Fraud Risks High for Multi-Unit Property Mortgages

A recent report, published by Interthinx, an anti-fraud vendor for the financial services industry, revealed that loans associated with multi-unit properties have a much higher fraud risk than loans associated with other property types. Mortgage fraud occurs when an individual makes a material misstatement, misrepresentation, or omission which is relied upon by an underwriter or lender to fund, purchase, or insure a loan.

According to Interthinx, the fraud risk for multi-unit properties is more than double the risk associated with single-family residences, condos, or planned unit developments. The report should prompt lenders to screen these kinds of mortgage loan applications with increased diligence.

Multi-unit property loans tend to carry with them a higher propensity for occupancy and employment/income fraud. To keep financial risks low, lenders and servicers must constantly be on the lookout for fraudulent applications. There are many technological tools on the market to detect fraud. The best line of defense, however, is often a strict lending policy and thorough screening of loan documentation.

The real estate team at McBrayer represents numerous lending institutions, in addition to counseling clients on the ownership and management of multi-unit properties. We are dedicated to eliminating fraud in the mortgage industry and providing positive closing experiences for all involved parties.

J. Markham

Joshua J. Markham is a member at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Lexington, KY office. Mr. Markham practices in virtually every aspect of real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, lease negotiation and preparation, and any and all other needs related to residential and commercial real estate matters.He can be reached at jmarkham@mmlk.com or (859) 231-8780, ext. 149.

This article is intended as a summary of  federal and state law and does not constitute legal advice.

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Beyond the Commercials: Understanding Reverse Mortgages

You have likely seen the commercials for reverse mortgages. While the advertisements urge viewers to “call now to secure you reverse mortgage today” and make them seem risk-free, obtaining a mortgage of this type is a serious decision that should not be made without fully understanding its pros and cons.

A reverse mortgage is a loan available to homeowners who are 62 years or older that enables them to convert part of the equity in their home to cash, ideally to cover basic monthly living expenses and pay for health care (though there is no restriction on how proceeds can be used). The amounts that can be borrowed are determined by a formula that takes into account the percentage of the home’s value based on the borrower’s age and current interest rates.

With a traditional mortgage, the borrower makes payments to the lender. The reverse mortgage “reverses” that payback stream so that the lender makes payments to the borrower in the form of a steady stream of income (annuity), a lump sum payment or a line of credit he or she can draw on. The loan is not required to be paid back until the home is sold or vacated. If the homeowner(s) die, the loan must be paid back either through the sale of the home or with other funds from the borrower’s estate. If the loan amount exceeds the value of the home when the loan comes due, the house becomes the property of the lender. Reverse mortgage terms mandate that borrowers continue paying property taxes and homeowner’s insurance, so default on the loan is still possible even though there are no monthly payment obligations.

Home Equity Conversion Mortgages (HECMs) are by far the most popular types of reverse mortgages. HECMs are created and regulated by the U.S. Department of Housing and Urban Development. A HECM is not a government loan, but is issued by a private bank and insured by the Federal Housing Administration. In recent years, the HECM program has experienced increasing defaults and it was discovered that many borrowers are confused about what a reverse mortgage really is (thanks, at least in part, to deceptive advertising common in those TV commercials). Instead of using the loan as a long-term financial tool, borrowers were using it as a last-ditch effort to manage a money crisis.

As a result, in 2013 many reforms were brought to the HECM program. The major changes included:

(1)   Limiting the amount of money that can be disbursed at closing or during the initial year after closing;

(2)   Requiring a financial assessment before granting loan approval so that borrowers demonstrate their ability to meet all their housing obligations, like taxes, insurance, and maintenance.

(3)   Requiring set asides for payment of property taxes and insurance out of line of the credit or tenure/term payments for some borrowers.

Hopefully, the changes will improve the program and help seniors use reverse mortgages in the way that they were intended to be used. If you have a question about your home mortgage, contact a real estate attorney at McBrayer today.

BMacGregor

 Brittany C. MacGregor is an associate attorney practicing in the Lexington office of McBrayer, McGinnis, Leslie & Kirkland, PLLC. She is a graduate of Transylvania University and the University of Kentucky College of Law. Ms. MacGregor’s practice focuses on real estate law, including title examination, title insurance, clearing title issues, deeds, settlement statements, preparation of loan documentation, contract negotiation and preparation, and lease negotiation and preparation. She may be reached at bmacgregor@mmlk.com or at (859) 231-8780.

This article is intended as a summary of federal and state law activities and does not constitute legal advice.

A Doggone Problem for Landlords

Whether to allow residential tenants to keep pets on property is a tough choice for landlords. On one hand, it can mean additional rental fees; on the other, it can result in damage to the units and, in Kentucky, increased exposure to legal liability.

In 2012, the Kentucky Supreme Court ruled that a landlord may be liable for injuries caused by a tenant’s dog that he or she permits to remain on or about the rented property. The case, Benningfield v. Zinmeister, 367 S.W.3d 561 (Ky. 2012), involved a child who was attacked and injured by a tenant’s Rottweiler on a sidewalk. The dog owner lived across the street from where the attack occurred and normally kept their dog in an enclosed pen in their backyard, with permission from the Zinmeisters (the landlords).

The injured child’s parent sued the tenant and the landlord. The trial court dismissed the claim against the Zinmeisters and the Court of Appeals affirmed the decision. The Supreme Court granted discretionary review and took an in-depth review of the state’s dog bite liability statute. KRS §258.235(4) specifies that “[a]ny owner whose dog is found to have caused damage to a person, livestock, or other property shall be responsible for that damage.”  A dog owner is defined by KRS §258.095(5) as “every person having a right of property in the dog and every person who keeps or harbors the dog, or has it in his care, or permits to remain on or about the premises owned or occupied by him.” In everyday life, no one would consider a landlord as a dog’s owner simply because the dog is allowed to remain on the landlord’s property. The Court, however, interpreted the statutes broadly and found that a landlord may indeed qualify as a dog owner for liability purposes if he or she permits a tenant’s dog to remain on the property.

Ultimately, the Supreme Court upheld the dismissal of the claim against the Zinmeisters because the dog bite in question did not occur “on or about” the property, but rather on a sidewalk across the street. It makes sense that a landlord’s liability will not extend to anywhere the dog may be, but only the area which belongs to the landlord (or areas immediately adjacent to it).

Make no bones about it – dogs can be a big problem for landlords. If they are allowed on rental property, landlords should ensure that they have adequate insurance in place and consider including an indemnification clause in a rental agreement for any bodily harm caused by the animal.

Robert E. Maclin, III, Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC has a broad range of legal experience gained through over 25 years of practice throughout the Commonwealth of Kentucky and various states where his clients conduct business. He often represents clients in leasing disputes, banking proceedings, including lender liability, bankruptcy, insurance bond claims, secured transactions, and other litigation and negotiation matters. He can be reached at remaclin@mmlk.com or 859-231-8780.

This article is intended as a summary of  state and federal law and does not constitute legal advice.

“I’m Keeping It”: Kentucky Law on Residential Security Deposits

When a tenant moves out of a residential dwelling and leaves it worse for the wear, what recourse does a landlord have? Many landlords assert their “right” to keep the security deposit when such an instance arises, but in order to do so, a landlord must strictly adhere to the established statutory requirements set forth in KRS §383.580.[1]

A landlord’s obligation regarding security deposits begins long before any damage is done. Prior to a prospective tenant tendering a security deposit, the tenant must be presented with a listing of any then-existing damage to the unit which would provide the basis for a charge against the security deposit and the estimated cost of repairing such damage. The tenant is then entitled to conduct an inspection of the premises to determine the accuracy of the listing.  Often, the landlord and tenant will conduct this pre-occupancy inspection together immediately prior to signing the lease.    If the tenant disagrees with all or part of the listing, the tenant can refuse to sign the listing and must state in writing the disputed items. If there is no disagreement, then the landlord and tenant must sign the listing which serves as conclusive evidence of the accuracy of the listing. It is crucial that a landlord retain the signed listing for the duration of the lease term.   After the pre-occupancy inspection(s) and the damage list has been provided, the tenant shall be required to tender the security deposit in full to the landlord.  The security deposit must be placed in an account used solely for that purpose and the tenant must be informed of the location of the account and the account number.

Upon termination of the tenant’s possession of the premises, a post-occupancy inspection must be performed and the landlord must provide the tenant with a final damage listing of any damage to the unit which is the basis for any charges against the deposit along with the estimated cost of said repair. Again, the tenant has the right to inspect the premises for accuracy of the listing and dispute any items in writing. If there is no disagreement as to the accuracy of the final damage listing, the landlord shall retain the portion of the security deposit necessary to cover the damages/repair work.

Unfortunately, landlord and tenant rarely see eye-to-eye as to the condition of the premises upon termination of possession. Thus, a tenant who disputes the accuracy of the final damage listing may bring an action in District Court. The tenant’s claim is limited to the items from which the tenant specifically dissented to, in writing, and signed in the final listing.

In the case of a fleeing tenant who leaves without paying the last month’s rent or requesting a return deposit, then a landlord may, after thirty (30) days, remove the deposit from the account and apply it to the debt owed.

When a tenant leaves and the unit has suffered from no damage (a rare occurrence, indeed), then the landlord must notify the tenant at his or her last known or reasonably determinable address of the amount of any refund due. If the landlord does not received a response from the tenant within sixty (60) days of notification, then the landlord is entitled to retain the security deposit without further obligation (an even rarer occurrence).

As a best practice, landlords should make detailed listings regarding the condition of the property, both pre- and post-occupancy, and strictly adhere to the aforementioned statutory requirements.   A security deposit can be the landlord’s to keep, but only if the landlord plays by the rules.


[1] KRS §383.580 only applies to cities, counties, and urban-county governments which have enacted the Uniform Residential Landlord and Tenant Act (“URLTA”).

BYates

Brendan Yates joined the Lexington office of the firm as an associate in 2002. Brendan is a member of the firm’s Litigation Department, where he focuses his practice on construction and real estate litigation, workers’ compensation defense litigation, insurance defense and commercial litigation. He has successfully defended his clients in state and federal courts, the Kentucky Court of Appeals, the Kentucky Supreme Court, and in administrative agency proceedings in Kentucky. He can be reached at byates@mmlk.com or (859) 231-8780, ext. 208.

This article is intended as a summary of  federal and state law and does not constitute legal advice.