After paying out huge settlements to clean up mold damage, homeowner insurers pulled back from issuing new policies on homes where a water damage claim had been made within the last five years.

They also minimized their exposure to mold claims by excluding mold coverage altogether or limiting their coverage. Currently a common cap on such claims is $5,000, although this can vary from one company to the next.

Some insurers are less concerned about water damage claims today. However, they are concerned about the profile of the insured. Homeowner insurers want to insure people who don’t have a history of making claims. Some companies won’t write a new insurance policy for someone who made a claim within the last three years.

Insurer guidelines for coverage vary from company to company. And, individual companies’ policies change over time depending on their loss history and the marketplace. For example, some big homeowner insurers, like Allstate and State Farm, currently do not write policies for new customers in California.

However, they will write a new policy for someone who is already insured by the company. For example, let’s say your house is insured with State Farm. You sell it and buy another home in the area. At long as the house meets certain criteria, State Farm would probably write a homeowner’s policy for you on your new home.

HOUSE HUNTING TIP: More and more homeowners are selling first and renting for a time before buying their next home. In this case, if the homeowner is insured with a company that isn’t writing new business in your state, it would be prudent to carry renter’s insurance through this company. The company would then be likely to cover your next home because you have been a continuous client. For this strategy to work there can’t be a break in coverage.

Renters who have never owned a home and who are having trouble finding homeowner’s insurance should check with their renter’s insurance company. This company will often write a homeowner’s policy for an existing renter’s insurance customer.

If you made a claim within the last three years with your existing company and you buy another house, that company will probably insure you on the new home as long as coverage is continuous.

However, if you made two or more claims during the last three years, you could be denied coverage. Or, there might be a surcharge. This is usually determined on a case-by-case basis, with leeway given to long-term customers.

Even though you’re gold-plated in terms of insurability, an insurer might turn you down because of the property. For example, it can be difficult to insure older homes with some companies. Outdated plumbing, electrical, heating and roof are red flags. Some companies won’t insure houses with wood siding in fire-prone areas.

There is flexibility with some insurers who will insure a home with older wiring as long as the buyer agrees to upgrade the electrical within a month or so of closing.

When you’re shopping for homeowner’s insurance, make sure to compare like-kind coverage. Some companies will pay only 100 percent of the coverage amount in the case of a total loss. Others will pay 120 to 200 percent of the coverage amount.

Find out what’s excluded from coverage. With older homes, it’s a good idea to pay for a code upgrade rider. This doesn’t cost much when you consider what it would cost to upgrade an older home to meet current code requirements in case of a catastrophic loss.

THE CLOSING: Because it’s risky to make a lot of claims, consider increasing the deductible. This will reduce your annual insurance premiums.

Reverse mortgages have been available for more than two decades for older homeowners who have accrued a significant amount of equity in their homes. Now, the government is backing a program to help older homeowners purchase a home with the increasingly popular financing program.

The Federal Housing Administration, a component of the U.S. Department of Housing and Urban Development, insures the nation’s most popular reverse mortgage known as the Home Equity Conversion Mortgage, or HECM.

The Housing and Economic Recovery Act of 2008 recently approved the HECM-for-purchase program, allowing lenders to close the mortgages after Jan. 1, 2009. The move allows older homeowners to make a large down payment on a new home and then utilize the reverse mortgage as permanent financing.

The same law reduced the maximum loan fee on reverse mortgages to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.
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A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free.

“The HECM for purchase will give seniors several more options,” said Sarah Hulbert, president of Senior Financial Corp., a reverse mortgage lender. “I think one of the key aspects is that they can stay more liquid. They do not have to reinvest all of their funds into their new home before getting the reverse mortgage, freeing up more cash for other uses.”

For example, if a 70-year-old homebuyer wanted to purchase a $300,000 home, he or she could put approximately $123,000 down and finance the balance of $177,000, plus closing costs, with a reverse mortgage. The buyer would make no monthly payments for as long as he or she maintained the home as a principal residence.

Interest and MIP (Mortgage Insurance Premium) accrue on the initial loan amount and become due when the borrower, or surviving spouse, dies, moves or sells the home. The current annual percentage (APR) for the monthly adjusted HECM 200 is 3.62 percent (including the government’s 0.5 percent annual mortgage insurance). When refinanced, the APR for the program has averaged approximately 6.5 percent for the past 15 years.

Eligible properties include:

* 1- to 4-unit single-family homes
* Manufactured homes, built after June 15, 1976, that meet HUD’s
permanent foundation guidelines
* Condominiums

“I think you will see the typical purchaser for a HECM will be the move-down buyer — perhaps headed to the sunshine,” said former Puget Sound resident Ken Keranen, who now originates reverse mortgages for Seniors Reverse Mortgage in Carlsbad, Calif.

Customers interested in the HECM for purchase must enroll in a HUD counseling class. Borrowers may not obtain a bridge loan (also known as “gap financing”) or borrow against other assets for the down payment or closing costs. This restriction includes personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing.

Lenders will be required to verify the source of all funds prior to closing. A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a large increase in an account or the account was opened recently, the lender must be able to obtain a credible explanation of the source of those funds.

To avoid cases of property flipping, lenders must take steps to ensure that: a) only current owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) FHA will require additional documentation validating the property’s value for resale that occurs between 91 and 180 days where the new sales price exceeds 100 percent of the previous sales price.

More than 450,000 HECMs have been made since 1989, the year FHA launch its reverse mortgage pilot program. FHA insured approximately 112,000 HECMs in fiscal-year 2008, up from 107,367 HECMs in 2007 and 43,131 in 2005.

The only challenge seniors now face in this slow market is finding a willing buyer to purchase their present home so they can “move down” via a reverse mortgage. After all, you have to sell your primary residence before you can buy another one.

When you apply for a mortgage to buy or refinance a house, should you be concerned that your appraiser is being paid much less — maybe just half — of the $300 to $600 you’re charged on your settlement sheet? Should you know who pockets the rest or that cut-rate fees are too low to attract the most experienced, highly trained appraisers?

Should you care that the appraiser might be pushed to come up with a number so fast — almost overnight in some cases — that he or she doesn’t have the time to do a proper inspection and accurate evaluation of comparable properties, pending sales contracts and local market trends?

All these questions are at the core of a swirling controversy created by the release of new appraisal standards by Fannie Mae and Freddie Mac, the giant mortgage investors. The “home valuation code of conduct,” issued by the companies’ federal regulator in late December, is under attack by the very industry it purports to protect — real estate appraisers. It’s virtually certain to turn into a political issue in the new Congress and may be the subject of a federal court suit.

The code of conduct, now scheduled to take effect May 1, is the end product of a settlement involving New York Atty. Gen. Andrew M. Cuomo, the Federal Housing Finance Agency and the two congressionally chartered mortgage companies the agency oversees.

The settlement came after Cuomo threatened Fannie and Freddie with an investigation aimed at ferreting out alleged appraisal overvaluations and evidence of illicit pressure on appraisers to “hit the numbers” needed to close loans. As part of the deal, the two companies and their federal regulator agreed to create standards to ensure that appraisals are accurate and insulated from pressure — whether from lenders, mortgage brokers, realty agents or third-party appraisal management companies.

But four of the largest appraisal organizations, including the Appraisal Institute and the American Society of Appraisers, issued a joint statement charging that the code will force lenders to shift their valuation assignments to third-party appraisal management companies, abandoning the traditional system of using local appraisers selected by mortgage loan officers. The code bans brokers, who originate a substantial share of new mortgages, from any involvement in selecting appraisers.

Management companies, the groups complained, “place appraisal quality last while shifting the cost of appraisal . . . services to the consumer without any disclosure.” Often, management companies require appraisers to perform valuations for $180 to $200 — far below their regular fees of $300 to $600 — and deliver their report within 24 to 48 hours of an assignment.

Consumers are charged the full fee at settlement with no knowledge that a third-party management company is taking a large percentage of what appraisers normally are paid for their work.

The Title Appraisal Vendor Management Assn., which represents third-party managers, denies that lower fees result in less-accurate home valuations. Jeff Schurman, the group’s executive director, said, “There’s no evidence of that,” and if there were, major banks and mortgage lenders would not hire them.

Appraisal management firms offer lenders valuation services anywhere in the country they’re needed to handle loan applications, Schurman said, and they deliver them quickly. He added that the portion of the appraisal fee the management companies take is “reasonable” given the savings they provide lenders.

But some prominent appraisers slam management firms. Jonathan Miller, chief executive of Miller Samuel Inc., one of the largest appraisal companies in the New York City area, said: “Their quality is terrible. All they want you to do is crank it out at the lowest cost.” Only “the least experienced people” are willing to do the work, he added, “and the product is unreliable.”

George Dodd, an appraiser in Virginia, said the most experienced appraisers will be the “hardest hit” by the new code “because of our unwillingness to sacrifice integrity and quality” by doing business with management firms. Rather than work for peanuts, Dodd said, “I can flip burgers at McDs for more.”

Where is all this headed? The National Assn. of Mortgage Brokers plans to appeal to Congress to reverse the code’s ban on broker selection of appraisers, and it is considering a lawsuit challenging the code. Appraisers also are expected to seek changes, either from Fannie and Freddie’s regulator or from Congress.

Why should this matter to you? Miller said quick, slipshod appraisals can severely undervalue some properties — forcing buyers to come up with bigger down payments — and can scuttle refinancings. Or they can overvalue houses that should be selling for less.

Either way, it matters.

But there’s a good chance that they could be relieved of the repayment requirement.

Should you give the $7,500 home buyer tax credit a second look? Now that Congress may be on the verge of transforming it into a true tax credit — one that never has to be paid back — you just might want to do so.

On Jan. 15, the House Democratic leadership outlined its $825-billion economic-stimulus package, loaded with $275 billion in tax cuts and $550 billion in new spending on healthcare, education, alternative energy and infrastructure improvements.

Tucked away in the tax section was a significant improvement to last July’s congressional effort to stimulate home sales. That program offered a credit of as much as $7,500 to buyers who had never bought a house or hadn’t owned one during the previous three years. To qualify, taxpayers would need to complete a home purchase between April 8, 2008, and July 1, 2009.

But relatively few consumers were attracted to the plan because unlike virtually all other federal tax credits, this one had to be repaid in full to the Internal Revenue Service over a 15-year period. The $7,500 was more like an interest-free installment loan from the government than a straightforward reduction on buyers’ tax bills.

Although final details on a revised credit are still subject to negotiations between the House and Senate — and to passage of the economic-stimulus package itself — there’s a good chance that buyers who sought the credit in 2008, and new purchasers in 2009, will be relieved of the repayment requirement.

According to industry estimates, removing the repayment rule could lead to an additional 202,000 purchases this year. The National Assn. of Realtors is pushing for the July 1 deadline to be extended to Dec. 31, opening the door to even more sales.

Meanwhile, the IRS has come out with two recent advisories on the credit, plus a new Form 5405 for taxpayers interested in claiming the $7,500 benefit, either for 2008 or 2009. You can download a copy of the form at www.irs.gov in the publications and forms section.

Based on the latest IRS guidance, here’s what you need to know if you’re thinking about buying a house this year — taking advantage not only of lower prices and record low mortgage rates, but a temporary tax credit that may well turn out to be nonrepayable:

* The $7,500 is available to singles, married couples filing jointly and unmarried co-purchasers, provided they meet the nonownership test for the previous three years. Married couples filing singly can claim as much as $3,750 each. Unmarried individuals can allocate the credit on their filings according to their respective ownership shares or capital investments in the house.

* Only principal residences — or in the IRS’ words, “the one you live in most of the time” — are eligible. No second homes, investment properties or houses outside the U.S. pass the test. But the definition of “home” extends far beyond conventional houses sited on lots. It “can be a . . . houseboat, housetrailer, cooperative apartment, condominium or other type of residence,” according to Form 5405.

* Even if it’s your first home purchase, you are not eligible if your adjusted gross income is more than $95,000 (single filer) or $170,000 (married joint filers). Married couples with incomes between $150,000 and $170,000 are eligible for reduced credits, based on a phase-out schedule. Single filers with incomes between $75,000 and $95,000 also are subject to reduced credit limits. District of Columbia residents who are eligible for the city’s first-time home buyer credit are barred from use of the federal tax credit. Taxpayers who use tax-exempt mortgage bonds issued by state or local governments to finance home purchases also are ineligible.

* You can’t claim the $7,500 credit if you buy your house from a “related person,” meaning a spouse, parents, grandparents, children or a corporation or partnership in which you own more than 50% of the stock or capital interests.

If you pass all these tests, and get the purchase done by the deadline date Congress decides as part of the final stimulus package, you should be able to take $7,500 off your federal tax bottom line and not worry about paying it back.

The November 2008 bankruptcy filing of leading 1031 exchange accommodator LandAmerica should alert all real estate investors to the real perils regarding what firm they choose for handling their 1031 exchange and holding their funds. 1031 exchange accommodators, also known as qualified intermediaries, hold funds in escrow from real estate investors who have sold a property at a profit and have 180 days to close on the purchase of a replacement property (which must be identified within 45 days of the sale of the original property) in order to defer capital gains tax on the profits. In the case of LandAmerica’s Exchange Services (LES), the company held hundreds of millions of dollars from more than 400 real estate investors.

Unfortunately for real estate investors using LES, their funds were placed into a pooled or commingled account and have gotten caught up in the parent company’s bankruptcy filing. LandAmerica got itself into trouble by investing this commingled money in 20-year maturity auction-rate securities backed by student loans. In the past, there was an active liquid market for these securities so LandAmerica was able to pocket millions of dollars in interest investing their 1031 customers’ money. Due to the turmoil in the financial markets in 2008, the market for auction-rate securities dried up and pushed LandAmerica into bankruptcy.

All of this could have been avoided if LandAmerica had their customers use separate or so-called segregated accounts whereby each 1031 exchange customer would have an account in their name titled such as “for the benefit of Joe Property Investor” in an FDIC-insured bank. In that case, the 1031 customer money would be protected from bankruptcy and lawsuits against the accommodator or parent company, etc.

State departments of insurance regulate title and escrow companies so this problem of an escrow company taking homebuyer or seller funds down with them in a bankruptcy can’t happen in a regular residential real estate transaction. 1031 companies are unregulated entities and few people understood the risks of real estate investment customers’ funds at companies like LandAmerica using commingled accounts. LandAmerica was named Fortune magazine’s number one most admired company in the mortgage services industry in 2007.

Mary Foster, who is the immediate past president of the trade association of 1031 intermediaries — the Federation of Exchange Accommodators — interestingly does not advocate that their members use segregated accounts. “Our association supports using prudent business models,” she says. Her own 1031 intermediary company uses segregated accounts held in local banks.

Foster says that some 1031 accommodators quote lower fees to handle a 1031 transaction and then make up for that lower fee by gaining the investment interest on the customer’s funds. While she says that the FEA’s ethics code requires disclosure of the interest portion of the compensation, their association doesn’t conduct audits to see if disclosure is actually happening.

Even more important than the disclosure of the investment earnings on the client’s funds is the risk that the 1031 exchange company is taking on when placing the 1031 exchange customer’s money into a specific investment.

In the case of LandAmerica, it turns out some of their customers might have chosen the safer path for their funds and been protected. LandAmerica’s third-quarter financial filings stated the following: “The like-kind exchange funds are either invested in a commingled account ($290.5 million at Sept. 30, 2008), or if requested by the taxpayer, in a separate account designated by the taxpayer ($110.2 million at September 30, 2008).” So, while most of LandAmerica’s 1031 exchange customers unwittingly placed their own funds at risk and cannot get them back now due to LandAmerica’s bankruptcy, those who requested their money be placed in separate accounts may be able to get their money back through an attorney’s request. Those folks might still be able to complete their 1031 exchange and reap the tax benefits they expected.

Gary Gorman, founder of 1031 Exchange Experts, a 1031 qualified intermediary company based in Denver, Colo., has been critical of his peers using commingled accounts because it puts their customers’ money at risk in a bankruptcy. He also alleges that title companies such as LandAmerica and Fidelity National “… make it very difficult to use someone other than themselves as an intermediary for a 1031 exchange. Fidelity National has fired people for referring outside the company and requires that their 1031 customers provide a written confirmation to use an outside 1031 intermediary company.”

Gorman also alleges that these same title companies run afoul of laws governing title companies to give three choices for when they refer customers to entities like their 1031 exchange divisions that are affiliated with their title company.

LandAmerica isn’t the first 1031 exchange company to take client money down with the company. 1031 Tax Group, a Richmond, Va.-based 1031 accommodator, and Southwest Exchange of Henderson, Nev., both went under in 2007 with possible fraud involving more than $200 million missing between these two companies.

In addition to real estate investors conducting a 1031 exchange using an intermediary who uses segregated accounts for their customers, investors should also be sure the full value of their account is protected at the bank they use. FDIC insurance is generally limited to $250,000 per account holder.

Also, CPA and tax lawyer Scott Haislet, who has done 1031 exchanges for 20 years, points out that some 1031 customers may not realize when they aren’t in compliance with tax rules. “1031 exchange companies don’t provide tax advice,” he cautions.

Possibilities include downsizing your home, selling assets, working longer and taking out a reverse mortgage. Each has its challenges and risks…

The safety net is almost gone, the nest egg is cracking.

Many Americans have recently found themselves changing their retirement plans after losing a substantial amount of home equity as the housing market and the overall U.S. economy struggle. These folks face years of living on fixed incomes from sources such as pensions, 401(k)s, individual retirement accounts and Social Security but don’t have the time to recover their losses.

Homeowners who tapped their home equity find themselves with no more funds to extract. Some have been laid off, relinquished their home in a foreclosure or lost pensions after their employers’ business failed. Ideas of a comfortable retirement full of relaxation and travel have been abandoned.

The good news is that about 30% of homeowners have no mortgage at all. So even though their properties are probably worth less now than a few years ago, these people can tap into that equity cushion if necessary.

The bad news, however, is that about 1 in 6 with a mortgage now owe the bank more than their homes are worth, according to Moody’s Economy.com. Most of these are property owners who purchased their homes within the last few years or refinanced their properties and siphoned off too much equity.

With that in mind, it’s time for Americans to explore options other than relying on home equity, especially if they have no retirement investments or savings. These include downsizing their home, selling assets, postponing retirement by working longer and signing up for a reverse mortgage. Each option has its challenges and risks.

Ken King, 61, once planned to retire in his early to mid-60s. The value of his home has dropped $70,000, so he has scrapped plans to sell the five-bedroom house and downsize, because the savings won’t be substantial enough to make it a smart move. He’s also seen his 401(k) lose value.

King, a credit counselor in Sheboygan, Wis., said he probably would work into his early 70s to compensate.

“This is something I wouldn’t have considered even thinking about 1 1/2 years ago,” said King, adding that priorities have changed this year among those he counsels.

“Now we’re talking to people about what they have to do to survive,” he said.

King’s own strategy of working longer is a growing trend. AARP reported in April that almost 1 in 4 people ages 45 to 54 planned to delay retirement, with 1 in 5 people ages 55 to 64 thinking the same.

Staying on the job has benefits besides a paycheck. Employment is often a requisite in qualifying for mortgage refinancing, a good option for those with equity and good credit because rates have fallen to historic lows. But refinancing becomes almost impossible for seniors on fixed incomes with no job or equity.

The scenario becomes more difficult if the senior has stopped working and wants to return to the workforce, especially as health issues crop up and competition for jobs increases, said George Moschis, director of the Center for Mature Consumer Studies at Georgia State University.

By working later in life, pre-retirees also can consider putting off collecting Social Security, a strategy that could lead to higher monthly payouts once they do start collecting.

Finding a smaller and less expensive home has long been relied upon to bolster retirement budgets. Ideally, profits from the sale of a larger home can be used to buy the smaller home with cash, with no mortgage, and the homeowner can pocket the rest. But the current environment of falling home values and tight credit has made selling a more difficult proposition in many markets.

Another way to shore up retirement accounts is selling off assets, including cars, second homes, stocks and expensive jewelry.

Options such as working longer and selling assets are not as risky as reverse mortgages or selling life insurance policies, two instruments marketed as ways to free up retirement cash.

A reverse mortgage allows homeowners to borrow from the home’s equity in a lump sum, line of credit or regular payments, while not having to pay a monthly mortgage. The homeowner retains title and must pay insurance and property taxes while living in the house.

The loan and fees are due once all parties listed on the deed die or the home is vacant for 12 straight months. The home is usually sold, and the proceeds from the sale are used to pay off the loan, plus interest and fees that can be as much as 8% of the loan.

Reverse mortgages have become more attractive because the government raised lending limits to $417,000 last year, noted Eric Bachman, chief executive of Golden Gateway Financial in Oakland. But as equity drops, so does the amount one can borrow in a reverse mortgage, so timing is key.

However, experts such as AARP financial “ambassador” Jonathan Pond say reverse mortgages should be something of a last resort, because of high fees and the complicated nature of the loans. Reverse mortgages also mean the home will probably be sold at the end of the loan, mainly because the homeowner, or an heir, will want cash to pay off the mortgage.

Education is key, because of fears that reverse mortgage complexities could be used to trick seniors. The American Assn. of Residential Mortgage Regulators and the Conference of State Bank Supervisors established guidelines to be used starting early this year to review lenders and brokers selling reverse mortgages to seniors.

The guidelines are meant to guard consumers against fraud and abuse, “such as the simultaneous sale of unsuitable investments or deceptive sales practices,” according to a December news release from the groups.

An alternative for desperate seniors is to sell their life insurance policy, either back to their insurer or on the private market.

This move, called a “life settlement,” is risky because it leaves consumers without the life insurance and financial security they had once desired to leave behind for loved ones.