Revised HOA Addendum Adds Greater Disclosure for Better Closures

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What is Private Mortgage Insurance, How Does It Work and When Can I Remove It From My Loan?

Private Mortgage Insurance, often referred to as PMI, is a form of insurance that protects the lender in the event that the borrower stops making payments on their loan. More specifically, if the borrower defaults, the mortgage insurer reduces or eliminates the loss to the lender, meaning that the lender is the sole beneficiary of the policy.

Typically, lenders will require a borrower to purchase PMI if their down payment is less than 20% of the sales price or appraised value of the home. Even though PMI exists for the protection of the lender, it is the borrower that pays the premiums for this insurance policy.

So, what’s in it for the borrower? The simple answer is that the borrower is able to obtain a loan and purchase a home for less than 20% down. As is evident, lenders take a risk whenever loaning large sums of money. The less the down payment, the greater the risk. Rather than simply refuse to approve loans with less than 20% down, PMI helps protect the lender, thereby incentivizing the lender to loan money even when the borrower makes a small down payment.

Because of the expense associated with Private Mortgage Insurance, which typically costs between 0.5% to 1% of the entire loan amount on an annual basis, borrowers are often eager to remove this financial obligation as soon as possible.

Pursuant to the Homeowner’s Protection Act, borrowers have the right to request, in writing, that the lender cancel the PMI once the principal balance of the mortgage falls to 80% of the value of the home. This date should be provided to the borrower in writing on a PMI disclosure form at the time the mortgage is secured.

Regardless, an increase in the home’s value from the time it was initially appraised may enable the borrower to more quickly cancel their PMI obligation. Borrowers may therefore choose to obtain a more recent appraisal of the home to prove to the lender that the home’s loan-to-value ratio is 80% or lower.

Even if a borrower fails to ask the lender to cancel the PMI, the lender is required by law to automatically do so once the borrower pays down the mortgage to 78% of the principal. However, the borrower must be current with their monthly payments before any lender is obligated to cancel the mortgage insurance.

To calculate the loan-to-value ratio, all the borrower need do is divide the current loan balance by the value of the home. For example, if a borrower owes $195,000 on a home valued at $250,000, the loan to value ratio would be 78%, meaning that the lender should terminate the PMI. ($195,000 / $250,000 = 78%)

Finally, it is worth noting that PMI is called “private” because it pertains only to private companies, not government agencies or public mortgage lenders. Public programs, such as VA and FHA, have their own mortgage insurance which is run differently and managed internally. One notable difference between PMI and the mortgage insurance attached to many VA and FHA loans is that the latter never expires. In other words, borrowers will continue paying mortgage insurance on VA and FHA loans even after the loan-to-value ratio falls below 80%.

Bottom line, a 20% down payment may prove a difficult hurdle for many consumers, especially young, first time buyers. PMI allows borrowers to overcome this hurdle, but at a cost. Fortunately, that cost is temporary.

For more information about PMI, consider the GRI course Financing: From Preparation to Closing. Tentative dates for 2016 are posted here; confirmed information will be posted on our Calendar of Events.

A Simple Solution to Solar Lease Liability

Residential solar power is increasing in popularity and an attractive option to many homeowners throughout Arizona. While REALTORS® often express concern about potential liability associated with transactions involving leased solar systems, ensuring that a copy of the solar lease is attached to the Residential Seller’s Property Disclosure Statement (SPDS) can decrease the potential liability of all parties involved.

Solar panels may boost a home’s value, but leased solar systems can present challenges when an owner decides to sell their home. Among those challenges is a buyer’s:

  1. willingness to undertake an additional financial obligation;
  2. ability to assume the solar lease, presuming that the lease is even transferable; and
  3. understanding of the terms of the lease

To mitigate potential liability, disclosure and due diligence are needed. In order to satisfy their disclosure obligations, sellers must convey information to buyers regarding the solar system, including whether the system is leased and not owned. Likewise, in order to satisfy their own due diligence obligations, buyers are advised to learn as much information as possible about the solar system, including the terms of the solar lease and how it can be transferred. Unfortunately, in the event that the buyer or seller fails to meet their obligations, disputes often arise.

Lines 181-189 of the SPDS address alternate power systems serving the property, including a leased solar system. Should the seller indicate on the SPDS that the property is served by a leased system of this nature, they are asked to provide the name and phone number of the leasing company, and attach a copy of the lease. By following this directive, everyone in the transaction is better protected.

In the event that the solar lease accompanies the SPDS, it would likely prove difficult for a buyer to successfully assert a non-disclosure claim against the seller or REALTORS® pertaining to this leased alternate power system. Similarly, receiving a copy of the solar lease would largely prohibit a buyer from claiming that information was withheld from them or that they lacked the pertinent facts needed to make an informed decision about purchasing the home and assuming the lease.

While solar leases can present obstacles to a successful closing, attaching the solar lease to the SPDS is a simple solution to reduce liability and it can make all the difference.

This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

Related story: High-Tech Impact on Home Values – Solar Panels

TRID Forms Webinar – Review of AAR Revised TRID Forms

This overview of August 2015 changes to AAR forms to comply with the October 3, 2015, implementation of TRID rules. This webinar is hosted with Martha Appel, Vice President & Designated Broker, Coldwell Banker Residential Brokerage and 2015 AAR Risk Management Committee and with Scott Drucker, Esq., AAR General Counsel.

MLS Connect & TRID Forms

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AAR Mediation Program Intact Despite Rule Changes

In January of this year, a petition to amend Rules of the Supreme Court was submitted to the Arizona Supreme Court. Included in the petition was a recommendation to revise Rule 31, which addresses mediators.

Pursuant to the petition, the proposed changes would “clarify the status of mediators.” The significant proposed changes included the following: (1) inserting “Serving as a mediator is not the practice of law” in the “mediator” definition; (2) deleting exemptions which allowed courts and professional associations, amongst others, to use mediators without compensation; and (3) inserting verbiage that if a mediator is not an active member of the state bar and that mediator prepares a written mediation agreement resolving the dispute, the mediator must then be either supervised by an attorney or be a certified legal document preparer.

The proposed changes would be detrimental to AAR and its mediation program. Currently, at the end of a successful mediation, volunteer REALTOR® mediation officers assist the parties in memorializing their agreement by filling out a pre-printed mediation agreement, which was drafted by an attorney.

If the proposed changes were adopted and AAR’s mediators continued with their current practice of memorializing settlement agreements, the mediators would be exposed to sanctions for the unauthorized practice of law. Alternatively, mediators would either have to become a certified legal document preparer or avoid preparing mediation agreements without the supervision of an attorney.

In order to become a certified legal document preparer, the volunteer REALTOR® mediation officers would have to invest time and resources to obtain the certification. Because of this, AAR believed there would be a significant decrease in the number of REALTORS® willing to serve as mediators.

Notwithstanding the potential loss of volunteer mediators, in the event a mediator was not a certified legal document preparer, AAR would have to ensure an attorney was present at the mediation, which would be cumbersome and undermine the economic benefits offered by the mediation program.

Because AAR’s mediation program would be greatly impacted by the proposed changes, in April, AAR filed a comment with the Arizona Supreme Court outlining the positive benefits of AAR’s mediation program – which has been widely adopted by the industry and enjoys a success rate of approximately 80 percent on average.

In 2012, AAR had 23 mediations with a 100 percent success rate. By way of its comment, AAR advised the court of the dire consequences the proposed changes would have on its mediation program. Accordingly, AAR requested that the committee and Arizona Supreme Court maintain the exemptions that allow AAR to offer its mediation program.

On Monday, August 31, the Arizona Supreme Court issued minutes advising interested parties of its decision regarding Rule 31, which encompasses mediators, amongst other rules. AAR is pleased to announce that while the Supreme Court adopted some portions of the proposed changes, it ultimately left the subject mediator exemptions in place. Accordingly, with the help of its remarkable volunteer REALTORS®, AAR’s mediation program will continue as-is.

Nikki J. Salgat, Esq. is associate counsel to the Arizona Association of REALTORS®. This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.

Compliance with Fair Housing and Assistive Animals

The Fair Housing Act (FHA) is applicable to nearly all types of housing. Under the FHA, housing providers are obligated to permit, as a reasonable accommodation, the use of animals that work, provide assistance, or perform tasks that benefit persons with disabilities, or provide emotional support to alleviate a symptom or effect of a disability.

In June of this year, the Department of Justice (DOJ) settled a civil rights lawsuit alleging that RiverBay Corporation (RiverBay), which manages a housing cooperative in New York called Co-op City, maintained and employed an overly burdensome and intrusive policy governing waivers to its “no pets” rule. Specifically, the DOJ asserted that the policy instituted by RiverBay deterred and prevented persons with disabilities from obtaining reasonable accommodations and that RiverBay used the policy to unlawfully deny accommodation requests.

RiverBay’s policy seemingly failed to provide reasonable accommodations to people who require service or assistance animals. More specifically, until December 2011, RiverBay’s application for requesting a reasonable accommodation to its no-pets rule consisted of the following: (1) five forms (including one required to be completed only in blue ink and another required to be typewritten); (2) certain breeds of dogs were prohibited; (3) animals were required to be neutered or spayed; (4) annual renewal requirements; and (5) the applicant was required to provide his or her medical records.

Since December 2011, RiverBay has amended its reasonable accommodation policy on two separate occasions. However, many of the provisions in the first policy were left in place. And, throughout the years, many requests for reasonable accommodations to the no-pets rule were denied.

In settling the lawsuit, RiverBay and the DOJ entered into a mutual agreement called a Consent Decree. The Consent Decree provided that RiverBay adopt a reasonable accommodation policy regarding assistance animals, pay a civil penalty of up to $50,000, and dedicate as much as $600,000 to compensate people who have been harmed by inadequate accessibility at Co-op City.

Because of the potential legal ramifications, business entities are advised to review existing policies and requirements related to assistive animals to ensure continued compliance with the FHA.

To read the DOJ’s report on the RiverBay lawsuit, click here and to read the Consent Decree, click here.

Arizona Sinkholes: Disclosure & Liability

As recently reported on azcentral.com, a study by ASU’s School of Earth and Space Exploration shows that parts of Apache Junction, Sun City West, Peoria, the North Valley, Tucson, Casa Grande and Eloy are at risk of developing sinkholes.

Scientists at the school blame large amounts of groundwater that was pumped years ago and report it “has the potential to cause costly structural damages,” according to ASU researcher Megan Miller.

Anne Ryman at The Arizona Republic reports that if this trend continues, fissures (crack in the ground) will develop and threaten canals, utility lines, water mains, storm drains and sewers. The foundations of homes and buildings can be damaged as ground levels drop.

Ryman went on to write that fissures have been reported in places including…Queen Creek, Chandler and Scottsdale. Some Valley homeowners have even filed claims and lawsuits against real-estate agents and builders, hoping to be compensated for property damage from fissures they say they weren’t told about.

Which leads us to the Residential Seller’s Property Disclosure Statement (SPDS) that asks the seller whether they are aware of any past or present issues or problems on or in close proximity to the property related to fissures (lines 190-196). The SPDS continues with a notice to the buyer that the Arizona Department of Real Estate (ADRE) provides fissure maps on its website.

Arizona ground fissure
Pursuant to A.R.S. § 32-2117, a subdivider, seller or real estate licensee is not liable for any act or failure to act in connection with the disclosure of property subject to earth fissures if they provide a written disclosure or include notice in a public report, with respect to real estate subject to earth fissures, of the Arizona Geological Survey (AGS) map and its location.

Fissures, as addressed on page seven of the Arizona Association of REALTORS® Buyer Advisory, are open surface fractures and have been mapped by the AGS since the 1990s, but the Arizona Department of Water Resources says land subsidence has been happening here since the early 1900s.

DISCLOSURE NOTE: Land subsidence happens quite slowly, maybe three-quarters of an inch per year, and in isolated areas. In many instances, subsidence will go unnoticed and cause no harm or property damage. In fact, most houses experience some degree of settlement, which is the downward movement of a building (or building components) to a point below its original position.

In some cases, land subsidence may result in structural damage, often evidenced by cracks in walls and operational problems with windows and doors. In this event, a seller should remember their duty to disclose known facts materially affecting the value of the property that are not readily observable and are not known to the buyer. See Hill v. Jones, 151 Ariz. 81, 725 P.2d 1115 (App. 1986).

One way for a seller to meet their disclosure obligation in this regard is by accurately completing line 74 of the SPDS which asks, “Are you aware of any cracks or settling involving the foundation, exterior walls or slab?” If it has been disclosed that the property is subject to any such soil conditions, or if the buyer has any concerns about the soil condition or observes evidence of cracking, the buyer should secure an independent assessment of the property and its structural integrity by a professional engineer.

See also Suggested Guidelines for Investigating Land Subsidence and Earth Fissure Hazards in Arizona.

Independent Contractors or Employees: Assistants, Transaction Coordinators and Administrators

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New TRID Forms Go Live on September 28, 2015

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