Ginny, in April I offered $165,000 on a short sale that was listed at $150,000. My offer was for all cash, but we just found out the property was sold in June to someone else for $160,000 — $5,000 lower than my offer! My broker said that banks look at the first in line and try to work with that rather than try to get the best offer or even look at all offers. Is that true?

My offer was third in line, and apparently the bank took a lower offer that came in before mine. Is this really the way it happens with short sales, or should I look for a different broker? — Maryedith B.,  Ashville, NC

Maryedith, I can envision several different scenarios that might have legitimately led to this result. First off, the other buyer might have simply gotten into contract first. Once a seller is in contract with a buyer, they can’t simply cancel the contract with that buyer because they get a higher offer. Some banks require that all offers be submitted by the listing agent so they can select the highest and best offer, no matter when it comes in. Others want only the actual “contract” the seller has signed.

With short sales, there is the additional nuance that once the bank is considering one contract, many experienced short-sale listing agents will not submit any additional offers to the bank unless and until they receive an acceptance from the bank — regardless of whether the bank has requested to see additional offers or not.

Many fear that submitting a new offer essentially presses the restart button on an already interminable short-sale application process. And this is especially so in situations where the new, incoming offers are higher than the one being considered — here’s why.

Short sales take a long, long time. And they are very unpredictable — most of the time, there’s no telling how long it will take before the bank will issue an acceptance, or whether the bank will ever accept the short-sale application at all!

For this reason, buyer’s brokers and listing agents alike understand the reality that most buyers who make offers on short sales continue to look around for other properties, even if their offer was the one accepted by the seller. As a result, oftentimes short-sale buyers make an offer but fail to hang in the transaction for the duration.

So, here’s what happens in a short-sale listing agent’s head. They get an offer for $160,000 that is submitted to the bank for consideration. Then, they receive an offer from you, for $5,000 more. Some listing agents — as backwards as it sounds — would prefer to get the bank to approve the lower sale price, because the approval of your higher offer price ties their hands from ever accepting other offers at a lower sale price than yours in the (quite likely) event that you walk away before the deal can be done.

If you walk away, and the bank has already seen or approved your high price, the listing agent may never again be able to find another buyer to pay that much. And the bank may never accept less than your offer price, once they’ve seen and/or approved it.

Other things could also be at play here that would make your offer less desirable than the prevailing offer. You offered $5,000 more, and were offering cash, but the other offer might also have been all cash — especially at that price point and in that area. Did your offer include a proof of funds — a bank or other account statement documenting that you actually have the cash in hand to do the deal? If it didn’t, and the other offer did, that could cause a seller to select the other offer over yours.

Did your offer contain any contingencies, like appraisal or inspection? If it did, and the other offer didn’t, that could also push the other offer into priority over yours.

Did the listing broker or agent also represent the other buyer? Often, the total sales commissions paid out on the seller’s side go down — and the total commission earned by the listing broker goes up — when the listing agent represents both buyer and seller.

This arrangement — where a seller agrees to pay a 5 percent commission split 50/50 between two agents or 4 percent commission if the listing agent also represents the buyer (the specific numbers are hypothetical) — is called a dual/variable commission structure, and can also result in preferential treatment to a lower offer because the costs are lower to the seller on the transaction that included dual representation.

There’s no way to know for certain — other than asking the listing agent, who may or may not elaborate — exactly why the lower offer was preferred over your higher, cash offer. But I would encourage you not to shoot the messenger!

I don’t know if you’ve heard or read, but short sales are notoriously difficult to buy. Google it, and don’t fire your agent over something that’s totally out of their control. Unless, that is, you have an ongoing trust crisis — even if it’s unwarranted, that’s a good enough reason to get referrals and do whatever it takes to find an agent you do trust.

The homebuying process is difficult enough — for both you and your agent — without you constantly questioning whether your agent’s on the up and up and threatening to ditch her when things don’t go your way.

If you’re trying to buy a short sale or REO, the one thing I can guarantee you is that something — or many things — will not go your way. C’est la vie on today’s real estate market (and that’s not your agent’s fault).

It can be a hassle to go through your local building department permit procedure when you make changes to your home. You or your contractor must apply for permits, pay fees and meet building inspectors to approve the work in progress. Sometimes there are complicating factors.

Recently, sellers of a home in decided to have wood-destroying pest work done before their home went on the market to make the property more appealing. The contractor applied for a permit and the plan for the repair work was approved by the city. City inspectors inspected the job twice while the work was being done. When a different inspector came out to give final approval, he refused to do so and required that more work be done.

Why should homeowners go through this aggravation and expense when they can do the work more quickly and save money by skipping permits? Even though the permit process doesn’t always work efficiently, there are good reasons to apply for permits for work that requires permits, and to actually obtain those permits.

There is no guarantee that permitted work was done correctly. Inspectors are human and can make mistakes. A certain amount of subjectivity is involved. Two inspectors could have different opinions about how something should be done, as in the case above.

However, permitted work is more likely to meet building code requirements than is work done without permits.

A possible repercussion from unpermitted work is that the next time you or a future owner applies for a permit, the building department might require that unpermitted work be permitted retroactively.

This could result in penalty fees in addition to the permit fee. For example, if an inspector were to notice a new bathroom in an old house, he might require that the bathroom be put through the permit approval process before approving the permit on the current work being done. This could involve opening walls so that the plumbing can be inspected.

While the overall homeownership rate climbed during the housing boom, and minority groups narrowed the homeownership gap with whites, the crash has sent the homeownership trend into reverse.

Gains in homeownership gave under the weight of the subprime loan market meltdown. Fair-housing advocacy groups also blame reverse redlining, the insulation of minority communities and an insufficient financial education for tearing down the homeownership rate.

Rise and fall in homeownership

The Pew Hispanic Center reported this month that, from 1995 to their respective peaks, the homeownership rate among blacks grew from 41.9 percent to 49.4 percent in 2004; the rate for Hispanics rose from 42 percent to 49.8 percent in 2006; and the Asian homeownership rate surged from 49.1 percent to 60.8 percent in 2008.

White homeownership increased from 68.7 percent in 1995 to 72.7 percent in 2005, the U.S. Census Bureau reported, and the Pew Hispanic center found that the white homeownership rate rose from 70.5 percent in 1995 to 76.1 percent in 2004.

According to Lisa Rice, vice president of National Fair Housing Alliance (NFHA), mainstream lenders were not meeting the needs of all borrowers in segregated communities, and “since the need (was) there, subprime filled it.”

NFHA’s members work together as advocates to the federal government on civil rights issues to address regional fair-housing concerns and to share information, test for discrimination locally, and address issues of systemic national housing discrimination, Rice said.

Lenders went after higher-cost markets and senior markets “once tapping out the African-American and Hispanic” market, said Rice.

Gap widens for some minorities

After the boom, the homeownership rate dropped to 47.5 percent in 2008 among blacks, fell to 48.9 percent for Hispanics, dropped to 59.1 percent for Asians and sank to 74.9 percent among whites, the Pew Hispanic Center reported — the homeownership gap with whites widened for blacks and Asians while narrowing for Hispanics.

According to the U.S. Census Bureau, whites recorded a 71.7 percent homeownership rate in 2008, and the overall U.S. homeownership rate declined from a peak of 69.2 percent in fourth-quarter 2004 to 67.3 percent in first-quarter 2009. This overall rate has fallen in the past five consecutive quarters.

From first-quarter 2006 to first-quarter 2009, the overall U.S. homeownership rate declined 0.8 percent among non-Hispanic whites and Hispanics of any race, dropped 1.2 percent among blacks, and fell 2.2 percent among all other races, the Census Bureau also reported.

The Pew Hispanic Center gathered its data from the Census Bureau, RealtyTrac, the Home Mortgage Disclosure Act, the Bureau of Labor Statistics, and the Federal Housing Finance Agency.

Real estate agents and brokers are well aware of how the percentage dips have decreased their prospects and impacted their bottom line.

Despite the souring of the housing market, some homeowner segments have continued to make gains. While foreign-born blacks and Hispanics are less likely than other minority groups to own a home, they have experienced rising homeownership rates.

The homeownership rate among foreign-born Hispanics grew from 36.9 percent in 1995 to 44.7 percent in 2008, while the rate for foreign-born blacks rose from 34.8 percent in 1995 to 45.8 percent in 2008.

For U.S.-born blacks and Hispanics, another picture emerges. The homeownership rate among U.S.-born blacks dropped from 50.1 percent in 2004 to 47.7 percent in 2008, while the rate among U.S.-born Hispanics fell from 56.2 percent in 2005 to 53.6 percent in 2008.

Subprime inequality?

“Foreclosure rates are much higher than whites because they were disproportionally represented” in the subprime loan market, said Rice, adding, “their (low) credit will also be disproportionally represented” after the crisis.

Moreover, some mainstream lenders “have never been able to effectively explain why they were able to penetrate the black and Hispanic market” with their subsidiaries and subprime loans to a greater degree than they had with their mainstream branches and products, said Rice.

The NHFA, a consortium of about 220 nonprofit fair-housing groups, reported that fair-housing groups processed a record 30,758 complaints in 2008, with the U.S. Housing and Urban Development Department processing 2,123 complaints, state and local agencies processing 8,429 and the Justice Department filing 33 fair-housing cases. FHFA also reported 1,499 cases related to discrimination in mortgage lending in 2008, compared with 1,245 in 2007.

We don’t get a good sense of why” minority homeowners were overrepresented in subprime markets, said Josia Madar, research fellow at The Furman Center for Real Estate and Urban Policy, but “large disparities in income level between (whites and minorities) is the straightforward answer.”

The Furman Center found that if borrowers lived in racially segregated metropolitan areas, they were more likely to receive a subprime loan — 3 percentage points higher than the federal Treasury rate, according to a Furman Center report analyzing HMDA 2006 data by the Federal Financial Institutions Examination Council.

Hispanics were 2.6 times more likely than whites to receive subprime loans, according to the Furman report. Blacks were almost three times more likely to receive subprime mortgages than whites in 2006, according to the Furman report.

The Furman study focused on metro areas with more than 200 loans, regardless of borrower characteristics.

White borrowers who lived in a predominantly segregated metro area had no correlation with receiving a subprime loan. This relationship to segregation holds even when compensating for individual borrower characteristics

This is “borrowing while black,” said National Community Reinvestment Coalition executive vice — president David Berenboum, alluding to alleged racial profiling by some law enforcement officers that gave rise to the phrase “driving while black.”

Rice said that a historical legacy of discrimination has complicated homeownership for minorities, and once minorities do gain homeownership status, blacks and Hispanics lose that status faster than whites, as the Pew Hispanic Center statistics show for the two largest native-born minority groups.

Maria Kong, president of the National Association of Real Estate Brokers (NAREB), which represents minority brokers, said agents are now counseling their clients about dropping market values.

And consumers’ ability to tap into the equity of their home is significantly impacted in the current market environment, noted Rice.

Possible contributors

Both Rice and Madar said that while racism could be a factor, the cause of discriminatory practices can be more subtle.

Tino Diaz, chairman of the National Association of Hispanic Real Estate Professionals and managing director and CEO for CharisPROS, a Miami loan company specializing in the Hispanic market, noted that “market dynamics were pushing the family and the professional” to conform to market demands at the time of the boom.

“When you are in a feeding frenzy you forget who you’re biting,” said Diaz.

Although the Furman report questions whether the physical location of mortgage brokers was a factor, as most all racial groups choose lenders who are based outside of their neighborhood, still Rice holds that proximity to lenders is relevant.

“African Americans and Latinos tended to get loans that had a mobile marketing scheme,” said Rice, adding that it was not uncommon for lenders to go to churches and other parts of the community to promote their product.

“You can’t get any more local than that,” Rice said.

Borrowing behavior

Minorities’ borrowing behaviors, too, may make them more of a target for subprime loans. Although more foreign-born minority buyers have been able to keep their home as compared to their U.S.-born counterparts, a significant number of minority borrowers received subprime loans who should have received prime loans, Diaz said.

The Furman authors cite various reasons for different behaviors between groups.

Minorities are less likely to be financially educated, according to the Furman report’s authors, citing reports that show blacks rely more on advice from their broker and are less likely to make an inquiry about loan products directly at banks and other lending institutions.

Hispanics, Furman reports, are more likely to consult their broker for advice than whites, but are just as likely as whites to inquire about loans directly at banks and other lending institutions.

White borrowers tend to secure loans from traditional banks, while many blacks and Hispanics get them from loan officers and brokers, Madar said.

The knowledge disadvantage festers when minorities and immigrants — who may live in minority communities and subcultures — are less likely to receive information from the society at large, according to Madar.

Information spreads differently in different community networks, he said, and it may be more or less acceptable in some community networks to talk about the process of homeownership with neighbors.

Financial education

Some agents question the education about the real estate transaction process and pitfalls that real estate professionals provided to their clients during the housing boom.

Rebecca A. Gallardo-Serrano, managing partner at Portelo Realty Group Real Estate Services in San Jose, Calif., and immediate past chairman of NAHREP, said “there was a huge lack of knowledge” among some minority homeowners who bought during the boom, and “they were not counseled correctly.”

While Gallardo-Serrano admits that real estate agents have a fiduciary duty to their clients, “we are lacking necessary knowledge in our industry.”

“Heck,” Diaz said, some buyers who are native English speakers “don’t read the (loan) documentation,” and communicating with a non-native English speaker is doubly difficult when the client cannot clearly understand their adviser or cannot read the terms of the financial product.

The lack of economic knowledge and the language in loan documentation can make minority and immigrant borrowers more reliant on real estate brokers or mortgage brokers, she noted, and may make them more likely targets for fraud.

“There was no will to change it when the economy was doing well and we were all having a great ride,” said Gallardo-Serrano, “We were part of the process.”

Praveen Sharma, marketing manager for the Asian Real Estate Association of America (AREAA), said immigrants’ and minorities’ language barriers make translated loan documentation crucial, and although immigrant communities have shown resilience in this down economy their homeownerships gap still represents a chasm as compared to others.

In some cases, Diaz said, minorities, foreign or native born, may “have difficulty reading the language” and do not understand how much interest they will pay or for how long.

If the borrower does not know English well “(they) are more likely to be lied to,” said Madar, and this can lead to a mortgage broker — with only their own interest in mind — guiding a borrower to sign off on a less than favorable product.

In a recent case, the Federal Trade Commission has alleged that a mortgage service partnership gave loan officers a percentage of excess markups and failed to monitor discrepancies between what non-Hispanic white borrowers paid for their mortgage as compared to black and Hispanic borrowers, Inman News reported.

New barriers, plans

An uneven rate of unemployment — 15 percent for blacks and 11.3 for Hispanics as compared to 8 percent for whites — could compound the homeownership gap. The unemployment rate for Asian Americans was 6.6 percent, up from 3.2 percent a year earlier, according to a recent monthly U.S. Census report.

Today and in the near future, minority credit hopefuls face a Janus at the credit-score door. Credit scores take into account employment, late payment, bankruptcy and foreclosure history.

Rice commented, “It seems like now I’ve stepped back in the ’80s,” a time when she began her work. Helping minorities achieve homeownership today is “a little frustrating — this sets us back 20 years on this issue,” she said.

Berenboum said banks need to “make it more difficult to get a loan to restore access to credit,” so only creditworthy borrowers can take out loans — appropriate loans with appropriate credit expectations.

He advises an increase in transparency, adjustments to the principal on current home loans, and counseling to avoid foreclosure. This will ultimately help investors, who are mostly institutional investors, pensions and retirement funds, Berenboum said, and increase the tax basis because there have been cutbacks in government spending.

Because some minorities do not have access to traditional mortgage products and have little built-up equity, NAREB, AREAA and NAHREP announced a joint legislative and regulatory partnership outlining a five-point plan to help minorities manage their mortgage woes and protect and foster homeownership.

Also, the plan provided for an increase in multicultural counseling and outreach, improved industry ethical standards, and protections for credit liquidity by — among other devices — advocating for more flexible automated lending standards so nontraditional creditworthy individuals can gain homeownership status.

Minority homeownership “has been promoted wrong and for the wrong reasons,” Rice said, adding, “You can’t promote homeownership with bad loans.”

Finding the right house to buy is never easy; selling a home today is also challenge. It’s best to prepare yourself for obstacles that could cross your path so that you’re prepared should they arise.

In some markets, one in three transactions doesn’t close. This is a high ratio compared to the fallout ratio in previous years when the housing market was stronger and financing options were plentiful. In past years, most transactions fell apart over inspection issues. The biggest hitch today is financing, which is not to say that property defects don’t come into play.

For some time, lenders have tightened up on their qualifying criteria, making it more difficult for buyers to obtain the financing they need to close a sale. Recently, appraisals have become problematic, particularly in low-inventory, higher-priced neighborhoods.

There are three components to lender approval. The borrower must be financially qualified. This requires a good credit score, sufficient cash for a down payment and closing costs, as well as verifiable income. The lender also needs to approve a title report on the property to confirm that the seller has marketable title to the property. And, the lender needs an appraisal of the property to confirm that the buyer is not overpaying.

Previously, lenders’ underwriters required three comparable sales in the area that occurred within the last six months to validate the purchase price. Due to the soft housing market, lenders now want to see comparable sales information on listings that sold and closed within the last three months. The listing inventory in some areas was very low from December 2008 through March 2009, making it difficult for appraisers to come up with enough comparable sales information to satisfy the lenders.

To complicate matters, some appraisers and lenders automatically lower the appraised value by a certain amount if the property is in an area that is deemed as a declining market. This can result in an appraised value that is lower than the price the buyer and seller agreed to in the purchase contract.

HOUSE HUNTING TIP: What can you do if an appraisal comes in under the negotiated price? Your agent should talk to the appraiser to find out which properties were used as comparable sales. Your agent might be able to provide the appraiser with comparable sale information that can support the contract price, particularly if the appraiser is from out of area.

The most accurate appraisals are done by appraisers who know the local market well. Unfortunately, changes in the lender’s practices are resulting in more appraisals done by appraisers from outside the local area. Many lenders no longer have their own, in-house appraisers; many are relying on large nationwide appraisal services to provide appraisal services.

If the appraiser can’t be convinced that the appraised value is low, and the buyers and sellers want to make the transaction work, it requires a compromise.

Let’s say a listing sold for $1 million, but appraised for only $950,000. One way to resolve the problem is for the buyers and sellers to split the difference. In this case, the sellers lower their price by $25,000 and the buyers put an additional $25,000 cash down.

For the cash-strapped, this is not an option. In this case, the sellers would have to lower the price by $50,000 to keep the deal together. Some sellers might be willing to carry a second mortgage as long as it doesn’t exceed the lender’s loan-to-value (LTV) limit and the loan isn’t due for at least five years.

THE CLOSING: Check with your lender before attempting to negotiate a seller carry-back; some lenders won’t allow it.

All too often, short sales are really l-o-o-n-g sales — it can take many weeks and months to close a deal.

And patience is increasingly wearing thin across the country as real estate agents become more vocal over the agonizing process. They argue that clearing the nation’s huge inventory of distressed properties is paramount to resuscitate an ailing housing market and sputtering U.S. economy.

A year after sounding off over the problems, Realtors are ramping up a campaign to prod the lending and mortgage servicing industries to embrace universal standards and procedures to streamline the short-sale process. Those include a uniform short-sale application and an online listing of people who service short-sale transactions.

If that doesn’t work, some are threatening to take their case to the White House and ask the Obama administration to convene a special task force.

A call to action

“It’s a disaster. It’s takes forever (to close a short sale). It’s unfair to the buyer and it’s unfair to the seller,” said George K. Wonica, a veteran Staten Island, N.Y., Realtor and chairman of the Nation Association of Realtors’ Conventional Finance and Lending Committee. “NAR has to exercise its power and its pressure to get people to the table.”

Interviews with real estate agents from some of the hardest-hit markets in California, Michigan, Arizona, Nevada and Florida found a bevy of complaints still persist. While banks have cut down the number of days they take to respond to short-sale offers, they also report that communications with lenders remain spotty.

“We’re seeing so many short sales that never come to a close. We have banks dictating how things are done. It has really become the Wild West out here,” said Suzanne Sherer, president of the Realtor Association of Greater Fort Myers (Florida) and the Beach, which represents one of the nation’s most distressed housing markets. “We need some sort of legislation to protect buyers.”

Wonica vows to become more proactive.

In February, Wonica huddled with 10 mortgage bankers and servicers in Florida to address the problems. Wonica said a uniform short-sale form developed by the California Association of Realtors could serve as an industry model. He plans a similar get-together with mortgage bankers and servicers during a summer conference in Las Vegas.

“We want to set up a communications line between the bankers and the brokers. Let’s meet with these guys and see if we could get a meeting of the minds.”

A top Wells Fargo official agrees.

“We as an industry were not the best in getting back to everyone. Wells Fargo has put in processes to address that,” said David Knight, a senior vice president at Wells Fargo Home Mortgage. We’re … working with NAR and other groups (to) reexamine our own process. There is always room (to improve).”

For the foreseeable future, foreclosure and short sales will remain a prominent feature in the real estate landscape. Short sales will continue to be an option for homeowners who owe more on their mortgage debt that their houses are worth.

Saving money with short sales

Indeed, the economic downturn wiped out about $3.3 trillion in home values last year, according to a report by Zillow.com, a company that offers online real estate information. Since the market peak four years ago, home equity has been eroded by more than $6 trillion.

In 2008, short sales accounted for about 11 percent of U.S. home sales, while foreclosure made up 20 percent of the market.

Most experts agree that short sales have a lesser impact to owners and lenders than bank-owned (REO) deals. That is reinforced in a study by Connecticut-based Clayton Holdings Inc., which follows more than $500 billion in mortgage loans for investors. The study showed lenders from May to October 2008 suffered an average 37 percent loan loss through short sales versus 56 percent on homes sold after foreclosure.

“We think (a) short sale is superior to foreclosure,” Knight said. “A short sale is not a bad deal all around.”

But these deals are more complicated and time-consuming than traditional sales. All parties with liens on the house — from the second mortgage holder to the private mortgage insurer to the tax collector — must sign off on the transaction. That’s where many of the problems arise.

“My sellers are so frustrated,” Sherer said. “We need to come up with real solutions.”

Tales from the trenches

There is no shortage of complaints from the field:

* In the Fort Myers area, one homeowner had five separate sales contracts rejected by the bank in the past year. The home value slid from $325,000 to about $200,000 today. That home remains unsold.

* In Phoenix, a bank turned down a buyer’s $225,000 offer for a home. Several weeks later, that listed for $200,000 as a bank-owned property (REO) for sale. “It’s hard to know what a bank will consider,” said Jay Thompson of Thompson’s Realty in Gilbert, Ariz. “Some agents won’t list short sales.”

* On California’s Central Coast, a bank took four months to finally accept an offer. But the deal collapsed because the buyer’s financing was no longer available.

* Over the past six months, short sales averaged 113 days to complete compared with 56 days for traditional deals and 43 days for real estate-owned in San Diego County, Calif., according to an analyst by Realtor John Altman of J.T. Altman and Associates in San Diego.

* In Folsom, Calif., one deal took seven months to go through, putting a strain on the buyer’s marriage. “My buyers hung in there.” But they “almost got a divorce in the process. I was ready to quit real estate,” said Tracey Saizan of Keller Williams Realty in Elk Grove, Calif.

Short sales make up three out of five listings in Elk Grove, a suburban community south of Sacramento. Every other day, Saizan spends up to four hours on the telephone with lenders to keep tabs on the seven short-sale deals she has in the works.

On average, it takes 60 days for a bank to respond to an offer, she said, “It would certainly help (if) there are guidelines for banks to follow.”

Progress, of sorts

Savvy real estate agents are setting realistic expectations for their buyers and sellers, stressing patience is a major virtue to survive the process. They suggest homeowners compile financial statements, hardship letters and other information early so a complete short-sale package can be sent to lenders and lessen the chances of a last-minute glitch.

Fannie Mae and Freddie Mac are trying to speed up the process, too. Fannie Mae, for example, launched pilot programs this winter in Florida and Phoenix that preapproved short sales for dozen of homes. The government-backed lender completed the research on a troubled property in advance and obtained all of the necessary clearances in advance.

In February, Wells Fargo crafted a short-sale fact sheet for borrowers and real estate agents that discusses the process and outlines the lender’s time line for dealing with these transactions. Wells Fargo’s goal is making a short-sale decision in 25 business days.

“A little more than a year ago, all the servicers had gotten a little overwhelmed. There was a lot of volume. It was a pretty unfamiliar area. People were treating them as regular sales,” Knight said. “What we’re trying to do is get everything we can do upfront. There are challenges.”

Those challenges include disagreements over payments between first and second mortgage holders. The second, for example, may be offered a $3,000 payment, but it wants $15,000. If the dispute isn’t settled, the short sale falls through.

“You have to deal with all of these different people. Everybody has to take a loss. Not all of those people want to walk away with nothing,” said Louis Galuppo, an attorney and director of Residential Real Estate at the Burnham-Moores Center for Real Estate at the University of San Diego.

Galuppo said there’s no easy answer. Lawmakers can’t dictate how much lienholders should receive. “It’s not going to happen unless we change the very political system. One solution, he said, is for Uncle Sam to set aside a pool of federal money for lienholders to tap into in order to recoup some of their losses.

There is one positive sign that could signal a change. Last month, Bank America said it plans to ease its stand on short-sale payments. A major holder of second liens in the U.S., BofA is seeking 5 percent of sale proceeds after real estate commissions and other costs. Previously, it asked for 10 percent of what homeowners owed on second mortgages or the balance of a home-equity loan.

Still, Wonica isn’t prepared to wait. “I’m going to be aggressive. If they want to fix a problem, sit down at the table and fix it. We have to attack it.”

These types of adjustable-rate mortgages can save you a substantial amount of money compared with conventional fixed-rate mortgages.

Some adjustable-rate mortgages may have been lumped in with such “toxic” mortgage products as interest-only loans, pay-option ARMs and loans with negative amortization, but those are not the same as more conventional products known as hybrid ARMs. These are loans that carry fixed rates for the first five or seven years, after which the rate is adjusted up or down annually based on market conditions at the time.

Hybrids are “a great product at a great rate,” said Silver Spring, Md., mortgage broker Christopher Cruise, who has several clients ready to lock in a starting rate of 3.99%.

That’s a full percentage point or more lower than what the traditional 30-year fixed-rate mortgage is going for these days. And the savings over five or seven years can be substantial. But many people are scared of hybrids because they are lumped in the same “bad loan” category as more treacherous adjustables.

Hybrids aren’t for everyone. But they’re not nearly as risky as other ARMs that come with below-market “teaser” rates that make them even more enticing — and more dangerous.

Here’s a quick primer about the differences.

With an interest-only loan, you pay just the interest for a few years. After that, your payment increases dramatically, not only because you are amortizing the principal over a shorter time frame (typically 30 years less the interest-only period) but also because your rate jumps up to market level.

Pay-option ARMs also work just as the name implies. You can make practically any kind of payment you like. You can elect to make a full payment. You can choose to pay only the interest. Or you can even make a partial payment to principal.

Most people take the easy way by paying only the interest. And again, when the option period expires, the payment jumps significantly because the principal is amortized over the remaining term and the rate increases to market level.

These loans are even more dangerous if they come with negative amortization. If your payment isn’t enough to cover the interest due because of annual increases in the rate, the difference is added to the principal. And that means you could end up owing more than what you originally borrowed.

Then there are the hybrids, which have a significantly longer period of fixed rates and come with annual and life-of-loan caps that protect borrowers against payment shock. A typical annual cap is 2 percentage points, meaning the rate can go up no more than that, while a typical lifetime maximum is 6 points.

Cruise, the Maryland broker, believes that people who dismiss hybrids out of hand in favor of more conventional 30-year fixed-rate loans are “stuck in the 1950s,” an era when many people bought one home and lived in it forever.

One key to picking a loan these days is how long you plan to remain in the home. Another is how long you will keep the loan. Although people will probably be staying put longer because of the recession, they are turning in their old loans for new ones faster than ever.

The mistake most borrowers make, Cruise said, is that “they look at the possibility” that they’ll have the same house and loan five or seven years from now “instead of the probability.”

“Even if they stay in the same house,” he said, “seven years for a mortgage is an eternity these days.”

Keith Gumbinger of HSH Associates, a mortgage-information company based in Pompton Plains, N.J., isn’t as gung-ho about hybrids as Cruise. But he does agree that they shouldn’t be dismissed out of hand. “There might be an opportunity there,” he said. “Certainly in the jumbo market, you have to take a look.”

That “look” might involve some work. “You’ll have to go out and scour the market to find a very good deal,” said Gumbinger, whose firm surveys lenders every week.

Let’s see how a 7/1 ARM plays out over time for a $250,000 mortgage, using a 1 percentage point difference between a 30-year fixed-rate loan at 5% and the adjustable loan at 4%. The difference between the monthly payments to principal and interest for the two mortgages is $148 — $1,194 for the ARM versus $1,342 for the fixed-rate mortgage. Over a year’s time, the savings is $1,776. And over the seven-year period the savings is $12,432.

The next question is, how long will it take to give back that money once the loan switches to a one-year adjustable? Let’s consider a worst-case scenario: Say on the loan’s eighth anniversary, the rate jumps the maximum allowable 2 percentage points, to 6%. That means the payment will rise to $1,499. That’s a bump of $305 a month.

Over a year’s time, that’s $3,660 extra out of your pocket. But you’re still ahead by $8,772 ($12,432 less $3,660).

Now say that in the ninth year, the rate jumps again by the 2-point maximum, to 8%. In that case, your payment this year will leap by $335, to $1,834, and your annual cost over and above your original payment will be $7,680. But again, you’re still ahead, albeit by this time the savings is just $1,092 ($12,432 less $7,680 less $3,660).

It’s not until early in the 10th year that you start giving back what you saved over the first nine years.

Of course, this ARM could become even more burdensome if the rate jumps again by 2 more points after 10 years, to 10%, or double what you would still be paying if you had decided to go with a fixed rate.

But with the life-of-loan cap, that’s the highest it will ever go. And who knows? Market rates could go down, which means your payment could go down.

Now let’s consider a jumbo mortgage. The differential isn’t as great in the jumbo sector — 6.5% for a fixed loan, according to HSH, versus 5.9% for a 7/1 ARM. But because the loan amounts are so large, the dollar differences are larger.

At 6.5%, a $750,000 fixed-rate mortgage costs $4,741 a month for just principal and interest. But at 5.9%, the ARM runs $4,449, a savings of $292 a month and $3,504 a year. Over the seven-year period, the total savings is $24,528.

Assuming the worst case from here on out, the payment on this fictitious $750,000 loan could jump 2 percentage points in year eight, to $5,541, an increase of $1,002 a month and $12,024 for the year. But you are still ahead, this time by $12,504.

It’s only if the rate goes up by 2 more points in year nine that you end up in negative territory. It’s then that the payment rises to $6,526. That’s $2,077 more than what you started out paying with the ARM.

But you are still ahead of the game until the sixth month of the ninth year with a 7/1 ARM.

For the housing market, it’s the equivalent of financial alchemy, and it’s hot: Turning the $8,000 federal home-purchase tax credit, which normally isn’t spendable until after you’ve gotten your refund, into immediate, hard cash, available for your down payment and closing costs.

Congress’ stimulus-bill tax credit for 2009 is generating efforts nationwide to find ways to “monetize” it — providing money upfront to buyers who need dollars for down payments right now, not next year after they file their federal returns and get refunds. The credit is available only to qualified taxpayers who have not owned a house during the previous three years, and who close by Nov. 30, among other requirements. Buyers can amend their 2008 returns to claim the credit or claim it on returns for 2009.

In recent weeks, at least 10 states say they’ve come up with ways to work this monetary magic. They have created innovative bridge-loan programs that advance credit-eligible buyers the cash they need for their closings. Generally the advances take the form of second mortgages — with or without interest charges — that become due and payable whenever buyers receive their credits in the form of refunds from the Internal Revenue Service.

In Missouri, which was the first state to create such a program, buyers can get a no-cost “tax credit advance” of up to 6% of the home price. The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.

If buyers can’t meet that repayment deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate. The underlying first loans are all fixed-rate 30-year mortgages issued by private lenders participating with the tax-exempt bond programs of the Missouri Housing Development Commission.

Colorado kicked off a similar program, known as JumpStart, on April 14. Delaware, New Jersey, Tennessee, Idaho, Washington state, Ohio, Pennsylvania and New Mexico have come out with their own versions, some with modest interest charges on the second mortgage from the beginning.

In Washington, where the state Housing Finance Commission already runs a tax credit bridge-loan program for buyers using its mortgages, state Treasurer James McIntire wants to make it much bigger. He has been pushing for creation of a “public-private” down-payment program that could reach far larger numbers of consumers than is possible under the housing commission’s current funding constraints.

McIntire has proposed depositing $25 million of state funds into interest-earning accounts at an FDIC-insured bank. The bank would then provide revolving lines of credit to the state housing commission to greatly expand its down payment bridge-loan efforts. In a novel arrangement, the Washington Assn. of Realtors has pledged $400,000 as a backstop for McIntire’s plan to cover any unexpected losses on the credit monetization transactions. The state Legislature has authorized the program in its new budget.

McIntire is also trying to persuade the Obama administration to allow the state to tap into bridge loan-assisted home buyers’ amended 2008 tax returns and be directly assigned all or a portion of the tax credit refunds. Under current IRS rules, McIntire said, tax refund checks are sent only to the taxpayer’s address. To ensure prompt repayment of bridge loans, the state would like to have refunds mailed to the housing finance commission in cases in which repayment of a bridge loan is due.

Bottom line: Since other state housing agencies reportedly are considering rolling out credit-monetization programs on their own, keep your eye on what’s happening in your area. A no-cost advance tied to the $8,000 credit just might get you the down payment and closing cash you need.

With 30-year interest rates well below 5 percent, and 15-year interest rates between 4 percent and 4.5 percent, it’s time to start seriously thinking about refinancing your mortgage.

But before you high-tail it to the nearest mortgage lender and fill out a mortgage application, there are eight things you should do:

1. Check out the interest rate you have on your current loan. When interest rates dip, the natural inclination is to start filling out loan applications left and right. But too many times, homeowners are focused solely on the new interest rate instead of how much they’ll save by refinancing. While you may get water cooler-bragging rights, you should refinance only if it’s going to save you money.

2. Find out how much your home is really worth. There’s no way to sugarcoat it: Home values have sunk around the country an average of about 20 percent in the past year. In some places, such as Las Vegas, Miami, Phoenix and the San Francisco Bay Area, the decline has been twice as steep. It’s vital to assess whether your home still has any equity (the difference between what you owe and what the home is worth) or if you are “underwater” with your mortgage (meaning that you owe more to your lender than the property is worth. Whether you have equity will determine what kind of refinance is open to you.

3. If you’re underwater with your mortgage, assess how far underwater you are. While federal requirements have changed with regard to refinancing loans owned or serviced by Fannie Mae, Freddie Mac or FHA, if your loan is more than 105 percent of the value of the property, you may not be able to refinance without bringing cash to the table. (You may still be eligible for a loan modification, however.)

4. Get a copy of your credit history and credit score. Since the credit crisis began, lenders have raised the credit scores required to get approved for the best loan programs and best interest rates. The best place to go for a copy of your credit history and credit score is AnnualCreditReport.com. It’s the only place where the three credit reporting bureaus provide a free copy of your credit history each year, plus you can pay $7.95 for a copy of your credit score. Choose the Equifax credit score, since it’s the one closest to the score used by most lenders. (You can also go to MyFico.com, and purchase your credit history and FICO score for $15.95. You may also find their online community to be helpful in terms of suggestions on how to raise your credit score.)

5. Start identifying potential lenders. Shopping around for a loan takes a little more planning and effort than it used to, as lenders have jacked up the fees they charge to underwrite and process the loan. Your best bet is to talk to a national lender, a credit union (if you belong to one or can join one), a local mortgage broker (call your real estate agent if you don’t know one and ask for several recommendations), and perhaps an online lender.

6. Find out if your second lender will subordinate to your first lender. If you have a first and a second mortgage (also known as a home equity loan), find out whether the second lender will subordinate to the new first lender. That will allow you to refinance your first mortgage, while leaving your second loan in place. Many second lenders will not agree to this, and if yours doesn’t, you may not be able to refinance at all unless you pay off the second loan. One possibility is to refinance your first mortgage with the lender who owns your second loan.

7. Focus on the big picture, not just the interest rate. While the interest rate you’d get is important, it’s also important to calculate how much you’d pay in fees, and how long it will take to pay yourself back the cost of the refinance with your monthly savings. For example, if you’re going to save only $50 per month, and it costs you $5,000 to refinance, it’ll take you 100 months — or more than eight years — to pay back the cost of doing the loan. You won’t start saving until well into the eighth year of paying down the mortgage. So, unless you’re cutting the term of the mortgage significantly (going from a 30-year to a 15-year), or you’re able to pay off the costs in a relatively short period of time (say, less than a year or 18 months), it may not pay to refinance.

8. Get your paperwork together ahead of time. Before the housing crisis, you could almost do a refinance over the phone. In fact, you could call the loan officer you worked with regularly and put in your order for a refinance. You could do a no-cost refinance without providing much in the way of proof of earnings, or account statements or copies of tax returns. The forms would be delivered to your home, and then you’d sign them and send them in. Today, you’ve got to have your paperwork in order before you can refinance. Gather your W-2, a current paycheck, copies of your last two federal and state tax returns, copies of your bank accounts, retirement accounts, and other assets. Then call the lender.

While job cuts and dwindling investment accounts continue to plague wage-earning households, many seniors continue to wonder how long their once-healthy retirement funds will provide them with the cash needed for their leisure years.

Some good news arrived recently, especially for older homeowners who continue to make mortgage payments on their primary residence. The economic stimulus bill signed into law raises the single national loan limit for the country’s most popular reverse mortgage to $625,500 from the previous ceiling of $417,000.

“This is a great opportunity for seniors to tap into additional funds to offset losses they may have experienced in the current economic environment,” said Sarah Hulbert, president of Senior Financial Corp., a reverse mortgage lender. “There are a great number of seniors in homes valued significantly over the old limit of $417,000 limit who will be able to maintain or enhance their standard of living through the implementation of this new loan limit.”

The Federal Housing Administration, a component of the U.S. Department of Housing and Urban Development, insures the nation’s most popular reverse mortgage known as the Home Equity Conversion Mortgage, or HECM. Other private reverse mortgage “jumbo” funds have virtually evaporated given the present credit crisis.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. Funds obtained from the reverse mortgage are tax-free. Here are the vitals of the new guidelines:

* All areas of the continental United States, as well as Alaska, Hawaii, Guam and the Virgin Islands, will operate under a single HECM loan limit of $625,500;
* The $625,500 limit applies to both regular HECM transactions and HECM for purchase;
* The current fee structure remains unchanged. HUD will continue to collect a 2 percent mortgage insurance premium upfront and 0.5 percent annually; and
* The maximum origination fee will remain $6,000.

Darryl Hicks, vice president of the National Reverse Mortgage Lenders Association, a nonprofit trade group based in Washington, D.C., said there is anecdotal evidence that reverse mortgages are helping seniors to avoid foreclosure, but the organization has no hard data to support the claim. NRMLA expects even more activity with the new loan ceilings as seniors look for ways to escape high monthly mortgage payments.

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

The same law reduced the maximum loan fee on reverse mortgages to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.

Last October, Congress gave HECMs, which make up more than 90 percent of all reverse mortgages, a common loan ceiling of $417,000, regardless of location. Previously, the HECM program assigned different lending limits by county ranging from $200,160 in rural areas to $362,790 in the highest-home-value areas. The $417,000 limit enabled borrowers to obtain a substantially greater benefit from their homes, but the ceiling still was simply regarded as too low for higher-end homes. Lenders immediately began to lobby for the $625,500 number, and the stimulus bill supplied the increase.

However, not everyone qualifies for the maximum. A borrower’s age, along with prevailing interest rates, determine the actual amount of the HECM. Older borrowers qualify for the greatest amounts.

While the 4.3 percent increase in the number of FHA-insured HECMs was down significantly in 2008 from previous years, it bettered the negative numbers of conventional loans. One reason for the lower HECM volume was the uncertainty over the loan limits. There were a significant number of seniors waiting on the sidelines to see what the new loan limits would be.

With the present state of the economy, the increased limits will be beneficial.

When most people buy a home, they deposit money at the settlement or closing with their lender for the payment of future real estate taxes.

Lender’s have a formula for determining how much money they need to hold in escrow to make sure that they have enough cash in the account for the payment of the next real estate tax bill.

Let’s talk about the tax mistake first. If the property taxes were incorrectly reported at the closing of the purchase of your home, you need to make sure you received the right amount from your seller for the real estate taxes. Conversely, if you owed the seller money, you need to make sure you didn’t overpay him.

Once you know whether the numbers between you and your seller are correct, you need to understand what your lender is doing.

If the mistake on the real estate taxes only affected your lender’s computation of the real estate taxes, you need to understand the process the lender uses for the collection and payment of real estate taxes.

If you underpaid your real estate taxes at closing due to a mistake by the title company or the lender, you should know that the lender would have collected from you a significant amount of money at that time to fund the escrow. At that loan closing, you would have had to have come to the table with more money in order to put the necessary funds into the escrow account for the future real estate tax bill.

If the number used for the real estate taxes was $1,200 but should have been $4,800, your lender started out being short $3,600. In addition, when the lender used the $1,200 amount for the monthly payment calculation, your monthly mortgage payment would have been what you needed to pay your loan plus $100 for the real estate taxes.

But that number should have been $400 per month, or $4,800 per year. The net effect is that your lender needs the $4,800 for the real estate taxes and must collect more money each month from you to make sure the coming tax bill is covered.

You’re being asked to pay a lot of money, but the question you have to answer honestly is whether you knew what the real estate taxes were on the home when you bought it. If you knew that the taxes were $4,800, the amount the lender is requesting should not be a surprise to you. It’s only a surprise that it took them this long to catch the mistake.

In some cases, when lenders make these mistakes, they may say they’ll increase your payment by the additional $300 per month they need plus another $300 per month to fund the initial $3,600 required. In this manner, in about a year, you would have funded the escrow the way it should have been and your monthly payments to the lender would stabilize to a number that reflects the actual amounts that the lender needs for the payment of the real estate taxes.

Going back to your original question, if the lender’s computation is correct, you’ll need to pay the lender the money. Whether you and the lender decide it should be paid in a lump sum or over time, that will be up to you and the lender.

If the numbers were incorrect then and are incorrect now, you need to work with the lender to make sure the correct numbers are calculated for your real estate taxes and that you pay the right amount monthly to the lender to fund the real estate tax escrow account.