REAL ESTATE PARADOXES    credit(and CREDIT ISSUES) and Retirees Renting Apartments

            Real property is a separate area of law because "real property," by definition, is finite in availability and supposedly permanent in form. "Intellectual property" is in fact the opposite - amorphos and subjective. But all property law addresses the question: what does property owner X deserve to have for what she has invested?

            Government's involvement in real property policy has some interesting side effects. Government has long supported the mortgage interest deduction, and it has subsidized low down-payment loans through FHA and (for former military servicemembers) VA. The generous purpose of these politically popular programs is to make homeowners out of people with modest incomes and means.

            Consider the consequences of these policies. We can debate whether, as a matter of morals, someone who owes a mortgage really "owns" his property. But people are encouraged to owe more money on houses than their income-earning ability and job skills really justify. How so? For one thing, when jobs are lost and homeowners default, FHA and VA rarely go after former homeowners for deficiencies (conventional lenders are much more likely to do so, even with subject-to assumption sales). This creates the impression that there is little personal risk in home ownership. (In fact, there is definite risk: a home with structural, moisture or even radon problems can be very difficult to sell.) Therefore, people who don't own ("renters") become seen as second-class citizens. No wonder, some live up to their reputations and do not take care of property they rent. The side effect is that renters run the risk of being treated as second-class citizens; fifteen years ago insurance companies were considering dropping renters' coverage, and many drug labs are on rental property/ Another effect derives from the mathematical effect that most mortgages (combined with real estate taxes) require enough itemizable interest to beat the standard deduction. Therefore, when people go into debt, they find it "easier" to make charitable or religious contributions or to grow hobbies into businesses.

            During the 1950's (the Levittown era), people did save for down payments and bought homes to live in to raise families. Over time, houses got to be seen as hedges against inflation and as tax shelters for non-family people, and forms of pseudo-ownership (condos and even co-ops) became well established by the 1970's, often with easy financing.

            One major consequence of the impulse to home ownership has been to perpetuate a de facto segregation. In the 1950's, before government programs had become a major influence, many suburban developments, even in the north, refused to sell to blacks. As inflation and government policies became more important, people in many cities developed the idea that they could shelter their families from racial and cultural mixing (and forced bussing) by moving to increasingly distant suburbs, often with their own well-off school districts. Large employers have sometimes followed suit, moving major operations centers to affluent suburbs, in some cases "to get away from the blacks." In the 1970's and 1980's this was likely to affect gays and lesbians, who often saw there jobs move away from them even before the major waves of mergers and downsizings. Urban, gentrified and expensive housing has usually been hospitable to gays and lesbians (and empty nesters), although as late as around 1980 we would hear stories (even in New York) of co-op boards that would refuse to approve sales to two cohabiting men.

            In Minnesota, property owners of rental units are taxed more heavily than are homeowners.  The result of such policies is to reduce the supply or rental housing and increase rents, effectively as ask less “stable” or “desirable” renters to subsidize homeowners and to encourage going into debt and penalize those who wish to avoid the risks of mortgages and the possibility of later down markets.         


            Everyone knows that getting a mortgage requires an extensive credit check, but so does getting an apartment and in some cases getting and keeping a job.  Employment-related creditworthiness may become more important in coming years as employers feel the pressure for extra due diligence in protecting their businesses and the privacy of their customers.

            There are three major major credit reporting companies (Experian, formerly TRW; Equifax/CBI; Trans-Union). (There used to be companies Chilton and Pinger.) But there are many credit reporting agencies and services that provide combined reports from these three companies. An item on one company’s report does not necessarily appear on the others. Consumers, often through larger ISP’s such as AOL, may obtain regular combined credit reports automatically warning them of problems.

            Employers and lenders will tend to regard consumers or employees as responsible for their own credit histories. The federal Fair Credit Reporting Act gives consumers certain rights to dispute inaccurate derogatory information and have it corrected.  Consumers with commonly used names may have more difficulty with inaccurate information than those with unusual names or unusual spellings.  An extreme example of credit reporting fraud is identity theft, in which criminals get credit on other people’s credit cards, social numbers and the like, and sometimes this is difficult to undo. It is appropriate for policy makers to consider ways to make it easier for consumers to respond to fraudulent use of their credit. 

            Consumers who have moved frequently are exposed to a particular kind of problem with credit cards.  Often credit cards expire, and companies may send renewal notices with dues to wrong addresses.  Small bills may also get sent to wrong addresses and never get forwarded (although this is becoming less likely as the USPS improves its NCOA systems).  The bank may allow small bills to go onto bad debt, but if the bank is bought by a larger bank, the newer bank may sell the debt to a collection agency. Voila, the consumer suddenly has a derogatory item on his reports, years old, with a huge percentage of interest.  The collection agency (however illegally) is likely to be unwilling to help the consumer investigate the claimed debt, and may even be negligent in removing the item even if the consumer pays it.

            Another possible problem may occur with consumers who have in the past sold homes under unqualified assumption during the real estate busts of the late 80s and early 90s (when homes, especially condos, were often worth less than what was owed on them).  They may still be liable for these mortgages indefinitely, and be unreachable when some years in the future a future assumed owner defaults and the bank forecloses. It is possible in some states for the original bank (or another bank to which the mortgage has been sold) to get a default deficiency judgment against the consumer without the consumer’s knowledge, if he/she cannot be reached because of multiple relocations. The possibility now of locating borrowers on the Internet could conceivably spur the efforts of creditors to locate them even for very old debts; I have not heard that this has really happened, despite the wide availability of Internet services claiming to be able to skip-trace individuals.  I have not heard that this has been common in recent years, however. 

RETIREES on fixed incomes and renting apartments

            An interesting side issue for retirees occurs when they are not working but want to rent apartments. What happens when a retiree (age 59-1/2 or greater) has an ample 401K (or IRA) but a relatively small pension (or no pension) because of recent corporate trends? For my own situation, I have sampled a number of apartment complexes in northern Virginia. About 75% will allow retirees to use “self paid taxable income” from 401K’s to qualify, as long as they are paid out in fixed disbursements. Keep in mind that some 401K plans only allow fixed withdrawals or annuities for specific periods (sometimes lifetime) and therefore the amounts may be insufficient.  Traditional IRA’s are usually more “liberal” but that may undermine the theory that the renter is actually getting previously earned income from a fixed disbursement controlled by a third party (that is, so the renter could not gamble his accumulated wealth away in Las Vegas, for example).  But some apartments (mostly gardens and lower-end) will not rent to applicants that do not demonstrate income-earning ability regardless of cash savings, and a few would require very large cash reserves (like $500,000) on the theory that the applicant should have sold a house first. I’d like comments on this since it is an emerging issue. Email me a

            A big issue has been the conversion of apartments to condos, especially during the period of low interest rates and run up of prices from 2002 to 2005. Retirees who rent could find themselves force to move and qualify for other housing. That is one hidden advantage to home ownership: if you can pay the mortgage (and homeowner’s fees and taxes) they can’t kick you out. That observation may form part of the intangible value of a condominium property, which otherwise might seem overpriced given the value of the physical cube of space. Real estate is supposed to be finite, yet air rights and upward building challenge that notion, as Donald Trump could attest.

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