If your house is damaged by fire, it’s a pretty sure bet that your homeowners insurance policy will cover the cost to repair it. But what if the damage results from something less common, such as mold or a meteor falling from the sky? Chances are you’re also covered. Homeowners insurance policies vary, as do state laws, but typical policies cover many atypical claims. Here’s a look at five of the more unusual things for which your homeowners insurance should foot the bill.

Dog bites

More than 4.7 million people are bitten by dogs each year, according to the Centers for Disease Control and Prevention, resulting in around 800,000 injuries that require medical attention. More than 50 percent of the bites occur on a dog owner’s property.

“Dog bites are probably the single most common cause of liability claims on a homeowner’s policy,” says Bill Wilson of the Independent Insurance Agents & Brokers of America. The Insurance Information Institute (III) estimates that dog bites account for one-third of all liability claims.

According to Wilson, most homeowners insurance policies will cover the medical bills for someone bit by a dog — or a cat or snake or other domestic animal, for that matter — and even pay lost wages if the person can’t work. On a typical homeowner’s policy, liability coverage maxes out between $100,000 and $300,000. If you get sued and a judgment exceeds that amount, you’re on the hook for the difference. The III says the average dog bite claim totals about $25,000.

Mold

For many homeowners, mold is a four-letter word that conjures up fears of illness and expensive cleanup. Indeed, the cost of mold remediation can run into the thousands of dollars. Whether your homeowners insurance policy will cover mold damage largely depends on the underlying cause of the mold.

In general, homeowners insurance will pay out for mold damage that’s a direct result of a peril that’s covered by your policy. Let’s say mold, which needs moisture to thrive, is caused by water from a burst pipe, a covered peril. In that case, any resulting mold damage should be covered because the source of the water is covered by your policy.

But if mold is due to long-term neglect or overdue maintenance, rather than a sudden and unexpected covered peril, then homeowners insurance is unlikely to cover the damage. Possible scenarios include excessive humidity in an attic, seepage into a basement or leaky pipes and appliances. You usually need separate flood insurance to cover damage from flooding.

Even if mold is covered, check to see if your policy caps damage at a certain amount. If so, it’s possible to buy additional coverage. Wilson says an extra $50,000 in mold coverage costs about $47 a year. The average annual premium for a homeowners insurance policy is $791, according to the III.

What about terrorist attacks or objects falling from the sky?

Terrorism

Homeowners insurance typically excludes acts of war. The same blanket exclusion doesn’t hold true for acts of terrorism, which are more akin to a criminal act than an armed conflict. Wilson says insurers should cover damage due to explosion, fire and smoke resulting from a terrorist attack, even if terrorism isn’t specifically referenced in your homeowners policy.

For example, take the Sept. 11, 2001, terrorist attacks. Residences near New York’s World Trade Center suffered blown windows and smoke damage. In that instance, those repairs were covered. Insured property losses from the 9/11 attacks totaled nearly $23 billion in 2009 dollars, estimates the III.

But coverage of a terrorist attack isn’t guaranteed since there’s little precedent in the United States save for 9/11. In the unlikely event that you ever need to file a terrorism-related claim, figure your home insurer will treat it on a case-by-case basis. Besides acts of war, typical homeowners policies don’t consider nuclear accidents a covered peril.

Falling objects

A limb breaking off a tree during a storm. Debris dropping from an airplane passing high overhead. Even a meteor falling from the sky. If any of those objects damage your home, rest assured your homeowners insurance should cover the repairs up to your policy limits.

Keep in mind that while the hole in your roof is covered, any ensuing damage might not be unless you make reasonable efforts to prevent further damage. If it’s raining, for example, you should cover the hole with a tarp as soon as it’s safe to do so to prevent more water infiltration. Wilson suggests holding off on making permanent repairs until your insurance adjuster can assess the extent of the damage.

Accidents outside the home

If someone gets hurt on your property, perhaps slipping on an icy stairwell, your homeowners policy should cover the medical bills. What you might not know is that your homeowners coverage can extend to injuries beyond the home, too.

Let’s say you’re at the grocery store, and you crash your shopping cart into another patron. Your homeowners insurance would cover the other person’s medical expenses. Same goes for the golf course and if you hit someone with a stray drive. As a bonus, coverage provided by a standard policy extends to anywhere in the world, not just to the United States.

Homeowners insurance excludes these types of claims related to use of a car, Wilson says. You need to rely on your auto insurance then. If you have a lot of assets to protect and you’re worried about getting sued, look into umbrella insurance. An umbrella policy kicks in when you exceed the liability limits of your home and auto policies.

10 Most Expensive States:

1. Texas
$1,460 per year
2. Florida
$1,390 per year
3. Louisiana
$1,155 per year
4. Oklahoma
$1,048 per year
5. Massachusetts
$1,026 per year
6. New York
$983 per year
7. Connecticut (tie)
$980 per year
7. Mississippi (tie)
$980 per year
9. District of Columbia
$926 per year
10. Kansas
$916 per year
U.S. Average
$791 per year

10 Least Expensive States:

1. Idaho
$387 per year
2. Utah
$432 per year
3. Oregon
$439 per year
4. Washington
$471 per year
5. Wisconsin
$503 per year
6. Delaware
$535 per year
7. Ohio
$565 per year
8. Maine
$572 per year
9. Pennsylvania
$586 per year
10. Kentucky
$601 per year
U.S. Average
$791 per year

Deciding whether to refinance can be a complicated decision for borrowers, and a lot rides on getting it right. The good news is that many financial calculators designed to help in the decision process are freely available on the Web. The bad news is that most borrowers have great difficulty finding a calculator that will help them, partly because they aren’t sure what their question is, and partly because many of the calculators are badly designed.

To do it right requires three steps. Step 1 is to clarify the question you want answered. Step 2 is to understand how the question ought to be answered. Step 3, discussed next week, is to find the online calculator that will answer your question properly.

Formulating the question

Calculators are designed to answer a specific question, and it is important for the borrower to get the question right before looking for the calculator that will answer it. If your question is whether refinancing will reduce your mortgage payment, for example, you don’t need a refinance calculator — a simple mortgage payment calculator will do.

Most borrowers contemplating a refinance want to know whether the financial gain from a lower interest rate more than offsets the refinance costs. Most of the calculators on the Web are directed to this question. Other reasons to refinance, such as raising cash or consolidating debts, receive little attention, as noted next week.

Comparing refinance and stay-put scenarios

A refinance decision involves a comparison of net costs under two scenarios, one where the borrower refinances and the other where he retains his current mortgage, over some future period. The period should be the borrower’s best guess as to how long it will be until the house is sold and the mortgage is paid off. For convenience, let’s assume that period is five years.

In both scenarios, the borrower must pay principal and interest monthly for five years, and the balance outstanding at the end of the period. If he refinances, the new monthly payment and/or the balance after five years may be lower than if he stays put, but the borrower must also pay the upfront cost of refinance.

Measuring net costs

Economists would compare the two scenarios in terms of the net present value (NPV) of costs, or net future value (NFV), which if done correctly will always yield the same result. With NPV, all costs are valued at the beginning of the period, whereas with NFV, costs are valued at the end. I use NFV because I find that most people find it easier to grasp.

If the NFV is to be accurate, it must account for everything that impacts the cost net of benefits of both scenarios. This includes a) tax savings on interest and points using the borrower’s tax rate, b) mortgage insurance if it is required, c) the interest loss on payments made upfront and monthly using the borrower’s investment rate, d) whether the borrower elects to pay upfront costs in cash or add them to the loan balance, and e) whether and how the borrower plans to make extra payments in both scenarios.

Here is an example of an NFV calculation. Jones took out a $300,000 30-year fixed-rate mortgage at 6 percent five years ago, which now has a balance of $279,163, and is considering refinancing into a 10-year fixed-rate mortgage at 5 percent with refinance costs of one point ($2,792) plus $5,000 in fees. Jones is in the 31 percent tax bracket, earns 2 percent on his investments, and expects to be in his house another five years. Jones pays upfront refinance costs in cash rather than financing them, does not require mortgage insurance, and does not contemplate making extra monthly payments during the five-year period.

Over the five years, monthly payments will total $69,738 more if he refinances, reflecting the short term on the new mortgage. The refinance also involves $7,792 in upfront refinance costs, $2,975 more lost interest, and $7,791 less tax savings than staying put.

However, Jones will pay down his loan balance by $94,154 more if he refinances, resulting in an overall net gain of $6,738. Breakeven, the period over which the gains just balance the losses, is 36 months. The Web version of this article, at www.mtgprofessor.com, will show the complete breakdown.

I had a reason for selecting this particular example. The entire benefit is in the larger balance reduction, which borrowers preoccupied with the monthly payment — a malady I call “payment myopia” — tend to overlook. A properly designed calculator is not vulnerable to payment myopia.

Four years ago, the Internal Revenue Service changed the law that required consumers to pay tax on mortgages forgiven by a lender. Those amounts used to be considered taxable income on a homeowner’s tax return.

There is no relief or tax deduction, however, for selling your home at a loss.

Most homeowners are now clear on the ability to pocket up to $500,000 of tax-free capital gain ($250,000 for single people) on the sale of a primary residence. The huge benefit, which can be used every two years, was made possible by the Taxpayer Relief Act of 1997.

However, the tax law that provided the capital help did nothing for capital losses. There still is no benefit for folks who bought at the peak or made expensive remodels, then had to sell in a hurry and actually got less for their home than the cash they have invested in it. Long-term capital expenditures usually pay off over time, but changes for the short term are difficult to recover.

If you were hoping for some help on your 2010 return before April 18, (pushed back from the usual April 15), don’t count on chalking up a capital loss as a big tax deduction. There still is no deduction for a capital loss on the sale of your primary residence. This often causes confusion and provokes questions from consumers, but Uncle Sam will not let you show a loss if you sell for an amount less than the purchase price.

Why? The principal residence has always been viewed as a personal asset.

The gain on the sale of a principal residence has been taxable as a capital gain but losses have never been allowed. Although the capital gain thresholds have been increased, proposals to address capital losses have been defeated.

The capital loss proposals first surfaced in the 1990s when complaints from homeowners in the Sun Belt states and New England said they were left with huge losses and no federal tax help when home values plunged — especially when the declining oil industry in Texas really shook the housing market around Houston.

Another hotly debated issue is the deductibility of loan fees. You can deduct the loan fees (“points”) paid to buy or improve your main home in the year of purchase. You cannot deduct these fees in the year you refinanced if you refinanced only to obtain a lower interest rate on your loan.

The term “points,” once used to describe only prepaid interest on government loans, now is used to describe charges paid by an owner to secure any mortgage. These points can be loan origination fees or prepaid interest to “buy down” an interest rate. To be deductible, these charges — or points — must represent interest paid for the use of money and must be paid “before the time for which it represents a charge for the use of the money.”

According to the Internal Revenue Service, most points paid when you are refinancing an existing mortgage must be written off over the life of the new loan. For guidance on closing costs, the best source may be the settlement sheet from the original loan.

And finally, if you manage your second home and investment rentals from your home office, make sure the office space you claim as a deduction is a dedicated room. Simply bringing a laptop into the family den in the evenings to respond to renters would not qualify the room as a home office under IRS guidelines. Accountants say some home-office deductions have raised red flags with federal auditors.

The home-office space can be depreciated. When the home is sold, however, the deprecation must be “recaptured” and subject to tax. The Internal Revenue Service’s Publication 587 “Business Use of Your Home” is accessible on the Internet at http://www.irs.gov/pub/irs-pdf/p587.pdf.

Investors have many choices in today’s market as to where to place their investment dollars. Many choose the stock market, in part because it is the easiest place to get started as an investor. However, those wanting to build significant wealth over the long term should consider real estate. Aside from the fact that over time, as populations tend to increase, land values should naturally increase, investing in real estate has many strategic advantages not available with other investments. Some of those strategic advantages include:

Income and Appreciation
It is very possible in today’s market to find properties that will be cash flow positive. This means that the rents collected from the tenants will more than cover the costs (expenses and financing) associated with owning the property. Few stocks in today’s market pay significant dividends, most are held for future appreciation. Those stocks or bonds that are acquired for cash flow tend not to appreciate well. With real estate, investors can have the best of both worlds: income and appreciation.

Leveraged Appreciation
The basic idea of leverage is that an investor can acquire a very high valued asset for a much lower investment amount. This works in the investors favor in an appreciating market, magnifying the returns on investment. For example, an investor may purchase a million dollar property with 30% down. If that property appreciates 10%, the return on investment is 33%. In the same example, with 10% down, the investor can achieve a 100% return on investment.

Although not impossible, it can be difficult to use leverage when investing in the stock market. Using leverage to acquire stocks is referred to as “buying on margin” and at best investors may only borrow 50% of the purchase price of the stock. Investors who choose to buy on margin are also subject to margin calls (adding more funds to the brokerage account) should the value of the stock decline significantly. The Federal Reserve Board also regulates which stocks are marginable, so options may be limited.

Tax Advantages
Although Wall Street can offer investors tax advantaged vehicles like the tax free municipal bond or the ability to buy and sell stocks through an IRA or 401K, the tax advantages Wall Street can offer pale in comparison to what is available with real estate. With real estate, there are tax advantages available while both owning and selling real estate. Let’s first discuss the advantages available during the course of real estate ownership:

Mortgage Interest Expense
The government allows all of the interest associated with the financing of the property to be written off as an expense of owning the property. For many real estate investors, especially those with interest only loans, this expense deduction can be substantial.

Depreciation
Depreciation is a method for matching the costs of acquiring property over the properties estimated economic life. The IRS now requires that most properties be depreciated using the straight-line method of depreciation (27.5 years for residential properties, 39 years for commercial properties). Depreciation will act as an intangible expense and will shelter income from taxes.

Expense Deductions
Many of the costs associated with owning and managing a real estate investment, such as management fees and insurance premiums, are deductible. One deductible expense worthy of note is the travel expense. Many real estate investors acquire real estate in places they like to (or have to) visit, and each time they travel to the property, the travel costs are a deductible expense. Not a bad deal if the property happens to be in Maui, or around the corner from a relative.

Passive Losses
Due to depreciation and expense deductions, it is possible to own a property that is producing positive cash flow, but for tax purposes showing a loss. These “passive losses” are subject to certain restrictions, but in many circumstances can be used to offset passive income from another investment.

There are also specific tax breaks available when selling real estate. The tax breaks available depend on the type of real estate sold. If a primary residence is sold, Section 121 of the Internal Revenue Code allows the seller to avoid paying capital gains taxes. If an investment property is sold, Section 1031 of the Internal Revenue Code allows the seller to defer the payment of capital gains taxes. Both sections of the tax code merit further discussion:

Section 121
Upon the sale of a primary residence a taxpayer can avoid paying capital gains taxes on the first $250K of gain if single, or the first $500K of gain if married. The seller(s) must have owned and lived in the home as their primary residence for two out of the past five years.

Section 1031
Upon the sale of an investment property a taxpayer can defer the payment of capital gains taxes. In order for the entire tax liability to be deferred, the taxpayer will need to reinvest all of the sale proceeds and purchase a property of equal or greater value. The new property must be acquired within 180 days.

Many investors can use both Section 121 and Section 1031 together for maximum tax advantage. An example would be an investor who conducts a 1031 Exchange into a rental home. After establishing the property as a rental for two years, the investor moves into the property. Once the property is established as a primary residence, taxes can be avoided on the sale via Section 121.

Obviously investors have many choices available to them on Wall Street. With a little education however, many investors might find that investing in Main Street, or Elm Street, might be a better long term decision.

Come April 1, a new set of rules governing the compensation of loan originators comes into play. Loan originators are mortgage brokers, and loan officers (LOs) working for brokers or lenders. They are the individuals who borrowers deal with; they take the loan application and shepherd the borrower through the process.

With the help of a “Compliance Guide” recently issued by the Fed, this pamphlet helps clarify both what the Fed is looking for and where it is muddled.

Defining lenders and brokers

The rules hit brokers and lenders differently, so it is important to know the difference. Lenders are entities that close loans with their own or borrowed funds, and either hold them in their portfolios or sell them in the secondary market. Brokers deliver loan packages to lenders who close and fund the loans.

Some firms close loans in their own name and immediately sell them to the lender who provides the funding, a process called “table-funding.” They are defined as brokers.

The new core rule

The core rule that will come into play on April 1 “prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction’s terms or conditions, except the amount of credit extended.”

The purpose of the rule is to eliminate any incentive for originators to select loans that carry larger payments to the originator.

Understanding how this will work, or how it might not, requires an understanding of how originators are compensated and how mortgage price information is provided to them.

The rule as it applies to lenders

LOs working for lenders receive retail prices for all loan products, and are paid a commission that is included in the price. For example, on a 30-year fixed-rate mortgage, the LO’s price sheet might show 4.875 percent at 1 point, 5 percent at zero points, and 5.25 percent at -1 point, which is a rebate from the lender.

The LO might be paid a commission of 0.7 percent of the loan, which means that he makes more on larger loans. This has long been customary and is permitted by the new rules.

What is not permitted under the new rules is for the LO to sell the customer the 5.25 percent loan and be rewarded by the lender with a larger commission. This has long been the practice in mortgage banking, with the higher price referred to as the “overage.”

The new rules don’t make overages illegal, but since LOs can’t be rewarded for them, they might as well be illegal. The result will be an important and much overdue change in industry practice. Some lenders, in anticipation of the new rules, have already eliminated overages.

A potential evasion by lenders

However, the rule is consistent with a lender response that would leave borrowers no better off, and perhaps worse off. Suppose a lender has an LO, “Smith,” who is a major producer and expects compensation of 1 percent, and another LO, “Jones,” who is a neophyte willing to accept 0.5 percent.

The lender in such case could provide Smith with a set of retail prices that are 0.5 percent higher than those provided to Jones. The compensation of both LOs would be independent of the prices they offer borrowers, and therefore in compliance with the rules.

But this arrangement would violate its intent and spirit. The hapless borrower would be protected against any one LO attempting to gouge him for an overage, but would have no basis for choosing between different LOs offering different prices except by price shopping.

Forcing borrowers to shop not only different lenders but different LOs working for the same lender would not make life easier for them.

Note that I am not forecasting that lenders will do this, only that they might without breaking the rules.

The rule as it applies to brokers

In contrast to LOs working for lenders, brokers receive wholesale prices from the lenders they deal with, which means that there is no commission embedded in the price. For example, on a 30-year fixed-rate mortgage, the broker’s price sheet might show 4.625 percent at 1 point, 4.75 percent at zero points, 5 percent at 1 point rebate from the lender, and 5.25 percent at 2 points rebate.

Brokers can pass the wholesale price on to the borrower and charge the borrower a fee for their services. For example, they could offer 4.75 percent at zero points and charge 1.5 points directly to the borrower. The much more common practice, however, is to quote a higher rate and retain the rebate as their compensation.

This would be 1 point on the 5 percent loan or 2 points on the 5.25 percent loan. Rebates, when retained by the broker, are referred to as “yield spread premiums,” or YSPs.

Note that YSP is not the counterpart of overage. The LO has a commission built into the price, and an overage is extra compensation. In contrast, YSP is the broker’s entire commission if no fee is paid by the borrower, which is usually the case. Of course, YSP can be reasonable and it can also be outrageous.

The application of the new rules to brokers is clear in one respect: Brokers can be paid by the lender or the borrower, but not by both. The real issue, however, is how it deals with YSP, and on that score the rules are hopelessly muddled.

The YSP muddle

Because the new rules say very clearly that compensation to a broker cannot be based “on a mortgage transaction’s terms,” and because YSP is based on the rate, it would seem to follow that YSP must be illegal. And if that is the case, brokers thenceforth could be paid only by borrowers.

Yet if one reads further into the rule, it is clear that it is not the Federal Reserve’s intent to make all YSPs illegal. If the Fed wanted to do that, it could have done it very simply by a rule that says so. The rule that the broker can’t be paid by both the lender and the borrower clearly suggests that in the Fed’s eyes, the broker can be paid by the lender. Because all such payments constitute YSP, the Fed has accepted the legitimacy of YSP.

An example of a broker being paid by a lender in the Fed’s Compliance Guide reveals the source of the Fed’s confusion.

“For example, suppose that for a loan with a 5 percent interest rate, the originator will receive a payment of $1,000 from the creditor as compensation, and for a loan with a 6 percent interest rate, a yield spread premium of $3,000 will be generated. The originator must apply the additional $2,000 to cover the consumer’s other closing costs.”

The Fed is assuming here that the broker is receiving a base payment of $1,000 from the lender, similar to the LO commission that is built into the retail price, and that YSP is an extra payment, comparable to an overage.

But this is wrong — brokers are quoted wholesale prices, and there is no base payment to the broker embedded in wholesale prices. All payments received by brokers from lenders are YSP. The $1,000 on the 5 percent loan in the Fed’s example is YSP, and because the Fed views it as legitimate, and because there is no rule capping the size of YSP, the $3,000 YSP must be equally legitimate.

Industry reactions to the muddle

I have come across two possible responses from the industry if the existing muddled rule becomes effective. One is for brokers to charge their entire fee to borrowers, and credit any YSP to the borrower to cover other settlement costs. The borrower would decide on the trade-off between the rate and the YSP. In my view, that would be a good outcome for borrowers.

Another possible response that would be terrible for borrowers, yet consistent with the rules, is for brokers to post a fixed YSP with each lender that would set the broker’s compensation with that lender. If the broker posted 1 percent YSP with lender A, 2 percent with lender B and 3 percent with lender C, the broker could charge what he can induce the borrower to pay by selecting the lender that provides the desired level of compensation. This is obviously a flagrant violation of the intent of the rules, because it would sanction the very worst broker practices.

Resolving the muddle

Rules are badly crafted when they can be interpreted in highly divergent ways, some of which are favorable to borrowers and some of which would make their plight worse. In my view, the Fed should delay implementation until they get it right.

Are we heading toward a Goldilocks solution for Fannie Mae and Freddie Mac? And if so, what does that really mean for consumers and real estate professionals?

The Obama administration’s much-delayed “white paper” on housing finance reform — nearly two years in the making — turned out to be just 31 pages that essentially said: Total privatization of the home mortgage market won’t suit us. (Too hot.) Total nationalization of the market won’t, either. (Too cold.) But something in between — well, you know the story — should be just right.

Because of its diminutive size and lack of specificities, it’s easy to dismiss Obama’s report to Congress last week. But the administration’s emphasis throughout on the need to reduce the federal government’s footprint in the mortgage market was an important message to Republicans in the House and Senate: We can work with you.

We’re prepared to resist consumer groups and others who want us to simply “fix” Fannie and Freddie rather than to kill them. We can wind down both companies within as little as five years, and do a lot more between now and then to slash the size of federal programs along the way.

Fannie, Freddie plan targets jumbo limits

For real estate professionals, a transition from 90 percent federal control of the market — Fannie, Freddie, the Federal Housing Administration, Veterans Affairs, U.S. Department of Agriculture and the Federal Home Loan Banks add up to about that percentage today — down to something under a 20 percent share will be where you really want to stay focused.

Some of the interim steps could be jolting and troublesome for your immediate business, and tough on consumers who don’t have large down payments and assets who want to buy houses this year and next.

The administration’s interim strategy, in a nutshell: Make Fannie, Freddie, FHA and the others progressively less attractive to homebuyers by raising their prices, making underwriting requirements stricter, and lowering their overall availability.

Equally important: Much of what the White House has in mind for the short term can be accomplished administratively — there’ll be no need to ask Congress for permission.

What are some of the baby steps along the way that could affect home sales and financing in the months immediately ahead? Start with FHA, which has approximately a 30 percent share of the home purchase market nationally, and easily double that for first-time homebuyers who are African-American or Hispanic.

The administration wants to slash that by as much as two-thirds during the next several years, allowing the agency to revert to its “historic” average market share of 10 to 15 percent.

To get that ball rolling, FHA intends to raise its annual mortgage insurance premium by a quarter of 1 percent (25 basis points) this year. That’s on top of premium increases last year, plus an expected decrease in maximum seller contributions to 3 percent of the loan amount, down from the traditional 6 percent.

(FHA proposed that decrease last year, triggering criticism from the National Association of Realtors and other housing groups, but has not yet finalized the rule. With the White House’s new emphasis on reducing FHA’s attractiveness to consumers, don’t expect to see much compromise on the 3 percent cap, as critics have demanded.)

Next on the list: Cut FHA’s maximum loan size, starting Oct. 1, when the current statutory limit of $729,750 for high-cost areas drops back to $625,500. But the paper suggests that FHA will then explore further reductions nationwide in order to retarget the agency on lower- and moderate-income families.

Significantly lower limits — say down to or below a $417,000 ceiling — could be a deal-breaker for some homebuyers in high-cost areas of California, along the East Coast, and elsewhere if borrowers have marginal credit and small down payments.

A final step toward shrinking FHA’s market share would be to increase the current low 3.5 percent minimum down payment. “FHA will consider other options, such as lowering the maximum loan-to-value ratio for qualifying mortgages more broadly,” said the report.

How high is higher for the minimum down payment? Five percent down is the most likely — another deal-killer for many buyers — but again, the white paper offered no specifics.

The administration has a list of short-term changes for Fannie and Freddie as well, including lowering conforming loan limits as of Oct. 1 (to $625,500 and below), higher down-payment minimums (heading toward 10 percent), and higher guarantee fees for lenders.

All of these will increase costs for homebuyers and make Fannie and Freddie less significant sources of mortgage money.

Where will consumers go for financing as these changes kick in? The administration’s theory is that the private sector — primarily the big four banks — will step in and fill the void.

Really? Will they do so in the absence of a robust securitization market? Will their offerings and pricing to people who can’t make 5 or 10 percent down payments be anywhere in the ballpark compared with what homebuyers can obtain today through Fannie, Freddie or FHA?

Excuse my skepticism, but I really doubt they will.

In the meantime, Congress is starting its work on its own plans for Fannie-Freddie reform. The Obama white paper suggested three broad frameworks for Congress to consider:

1. Retention of FHA, VA and USDA as the federal government’s players in the market, but with no federal financial backups or guarantees available for lenders in the event of losses.

2. Retention of FHA, VA and USDA but creation of some unspecified federal guarantee or insurance mechanism that would “scale up” during times of economic crisis but otherwise not be a factor in a private lender-dominated marketplace.

3. Retention of FHA, VA and USDA but creation of a reinsurance entity that would cover “catastrophic” losses. This reinsurance would be the final fail-safe to prevent a total blowout. It would back up “significant private capital” and federal insurance at the mortgage securities level that would be available to regulated lenders.

That’s the shape of the future, long term and short term, at least according to the Obama administration. The long-term resolution is almost certainly years away from taking final shape. But key changes could hit much sooner, and sooner is where we all live.

Fannie and Freddie are toast for the long term. But some homebuyers probably are going to get burned in the short term.

++++++++++++++++++++++++++++++++++++++++++++++++++

Many of the claims made against sellers today are related to disclosures that were not properly relayed to the buyers before closing.

In 2006 home prices were escalating so fast that buyers often overlooked sloppy disclosures. They were happy to own a home in a market where prices in many places rose monthly. Today, home prices are still declining in many areas. Buyers are more likely to make a claim against sellers if they discover after closing that the sellers were less than candid with their disclosures.

Seller disclosure requirements vary from state to state, but the trend nationally is to require that sellers disclose known material facts. A material fact is one that might affect a buyer’s decision to buy or the price offered. It’s a good idea to discuss your disclosure obligations with your real estate agent or attorney before you put your home on the market.

In states that have mandatory home seller disclosures, like California, sellers often complete the mandated forms in a hurry without providing thorough explanations of current and past problems. Your real estate agent should read your disclosures and alert you if they seem incomplete.

If you should have the misfortune of ending up in court, a judge may not look favorably on slipshod disclosures.

Many sellers are busy and feel they don’t have time to devote to what they may see as a ridiculous chore. Completing disclosures may feel like drudgery. But, dealing with an after-closing claim will be far more time-consuming and could be expensive.

Ask your agent to provide you with copies of any disclosure forms you need to complete when you list your home for sale. Read them; they’re designed to help you recall material facts that should be disclosed.

As you prepare your home for sale, make a list of things you see in the process that may need to be disclosed. If you ask yourself if something should be disclosed, it probably should. Check with your real estate professional.

Some sellers fear that if they disclose what’s wrong with their home, buyers won’t buy it. This is a possibility, depending on the severity of the problem. For example, if you disclose that the house needs a new foundation and you won’t pay for it, buyers who can’t afford to make the improvement would probably back off.

HOUSE HUNTING TIP: Buyers appreciate candid and complete disclosures. The time for the buyers to receive the disclosures and any reports you have on the property is before they make an offer. This way you minimize the chance that the buyers will try to renegotiate the contract price after they complete their inspections.

Buyers who don’t have the benefit of reviewing the property information before they make an offer could back out after you’re in contract and they find out about the defects. Why put yourself and the buyers through this ordeal? You’ll have to put your house back on the market and find another buyer. A well-informed buyer is more likely to go through with the sale.

Don’t withhold reports on your property. One seller had two termite reports on his property. One was better, meaning that it recommended fewer repairs. This report was given to the buyers; the other was not.

The buyers wanted a second opinion, so they ordered a termite inspection from another company. Coincidentally, this company had done the second report on the property for the seller. When the buyers learned of this they sued the seller and won.

THE CLOSING: What you choose not to disclose to the buyers might be conveyed to them by the neighbors after they move into the neighborhood.

Refinancing continues to be a hot topic. Many homeowners who are planning to stay in their homes for the long term are trying to find ways to lock in record-low interest rates.

Some borrowers are running into qualification issues for the first time in their lives. They are discovering they do not have enough income to refinance the home they have occupied for the past several years — even though the new loan comes with a lower interest rate than their current loan.

Loan representatives are reporting that their biggest challenge in the past 15 months has been explaining to existing customers that they “can’t even qualify for a mortgage under 5 percent.”

Others are upset because they are facing prepayment penalties on existing mortgages even though they have a flawless payment history and a terrific credit score.

A different wrinkle surfaced recently when a Buyer brought up an issue that had not been explored for years. She had purchased a home with the proceeds from her previous home plus a small balance that was financed by the owner.

She had planned to pay the small balance off within three years and save some interest money but was shocked to discover the loan structure — “the rule of 78s” — did not allow any savings.

Lenders frequently used the rule of 78s for personal loans and auto loans because it’s quick and simple to apply to a prepaid loan. The rule of 78s is only a problem for someone who decides to pay off a loan before the agreed-upon term of the loan. In this case, the owner of the home was a retired car dealer and opted to employ the loan method on the woman’s loan.

When lenders use the rule of 78s, they distribute the total finance charge over all payments but charge more interest early in the loan term and less later compared to other methods, such as simple interest. Mortgage interest is also front-loaded, but a prepayment penalty is not automatically built into the payment system like it is with the rule of 78s.

The rule of 78s, also called the sum-of-the-digits method, gets its name because the sum of digits 1 through 12, the months in a one-year loan, is 78.

Here’s how the rule of 78s works for a 12-month loan: You pay 12/78 of the total finance charge the first month, 11/78 the second month, 10/78 the third month, and so on. The rule of 78s applies the same way for long-term loans.

For example, a 24-month loan — where the sum of the digits for months one through 24 is 300 — would have a first month’s interest of 24/300, second month’s interest of 23/300, and 22/300 for the third month. Interest on a 36-month loan would be broken into 666 parts.

In contrast, credit unions traditionally charge simple interest on a declining balance. This method assesses interest only for the period that you use the money. With both loan calculation methods, each monthly payment is part principal and part interest. The rule of 78s assigns more interest to early payments than does the simple-interest approach.

Why should you care? It can cost you if you’re thinking about paying off or refinancing a rule of 78s loan before it matures. The rule of 78s is a method for refunding unearned interest when an installment loan is paid off before maturity.

In the end, if the loan is not prepaid and held for the full term, there is no loss to the borrower whether the loan is set up for the rule of 78s or simple interest.

The borrower gets snagged with the rule of 78s because it accelerates the interest recognition by assuming you will pay the total contracted interest, which favors the lender if you prepay. Therefore, it’s a hidden prepayment penalty.

Not sure if your loan uses the rule of 78s? Look at your Truth in Lending disclosure. If you see a phrase like “you will not be entitled to any rebate of part of the finance charge if you prepay,” ask the lender if it computes interest using the rule of 78s.

A private party probably will not supply you with a Truth in Lending sheet. While there’s only a remote chance you cannot prepay the balance without a penalty, always ask and require the party to discuss the prepayment possibilities.

The Federal Reserve is backing down from a slew of proposed changes to mortgage loan disclosures, saying authority in that arena will soon be transferred to the new Consumer Financial Protection Bureau.

The Fed’s proposed changes to mortgage loan disclosures were over a year in the making, prompted by criticism that homebuyers often didn’t understand the true cost and terms of mortgages taken out during the boom.

The situation was complicated by the fact that borrowers get two sets of federal mortgage disclosures: one addressing Truth in Lending Act (TILA) requirements, and the other satisfying requirements of the Real Estate Settlement Procedures Act, or RESPA.

The Federal Reserve has had rulemaking authority for TILA loan disclosures under Regulation Z, while the Department of Housing and Urban Development (HUD) oversees RESPA disclosures.

Lenders, the real estate industry, and consumer groups have complained that having two sets of mortgage loan disclosures is confusing.

In an attempt to address that problem, the Dodd-Frank Wall Street Reform and Consumer Protection Act transfers oversight of both TILA and RESPA to the Consumer Financial Protection Bureau in July.

The bill mandates that the CFPB issue a proposal for a single federal mortgage disclosure form that satisfies both TILA and RESPA requirements within 18 months of assuming oversight responsibility.

By the time Dodd-Frank was passed, HUD had rolled out new RESPA loan disclosure forms in the face of industry opposition, but the Fed was still in the process of overhauling TILA disclosures.

A combined TILA-RESPA disclosure rule “could well be proposed by the (bureau) before any new disclosure requirements issued by the Board could be fully implemented,” the Fed said in announcing that it will not finalize three rulemaking proceedings it’s initiated since August 2009.

Although there are specific provisions of the Fed’s proposals that would not be affected by the bureau’s development of joint TILA-RESPA disclosures, adopting them “in a piecemeal fashion would be of limited benefit, and the issuance of multiple rules with different implementation periods would create compliance difficulties,” the Fed said in an announcement.

In announcing plans to update TILA loan disclosures in the summer of 2009, Fed Chairman Ben Bernanke said the one-page TILA disclosure currently in use “is not adequate to convey the features and risks of today’s complex products.”

The Fed promised improved disclosures would:

* Capture most fees and settlement costs paid by consumers in the disclosed annual percentage rate.
* Require lenders to show how the consumer’s APR compares to the average rate offered to borrowers with excellent credit.
* Require lenders to provide final TILA disclosures at least three business days before loan closing.
* Require lenders to show consumers how much their monthly payments might increase for adjustable-rate mortgage (ARM) loans.

Another issue the Fed was attempting to tackle was the use of “yield spread premiums” — rebates paid by lenders when mortgage brokers place borrowers in loans with higher interest rates than they might otherwise have qualified for.

Critics said the rebates were often pocketed by mortgage brokers without a borrower’s knowledge, creating a financial incentive for loan originators to place borrowers in more costly loans.

The Fed proposed a ban on yield-spread premiums that was to take effect April 1 — a move adamantly opposed by the National Association of Mortgage Brokers.

HUD, for its part, has maintained that yield-spread premiums can benefit borrowers who would otherwise have trouble paying their closing costs, as long as the rebates are not pocketed by mortgage brokers.

Instead of banning yield-spread premiums, the standardized loan disclosure forms HUD began requiring lenders to use last year require that the rebates be credited against a borrower’s closing costs.

Columnist Jack Guttentag has characterized the dual-disclosure system as “a disgrace” because critical information is often buried or absent.

But Guttentag — also known as “The Mortgage Professor” — has also questioned whether the solution put forward in Dodd-Frank will solve the problem.

Dodd-Frank appears to have more mandated disclosures than TILA, some of which are “nonsensical and will prejudice the ability of (the CFPB) to do its job,” said Guttentag.