There are incentives for consumers to buy homes. There are programs for those in trouble to modify their loan terms. What about tossing a bone to those borrowers who have never missed a payment but also could use a break?

For example, I was recently contacted by a couple who are three years into an interest-only, adjustable-rate mortgage (ARM) that has its interest rate fixed for the first 10 years. The loan carries a prepayment penalty if the couple were to refinance the loan within the first five years of its term.

The prepayment addendum, known in the loan industry as a “soft” prepay because no penalty is assessed if the couple sells the home, stipulates that a refinance could cost an amount equal to six months of interest payments.

While the couple (let’s call them Couple No. 1) understood the agreement when they signed it, they did not anticipate other borrowers with inferior credit and poor payment histories (let’s call them couple No. 2) getting a better deal. It seems that lenders — or the institution that now owns the loan — are willing to help only when they fear they will be taking on a negative-equity situation and end up receiving less than what the home is worth.

For example, Couple No. 1 has a loan of $440,000 at an interest-only rate of 6 percent. Their intent was to refinance to a 30-year fixed-rate loan at 5 percent or a 15-year fixed-rate loan at 4.75 percent. They did not want to take any more additional “cash back” or increase the loan size in any way. They simply wanted to get out of the interest-only loan, begin an amortizing loan and perhaps lower their monthly payments.

Their lender, with whom they hold three checking and savings accounts, said the new payments on the amortizing loan would be more than the current payment. However, there was no way that the investor that bought the mortgage (Bank of New York) would be willing to waive the prepayment penalty.

The reason given was that there was no incentive to do so — the home had plenty of equity and if the borrower defaulted, the bank could sell the home and be repaid all of the outstanding mortgage, plus fees and expenses.

Conversely, Couple No. 2 had a loan balance of $285,000 on an option ARM. They had made minimum payments on the loan, meaning the amount they had paid had not covered the interest portion of the loan. They already owed more money than they had borrowed (also known as negative amortization).

In addition, they had missed three payments in the past 24 months. When the couple applied for a refinance, the lender agreed to waive the prepayment penalty because the bank did not want to take the house back in the event the couple defaulted.

The concept of “fair” is off the table — and has been for a long time. The question now becomes: What will lenders do to retain good customers? For example, when the prepayment penalty period comes to an end, why would Couple No. 1 choose to return to the same lender for another loan? What did this lender actually do to keep these terrific customers from going to another lender on the street?

A year ago, the National Association of Realtors, the largest trade group in the world with 1.2 million members, offered a solution to the housing dilemma. NAR presented Congress with a Four-Point Housing Stimulus Plan to help stabilize the housing and mortgage markets. The crux of the package suggests using $130 billion of the $700 billion federal bailout funds on housing, specifically earmarked for an interest-rate buydown and more tax credits.

That buydown would be a one-percentage-point interest-rate buydown on fixed-rate loans for all buyers. The reduction reportedly would have resulted in approximately 840,000 additional home sales and reduced the inventory of homes by as much as 20 percent. The buydown offer would be available for a specific time period.

The incentives that became reality were an $8,000 first-time homebuyer tax credit and a new existing homeowner tax credit of $6,500. As previously stated, the amount of the “existing homeowner” credit equals the lesser of: (1) $6,500, or (2) 10 percent of the price of the replacement home, or (3) $3,250 for a buyer who uses married-filing-separate status.

To qualify, the buyer must have owned and used the same home as a principal residence for at least five consecutive years during the eight-year period ending on the purchase date for the replacement principal residence. If married, the spouse also must pass the consecutive-year test. Homes valued at $800,000 or more do not qualify.

Still, foreclosures are expected at a record pace. Why not slow the foreclosures, curtail high inventories and make more mortgage money available? Lenders can do that by offering good customers a buydown in interest rates, keeping them in their homes.

There is no shortage of short sales and bank-owned (REO) homes in markets across the country, and it’s likely going to be a “long, slow burn” to work through this inventory of distressed properties, said Paul Jackson, publisher of HousingWire and REO Insider.

By most measures, REO activity was fairly steady in 2009 compared to 2008, said Jackson, speaking during a discussion on “Breaking into the REO Club” at the Real Estate Connect conference in New York City last week.

And while some analysts have tossed out staggering numbers about the so-called “shadow inventory” of foreclosing and foreclosed homes that will hit the market, he said he expects a continuing steady flow rather than a tidal wave.

That’s because there are government programs that are intended to check a rush of new foreclosures, he said. Also, as noted by speakers in an earlier conference session, financial companies would prefer not to take a hit on their balance sheets all at once by releasing a flood of distressed properties to market.

FirstAmerican CoreLogic, for example, has estimated a “shadow inventory” of 1.7 million homes at the close of September 2009, a rise from 1.1 million at the same time in the previous year, while the “visible inventory” dropped from 4.7 million at the end of September 2008 to 3.8 million at the close of September 2009.

There will be opportunities for real estate professionals to work with distressed properties for some time, Jackson noted.

“For those of you looking to get into the space, now is a pretty good time,” he said. “REOs and forelcosures are now an organic part of the real estate market — they’re no longer a niche.”

Of course, that doesn’t mean it will be easy. Jackson and other panelists noted that it takes a lot of time, effort and organization to deal with distressed properties. And the rules are changing.

Broker price opinions (BPOs) — which are valuations of properties by real estate agents or brokers that are ordered by lenders and loss mitigation companies when an appraisal is deemed unnecessary — are not necessarily a gateway for real estate professionals to get REO listings these days, for example, said Jackson.

And brokerage companies may find that it’s better to have separate, specialized departments to handle BPOs, REOs and short sales these days, as each requires a particular skill set.

Panelists also noted the alphabet soup of companies offering foreclosure certifications and training and conferences and the difficulty in breaking in with lenders and servicers in the first place. They cited RealEstateEducate.com as a provider of a distressed-property training that is required by several major servicers.

Panelists noted that it can take a heavy investment — perhaps $5,000 per property — to handle all of the tasks associated with REO properties when serving as a listing agent.

Marie Chung, director of REO and foreclosure services for REO Modern Realty Corp., that offers brokerage and other services, emphasized the importance of a subtle and persistent approach to getting a slice of action in distressed properties — being overly pushy in your networking approach can backfire, she said.

“This is not a science — it really is an art. Breaking into this business is networking, persistence, and once you’re in it’s all about keeping the business.”

Networking means “truly understanding the REO industry itself,” she said. “You need to understand how it works and who the players are.”

Companies will likely have different processes and points of contact for agents, she noted, and that requires some homework on the agent’s part. Agents may be in contact with asset managers, pre-marketing representatives and closing coordinators at various companies for various aspects of the transaction, for example.

Chung’s company has 18 people on payroll, and its operations differ from that of a typical real estate brokerage company. The deals may not be as lucrative as standard transactions, she noted, and those who list REOs must bring a lot of money and expertise to the table.

In some cases, Chung and other panelists said, reimbursement for some of the many tasks performed in selling distressed properties may be delayed … or it may never come. And delayed utility bills that show up late in the sales process are a definite problem, she said.

Beth Butler, a panelist who is owner and consultant for Bigmouth Consulting, a real estate consulting firm based in Miami, said that it’s inevitable if you work with REOs that “you will end up out money, but sooner or later hopefully you’re making enough to cover” those expenses.

Jackson said real estate professionals who work with REOs are expected to be more hands-on with properties these days, too, and must identify and manage needed repairs, for example, while handling occupancy issues and filing regular reports with the servicer.

“(Servicers) are looking for agents who can bring more to the table than just (the basic) criteria,” Jackson said, which means community involvement and specific knowledge of local codes and ordinances can give agents a leg up on their competition.

“You are their local representative in their market. Someone who is connected to that city, knows what is happening in that city and has a civic-minded mindset,” he said.

Chung also stressed the importance for agents and brokers handling REO properties to be the steward for all actions related to that property.

“You are ultimately responsibility for the property. This is your asset, so treat it like your own,” she said.

In an earlier conference session focused on foreclosures, participants noted delays in banks bringing distressed properties to market and signing off on short sales.

Rick Sharga, senior vice president for RealtyTrac, a distressed-property data provider, said that “one of the fallacies of short sales … (they) force the bank to take a loss today.”

That panel’s moderator, Jonathan Miller, president of Miller Samuel Inc., a New York City real estate appraisal firm, said such deferred losses on bad or souring loans is sometimes referred to as “extend and pretend,” delay and pray” or even, “a rolling loan gathers no loss.”

Short-sale expert Philip Tesoriero of Gelip Inc. Consulting, during a separate conference session, hammered home the need for agents to have a compile a comprehensive package of documents in getting short sales closed.

Many agents have complained that short sales too often lead to delays and failure, and Tesoriero said that common reasons for rejection: the purchase offers are far too low, sellers fail to qualify to engage in a short sale, and the paperwork may be insufficient.

He recommends that agents prepare a list of materials to help close the deal, including a hardship letter, sales contract, tax return form, proof of finances for buyer and proof of income and assets for the seller, among other documentation. A written offer letter, a broker’s price opinion, a “carry cost analysis” that compares the costs associated with a short sale versus the cost of allowing the property to foreclose, and a 4506 T form — a tax form that is useful for gauging a borrower’s creditworthiness — can also be beneficial in seeking short-sale approval, he said.

“I’ve got to assume that there’s a human being on the other side. I try to send them a very detailed cover letter that explains the hardship, explains that these people are very motivated,” he said.

The financial crisis has made the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration, the only reverse mortgage in the market. Yet the HECM has been strengthened by higher loan limits and new options, offering valuable opportunities to many, though not all, seniors.

Characteristics of Seniors Who Should Look Into HECMs: They must be 62 or older and occupy the home as their permanent residence.

They have significant equity in their homes, meaning that their mortgage is either paid off or is small relative to the value of their property, but their income and financial assets are not large enough to meet all their needs.

They either intend to stay in their current home indefinitely, or they want to move to a different home immediately, using a reverse mortgage in the process, and remain there indefinitely. (Note: HECMs that terminate within a few years are very costly).

They are not uncomfortable about leaving their heirs with less (or no) equity in their homes.

A Simple Shopping Rule: Shopping for a HECM can be very difficult, or very easy. If you shop in the conventional way of compiling all the price components for each lender, the process is tedious and prone to error. Interest rates, origination fees, servicing fees and third-party charges are all costs to the borrower that can vary from deal to deal.

But there is a shopping shortcut that is close to foolproof. You shop for the largest amount of cash you can draw at the outset, which is called the “Net Principal Limit,” or NPL. The NPL is the bottom line because it is reduced by higher interest rates, origination fees, third-party charges, and servicing fees. I gave an example of an NPL in last week’s column.

Just make sure that when you shop NPLs among different lenders, you give them all the same property value, age and existing debt, because these also affect the NPL. If you tell lender A that you are 72, for example, and only remember that you have a spouse of 68 when you get to lender B, you will be comparing apples and oranges.

The fact that you shop for the largest NPL does not mean that you must draw that amount. On a fixed-rate mortgage (FRM), you must draw the full amount, but on an adjustable-rate mortgage (ARM) you can draw any part of it at the outset, including none, retaining the remainder as a credit line. Or you can use all or part of it to purchase a term or life annuity.

HECM Rates: A HECM has two interest rates. The expected rate is used to calculate the future growth of the borrower’s loan balance, which affects the NPL. The note rate is the actual rate the borrower pays. The two are the same on a FRM, but on an ARM, the note rate changes every month with changes in the rate index.

Locking: Locking the terms of a HECM is easier than locking the terms of a forward mortgage. The expected rate used in calculating the NPL is locked at application with a “float-down” for 120 days. If the rate declines before the loan is closed, the borrower gets the benefit of it. On an ARM, however, the note rate is reset every week and is not locked. This has caused a problem only once, in March, when Fannie Mae increased the ARM margin by a large amount, catching both borrowers and lenders by surprise.

Appraising the Property: When you apply for a HECM, the lender will order an appraisal. The NPL is not finalized until the appraisal is accepted. However, any difference between the final NPL and a preliminary NPL based on a different property value should be exactly proportionate to the difference in values. For example, if you estimate your house value at $400,000 and the appraisal comes in at $396,000, a decline of 1 percent, the NPL should be lower by 1 percent as well.

Selecting a Lender: I recommend going to www.reversemortgage.org, which lists reverse mortgage lenders by state and has links to all their Web sites. Narrow your choice to those who provide calculators that you can use anonymously to find their NPLs for both the adjustable-rate and fixed-rate HECMs.

As a test case, I recently did this for Pennsylvania where I live. Of the 22 lenders listed in the state, six had anonymous calculators. That’s enough. The six included three national lenders that would come up in all other states. Two other lenders in Pennsylvania had calculators on their sites but to use them you have to provide contact information. There is no need to expose yourself to solicitations.

What Not to Do: Under no circumstances allow yourself to be solicited by a loan provider, which requires that your name not appear on lists of reverse mortgage leads. Compiling leads and selling them to lenders is a thriving business. You avoid becoming a lead by not responding to teaser ads, such as “Great New Government Program, See How Much You Qualify to Receive.”

It is very hard to get into trouble if you initiate the HECM. When someone else initiates it and you go along with the solicitation, the likelihood of a bad deal for you escalates dramatically. If the soliciting party ties the HECM to an annuity or house purchase, you are almost certainly going to be scammed.

The Obama administration says pressure on lenders is paying off:
After a month of intense pressure on banks and other mortgage servicers, the Obama administration on Friday reported improvement in its much-criticized program to reduce mortgage payments to stave off foreclosures.

The number of temporary loan modifications that were made permanent had more than doubled to 66,465 as of Dec. 30, the Treasury Department said.

In addition, 46,056 three-month trial mortgage modifications were approved and awaiting only the homeowner signatures before they were made permanent as well.

As of Nov. 30, only 31,382 mortgages had been permanently modified.

California led the nation with 13,353 permanent modifications as of the end of last month and 158,935 active trial modifications.

Mortgage servicers have been slow to turn the three-month trial modifications into permanent ones amid complaints from homeowners of lost paperwork and other bureaucratic problems.

Although the pace picked up in December after the administration increased scrutiny and threatened banks with fines, the number of permanent modifications was still low compared with the trials started.

As of Dec. 30, there were 697,026 active trial modifications. To be eligible, homeowners must be at least two months behind on their payments.

But with 2.8 million foreclosures last year, according to RealtyTrac, and filings in December up 14% from the previous month, the administration’s Home Affordable Mortgage Program isn’t doing enough to stem foreclosures, critics said. The program provides incentives to mortgage servicers to reduce monthly payments for struggling homeowners.

“Serious people inside and outside the administration have thought this through, and we all understand that a more substantial response is needed,” said John Taylor, president of the National Community Reinvestment Coalition. “The question is: Does the political will exist to force the banks to modify loans?”

Administration officials said that they realized more needed to be done but that the program was on pace to meet its target of 3 million to 4 million modifications by 2012.

“We believe there is much, much more work to be done to make sure the program is running right and stabilize our housing market and the broader economy, but we’re encouraged very much by the efforts we’ve seen to date,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

Overall, 25% of eligible homeowners had trial or permanent modifications, the Treasury Department said.

Some large mortgage servicers such as JPMorgan Chase & Co., Citigroup Inc.’s CitiMortgage and Wells Fargo & Co. had extended trial or permanent modifications to at least a third of eligible homeowners as of Dec. 30.

But Bank of America Corp., which serviced the most eligible mortgages — about 1.1 million — was only at 19%. The bank had permanently modified just 2,737 loans as of the end of last month.

“You have some banks that really did step up to the plate quickly . . . and others whose results were disappointing and need to do much better,” Barr said.

BofA tried to get ahead of the news Wednesday by noting its improvement, saying it began 34,000 trial modifications in December and had more than 200,000 customers overall who had started trial modifications.

Ginny…I read with interest what you wrote about putting rental properties in LLCs. What can you tell me about the new series LLCs for real estate investors? It appears they can be formed only in certain states, but would they be recognized in all states? — Rob V., Asheville, NC

Rob…The “series LLC” is a new, untested concept. Oversimplified, it is a “master” limited liability company, composed of two or more limited liability companies.

I have always recommended that real estate investors put their property into an LLC. But if you own two properties, each should be titled in the name of a separate LLC. Why? Because if a tenant in one of your properties decides to sue you — and you do not have adequate insurance coverage, or if the lawsuit is based on a matter that is excluded from your coverage — you could lose all of the assets in that LLC. So if you have two properties in the same LLC, both properties could be sold to satisfy any judgment against you.

On the other hand, if you have only one property in the LLC, the court — and the creditors — cannot go after those other properties. Of course, if you do not carefully follow all of the LLC rules (i.e., commingle funds, or sign legal documents in your name and not as “manager” or “member” of the LLC), then you potentially are exposing all of your assets.

Enter the series LLC. The concept began in Delaware, and to my knowledge, only seven other states currently allow the creation of such a legal entity. Those states are Illinois, Iowa, Nevada, Oklahoma, Tennessee, Utah and Texas.

In a series LLC, although each separate LLC (often referred to as “cells”) can have separate assets, different members and managers, the series (or master) pays only one filing fee and files only one income tax return.

While this column cannot provide a complete summary of the pros and cons to this concept, you can get a lot more information on the Internet by searching for “series LLCs.” But the most important questions are:

1. Will a state that does not authorize the series allow an entity that is legally formed in another state to be recognized and authorized to do business in that state? Recently, California has said “yes.” However, California is still going to require filing fees and taxes to be paid by each of the various cells in that master.

2. Is it absolutely certain that the assets of each cell are individually protected in the event of a lawsuit against one of the individual LLCs? Recently, the American Bar Association issued a report questioning the viability of this entity. One of the ABA’s concerns is whether the so-called “internal liability shield” would be recognized in those states that have not formally authorized series LLCs.

This is a new animal, and while intriguing, leaves a lot of questions unanswered. If you are an investor, discuss your situation with your attorney and your financial advisors before going down this uncertain path.

The holiday rush is over and the decorations are put away, but you still have plenty of New Year’s resolutions to make. Besides the diet, here are 10 resolutions that will make your home a better place to live in 2010.

1. Change the batteries on your smoke detectors
Rather than waiting for your smoke detector to go off in the middle of the night when the battery goes out, get in the habit of replacing the batteries the first weekend of each year. If you have a fireplace or gas appliances, it would also be wise to install a carbon monoxide detector to avoid deadly leaks.

2. Update your insurance policies
Many people buy new items over the course of the year, especially at the holidays. If you have purchased a new computer, jewelry, art, or other major item, check with your insurance company to determine whether you need to increase your insurance. Review your policy to determine if you have “full replacement value” coverage. If your policy doesn’t have this coverage and you experience a major loss, the insurance company can give you the pro-rated value of your appliances and other items. The net effect is that you will lack the funds necessary to restore your home to its original state prior to the loss.

3. Take pictures and/or video
If you haven’t done so already, take pictures and/or video of every nook and cranny in your home. Store this in a safe deposit box away from the property. (It’s also smart to save it online). If you do experience a major disaster, you have proof of the quality and the condition of your home prior to your loss.

4. Eliminate toxic cleaning materials
You can clean most of your house with vinegar, water, baking soda, and a microfiber cloth, according to the Spring Cleaning Guide at HouseLogic.com. The orange-based cleaners also work well. Use microfiber on your stainless steel appliances to make them shine. Best of all, not only will you save money, you will avoid mixing your food with toxic chemicals.

5. Change the filters on your heating/air conditioning systems
During the winter, we generally don’t have the luxury of leaving our windows open to air out our homes. Changing your filters not only helps your system work more efficiently, it also reduces allergens and other irritants.

6. Check your emergency preparedness
If you live in an area where you may experience an extended power outage from an earthquake, hurricane, snowstorm, tornado or even a terrorist attack, make sure that you have sufficient amounts of water, food, a generator, and propane or charcoal for cooking during an emergency. The usual guidelines are to have at least one week’s worth of everything you need. This includes medications. You may want to consider purchasing some of the wilderness supply products including a solar generator that fits in a backpack.

7. Don’t just vacuum your carpets
The next time you vacuum, be sure to also get your refrigerator coils, the lint filter in your dryer, and your tiled surfaces. Apparently, water helps small particles bind to the grout rather than washing them away. If you vacuum before you wash the tile surfaces, you will prevent grime buildup in your grout.

8. Check your chimney and/or wood stove
Chimneys are designed to carry toxic fumes away from your living area. Many people believe that chimneys are maintenance-free. They are not. Check your flue to make sure it’s operating properly. Also, depending on how much wood your burn, you should have your chimney cleaned on an annual basis. If you’re burning more than four cords per year, it’s advisable to have your chimney cleaned twice a year. There are more than 25,000 chimney fires every year. For additional prevention information on chimney maintenance, visit the Chimney Safety Institute of America.

9. Check for air leaks
A cold, windy day is a great time to discover where your house is not properly sealed. In many cases, all you need to repair the leak is some caulking. If your windows need replacing, research what types of rebates are available for installing energy-efficient windows. There are also energy rebates for insulation and for radiant barriers for your attic. A radiant barrier prevents heat loss during the winter and keeps heat out during the summer.

10. Kill dust mites
Like the other flat surfaces in your home, dust accumulates on your bedspreads, drapes and other fabric surfaces. If you’re not ready to haul these to the cleaners, many experts suggest running them through your dryer. (Caveat: Some fabrics such as rayon may melt in your dryer, so check the labels.) A different option is to vacuum and then steam the fabrics using a portable steamer.

While this list is by no means comprehensive, it is an excellent way to make your house more livable throughout the upcoming year.