We entered into 2002 in the midst of an unprecedented real estate boom. Sales of all kinds of residential property -- single-family houses, cooperatives and condominiums -- were brisk. Buyers were bidding against each other just to be able to get a contract signed by a happy seller. Interest rates were very low, and that was perhaps the single most important factor fueling the real estate frenzy.
The frenzy dissipated somewhat during the year, although real estate sales continued to be strong. Potential buyers began to realize that no house was that important -- that unique -- that they should sign a contract with an inflated, escalated price, and with no contingencies for financing or for a home inspection.
Welcome to 2003.
Real estate sales continue to be strong -- indeed perhaps one of the few positive indicators on the charts of economists and statisticians. And mortgage interest rates are still near historic lows.
But these same economists continue to argue about whether we remain in a recession. That clearly is not the way to usher in a happy new year. Despite predictions, or perhaps hopes, that retail shopping over the Christmas holidays would be strong, current indicators seem to suggest that sales were slow.
There are concerns beyond the economy, too. As we enter into this new year, terrorism continues to be a major threat -- and a major source of uncertainty for our nation and our world. And, as if that was not enough, we have to add the possibility of war with Iraq and nuclear threat from North Korea.
Its always challenging to predict the future. But the two crystal balls on my desk reveal the following:
* Mortgage interest rates. They are hovering at about 6 percent, and have been relatively stable all year. No one could have predicted at this time last year that the Federal Reserve would continue to reduce the federal interest rates as often as it did -- and to such a low point. However, not all decisions of the Fed directly affect mortgage interest rates. Indeed, just a few months ago when the Fed once again lowered the federal rate, mortgage rates actually jumped up a bit.
I predict that interest rates will continue to stay at their current levels for at least the next eight months. Now is still the time to buy -- or refinance your current mortgage.
* Real estate sales. Home sales will continue to remain strong, as long as interest rates remain low. However, condominium and cooperative apartment sales will slow down. Many Americans are not happy living in community associations, where the rules and regulations often conflict with the basic right to enjoy living in your own home. Every year, I receive numerous letters from disgruntled owners, complaining about their neighbors, their boards of directors and their restrictive covenants.
* Predatory lending practices. This was a hot-button issue during 2002. Although Congress continued to claim it did not understand the concept, many state and local legislatures attempted to address the serious problems by enacting laws aimed at curtailing some of the most pernicious lending practices. Too many people, especially minorities and low-income families, are being taken advantage of by unscrupulous lenders. These lenders have as their sole objective milking unsuspecting homeowners, driving their homes into foreclosure.
Such unconscionable practices as flipping, multiple refinancings, home-improvement scams and excessively high settlement and mortgage broker fees will continue to be the focus of attention this year. To their credit, several federal agencies, notably the Federal Trade Commission, were extremely active last year. Their activities resulted in several large financial settlements with mortgage lenders. I hope the message will get out and these practices will end.
* Settlement services. This may be the hot-button topic for 2003. The Department of Housing and Urban Development has issued proposed regulations that, if enacted, will dramatically change the way real estate settlements take place. Consumers will be given an opportunity for "one-stop" shopping: The lender not only will make the loan but also will offer fixed rates for associated services, including real estate closings.
While this sounds like a good idea, in my opinion it will deprive American consumers of the ability to shop and compare -- and to use the services of their own lawyer for a real estate closing. The small title companies will ultimately be forced out of business. Then, with little or no competition, the cost of closing on a house, which is already quite high, will get even higher.
* Buyer-brokers. I want to continue to raise my concerns about this concept. Why should a potential buyer have to retain a real estate broker, especially if that broker will be paid a commission by the seller? How can a buyer-broker truly represent a buyer under these circumstances? Consumers and legislators are beginning to look carefully at this issue, and there will be some important court cases decided throughout the country this year that will deserve the attention of the entire real estate community.
* Contingencies. In my opinion, there are two important contingencies that must be included in every real estate contract. A contingency is a condition that if it does not materialize gives the buyer the right to cancel the contract and receive a return of the earnest-money deposit.
These contingencies are to get a mortgage loan and to get a satisfactory home inspection of the property from a home inspector selected and paid for by the buyer.
In the real estate frenzy of 2001, and part of 2002, buyers were afraid that they would not get the house if these contingencies were included in the purchase offer. However, many buyers, after successfully entering into a real estate contract, learned a valuable lesson the hard way. Many who did not have inspection contingency clauses found thousands of dollars of repairs were needed, repairs that could have been negotiated with the sellers had there been an inspection.
Additionally, many potential home buyers lost their earnest-money deposit because they could not get a mortgage loan -- and their contracts contained no financing contingency. Why was the loan not made? Because the house did not appraise at the inflated purchase price.
I predict that more and more home buyers will begin to understand that they should not sign a real estate contract without at least these two contingencies. I also predict that homeowners will begin to realize that the seller's market has slowed down. While it still is not a buyer's market, at least it is a balanced market.
One issue that will continue to be on my wish list relates to the huge amount of paperwork needed to buy or refinance a single-family house. In the good old days, borrowers had to sign only two or three legal documents -- a promissory note, a deed of trust (mortgage) and a settlement statement.
Now, in addition to the mortgage documents, lenders require such miscellaneous documents as name affidavit, clerical error affidavit, affidavit of debts and liens, disclosure statements, flood hazard insurance statement, power of attorney, etc. While relief in this area is desperately needed, and while it appears that high-level officials at HUD are aware of this issue, I do not believe that the mortgage industry will rise to the call this year.
The new year is but a few days old. Let's enjoy 2003 with health, peace and patience.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet, "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.