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Affordability and Other Stuff

FEB 28, 2013 2:26pm ET

WE’RE HEARING that sometimes one hand at a lender DOES know what the other hand is doing.

This month a new client came to me to assist her in qualifying her husband for Medicaid because he has to enter a nursing home. When I represent a client in a Medicaid matter I have to thoroughly examine their finances. About six months ago my client had closed on a refi with a community bank in Ann Arbor, Mich.

Another reason this client came to me was to try and increase the amount of her husband’s income that she can keep each month as opposed to paying it to the nursing home. This can be done in a court proceeding but you have to demonstrate financial need. Well the more I looked at her finances the clearer it became she has need.

What I found odd was that her recent refi did not include (pay off) $32,000 of other debt. Coincidentally $13,000 of the other debt is on a credit card at 24% interest with the same bank that did the mortgage. I guess they overlooked the high interest rate debt. Then again maybe not because there is another $4,000 of credit card debt at 15% with the same mortgage lender friendly bank. The minimum monthly payment on the credit card is higher than the mortgage payment. Well at least she does not have a payday loan.

But wait there is more. Turns out the refi has a five-year balloon to it. Maybe she will win the lottery during the next five years. Chances are her earnings from work will not increase that much since she has health problems and turns 70 in June. I am sure the refi helped her out to some extent but it remains to be seen whether the loan passes the existing affordability rules. I will be giving the local bank a call and next month will let you know what they have to say about this.

Oddly this same bank was involved in another case I had recently. This case involved a client trying to refi to a lower rate with no cash out. The bank (actually the title company selected by the bank) wants a subordination agreement from a neighbor of my client. The neighbor has a right of first refusal over part of my client’s property relating to a pond. The neighbor had already subordinated to the original mortgage. I tried to get the title company to close without a subordination because the no-cash-out refi was not a sale. Also the refi was not technically a new loan since no new money was being loaned out.

As you might have guessed the neighbor and my client apparently no longer get along very well and my client does not want to ask them for a subordination. The title company does not find my arguments persuasive and insists on a subordination. Their concern is with a possible foreclosure sale. The actual right of first refusal was created in a deed and as you probably also already guessed my clients bought the property without using an attorney. The moral of the story is that you never know what crazy things people do with real estate.

I once had a client who sold property in Saratoga, N.Y., very close to the race track. The client had inherited the property and was not too anxious to sell it. Rather they wanted to make sure it was not later developed into a commercial use. The zoning had been changed to allow commercial use which was the reason a covenant and restriction was placed on the land by my client.

Not only was the use of the property restricted to residential but I also included a right of reversion in the recorded documents which meant that if the use is ever changed the property comes back to my client. Who would have bought this property you ask? A buyer with similar values, a lot of money and no need for a mortgage loan.

Based in Chelsea, Mich., John McDermott is a real estate and elder care attorney who represents both consumers and businesses. He can be emailed at jamcd@comcast.net.