’s say that the ex-spouse has signed the quitclaim but is still on the existing loan, which was taken out while you were still married. This isn’t really a problem. In order to refinance, or deliver clear title on a sale, that loan needs to be paid off. The lender doesn’t care how it gets the money, or from whom. That ex-spouse can drop off the face of the earth once the quitclaim is signed, and it really doesn’t make any difference. Once they are out of the legal picture, they might as well be dead. On the other hand, both of you are responsible for the entire debt. It’s not like some is His and some is Hers. Now, because this is true, sometimes ex-spouses also get their credit hit when things like a short sale subsequently happen, or foreclosures. To guard the ex-spouse who is giving up the rights to the property from this happening, many times the divorce court will order the ex-spouse who is retaining possession to refinance in order to remove the spouse who no longer has a legal interest in the property from future liability on the debt.
Many times, the court will order the ex-spouse retaining the property to buy the relinquishing ex-spouse out of the property, to give them some money or other goods in exchange for their interest in the property.
Often, especially if both spouse’s incomes were used in order to qualify for the loan on the property, the remaining ex-spouse will not be able to qualify for the necessary loan on their own. In this case, the smart thing to do is usually sell the property. It is a real issue that because many former spouses are delinquent in their payment of alimony and child support, the lenders want to see a certain history (usually three months) of these items being paid before they will allow the income so generated to be used to help qualify the remaining ex-spouse for the new loan.
Keep in mind that all of the above are simply common concerns and happenings, and may have nothing to do with the situation you find yourself in in a divorce. Consult your attorney for real feedback of how the law and legal precedent apply to your situation.
Caveat Emptor
Legal Late Payments on Your Mortgage
(I have noticed a fair number of hits to this article that, judging by their search query, probably want the article on What Happens When You Can’t Make Your Real Estate Loan Payment instead)
I got a question about legal late payments in California.
Unfortunately, there really is no such thing as a legal late payment. You borrowed the money, signed a contract, and it accrues interest according to that contract. You owe this money, and it only gets worse if you don’t pay it. There is some wiggle room so you don’t get unduly hit for a day or two late, or if the right to receive payments is sold, but that’s about it.
The law gives you some wiggle room in the timing of the payments. First off, the laws of California and most other states give you fifteen days after the due date to pay the mortgage before a penalty can be assessed. I know of a lot of people who make consistent use of this. If it’s due on the first, it’s supposed to be there on the first, but many people take advantage of the fact that there is no penalty as long as it’s paid within fifteen days of due date (i.e. before the sixteenth), and consistently mail their payment on the tenth or twelfth.
Now if you miss it by even one day, the penalty is up to four percent of the amount due here in California. As you might guess, most lenders charge the maximum penalty. When you compute it out, four percent times 360 divide by 15 is ninety-six percent annualized. I had my check get lost in the mail once and the lender waived the penalty when they called me on the eighteenth because I always paid on the first or before, but they didn’t have to do that. I got the distinct impression that if I were the kind of person who pays on the twelfth or fourteenth every month, they would not have waived the penalty.
Now, there is also some wiggle room on when the new lender receives it if your contract is transferred between lenders. Because once upon a time some unscrupulous lenders would sell notes back and forth between their own subsidiaries because it made them more likely to get late fees, or even able to foreclose on appreciated property when there were relatively few protections for borrowers in law. Mind you, you still have to send it on time, but if it gets hung up in forwarding between lenders, that’s not your issue. Within sixty days, the old lender must forward the payment promptly, and it counts as received when the old or the new lender receives it, whichever is first. It’s still better to send to the new lender at the new address if you have it or know it.
In short, although there are some small period where payment is allowed to be delayed due to one factor or another, it is never to your advantage to do so. Make your payments on time.
Caveat Emptor
Housing Bubble Death Trap
That was the wording of a search engine hit I got. It’s not literally a death trap, of course, only much financial pain. But the hyperbole is forgivable in today’s modern society and the state of the current market.
Other people may have other definitions of “housing bubble death trap,” but when I’m talking about stuff like that, I’m talking about someone who bought too much house with an unstable (or insufficiently stable) loan.
I just picked a couple random streets in older lower middle class neighborhoods, and looked back a couple of years. I found a couple of homes that have sold twice or are on the market again.
A 3 bedroom home sold for $487,000 at the end of last year. It’s back on the market now for $425,000. A condo sold for $285,000 at the end of 2004, and again just recently for $265,000.
Now just in case you don’t understand, the owner doesn’t get the full sale price, but they paid the previous sale price to buy it. Usual seller’s expenses run about seven percent or so. So for the 3 bedroom home, the owner is only going to get about $395,000 to pay it off, even if they get full asking price. For the condo, the owner only got about $246,000.
Now, let’s consider the sales involved. Either their down payment when they bought the home will cover it, or it won’t. If it does, the homeowner is out about $92,000 in the first case, about $39,000 in the second. This doesn’t include any prepayment penalties there may be or negative amortization it may have undergone, not to mention the cost of any payments they may have missed, etcetera, etcetera. There’s always a reason people sell for a loss, and it’s usually because they have no choice. They can’t make the payments (and never could) or they have been transferred, have to get housing elsewhere, and can’t make the payments. And what if the down payment won’t cover the deficit? Well, at the end of the year they are likely to get a 1099 form that says they got income from forgiveness of debts. As I understand it, this is ordinary income, and it can knock you up to higher tax brackets, both federal and state, if your state has state income tax.
So why didn’t the folks just refinance into something stable, you ask? They couldn’t afford the payments on a stable loan. Furthermore, they couldn’t refinance due to their situation. If you bought with anything close to 100% financing, and you lose $55,000 of value, well, banks don’t like lending money for more than the property is worth. There’s no security in it. Now there are 125% loans out there, but the rate is high and the terms are ugly. If you can’t afford the rate at 100 percent, or 95 percent of value, you certainly can’t afford the rate for over 100 percent. There are only two times that the value of a property means anything. One is when you buy or sell, and the value is whatever you paid for it, or your buyer pays. The other, alas, is when you refinance, and if you owe $480,000 on the property when similar properties are selling for $425,000, the odds of you getting a better loan with a lower payment are essentially non-existent.
Now if the folks are in a stable loan, and can make the real payments, it doesn’t really matter what the property is worth right now. You’re doing fine, whether you refinance or not. Refinancing might put you into a better situation, but if you can’t refi, you’re still doing okay. Yes, the prices are down and they’re likely to go down more. It just doesn’t matter if you don’t intend to sell and don’t need to refinance. Your cash flow is what it is, and if you really were okay with that to start with and the loan is stable, you’re likely okay with it now. If you got a loan that was stable for three or five years long enough ago to worry about loan adjustment now (or soon), you’ve likely got plenty of equity in the property now. If, on the other hand, you did a 2/28 interest only a year and a half ago, then you’re potentially looking at a payment adjustment in the next few months that’s suddenly two percent higher and fully amortized, which could be thirty or forty percent difference in the payments. Ouch. Out of such scenarios are losing a property to foreclosure constructed, with consequences even worse than the ones I talk about above. Just the act of lender filing a Notice of Default usually adds thousands of dollars to what you owe, never mind any payments you may have missed or been late.
This then, is what I call the Housing Bubble Death Trap. People who bought too much house with unstable loans, then had the market recede a little on them. Now they are upside down (owe more on the property than it is worth) with a loan they cannot refinance and cannot afford, and they can’t sell for as much money as they paid.
What are the loans to watch out for if you’re buying. Anything like stated income, where you’re not documenting that you make enough to qualify for the loan. Stated Income has legitimate usages, mostly for small business folk and those paid on commission, but should not be used nearly so often as it has been, of late. For all the people who have claimed otherwise (and used them for such), I have never seen a situation where I’d recommend any kind of negative amortization loan for the purchase of a property that you intend to live in. Stated Income Negative Amortization loans should scream out to anyone “WARNING, WILL ROBINSON! DANGER! DANGER! DANGER!” Short term (2 year) interest only loans are less clear-cut, but often a bad idea. These are sub-prime loans. I did a lot of 2/28 loans at six percent a couple of years back. They were intended as short term loans until folks’ credit improved, and that’s the way I explained them, emphasizing that fact that they have to make certain their credit score actually improves during those two years. They’re going to be around 8 percent the first six months they adjust, and a $300,000 6 percent interest only has a payment of $1500 per month. If it adjusts to 8 percent and starts amortizing with 28 years left to go, that’s a payment of $2240. I have a firm rule of no prepayment penalties longer than the fixed period of the loan, but I’m definitely the exception rather than the rule there among loan officers. If you were paying principal and interest all along, like most of my clients, you’ve got some breathing room (equity) in your property and the “payment shock” won’t be nearly so bad, not to mention that if your score actually went up, you likely qualify A paper now.
Three year (or longer) fixed rate A paper probably gives you enough breathing room in all but the worst of all market collapses, and I prefer at least five, with thirty year fixed actually being my favorite loan right now, due to the fact that depending upon the lender and the client, I may actually be able to get them cheaper than anything else. This, however, is a short term phenomenon of the moment, due to the yield curve being inverted, and once it straightens out, I’ll be doing more hybrid ARMs again.
Caveat Emptor
Homesteading and Declaration of Homestead
One topic I haven’t covered yet here is homesteading. This has nothing to do with the Homestead Act of 1862 that encouraged settling the western United States.
A declaration of Homestead basically protects your equity. In many cases, you may not even have to file a declaration to receive the benefits, but whether this is so is complex. If you file, you remove the ambiguity.
A homestead declaration may only be filed upon a primary residence, and only if you own it. Rental property, second homes, and property held for business purposes is not eligible. Law between the states varies, as does the exemption amount
How it works is pretty consistent. First off, it protects no equity arising from dates prior to declaration. If you are in one of those situations where you have to explicitly declare homestead instead of it happening de facto, you have to actually declare it before the incident happens. You get in a traffic accident that’s your fault, and go out and declare homestead the next day, it won’t help you protect your equity against that particular lawsuit.
Note that it protects your equity, not your asset value. If the home is worth $500,000 (as is often the case in San Diego) but you owe $400,000, you have $100,000 of equity. How much it protects is dependent upon your state law and exact situation. Default protection in California is $50,000, but it can be up to $150,000 if you or your spouse are 55 or older, disabled, or have income less than $15,000 per year.
It can also prevent sale of the property in some, although not all situations. In California, the judgment creditor usually has to get a court order, after they have won the judgment, in order to sell the property. I’m not a lawyer, so I’m not going to presume to advise anyone on what those circumstances are.
Now, there is some question in some minds as to whether a homestead declaration inhibits enforcements of Deed of Trust, so many lenders will require an abandonment of homestead prior to funding their loan. You can always re-declare as soon as the loan funds, anyway. I know that some folks have fought this issue in court, costing the lenders money to pay their lawyers, so it’s hard to blame the lenders for requiring it. You can refuse to do this, but they can also refuse to give you the loan. It’s their money, and they are the arbiters of how they lend it out.
Caveat Emptor.
Failures of Imagination?
I recently discovered the film Secondhand Lions. Robert Duvall, Michael Caine, and Haley Joel Osmont. Beautiful tightly plotted movie, highly recommended, and if it hadn’t been up against Return Of The King it might have won Best Picture. Robert Duvall and Michael Caine are a pair of brothers, old coots who disappeared for forty years before turning back up in Texas. Everyone knows they’ve got money, and everyone’s got their theories as to how they got it. One person thinks they were mobsters, another bank robbers, a third contract killers. Nobody knows where the money is, and everybody wants to get their hands on it. Walter (Haley Joel Osmont) is their great nephew dumped off with them by his mother for the summer. Over time, Michael Caine starts telling this fantastic story about where they were all that time, what they were doing, and incidentally, where they got their money. Along the way, we see how the two old brothers treat the world around them, and the boy starts to get a sense that there really is something to their story, no matter how many people tell him otherwise because it’s too fantastic. Nothing out of science fiction or fantasy, but quite a bit of the stuff that romantic fiction is made of. The imaginations of the adults simply will not stretch far enough to believe what you as the observer suspect more and more along the way is the truth. They’re older, “wiser”, and “not that naive.” But the story Michael Caine’s character tells is not only compelling, but has all the little elements that make it believable and fits with the way the brothers treat the world around them, and when the major confrontation happens, Walter decides he believes his great uncles rather than his mother (who’s lied to him for convenience many times) and her latest sleazy boyfriend, who are trying to justify stealing the two brothers’ money.
There is eventual corroboration of main theme of the brothers’ story just as the picture ends, after a twenty year fast forward, but by that point the viewer who has been watching carefully doesn’t really need it, and the point of the corroboration is elsewhere. The watchers of the movie have seen the evidence. No matter how unlikely, we know it’s the truth, even if those characters stuck in denial on the silver screen do not. If Michael Caine has possibly embellished the details a bit, that’s not really important. You know that the basic story happened, where the on-screen adults refuse to believe.
This happens in the real world, also. When Heaven’s Gate group suicided, the local rag ran a transcript of the sheriff’s call. The first officers at the scene just could not understand what happened, despite it being fairly straightforward logically. Their minds just could not make the deduction. Their prejudices refused to believe 39 people could commit mass suicide, and they asked for back-up partially to figure out what had happened.
The real world happens, and it cares not a whit for our prejudices and experiences. It just is. It doesn’t matter whether we believe there is an express train coming down the track or not. We’re just as spectacularly dead either way when it hits us.
We have once again reached a point in history where many people believe that their perception is everything, despite it missing a large number of data points and ignoring another large number of them. People who would have no problem demanding immediate action if a group of neo-nazi skinheads took over the government of Germany, changed the flag to a swastika, built up their army, and started saying things like lebensraum and Drang Nach Osten and Judenfrei, nonetheless have a failure of imagination when it comes to the Islamists. When you’re talking about the Nazis, I don’t imagine anyone would have any problem extrapolating what would happen next. It’s all happened before, and most of us have heard stories about it and seen movies and television ad nauseum (Hollywood has no problem with Nazis as bad guys; after all, they attacked the communists and almost won). Indeed, many folks believe something very similar has happened here in the United States, despite the vast weight of the evidence to the contrary. For example, instead of metaphorically “scapegoating the jews” so to speak, we are going quite a distance out of our way not to hold those of the ethnicity that was responsible for the most recent atrocities, despite the fact that a not insignificant proportion have actively worked to advance the cause of those who perpetuated the atrocities, and yet we refuse (mostly correctly) to allow our law enforcement and counter-terrorism units to concentrate their efforts on this ethnicity. We have yet to restrict them in any fashion, or treat them in any way disfavorably as compared to any other group. Compare and contrast this to the treatment that the Jews received in Nazi Germany, even before Kristallnicht. Consider that we are gearing up for Congressional elections, not burning the Reichstag, and that it is accepted by all concerned that our current president will leave office in January 2009 while having no apparent successor currently in sight. Indeed, for the first time in 56 years, we will have neither a sitting president nor vice-president on the ballot in 2008.
Why, if we are so intent upon manufacturing threats and conspiracies, are we unable to believe the publicly stated intentions of a large faction of a major world religion? They make no secret of their Islamist doctrine, and conquest for the sake of spreading their religion is embedded far more strongly in the dogma of Islam than it ever was in Christianity, yet a significant portion of our population completely discounts this threat while obsessing about the “establishment of a theocracy” here in the United States, presumably of the fundamentalist or evangelical Christian stripe. Despite their words, despite their actions, it’s almost as if these people have dismissed the islamists as being unimportant, much like the British Empire of a century ago dismissed the request of one chinese mandarin who inquired as to when this barbarian chieftainess Victoria was going to come do homage to the Son of Heaven? The world today is different in many ways, but one of the most important is the damage a small group of dedicated people can do.
There is the fact that there have been christian theocracies, many of them spread all over europe. There is also historical favoritism towards protestant christians in this country. However, there hasn’t been a single christian majority nation which has been believably a theocracy since at least the Spanish Civil War, and not really since the French Revolution. Protestant favoritism has never been legally based in this country, and its social practice in this country and elsewhere have been dying since the end of World War II and in another generation you’ll have people who don’t even realize that protestants used to be favored.
Compare and contrast this to Islamic nations, where the dhimmi tax is the order of the day, non-moslems are severely restricted in their opportunities and not allowed to do certain things. There is no imagination required to believe Islamists intend exactly what they say; these are typical practices in those countries that are officially islamic.
Consider the treatment of non-islamics in islamic countries, and historic militant expansionism of islam. Dhimmi is real. It is happening today. The pressure to adopt Islam is intense, starting with increased taxes and going from there through being unable to bring any kind of legal action against a Muslim, not being allowed to testify against them in court. If ever you give in, and accept Islam, not only do the imams have dominion over you forever, but you are never permitted to give it up. If you are raised in an Islamic household, you will be required while still a child to profess islam, and once you have done so, there is no recognition of the fact that you may have done so under coercion, or before the age of consent. You are moslem forever. Not even in the darkest, most repressive days of christianity did the christian priests go so far. Several muslim countries still enforce the death penalty for apostasy – attempting to leave the islamic faith.
So far, I have ignored the militant nature of Islam, how it carried the religion at the point of a sword all the way from Arabia to the Philippines and Morocco and Spain, most of it within a century or so after founding, and how it wants to do so today. Indeed, it is doing the best it can towards that purpose. Christianity a hundred years after the death of Jesus, or Paul, was a small sect, and if not generally persecuted to the degree portrayed in christian mythology, was officially forbidden and hid in the shadows where nobody looked. The reason we have so few examples of early christian lore, or buildings, is because they were forced to hide from official notice. For nearly three centuries, this was how christians lived. The christian philosophy has developed in accordance with this fact; it does not need official sponsorship from the state in order to attract believers.
Islam has never done anything of the kind. Indeed, they would likely have become something more akin to christianity if they had had to live thus. What they did in India was in no way atypical. I’m not going to pretend the Crusaders were saints, but the moslems, in general, gave at least as good as they got in terms of atrocities (there were some exceptions). The conquest of Cyprus, Syria, and Persia all had their atrocities. Not to mention the destruction of most of the remnants of classical civilization in Africa. Vlad Tepes was mostly noteworthy for being one of the few non-moslems willing to be savage enough to give them pause. Here’s one more link just to drive the point home.
So what,” you say, “The last major offensive of the Islamic world was in 1683.” True enough, but it was the last because they ran out of the means to carry them out, not because they had renounced conquest in the name of religion. The europeans had built their own civilization, and their technology, both civil and military, surpassed the Ottomans. By the time of Lepanto in 1571, it was only greater numbers that made them formidable, and when the southern european powers of the Mediterreanean combined against them to generate approximately equal numbers, the Turks were beaten. By the time of their last assault on Vienna, even superior numbers were insufficient to achieve their objective.
Not only have the Islamists today never given up on the goal of spreading their religion through conquest and force, the laws in the islamic countries hobble any who would speak against them or moderate their influence. It is a mistake to think of an islamic ruler as having the same sort of power that an absolute despot in most of the rest of the world. The real power lies in the mosque, which may grant the ruler some leeway, but nonetheless rules with an iron hand, and there are few islamic rulers who have successfully defied their priests. It is probably closer to the mark to think of their nominal rulers as administrators, because although they have discretion and authority of their own, there are boundaries they cannot cross if they wish to retain their position or their lives, as both Nasser and Sadat of Egypt, to name the first examples that spring to mind, demonstrate. Neither the ruler nor anyone else can fight sharia, and sharia supports the Islamists. There are a number of courageous moslems, primarily in the west, who have spoken out against Islamism and various parts of Islamic law. To date, I cannot point to a difference they have made in the overall islamic mindset, and many of them are under fatwas of death. I respect and admire them for speaking out, but thus far I cannot see that they have had much effect.
In short, this situation is in no way, shape, or form comparable to what limited efforts that christians have made to promote their values through legal-based means. The Islamic theocracies might be very comparable to Nazi Germany, if the Nazis had been in power for 1400 years and essentially every german was a true believer in Nazism and the virtues of the master race. This was not the case, as is demonstrated by the actions of Oskar Schindler and the White Rose group, among many others. China under Mao, the greatest mass murderer in history, comes closer, but even that falls short of the degree to which Islamic society proscribes disagreement with, and debate about its religious precepts, let alone the penalties for acting against those principles. If any imam has yet disavowed or spoken against world conquest by Islam, it’s news to me. I just executed searches on several major search engines, and didn’t come up with any. I seem to recall the pope apologizing for the crusades and indeed, christians have questioned them almost since they happened. I haven’t heard of any reciprocation from moslems for their co-religionists’ deeds in the same places, before, during, and after.
With all of this evidence readily available, if not precisely trumpeted by the guardians of our national discussions, the media, I cannot put the failure to comprehend the threat down to a failure of imagination. The data, the explanations, have been laid out quite solidly any number of places and they are easily findable on any search engine (except perhaps the ones based in Islamic countries, which are censored much the same as Google, MSN and Yahoo drew so much fire for accepting and cooperating with in China). Those sheriff’s deputies who encountered the Heaven’s Gate bodies I mentioned earlier did figure it out for themselves, although it took them a bit longer than you might think if you’d never been in a similarly worldview stretching situation. But they did manage to stretch their worldview to accommodate new facts. Those who do not believe in the war on terror are being presented with new facts that contradict their worldview, and instead of adapting their worldview to the new facts, they pretend those facts do not exist. Instead of believing in quite open and blatant islamist conspiracies for world domination, they insist upon creating ones which do not stand up under the comparison with known facts. This is not a failure of imagination. This amounts to nothing less than a willful denial of evidence, much like any number of scientists in the past refused to believe theories which described the world better than existing theories and correctly predicted subsequent events, much as the islamist hypothesis has correctly predicted everything from the arrests and other activity in Egypt to Iran wanting to join Pakistan in the nuclear club to the actions of the Wahhabi priesthood in Saudi Arabia.
TO BE CONTINUED
Buyer’s Basic Guide to The Foreclosure Market and REOs
I’ve written articles on when you can’t make your mortgage payment and how to react if you see foreclosure coming in time to do something about it, and even on Short Payoffs, but all of those are owner (seller) oriented. This is intended as a basic buyer’s guide to getting a bargain from people who bit off more than they could chew, with emphasis on the current local market but applicability anywhere.
There are essentially four phases in the foreclosure process. The first is pre-default. They’ve made late payments or none at all, and there’s no way they can keep the payments up, but they won’t to the intelligent thing, which is sell for what they can get. Many people who own properties headed for default are deep in Denial. Yes, this is often because something bad happened to them for reasons beyond their control. I’d be happier if those sorts of things didn’t happen, but the amount of rescuing that’s going to get done is minimal. There are very few White Knights running around, and the ones who claim to be White Knights are usually blackguards. Unless the seller knows of some factor that is going to change, this is the smart time to deal with the problem. Before the Notice of Default is recorded, nobody really knows but the owner and the bank. Once the Notice of Default hits, all the sharks come out because everyone knows the owner is in Dire Circumstances. Let’s face it: most folks will make the payments on their home even if they let every other bill slide. When someone can’t make their mortgage payment, and it’s public information as a Notice of Default is, everybody and their pet rock knows thet don’t have any choice but to sell. They’ll flood you with offers, but they won’t be good offers.
Now if you’re looking to buy at this stage, the thing to do is examine the Multiple Listing Service. “Motivated seller” and similar phrases are often code for “These people can’t make their payments!”, particularly in the current market with prices declining somewhat and many people who stretched beyond their means. It would be great to be able to get a list of properties that are sixty days or more delinquent, as this would include the folks in denial, but it just isn’t going to happen. The only folks who know are the banks and the credit reporting agencies, and they are prohibited by privacy laws from disclosure. So at this point all you have to deal with are the people who are not in denial. When the market is rapidly appreciating, this is a good place to find a bargain, because once the Notice of Default hits, the sharks swarm, so if you can find these people before that, you’re in a strong bargaining position if you correctly suspect they can’t make their payments. The taxes being delinquent is often a good indicator of this, but there is no way to know for sure unless the people or their agent tell you, and the agent who tells you has just violated fiduciary duty. This can mean prospective buyers overplay their hands in negotiations, which is fine if you intend to move on if you can’t get a “Manhattan for $24” type deal, but if it’s a property you want and can make money on, overplaying your hand can poison the atmosphere. There aren’t many “Manhattan for $24” type deals out there. There are a lot more good opportunities for someone willing to pay a reasonable price and hold the property a while or make improvements. Deals so good that they instantly make oodles of money, someone will usually come along and offer the poor schmoe on the other end a better deal, and if the poor schmoe has a decent agent who’s looking out for their interests, they can switch to the other offer. Buyers and escrow companies don’t like it, but it can be done. It’s extra work for the listing agent, so they may not want to, and they may not have done the best set-up, but it can usually be done anyway.
The reason it’s smart for sellers to sell at this time is that this is when they are going to get the best deal. The mere act of entering Default is likely to cost thousands of dollars. Furthermore, this is the phase with the most opportunity to find a property at a better than usual price for buyers, because most of these don’t get to actual default. Someone will come along and make an offer, and a listing agent who gets an offer on one of these is likely to advocate taking the first reasonable offer, reasonable being defined as “anything vaguely in the neighborhood of the asking price,” and the asking price itself is likely to be lower than it otherwise would be.
The second stage of the foreclosure process is default. The Notice of Default has been filed, and because it is a matter of public record, the sharks instantly react to the blood in the water. The seller is going to get dozens to hundreds or even thousands of solicitations. Also, once the property is in default, the bank can require the owner bring the Note entirely current in order to get out of default. Whether or not the property is listed, they’re going to have agents offering to sell it for them, individual buyers who want those Manhattan for $24 deals, and lawyers offering to “protect” them by declaring bankruptcy. By the way, I’ve never heard of anyone who came out better in the end by declaring bankruptcy, so you probably don’t want to do it if you’re in this position. I know it’s your home, and you’re likely extremely emotionally attached to it, but declaring bankruptcy doesn’t mean you don’t owe the money when it comes to a Trust Deed. Every single one of these folks, lawyer, agent, or prospective buyer, knows that you’re in default. Some owners are still in denial at this point, but all denial means at this point is that such an owner is not likely to take the best offer they’ll get. It’s at this phase that most “subject to” deals happen, usually with highly appreciated properties with significant equity over and above the trust deed. If the owners owe anything approaching the value of the property, that’s a silly situation to do a “subject to” purchase for buyers, and most of the prospective buyers (those with decent advisors or agents or experience) won’t do it if the equity is less than a certain amount or proportion of the value.
The third phase of a foreclosure is the auction. This is typically a very short period. Five days before the auction date itself, the owner loses the legal right to redeem the property, although the bank will usually let them until the last possible instant. There is also a legal requirement to vacate the property before the auction. “Subject to” deals can still go through as long as the bank will accept redemption. Now the auction itself requires cash or an acceptable equivalent. You don’t go to the auction and then get a loan later. At the very least you have to have the loan prearranged and a check for the proceeds in hand. This can mean that the rate is significantly higher, and it can be difficult to refinance within the first year.
The fourth phase is after the auction. In California, if the property does not get a bid for at least ninety percent of appraised value, it does not sell and becomes owned by the bank. The bank doesn’t want it; they’re not in the real estate business and in fact, they are legally required to dispose of it within a certain time. In the current market, this can be the best place to acquire a property. The bank knows they’re taking a loss, and the longer it goes, the bigger the loss. Mind you, because the bank usually takes a loss, few properties go to this stage. The lenders will usually do anything reasonable in order to avoid auction, but once it goes to auction, they want to get rid of it. They usually require a substantial deposit, but the purchase price can be the best of all.
One thing to be wary of in foreclosures is they are often in less the ideal condition, to say the least. These people know they are losing the house, and often that they are going to come away with nothing in the best realistic case. They have no incentive to take care of the property, and many actively work to mess it up. This is cause for care in purchasing them, and inspections, because not all of the damage may be obvious. Furthermore, many of them may have been unable to afford proper maintenance for some time before they lost the property. Purchasing a foreclosure can mean you will need a large reservoir of cash in order to fix up the property to habitable condition.
Caveat Emptor
Shopping for Long Term Care Insurance – Who Should and Shouldn’t Buy, and Policy Characteristics
I’ve run two prior articles this week on the theme of Long Term Care, one on Long Term Care Issues, and one on Non-Tax-Qualified versus Tax-Qualified, and Partnership Insurance Policies. Now, I’m getting down to nuts and bolts of what you need to know while shopping for a policy.
The two most important characteristics are the total benefits and the daily benefits. It may be helpful for many people to think of total benefits as a lake, where instead of water, it contains the total amount that is available to you, and the daily benefits as the size of the pipe that brings those benefits to you when you need them. It doesn’t do you much good to have a huge lake and a too-small pipe that can’t put out the fire, which is the daily bills you have to pay for care.
The way policies are generally sold is that they are for X number of years, with a daily benefit limit of $Y. The product of these numbers (and 360 days per year) is the initial total benefits limit. A one year policy with a $150 per day limit is good for $54,000 of total coverage. A three year policy with a limit of $300 per day is worth $324,000 of total benefits. A five year policy with a limit of $180 per day has that exact same aggregate coverage limit of $324,000. There are lifetime policies available; these have no aggregate limit but are limited to whatever the daily benefit is.
Note that a three year $300 per day policy is superior to a five year $180 per day policy in that although they both have the same “lake” of benefits, the former has a larger “pipe” (or “stream”, if you’d prefer) to get them to you. Therefore, the policy with the large pipe will be more expensive. It is an often misunderstood part of policies that there is no time limit for benefits. You can use less if you like, but you can’t use it faster than the pipe brings it to you. If it takes you three, five, seven, or seventeen years to exhaust the “lake” that’s how long it takes. I’ve known agents who did not understand this clearly. If you only use $60 per day, either of these policies will last fifteen years. But if you use $250 per day, the former will pay off the full amount of your daily benefit until exhausted (about 3.6 years), whereas if you have the latter, you’re going to be out of pocket $70 per day from day one. This can cause you to exhaust the resources you were trying to protect well before the policy is done paying benefits. The “time duration stated” – the Y years part – is the shortest amount of time in which it is possible to exhaust your lake of benefits. It has nothing to do with how long the benefits can last, which is always “until exhaustion.” Given the facts of the situation, it is better to have a big “pipe” than a long duration, and in the example given, the 3 year $300 per day policy will be the more expensive. It’s also likely to be worth the difference. For Partnership policies, the state of California currently has a minimum daily benefit limit of $130.
It is to be noted that for the Partnership policies, at least in California, the limit is actually a monthly limit of thirty times the daily limit. Many other policies follow this as well. This means if you get something that costs extra once or twice a week, like physical therapy, as long as your entire monthly care does not exceed thirty times the daily benefit, you won’t be out of pocket for those not-so-little extras.
Policies are sold as home care only, facility care only, or comprehensive, so called because it covers care where ever you may need it. Actually, here is a Glossary of terms you may want to refer to. Partnership is only sold in facility care only and comprehensive policies. My advice to to buy a comprehensive policy, because you never know what your situation will be when you actually need to use benefits. The difference in cost is typically small.
One of the really sneaky ways some insurance companies can stick you with a gotcha! is to require you to continue paying premiums while you are receiving care. Since you’re likely in a situation of incompetence, or just plain unable, this is a good way to get out of paying benefits. (“But your honor, Ms. Jones did not continue to pay her premiums as is clearly required by the policy! We are clearly within our rights to cancel”). Insist upon a policy with waiver of premium upon commencement of benefits. This means you don’t have to continue paying your premiums when you may not be mentally capable, or able to get new checks, or any of dozens of other possible hitches. In California, waiver of premium is required for all Partnership policies.
Policy Lapse Protection is similar, having to do with reinstating your policy if you neglect to pay the premium before you are diagnosed as needing care and it lapses for that reason, but good policy lapse protection is actually fairly widespread. You’re going to have to pay the back premiums, “bring your payments current,” and there may be an administrative or interest charge, but better that than needing an entirely new policy. This is not “don’t make your payments for ten years and drop a lump sum on them when your doctor diagnoses you with Alzheimer’s.” About six months to maybe a year in some cases, is about the limit of lapse protection.
Elimination period is the time after you start receiving care, before your policy starts paying benefits. It’s analogous to the “deductible” on your automobile insurance. Short elimination periods are more expensive, longer ones less so. I would not consider an elimination period of less than ninety days, or more than six months. Even at $200 per day, the person who is an appropriate buyer of long term care insurance should be able to fund three to six months or so. Lengthening the Elimination period makes the policy cheaper. Indeed, a three year policy with a six month elimination period may be cheaper that an equivalent two year policy with a three month elimination period. The average stay in long term care is something approximating two years, but in a large number of cases it is five years or more. If you’ve got assets to protect, you can likely afford three to six months, but fewer people can afford years of coverage. If you’re lucky enough to live in one of the states with an active Partnership for Long Term Care, the asset protection function means you continue to receive benefits even after the policy is exhausted. Even if you don’t live in one of those states, the policy can get you through the “lookback period” where Medicaid will go back and attach any assets you transferred elsewhere. I know I’ve said Medicaid coverage is awful, but if you still have money, or people willing to spend money on your behalf, you can make it a lot more tolerable than it is for someone who is truly destiture.
Pre-existing conditions are not something to unduly worry about here, in my experience. If you have a pre-existing condition, the insurer is only allowed to exclude paying to treat it for six months in California, and I believe (but I am not certain) that this is an NAIC rule, which would mean it likely applies nationwide. This can mean that you will be flat out rejected until/unless you recover, but this is in accordance with the principles of insurance. You buy insurance when it’s a risk, not a certainty. You don’t wait to buy health insurance until the heart attack starts, you don’t wait until you’ve got terminal cancer to buy a life insurance policy, and you don’t wait until the doctor diagnoses you with Alzheimer’s to buy a policy of Long Term Care Insurance. You would be quite properly rejected for coverage in all three cases.
Other bells and whistles you should be interested in include “step down” options for if the premium increases beyond your ability to pay. This gives you the ability to change to a less expensive policy without new underwriting, rather than simply losing coverage, if your circumstances change..
One protection I strongly advise everyone to get is inflation protection. If you buy a $200 per day policy, that may be adequate now. It may not be adequate when you need to use benefits. All California Partnership policies require compound interest inflation coverage if you are less than seventy at time of purchase. This is a good thing. If you are over seventy when you first buy, simple interest inflation protection is permitted, but I wouldn’t advise it unless you are going to use benefits within the next couple of years or not at all.
Inflation protection applies to both daily benefit and total available benefits. So if you start with a 3 year, $300 per day policy, after one year of 5 percent inflation protection, it goes to a $315 per day policy with a total benefit pool of $340,200. Let’s say it’s twenty years down the line, and your “total pool” of dollars has gone to $871,000, but now you start using them. Let’s say you use $21,000 of benefits that year, leaving $850,000. That $850,000 pool becomes $892,500 the next year, demonstrating that even after you start using benefits, it is still possible for your “available lake” to increase if you have inflation protection. Now the last I was aware, actual cost rises were running about 7% per year, so 5% isn’t really long-term adequate, but it’s what’s available. If you’re relatively young, you probably want to overbuy by some factor to compensate for this.
One rider that you probably do not want is return of premium. Return of premium means if you die without using benefits, your estate gets the money you paid in premiums back. This is very attractive to laypersons, and it makes a nice addition to the salesperson’s commission. Unfortunately, it can also double – or more – your cost of coverage, and the older you are, the larger the multiplier will be. This can cause people who can and should buy a policy to buy a smaller policy benefit than they really need, smaller than they should have. Even though they are spending the same amount of money on the premium, their coverage is far less. Furthermore, the return of premium is usually with only a very small interest, or none at all. It takes comparatively little time before you would have been better off investing the difference.
Now, who should and should not buy a policy of long term care insurance. There are no hard and fast rules, but if you have no assets to protect or the policy premiums are a real hardship, then you should not buy a policy. The state of California defines this as assets between $50,000 and $250,000, but those standards are the same as when I took my training, and would suspect that a truer picture would be those with liquid assets under $75,000 should not bother. On the other hand, California has some very smart millionaires with top of the line advisers buying Partnership policies because they are never certain their circumstances will not change. Income wise, the state of California has a .pdf document that they referred me to. Furthermore, someone who could afford long term care indefinitely would have no reason to purchase an insurance policy – the insurance company doesn’t work for free. In California Partnership Policies, at least, you do have an additional protection in that the company is required to advise you if you are not within the income and asset guidelines for policy purchase, and offer a full refund.
The best time of life to buy long term care is as early as practical. If you buy at 40, your premiums will always be less – a lot less – than someone who buys the same policy at 50, who in turn will save a lot over someone who buys at 60, and so on. Typically, if you wait until after you are sixty, you will have to pay far more in yearly premiums than you saved by waiting – even considering the time value of money. I always called this the “penalty box”, and it makes sense for the same reason life insurance is cheaper the younger you buy it. This is not to say it doesn’t make sense to buy after age 60; what I’m saying is that the statistically average person will save a lot of money over the course of their life expectancy by buying earlier. I’ve had people eighty years old ask me for quotes, and are surprised when minimal coverage is thousands of dollars per year. This is because, first, if you’re buying at age 80, you are overall more likely to use benefits, and for a longer time, and second, because it’s likely to be sooner rather than later, leaving less time for the insurance company to invest your premium dollars and earn a return.
Caveat Emptor