Deed restrictions for Chamonix are lacking
When Vail Commons was the first deed restricted community in Eagle County about 20 years ago, mortgage lenders were struggling with how to deal with getting financing approved for traditional 30-year fixed loans. I assisted the town back then in getting Fannie Mae and Freddie Mac (which ultimately provide virtually all of the 30-year fixed mortgage money) to approve lending based upon the deed restrictions. In those days it was a novelty for the agencies to do such loans and a whole section of rules evolved because of those efforts that now serve deed restricted communities nationwide.
Deed restricted properties
To get the agencies to buy loans secured by deed restricted properties it was a requirement that if the property was foreclosed and the lender got stuck with it, then the local government that put the deed restrictions in place would have to redeem the property from the lender for the amount due or the deed restrictions would go away and the lender could then sell the property at free market value.
Fast forward 20 years and the rules have changed, kind of. The rule requiring the town to buy the property from the lender or the deed restrictions go away has been eliminated and the agencies will buy loans with deed restrictions that survive foreclosure. As such, the proposed deed restrictions on the new Chamonix units are written to survive foreclosure with no action from the town of Vail.
But there is also a provision that if deed restrictions do include the requirement, that the town buy back the unit to preserve the deed restrictions, the homeowners get an enormous opportunity to save tens of thousands of dollars. The rule is that in such a case, a homeowner refinancing his property on a rate and term (meaning he is not taking cash out) can have the appraiser determine the value of the unit as if it were unrestricted. This logic is that if the lender ends up with a free market valued unit because the town declined to redeem the unit after foreclosure, the unit is worth a lot more money.
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Mortgage rates and mortgage insurance are influenced heavily by the loan-to-value. Buyers with less than 20 percent down payment will have to pay a higher rate and mortgage insurance which may equal several hundred dollars per month.
If the Chamonix deed restrictions included the above provision requiring the town to buy back the property to maintain the deed restrictions, then homeowners who had minimal down payments could likely refinance within months of their purchase and have their units valued much higher for purposes of determining loan-to-value and terminate their mortgage insurance premiums. The new appraised value would not reflect the actual price the homeowner could sell for, but rather the price the lender could sell for if they end up with the property via foreclosure and the town would fail to redeem the property from the lender.
Let’s look at an example: Say a unit sold for $450,000 and the borrower had 10 percent down and a 700 FICO credit score. His initial rate today would be about 4.50 percent and his monthly principal and interest payment would be $2,052.11. On top of that his monthly mortgage insurance would be $138.00 per month.
A good project
If rates remained steady and the Chamonix deed restrictions were inclusive of the above provisions, then the owner could refinance shortly thereafter and if the property appraised at free market value — at, say, $600,000 — then the owner would have a loan to value of 68 percent and could get a rate of 4.25 percent with a payment of $1,993 and no mortgage insurance. His total monthly savings would be $197 per month. Over 10 years, that totals $23,640.
I do think Chamonix Vail is a good project and that this issue should not necessarily be a deciding factor to buyers considering this choice, but it is a factor that buyers should have on their radar. I’ve asked the Vail Town Council and housing office to include this deed restriction on multiple occasions but at this point they decline to, citing the possibility the town might not be aware of a foreclosure and unintentionally lose a deed restricted unit.
As written in the Vail Commons restrictions, the town would receive notice via certified mail at such time the lender ends up with the unit, and have 30 days to cure the situation, but the council maintains that might not be enough time to act accordingly. The foreclosure would also be published in the Vail Daily and in an easy-to-follow database with the Eagle County Trustee. It is unfortunate that the town seems to not realize the magnitude of the opportunity they are denying local home buyers.
The good news is that deed restrictions can be modified in the future. Perhaps after the units have closed the new homeowners association can approach the town of Vail and negotiate this issue to their advantage.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon. He welcomes mortgage related inquiries from local lenders. He can be reached at 970-748-0342.