WE’RE HEARING about ED and it is not in connection with a TV commercial for a popular prescription drug. Rather it is all about something known as eminent domain or ED. Some of you may vaguely remember hearing about this legal concept somewhere along the line. Traditionally ED is a legal process where a municipality, state or local, takes someone’s private property for a public use.
Recently some local municipalities have been considering using it to clean up certain areas within a community where there are underwater properties. This would also involve restructuring the mortgage loans that affect these properties typically by cancelling a portion of the debt. Well this is certainly a creative idea but like all ideas it would have consequences. One of the biggest consequences relates to mortgage lending and the FHFA has weighed in on the ED topic.
As you might imagine the FHFA is opposed to the idea of local or state governments using ED to restructure mortgage loans, especially loans involving the GSEs. In fact the FHFA has pointed out that in response to an attempted use of ED it can institute a legal challenge to the actual process which strategically would discourage local governments from using ED because of the cost of litigation. Also the FHFA has a more shock-and-awe approach as a not-so-secret weapon. Namely the FHFA can order that the GSEs stop lending in the communities where ED is used or even threatened to be used.
In other news I heard something funny on CNBC this morning. I had only one cup of coffee in me at the time but I am pretty certain I heard a discussion on housing and home values. The commentator said that home values would be increasing 6% a year for the next three years which will offset any increase in interest rates. This sounds a lot like the sales pitch used during the bubble boom (bomb) pre-2008. Get an ARM and don’t worry about it. I am surprised to hear this pitch so soon.
On another front I, or should I say a mortgage broker, have run into a problem with a mortgage contingency clause in a purchase agreement. I represent the buyer and the seller’s attorney prepared the contract. My client told me the specific loan amount they would apply for which is what the contract contemplates. It turns out they are in need to apply for a larger mortgage loan. Well they can but unless the contract is amended they will lose their contract deposit if they do not qualify for the loan.
Since their contract deposit is only $500 I am not too worried about it. The broker says the lender may want to amend the purchase agreement to permit the higher loan amount. This means the lender does not understand the purpose of the mortgage contingency. The mortgage contingency is there so the buyer gets their downpayment back if they do not get the loan and they have complied with all the terms of the mortgage contingency. The mortgage contingency is not there to prohibit a buyer from applying for a higher loan amount. If they do apply for a higher loan then they put their downpayment at risk because they lied to the seller.
The last time I had a problem like this was 15 years ago when a buyer applied for a higher loan amount than the contract permitted. This client had $15,000 at risk and it bothered me because I spent time explaining the mortgage contingency in detail to them. In fact I had done everything except fill out the 1003. Well this deal closed and everyone was happy. I even sold the buyer a used lawn mower. I am probably the only person in the world who can say they sold a used lawn mower to a former Miss New York State.
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
