For at least the last thirty years, I've been hearing "affordable housing" advocates yammer about the high cost of housing, and how working families can no longer afford "decent" housing, which they apparently consider to be the three or four bedroom, two bathroom detached home. They go on and on about what is necessary to create more of this type of housing and our "moral obligation" to create more of it. In light of the current situation, I'm going to make a conscious effort to continue my occasional series on factors that influence the overall market for housing. I'm going to examine the broad macroeconomics involved, the assumptions necessary, whether it is or is not long term sustainable, and the choices we face in sustaining or curtailing it.

Today's topic is how the housing market of today came about and what sustains it. A century ago, roughly eighty-five percent of the population did not live in major cities, but rather in small farming communities which more or less blanketed the nation. Suitable land for housing could be anywhere, and so it was much more readily available and much cheaper. When the criteria is "anywhere there's land I can farm," you can choose any arable parcel and build a house on it. Even if you don't live on a farm but in one of the small towns, when you can walk the length of the town in five or ten minutes, it's a lot easier to arrange housing for everyone. If one particular town becomes too crowded, the next one over became attractive. If you need a place for a few more people, one of the farmers whose land immediately surrounded the town could usually be persuaded to sell some land. The cities were dense affairs, much more like european cities than is the case today. Indeed, the few large cities we had built up before World War II still retain that urban core with dense multistory housing that is characteristic of the period. The typical pattern of the day was that young women, in particular, would continue to live with their parents until marriage. Young men of marriageable age would most often live in rooming-houses or boarding houses once they became gainfully employed. Apartment dwelling was only somewhat expected for young couples just getting started and urban dwellers who might have been together for many years, yet could not afford anything better in close proximity to their profession. Urban housing was tight-packed because the land was very expensive by standards of the time, and urban transportation was communal to a far greater extent than today. It is much more common today for even people in Manhattan to own and drive cars than it was before World War II. The use of steel as a building material was a big deal for those urban centers because it meant that it was possible for them to build further up. San Diego is very much a post war city, but even we still have areas that were built in those times - packed in tightly, cheek by jowl, extremely dense living. Once upon a time, before reliance upon military work and bad policy ruined it, San Diego was a major west coast port and the base for the largest fishing fleet in the world - two of my aunts married tuna fishermen. Even further out, in what were before WWII the "newly urban" areas of North Park and National City, the housing very much resembled classic "company town" housing - 600 and 800 square foot one and two bedroom cottages sitting on 3500 square foot lots. These were the era's predecessor to the exurban bedroom community of today, usually owned by members of the skilled trades or young professionals. The core suburbs today such as La Mesa were still economically speaking, farming communities. Even Mission Valley was mostly farms until the early sixties. During this time frame, only the comparatively wealthy lived in larger houses within city limits. If you go to Mission Hills above Old Town, or Grant or Banker's Hill (and here and there in other neighborhoods) you can still see a very few of the large houses for the well-to-do of that era.

Indeed, the three bedroom, two bath detached house in an urban setting for the working class is almost entirely a creation of the post World War II mood in this country. For several years, very little housing had been built, and now these men who had gone off to war and saved the world as seventeen and eighteen year olds who had traditionally remained with their parents or moved on to boarding houses until they got married were now returning as twenty-two and twenty-three year olds who were traditionally married and starting families by that point in their lives. The women to marry them wasn't a problem; the housing to put the new families in was. These folks had several years of savings (war bonds, the wartime sacrifices, etcetera), and the traditional apartments were considered a poor and at best temporary inconvenience until that new modern post-War marvel - tract housing - could be built in sufficient numbers. And if such housing was horribly inefficient in terms of land, utilities, and transportation, nonetheless we were the wealthiest nation in the history of the world, and accommodating their desires for such was the least the nation could do for our valiant warriors. Furthermore, with the aforementioned savings they had accumulated during the war, the young men and their new wives could afford to pay for this new housing. If you're wondering about "It's a Wonderful Life," keep in mind that most of that 1946 movie takes place well before the war, and even by the time of its release, the country hadn't yet shifted very far from the way things were done pre-War.

The land was available and largely vacant then, and certainly could not and can not be covered effieciently by public transportation, but the newly affluent families (through savings during the war and better jobs after) could afford far more automobiles as well. For the first time, women were staying in the work force in significant numbers until motherhood. There was plenty of land available. As a young child in the early sixties, I can still remember when there was space between all of the suburbs, even when we drove to Los Angeles to visit family members or Disneyland. I-5 was brand new thanks to President Eisenhower, and from the point we got out of the Pacific Beach, there weren't any towns visible from the road, just widely separated houses, until we passed Oceanside and Camp Pendleton, at which point there wasn't anything more until San Clemente and San Juan Capistrano, then another good long way past that before there was anything more again. It wasn't until just before Disneyland that we saw more city. The I-5/405 split in the middle of present day Irvine was out in the middle of nowhere back then. My parents almost bought a 320 acre farm just east of the Del Mar fairgrounds the year I was born. One of my best friend's parents had considered a farm in Mission Valley, despite the fact my friend's father was in the navy. If you clicked on the images, you know none of these are empty land any longer.

Why not? Suburban housing and to a lesser extent, support services have eaten it up. The only open area between the Mexican border and the Tejon Pass is the stuff that's been held aside for other reasons, such as Camp Pendleton, which the Marines badly need. Los Angeles with 3.8 million people has an area of almost 470 square miles, while by comparison cities of similar population elsewhere such as Ahmedabad in India, Alexandria in Egypt are a fraction the physical size. If we're going to keep doing the same thing, we're going to run out of places to put everybody. In fact, in Southern California we have essentially done so. New development is taking place in Hesperia and Victorville, or out past Banning, or out in Hemet or eastern Murrieta, all of which are an hour and a half minimum trip time from the center of the urban areas they service, even if you're driving it at an hour when there's no traffic. Nobody wants to drive an hour and a half each way to work - especially not in stop and go traffic when gas is this expensive.

This also creates a lot of logistical problems. Most inhabitants of the cities concerned would have no trouble naming the most salient problem, which is transportation. When you have that many people that spread out, and you need to move them all significant distances at pretty much the same time, it takes a massive amount of transportation infrastructure to do so. US 395, the predecessor to I-15, was one lane each direction from Escondido until just a few miles south of present day I-10. But it isn't just transportation. Utilities are a much larger headache to supply than sixty years ago as well, and the logistics of keeping that many people supplied with groceries and gas and everything else make the transportation and utilities problems seem easy.

Finally, there are legal and political barriers to continuing to build housing in this manner. Environmental concerns are the most obvious of these, but building codes, zoning, and other concerns form significant obstacles to its continuation, as does the consumption of land. Once upon a time Southern California was some of the most productive farm land there was. My wife's uncle was a well-off citrus grower until the developers bought his land for millions of dollars. I can remember (barely) large tracts of citrus in El Cajon and Lemon Grove and Escondido. The only reason the hillsides north of Escondido are still relatively uninhabited avocado farms is because they're steep enough to render development difficult. The same applies to all of the other agricultural land remaining.

All that aside, I would like for housing prices to be affordable, and for everyone who's going to grow up in this country for the next century to be able to afford the type of housing they want, where they want. Absent some major changes in public policy and employment practices, it's not going to happen. The land no longer exists, we can't afford ongoing losses in arable land (look up how few countries in the world are net exporters of food), the transportation networks are saturated, environmental regulations are restricting development as are legal hurdles such as necessary permits (which add roughly $20,000 per unit to the cost of new housing, but over $100,000 to the price due to constricted supply), and lets not forget legal challenges from NIMBYs, BANANAs and environmentalists who already have their 3 bedroom 2 bathroom suburban home, and whose property values just happen to increase in a manner directly dependent upon how far they can constrict the supply of new housing. In short, the current situation does not appear to be sustainable absent major societal changes.

Caveat Emptor

Original article here

Must you sell if you list at a specific price and the broker comes up with a qualified buyer?

in the US in general, no you do not have to sell, but you could still be liable to the broker for their commission. You might also need to justify why your decision was non-discriminatory (assuming that it wasn't), but if (for instance) your broker brings you someone you have had business dealings with in the past, and they have tried every maneuver possible to scam you after reaching agreement in those past dealings, you are (usually) quite justified in refusing to do business with them.

Talk to a lawyer, but generally speaking, if you do not have complete and perfect agreement between the parties on the contract, you do not have a valid purchase contract. If you didn't want to do business with (say) Bill Clinton or George W. Bush, such is your right as long as you refuse to do so on the basis of them being a particular individual, not based upon them being members of a class protected under anti-discrimination law.

In general, nobody can force you to sell unless you've agreed to a fully executed purchase contract. But I'm talking about legal force here, not economic. It can be expensive not to take a particular offer. I am not familiar with any cases where a real estate agent, listing or buyer's, was awarded a commission even though there was no transaction consummated, but that doesn't mean it couldn't happen. And lest the general tone of this article be mis-interpreted, refusing to sell on the basis of race, sex, religion, sexual orientation, lifestyle or any other legally protected reason is setting yourself up for a lawsuit.

List price is a representation that you would be willing to accept that price, but there are other proposed terms of the contract to consider. As I have said before, if you're still arguing about who replaces a given light bulb, you don't have a valid contract any more than you do if you're $100,000 apart on the price. I can't imagine stressing about a light bulb like that, but the point is just because someone offers you full list price does not mean you have to accept their offer. If the other terms proposed are onerous, if it comes attached with conditions you don't care to accept, or if it is merely from an individual who you have done business with in the past and are unwilling to be involved with again, you are usually within your rights to refuse the offer.

Or instead of an outright refusal, you can return a counter-offer back to them, which is usually the smarter thing to do.

Caveat Emptor

Original here

Purchase Money: This is a loan that enables you, in combination with your down payment, to actually purchase the property. If you spend cash to buy the property and get a loan the next day, that is not a purchase money loan. Whether it is or is not a purchase money loan has significant tax consequences everywhere, and significant legal consequences almost everywhere.

Rate/Term Refinance: This is a refinance that does not put money in your pocket for other purposes. As it is more usually defined, this is a refinance that does not put significant numbers of dollars in your pocket. These loans typically have the best rates of the three purposes. For A paper rate/term, you are allowed to pay off an existing first mortgage against the same property, you are allowed to borrow enough money to "seed" a new impound account, you are allowed enough money to pay up to one month of prepaid interest, and you are allowed up to 1% of the new loan amount, or $2000, whichever is less, to be put into your pocket for other purposes. In order to qualify as rate/term, A paper cannot do anything with an existing second (or third) mortgage, unless every last cent of that second (or third) mortgage was spent in acquiring the property, a fact which can force you to either do a cash out refinance or to subordinate your existing second mortgage to a new first trust deed. Sub-prime may have more forgiving definitions regarding other debts, but choosing a sub-prime loan because it allows your new loan to be defined as a rate/term refinance is like voting Cthulhu for President because you're tired of voting for the lesser of two evils. Sub-prime loans have pre-payment penalties by default, and generally carry higher rates.

The difference in tradeoffs between rate and cost can be small to non-existent between rate/term and cash out refinances, particularly at lower loan to value ratios. The difference also varies depending upon credit score, size of loan, and individual lender policy, but it can be quite steep. The point is to get an honest discussion of your options beforehand, not simply to sign up with some lender who pretends that the difference doesn't exist.

Cash Out Refinance is any refinance that does not meet the definition of rate/term. It puts cash in your pocket, it pays off other debts, it includes or combines or refinances a home equity loan or home equity line of credit that you took out for improvements or to pay other debts. Violating any of the requirements to be considered rate/term means that the loan becomes a "cash out" loan. Cash out refinances will usually have the least favorable set of rate and cost trade offs, what the uneducated think of as "highest rates" of these three purposes, at least at higher loan to value ratios. Depending upon the lender, cash out loans with loan to value ratios under seventy to sixty percent may have the same rate structure as rate term refinances. Cash out refinances also usually have slightly tougher underwriting guidelines than either of the other two categories. One specific example that trips a significant number of people is that there cannot have been anyone added to title in the last six months.

Caveat Emptor

Original here

One of the concepts I keep seeing without a decent treatment is the concept of leveraging an investment. Real Estate has this like no other investment. You go talk to a bank about leveraging eighty to ninety or even one hundred percent of your investment in the stock market, or the same percentage of a speculative venture, and see what happens. Be prepared for laughter, and they're not laughing with you. But for real estate the lenders will do it. Why? Because it's land. It's not going anywhere, and they're not making any more.

The fact is that real estate has the potential for leverage like no other. This is due to the interplay of two factors. One is the fact that you can rent the property out to pay for the expenses of owning it, and even if you use it yourself, you're able to save the money you would be paying in rent. Everyone's got to live somewhere, and every business needs a place to put it. The other, more important factor is leverage, the fact that you're able to use the bank's money for such a large portion of your investment. The bank will loan you anywhere from fifty to one hundred per cent of the value of the property. Yes, you've got to pay interest on it, but you're paying that through the rent - either the rent you'd save or the rent you're getting - and there are tax deductions that make such costs less than they might appear.

Now here are some computations based upon the situation local to me. Suppose you have a choice as to whether to buy a three bedroom single family residence for $450,000 (to pick the figure for a starter home) or rent it for $1900 per month. Let's even allow for the fact that the home may be overpriced by $100,000. You have $22500 - a five percent down payment. More than most folks, and you would invest that and the difference in monthly housing cost, and earn ten percent tax deferred if you didn't buy the house. Let's crank the numbers and see what they say.






Year

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

Value

$450,000.00

$374,500.00

$400,715.00

$428,765.05

$458,778.60

$490,893.11

$525,255.62

$562,023.52

$601,365.16

$643,460.72

$688,502.98

$736,698.18

$788,267.06

$843,445.75

$902,486.95

$965,661.04

$1,033,257.31

$1,105,585.32

$1,182,976.30

$1,265,784.64

$1,354,389.56

$1,449,196.83

$1,550,640.61

$1,659,185.45

$1,775,328.43

$1,899,601.42

$2,032,573.52

$2,174,853.67

$2,327,093.43

$2,489,989.97

Monthly Rent

$1,900.00

$1,976.00

$2,055.04

$2,137.24

$2,222.73

$2,311.64

$2,404.11

$2,500.27

$2,600.28

$2,704.29

$2,812.46

$2,924.96

$3,041.96

$3,163.64

$3,290.19

$3,421.79

$3,558.66

$3,701.01

$3,849.05

$4,003.01

$4,163.13

$4,329.66

$4,502.85

$4,682.96

$4,870.28

$5,065.09

$5,267.69

$5,478.40

$5,697.54

$5,925.44

Equity

22,500.00

-48,406.32

-17,287.01

15,999.55

51,604.93

89,691.37

130,432.52

174,014.27

220,635.59

270,509.51

323,864.05

380,943.34

442,008.77

507,340.18

577,237.20

652,020.69

732,034.20

817,645.65

909,249.05

1,007,266.37

1,112,149.54

1,224,382.64

1,344,484.16

1,473,009.54

1,610,553.79

1,757,754.34

1,915,294.15

2,083,904.97

2,264,370.91

2,457,532.19

Net Benefit

-31,500.00

-110,236.00

-94,761.88

-77,990.23

-59,828.07

-40,176.54

-18,930.59

-4,021.36

28,797.71

55,524.07

84,333.56

115,367.22

148,774.35

184,712.85

223,349.64

264,861.00

309,432.96

357,261.61

408,553.54

463,526.08

522,407.72

585,438.30

652,869.38

724,964.38

802,381.90

885,736.68

975,442.55

1,071,939.93

1,175,697.38

1,287,213.19


The Net Benefit Column is net of taxes, net of the value of the investment account. The cost of selling the property is also built in. Now most people won't really do this, invest every penny they'd save. I have intentionally created a scenario that contrasts a real world real estate investment where you bought in at a temporary top, with a hopelessly idealized other investment.

There is a potential downside, and it could be big. This is a real risk, and anyone who tells you otherwise is not your friend. Look at the beginning of years numbered 2 through 5 in the equity column. You haven't gotten your initial investment back until sometime in the fourth year. Look at years 1 through 7 in the net benefits column. You're immediately down $31,500, due to me assuming it would cost you seven percent to turn around and sell the property. A year later, due to me assuming the bubble has popped, you're down by over one hundred ten thousand dollars, as opposed to where you'd be in you put it in the idealized ten percent per year investment. There is no such thing, but for the purposes of this essay I'm assuming there is. This is the illustration of why you need to look ahead when you're playing with real estate - a long way ahead. A loan payment that makes you feel comfortable for a couple of years isn't going to cut it. You need something viable for a longer term. If you'll look at projected equity at the beginning of years five and six, it goes between fifty odd thousand and eighty some thousand, assuming you've been making a principal and interest payment. You have plenty of equity to refinance there if you need to. If you need to do something in year three, however, you're hosed. If you've been negatively amortizing, you're hosed. You owe more than the property is worth. The payment adjusts, you can't afford it, you can't refinance, and you have to sell at a loss, as well as getting that 1099 love note from the lender that says "You Owe Taxes!"

But now look ten years out. At the beginning of year 11, you have $323,000 in equity, and if you sell at that point, you are $84,000 ahead of where you would have been if you invested that money in the idealized investment I've posited. That's four times your original investment, and I only assumed real estate went up seven percent per year, whereas the alternative investment went up by ten percent per year. How could that possibly be right?

The answer is leverage. That $450,000 was almost entirely the bank's money. The appreciation applied to this entire amount. But you only invested $22,500. The bank isn't on the hook for the value; their upside is only the repayment of the loan. If the property goes to a value of $481,500 and then $515,205 (normal seven percent appreciation in two years), then that extra money is yours. Think Daffy Duck shouting "Mine! Mine! All Mine!". Daffy's got to pay some money to get the property sold, as real estate is not liquid. Then the bank gets all of its money. The bank always gets all of its money first. After that, however, then the extra belongs only to the owner, not the lender.

The lender gets none of the appreciation. This is all fine and well with them, by the way. They've been well paid whether the property increased in value or not. This money from increased value is all yours. This applies even, as in our example, if the property lost value for a while. Yes, if you had had to sell in year two, you'd have been up the creek. But you didn't; you kept your head and waited until the property increased again. Given that you didn't, the only numbers that are important are the numbers when you bought it, and when you sold it. The rest of the time is completely irrelevant to the equation, a fact that is true for any investment, by the way. Doesn't matter if the value is ten times what it was when you bought on paper, it only matters that when you actually sold, it was for a loss. Doesn't matter if the value goes to zero the day after you buy, and stays there for thirty years. If in the thirty-first year it rebounds to fifty or a hundred times the original purchase price and that's when you sell, then you really were a genius. Get it? Got it? Good.

So when the property appreciated back to $688,000 and change at the beginning of year eleven, and you only owe $364,000 and change, that's $323,000 in equity. You're almost fifty percent owner. Even after you pay seven percent to sell the property, you come away with $275,000, as opposed to a little over $191,000 that you'd have in the idealized but unleveraged investment.

Keep in mind this whole scenario is a hypothetical. Every Real Estate transaction is different. Every property is different, every market is different, and the timing makes a critical difference. That's why you can't just call your broker to sell it and get a check within seven days, like you can with stocks and bonds. That's why a decent agent is worth every penny, and a good one is worth more than you will ever pay us. But properly executed, a leveraged investment pays off like nothing else can, and real estate is the easiest way to make a highly leveraged investment that is stable until such time as it is favorable to sell.

Caveat Emptor

Original here

Yesterday, I published the first half of this article, describing the issues currently preventing a return to a more normal real estate market, and the facts that any proposed solution needs to be built upon. At a quick recap, the main facts to take into account are: magic solutions don't exist, people will continue to be people, The Mortgage Loan Market Controls the Real Estate Market. The main issues causing problems are: Overly paranoid underwriting, the overly restrictive requirements regarding income documentation that do not take into account societal changes since they were solidified in the 1930s, and a return of an old (and discriminatory) monster known as the 60% owner occupancy rule that is only going to get worse with time.

So, how would I fix this mess?

First off, I'd get rid of the 60% owner occupancy requirement for condominium loans. Other than scale, I can't see a difference between this requirement and Redlining, which has been illegal for decades. Furthermore, it's just helping the already rich get richer, to the detriment of those without large amounts of cash for a down payment. I described this issue at length in the first half of this article, so I don't want to make those who have already done so wade through it again, but if you haven't read the first part you probably should. This article will still be here when you're done. I've said many times I don't hate rich people and I want to be one of them, but they don't need the rules artificially rigged in their favor. Nor, unlike investments in employment producing enterprises, does this provide economic benefit to the economy. It's a purely parasitic transfer of wealth from those who don't have a large amount of cash to those who do.

Second, repeal or substantially amend the rules essentially prohibiting all but private money lenders from making more money when they make a riskier loan. I don't want to bring back loan sharks, not that they're kept out now. The current rules enacted in 2008 don't keep loan sharks out and they do keep out the enterprises with the ability to bring real competition back to the field. Allowing the regulated lenders with access to the capital markets to make these loans means that for consumers there is both more money available and a less costly alternative to loan sharks. More money legally able to make these loans means more supply for the same demand which means lowered interest rates, as well as meaning that people have the ability to choose whether getting the loan they can qualify for and get puts them into a better situation, instead of being locked out by law. In the early 1990s recession, such loans and the lenders who made them were at least one of the biggest drivers of recovery, perhaps even the biggest - but they're completely absent now because Congress and the Federal Reserve made them illegal in 2008. Allow mortgage securities investors to make more money if they assume a little more risk, and many of them will choose to do so. In fact, net returns on the secondary mortgage market are so low right now it's hard to imagine a scenario where the increased money they make does not more than pay for the increased risk, meaning pension funds and the like which are required to have so many percent of their money in mortgage securities can maybe start showing something more closely resembling a reasonable rate of return to those investing in them.

Third, we need something (or several somethings) that fills at least part of the niche that Stated Income loans used to fill. Yes, Stated Income was badly abused, but when it existed, there were people it was intended for and those who made responsible use of it for many years. The self-employed, those with large deductible expenses, those with gaps in employment or changes in career. When Stated Income loans went away, a large number of people who weren't having any difficulty making their payments suddenly found they were unable to refinance when their loan hit the end of the fixed rate period. People who were making the payments and had made ALL of their payments, had excellent credit, good reserves of money they could access if they had to, suddenly found their 5% interest rate shooting up to 9% or more but through no fault of their own were completely unable to refinance into something more affordable because the rules they originally qualified under were gone, made illegal at the stroke of a pen by the government. Many lost their homes solely for this reason.

I am NOT saying bring back Stated Income. I am saying we need alternative methods for documenting income that are generally acceptable, and acceptable in all loan niches from A paper down to what used to be called sub-prime. Methods of documenting and making acceptable to underwriters interrupted income. Change in Job Title or Career, providing you can show me a stream of income for at least four to six months at what you're doing now, should no longer be a reason to refuse a loan at all. I think the maximum you should be allowed is the stream documented in the current career, but income from all careers you may have had over some relevant period should be allowed up to that maximum. To illustrate what I'm saying, if six months ago you went from making a salary of $3500 per month as a clerk to $6000 per month as a nurse, you should get credit for ($6000x6months + $3500x18 months)/24 months = $4125 per month. If you did the reverse, you get credit for $3500 per month because the maximum is what you're making currently. Document the income, but be real about the economic changes that have happened since the traditional standards were adopted. Currently, if the sort of situation described in these examples applies, regulatory underwriting standards automatically reject the loan, and that's not in anyone's best interest. Current loan standards reject the loan even if someone went from being an employee making $6000 per month to being a contractor with a contract for $9000 per month for doing the same work, and that is nonsense on stilts.

Finally, I'd concentrate on the low end of the market - real first time buyers. I don't mean what the NAR considers to be "starter homes" of up to the conforming loan limit. I mean the people making $10 or $15 dollars per hour and the properties it would be appropriate for them to purchase as first time buyers. These people strongly tend not to have large down payments because they can't save them on such salaries. If a couple is both making $15 per hour, they're making about $4800 per month. If they've got car payments and maybe some debt, they can maybe afford a $200,000 loan at 6%, which may be higher than current rates but is low in terms of both historical rates and where we're most likely headed.

In most of the dense highly populated urban areas where the majority of the actual population lives, this means condominiums, or developments that may look like detached housing but are still legally condominiums. But condominiums or true single family detached housing, this price range is the real foundation of our housing market.

The real first time buyer market is damned weak for reasons that go back nearly 15 years now. In the Era of Make Believe Loans, the people in this market segment got leapfrogged by real estate agents and loan officers who realized they could make a larger commission by selling the people who should have been buying one of these properties a more attractive and therefore more expensive property. And now, with the 60% owner occupation rule for condominiums, the people who should be the market to buy these are locked out of the vast majority of condominium ownership because nobody will fund the loan they need to buy.

Let's take a slightly more in depth look at the situation of this couple who each make $15 per hour. With taxes and health care, if they can save $500 per month, they're doing better than 95%+ of their compatriots, and at $500 per month it takes them about seven years to save a traditional 20% down payment, assuming no financial setbacks at all. How many times you know has a car gone seven years without needing repairs? Why should their cars be any different?

What I'm trying to get at is that these people do not have enough for a traditional 20% down payment, and rules that require them to have that much are not based upon reality. Such rules will crash the market further, if implemented as currently proposed. This will result in further transfer of wealth from these people to the people who already have the cash for a down payment, who then are able to buy for a lowered price, and turn around and make a profit by renting to these people. Even a 10% down payment takes three and half years to save, while a 5% down payment takes just under two years, and none of these figures include the actual costs of buying the property nor any reserves so that a minor setback that occurs in the first couple years after purchase isn't an unrecoverable financial disaster. Think about that: Two years of scrimping and saving just to make a bare minimum 5% down payment, plus at least another year so they can pay the actual costs of buying, plus perhaps another year or more so they've still got something in the credit union in case the car needs fixing after they've bought the property. Minimum four years, more likely 5 or more, of focused disciplined saving just to have the money for a 5% down payment that the wealthy people in Congress and the lenders behind them are trying to outlaw as too small by a factor of 4. I have a great number of words for those who would mandate a 20% down payment rule for all loans, but I can't use any of them in a family friendly environment.

When I look at the loans which are out there and available to the general public right now, there is one loan program which the first time buyer with a 5% down payment can qualify for: The FHA Loan. The downsides, however, are many. The most significant is that the FHA loan is one of those government controlled loan programs out there that never did repeal the 60% owner occupied ratio requirement, and the FHA is now more firmly wedded to it than ever. Practically speaking, this means that once a condominium complex drops below 60% owner occupancy once, those wanting to buy there will never be able to get an FHA loan again. In point of fact, I don't know of any loan current loan programs requiring less than 25% down without a 60% owner occupancy requirement.

The FHA loan charges an insurance premium to borrowers to pay for the chance of default on the loan. Even if there is evidence somewhere showing that the 60% owner occupancy ratio significantly increases risk of default or loss, even if this requirement isn't illegal for precisely the same reason why Redlining is illegal, there is no reason on God's Green Earth why this insurance premium cannot be adjusted to pay for such increased risk, and if ever there has been a reason why we should make an entire insurance pool pay a slight increase in premiums, this is certainly that instance. The practical fact in favor of it is that paying to remove the 60% owner occupancy requirement prevents a crash in value of that development the first time it drops below 60% owner occupancy. Remember, The Mortgage Loan Market Controls the Real Estate Market. If the FHA won't lend on the complex, and every other lender requires 25% down payment in order to buy, people with less than 25% down payments can't buy there, which means the prices fall for that complex. When the value of a property falls, especially for reasons like that, likelihood of default skyrockets. There's a strong likelihood that removing the 60% owner occupancy requirement will lower the default rate over time, thereby lowering the risk and therefore the premiums necessary for that risk.

Even if such a step does not lower the default rate and therefore the risk over time, insurance pools are legally obligated to pay increased premiums in innumerable instances for purposes of social engineering. If you're not going to argue for the abolition of all of them, show me a more deserving candidate. You can't, because there isn't one. I'm a diehard libertarian and deficit hawk, and I'd vote for the US taxpayer financing this increased cost if there was no other way because the benefits to the treasury would far outweigh the cost. The FHA needs to abolish their 60% owner occupancy requirement immediately if they want to move people in urban areas onto at least the bottom rung of ownership. If they don't want to move people onto the bottom rung of ownership, then why do they exist?

Once people are flowing once more into the bottom rung of housing ownership, I think the market will pretty much sort itself out. It won't be immediate and it won't be perfect, but solutions alleged to have either of those properties rarely function anything like intended. Putting into effect small changes intended to push the markets back towards normal don't prevent someone from also finding some other solution I've overlooked, they won't hamper the implementation of additional ideas, and someone does try other solutions this cannot do anything but help push the market back towards normalcy. Those who currently own and live in bottom rung units will have equity increase as well as just flat out being able to sell, enabling them to in turn move to the next higher rung on the ladder if they so desire - and many of them desire, because they've been wanting to sell and move up for years but haven't been able to sell because the loan markets have been so screwed up, first in one direction (leapfrogging them) then the other (cutting them off from potential buyers).

As a general rule, It's really only first time buyers that have issues with saving a down payment. Once you're an owner, equity tends to increase over time. Not universally, and not evenly, but the vast majority of home owners are paying their balances down every month and when normal conditions apply, values do tend to increase for many reasons. The point is, if you buy a $100,000 condominium that increases in value to $130,000 over a period of several years while paying the balance down to $80,000, when you sell you'll walk away with $40,000 after expenses of selling - a perfectly acceptable down payment for much pricier properties. This is the "move up" or "property ladder" idea that, when the loan market isn't as screwed up as it has been, happens every day because of natural demographics. Normally, "move up" owners tend to have more of a down payment than they really need.

It takes some time, but the people in the rungs above that will see the benefits from this as well. It's straightforward macroeconomics. The "move up" or "property ladder" effect works on such a routine level that it's like water is for fish. Fish don't realize water is there, and most folks take the property ladder so much for granted that it is built into all of their assumptions about housing. The fact that it's so screwed up right now is itself one of the biggest things wrong with the housing market. Fix the property ladder, and you go a long way towards fixing the entire market, given time. It doesn't make everything magically better overnight, but as I told you at the beginning, there's no "magic wand that makes it all better right now" solution. There are, however, a few cheap and easy fixes that get things almost inexorably started in the right direction, especially if undertaken together.

Caveat Emptor

Original article here


Lots of folks have offered lots of different proposals for fixing the real estate markets and the mess we were in (and continue to be in to a less obvious degree). All of the ones I have seen have suffered from one or more of about three problems. First, the majority have been suffering from what I like to call "magic wand" syndrome: somebody waves this magic wand and all of a sudden everything is magically all better. Not gonna happen. Macroeconomics doesn't work that way.

Second, they think that people are somehow magically going to stop doing things in their own best interest. Sometimes I wonder if blunt enough language exists to get through these folks' mental barriers. Any proposed solution that wants to have a hope of being successful is going to have to acknowledge that people will continue to be people, and in the main, act in what they perceive to be their own personal best interests.

Third, they fail to understand that the loan market controls the real estate market. I'm going to be talking about the implications of this fact quite a bit in this article. If the loans don't exist, neither do the buyers, at least not in sufficient numbers. The alternative, waiting for people to be able to afford to buy with cash, would mean either a massive crash in housing prices - to the point where nobody can profitably build - or stagnation until massive inflation takes hold and general price levels catch up, which has the same implications for value in the housing market and much worse implications for everything else. The only way to move away from the loan market controlling the housing market will effectively crash the value of housing much further than it has already fallen. Whether this is done by maintaining dollar cost constant while everything else spikes, or by crashing the actual value, the implications are the same. It takes a certain amount of materials and a certain amount of labor to create an acceptable housing unit, and the costs for those are well in excess of what most people can afford to pay 100% cash for in a unit of housing or anything else. If the people can't afford to pay for it, there won't be any sold, and before too long there won't be any more being built. Yeah, we could go back to one room log cabins and massive unreinforced masonry apartment buildings with no running water or electricity, but I happen to think that the idea of having at least a minimal building code is a good idea. It costs money to comply with building codes - more money than most people are willing or able to save prior to purchasing a home. That's the situation as it would exist without loans. Lest you think the influence of loans is something recent recent, here's entertaining evidence otherwise. 65 year old evidence that most of you will have seen before, if probably not considered in this context, describing a phenomenon that had been widespread in the United States since the 1830s. When you're looking at the real estate market, you're essentially looking at the loan market - the exceptions are damned few, statistically speaking.

So understand that if you want to fix the real estate market - really fix it - what you really need to do is fix the loan market.

This is far from straightforward, and yet the evidence is overwhelming that we have problems. 26.8% of all loans were rejected in 2010. That's 26.8% of ALL loan applications - the data wasn't broken down by loan type, but I strongly suspect it was lower for "rate/term" refinances and higher for both "cash out" and purchase money, as that would be in line with what I know and what's related to me by others in the business. 2010 was a great year for refinancing as rates tumbled - but few could actually qualify. I know I don't want to take an application if I don't have a reasonable idea that this loan should stand an excellent chance of approval. If the values in the neighborhood don't support an appraisal that's going to work, I'll tell the folks, "Look, I will process this if you really want me to, but I think you're wasting your time and about $450 for an appraisal. The highest selling price within the distance and time that appraisers are allowed to consider is 10% less than the value we need - and that was a bigger property well maintained." Similarly, if the debt to income ratio isn't going to work, it's better serving both the applicants and myself to find out as soon as possible.

What are the sorts of things I'm seeing or hearing about as reasons for a decline on an application? Most common is that appraised value of the property is too low, usually on a refinance simply because bargaining power for those willing to actually make a purchase is so great right now. Somebody owes $400,000 on what was a $600,000 property and is now a $440,000 property - a 91% Loan to Value ratio, and that's for those people who don't owe more than the property is currently worth. No lenders want to refinance above 80% loan to value right now (some will, with PMI, but even there 90% is about the absolute limit). Net result: That rate under 4% for a thirty year fixed rate loan you see everyone quoting is no good if you can't qualify for it because you don't have the equity and you sure as heck don't have the cash to pay your loan down that far. If you're in default or in trouble, your current lender will likely work with you in the hopes of avoiding losses. That's not the same thing as a regular refinance. I predicted this problem back in March 2006.

Another reason: Debt to income ratio doesn't work, usually because of a term of low to non-existent income. In plain English, someone has been laid off, or downsized, and it took them a while to find a new job. Even if the income now is as high as the income was before - it usually isn't - due to the way lenders calculate income having six months of missing income can completely kill your chance of a loan until that period is at least 2 years in the past. Stated income is essentially dead, so there just isn't a good way around this. I can get you a hard money loan at 13% or so if your equity is good enough (25% or more; 35-40% if there's "cash out") but that just doesn't help most people.

These ways are pretty much predictable. I can look at the situation before we even complete the application and tell if it's likely to be rejected on such grounds. Yeah, I'm perfectly willing to go ahead and try if the people say to try, but most people get the message when I tell them that in my experience, if they submit a loan application it is likely to be rejected. I can't remember anyone who told me to go ahead and commit them to spending the money for the appraisal when I'm talking about predictable reasons for rejection. From what other loan officers have told me, this tends to be their experience as well.

The majority of the actual rejections are ones that I never would have predicted. This class of failures seems to stem from mortgage investors who have taken losses and are now completely paranoid about losses, to the point of ridiculousness. I think the most egregious was a lender refusing to refinance because there was a private money second that had been originally written to comply with their own specifications when the people bought the home. I was the original agent and loan officer, and the client's parents wanted to give them a loan that would be forgiven in accordance with federal gifting rules so as not to create estate tax problems. So under the lender's instructions, we wrote it up with a given interest rate and payment schedule that did not take into account the planned forgiveness and did include the projected payments in the client's debt to income ratio. Everything worked, everything fit, everything completely above board, legal, verified and copacetic- until the refinance several years later where the bank wouldn't lend because this - much shrunken - private money second was still in place - even though the holders would sign any subordination the lender wanted, or even reconvey the trust deed and convert it into an unsecured personal loan. There was no issue whatsoever with property loan to value ratio, client credit, debt to income ratio or anything else. Just a flat rejection because they owed money to a non-institutional lender. I have yet to tell this story to another loan officer or processor without getting a three word response that most people abbreviate "WTF?", usually with severe emphasis on the last word thereof. (Under other circumstances, it would have been hilarious coming from my processor who is usually quite ladylike). I tried taking the loan elsewhere only to be told it wouldn't be approved there (or there, or there, or ...) either, in large part due to paranoid investor rules about approving loans that had been rejected elsewhere.

Just because the worst I can personally vouch for, but that doesn't mean it's the only one. Refusing to allow the inclusion of rental income for other properties despite extensive documentation of it actually being paid. Slight job title changes due to consolidated duties. Many things that would take way too long to explain, but I (and other loan officers and our loan processors) have been flabbergasted by. Crap that just wasn't on the radar even 20 years ago, well before the Era of Make Believe Loans, but today it's being used as a reason to refuse a loan application.

Now, let me ask "Who is being hurt by the current state of the loan market?" Yes, lenders have taken some real damage, but they are not among those being hurt the worst from current events and going forward. Their pain is mostly in the past, and the ones that have survived this far are pretty much insulated from bad effects going forward. The federal government has assumed the liabilities for the bad loans. They're also still making their usual and customary margin - if not more - on every loan they sell to the secondary market ("mortgage investors" above). In point of fact, lenders - who in my opinion bore far and away the largest non-governmental share of guilt for the meltdown - are doing very well with sweetheart deals from the Federal Reserve and other government agencies, not to mention the hundreds of billions they got through TARP.

Consumers are being hurt far worse. Few people can buy because they can't scrape up the higher down payment necessary even considering the lower prices. As a result, people who need to sell for whatever reason, can't sell.

Another group taking it in the shorts are mortgage investors. A lot of these are pension plans and investor groups who have to invest a certain amount in mortgage securities, because they have traditionally been such a solid investment and there are therefore requirements to invest in them written into their charter documents. The results of this are as obvious as gravity: if you're not making diddly squat on something you're required to have and which you have recently lost a blortload of money on, you're going to be certain you only fund the very safest ones, leading to the paranoid nonsense of underwriting rules discussed earlier and other things that prevent would be borrowers from getting the money to borrow.

Making the entire situation worse are several rules the federal government has passed, allegedly to "protect" consumers, but the net effect is to protect the big lenders with the large bundles of campaign contributions from competition, and even if the politicians in Congress are ignorant enough to believe these rules benefited consumers, the lenders who sponsored them are not. Among other things, these rules prohibit both charging significantly higher rates of interest to compensate for risk and funding loans without having traditional documentation to show the people can afford it.

I'm going to cover the latter item first. Stated Income (and so called "NINA programs, which you may have heard called "ninja" loans) were so badly abused I doubt I can communicate how much damage it did to people who weren't dealing with the situation every day of their working lives. But traditional income documentation was set in place when almost everyone worked the same job with the same company from the time they first went to work as teenagers to the time they retired. I shouldn't have to tell people how rare that is today, or how common disruptions in employment, changes in employer, or even career field, let alone moving to self-employment. The income documentation it requires is inflexible and doesn't take into account the way people work in this modern world. We change jobs, change careers, get promoted, get laid off, go back to school and find new careers, sometimes at intervals measured in months. The response of traditional income documentation to all of these is to cause the loan to be rejected. Pardon me, but I really don't think that someone who can document making $10 an hour in one field, $11 per hour in a second, and $12.50 an hour in a third all within a 2 year window is a larger risk for extended unemployment that anyone who has been solely in any one of the 3 fields. If one field of employment dries up, they still have two others where they have a track record of employment. Traditional lending standards, however, disagree. Such an applicant will be rejected outright for the loan because they cannot show 2 years in the same line of work. Even if the 2 years same line of work requirement here were to be relaxed, lending standards declare that said folks are only able to count the income from the one they're currently in, averaged over a 2 year period even though they may only have been doing it a few months. $12.50 per hour over six months is about like making $3.12 per hour over two years, and the loan is rejected because debt to income ratio is too high.

In regards to the former item, if lenders can't charge more interest to allow for higher risk, then there will be no higher risk loans made, despite the fact that they are good loans and the ability to get those loans puts people into better situations. If Young Couple A can get a loan for $90,000 on a $100,000 condo at 8% - much higher currently available rates - their monthly cost of mortgage become $660, which even with $250 per month for association fees and $100 per month for property taxes means they are paying almost $300 per month less than the $1300 per month rent they were paying for an identical unit elsewhere in the complex, and they're building equity with that money and they OWN the damn thing, which means they are motivated to take care of it. If it is a condo, they get a seat at the table in deciding how to manage the complex. If not, they get to decide all on their own. This also generates all sorts of other good things that I have yet to hear anyone make a single argument against in my time on this planet. Unfortunately, they probably can't get that loan on a condominium, even without this restriction, because of the re-institution of another brain damaged rule: The 60% owner occupancy requirement.

The 60% owner occupancy requirement for condominiums is an old monster come back to life. VA and FHA loans, controlled by the federal government, never dropped this requirement, but every other loan program in the known universe did. When the federal government nominally reassumed ownership of Fannie Mae and Freddie Mac (which had been ruined by political requirements and political appointees, as they were always controlled by politicians), Fannie and Freddie were required by Congress to resume requiring 60% owner occupancy, and so the entire mortgage market in homage to investor paranoia above re-instituted this requirement. Practical effect: Once a condominium complex drops below 60% owner occupancy even once, units in that complex will never be eligible for any of the loans designed to move people into at least fist time ownership ever again, because from that point forward the only people who can buy are the ones with enough cash that they don't need a loan that comes with a 60% owner occupancy requirement. Remember, the loan market controls the real estate market.

Let me also observe that there are a lot of places out there that are legally condominiums even if they may not look like it. A group of detached dwellings on a large lot sharing parking and community recreation? Odds are long they are legally condominiums, and therefore the lender must treat them as condominiums. If it's got a Homeowner's Association and dues, it's most likely a condominium. Many developments in recent years have taken the "legally it's a condominium" route because it makes the property more valuable and means the developer can make more money. But once they drop below 60% owner occupancy, they're still stuck with the rules that lenders have for condominiums, and the questions isn't if it's going to bite a given development, but when.

The fact that these units are not eligible for those loans means that most people can't buy them. Since most people can't buy them, the value drops until some investor realizes that for a $30,000 investment in what used to be a $100,000 condo but is now only worth $60,000, he can make over $750 per month by renting it for $1300 to the poor suckers who can't buy because they don't have the down payment required. Additionally, his equity is increasing every month. All because the renters can't manage to save the necessary down payment because they're too busy paying all their money to investors like this. Overall effect: Transfer of wealth from the less affluent to the more affluent. The people who already own them when such a change happens see a loss of a large portion of their value, quite likely going from having made a significant upfront investment to owing more than the property is now worth - because your average buyer who might actually want to live in it, can't buy it, it's worth far less. I should also mention that in practice this is extremely discriminatory in effect. If it were a private company doing this, it would be probably disallowed by the courts because try as I might to have someone point me at research that shows the 60% owner occupancy ratio means something tangible, nobody has been able to do so. Even if such research exists somewhere, may I point out that Redlining has been illegal for decades? What is the 60% owner occupancy ratio if not Redlining on a smaller scale?

This is the situation we face in the current housing and loan markets. Tomorrow, I will propose some solutions. Not grand sweeping costly solutions that will allegedly fix everything overnight. Solutions like that not only aren't real; they tend to screw the markets up even worse. But incremental changes grounded in accepting the changes in society that have happened in my lifetime. Small touches that make a big difference over time, by allowing the markets to return to a state where the vast majority of those who would like to buy do not face artificially increased barriers to ownership, and therefore, the people who currently own and would like to sell are able to do so.

continued here

Original article here


First off, neither the California Mortgage Loan Disclosure Statement nor the Federal Good Faith Estimate are promises, commitments, or anything more than your loan provider wants them to be. Quite often, they're nothing more than a fictional story told to get you to sign up for their loan. It's amazing and disgusting how much it's legal for lenders to lowball their quotes.

That said, there are three explanations as to why your rate, cost, or both are higher. They're not mutually exclusive by any means, but it has to be at least one of these three.

The one that reflects on you is that you somehow misrepresented your situation when you were getting that loan quote. In that case, you are no one's victim except your own. It is pointless to lie to a loan officer, and if you don't know the answer, you should say "I don't know" instead of making one up. This does happen, but it's probably the rarest of the three answers, and you should know if you did it. If you didn't do this, what's left is one or both of two common loan officer sins. They're not mutually exclusive; it can be both.

The less abusive of these is that the loan officer did not lock the loan. When I originally wrote this, I said, "This is either rank stupidity or frustrated avarice. Shorter rate locks are cheaper, and there's always the hope that rates will go down, so they can make more money on the same loan they quoted you. Of course, rates can go up, also, and they do so about fifty percent of the time. When that happens, they can either make less money, often to the point where delivering the original loan would cost them thousands of dollars, or they can deliver a loan with a higher rate. Since we're living in the real world here, which of these alternatives do you think is going to happen?"

Since then the market has changed, especially for brokers and correspondents. Every loan that is locked that does not result in a funded loan under that lender costs that loan officer and their future clients money in the form of higher costs for every loan, raising the tradeoff between rate and cost for their loans to the point they may no longer be competitive even with bank branches, much less other brokers and correspondents. Net result: Brokers and correspondents are having to be very careful which loans they lock, which means uncertainty for you, the client. What, you thought the regulators were looking after consumer interests? They're looking after the interests of large institutions, who want to put brokers and correspondents out of business because brokers and correspondents offer cheaper loans than they do.

The more abusive alternative is that you were deliberately lowballed. There is always a tradeoff between rate and cost for real estate loans, and the person who gave you that quote told you about a loan that didn't exist. Either it always carried a rate much higher than you were told, or the loan officer ignored potentially many thousands of dollars it was going to cost all along. I see this happening literally every time I check a loan quote forum. I do business with eighty lenders, among which are the lenders who are most keen to compete based upon price. I know what's deliverable and what is not, every other loan officer I respect knows what is and is not deliverable, and I can't imagine anyone in their right mind wanting to do business with anyone who doesn't know whether what they quote is deliverable. It's not exactly confidence inspiring to be told essentially, "I can get you this loan, but I don't know if it really exists." I'm sure you'd line up for that loan like it was free beer, right?

Not really. But loan officers do this because none of the paperwork you get at the beginning of the loan process is in any way binding. Not for price, not for a loan at all. In fact, the only form that's required to give an accurate accounting of the costs is the HUD 1, which you don't get even in preliminary form until you are signing final loan documents. Loan officers do this because once you have signed up for their loan, you are likely to sign the final loan documents no matter how bad they are. Why is that? Because thirty days or so have gone by, you've got a deposit at risk that you're going to lose if you don't sign, and you're not going to get that house that you wanted badly enough to put yourself in debt for thirty years. I assure you that loan officers know that they will have you over a barrel when you go to sign final documents. Many of them are counting upon that from the day you sign up, and they'll tell you anything at loan sign up in order to get you to choose their loan, because it's not like any of this is binding on them.

Let me get one other thing out of the way to clear the air: You didn't get a higher rate because you somehow didn't qualify for the lower rate. The way people qualify for loans is based upon debt to income ratio and loan to value ratio, and of those two ratios, debt to income ratio is much more important. The lower the debt to income ratio, the more qualified you are. Debt to income ratio is a measure of the ratio of how your housing and expenses compare to your overall income. Lower interest rate means lower payments. Lower payments mean lower debt to income ratio, and hence, you become better qualified the lower the interest rate that is available. Counter-intuitive though it may be, it's easier to qualify you for a lower interest rate than a higher one. Any loan officer who offers you an excuse that you didn't qualify for the lower rate has just flat out told you that they are a liar.

What really happens is that while this loan officer was spinning you a tale of how great the rate you were supposedly going to get was (a loan officer's version of, "Yes I'll respect you in the morning"), in amongst all that creative storytelling, they neglected to account for the money you really are going to be paying, or even the money they admitted you were going to be paying.

However, we're dealing in the real world here. That money still needs to be paid.

There are three ways to pay it: Borrower cash, rolling it into your mortgage balance, or by giving you a higher rate. They have to tell you if they want more cash, and you may not have it. There's only so much equity in the property, particularly since there are no playing valuation games via a compliant appraiser. But since there is always a tradeoff between rate and costs, they can always create some more cash by sticking you with a higher rate, resulting in more cash available to pay for the things you were going to be paying from the very first. Often it means they'll make more money as well, for providing this "service", because "you were such a hard loan." Sticking you with a higher rate is often the only way they can pay for all the things that need to get paid. Yes, this means that you end up paying more for the low-ball deceiver's loan than for a loan where you were quoted something honest.

All of this is nothing more than practical effects of the common phenomenon of lenders low-balling their quotes to get you to sign up with them, knowing that when the time comes to actually deliver that loan, they will have all of the power and you will have none, which is a 180 degree reversal from the situation at sign up. They have this loan that you need right now, where anyone else will take time you probably don't have. If rates have gone up (once again, this happens about fifty percent of the time), even the lowest cost, most ethical provider in the world might not be able to deliver what this scumbag is offering you by signing his loan right now. If he's got the originals of your documents, you can't take your loan elsewhere. Finally, most people are tired of the whole loan thing by the time it comes to sign documents. Many folks won't examine the final documents carefully - figures I've seen say that over fifty percent of all borrowers literally never figure out that they were hosed by their lender, and on the ones who do figure it out, about eighty five percent will sign anyway because signing means they're done.

The games that lenders play are legion. They can lure you in with talk of low rate that exists, but costs you more than you'll ever recover. Whether they deliver that rate and soak you on the cost end, or switch it off for a higher one to pay the costs and make more money, is up to them. I see lenders quoting full documentation A paper conforming loans for people who are known to be stated income, temporary conforming ("Jumbo conforming"), non-conforming loans, or even decidedly sub-prime. Even for people who are full documentation and would have qualified if that loan existed at the costs they told you about, this need to raise the rate can move you to over to being a stated income loan because you no longer qualify full documentation at the higher rate. With stated income loans now gone, this not only means higher rates, but quite often means that no loan can be done, something completely alien to the thinking of many agents and loan officers who became accustomed to the Era of Make Believe Loans, and they haven't yet gotten their heads out of that mindset.

How can you avoid this? Ask all these questions of every loan provider, know what the red flags are if you encounter them, and take steps to protect yourself from being lowballed. A written loan quote guarantee used to be good, but even the most ethical provider in the world can't issue one without locking the rate, which the market has made costly for their future business. I used to tell people to get a back-up loan, but back up loans are dead. Even I cannot economically do them any longer. The only practical solution is to stop rate shopping by telephone and have a real problem solving conversation with prospective loan officers.

If someone goes over cost components for your loan and rate, chances are they are being more honest than someone who doesn't. If it's investment property and they tell you there's a point and a half surcharge from the lender right up front, they are likely being honest. Such adjustments exist, and you're going to pay the ones that apply to your loan. Period. Therefore, you're better off knowing what they are. You should still choose the loan that has the lowest bottom line to you, but choose the one with the real bottom line, not the one that looks lower because the person quoting you "forgot" the adjustments. If someone told you about the adjustments that apply to your loan, ask other prospective about those adjustments. Even they're "included" in the quote you still want to know how much they are. Why? Because once you know this information, it may become apparent to you that the loan you are being quoted is not the real loan you will end up getting.

You don't need to get victimized by any of the things that go on in the world of mortgage loans. But you have to understand that they do happen, and you have to take specific steps to prevent it from happening to you. Otherwise, you're just trusting to luck, and judging by what people have brought me from other providers, you'd need less luck to win the lottery so you can pay cash for the property.

Caveat Emptor

Original article here


The buyer's deposit is always at risk. This is just a fact of real estate transactions. I could pretend it's not so, but that wouldn't keep the deposit from being at risk - it would just make me a liar. Nonetheless, because it's cash that the buyer had to forego spending that money in order to painstakingly set it aside a few dollars at a time, they understand that the deposit is real money in no uncertain terms, where most don't have that same understanding about a loan that's probably fifty times bigger and just as real. It may be comparatively rare that the buyer's deposit is actually forfeit (As of yet, I haven't lost one), but by recognizing that it is at risk and planning for it, I can protect a client's deposit far more effectively than anyone who pretends otherwise.

The first rule is to be careful writing the offer. I want to make certain that all offers (and counteroffers) consist of something my client qualifies for and that I can make happen. This is one of the best reasons why real estate agents want to know enough that they could do loans, even if they don't. If I wasn't a loan officer, I'd consult a loan officer before writing an offer. Review client qualifications and necessary loan guidelines before the offer is written. If the issues of whether the client can qualify and what needs to happen so they do qualify have already been solved, you start the transaction with the largest part of the road to successful completion already paved.

Related to this is the issue of a client getting cold feet, which is one of the most common ways to lose a deposit. The best way to solve this is by showing them enough properties that they really understand the value offered by this one. Some agents believe in pressure sales and glossing over problems with the property. I believe in meeting these issues head on. One thing I tell every buyer client at our first meeting is that there is no such thing as a perfect property. They need to decide what they're willing to live with and what they aren't, and how much they're willing to pay for not doing so. It's my job to make certain they understand what the issues are with a given property, and that they'd be happy paying the necessary price to live there. All of an agent's nightmare scenarios start with talking someone into buying a property they don't like, so I'm not going there ever. This also solves the "cold feet" before we make an offer, where someone who doesn't understand these issues is going to be in danger of cold feet at every bump in the road.

The main issue with all of the buyer contingencies is time. You have a certain number of days to deal with those contingencies. When I get them done well before the time limit, the time limit isn't a problem.

For the loan contingency, I want an automated underwriting decision ASAP. Usually, there are reasons not to do this before we've got that fully executed purchase contract, but once we have that contract, there's no reason whatsoever not to do it that day.

I also want to order inspection and appraisal immediately, to meet those contingencies. I've got seventeen days for those. If I've got the appraiser and inspector out there the next day, I should have their report within two to three business days after that. Any subsequent negotiations needed due to those reports, I can start on right away. If the seller isn't going to be reasonable (or reasonable enough), we can find out about it right away and if the buyer decides to walk away based upon these reports or subsequent negotiations, we're in a much better position to argue that they should retain the deposit than if it were twenty-five days into the transaction and now the deposit is in jeopardy regardless of whether the contingencies have been released in writing or not. All parties agreed the contingencies ran for seventeen days in the purchase contract, and if that period is up, there's an argument to be made that the deposit is forfeit. I'm not a lawyer, so I don't know if it's a good, valid, legal argument, but if the whole issue is moot because we're done on day ten, the argument never gets started.

While this is all going on, I'm getting any final loan stuff together. This includes Preliminary Title Report and Escrow information. That complete loan package should be submitted before I go home on the day I get the appraisal. If it's not done by then, something major is wrong. I can submit loan packages with the appraisal "to follow", but it's better to submit them complete in the first place, even if it does mean I've got to pay for color copies. Every time an underwriter touches a file, they can add conditions. Those conditions can effectively make a loan impossible, and far more loans are approved with impossible conditions than flatly rejected. Also, submitting a loan with minimal information is itself one of the best ways to raise red flags in an underwriter's mind, or would be if raising red flags in the underwriter's mind was a good thing. It isn't. Once red flags get raised, expect them to throw as many roadblocks at you as they can. Better to submit a clean, complete loan package as soon as possible. Doing the extra work right off the bat really does save you a lot of future work.

This has become even more important of late. When I first wrote this, underwriting was a lot less paranoid than it is now. Even when refinances were running several weeks, purchases were usually no more than two days for underwriting. If you submitted a clean complete file, any prior to documents conditions you do get would be minimal and trivial, and the funding conditions were just the absolutely standard cookie cutter stuff. That has now changed. Fannie and Freddie and the Federal Government have now added all kinds of new twists to lending. I have lately started saying that we need to extend the default loan contingency period on purchases to 30 days on purchase contracts, because it has become difficult to get a real loan commitment in seventeen, and even forty five day escrows are becoming a thing of the past because the new requirements mean that loans take longer - adding three weeks or more to the process in some cases. I don't like getting anything other than the routine funding conditions that happen on every transaction, because it means I have to get those conditions and wait a couple of days for the underwriter to get back to the file. I originally wrote that this waste of time is my fault if it happens, but with the best will in the world, it will happen to you a pretty significant percentage of the time. In the past year that percentage has increased in the last year to nearly 100%, and there's nothing that can be done to change this because giving unnecessary information to an underwriter is the Number One way to get the loan essentially rejected.

I believe in giving the seller and their agent a reasonable amount of time to hang themselves, but once the loan is submitted, I'm going to be asking about their responsibilities if I haven't gotten evidence they're done yet. Allowing them to hang themselves doesn't mean letting them hang my client. I want to see that termite inspection in particular before the end of seventeen days. The standard contract has the buyer responsible for section 2 work. It's never happened to me, but it's very possible that there's enough section 2 work needed to call the transaction into question. After seventeen days, this becomes more difficult for the buyer.

As soon as possible, I order the closing documents and get them signed. Even if you're not ready and able to close the transaction as a whole, this is a good idea. Something that's already done correctly isn't going to be an issue if my client gets called away on business - particularly out of the country as does happen. Notary work becomes a real issue outside the United States - it must be done at a US Consulate or Embassy. There is no exception for "Buyer had to leave the country" (or even just "go out of town") written into the time frames and contingencies on that purchase contract. I suppose you could ask for one, but it will make most sellers more than a little nervous, for tolerably obvious reasons. Better to know and plan in advance, but life happens. Better not to be bit if it does.

If I can get all the ducks in a row before the contingency period expires, not only does this preserve my buyers rights and give us an advantage in subsequent negotiations, but preserves as much as possible of my client's options to exit the transaction while preserving their right to recover the deposit. If I can close the entire transaction before the end of the contingency period, that makes me very very happy, and not just because I get paid sooner. It means that the issue of my client losing the deposit for walking away never comes up..

By finishing everything before the end of the contingency period, I've also preserved as much as possible of the right of specific performance in case the seller gets cold feet. It happens. Not so much right now, but a few years ago in the crazy seller's market, it happened because sellers decided they could get a higher price. If my buyer client is happy with the state of the contract as it sits, their lawyer can quite likely argue specific performance of the contract, and maybe recover legal costs too. Not my place to say whether or not, as I'm not a lawyer. I only know that lawyers seem to be much happier with agents that keep this information in mind.

If I can't close it before the end of contingency period (and I recently had signed loan documents sitting at escrow for two weeks while we waiting for the sellers to finish termite work), I still want to get together with my clients before the contingency period expires, put the evidence in front of them, and have them make a choice to continue or abort the transaction. Just because the contingencies haven't been released in writing is no reason that a seller's lawyer can't argue that they were released anyway. Much better if the argument never comes up because it's a moot point.

There is nothing I can do that generates an ironclad, foolproof guarantee that my client won't lose their deposit. But doing things the right way, quickly, can certainly make it a lot less likely than pretending that tje deposit isn't at risk. Lawyers and judges are the only ones who can answer the question of whether it has been forfeited, but it the issue is resolved without them getting involved, everybody is going to be happier. Neither party should have signed the purchase offer if they didn't want the transaction to happen on those terms set forth in the contract. Therefore, making it happen quickly, reliably, cleanly, and before the deadlines have passed is the best way to prevent making anyone unhappy.

Caveat Emptor

Original article here

That's one of the questions I've been asked, and it deserves an answer. Know that there is some flexibility to the answer, as there are embedded trade offs. You don't need as much of an income, or as high of a credit score, if you have a larger down payment. A sufficiently high credit score can also mean that you can afford a more expensive property, as higher credit scores get better interest rates, and therefore, lower payments for the same property. On the flip side, if you have monthly bills that consume a large amount of your income, you cannot afford to pay as much for a property. When I originally wrote this, there was another tradeoff involved in whether you can prove sufficient income via the traditional means of w-2s or income tax forms, as the alternative loan forms do not give rates as good, and most have higher down payment requirements. However, stated income loans are gone, at least for now. Finally, most of this only applies if you want or need a loan. If you intend to pay 100% of the price with cash, you can buy anything legal that you desire with your cash, and the hurdles become much smaller. So admittedly this only applies to 99.9999% of first time home buyers.

The first thing any buyers need if they want a loan for the property is a source of income. If you want a loan, you've got to have money coming in from somewhere to make the payments. Preferably, it's a documentable, regular source of income, such as paychecks or income from a business on which you report taxable income. I suppose I should mention that tax cheats have difficulty getting good quality home loans, because I have dealt with a few people I suspect of that. Don't worry, I'm not an IRS employee and I won't turn you in. But all lenders must report loan transactions, and every real estate transaction is a matter of public record. If you make a major purchase or take out a major loan, the IRS can take an interest in you. Just saying.

You income, together with whatever amount you have for a down payment, gives you a budget for a property. The vast majority of the loan is driven off two ratios, debt to income and loan to value. These two ratios together will determine minimums for everything else about your loan. If your credit score was not horrible, a down payment was pretty much optional for several years during the Era of Make Believe Loans, although it has since become essentially mandatory as the VA loan is the only loan out there where most lenders are willing to fund loans without a down payment.

You will need at least a few thousand dollars for a good faith deposit, and probably another thousand at least for appraisal, inspections, and miscellaneous stuff. The once-upon-a-time rule of thumb about a 2% earnest money deposit has long gone by the wayside, but a good deposit is often evidence that you are serious about your ability to consummate the deal, and might get you a lower price in negotiations. I will argue against my listing clients accepting any offer, no matter how good, without a deposit, and most sane real estate agents agree with me.

The larger the down payment, the lower you can expect the needed income to be, and the better the interest rate you are likely to get at any given time. In order to make a difference on the terms of your loan, the required down payment generally goes in increments of 5%. 3.5% for an FHA loan is the absolute minimum for most people currently, but you will get a better deal from conventional loans that require a minimum of 5% down (But as few lenders as will do that, they can charge higher rates than others). 10% will get you better terms than you would get for 5% down, 15% will get you better terms than ten, and the really major differences happen if you can put 20% down. More still will get you better terms yet, but 20% is the big dividing line.

If you want to take advantage of a governmental first time buyer assistance program, either the Mortgage Credit Certificate or a locally based buyer assistance program, you need to be very careful about staying within what you can prove you can afford via tax forms. Stated Income, or documenting your income via bank statements, is not an option on any of those programs and never has been. Using creative financing options, such as negative amortization loans, with such programs is similarly forbidden. First time assistance programs are not designed to encourage irresponsibly buying a more expensive property than you can afford; they are designed to help you stretch what you can afford just a little further. Know what you can afford in terms of sales price, because agents and loan officers can too easily manipulate payment quotations. Rules of thumb based upon income (2.5 times income, four times income, whatever) are garbage, and the entire concept is a good way to get into trouble. This article will help you compute what you can afford, once you know the approximate rates for current thirty year fixed rate loans.

You will need to be able to document a two year history of housing payments. Since you have never bought before, this means rent. No fun to have had to enrich someone else for a couple of years, but there are valid reasons why lenders require a history of regular housing payments on time. If you can document that you've been paying regular rent to your parents, grandparents, or what have you, that can count, although lenders will usually demand copies of the canceled checks rather than accepting their word for it.

You will also need a history of credit payments. Mortgage lenders want to see evidence that you have the habit of paying your debts on time regularly. The usual criteria is three total lines of credit, one open for at least 24 months, the other two for at least six months. These can be revolving lines of credit such as credit cards, or installment debt such as car payments or student loans. Note that they do not necessarily have to still be open, but whatever balances and monthly payments you still have will be counted against your debt to income ratio.

Also, you generally need at least two open lines of credit in order to have credit scores reported by the major credit bureaus. Ideal is two long term credit cards with very small balances. The way I handle this is to charge one thing per month for about $20 or so that I would normally pay cash for, and pay the bill in full when it arrives. You will need an appropriate credit score for what you are trying to do. What score is sufficient will depend upon the exact characteristics of your transaction. Better scores will lower your rate, and therefore your payments, but the best thing that can be said about a 580 credit score (which some lenders will accept for FHA loans) is that it isn't putrid. Unfortunately for those who want to buy now without any cash, the lenders have now figured out that them being on the hook for 100% of the value of the property is a good way to lose money. I do anticipate 100% financing returning eventually, but "eventually" could be years, and even A paper has introduced differentials to the tradeoff between rate and cost based upon credit score, where until recently, as long as you staggered over the line into qualification, you'd get the same rates and costs as King Midas.

The last things I will mention that will stand you in good stead are also optional: An educated layperson's knowledge of the process (I would like to think being a regular reader here will help with that), a investigative attitude, and the willingness to shop effectively for services, both loan and real estate. There seems to be popular resistance to this, but getting a good buyer's agent will not only save your backside, it'll make a real difference to the quality of the property you end up with as well as to how much you pay.

Caveat Emptor

Original here


Many people think that mortgage interest works like rent: paid in advance before you live in the property for the month.

This is not the case.

Mortgage interest is paid in arrears. As you begin the month, interest begins accruing. It accrues throughout the month, and the payment is due at the beginning of the following month. The reason for this is that the interest is unearned until you have actually borrowed the money throughout the month. You could win the lottery, write a best seller, sign a contract a with professional sports team, or any number of other farfetched but real possibilities for suddenly acquiring a windfall of cash enabling you to pay that loan off. You could also refinance, in which case that lender is only entitled to the interest from the days you had their loan.

When you refinance, however, or even when you take out an initial purchase money loan, you will generally be required to pay the interest for the remainder of the month on that new loan in advance. The reason for this is quite simple administrative - it gives the lender some time to set all the bookkeeping on that account up, gives them a full month at least between initializing the loan and the time any money should be hitting their account in payment of that debt.

So when you refinance, you make an upfront payment to the old lender for the part of the month they held your loan during the month, and to the new lender for the time they held your loan. Say the new loan funds and pays off the old loan on June 15th. You will pay the interest from June 1st to 15th to the old lender, and from June 15th though the 30th to the new lender. You never, ever, get a free month, because interest never stops, at least so long as you owe the money. In point of fact, I tell people to think of it as making their normal payment early, as in this case they're writing the check they normally would have written July 1st two weeks early on June 15th. It's really just the interest owed, but since most folks don't keep their loan more than a few years, there usually isn't a large proportion of principal in their regular payment anyway. Therefore, if you think of it as your regular payment, paid early, it'll usually be a little bit less. There are usually one or two days of overlapping interest, which is why most escrow officers won't request funds on a Friday. You don't want to be paying interest on two loans over the weekend to no good purpose.

So why do lenders use the "skip a month of payments!" come on? Some will even use, "Skip two payments!" Because a new loan is being originated, they can (generally) roll that money into the balance on your new loan where you not only pay the money, but you pay interest on it for as long as you owe that money. Make you feel all warm and cuddly? Didn't think so. Anyone who uses the "skip a payment!" promise to get you to refinance has just told you point blank that they're a dishonest crook. However, since most people don't know how to translate loan officer speak into English, they get away with it disgustingly often. The state of financial education in this country is a national disgrace. Of course, it's to the benefit of certain political groups to have voters believing that there is such a thing as a free lunch.

You never really skip a loan payment when you refinance. If you try, all you're really doing is adding it to your balance. You can decide to pay your balance down at loan inception and pay closing costs out of pocket, and while an accountant or financial planner will generally tell you there are better uses for the money, it can be a very smart thing to do if your circumstances are right for it.

Caveat Emptor

Original article here

You've probably heard the horror stories, and I've mentioned the possibility more than once. Some unsuspecting person is looking at properties beyond their price range, and it therefore has all kinds of attractive features that properties which are in their price range do not have. They are just about to regretfully but firmly put the notion of buying this particular property out of their heads when the Real Estate agent whispers seductively, "I can see that you want it, so let me show you how you can afford it!"

There are all kinds of reasons why this happens. Bigger commission check for the bigger sale certainly is one, but a far bigger concern to most of the predators who do this is that it's an easy immediate sale. Instead of having to take those folks around to dozens more properties that are in their price range (and perhaps lose them to some other agent taking advantage of an opportunity in the meantime), while the clients agonize about the trade-offs of linoleum versus carpet in the bathroom and kitchen, and maybe if they'll keep looking just a little while longer they'll find one that is perfect despite the market, so they're not going to make an offer today, thank you very much, this predator has shown them the equivalent of the holy grail, provided the clients do not understand the downsides of the loan that is necessary to procure that property.

There is a reason why I advise people shopping for a property to make a budget based upon what they can afford based upon current rates on 30 year fixed rate loans costing no more than one point total, or at the very most a fully amortized 5/1 ARM, and stick to it (It's actually harder to qualify for the 5/1, due to lower debt to income ratio guidelines). That's the maximum price you will offer - end of discussion. Even if you, the client, end up applying for another type of loan that has lower payments, if you could make the payment on a thirty year fixed rate loan, you are pretty certain you are not getting in over your head. But shop by sales price, not payment. It's not like the sharks haven't figured out that suckers shop by payment - so don't be a sucker. "Creative financing" has become so pervasive and so varied that shopping by the payment the real estate agent has posted, or tells you about, is severely hazardous to your financial health. Maximum purchase price you are willing to consider should be the most important thing buyers discuss with their agents, and the budget must be quoted in terms of purchase price, not monthly payment. There are too many games that can be played with monthly payment, and just when I think I have them all covered, another one pops up.

Indeed, the very head of the list of reasons why buyers should fire an agent is that the agent showed them a property which can not reasonably be gotten for the sales price limit they told the agent about. You tell me that your limit is $320,000, it might be okay to show you a property listing for $340,000 or even $350,000 if buyers have enough power to bargain it down to the agreed maximum and are willing to walk away if they can't. In a seller's market, of course, it would likely rule out anything where the ask is over $325,000. But if the agent show you a property listing for $450,000, simply ask to be taken home or back to your vehicle immediately, and then inform them that their services are no longer required and that you desire them to make no further efforts to contact you. Were I shopping for a property, I would demand to know the asking prices before I went, and not only fire the agent but also refuse to go if they cannot show me why they think this property can be obtained for the total cost limits we have agreed upon. Not monthly payment limits, sales price.

So what loans should not be used to purchase a property? Well keep in mind that this list assumes that your loan providers are telling the truth about the kind of loan they are working on for you, an assumption that, judging by a dozen or so different e-mails I've gotten from people who were scammed, is increasingly iffy. Furthermore, if you are a real financial and loan expert, there are reasons why these warnings may not apply, particularly if the property in question is investment property, but those sorts of experts should know the exceptions, should not be looking to this website for advice, and are always able to accept the financial consequences of not following these guidelines (in other words, they have the ability to absorb the losses).

The absolute head of the list, the loan that should never be used for purchase of a primary residence is the negative amortization loan. Known by many other friendly sounding names such as "pick a pay", "Option ARM", "COFI loan," "MTA loan," and "1% loan" (which it is not), this loan is a truly horrible choice for the vast majority of the population (99%+). It was only approved by regulators to service a very small niche market, and if you are a member of that niche market, chances are that your Option ARM will not be approved by the lender! This loan is usually sold strictly on the basis of the fact that the minimum payment is lower than any other type of loan, making it look like clients can afford a loan that they cannot, in fact, afford. This low payment is based upon a low nominal, or "in name only" rate that is not the real rate the money is accumulating interest at. In fact, the real rate that you are being charged is currently at least 1.5 percent above equivalent rates for thirty year fixed rate loans, as well as being month to month variable. How often do you think people who are being fully informed of the loan would agree to accept a rate a full 1.5 percent higher on a fully variable loan than what they would have gotten on a thirty year fixed rate mortgage, and with a prepayment penalty also? The lenders pay very high yield spreads for doing these loans, and the bond market pays even higher premiums, so many lenders push them hard, and many wholesalers push them even harder. Despite being warned that I was not interested in any loans that feature negative amortization, three new potential wholesalers had gotten themselves thrown out of my office in the month prior to originally writing this. I guess they weren't interested - or able - to compete with other lenders on real loans. Fortunately, now that the chickens have come home to roost on this "Nightmare Mortgage," very few lenders are quite so eager - or even willing - to offer them. The lenders lost a blortload of money on them, investors aren't buying the bonds, and the federal government has made them very difficult to sell. I hope that continues because the absurdly low percentage of people who saved their homes after signing up for a negative amortization loan is completely unacceptable. And although this loan is gone now, I'm leaving it in because I thought it had been permanently staked through the heart in the early 1990s too.

The Interest only 2/28 does have one redeeming factor, as compared to the negative amortization loan: At least your balance isn't getting higher every month. With the average loan around here being about $400,000, a rate of 5.5% would have the payment being $1833. But if that's all you can afford, what happens in two years when the rate adjusts and it starts amortizing, and if the market stays right where it is today, the payment goes to $2771, an increase of 51%? You haven't paid the principal down. There's a pre-payment penalty stopping you from selling or refinancing until it does adjust. If prices have appreciated enough to pay the costs of selling you might not come out so bad, but what if they haven't, or if prices have actually gone down? This is not the sort of bet that someone with a fiduciary relationship should make, as real estate prices increasing in two years is not something you can make a risk free bet on. Millions of people are finding that out right now.

The next loan on the list is the 3/27 Interest Only. This does offer you one more year to get your act together and start making more money to make the payments with than the 2/28. The downside is that it actually adjust higher due to the increased interest only period. In the example above, the payment would adjust to $2804, an increase of just under 53%. This also means you have another year for the value of the property to do the historically normal thing and appreciate a little. Still doesn't mean it's a bet somebody with a fiduciary responsibility should be making with your finances.

The scamster's new favorite substitute for the essentially extinct negative amortization is the buydown, because it allows them to quote a lower payment and a lower interest rate, because they can pretend that the initial rate and payment are what is important. Most suckers will only look at now, and be far less concerned with a year or two down the line ("and maybe the horse will learn to sing"). Make no mistake - that rate and payment will rise in one year, and will almost always rise again in two. So not only are you stuck with what's probably a higher loan rate than you can otherwise get, but you paid good money - more than you will recover - for that temporarily lowered rate.

The next type of loan to be wary of is anything stated income or even lesser levels of documentation (NINA or "no ratio" loans). These loans are great and wonderful if you really are making that money and really can make those payments, but don't let the temptation to buy a more expensive property lead you to exaggerate what you really make, or allow a loan officer to exaggerate what you really make, in order to qualify for the loan. Remember, you are still going to have to make those payments, and if you can't, the bad things that will happen more than counterbalance the nicest thing that might happen. Again, millions of people are discovering this right now. As of this update, I know of no loan providers offering a stated income loan. The downside to this is that the people stated income was designed to serve now can't get a loan at all. The upside is that people it's inappropriate for can't be seduced into something that's most likely going to ruin their financial future.

Somewhat less dangerous are interest only loans with a longer term or extended amortization loans. A five, seven, or ten year interest only period, while much more endurable than a two or three, is still not a certain bet of making a profit. Same thing with a forty or fifty year amortization loan. Given the way the rate structure is applied by most lenders, these loans are given out by lenders wishing to cover questionable lending practices to people who do not qualify for interest only loans according to bond market guidelines. Still, if it's got a good long fixed period of at least five years, you are paying the balance down and it's a reasonable bet that you will be able to sell for a profit before the adjustment hits. Not a certain bet, but a reasonable one, as in "the odds of making a profit or being able to refinance on more favorable terms before the payment becomes something you cannot afford are definitely on your side."

The ordinary 2/28 and 3/27 are dangerous enough for most fully informed adults. Using the interest only examples above, the 5.5% rate actually becomes 5.25% fully amortized, as it's a less risky loan for the lender. The initial payment becomes $2208, which does pay the loan down some, but then the payment becomes $2691 (in the case of the 2/28) or $2678 (3/27) holding the market constant as it sits and keeping other background assumptions constant. If you cannot afford these smaller jumps when they happen, at least you've got several thousand dollars that you have paid the principal down to use for closing costs on the new loan or towards the costs of selling, but be aware that the market is never reliable in its fluctuations over a short period of time, and using these loans for a purchase can and many times has meant that when the fixed period ran out, those people who choose these loans are in the unenviable position of being unable to afford their current payments, being unable to refinance, and being unable to sell for enough to break even when you consider the costs of selling.

There is nothing really wrong if you can afford the thirty year fixed rate loan but deliberately choose some other loan. I do this myself to save money on interest charges, which is the real major cost of the loan, but as narrow as the gap in rates was when I originally wrote this, even I might have chosen a thirty year fixed rate loan if I had needed to refinance. It's not being able to afford the sustainable loan that will kill you. If not a thirty year fixed rate loan, at least a fully amortizing ARM with a fixed period of at least five years. I do like the 5/1 ARM, however, and rates for it are once again becoming attractive - as in significantly lower than the thirty year fixed rate loan.

The most important things about any loan is the interest you are being charged for the money you are borrowing, how long it lasts, and the cost in dollars of getting that loan done, not a lower minimum payment that, certain as gravity, has a gotcha! engraved on it that will cause you to regret getting that loan. Unfortunately, we cannot go back to the past with information we learn in the future, and real estate loans are especially unforgiving of borrowers who do not understand the future implications of their current loan decisions.

As a final note, I have structured this essay around the loan to purchase a property, but the arguments work just as strongly and just as universally for so-called "cash out" refinances as they do for purchase money loans.

Caveat Emptor

Original here


Many agents seem to answer this question differently depending upon whether their client is the prospective buyer or seller, according to what they think will make the client most comfortable. When their client is making an offer, "No, your deposit could never possibly be at risk," while when their client is evaluating an offer, "And besides, if they renege or can't bring it off, you get to keep the deposit." Both of these are false, misleading, and practicing law without a license.

The cold hard fact is that the deposit is always at risk, but there is absolutely no guarantee that a jilted seller will get it, either. The answer to "Is the deposit at risk?" from a real estate agent can never honestly be anything other than "Yes."

For buyers, the deposit is "at risk." Otherwise, what would be the point of having it? If it couldn't be lost, why would it need to go into escrow? Just to prove the buyer has a couple thousand dollars to their name? I can do that with a Verification of Deposit. The only reason to make a deposit on a purchase offer is that it is at risk, and no listing agent in their right mind is going to accept any purchase offer where there is no deposit - even if the buyer is doing a "one dollar down" VA loan. That seller is risking a minimum of a full month of all carrying costs (usually much more) upon your representation that you want the property, and they are entitled to keep your deposit if certain conditions are met. For sellers, no you don't automatically get the deposit if the buyer flakes out. There are burdens upon you and your agent, and contingencies, aka escape clauses for the buyer, built right into the purchase contract. You don't want to allow those clauses, that's your choice, but you'll severely restrict the number of people willing to make offers as well as the price you will actually get. Even if the seller negotiates the payment of the deposit to them as part of the contract, the buyers can still sue to get it back. This is the real world and an offer is being made with real money and real consequences to that money. If you're unable to come to terms with that fact, stay a renter, because that fact is not going to change. For agents, if the only way you can make a sale is to misrepresent the deposit, it doesn't take a great fortune teller to see a courtroom in your future.

For buyer clients, I can do a lot to keep a deposit from being forfeit - any agent and loan officer can. Get out in front of all the contingency issues and any other reason that my client might decide they don't want to purchase the property, and get them dealt with right away, during the contingency period. Loan, appraisal, inspection, I want them all done before their contingency expires, or at the absolute minimum, a loan commitment with contingencies I'm certain we can meet. As of this writing, I have not yet lost any buyer deposit money. Nonetheless, since no agent can honestly guarantee the deposit will not be lost, I cannot and will not pretend that I'm some kind of exception to the law. The only way I could make such a guarantee is by putting up my own money as a surety, and if my client lost a deposit for a reason that was in any way my fault, I hope I would reimburse them (Until it happens and I'm facing an actual choice, there's no way to be certain). But it's not my investment, and if the investment succeeds, I'm not going to share in the proceeds (I'm given to understand that's illegal, at least in California), and one of the essential, unchangeable facts about investment is that there is no such thing as a risk free investment. If you don't understand this, any money or assets you may have can be considered a temporary thing, and you have no business in a profession with responsibility for other people's money. Anyone willing to say that there is no risk is either a fool or a crook. Nor is it likely your agent or anyone will reimburse you, especially for situations beyond their control, or if you misrepresent your situation or miss deadlines.

For listing clients, the same thing applies: Get what I need to done right away, and keep after that buyer's agent to remove contingencies in a timely fashion. If they won't remove contingencies when they are supposed to be removed, it tells me all I need to know. It's my client's call, but I know what my recommendation is going to be. I want the transaction to work, but I also want my client to get that money if it doesn't. Incidentally, Deposit issues are one reason of many that nobody should ever be willing to accept dual agency.

The bottom line is like something out of quantum physics: Schrodinger's Cat. Ideally, you want the sale to go through and record and for everybody to be happy because it all turned out exactly as agreed. Unfortunately, that's not perfectly predictable or knowable in advance. If it was, no real estate transaction would ever blow up, and the deposit would not be an issue. There are laws and procedures, and things agreed to in the purchase contract, that you have to be a real estate lawyer to offer an informed opinion about, and the judge, arbitrator, or whatever making the decision to make a definitive ruling. Escrow has custody of the money, but they're not going to do anything without mutual agreement of the buyer and seller. Either side can potentially decide to be stubborn and force the matter to arbitration, court, or whatever is appropriate, and all the consequent expenses of the legal system (which additional money is also at risk as the usual agreement is that prevailing party is entitled to legal expenses). And the legal system runs in incomprehensible ways for unpredictable reasons - the one thing that seems to be a constant is that if the judge wants the ruling to go a certain way, they can probably find a precedent to justify it if they try.

The point is this: The deposit is at risk. It is not "safe", and it does not necessarily belong to the seller either. Since this is cash, people understand that it is real money, because they had to scrimp, save, and set every single dollar in it aside from other uses, so they get understandably nervous about it. It represents a great vacation, a down payment on a new car, or something else very desirable that they're giving up, and they're putting at risk of forfeiture. Against this, the seller wants it if the transaction fails. There are ways to protect it, and ways to endanger it, and you've got both agents working to their client's advantage. As with any other competitive or potentially competitive situation, that makes the result indefinite until the game is complete. It isn't common in my experience that the deposit is forfeit, but it does happen. And anybody who tells you otherwise is either lying or hopelessly incompetent. Nonetheless, real estate is such a powerful investment that you are well advised to come to terms with the risk, because it's a necessary risk in order to buy real estate.

Caveat Emptor

Original article here


When I wrote explaining why borrowers should consider a 5/1 ARM, because the tradeoff between rate and cost is lower for that loan, and most people don't keep their loans 5 years anyway, so having a likely need to refinance 5 years out is not an additional cost for most people with mortgages.

Costs for a loan break into two categories: The cost to get the loan done ("closing costs"). This pays for everything that needs to happen so that the loan gets done. These costs may vary from place to place, but they are absolutely mandatory - they are going to get paid. For instance, on a $400,000 refinance with full escrow, my clients are going to pay $2945 in closing costs, when you really include everything. Many lenders will try to pretend some or all of the closing costs don't exist in order to get people to sign up, but they do. I can save some money with virtual escrow in some cases, but $2945 is real. The proof is that I can put it in writing and guarantee not to go over. Lenders don't want to do this, but if they're not willing to put it in writing that they'll pay anything over that, the reason is because they know it's going to be more when it comes down to it at the end of the loan.

The other cost is the cost for the rate. There is always a tradeoff between rate and cost. If you want the lower rate, it is going to cost you more money. If you are willing to accept a higher rate, you can save money on the cost for the rate, to the point where it can reduce or eliminate the closing costs you're going to have to pay. Zero Cost Real Estate Loans exist - I've done dozens. I love them because they save my clients money.

NOTE: Since I wrote this Congress has changed the law to discriminate against brokers by making Yield Spread legally a cost of the loan, despite the fact that it adds zero to the amount the consumer pays and in fact can mean that what the loan actually costs the consumer is reduced. So technically, a broker can no longer deliver a zero cost loan. However, we can deliver a loan where you don't actually pay any money - either out of pocket or through increased loan balance. A matter of semantics and sounds to your average cynical but uneducated consumer like I'm weaseling in order to hose them later. If not for the law meant to confuse matters, it would be easier and more straightforward for consumers to understand. Thank Barney Frank and Christopher Dodd for "protecting" you.

You can lump the loan provider's profit in with the costs for the rate, as origination points, or in with the cost of the loan, as an origination fee, and pay it via Yield spread (if you're a broker) or even (in the case of a direct lender or correspondent) hide it in the fact that you're going to make a huge profit selling that loan on the secondary market, but I guarantee you it's going to get paid somehow. Nobody does loans for free, for the same reason you wouldn't work if you didn't get paid.

These costs are going to get paid. End of discussion. The costs are slightly different in states with different laws, but necessary costs are going to get paid. They can get paid out of pocket or they can get paid by rolling them into your loan balance but they are going to get paid. Most people don't understand loan costs which aren't paid by cash, and think that they are somehow "free", but that is not the case. Not only did you pay it, but it increases the dollar cost of any points you may pay, you're going to pay interest on it, and (less importantly) it's going to increase your payment amount.

The genesis of this whole thing was a guy I thought I had talked into a 5/1 ARM when I originally wrote this (rates are lower now). I went through this whole process of explaining why the rate/cost tradeoff for a 30 year fixed rate loan was not going to help him, and then a couple days later, he called me saying he'd found a thirty year fixed rate loan at 5.5, saving him three quarters of a percent on the interest rate and almost $400 on the payment. Remember that at the time, I had 5.5 available as well (rates are lower at this update). So I'm going to keep that exact same table:

30F Rate30F Cost5/1 rate5/1 Cost
5.5%2.65.25%1.5
5.875%1.85.5%0.9
6.25%0.25.875%0

The problem with the rate of 5.5% is that for a $600,000 loan, those closing costs are going up to $3475 (lender and third party costs are higher above the conforming limit) in order to get the loan done, and at the time, based upon current loan amount, 2.6 points would cost $16,100 and change. But he had gone to a loan officer who did his math as if that $19,585 (my loan quote at that time for that rate - I suspect the competitor's was higher) was going to magically disappear like one of a David Copperfield's illusions. He calculated payments and savings as if there were no costs - based upon the current balance and new interest rate and amortization period. Of course, this makes it look like the client was saving a lot of money $382 off the payment and three quarters of a percent off the rate, give him a whole new thirty years to pay off the loan, and pretend the costs of the loan aren't going to happen to get the guy to sign up. You'd think that somebody who reads this website every day would know better, but that does not appear to have been the case. In point of fact, the competing loan officer still has not told the guy how much his closing costs are or how much that 5.5% rate is going to cost him through him. I'll bet it's more than I would charge, but I don't know.

Psychologically speaking, what the competing loan officer is doing is smart. Because there's incomplete information available to the prospect, and I'm straightforwardly admitting how much it's going to cost (which is a lot, as most people who aren't billionaires or politicians think about money), an indefinite, uncertain number sounds like it might be less, even though it won't end up that way. Furthermore, by pretending costs don't exist, he has raised the possibility in the client's mind that there won't be any, because most people don't know how much lenders can legally lowball. There will be costs,and I'm willing to put my money where my mouth is that I have honestly represented mine. If this other loan officer could really deliver that loan at a cost lower than I can, there would be no reason for him to prevaricate, obfuscate, or attempt to confuse the issue. I've written before about how you can't compare loans without specific numbers, and there is no doubt in my mind that this other loan officer knows what those numbers really are - he just doesn't want to share that information, and the way our public consciousness about loans works, he can most often get away with it. It's still scummy behavior, and takes advantages of loopholes in the disclosure laws to practice bait and switch, knowing that when the deception comes to light (at closing) most people won't notice, and most of those who do notice will want to be done so badly they'll sign on the dotted line anyway.

Now what's really going to happen in 99% plus of all cases is that the costs are going to get rolled into the balance of the loan. The client certainly isn't going to be prepared to pay them "out of pocket" if they're not expecting those costs. So here's what happens: The client ends up with a new loan balance of $619,585 (Probably higher, because they're likely to roll the prepaid interest in as well, and quite likely the money to seed the impound account, but I'll limit myself to actual costs). In fact, the difference in payment drops to $290 when you consider cost, and $115 of that difference is directly attributable to starting over on the loan period, stretching out the repayment period to an entirely new thirty year schedule of payments (even though he was only two years in), completely debunking any serious consideration of payment as a reason to refinance. But lets compare cost of money, in the form upfront costs ($19,585 to get the new loan, versus zero to keep the loan he's got) and ongoing interest charges ($3125 per month on the existing loan, versus $2840 per month on the new loan). In this case, you're essentially spending nearly $20,000 in order to save $285 per month on interest. Straight line division has that taking sixty-nine months to break even. Actual computation of the progress of the respective loans cuts a month off that, to sixty eight months. As compared to a national mean time between refinances of 28 months, and this particular prospect is currently looking to refinance after less than that. In good conscience, I cannot recommend a loan where it's going to take him almost six years to break even, and by not considering the costs involved in getting that rate, he's setting himself up to waste probably half or more of the nearly $20,000 it's going to cost him to get that loan.

In fact, if this prospect were to refinance again in 28 months (once again, national median time), he would have spent $19,585 in order to save himself $7847. That doesn't sound like a good deal to me, and it shouldn't sound like a good deal to you. But here's the real kicker: The balance of the loan he refinances in two years is $19,250 higher. Let's assume it takes a low rate, rather than a cash out refinance to lure him into refinancing again, so he gets a 5% loan to refinance again. The extra $19,250 he owes will continue to cost him money, even thought the benefits of the refinance he is considering end when he refinances again or sells the property. At 5% for a putative future loan, that $19,250 extra he owes will cost him $962.50 per year extra on the new loan. Even if he sells in order to buy something else, that's $19,250 the client needs to borrow, and pay interest on, that he otherwise would not. Even if the client waits a full five years to refinance again, he's only saved roughly $16,400 in interest, and the additional balance owed on the new loan has actually increased slightly, to $19,280 (Remember, he's two years into the existing loan, hence $115 of phantom payment savings which keeps reducing his balance if he keeps paying it)

Failing to consider the fact that most people are not going to keep their new loan as long as they think they will is the gift that keeps on giving - to lenders. I run across people in their forties and fifties who have done this, all unsuspecting, half a dozen times or more, running up eighty to a hundred thousand dollars in debt for nothing but the cost of refinancing, and at 6% interest, that's $4800 to $6000 per year they're spending in interest on that debt. A more careful analysis says that the calculus of refinancing should emphasize finding a rate that helps you for a lower cost, but that's not the way lenders get paid the secondary market premium, and that's not the way that loan officers get paid to do lots of loans. Therefore, if you find someone who will go over these numbers with you and tell you it's not a good idea to refinance when it isn't, that loan officer is quite a valuable treasure because they're going to keep you from wasting all that money to no good purpose.

A good rule of thumb is that if a zero cost loan won't put you into a better situation, it is unlikely that paying costs and points to get the rate down is really going to help you either. You are unlikely to recover those costs and points before you sell or refinance your property. If a loan that's free doesn't buy you a better loan than you've got, then the current tradeoff between rate and cost isn't favorable to refinance. There may be reasons to do so anyway - cash out, ARM adjustment, etcetera, but chances are against you getting a rate that is enough better to justify the cost. When you consider how often most people refinance or even actually sell and move, it's hard to make a case for anything other than low cost loans and hybrid ARMs. I understand the people who want the security of a fixed rate loan and a low fixed rate - especially with the loan qualification standards as fussy as they currently are. But that rate, especially, is likely to come with a cost that they will never recover before they voluntarily let the lender off the hook. Good mortgage advice takes this into account, with the net result that the folks don't end up in debt to the tune of $80,000 to $100,000 extra, and spending thousands of dollars per year just on interest for money they shouldn't owe in the first place. No, they never wrote a check for it, but it's money they spent, and if they had needed to write a check for it, they probably wouldn't have spent the money in the first place. Kind of like having a credit card with a balance owing of $80,000 or more, just for the unrecovered costs of refinancing, but people don't realize it because it's not broken out of the total cost and balance of their mortgage, and nobody educates them as to where they would be if they hadn't made these mistakes. I try to teach my clients what they need to know to avoid that situation, so they don't find themselves victimized by it.

Caveat Emptor

Original article here

For Sale By Owner Issues

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I've been taking a long look at the world of For Sale By Owner and similar concepts lately. With the digital revolution, you always want to be watching the tide to figure out if you're in a business that's about to go the way of milk delivery and diaper service - a few left, but only a tiny fraction of the size they were. Since blogs and online magazines replacing or at least greatly supplementing mainstream journalism is one thing I'm constantly reading about, it might be good information to know if my real career is about to go the way of journalism.

At this point, I'm not worried about needing to change professions. The world of For Sale By Owner (FSBO) does seem to be figuring out the legal ramifications fairly well. There are resources available to get most, if not all, of the legally required disclosures for sellers to avoid future liability to the buyers. I'm going to go on record as believing from the things that I have read and seen that they are not as assiduously practiced as they are by people with real estate agents working for them. Reading the groups, I am seeing all kinds of whining about "Do I have to disclose X?" "Do I really have to disclose Y?" Sometimes, the stuff is minor and inconsequential (leaky toilet, drippy faucet), but a lot of times it's pretty major as well (water leak in/under slab, lead based paint, asbestos, "minor" cracks in the slab). Mind you, I've heard similar whining from real estate agents, particularly new ones. But the real estate agents at least want to be in business (and not sued) for a long professional career with many transactions every year, and so have motivation to disclose everything they find out about, lest one transaction cost them their license. Many individual owners, it seems, even the ones who have been made aware of the legal requirement to disclose, are hoping to get through the one transaction unscathed. After all, they hope they're going to be long gone when the problem crops up. To this, I say, don't count on it, and failure to disclose can often make your legal liability worse than it needs to be.

Needless to say, this is a big "let the buyer beware," when dealing with FSBO properties. You're standing across the table from someone with an immediate motivation to not tell you about whatever metaphorical bodies are buried in the property because once told you may not still want to buy, and most particularly you may wish to reduce your offering price. They have only a hazy motivation to tell you - the indefinite threat of perhaps some legal action sometime in the future, when they may or may not have assets you can even go after. If that doesn't make you uneasy, something is wrong.

One area FSBO is falling short in is picking an appropriate asking price. By the evidence, this is not only lack of information but also homeowner ego speaking here. Some people are not aware of what their home is really worth, or if they are aware then they are ignoring the evidence. Speaking from personal experience, persuading people to put an appropriate asking price on their property is one of the most difficult parts of the listing interview. Also significantly, in the long seller's market we had, many real estate professionals were making a lot of money buying "For Sale By Owner" properties that were under-priced, and immediately "flipping" them for $30,000 to $50,000 profit, often more. Here's the math for a property that sells for $460,000 but should have sold for $500,000: In the latter case, assuming you pay a standard 5%, you paid a $25,000 commission, split between the buying and selling brokers. But you come away with a net that's $15,000 higher. I personally know of several sales where an agent purchasing a FSBO property then sold it again before escrow was even completed for profit of $75,000 or more.

There is still some of that going on, but the problem with most FSBO properties seems to be over-pricing the market, rather than under. Their neighbors house sold for $500,000, and by god they are going to get $525,000. Never mind that the neighbor house has an extra bedroom, an extra bathroom, 800 more square feet, sits on a corner lot that's twice the size, and most importantly, sold when demand was high and supply was low. They are going to get that price, come hell or high water. So they put that out as the asking price, and they wonder why the one or two people to express enough interest to look vanish as soon as they've seen it. The reason is simple: They've priced themselves out of the market. There are better homes to be had for less money. In a fast rising market, this may be a survivable defect. When prices are rising as fast as they were, the market would catch up to anything that was vaguely reasonable. That has changed now. It's bad enough with people who have a real estate agent for their listing. Two of the hardest fights with listing clients in this market are keeping the property priced to the market, and getting them to accept what in today's market is a good offer rather than hoping for previous years' "bigger fool." Seems that most people who don't have an agent are just in denial. There's a FSBO two doors down the block from a corner listing we had where I held an open house. Even with me drawing the traffic to him, he didn't get a single offer because his asking price was too high. That's fine if you would be happy and able to stay if the property doesn't sell. If you're not in that situation, it's not.

Another area where FSBO properties are falling short is in marketing. They've got an internet advertisement and a sign in the yard. Maybe they've got an advertisement in the paper (usually the wrong one), and maybe they are holding open houses. All of these are nice. None of these are optimal. First thing is that internet advertisement you have is often on one site where even internet savvy buyers don't necessarily see it. Even if that is free, it's probably worth money to list on a co-operating network of sites. For Sale By Owner signs in the yard are more bait for agents than a prospective buyer. I'll put a sign out there when I get a listing also - it does catch a few people, and a sign with an agent or broker's name on it keeps other agents from bothering you. But it's a long shot at actually selling the property.

There are places to advertise your property to actually sell it, and there are places where agents advertise their business to attract new clients. Most of the FSBO ads I see seem to be in the latter sort of place. I don't think I recall a "For Sale By Owner" ad in the places where I'd expect it to generate significant actual interest in buying that particular property. There are reasons for this. The ones that are likely to generate interest require more lead time. I don't mind spending the money (especially amalgamating my listing with other listings in the office). Even if it sells before then, it helps the office generate more clients we're going to go out and show similar properties with, and I get a certain proportion of those. But For Sale By Owners tend to balk, as they are thinking one transaction. There are also resources that make an Open House effective, but are not cost effective for somebody looking to sell one house.

Number one resource for actually selling the property is the Multiple Listing Service (MLS). Put it out there where the agents who the buyers come to will see it. My primary specialty is buyer's agent. I know they are ready, willing and able to buy a property. Do I even take them to look at "For Sale By Owner" properties? Not unless I know ahead of time that the seller will pay my commission. Nor does any other buyer's agent I know of. Before you "For Sale By Owner" types start cursing us, remember first, we've got to make a living so we'll be there for the next buyer. Second, we're actually living up to our fiduciary responsibility when we do this, as I've got their signature on a piece of paper that says they'll pay me if you don't. So unless your property is priced far enough under the market to justify the expense on my client's part, your property is not a contender, and I'd better be prepared to justify the expense on my client's part in court, so your under-pricing the market has got to be by more than my commission. Furthermore, going back to legal requirements, I've got to figure that there is a higher than usual chance that the seller will not make all the necessary disclosures, or perhaps won't tell the complete truth and nothing but the truth on them. This puts my clients, and through them, me in a bind: Sure my clients can and will sue you, but if you don't have the money my insurance is likely going to end up paying out, because even though I've done everything I reasonably could have done, you didn't have an agent.

Given that the Multiple Listing Service is far and away the best tool for selling any given property, if you're not on it, you're missing out on buyers. If you don't have a selling agent's commission listed on Multiple Listing Service that is at least what is specified in the default Buyer's Agent Agreement in your area, you are missing out on buyers. If you don't have an agent at all, you are missing more buyers. Because I, like other buyer's agents, want to be certain we're not wasting our time. I've done a real pre-qualification or even a preapproval on my buyers (if the transaction doesn't actually go through, I don't get paid by anyone). Compare that with Mr. P, whom I sent away the night before I finished this essay. He's out there looking at houses he wants to buy, but the fact is that given the situation he should continue renting. A competent loan officer such as myself who was less ethical could maybe get him the loan anyway, or maybe not. It would certainly be an uphill fight. So he's out low-balling "For Sale By Owner" properties on his own today. The one who's desperate enough to sell at that price needs the transaction done with the first buyer who comes along, and is going to spend at least a month finding out there's only a small chance of the transaction actually going through, a month that they likely don't have to spare. The other For Sale By Owners are likely to get mightily annoyed with him, but he's the customer they're most likely to get.

There are also issues of timeliness and context and negotiations to consider. Putting your property on the market for the wrong price is a recipe for disaster, because by the time you figure out that the buyers aren't interested at that price, your "days on market" counter is so high that they're not interested, period. Agents know - because they're dealing with the issues all the time - what is a good response in this situation to a given event, and the good ones understand a lot more about keeping negotiations appropriate, so as not to lose what really is a good offer.

Caveat Emptor (and Vendor)

Original here

Yet that is exactly what you want them to do.

To avoid competing on price, they have all kinds of distractions they offer to make life more convenient, but not cheaper. They offer automatic payment options, the convenience of having your mortgage at your corner financial institution, biweekly payments, mortgage accelerators, and even negative amortization loans, which offer the apparent benefit of lower payments, which many uneducated consumers believe is price, at the price of a much higher interest rate than you would otherwise be able to get, which is the price the lender really cares about, and the one you should also.

There is always a trade-off between rate and cost for a given type of loan. That doesn't mean that different lenders won't have different trade-offs. Some are less willing to compete on price than others, so they tell you about how great their service is, how you are such a difficult loan that nobody else can do, or how easy their paperwork is, or how easy their loans are to qualify for. As a matter of fact, the lender with the easiest paperwork and loosest qualification standards will usually have the highest price trade-off, because their loans are statistically more likely to default, and therefore have to bring in a higher interest rate in order to have the same return.

Just like branding in the world of consumer products, which is also in effect for mortgages (why else would National Megabank be spending all that money for commercials? They expect to make a profit on it!), all of these little extra bells and whistles increases the price they can charge consumers for their loans, which is to say, the rate that you get, and the cost to get that rate.

So long as the terms are comparable, a loan is a loan is a loan. Provided that it has no hidden gotchas, a 5.875% thirty year fixed rate loan is exactly the same loan from National Megabank as it is from the Lender You Have Never Heard Of. No pre-payment penalty, and lower costs for the same rate? That's the lender I'll choose. It should be the same one you choose as well. It doesn't matter to me what name I make the check out to, or what address I put on the envelope. It shouldn't matter what routing symbol you put on the automatic payment, either, if that's what floats your boat. Lower rate for the same cost on the same loan? Same situation. Everything else is window dressing.

(Okay, it doesn't often matter to me. There are lenders that I'll bet you've heard of where I won't place my client's loans no matter how good the price due to some issues with their lending practices. But those lenders trend heavily to be the ones with massive consumer ad campaigns that don't really try very hard for broker generated business, anyway, because brokers learn to stay away from them fast. Nor are they usually competitive on price, because they're aiming for the "consumers shopping by name recognition" market).

So how do you force lenders to compete based on price? It's actually very simple. Ignore all of the stuff that they try to distract you with, like low payments for a while or mortgage accelerators or biweekly payment programs. Those are bait, and they serve the same purpose as bait: To get you to take the hook. Think about the things that happen to the fish after it takes the hook. That's you, if you take the hook. Concentrate on the type of loan, the rate, and the cost to get that loan. Here is a list of Questions You Should Ask Prospective Loan Providers. Ask all of them with every conversation you have about what is the right loan for you, and the best rate and cost they can deliver on that type of loan. After you have settled on one loan with one provider, it is then okay to ask about the bells and whistles that lenders (and every other sales organization) love to distract you with. If you want auto-pay, or biweekly payments, or a mortgage accelerator, these are just as much in the lender's best interest to offer you as they are convenient for you to have. I wouldn't pay for them, but many people think they're nice to have, and that's fine. Just don't let them distract you from what's really important: The price of the money you're buying.

Caveat Emptor

Original here

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