Florida Commercial Law

Florida Gov. Crist Vetoes Property Insurance Rates Bill - Was that a Good Idea?

Florida Gov. Charlie Crist has vetoed a measure that would have allowed some insurers to charge unregulated property rates stating that it would allow them to essentially “red line” areas of the state

The governor said that HB 1171, the “Consumer Choice” bill, permitting unregulated rates for carriers that have a surplus of at least $200 million and a ratio of net written premium to surplus of no more than two to one would hurt emerging Florida domestic companies.

His decision angered insurance interests, but drew praise from a consumer group.

Insurance Commissioner Kevin McCarty had urged the governor to veto the bill, drawing anger from the bill’s sponsor, State Senator Michael S. Bennett, R-Bradenton. Sen. Bennett claimed Mr. McCarty had made assurances he would not oppose the bill before writing a letter to Gov. Crist asking for the veto.

In his veto message, Gov. Crist said rates have remained relatively stable since passage in January of a bill which lowered rates by 15.9 percent. The measure he vetoed would reverse that, he argued, by allowing certain insurers to charge excessive rates at a time when people cannot afford to pay them.

He also said the state has added new insurance companies and “a significant amount of new capital” since 2006, and the bill, he added, would “disrupt the effort to build an increasingly competitive insurance marketplace….”

Insurance company trade associations argued the market would be more competitive, with consumers having the choice to insure with companies charging either regulated or unregulated rates.

But, Gov. Crist said the select few insurers that could charge unregulated rates would simply pass on bad risks to non-qualifying competitors and Citizens Property Insurance Corporation, the state’s insurer of last resort.

"Commissioner McCarty knows that Gov. Crist carefully considered this bill and has done what is best for the people of Florida," Mr. McCarty’s office said in a statement.

Robert Hunter, director of insurance for the Consumer Federation of America (CFA), supported the veto. “This legislation would have let insurance companies raise home insurance prices at will in Florida's uncompetitive insurance marketplace. This bill was an invitation to insurers to game the Florida regulatory system and abuse consumers.

“No insurance rates could have been found to be too high, no form of discrimination could be found to be unfair if a policy is issued under the terms allowed by the legislation.”

Eli Lehrer, director of the conservative think tank Competitive Enterprise Institution’s Center for Risk, Regulation, and Markets, attacked the veto saying it will likely leave State Farm Insurance with no choice but to continue its withdrawal from Florida.

Because the bill only applied to larger highly capitalized insurance companies, it is likely that the bill would have only applied to State Farm if it had passed, essentially giving State Farm carte blanche to charge whatever it wants.  This would have allowed them to "drop" policies without following the state regulations for dropping policies.  The state has regulations on how companies may drop policies, requiring companies to give advance notice and prohibiting companies from dropping policies that have had a recent claim without finding another insurance company who is will to offer comparable coverage.  If this law had been implemented, State Farm would have been able to simply raise the premiums on all the policies that it wants to drop to a level that is so high the customers would be forced to replace the policy with a more affordable one from another insurer or the state of Florida underwritten Citizens Insurance.

That could potentially be catastrophic for the state because many insurance insiders believe that State Farm is the only company that is adequately capitalized to absorb the losses from another major hurricane hitting the state of Florida.  Many have speculated that Nationwide would be bankrupted by a major hurricane hitting Tampa or Palm Beach, and Allstate has already withdrawn from the state because it cannot risk the major exposure, and USAA is doing everything it can to avoid writing policies in Florida as well.  It is obvious that the state's Citizen's Insurance does not have the capital for such a major event as the state of Florida's capital is only 1/9 of Nationwide's and the state is completely dwarfed by State Farm. 

It is rumored that Gainesville-based Tower Hill Insurance has the ability to survive major hurricanes because of its strategic and extensive re-insurance policies.  This means that Tower Hill has bought catastrophe insurance for itself, so that large re-insurance companies (probably Swiss companies) would be on the hook to pay for Tower Hill's hurricane claims in excess of a pre-set amount, such as $5 million. 

The larger companies, such as State Farm, Nationwide, and Allstate, dropped their re-insurance after Hurricane Andrew because of huge premium increases and because it was believed that they were so large that they could cover such catastrophic events without re-insurance.  After all they had survived Andrew.  The theory was that major hurricanes (Cat. 3 and above) only hit Florida once every 10 years, so these companies can afford to pay the claims for one or even two and then re-build their reserves before another major catastrophe. 

2004 proved that this strategy was a foolish gamble.  4 major hurricanes hit Florida within 6 weeks.  While the insurance companies were in crisis mode dealing with the monumental amount of claims from this unprecidented hurricane season, 2005 followed with 4 more major hurricanes hitting Florida, including Hurricane Katrina, which caused amazing devastation throughout Mississippi and Louisiana.  Because these are national companies, these huge losses in other states are undermining the companies ability to operate under-capitalized in Florida.  Quite simply, continuing to write homeowners' policies in Florida is putting entire Fortune 100 national financial services companies at risk of Chapter 7 bankruptcy -- not something that our current economy needs right now.

The 2004 and 2005 hurricane seasons wiped out much of these companies' capital, and after 2005, the re-insurance companies have refused to issue them policies at rates that would be affordable for the companies, given how tightly the state is regulating homeowners' premiums.  So, these large companies are really between a rock and a hard place, unable to get re-insurance and unable to charge rates high enough to adequately capitalize the companies for the risk that they are underwriting.  They are also unable to drop a lot of these policies due to strict state laws surrounding policy cancellations.

However, as much as I can sympathize with these companies' predicament, I think that the state-owned Citizen's insurance is in much greater danger, putting every Florida taxpayer on the hook for the mess that will result.  Ever since 2004 and 2005 hurricane seasons, Citizen's Insurance has been issuing policies for the state's riskiest real estate for ridiculously low premiums that don't even begin to cover the risk.  These policies are backed by the full faith and credit of the state of Florida government.  This means that when the next major hurricane catastrophe hits the state of Florida, all of the state's taxpayers are going to be in for nasty tax assessments.  If you think Florida's economy is struggling now, you just wait until the state is trying to pay all these hurricane claims. 

Governor Crist did absolutely the right thing.  Signing that bill would have allowed the state's best capitalized insurance company to drop all the policies it wants, leaving Citizen's Insurance to continue to pick up the slack.  The state government needs to do whatever it can to keep State Farm in the state and to get off all the excessive risk that it has underwritten with Citizen's Insurance.

Considering a Reverse Mortgage?

Considering a Reverse Mortgage?

Changes to Fannie Mae margins affect reverse mortgage process

Many changes have certainly been brought to the real estate industry in 2009. Just about all homebuyers and homeowners have been impacted in one way or another. Another group of homeowners is now feeling the effect: seniors.

Seniors have traditionally turned to reverse mortgages as a way to help boost income while remaining in their homes. But a recent—and unexpected—change from Fannie Mae allow for higher margins (the interest rate spreads that lenders collect on a loan) for reverse mortgage lenders. Margins can now fluctuate throughout the entire funding process. Fannie Mae reported that the company instituted the pricing adjustments in effort to bring more investors and more cash flow into the reverse mortgage industry.

This change potentially brings new risks for seniors. The continually changing margin means that seniors won’t know the total amount they can borrow until close to or even day of closing. And as the competition for this business increases among mortgage lenders, so does the risk for fraud.

“It's much more of a buyer-beware environment now," Bronwyn Belling, reverse mortgage specialist in the AARP Foundation, was quoted in a recent Palm Beach Post article. "It's clear that things are not as simple as they used to be."

Even though the rules are changing, reverse mortgages will likely continue to increase in popularity, as retiree stock accounts have lost value due to the economy. The Federal Housing Administration approved 115,176 loans in 2008, which was an increase of 6.4 percent from 2007. And, that number is expected to grow in 2009, according to the National Reverse Mortgage Lenders Association which predicts approximately 150,000 reverse mortgages in 2009.

The pros: Your home is your piggybank

The No. 1 benefit of reverse mortgages is that you can tap into your home’s equity while you live there—and you never have to make repayments. As the name suggests, reverse mortgages are the mirror image of traditional home loans; instead of a borrower repaying a lender each month, the lender pays a borrower an income based on his or her home equity. This can be a great way to handle all kinds of expenses, including home repairs, medical bills or other unexpected costs.

Reverse mortgages can offer borrowers renewed financial freedom. You can choose to receive payments as monthly income, in one lump sum, as a line of credit or as a combination of all three. You may use the money you borrow for any purpose, as long as you continue to pay property taxes and maintain the home.

The cons: You commit to staying put

If you’re not sure that you will live in your home throughout your golden years, a reverse mortgage might not be the best option. Before committing to a reverse mortgage, it makes sense to explore other living arrangements. Maybe you’ve considered moving to a smaller house or apartment. Or, perhaps you would receive more money from selling your house. If after some research you decide that there’s no place like home, then it makes sense to explore reverse mortgages further.

If you’re planning to borrow a small amount, a reverse mortgage is not a good option. Interest rates on smaller loans tend to be higher and up-front loan costs can make a small reverse mortgage overly expensive.

Finally, if leaving equity to your heirs is a top priority, weigh your options carefully before deciding to take a reverse mortgage. Lenders collect principal and interest when you die or sell your home, diminishing your equity to pass along.

Though it’s more important than ever to do your homework before entering into a reverse mortgage agreement, there are still many advantages to reverse mortgages. Talk to your real estate attorney and a HUD counselor to determine if a reverse mortgage is the right step for you.

The above information on Reverse Mortgages was provided by Charles J. Kovaleski, President of Orlando-based Attorneys’ Title Insurance Fund, Inc., (The Fund) the leading title insurer in Florida and the sixth largest title insurance company in the country.  Acknowledged as the Florida residential real estate expert, The Fund has been in business for more than 50 years.

Bogin, Munns and Munns is a member of the Attorneys' Title Insurance Fund.  If you have questions about a reverse mortgage and would like to talk to a real estate attorney, you can call (352) 332-7688 in Gainesville or (407) 578-1334 in Orlando.

How to avoid the 'death tax'

 

How to avoid the 'death tax'

      (Fortune Magazine) -- If 84-year-old Bob Sievers of Pacific Palisades, Calif., had his way, Congress would scrap the estate tax altogether when it considers an Obama administration proposal on the future of the controversial tax. As co-owner of a lumber business for 40 years, Sievers built his wealth from scratch and paid taxes on his earnings every step of the way.

      "What we have, we earned, and we paid tax on everything we earned, and we don't want to be taxed again when we die," says Sievers emphatically. Sievers, along with his wife, Carol, first set up an estate plan in 1982, and they have updated it numerous times over the years to reflect changes in the value of their nest egg and the expansion of their family, which now includes five children, 11 grandchildren, and four great-grandchildren. They quickly discovered they would need to establish an intricate network of trusts and other tools if they hoped to pass along the bulk of their hard-earned assets to their children without Uncle Sam taking a sizable chunk in taxes.

      The estate tax - known as the "death tax" among its detractors - will be a hot topic in coming months. The tax-cut package enacted in 2001 called for it to be phased out over 10 years. This year, for example, only the portion of estates that exceeds $3.5 million for an individual and $7 million for a couple is subject to tax; the rate is 45%. This exemption is far bigger than in 2008, when the tax applied to estates valued above $2 million. But the 2001 tax cuts expire after next year. If Congress doesn't act, the estate tax will disappear in 2010 but will return in 2011 at the pre-2001 level of $1 million with a tax rate of 55%.

      President Obama has said that he wants to keep the estate tax where it is today: at 45% on amounts above $7 million (for couples). Estate-planning experts speculate Congress will pass a new law before year's end to prevent 2010 from being a tax-free year. "They can't suffer the revenue loss" from removing the tax for a year, says Jay Adkisson, an attorney and founding partner at Riser Adkisson LLP. (One thing that's not expected to change: A spouse can inherit an unlimited amount tax-free through the marital deduction.)

      Regardless of what happens in Washington, creating an estate plan and keeping it updated is critical. A smart plan uses tools, ranging from life insurance to trusts, to lower or even eliminate the estate tax and to prevent strife and bitter feuds among beneficiaries after a death. "Poor planning can destroy a family," says Les Kotzer, an attorney who is the author of "Where There's an Inheritance - Stories From Inside the World of Two Wills Lawyers." If no plan is in place or if terms are not explicitly spelled out, chaos can ensue, he says. Kotzer recalls a man who made a handwritten will leaving "all his personal stuff" to a son. A bitter court battle erupted as a daughter claimed "stuff" meant his power tools and personal possessions, not gold and diamond rings that their mother had owned. The son vowed to fight her to the gritty end, claiming he hoped his sister's legal fees would cost more than the jewelry was worth. Here are some tools you and your lawyer or estate planner can use to avoid such disasters.

The joy of giving

      Let's start with a couple of simple techniques. For example, giving away money during your lifetime can reduce the value of your taxable estate. Here are the basics: You can give any number of individuals up to $13,000 each year without any tax consequences. Amounts above $13,000 are subject to the gift tax, but you also have a tax credit that allows you to give up to $1 million during your lifetime without incurring taxes. And there is no limit on how much you can give tax-free when you pay someone's higher-education or medical expenses directly.

      As far as how you make those gifts, you can simply hand the money over to the recipient, but you have other choices. One popular method is a so-called Crummey trust, often used for a child, which allows you to impose conditions on how and when the beneficiary can get access to the money.

Life insurance.

      If you're planning to leave property, a business, or other noncash assets to your heirs, life insurance can be a lifesaver. If you purchase a policy that will cover the taxes on your estate, your heirs won't be faced with having to sell assets to pay the taxes. "Mom and Dad give money to the kids to take insurance out on their lives," says attorney Jeffrey Condon, author of "The Living Trust Advisor." "When they die, the insurance company will write a check tax-free to the kids." You can also set up a life-insurance trust to be the beneficiary of the policy: That way, the death benefits won't be taxed as part of the estate.

      Geoffrey VanderPal, of Elite Financial Planning Group of America in Las Vegas, recalls one client who had a $40 million financial services business that he wanted to pass on to his son. The client ignored suggestions that he set up an estate plan with a life insurance trust to cover the taxes on the estate. When the client died, the son couldn't afford the $18 million in taxes and had to liquidate the business.

Put faith in trusts

      Trusts are one of the most popular tools for reducing estate taxes. But they are expensive - setting one up can cost anywhere from $500 to $20,000, with most falling between $2,000 and $5,000 - and complicated. We're not talking about living trusts, by the way. Living trusts can keep your estate out of probate court but generally do not help avoid estate taxes. To do that, you need to set up an irrevocable trust. One popular form is the grantor-retained annuity trust, or GRAT. With a GRAT, you transfer assets into a trust that has a set life, typically five years. You receive annual payments from the trust, based on an interest rate set by the IRS. The payments are calculated so that the trust "zeroes out" by the end of the term, which means you will have gotten back your original assets plus the IRS rate of interest on them. Any appreciation above that interest rate goes tax-free to the beneficiaries of the trust, such as children and grandchildren.

      Since the current IRS-designated rate is low - only 2.4% - this trust is an attractive place right now to put battered stocks, property, or other assets that are expected to see big gains in the next few years. "We've seen an explosion since last December in the number of individuals who are making and thinking about doing GRATs," says Gail Cohen, head of global wealth management at Fiduciary Trust Co. "People are thinking they're going to see jumps of 25%, 30%, or 50% in securities in the next two years because the values had gone down so low."

      You can also use trusts to give money to your favorite causes. For example, with a charitable lead trust, or CLT, the charity gets annual distributions, with the balance passing to your heirs at the end of the term. In a charitable remainder trust, or CRT, the donor gets annual distributions from the trust, with the balance passing to the charity when the term ends.

      In addition to trusts, limited partnerships and limited liability companies can play a role in your estate plan. Under IRS rules, you are allowed to transfer real estate or other assets into a partnership at a discount to market value, typically 20% to 30%. Then you can give shares in the limited partnership to your children. This maneuver effectively lowers the value of the asset for tax purposes.

Stay-up-to-date.

      Once you have an estate plan, update it regularly to reflect changes in the value of the assets, revised tax laws, a new marriage, or the birth of children. "People really need to revisit their estate plans today in light of the shrinking values of their homes and their businesses," says Cohen.

      And don't procrastinate. When actor Heath Ledger died in January 2008, his outdated will did not include his infant daughter, Matilda Rose, and a family battle ensued over his assets. "Nobody wants to talk about death, and nobody wants to talk about money," says Holly Isdale, managing director of Bessemer Trust. "It's like planning a huge party that you're never going to attend." But you have to make sure you've set up your plan properly, she says: "You're not going to be around to fix it if it goes wrong."

     If you live in Florida and want to create or update your estate plan, call Bogin, Munns & Munns, P.A. at (352) 332-7688.  We have several attorneys who are qualified to assist you with your estate plan.  Most plans can be set up within 1-2 weeks.

Rebates, Refunds, Kickbacks and Incentives from Realtors

Rebates, Refunds, Kickbacks and Incentives from Realtors

Federal law allows real estate licensees to give prizes, money, gifts, and other valuable consideration (I will call "incentives") to parties to induce them to enter into real estate transactions. If this sounds simple, do not be deceived. Federal law does not allow a real estate licensee to give or receive a kickback or unearned fee in connection with certain real estate transactions. As we will see, there are other hidden problems with the giving of such incentives.

Here are some examples of what the law allows a licensee to do:

1. Pay cash to owners who list property for sale.
2. Pay cash to a customer to get him or her to buy a home.
3. Give a car or refrigerator to customer to get him or her to buy a home.
4. Give one month’s free rent to a customer to get him or her to rent an apartment.
5. Pay repair expenses to get a buyer and seller to contract or close a sale.

Giving any incentive without violating another law depends in part on how it is given. All incentives must be given in advance or at closing and must be disclosed to all interested parties. Interested parties in the case of a sale are the sellers, buyers and lender or guaranteeing agency (FHA, VA or HUD, for example.) It is a violation for a licensee to misrepresent or fail to disclose to any lender, guaranteeing agency, or any other interested party the true terms of a sale of real estate. Obviously, an incentive of material value would matter to these parties and must be disclosed at every step. No disclosure would violate this section of state law and invite FHA, VA or HUD to consider appropriate sanctions against an offending licensee. Criminal charges are also possible in some cases. A classic example is the undisclosed loan or gift to a buyer without which the buyer could not have qualified for a mortgage loan.

The federal law in this area is the Real Estate Settlement Procedures Act (RESPA). The provisions of the act are broad and complicated. For purposes of information, I am going to simplify the relevant sections here. Licensees should seek legal advice on compliance with RESPA.

Note, RESPA does not apply to all transactions. It applies only to certain transactions involving federally related mortgage loans. Generally, a mortgage is federally related if the loan is a first mortgage financing the purchase of a one to four family unit structure in the United States and is governmentally guaranteed, insured, supplemented, or assisted.

RESPA prohibits paying or receiving any unearned fee, kickback, or thing of value for the referral of business. It appears these payments are illegal whether or not they are disclosed.

Here are some examples of illegal kickbacks:

1. Payment of a fee by a title insurance company to an attorney or broker for referring business to the title insurance company.
2. Payment of a fee by a mortgage originator to a real estate salesperson for referring business to the mortgage company.

The best definition of an unearned fee is the common sense one which says an unearned fee is any fee paid which is not for the performance of legitimate services actually performed. Steering or referring business to a company is not considered a legitimate service.

No law prohibits earned fees in connection with real estate transactions. A licensee may earn a commission split for referring a buyer to a listing broker. A broker may legally earn a fee for originating a mortgage loan, provided the broker actually is the originator and does the work of an originator. Similarly, a broker who also holds an insurance license may legally earn a commission for homeowner’s insurance written on a property in a transaction, but they cannot require the homeowner to buy insurance from them because Florida has anti-coersion laws which prohibit that.

If you have any questions about which incentives are legal for Realtors and which disclosures are required, you can call Zana Dupee at Bogin, Munns & Munns, P.A. at (352) 332-7688 and schedule a consultation.