In the case ProBuild LLC v. Ellis, homeowners Ronald and Kimberly Jinks entered into a contract with home improvement contractor Steven Ellis for work to the Jinkses’ home. The Jinkses paid slightly more than the contract price, which included labor and materials.

After the contract and the work was completed, supplier ProBuild North LLC (ProBuild) filed a mechanic’s lien against the Jinkses home in an effort to recover the amount of Ellis’ outstanding bill for building materials that Ellis used on the Jinkses’ job.

Eventually, ProBuild sought to foreclose on the lien, collecting against the Michigan Department of Labor and Economic Growth’s Homeowner Construction Lien Recovery Fund, which then sought to be repaid by the Jinkses.

The trial court found that because the Jinkses had paid Ellis the full contract price for the project, they were not liable to ProBuild for the unpaid supplies. The fund appealed the trial court’s ruling.

The Michigan Court of Appeals upheld the trial court’s ruling. ProBuild and the fund argued that Ellis’ quote — and the resulting contract with the Jinkses — charged the Jinkses less than the value of the improvements they received. On appeal, ProBuild and the fund argued that the Jinkses should be required to compensate them for the value the Jinkses received above and beyond the contract amount.

However, the version of Michigan Construction Lien Act Section 570.1203 applicable at the time of the underlying events expressly provided that homeowners could not be liable under a construction lien where the owners filed an affidavit with the court stating they had: “(a) paid the contractor for the improvement to the residential structure and the amount of the payment; (b) not colluded with any person to obtain a payment from the fund; and (c) cooperated and will continue to cooperate with the department in the defense of the fund.”

Ronald Jinks had filed such an affidavit with the trial court, and the trial court had found that it was materially undisputed that the Jinkses had actually paid Ellis more than the contract amount.

In response to ProBuild and the fund’s argument that the Jinkses had not paid for “the improvement” because the contract amount was less than the dollar value of the improvement, the Court of Appeals cited another section of the Michigan Construction Lien Act, which “indicates that the total amount of liens cannot exceed the contract price less payments made.”

Accordingly, the appellate court rejected ProBuild and the fund’s appeal, and affirmed the trial court’s ruling in the Jinkses’ favor.

Please note: This story has been edited to clarify that short sale properties are not owned by banks.

Industry groups representing appraisers say the Obama administration’s short-sale incentive program lacks safeguards to prevent mortgage fraud, including so-called “property flopping” schemes in which real estate agents help investors obtain distressed properties at deflated prices.

In a letter to Treasury Secretary Timothy Geithner, four groups representing appraisers, including the Appraisal Institute and the American Society of Appraisers, urged the Obama administration to prohibit the use of broker price opinions (BPOs) when valuing properties eligible for the Home Affordable Foreclosures Alternatives (HAFA) short-sale incentive program.

“Generally speaking, real estate agents and brokers are not independent or properly trained valuation specialists,” the groups said. “They have an inherent bias toward quick results and action, which produces a fee for themselves irrespective of whether the lender … gets a fair return on the short sale.”

The National Association of Realtors did not immediately respond to a request for comment by Inman News. While some real estate agents acknowledge that property flopping and mortgage fraud can be a problem with short sales, they say BPOs in and of themselves are not necessarily to blame.

Nathan Bangs, a Tampa Bay, Fla.-based Realtor who specializes in short sales, said that unlike an appraisal, which attempts to determine a property’s market value and can quickly become outdated in a declining market, a BPO is intended to establish “what it would take to move (a property) in 30 days.”

“I would have the same conversation with a seller who is not in a short sale,” Bangs said. “You price it in front of the market.”

The HAFA program guidelines issued by the Treasury Department in November include measures intended to thwart fraud. Properties must be publicized in a multiple listing service (MLS) and marketed by the listing broker.

Any short sale “must represent an arm’s-length transaction and that the purchaser may not sell the property within 90 calendar days of closing, including certification language regarding the arm’s-length transaction that must be included in the sales contract,” the guidelines say.

But industry groups representing appraisers cited recent studies, like a mortgage fraud risk report by Interthinx Inc., as cause for concern. The Interthinx report showed schemes involving short sales and “real estate owned” (also known as bank-owned or REO) properties has increased by nearly 50 percent over the past year and doubled over the past two years, the groups said.

Groups representing appraisers also pointed to a recent analysis of 18,000 property sales in two Florida counties, Sarasota and Manatee, by the Sarasota Herald Tribune, which concluded that 1.4 percent were “questionable short sales.”

A U.S. Treasury Department representative did not respond to requests for comment.

According to a fact sheet issued by the Treasury Department in May, lenders may use an appraisal performed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) to determine a property’s list price and any permissible reductions, or one or more BPOs. Either way, the valuations must be dated within 120 days of the short-sale agreement.

Appraisers want the Treasury Department to prohibit the use of BPOs for property-valuation requirements involving short sales, in order to “reestablish independence in the valuation process and guard against conflicts of interest in short sales.”

Laws in 23 states limit real estate agents and brokers to performing BPOs only to assist buyers or sellers, the groups also noted, and lenders who sign off on short sales do not own the properties and are not buyers or sellers.

The HAFA program is aimed at borrowers who are eligible for the Home Affordable Modification Program (HAMP) but who did not qualify for or failed to complete a trial loan modification.

HAFA sets up a streamlined process and provides incentives to divert homes headed for foreclosure into a short sale or deed in lieu of foreclosure.

In addition to questions about whether the program will be able to prevent fraudulent transactions, there are also doubts about whether the incentives offered will be enough to prevent a significant number of foreclosures.

The program pays loan servicers $1,000 to cover administrative costs. Homeowners get $1,500 in relocation assistance and a promise from their lender not to pursue a deficiency judgment against them for the difference between their home’s sale price and the amount outstanding on their mortgage.

Because the claims of lenders who have made second, or “piggyback,” loans on many properties often derail short sales, the HAFA program also provides incentives for paying those claims off.

To defray the costs of paying off claims by second lenders or other subordinate lien holders, the first lender can be reimbursed $1 for every $3 it provides to subordinate lien holders, up to a maximum of $1,000. In other words, a first lender that provides $3,000 in proceeds from a short sale to a second lender can receive $1,000 from the Treasury Department.

The program restricts payments to subordinate lien holders to no more than 3 percent of the unpaid principal balance of their loan, up to a maximum $3,000.

That means a second lender owed $50,000 could receive no more than $1,500 — which Bangs said is not enough of an incentive for the second lender to agree to give up its right to obtain a deficiency judgment against the borrower.

Bangs, who said 75 of the 80 listings he’s handling now are short sales, views the HAFA program as “political grandstanding. The government is trying to help, but it’s not on the same page as the private sector.”

Investor limitations on payments to subordinate lien holders have reportedly led some to pursue payments outside of closing.

In January, CNBC real estate reporter Diana Olick wrote about attempts by subordinate lien holders to get real estate agents or buyers to make payments to them outside of escrow.

The Escondido, Calif.-based North County Times documented similar practices in an article published in November.

Title insurer Fidelity National Financial, in the September 2009 edition of the company’s newsletter, “Fraud Insights,” documented a case in which a second lender demanded a $9,141 payment outside of closing that had supposedly been negotiated between a buyer and short-sale negotiator.

There’s some anecdotal evidence that short sales provide opportunities for “property flopping,” in which a real estate agent, instead of actively marketing a short sale or REO property, works with an investor to facilitate a sale of a property at much less than its market value.

Jim Klinge, a San Diego broker-owner, writes about interesting transactions on his blog bubbleinfo.com, and posts videos as “Jim the Realtor” on YouTube.

One such transaction involved a property that was placed in a multiple listing service and withdrawn within 48 hours, eight months after the agent took the listing, he said.

“The only thing I could think of was (the agent) had that short-sale cooking, and the bank must have come back and said, ‘You didn’t put that on the MLS,’ ” Klinge said in a recent video.

Contacted, Klinge declined to identify the agent.

“I could give you dozens of examples, and yet (it appears there is) nobody doing anything about it,” Klinge said.

The HAMP and HAFA programs can tap up to $75 billion from the $700 billion Troubled Asset Relief Program (TARP).

Ginny,  I’m about $150,000 upside down on my house, and I have been trying to do a short sale. I had a contract to sell it to a buyer who is well-qualified and has been waiting patiently for several months while we awaited approval from my mortgage lender. (I have two mortgages, with two different lenders.)

Anyway, we got an approval on the first mortgage, but on the second mortgage they refused to allow the short sale with anything less than 30 percent of what I owe them. The first mortgage lender refused to sign off on the short sale, though, if the second lender got more than a flat $5,000. This left about $15,000 between the two, and my agent couldn’t break the impasse.

I don’t understand this — I’m on the verge of foreclosure, and my second won’t get anything if I lose the house, because my negative equity in the place is more than I owe them. What am I missing here? Was there anything we could have done differently?  Kimberly S.

Kimberly, if I had a dollar for every time a thwarted short-sale seller, baffled by the banks’ collective refusal to play ball, asked me what they were missing, I’d be a rich woman, not a real estate columnist. Recently, though, a valid (yet unhelpful) answer has emerged.

What we’ve all been missing is the impact of private mortgage insurance coverage (PMI), which is to offer banks — especially second mortgage lenders — an opportunity to recover their total loss if they refuse to allow a short sale and you lose your home.

PMI works to cover a lender in the event their borrower defaults on their loan. However, most of us understood PMI to be a policy that is obtained by first mortgage lenders on loans greater than 80 percent of the borrower’s loan-to-value ratio. That just means that we always thought of PMI as something that a lender required only when there was a low- or no-downpayment loan involved.

And we all believed that using two loans to purchase your home, where the second loan stood in for your downpayment (e.g., an 80/20 or 80/10/10 loan scenario) avoided PMI altogether.

In fact, these scenarios govern only whether a borrower is required to pay for his or her own policy of PMI on top of the normal mortgage loan interest and fees. In reality, most (if not all) lenders obtained PMI on their entire portfolios of loans, including even “regular” 80 percent mortgages and on the second mortgages they originated and serviced as home equity lines of credit (HELOC) or downpayment substitute loans.

They didn’t charge borrowers for these PMI policies as a separate fee, although I’m certain that the cost of the PMI was factored into the other fees and costs of the loans.

Accordingly, what you’re missing is that the second lender is really unmotivated to take a lowball recovery like the $5,000 it would get if it agreed to the short sale on the terms set forth by the first lender, because the second lender might very well be able to recover 100 percent of the loan amount if you lose the home to foreclosure and it files a claim with its private mortgage insurance company.As an aside, this might also be why so many lenders are failing to pursue deficiency judgments against their borrowers, after foreclosing on their homes. Why go to the expense of trying to litigate blood out of a foreclosed owner/turnip, when you can simply collect your loss from an insurance policy?

Now, in terms of what you might have done differently, the most experienced and sophisticated short-sale agents are evolving strategies to work around this issue as we speak. This is a very rapidly developing area, though, and there are absolutely zero guaranteed ways to secure short-sale approval.

Every situation is different, so while I can suggest some things that might have worked, there’s no way to know whether either of them would have done the trick.

This gap between the first and second lenders’ bottom lines can be resolved only by what we call a contribution. That means either the seller or the buyer must make a cash contribution to pay the second off. (If you simply get the buyer to increase the purchase price and finance the contribution, the first lender will want to take that increase, too!)

Now, many experienced short-sale agents are anticipating this contribution issue, and as soon as they receive an acceptable offer, they actually give the buyer a heads-up about the contribution issue and ask whether they have the cash available to make a contribution, if it’s needed to close the deal.

To avoid the buyer having to overpay for the property, I’ve even seen listing agents negotiate a lower contract price than the price the buyer was offering in the first place and advise the buyer to secure a loan approval with as low a required downpayment as possible, so that the buyer can conserve his or her cash to have it available to make a contribution to the second.

This also allows the buyer, post-contribution, to have paid no more than the home’s fair market value.

Many banks suggest that sellers make the contribution to close this gap out of their own pocket, savings or retirement funds, or even via an IOU or promissory note. This solution is much less feasible, in my estimation, than working to revise the transaction so that a buyer can make the contribution.

It makes little or no financial sense for sellers — who are already taking a loss and a credit hit — to bind themselves to pay more money in the future to the lender for a home they are losing and leaving.

For the seller to make a large contribution to get the short sale done would be especially nonsensical in no-recourse states like California where, if the home goes back to the lender via foreclosure, the lender cannot sue or otherwise come after the owner.

If you plan to take out a mortgage or refinance any time soon, you might want to hear this blunt message from federal officials: Don’t fly blind. When you’re shopping among competing lenders for the best loan terms and fees, make sure you know which quotes come with a guarantee and which do not.

Depending upon how loan officers provide their quotes upfront — on an informal “work sheet” that carries no federal consumer protections or on a new, three-page “good-faith estimate” mortgage shopping tool that comes with rock-hard guarantees — there could be a world of difference.

A loan officer might quote you fees that are low-balled by hundreds of dollars on an informal work sheet to get your business. But if the quotes are made on a good-faith estimate, they’ve got to be accurate because, under federal rules that took effect Jan. 1, any significant excesses must come out of the lender’s own wallet at closing.

This month the Department of Housing and Urban Development brought together representatives of the highest-volume mortgage lenders in the country — who originate a combined 80%-plus of all new home loans — to review the agency’s reformed good-faith-estimate and closing documents.

Among the issues discussed: the widespread use of informal work-sheet estimates to quote loan shoppers mortgage rates and closing fees. HUD does not object to lenders using work sheets to give casual shoppers a rough idea of what they’ll pay. But the agency says it wants lenders and loan officers to make clear to customers that work sheets are not good-faith estimates, and they are not guaranteed.

At the meeting with major lenders, HUD Deputy Assistant Secretary Vicki Bott warned that under no circumstances can work-sheet quotes be issued to a mortgage applicant “in lieu of a GFE.” Once a consumer supplies the essential application information — Social Security number, property address and estimated value, among other data — lenders must issue a binding-cost good-faith estimate.

Also, loan officers cannot refuse to provide a good-faith estimate to an applicant who requests one, nor can they tell applicants that they can receive a GFE only if they commit to moving forward with their company to obtain the mortgage.

“By no means can they say you are bound to me as your lender” following issuance of a cost-guaranteed good-faith estimate, Bott said. Why? Because the whole concept of the revised GFE is to enable home buyers and refinancers to shop intelligently, with confidence in lenders’ estimates.

You can now get cost-guaranteed quotes on a good-faith estimate from one lender, then take them and compare them with GFE quotes from competitors. The new form contains itemized boxes allowing comparison of up to four lenders’ quotes — including interest rates, loan fees, prepayment penalties and total settlement expenses.

The good-faith estimate also ties upfront estimates to later charges at closing, and encourages borrowers to check line by line for any discrepancies. The form explains which fees come with zero tolerance for changes between upfront estimates and closing — generally the lender’s own loan fees and local transfer taxes — and which fees allow a 10% tolerance for changes higher than the estimate, such as certain title and closing-related services.

Here is how to be a smart mortgage shopper using the new federal rules to your advantage. If you are seriously looking for the best deal and are prepared to supply basic application information, ask for a good-faith estimate by name. If you’re merely shopping for generic rate quotes, work sheets are fine as long as you understand their limitations.

Beware of look-alike ploys and substitutes. Bott told lenders to make sure their work sheets do not “look like a GFE” and that they “be clear [to the consumer] that they are not GFEs.”

Some work sheets that have been used by lenders since Jan. 1 resemble good-faith estimates but have titles such as “estimated settlement costs” at the top of the page. Others indicate on the bottom of the form that the work sheet “is not a GFE,” but the typeface is so small it’s barely legible.

Finally, be aware that federal law requires that a good-faith estimate be issued within three days of any application.

Closing costs, the costs associated with buying or selling a home, can add up. It’s wise to get an estimate of how much you’re likely to pay in closing costs before you make an offer to buy a home or accept an offer to sell.

Closing costs reduce the amount the seller nets from the sale. Buyers need to know in advance of entering into a home-purchase contract that they have enough cash to cover both the downpayment and closing costs.

Closing costs vary with location. Often who pays what fees — buyer or seller — is dictated by local custom. For instance, in Northern California, buyers usually pay the title insurance premium, while sellers usually pay the premium in Southern California.

HOUSE HUNTING TIP: Some real estate agents use 1 percent of the expected selling price to estimate a seller’s closing cost. This might be close to accurate in some cases. But, there are so many variables that can affect the closing costs in any given sale transaction that it’s preferable to have your real estate agent give you an itemized list of the costs you are likely to pay.

Sellers’ closing costs can include such things as the real estate broker’s fee; transfer taxes, if there are any; costs associated with any mandated compliance requirements; title insurance, in some places; attorney fees, in some cases; closing or escrow agent fees; inspection fees, unless they were paid directly to the inspectors; a home warranty, if applicable; fees for drawing, notarizing and couriering documents; recording fees; property taxes (if seller has overpaid, the buyer will credit the seller that amount); and homeowner association dues, if there are any.

In addition to the closing costs listed above, the sellers pay off the liens secured against the property and any outstanding interest owed at closing. When you make a mortgage payment, it pays interest owed for the previous month. So, if you were to close on March 1, you would owe the lender interest from Feb. 1 through the date the lender receives the funds, which may not be until a day or so after you close.

With short sales, where the sale price is insufficient to pay off the liens and closing costs, additional closing costs may apply, such as a short-sale process fee charged by the escrow or closing agent. If a third-party short-sale negotiation company is involved, there could be a fee as high as 1 percent of the sale price charged at closing.

Sellers who live in an area where a property survey is required and who customarily pay the cost might have significantly higher closing costs than would a seller in Oakland, Calif., for example, where there aren’t any expensive point-of-sale compliance requirements.

Buyers’ closing costs customarily cover such things as the fees associated with the buyers’ new mortgage; transfer taxes, if there are any; title insurance, depending on the area; homeowner insurance premium for the first year (usually required by the lender); buyer’s broker fee, if appropriate; attorney fees, in some cases; escrow or closing agent fees; miscellaneous fees for document preparation and notarizing signatures; and proration of property taxes and homeowner association dues, if there are any.

Buyers’ closing costs can differ significantly depending on how many points their lender charges. “Points” is a term used for the loan origination fee; one point equals 1 percent of the loan amount. On a $600,000 mortgage, one point would add $6,000 to your closing costs. It would add only $1,500 if you paid 1/4 point, but your interest rate on the loan would be higher.

THE CLOSING: Even though local custom usually prevails, who pays a particular closing cost is negotiable.

“I am 58 years old and looking to buy a new home. I won’t be able to pay off this home before I retire, but I would like my payment to drop at retirement because my income will drop. I was thinking that a combination of a 15-year and a 30-year mortgage might work for me because the 15-year portion would be paid off about the time I retire. What do you think of this idea?”  Luanna L.

Interesting.  If you borrow $100,000 at 5 percent for 30 years, your payment is $537 for 30 years. If you take a 15-year at 4.5 percent, the payment is $765 for 15 years.

If you borrow $50,000 of each, the payment is $651 for the first 15 years, and $269 for the next 15 years. This is the kind of deal you are looking for. Obviously, the portion of the combination that is 30 relative to the portion that is 15 could be adjusted to the circumstances of the borrower.

To my knowledge, however, no lender is offering this kind of combination loan. The major thrust of mortgage innovation has long been to find ways to reduce early-year payments, at the expense of higher payments in later years. All such mortgages carry additional default risk because they all carry delays in paying down the loan balance.

In contrast, the combination loan you are looking for would reduce default risk because of larger payments in the early years, and should therefore be attractive to lenders. Presumably the reason it doesn’t exist is that nobody thinks there is much of a market for it. In this, they may be wrong.

Of the mortgages now available in the market, the one that comes closest to meeting your needs is the 10/1 adjustable-rate mortgage (ARM). This loan has a fixed rate for 10 years, and when the rate is adjusted, a new payment is calculated that will fully amortize over the remaining 20 years. The new payment is based on the balance after 10 years, so the extra payments you make during the first 10 years will result in a lower payment starting month 121.

Further, after 10 years, the payment is recalculated annually with a new interest rate, so that any extra payments made during the year will reduce the payment in the following year.

The weakness of the 10/1 ARM for your purpose is that every recalculation of the payment is made at the then-current interest rate, and a rise in rate could offset the effect of your extra payments. The risk is considerable. While rates can go up or down, over the next 10 years they are much more likely to go higher than lower.

What is needed to meet your needs is a mortgage that operates like an ARM in having the payment recalculated at periodic intervals, but with a fixed rate for the life of the loan. The initial payment period could be set to equal the borrower’s high-income period. At the end of that period, a new payment would be calculated that would be lower to the extent that the borrower had made extra payments during the first period. This would be a very simple instrument designed to meet a specific market need.

Will the New Good Faith Estimate (GFE) Reduce Third-Party Settlement Costs?

Third-party settlement charges are charges for services that lenders require borrowers to purchase. They have always been overpriced because the lender has usually selected the service provider and the borrower has paid the tab. This results in “reverse competition,” where service providers compete for the favor of lenders, which raises their costs and prices.

The obvious, simple and direct remedy is to require that lenders themselves purchase all third-party services they require borrowers to have. Lenders would pass the cost on to borrowers in the mortgage price, but it would be far smaller than it is now because lenders are informed buyers who would buy in bulk and drive down prices. It is the same reason why car buyers pay less for tires when the tires are purchased by the manufacturer and included in the price of the car.

Instead of doing the obvious, Congress declared that fees paid by service providers for the referral of business were illegal, as if this would encourage service providers to reduce prices. It hasn’t.

In the new GFE that became effective Jan. 1, HUD tries another tack. It requires lenders to distinguish third-party charges of service providers that the lender selects, and charges of providers selected by the borrower. Charges in the first group cannot be more than 10 percent higher at closing than the estimate shown on the GFE. There is no such limit applicable to the charges of service providers selected by the borrower.

The 10 percent limit on price increases will eliminate the practice of “lowballing” these charges, which some lenders did as a way to entice borrowers who shopped total settlement costs. But it will not reduce these charges.

The explicit recognition of the two categories of charges may induce more borrowers to shop, and more service providers to market directly to borrowers. Over the years, this could put some downward pressure on prices. This is about the best HUD could do, because it does not have the legal authority to require lenders to purchase all third-party services themselves.

A spurt in home sales in 2009, aided by low interest rates and the first-time homebuyer tax credit, has led some economists to forecast a turnaround in the housing market this year. Other forecasters feel this is too optimistic a projection.

Among those who see improvement in the 2010 market is Lawrence Yun, chief economist for the National Association of Realtors (NAR). Yun hopes that the extension of the first-time homebuyer tax credit will provide a new pool of buyers to absorb the additional foreclosures that will hit the market this year.

He expects existing-home sales to rise 13.6 percent in 2010; home prices should go up 3 to 5 percent, with wide geographic differences. The average rate on 30-year fixed mortgages will range from 5.3 percent in the first quarter to 5.8 percent by year end. This forecast assumes there will be no major economic surprises. The weak job market remains a concern.

The Mortgage Bankers Association (MBA) has a slightly different take on the 2010 housing market. MBA predicts existing-home sales will increase approximately 11.2 percent. Interest rates should be about 5.6 percent by the end of 2010. The unemployment rate is expected to peak at 10.2 percent and gradually decline in 2011. National average home prices should stop sliding during the first part of the year and stabilize, depending on area and price range.

The November 2009 Economic and Housing Market Outlook from Freddie Mae expects there will be an increase in foreclosures and short sales this year, even though foreclosures declined significantly in some of the worst foreclosure markets (like Las Vegas) at the end of last year. RealtyTrac reported that foreclosures nationwide decreased 8 percent in November 2009.

Zillow.com, an online real estate marketplace, reported in December 2009 that stabilization and increased home prices were found in 48 of the 154 markets tracked. However, Zillow forecasts a decline in demand as interest rates rise. Foreclosures are expected to stay high and could challenge recent stabilization.

Some economists think prices will continue to decline in some areas through this year. Others feel that at best, the economic and housing recovery will be a bumpy ride. And, we could bounce along the bottom for some time. Few expect home prices to rebound quickly.

HOUSE HUNTING TIP: There will be significant variation from one market to the next. Areas that have a good diversified economic base and limited inventory of homes for sale could stabilize in 2010 and see an improvement in home prices. Areas that are bloated with foreclosure and short-sale inventory and have a weak local economy probably won’t see a turnaround this year.

Credit tightening would put a damper on the market. On Dec. 12, 2009, Fannie Mae took steps to make mortgage qualification more difficult. A significant change is that the maximum allowable debt-to-income ratio is being lowered to 45 percent from up to 64 percent. This means that the housing cost plus all other debt can’t exceed 45 percent of the borrower’s income. Buyers with strong credit and assets have a chance of approval with a debt-to-income ratio of 50 percent.

2010 is not expected to be a banner year for housing. But it could be a year of improvement for some niche markets and some price ranges. Expect to see more purchase offers made contingent on the sale of the buyers’ home. Credit tightening has made it impossible for most buyers to qualify to own two homes at once.

There will likely be an increase in short-sale listings. Buyers have shied away from these listings in the past because they took so long to process, and were often denied by the lender. Lenders are now more open to approving short sales than they were a year ago.

Hopefully, they’ll improve their performance in 2010.

Over the past two years, in a number of markets stretching across the West, from Phoenix through Las Vegas to Sacramento and Riverside, investor groups have been maneuvering to acquire finished residential lots that due to the recession ended up stranded without hope like lost pilgrims in a vast desert.

There were so many unfinished developments of one size or another that the buying spree lurched along in starts and stops through this year with another great push at the end of 2009.

Some cities have been scraped almost clean of unsold finished lots, but, again, there were so many sites slated for residential development over the past decade that it’s been hard to get to them all. Yet, the economics of investing in finished lots is so darn attractive it’s worth hunting them down.

Typically, the cost of a lot is about 25 percent of the finished house price. So, if a home sold for $800,000, it probably cost the developer $200,000 just to buy and prepare the lot, getting it graded and then hooked into water, utilities, and assorted street and drainage lines. The latter expenses usually run about $50,000.

During the past decade, builders could usually tap their lenders to the tune of $100,000 per finished lot, says Scott Clark, president of San Ramon, Calif.-based Americap Development Partners, which has been aggressively pursuing finished-lot deals since 2004, acquiring thousands across the West.

Most of the housing development volume was the result of aggressive construction practices by regional and publicly traded national builders. Now the regionals are bankrupt and out-of-business, while the nationals were punished by investors for the vast inventory of non-revenue-producing land held on their books. This was raw land and finished lots that would not be utilized in the near future because the lengthy recession had pummeled housing markets making new development very risky.

As a result, finished lots are being dumped back into the market at 50 cents on the dollar — or much, much less — by builders and banks, which took back the properties due to loan defaults.

In bigger developments, investors have been buying these lots at 30 cents on the dollar, notes Nate Nathan, president of Scottsdale, Ariz.-based Nathan & Associates. In fact, well-funded investor groups have been sweeping up these long rows of unfinished lots by the dirtful leaving individual investors with no other option than to haunt smaller projects. And that, too, has been a worthwhile use of time and resources because, as Nathan points out, customized lots are selling for 10 cents to 20 cents on the dollar.

Think of it this way, lots are being acquired below finishing costs, which if new construction proceeds means the land cost is negligible, if not zero-valued.

“I love this space,” chortles Clark. “About 80 percent of what we are doing is finished-lot investing. We are concentrating on buying at below finishing costs, leaving virtually no land cost whatsoever.”

Americap “has scraped everything in Northern California” and is starting to work the Phoenix market. It is also looking closely at Southern California, the Inland Empire (Riverside and San Bernardino, Calif.), Las Vegas, Denver and Salt Lake City.

As of the beginning of 2009, Riverside and San Bernardino counties contained almost 30,500 lots ready for construction, reported The Press-Enterprise newspaper in Riverside.

“If you take multifamily out of the equation, there is probably about 40,000 unfinished lots of standard, single-family size (40 feet by 90 feet) in the Phoenix market,” says Nathan. In November 2009, Nathan brokered the sale of 7,000 finished, partly finished and plotted lots dropped into the market by two major homebuilders.

Currently, so-called “money partners” are buying the lots and then doing off-balance-sheet, rolling options with builders. That’s because, for the publicly traded homebuilders, an extensive inventory of lots is considered bad business. “It’s what got them into trouble three years ago,” says Clark.

Americap, as an example, is acquiring a residential project in El Sobrante, Calif. The lots are being purchased at about $50,000 a pop in a community where the houses are selling for an average of $350,000.

For individual investors, the most important point to realize about finished lots is that these investments, unlike a downtrodden single-family home that can be quickly reconstructed to market veneer, generally can’t be flipped.

“In a typical cycle, we hold the finished lots for anywhere between 12 months and 36 months depending on location,” says Clark.

“Investors are underwriting to hold unfinished lots for three to four years,” Nathan confirms.

By one estimate, most cities across the American West have about a two- to three-year supply of lots. By the time house prices recover, which optimistically could be as early as 2011 or 2012, developers will need to start building again.

By then the existing overhang of finished lots would have been consumed, and because developers over this period hadn’t been buying land, they are going to suddenly wake up to the fact they need lots and at that point they will be paying a premium. At least that’s the scenario most investor groups are counting on.

“The country needs 1.2 million new units for the next 10 years just because of population growth,” says Clark. “We built about 500,000 units in 2009 and 600,000 units in 2008, so there eventually will be pent-up demand. We want to get as many of those finished lots as we can because as demand begins to rise, the need for housing will become painfully obvious. The delta (ratio of change to value of underlying asset) in this investment will be significant.”

Reverse mortgages are for seniors who don’t have enough spendable income to meet their needs but do have equity in their homes, which they don’t mind depleting for their own use rather than leaving it for their heirs.

For reasons not clear to me, reverse mortgages are being badmouthed by an unlikely source: consumer groups who are supposed to represent the interest of consumers in general, and perhaps seniors in particular.

Reverse mortgages have always been a tough sell. Potential clients are elderly, who tend to be cautious, especially in connection with their right to continue living in their home. Fears about losing that right were aggravated by some early reverse mortgage programs, which did allow a lender under certain conditions to force the owner out of his or her house.

These are reasons why, until recently, reverse mortgages never caught on.

In 1988, however, Congress created a new type of reverse mortgage called the Home Equity Conversion Mortgage (HECM), which completely protects the borrower’s tenure in his or her house. So long as he/she pays the property taxes, maintains the property and doesn’t change the names on the deed, he/she can remain in the house forever.

Furthermore, if the reverse mortgage lender fails, any unmet payment obligation to the borrower is assumed by the Federal Housing Administration (FHA).

The HECM program was slow to catch on, but has been growing rapidly in recent years. In 2009, about 130,000 HECMs were written. Feedback from borrowers has been largely positive. In a 2006 survey of borrowers by AARP, 93 percent said that their reverse mortgage had had a mostly positive effect on their lives, compared with 3 percent who said the effect was mostly negative.

Some 93 percent of borrowers reported that they were satisfied with their experiences with lenders, and 95 percent reported that they were satisfied with their counselors. (Note: All HECM borrowers must undergo counseling prior to the deal.)

But while all is well for almost all HECM borrowers, some of their advocates in consumer organizations, alarmed by the program’s growth, are badmouthing it. I hasten to add that there is a major difference between badmouthing and educating.

Legitimate issues exist regarding when and who should take a HECM, and seniors also face hazards in this market, as in many others. Advice and warnings to seniors from authoritative sources on issues such as these are useful. I try to provide useful advice and warnings myself.

What is not useful is needlessly and gratuitously fanning the flames of senior anxiety about losing their homes. In its September 2009 issue of Consumer Reports, Consumers Union warned of “The Next Financial Fiasco? It Could Be Reverse Mortgages.” The centerpiece of their story is a homeowner who is “likely to be evicted” because of a HECM loan balance he can’t pay off. How is that possible?

It was his wife’s HECM, not his, and when she died, ownership of the house reverted to the lender because the husband was not an owner. At the outset of the HECM transaction, he was too young to qualify so he had his name removed from the deed so that his wife could qualify on her own. She could have lived in the house forever, but as a roomer in her house, he had no right to remain.

This is painted as a reverse mortgage horror story, but it is nothing of the sort. HECMs are for owner-occupants, not roomers, which is what the husband had made himself into. The correct moral is that the program should not be misused.

Even less useful are spurious claims that growth of the reverse mortgage market has major similarities to the growth of the subprime market, and could lead to the same kind of “financial fiasco.” The major source of this nonsense is an October 2009 monograph by Tara Twomey of the National Consumer Law Center entitled “Subprime Revisited: How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk.”

In fact, the two programs could hardly be more different, and there is no chance of a similar fiasco.

Subprime loans imposed repayment obligations on borrowers, many of whom were woefully unprepared to assume them, and which tended to rise over time. The financial crisis actually began with the increasing inability of subprime borrowers to make their payments, with the result that defaults and foreclosures ballooned to unprecedented heights.

In contrast, reverse mortgage borrowers assume no repayment obligation at all. Their only obligation is to maintain their property and pay their property taxes, which they have to do as owners whether they take out a reverse mortgage or not.

They cannot default on their mortgage because the obligation to make payments under a HECM is the lender’s, not the borrower’s. There are no reverse mortgage foreclosures.

Subprime foreclosures imposed heavy losses on lenders and on investors in mortgage securities issued against subprime mortgages. Such securities were widely held by investors, which included Fannie Mae and Freddie Mac. Losses by the agencies on their subprime securities played a major role in their insolvency.

In contrast, no lenders have suffered or will suffer losses on HECMs because they are insured against loss by FHA. FHA assumes the losses when HECM loan balances grow to the point where they exceed property values. However, this is an expected contingency against which FHA maintains a reserve account supported by insurance premiums paid by borrowers.

It is true that the unprecedented decline in property values over the last few years has increased losses and eaten into FHA’s reserves. But FHA has responded to that by reducing the percentage of home values that seniors can access. According to a recent study by New View Advisors, who are seasoned experts on HECMs, this should allow FHA to break even over the long run.

In sum, the current state of the HECM market has no resemblance whatsoever to the conditions in the subprime market that led to disaster.