By Harvey S. Jacobs November 30, 2012
If you’re buying or selling a house in the Washington area and have a loan in the pipeline, you may experience significant delays because of Hurricane Sandy.
The Federal Emergency Management Agency (FEMA) has declared portions of the District, Maryland, Virginia, Connecticut, Rhode Island, Pennsylvania, New York and New Jersey disaster areas. This declaration will affect tens of thousands of loan applications being processed by lenders.
As a result of this declaration, lenders are requiring properties in those disaster areas to be reinspected. Any damage must be repaired before the loan can close. Home buyers and sellers in these areas can expect that lenders will send appraisers back out to examine the exterior of the property to see whether there is any obvious storm-related damage.
If damage is evident, the home will have to undergo a full interior and exterior inspection. After any major repairs, another appraisal will need to be conducted. In some cases, where repairs are not of a structural nature, lenders may permit loans to close but with funds held in escrow to cover the costs of making the required repairs.
These steps will take additional time and effort to accomplish. In areas severely affected, such as the New Jersey shore, shortages of power, gasoline, building materials and perhaps even labor will hamper a homeowner’s ability to satisfy lenders’ additional demands. The ability of appraisers to go into a disaster area and perform competent reappraisals of fair market value is also of dubious worth.
Under any scenario, the uncertainty does not bode well for a continued short-term recovery in the housing industry. Over the long-term, however, the immense need for new housing will certainly have a positive impact on rental rates, new-home construction and home renovation, and it will certainly lower the unemployment rate in the construction trades for the coming year.
What does this mean for someone in the process of buying or refinancing? At a minimum, there will be delays and perhaps even denials of pending or even approved loans. Carefully drafted financing and appraisal contingencies should be inserted into all purchase offers. Home buyers and sellers need to prepare for these inevitable delays by postponing moving dates. Home buyers who have to give notice to their existing landlords may want to hold off for 30 or more days.
Home sellers who anticipated having cash from their sales for other purchases may need to look for alternative short-term financing means, such as short-term loans from retirement accounts. Refinancing homeowners seeking cash-out refinancing may need to rethink whether the refinance still makes sense, if the amount of cash-out is severely reduced as a result of a lower appraised value.
In recognition of the additional delays, lenders are extending interest rate locks on approved loans. Lenders are also providing forbearance on mortgage loan payments for those whose home and/or employment have been severely affected by Hurricane Sandy.
If unemployment or other hardship appears to be more than a temporary situation, then you may consider applying for a loan modification under the many loan programs already in existence. The requirements vary widely. Some require you to be current in your mortgage payments, others require you to be delinquent. Some are only available if there is equity in your home, others permit your home to be in a negative equity situation.
The best place to research loan modification programs is at the www.makinghomeaffordable.gov Web site. This site provides detailed descriptions of at least a dozen government loan modification programs. They can also be reached by phone at 888-995-HOPE (4673).
Certain lenders have also instructed their foreclosure departments to temporarily freeze all foreclosure proceedings in disaster areas. These steps are being taken for both humanitarian and good business reasons.
Valuation has become a tricky issue. Bidders at foreclosure auctions want to get the best deal possible, but if storm-damaged homes are going on the auction block now, the values those bidders are willing to pay may be far below even post-Sandy values. That will often result in the lender being the high bidder and having to take the property back into its inventory.
Once the bank becomes the owner, it is responsible for securing the home from vandalism, future weather elements and neighborhood blight. With the cold weather rapidly approaching, banks must spend the time and money to manage these homes. For example, they must cut the lawns, remove dangerous leaves, snow, and ice and winterize these homes to prevent pipes from bursting or roofs from leaking. Banks also become liable for real property taxes, insurance and homeowner’s association dues. As a result of these legal obligations, banks have a vested interest in trying to have their delinquent properties sold to third parties at fair market values.
Will Hurricane Sandy affect interest rates?
On one hand, the decreased demand for mortgage loans from homeowners unable to meet the appraisal values will keep interest rates down. On the other hand, once values stabilize, there will be a pent-up demand for new home mortgages from those homeowners who lost their homes and need to buy or reconstruct a new home.
There will also be pent-up demand for home equity loans to make repairs, improvements or additions to homes that are damaged but fixable. Interest rates may rise in response to this increased demand. In the end, time will tell just what the Sandy effect will be on homeownership.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Jacobs at (301) 417-4144, jacobs@jacobs-associates.com or ask@thehouselawyer.com.