December 2006 Archives

What a Difference 30 years Make!

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My wife sent this to me:

Scenario: Jack pulls into school parking lot with rifle in gun rack.

1973 - Vice Principal comes over, takes a look at Jack's rifle, goes to his car and gets his to show Jack.

2006 - School goes into lockdown, FBI called, Jack hauled off to jail and never sees his truck or gun again. Counselors called in for traumatized students and teachers.


Scenario: Johnny and Mark get into a fist fight after school.

1973 - Crowd gathers. Mark wins Johnny and Mark shake hands and end up best friends. Nobody goes to jail, nobody arrested, nobody expelled.

2006 - Police called, SWAT team arrives, arrests Johnny and Mark, charge them with assault, both expelled even though Johnny started it.


Scenario: Jeffrey won't be still in class, disrupts other students.

1973 - Jeffrey sent to office and given a good paddling by

Principal. Sits still in class.

2006 - Jeffrey given huge doses of Ritalin. Becomes a zombie. School gets extra money from state because Jeffrey has a disability.


Scenario: Billy breaks a window in his father's car and his Dad gives him a whipping.

1973 - Billy is more careful next time, grows up normal, goes to college, and becomes a successful businessman.

2006 - Billy's Dad is arrested for child abuse. Billy removed to foster care and joins a gang. Billy's sister is told by state psychologist that she remembers being abused herself and their Dad goes to prison. Billy's mom has affair with psychologist.


Scenario: Mark gets a headache and takes some headache medicine to school.

1973 - Mark shares headache medicine with Principal out on the smoking dock.

2006 - Police called, Mark expelled from school for drug violations. Car searched for drugs and weapons.


Scenario: Mary turns up pregnant.

1973 - 5 High School Boys leave town. Mary does her senior year at a special school for expectant mothers.

2006 - Middle School Counselor calls Planned Parenthood, who

notifies the ACLU. Mary is driven to the next state over and gets an abortion without her parent's consent or knowledge. Mary given condoms and told to be more careful next time.


Scenario: Pedro fails high school English.

1973 : Pedro goes to summer school, passes English, goes to college.

2006 : Pedro's cause is taken up by state democratic party. Newspaper articles appear nationally explaining that teaching English as a requirement for graduation is racist. ACLU files class action lawsuit against state school system and Pedro's English teacher. English banned from core curriculum. Pedro given diploma anyway but ends up mowing lawns for a living because he can't speak English.


Scenario: Johnny takes apart leftover firecrackers from the 4th of July, puts them in a model airplane paint bottle, blows up a red ant bed.

1973 - Ants die.

2006 - BATF, Homeland Security, FBI called. Johnny charged with domestic terrorism, FBI investigates parents, siblings removed from home, computers confiscated, Johnny's Dad goes on a terror watch list and is never allowed to fly again.


Scenario: Johnny falls while running during recess and scrapes his knee. He is found crying by his teacher, Mary. Mary, hugs him to comfort him.

1973 - In a short time Johnny feels better and goes on playing.

2006 - Mary is accused of being a sexual predator and loses her job. She faces 3 years in State Prison.


Now, is there anyone who believes any of these 2006 resolutions are preferable to the comparable one of 1973?

Perhaps we can start restoring some sanity in 2007?


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 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. The same applies if you cannot 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. Finally, most of this only applies if you want or need a loan. If you intend to pay with cash, you can buy anything legal that you desire with your cash, and the hurdles become much smaller.

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 sayin'.

You income, together with whatever amount you have for a down payment, gives you a budget for a property. If your credit score is not horrible, a down payment is optional, but you will need at least a couple thousand 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.

Regarding the down payment, it may be optional, but at least a certain amount is a good option if you have it. In order to make a difference on the terms of your loan, the required down payment generally goes in increments of 5%. 5% will get you better terms than you would get for no deposit, 10% will get you better terms than 5%, 15% better than 10%.

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. 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 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 (2.5 times income, four times income, whatever) are worthless. 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 ask for 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. 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. 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. For 100% financing under full documentation, a credit score of 580 is generally sufficient. Better scores will lower your rate, and therefore your payments, but the best thing that can be said about a 580 credit score is that it isn't putrid.

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.

Caveat Emptor


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, or at the very most an amortized 5/1 ARM, and stick to it. That 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. "Creative financing" has become so pervasive that shopping by the payment the real estate agent has posted, or tells you about, is severely hazardous to your financial health. This number should be the most important thing buyer's 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.

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. In the current buyer's market, that's a comparatively small amount of bargaining power. 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 have gotten themselves thrown out of my office in the last month. I guess they weren't interested - or able - to compete with other lenders on real loans.

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 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 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.

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. 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 is right now, even I might choose a thirty year fixed rate loan if I 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.

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


Carnival of The Capitalists

Carnival of Debt Reduction

Carnival of Personal Finance Recommended: Ask Uncle Bill


Roger Simon on Sandy Berger and smuggling classified documents out of the National Archives.

Question: If Condi Rice or Donald Rumsfeld did the same thing, what would the reaction be in the media?

Begging the Question 101:

Ford: Bush made 'big mistake' on Iraq justifications

"I just don't think we should go hellfire damnation around the globe freeing people, unless it is directly related to our own national security," Ford told Woodward.

(emphasis mine)

I always respected President Ford, but this does directly impact our national security. I haven't heard the tapes, so I cannot judge context or the way in which it was meant, but this is a common error called "begging the question," which presumes the answer in the premise. For instance, if you are trying to prove that all dogs are blue, and include in your premises a statement that anything not colored blue is not a dog. In this case, it renders the conclusion correct by an immediate logical corollary (the contrapositive), but it's still a worthless conclusion based upon a false premise - I have two dogs at home, neither one of them blue. A very common one is made by abortion proponents, when they argue that women have the legal right to do anything to their bodies that they please, and therefore abortions should be legal. I mostly agree with the conclusion, but not the premise. If you could do anything you like with your body, on what basis do we prevent, stop, or medically treat suicides against their obvious wishes? On what basis do we require drugs which the person freely chooses to be prescribed by a medical practitioner or even outlawed entirely? Error, NOMAD, Contradiction! Sterilize!

Nazi Germany did precisely nothing to the United States prior to the declaration of war after Pearl Harbor. Indeed, they were very accomodating in ignoring many actions, such as the sinking of three German subs by US Coast Guard cutters, that would have been valid causes for war (much like the US is currently treating both Iran and Syria, by the way). Why then, did we make defeating Germany in World War II our main priority and only devoted leftover resources that could not properly be used against the Reich to the Pacific Theater of operations, against the Japanese who so treacherously attacked us? Because Germany was the greater threat for many reasons, and President Roosevelt knew that Germany would have to be fought, and if they were allowed to consolidate their gains they would have been a much tougher opponent.

We could abandon the rest of the world to fend for themselves, wean ourselves of dependence on foreign energy sources, and completely abrogate all of our alliances, in effect walling ourselves off from the rest of planet earth, and still the people we are fighting would come after us when they have consolidated their gains. Indeed, such an act would make it immeasurably easier for them to make and consolidate gains, accelerating the day when they felt ready to attempt conquest or destruction of our homeland. They aren't interested in any kind of reasonable accommodation, any more than the Inquisition was. Indeed, the Inquisition was willing to make allowances for the weaknesses of men and women, and foibles and errors of people, whereas the Islamists are not. The Inquisition was given authority only over professed Christians, while the Islamists are after dominion over everyone.

We have the option of fighting them now, on their territory, or later on when they have grown immeasurably stronger when they are ready to conquer or destroy the United States completely. I would like not fighting them at all to be on the table, but the only way to achieve that is to accept the place of the dhimmi, which would be the death of all of those cultural differences that those arguing the hardest against the war would have us celebrate. Gay rights? Women's rights? Separation of church and state? Freedom of expression? The right to choose any religion, or none? The ability to ignore officious preachers of moralism?

Suppose the Bill of Rights were suddenly repealed by our own elected leaders? Not just the unconstitutional abridgements like McCain-Feingold and all of the limits on the right to keep and bear arms, but freedom of speech, political expression, equality under the law, all of those things particularly in the first, fourth, and fifth amendments that gets everybody all excited? The sixth, seventh, and eighth amendments that protect the due process of law? Do you think a Second American Civil War might be justified? The Islamists mean to impose these changes by conquest. Do you think that means it would be somehow better than imposed by the opponents of your favored politics?

Here's one link to the text of the Constitution. Is there anything there, either individually or in the aggregate, that you might consider worth defending, by violence if necessary? What if our next President proclaims the entire Constitution null and void (without the due process of another Constitutional Convention and ratification by the states)? Well, the people we are fighting want to do precisely that, as well as destroy our way of life and kill anyone who does not submit. Actually, they'll kill a lot of those who do submit, as well. I knew some folks who went back to Iran to help overthrow the shah. I've been informed that more than one of them was purged by the Islamist regime.

War is a horrible thing. But it is not the worst thing. Yes, many of us are going to be killed in the fighting, and much treasure spent, even if we win. That's a lot better than the alternative if we don't fight or if we lose: more of us killed, what treasure we don't spend confiscated, and that precious thing known as the United States which allows us all of these freedoms we take for granted gone forever.

Prices are down 20% locally to me. It is possible, even likely, that prices may come down further. But right now, buyers have more power to make the deal they want than they will again for the next ten years. Even the ugliest buyer is looking very attractive right now. When more people come off the sidelines and are willing to buy, buyers are going to have a lot less power.

For instance, right now seller carry-backs are practically routine. People with truly putrid credit are able to leverage this fact into 100 percent financing. Sellers don't want to do carry-backs, ever! They want their cash, not a continued interest in the property, and particularly not from someone with putrid credit who can't get banks to lend that much! But the facts of the market are giving buyers the leverage to get that. Later on, when more buyers come off the sidelines, sellers will tell such buyers to take a hike.

If it looks like I'm telling you that now is the time for buyers to get off the sidelines because nobody else is willing, you've got the first piece of the puzzle.

The second piece of the puzzle is that those sellers who don't have to sell are figuring out that now is a lousy time to sell. Total local market inventory is down by 2000 units since the beginning of December, and 8000 units since the end of summer. People rented them out and took them off the market. In my office, various agents have made at least a dozen offers where the sellers took them off the market and rented them out instead. It's great for those sellers who have that option, but what about those sellers who do not?

The answer is that those properties still on the market is the ones that have to sell. They can't rent it out for enough to cover the mortgage, even if they add hundreds of dollars cash to it every month, and how many people want to add hundreds of dollars cash every month to a mortgage that they couldn't afford in the first place? Many of them have negative amortization loans that they couldn't afford, while others have 2/28 Interest Only loans where they could barely afford the interest only short term payment, and now the interest only period is over, the rate adjusted upwards, and there's no way they can afford it, as most of those payments increase by forty percent or more. The end result of either is pretty much the same as when Wile E. Coyote looks down. Bye bye.

So what does this all mean? Let's leave aside the fact that the ratio of sellers to buyer spiked to 55:1, as this was Christmas week. But the week before, the ratio was 45:1, and I'm pretty sure that's where it's going to be back to in a couple of weeks. Since January 1st, 2006, 30,413 properties have sold while 46,274 have failed to sell and 17,026 are still on the market. This means that for all properties listed for sale on the local market, there is only about a forty percent chance that any given property sold at all (30413/30413+46274=0.3966).

Now obviously, it's not pure chance as to who sold and who didn't. Attractive properties correctly priced did fairly well, but even there, the point of having some nice feature like hardwood floors wasn't that you could therefore sell the property for $25,000 more than the one down the street with carpet over a slab - it was the fact that the property with hardwood floors sold, where the one with carpet over a concrete slab is still sitting on the market, if not expired.

Most important of all attributes in getting a property sold is the seller's attitude. In a market like this, the seller who has made up their mind that they are going to get every last penny out of the house is wasting their time. $25k for the hardwood floors, $15k for the marble in the bathroom, $15k for the whirlpool spa? Not going to happen. It's okay if they can last until the next seller's market, but we've already established that the ones on the market now can not. What's going to get that property sold is the seller who swallows their ego and realizes that the odds of a better offer are against them, and decides to accept the offer that's the same or even less than the last property that sold in the neighborhood, even if it wasn't quite so blinged out as theirs. They know that the buyers out there now are bottom feeders looking for the best possible bargain, and they can spend their own weekends putting in the hardwood floors, the marble in the bathroom, and save themselves a lot of money doing so. If your house has the whirlpool spa, that might draw the offer where the property without doesn't get one, but they're not going to offer $15,000 more for it. They're going to offer the same price, because they'd rather have the house with the bling than without, but they're not willing to pay significantly more for it. Gone is the market where even the most marginal improvements meant you could expect to get more for the property. It might come back again, but in the mean time, the home improvement companies pushing the consumer to improve their homes based upon investment return are referring to a market that no longer exists. Double paned windows? Nice, and nice that I'll save some money off the heating bill also. But it's not worth $20,000 to cut your heating bill from $250 to $160 per month. The opportunity cost of that money is over twice the return, and a competently advised buyer knows it.

The point of all of this is that if one seller won't do what is necessary to deal with you as a potential buyer, the next one over will. If they don't, they don't sell, simple as that. Furthermore, with as many properties as are on the market for as few buyers as there are, amenities are not bringing increased sales prices like they were a couple years ago. They're back to the situation as it was before that seller's market, where the nice feature was the one that drew the offer in the first place, but the buyers are not offering enough extra to recover whatever the cost of that feature was. This has some really depressing implications for those who bought blinged out developer property, but that's the way it is right now. For buyers, research and patience and the willingness to walk away are paying major dividends right now, as is the willingness to be in the market at all. There are a lot of desperate sellers out there right now, and if you wait until prices are increasing again, you will have missed the best time to buy.

Caveat Emptor

Gerald R. Ford 1913-2006

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Farewell, Gerald R. Ford. You will be missed.

Unlike so many others, he never wanted to be President, but did a good job with the situation he was handed. I've always thought that had he not suffered by association with Nixon as every Republican did, he would have been re-elected in 1976. Those of us who are old enough to remember the problems of his successor's term wish that he had been. The Mayaguez incident lasted a grand total of 4 days, not 444, and his willingness to take action in the face of Khmer Rouge aggression ameliorated some of the stronger negatives from the fall of South Vietnam.

Of course, his most "controversial" decision was his pardon of Richard Nixon. I was 13 at the time, and even then I thought it a no-brainer. Looking back, I now understand that the "controversial" thing about it was "depriving" the press, which leaned heavily left even then, of several more years of beating the Republicans with "Nixon!" as the case made its way through the courts.

Tigerhawk has more worth reading.

I was comparatively young when he left public life, yet the one thing I remember most about him was that he was never barbed or hurtful in his politics, making his points by persuasion and logic, never by belittling his opponent. For that reason, despite 66 vetoes in two years (12 over-ridden - the Democrats had a truly massive majority thanks to Watergate fallout), he truly was a healer. Nobody ever considered calling Gerald Ford "Hitler." To do so to the President who made his own breakfast would have been ludicrous. There are certainly worse things to be remembered for than his, "You can disagree without being disagreeable."

Perhaps not one of the greats. But definitely one of the good. Would that we had more leaders of his type.

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, 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? 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. You don't want to be like the fish, do you? 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 provider (or a primary and a back up), 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


(The original was posted March 31, 2006. This is an updated version)

Doing my workout this morning I asked myself what's next for the real estate market.

The state of the market here locally is that prices are and have been in decline. The Association of Realtors even finally admitted it last summer. They are still hiding how far that prices have declined, but that is to be expected, stupid as it may be.

What comes next? I originally said increased defaults, as short term loans come up for adjustment and people are unable to make the payments, as I had previously said any number of times, and unable to refinance because they owe more than the property is worth. Short sales also increase, as people try to just get out. More Notices of Default means more trustee sales, as well. If the property sells at auction, somebody probably got a bargain. If it doesn't, the lien holder owns it (subject to senior liens) and that may be even better if they are willing to admit reality, which some are and some are not. The phenomenon I've been encountering is that the servicer overseeing the foreclosure is often the original lender who approved this loan in the first place, then sold the right to receive payments. They take less than the amount of the loan, so that the company with the actual right to receive payments takes a loss, and they get sued. So they are playing the same game as the old joke with the punchline, "A lot may happen in a year. I may die, the king may die. And maybe the horse will learn to sing." A lot of the asset managers I've tried to deal with are freshly minted MBAs, twenty-three years old and no experience in the real estate market. Their entire adult lives, they have been hearing about how real estate appreciates twenty percent per year. They think if they stonewall hard enough, people will offer more than the property is worth. Not. Gonna. Happen.

All of these are happening already. When I wrote the original, daily foreclosure lists had more than doubled locally from a year prior, and the levels have continued to build. Trustee Sales are up, and so are REO's (Real Estate Owned by those who were originally lien holders). Check, check, and check. All about as surprising as gravity. What I'm trying for here is at least one prediction that has not already come true.

Rates have been rising of late, but there is a limit as to how far they are likely to go, if only because Bernanke and company are very shortly going to have irrefutable evidence of all of the above stuff nationwide (What did I tell you? They stopped raising rates in the summer). A nationwide economy has a lot of something analogous to inertia. Takes a while to move things in the direction you want them to go. More time, and more effort, than most folks, particularly bankers running our money supply, are likely to realize and sit still for without further pushing, which they have done a bit too much of, in my opinion, by about one full percent on the overnight funds rate. Once things get going in the direction that the Fed has been pushing them for the last two years, they are similarly going to have a lot of momentum built up. Bond investors are going to dry up at attractive rates, and Sarbanes Oxley or no, you're going to see private companies going public again because it's the only way they can raise capital at attractive prices, and the flow of public companies going private is likely to mostly stop. Hard to think of Sarbanes-Oxley as a brake upon economic activity, but in the short term, that's what it's likely to prove. CEOs and CFOs are still not used to the idea of personal responsibility for corporate activity, and while the cost of private capital is even vaguely competitive with public, private will be their choice. It's going to take a while for countervailing forces to come into play. This is still ongoing. The newer factor that's come into play is that the rest of the world may have finally woken up to how shaky the entire US economy is, with foreign investment in our debt keeping the cost of borrowing as low as it was (the law of supply and demand is always in force, even if it does take a while to work), and the dollar has slipped some in recent weeks, with the trailing expectation being that borrowing capital is going to become more expensive, and therefore, public offerings more lucrative.

When bond rates rise, so do mortgage rates, and mortgage consumers don't have the option of moving back to public offerings of stock. When mortgage rates rise, and people can only afford the same payments, prices fall, further exacerbating the price fall that's already happening. I actually think that my local market (San Diego) has seen most of the depreciation it is likely to, due to constricted supplies of housing and the fact that it is not the entire supply of housing, but only those intending to buy or sell who are influenced by the sales market. For those who don't want to buy, or those who don't want to or have sell, the market is not very relevant. They've got their property already. Furthermore, there is a large amount of pent up demand, for who want to buy, but are frustrated by market conditions or waiting for market conditions to improve. Let their perceptions of the market change, and they're going to be back in the market.

Lenders are already between a rock and a hard place to a much larger extent even than nine months ago, and it's going to get worse as those who were sold too much house, or took too much money out of their equity, continue to experience difficulty. Keep in mind also that aggregated mortgage bonds are an attractive investment because of their historical level of security, and even that's going to be compromised to a certain extent, and rates are going to rise further if for no other reason than that is what the money costs. Low supply and high demand. I expect rates on A paper thirty year fixed rate home loans to stabilize somewhere around seven percent, at least for a while. Shorter term fixed rates will be cheaper once the yield curve normalizes, and indeed, the 5/1 ARM is starting to be noticeably cheaper than the thirty year fixed rate loan again, if not nearly so wide as it usually is. Given the prices things have sold at in highly appreciated markets, this is likely to permanently popularize medium term hybrid ARMs, as saving one percent in interest on $500,000 is well worth the cost of refinancing every few years, and people are refinancing every two years on average anyway. Two and three years fixed is really too short for most folks, but five is probably more than fine.

Here's another newsflash. I'm not going out very far on a limb here, but a three bedroom single family residence in a reasonable neighborhood here locally is likely never to drop back into the sub $300,000 range again. I'd bet serious money it's not going below $250,000. That's what I said nine months ago, and the bet is looking more solid now than it was then. Yes, the market got badly overheated - but not that badly overheated. Furthermore, if past Southern California history is any guide, we'll lose about 30 percent of peak value, and then start going back up again. No fun if you're a semi-skilled worker trying to raise a family, but the most likely scenario nonetheless.

Now what's going to happen to the people who have bought highly appreciated properties who can actually make the payments? Well, if prices fall, they can't sell for what they bought for until they recover. They don't want to do that. But they don't want to be in a negative cash flow situation, where the rent they get from the property doesn't cover their expenses, if they can avoid it. They definitely don't want to be in that situation to a larger extent than they can avoid. A $500,000 purchase with a 6 percent first and 10 percent second yields principle and interest payments of $3276, plus property taxes of $520 and insurance costs of $120 per month, means that the owner is out $3916 per month without any repairs or management expense. A monthly rental of $1900 isn't going to cover that. A monthly rental of $2500 isn't going to cover that. This is starting to put more upwards pressure on rental rates. $2500 is the entire gross monthly income of someone making $14.75 per hour, by the way. But the people feeding the mortgage alligator don't really care, all they know is that they have to pay the bank so much per month, and set aside so much for the state and the insurance company. This is also going to put upwards pressure on wages, and therefore prices, as people have to make more to be able to afford living here, or anywhere else that got this highly appreciated. Inflation kicks into higher gear, which puts more upwards pressure on interest rates. Vicious cycle.

And this phenomenon is going to be part of what eventually helps prices make a comeback. If somebody is feeding the landlord $3000 per month, they're going to be more amenable to paying it to the bank instead. Especially since they get tax breaks, and most especially because when you buy the property you intend to live in, you take your monthly cost of housing out of the column that says "what the market will bear," which is subject to changes - and usually increases - and put it into the column that says "this is under my control." If you buy with a sustainable loan, your monthly payment may be higher right now, but you are putting it under your control forever.

(It is to be noted that even if that $500,000 property loses $150,000 in value the day after you buy it, historical 7 percent per year increases will have you back in the black in about five years, and ahead of a market return on the rent you would have saved in about ten. Thirty years down the line, your net benefit from the purchase as opposed to invest the extra money over the cost of renting and investing the excess in the stock market, will be somewhere between $800,000 to $1,000,000. An almost irrefutable argument in favor of buying a home, if you plan to live there a while. Yeah, it's no fun being upside down while it happens. But the eventual payoff isn't exactly chump change, even by the projected standards of thirty years from now.)

Caveat Emptor

First of all I love the information on the site. I've done some research into buying a home and have talked to several people who have bought homes and I can never believe the stories I've heard. My response is always "why didn't you just walk out . . it's only a $2000 deposit . . . you're paying that in the first year with the difference in interest you are getting now" but after reading your site it seems to me you would have to get lucky to find a good mortgage broker and get a good loan where what you are told is what you get. The rule seems to be if you want a house "getting screwed" is just a part of the process. In this market (DELETED) you would need to be especially lucky to find someone who is willing to be honest . . . it's a risk and, again, it seems to me being honest is will just lead all clients to the fibbers who, frankly, tell people what they want to hear.

Anyway, back in May 2003 I was looking for a house and a friend of mine was looking to invest $70,000 (that he got from another land sale) so he wouldn't have to pay taxes on it. We ended up buying a $150,000 home where I live now. By "we", I mean "he" because my name couldn't be on the loan for tax purposes (at least that's what they told us . . . it's hard to get good information). And, I know, I know, I have no rights and he can do whatever he wants and I understand that. If anything I've had a place to live where the rent was relatively low (but it sucks that I didn't get a house when they were affordable). I've been living in this house and paying the mortgage for more than 3 years now. I'm in a much better financial situation now and I'd like to buy the house from him. He also has another $70,000 from another land sale (I'm not sure of the details but suffice to say he is thinking about paying off the mortgage). Anyway, once all this happens I want to buy the house from him at a price way below market (similar houses are now around $300,000 but there is no way I'm paying $300,000 when I could have gotten it for $150,000 when I moved in). My question is: can a seller also be a lender? Where do I start? I've talked to a few people and they won't touch it . . . in fact, they have no advice whatsoever beside for me to move out and get my own house (which they would be happy to help me with). What are the tax implications of all this?

Thanks again.

If it was inevitable that you would get screwed as part of doing a real estate transaction, most of the information on this website would be useless and pointless. Furthermore, if it was inevitable, I'm not certain it would be appropriate to call it "getting screwed," if it happened on every transaction. What I'm trying to do here is give folks the tools to get correct relevant information, make rational informed choices, find honest competent service providers (it is not as difficult as I may make it seem sometimes, but neither is it easy!), and in general have a better outcome, which is the target you really want to hit. How much effort you want to spend is up to the individual reader. If you want to do only the easiest and most basic items, it should still make a significant difference. If you want to go whole hog, you should see much larger benefits.

Now, as to your specific situation, here are the issues I see:

First off, I have never heard of a situation where you cannot be on the title "for tax purposes." The only tax purposes that would serve is allowing the other person to get the entire deduction, which he would anyway from being the only person on the loan. As soon as the loan is recorded, there is no reason why there could not have been a quitclaim from him to him and you (in whatever manner you desired to hold it, most likely tenants in common in this case). This would have started the clock on having you on title, and since you cannot refinance for cash out within six months of having your name put on title via quitclaim, this constrains your options as well as putting you at your friend's mercy. You may have been paying the mortgage, but even if you can prove it this is unlikely to give you any legal rights if your friend decides not to play it straight.

The next issue, relatively minor, is that you have no verifiable history of paying either rent or mortgage payments at this point. Those checks you have been writing to pay the mortgage in your friend's name? Well, that mortgage is being reported as paid, but your name is not on it. Rent? Not there either.

However, assuming this really is a friend who intends to play it straight with you, this situation is very workable. If it was someone who wanted to work you over, you would be well and truly hosed. Now, you bought for $150,000, of which your friend furnished $70k. The loan for the remainder that you have been paying for sure looks like your contribution to me! By my reading, this makes him approximately 7/15ths owner, and you 8/15ths, but if your friend has been playing it straight, he's done you a pretty big favor not just by tying up his money in the down payment, but by allowing his credit to be used for your loan. This has effects on his debt to income ratio if he wants another loan, among other things. I wouldn't mind ceding him a larger share of ownership in your case.

Whatever the amounts of ownership you agree upon, however, you are also going to need to agree on a method for valuation. I'd probably agree to something like the average of a Comparative Market Analysis of sold properties in your area, and an appraisal. Appraisals are not what you could get on the market in the current conditions, and don't try to think that they are, but both measurements can be manipulated. Pay for each of them in equal shares. As compared to each of your investments, it's small potatoes, and a worthwhile guard.

You have an agreed valuation, and an agreed upon share of ownership. Out of that, you currently have a loan on your share, but that should probably be your issue, not the partnership's. So from that, you can figure what your friend's current share of ownership is, and therefore what he is due upon buy out. You should still have a pretty good ownership equity, roughly $80,000 by the rough amounts and ownership shares in the previous paragraph. So you need to come up with about $80,000 to pay off the current loan, plus about $140,000 (again, by the computations as to ownership share above, subject to revision per your agreement) to pay off your friend. Total owed: $220,000.

Now, your friend actually want to go from owner to lender, and I don't know of anything wrong with that, although in all truth I've never encountered it before in this context (seller carrybacks happen all the time in this market). Furthermore, he wants to invest an additional $70,000 in being the lender. Whereas this will not qualify for 1031 tax deferred treatment as far as I can see (consult a tax professional), this means you are going to have two loans on the property, one from a regular lender, and one from your friend. The specifics of this are difficult to see without more information, and shopping your situation around (I'm not licensed in your state, so I can't put my wholesalers through that for no potential pay off!). It could well be that your friend's loan ends up in second position, but it strikes me as more likely appropriate for a first, as the guidelines for Home Equity Loans and Home Equity Lines of Credit are more likely to have this whole situation be acceptable to your lender for the balance.

Now, as to the structure of the transaction, it's going to look like a sale, but don't expect real estate agents to want to work through that without a commission, which you are probably not going to want to pay, because all of the hard work to the transaction is kind of irrelevant in your case. On the other hand, good loan officers do these all the time. However, the commission structure for Home Equity Loans and Lines of Credit leaves them not making a whole lot of money unless you agree to pay them a flat fee for going through all of this, and for all the times I tell people that transactions aren't as difficult as some loan providers would have you believe, this is a very difficult transaction. I normally work on less than one point of total compensation for loans but I'd probably want to see about $6000 in order to put this transaction through, and that's if everything else is perfect. I don't know about your state's predatory lending law (most states have one, limiting total loan costs to a certain percentage of the loan), which may well prevent them from getting paid enough to make the transaction worthwhile for them. By comparison, on a loan of about $80,000 plus transaction costs, which is what the computations above suggest, California's predatory lending law limits total cost of the loan (and also total lender compensation via another law) to $4800. In most cases, direct lenders can basically ignore this by jacking the rate up so that they can sell the loan for more on the secondary market, but brokers cannot. And whereas that's way more than plenty in most situations, in this case it is not.

The reason why I'd want that much money is that, on top of everything else, this is a related party transaction. You are effectively selling from a partnership to one of the partners. That is going to mandate shopping lenders not only for price, but for willingness to do the transaction based upon the situation. We're going to need a very flexible lender, probably sub-prime. A paper Fannie Mae/Freddie Mac is right out. We are going to have to document an awful lot of stuff, and there are a number of points on which the loan can fall apart. You're also probably going to want this to be a short term loan without a pre-payment penalty, so that you can refinance after you've been on title six months or so, because you'll be able to get a better rate then (unless rates have skyrocketed). All this stuff adds to the complexity, and whether the loan will get funded or not is not something I can control by paying attention to underwriting guidelines like I can in other cases. This requires a lender who's willing to issue some waivers and exceptions, and I might have to submit this loan several times to different lenders over a period of months before it actually funds. That's probably the reason nobody wants it: They can't get paid enough to make it worthwhile. The predatory lending law may have good intentions, but in this particular case it's making life difficult for the consumer because brokers can't get paid enough to make it worth their while, and any given direct lender (especially the ones that consumers see, which tend strongly toward the high quality cookie cutter loan) is unlikely to have sufficiently flexible guidelines. You could go to a hard money lender, of course, but those rates are about fourteen percent or so, which causes most consumers to say, "Never mind!"

There is one other alternative. He could use that cash to buy you out, at which point he is left with basically his current loan, and I think this might even qualify for 1031 deferral (but consult a qualified tax professional before doing anything). If he can't rent it out for enough to have a positive cash flow under those circumstances, something is very badly wrong. He verifies that you've been paying rent/mortgage/whatever, and away you go with $70,000 or so in your pocket and all the leverage a qualified buyer has in a very strong buyer's market, and yours becomes a very easy transaction. I think you could do very well for yourself, given what little I know of your particular market at this point in time.

Caveat Emptor


This one came from a search engine:

amortization of real estate loans early payoff based on a lump sum payment

This is one of the smart things you can do. Not necessarily the smartest, mind you, but smart. Unless you have a pre-payment penalty, you can always pay more than your minimum payment, and often even with a penalty. The question is if there's a better way to get a return on that money, whether by paying down a higher interest debt or by investing the money in a new asset. If you owe thousands of dollars on a credit card at twenty-four percent when your mortgage is at six, why would you want to pay down a tax deductible six percent instead of a non-deductible twenty four?

Similarly, if you can earn ten percent somewhere else with the money, why do you want to pay your six percent loan down? Net of taxes, a six percent loan costs you about 4.5 percent, depending upon your tax bracket. Even if the return is not tax deferred, the net return on ten percent is somewhere over seven percent for most folks. Say you are in the twenty-eight percent tax bracket and the ten percent is completely taxed every year. $10,000 over the course of 15 years will turn into $28,374 if invested. If it's fully tax deferred, it turns into $41,772. For comparison with other numbers later on in the essay, at twenty-seven years the numbers are $65,352 and $131,099, respectively. Not half bad.

Suppose you've got the cash flow to instead buy another property? That puts the power of leverage to work for you, and if you can rent out one of your properties or something, possibly multiply your money by a factor of ten within a few years. When you put ten percent down, and your new property appreciates ten percent while giving you a few dollars per month of cash flow, that's smart investing. At seven percent annual appreciation (historical average), you've doubled your purchase price in a little over ten years. A three hundred thousand dollar property will likely be a six hundred thousand dollar property in about ten years (It's just numbers), while you've paid the loan down from $270,000 to about $226,000. Even if your expenses of selling are seven percent, your gross is $558,000, less the $226,000 you've paid the loan down to, and you've come away from the property with $332,000, not counting those few dollars per month you netted after paying your expenses. Sure there are places and properties that don't pencil out, and being a landlord is a headache, but as you can see the potential rewards are substantial if it does "pencil out".

Now, let's say you do this every nine years on a three to one split, and 1031 Exchange the first two at least. After nine years you have $281,267 pre-tax, net in your 1031 account. You then turn around and buy three $600,000 properties. You end up with three loans of about $506,000 each. Assuming net zero cash flow on the properties, after nine more years, you have three loans at $434,100, netting you $1,775,286 into your 1031 accounts, which you then roll into three more properties each at $1.2 million purchase price. Your loans are $1,000,000 each, but you rent them for enough money to break even on expenses. After nine years, you sell all of these properties, and end up with just a little under $10,750,000 net of sales costs in your pocket before tax, which at long term capital gains rates (15%) nets you $9.13 million or thereabouts. Now, you did start with three times as much money, and nobody in their right mind sells off nine highly appreciated properties in one year, and you did have the headaches of being a landlord on an increasingly widespread basis for those twenty-seven years, but this illustrates the money to be made for the same investment. Patience and leverage working for you over time are far more powerful than any quick flip.

But assuming there are no better alternatives, it is a smart idea to pay down your mortgage. Here's why: Let's say your balance is $270,000 at six percent, and you pay your loan balance down by $10,000. Your regular payment was $1618.78, and it still is, but interest is $1350 of that. Only $268.78 would normally be applied to principal. Yeah, you've just sent them about six months of payments - but it just paid your loan down by three years of principal payments. Assuming you never sell and never refinance and never pay an extra penny again, you will be done in month 324 - saving yourself thirty-six payments for a total savings of $58,276. Not to mention that if you do refinance, you'll pay lower fees. Not in the league of some of the alternatives above, but still a nice return on investment. Definitely beats spending the money.

Caveat Emptor


This email exchange is worth another article on a different subject. Everything down to "Afterwards" is a straight out of the email except that I deleted any information that might identify a particular individual or company.

I am currently working with a coworker with no agreement. However, she has offered to rebate 50% of her commission. Are you negotiable with your commission?

I am very ready to buy a place at a bargain or discounted price. I have been pre approved by DELETED for $550 but I do not want to spend more than $525, preferably around the $450 range.

I have sufficient liquid funds for 10% down and have an excellent credit score...score 3 months ago was 752.

Let me know.

I do have lower cost packages for when you do part of the work, starting with finding the property.

When I find the property, I retain the entire commission.

Yes, getting half the commission back is cool with most folks. But consider: Did your current agent find you something like this? Does she spend enough time shopping the market that she even knows what is and is not a bargain, or does she just say "Here is the living room."? What value is she providing you? If the answer is, "not much," then no wonder she's willing to rebate half the commission! As far as she's concerned, the half she does keep is free money for going around and looking with you. My goal is that my clients end up with at least 10% they would not have had without me - either a better property for the same money, or the same value property for a lower price, or some combination of the two. Now, if getting half of a two point five percent commission via rebate sounds better than saving 10% of the value of the property, by all means keep doing what you are doing. If getting a property that is worth more, or paying less for the same property, is what you are after, you need someone who is likely to deliver that.

Yes, I'm one of the deepest loan discounters there is. That's because a loan is a loan is a loan, as long as it's on the same terms. A thirty year fixed from National Megabank is the same loan as a thirty year fixed from the Bank of Nowhere in Particular, provided the rate, costs, and terms are the same. Only difference is who you make the check out to.

No two properties are alike. Especially in the current market, the difference between shopping smart and not doing so is tens of thousands of dollars, far more than a commission rebate. I don't rebate buyer's commissions because I provide more than that in value.

Now, I've got some bargains I've found. If you'd like to work with me and get shown these bargains, or have me go looking for bargains specifically for you, give me a call and let's make an appointment to meet and get my contract signed. It's non-exclusive, so if you don't like what I find for you, you're free to stop at any time and go work with someone else. If I don't perform, as in find the property you want, I get nothing. I put a lot of work into every client or prospect I work with, with the idea of getting them a better bargain. I'm confident enough of my abilities that I don't need to tie you to me exclusively. But you do get what you pay for. If you want a Yugo agent that breaks down in the middle of the transaction and leaves you stranded, that's no skin off my nose, but you are not the client I'm looking for and the bargains I find are for my clients.

Consider that your boss could probably hire other people to do your job more cheaply, but his additional investment in you probably makes him more money than that cheap replacement worker would save, and that's same reason is why I am worthy of my pay.

By those characteristics, you are a very qualified buyer. You should be working with someone who knows how to use that as leverage to get you a better bargain.

Or you can pay full price for a mediocre property, and console yourself with 1.25%.

If you decide you would rather have the real bargain, here I am, ready to go to work for you.

It may be true of what you are saying, however, if you want to win over are going to have to change the tone of your communication. You come across very demeaning. Even if you were giving your services away free...I wouldn't be interested.

I took the time to explain the situation to you, rather than a flat answer. That's just a small taste of the value I provide. I am paid to be the expert, and I earn my pay. If you are an expert, you don't need me. If you don't know about all the stuff you don't know about and are stuck in denial about "Agents don't even need a college degree!", you won't see the value of a real expert - which is part of the point of what I wrote. Believe it or not, there are clients a good agent does not want, and you appear to be one of them by your response.

If all you're interested in is that rebate, that's fine with me - I am not looking for penny-wise and pound-foolish clients. I am looking for people who understand and are willing to pay for value when they find it, in order to save more money in the long term. But if you won't pay for value, don't be surprised when you don't get it. If you don't believe skill makes a difference, by all means go with the commission rebater.

Good bye and good luck.

You are an idiot. And I am going to report to the board.

There are plenty of agents that want my business. I haven't even tried to contact any agents yet.

You are the one that needs the good luck.


Afterwards: This guy is working with a weekend agent who isn't good enough or confident enough to quit her real job on the largest transaction of his life. No wonder he doesn't realize what a difference a good buyer's agent can make! Furthermore, it's highly unlikely that working forty hours per week somewhere else, she has the time, energy, and inclination to keep up with the market and its changes, let alone screen out properties that aren't worth the client's time. Value provided? Letting him into the property and saying, "Here is the kitchen. Here is the living room." Most people really can figure that out for themselves. Improvement in outcome over just doing something incredibly stupid and calling the listing agents? I can't see that there is likely to be any.

Now this guy was hoping I'd cave on my commission, and it's okay to ask. It's not okay to get upset when someone won't. It's counterproductive to get upset and claim I'm being "demeaning," by explaining to him what he plainly had not considered, that the value provided by a good agent far exceeds the commission rebate. He probably thought that that was "hard negotiating," not understanding that he had marked himself as someone that cannot be dealt with on the basis of mutual profitability, both of us coming out of the exchange better than we otherwise would have. If you don't understand that there is a problem or challenge, you are unlikely to understand the solution. On paper, the Yugo looks like a good idea. But once you deal with one, you know it's no bargain. Maintenance, reliability, performance, noise, lack of room, etcetera, etcetera, etcetera. I see a lot more original VWs on the road, marketed to the same demographic over twenty years earlier, than I do Yugos. Problems in real estate transactions happen, and they're often much better buried than anything purely mechanical. Furthermore, there's no real "lemon law" equivalent in real estate, and if you fail to deal with the issue at the proper time - most preferably, before it's a problem at all - it's far more costly to go back and fix. You saved $4000 on agent commission! Yay! You bought the wrong property, paid too much, can't afford necessary repairs, and have to sell at a huge loss and pay bigger commissions out of that than the person who sold you the property did? Not so good. Definitely not so good. Not to mention that with the prices of real estate being what they are, anything you "saved" in compensating the person who is supposed to be the expert on your side is likely to be lost several times over because the person who will work cheaper isn't worth as much.

In certain quarters, it's practically an offense against humanity to claim that you provide more value than another agent might, but it is nonetheless true that some agents provide more value than others. Get offended if you want. It makes zero difference to the facts. It is more constructive to employ techniques to find those agents who provide more value. Agents need to know the market segment they are serving, and this person is not part of mine. My business model does not permit me to do business with this sort of client and stay in business. You want cheap service with a commission rebate? The weekend agent is the way to go, not me, however much it might anger you to be told so. You want someone who is actually going to find you a better property at a better price, and provide more leverage in negotiations? You may be the client I'm looking for, and the discounter with the commission rebate is as inappropriate for you as an agent as I am for his ideal client. The discounter might want my clients, but they are not set up to serve the needs of those clients. I might occasionally do business with one of the discounters preferred clients, but I have no interest in seeking them out, and I cannot stay in business spending as much time and effort on them as someone where I make the full commission. Truth be told, the existence of such clients dilutes the value of my reputation, when somebody who has persuaded me to offer them a discounted package for lesser services tells someone who might otherwise be a good prospect that I did a good job, but nothing special. My target client is someone who's not only looking for excellent value, but recognizes it when they see it.

Caveat Emptor.

I am going to do a seminar on First Time Buyer Programs to see if there is a demand for it here in San Diego. If this one attracts sufficient business, I will do others.


Real estate expected to flounder in 2007

Just a few echoes of what I've been writing, most recently in this article.

However: Most mainstream articles suffer from inertia. "As before, so in the future." They kept writing schlock about 20% per year gains for nearly two years after the market started to turn. I think they are most likely correct, and that the market will recover in 2008, but I am seeing moves in some indicators that say summer 2007 (July or so) is a real possibility. However, this will not be a return to 20% gains per year, merely a return to upwards valuation trends.


via Q and O, Bruce Bartlett on the best way to advance a libertarian agenda. Sending the Libertarian Party money is roughly equivalent to flushing it down the porcelain commode. So how is the libertarian agenda to advance? By Political Action Committee. It works for the NRA, so libertarians really shouldn't need to duplicate effort by spending any great amount defending the second amendment (and if you're calling yourself a libertarian but are not in favor of the right to keep and bear arms, you probably need to consider the philosophical underpinnings of your politics again). It works for any number of other organizations. Why could it not work for libertarians? Kind of an exercise in political judo or aikido, using the mechanisms of the statists to advance our agenda.


to all of those who have served.


Does Osama know? Zawahiri's most recent propaganda release.


Since this will quite likely be my last L&M before Christmas, be careful, be safe, and cherish those close to you.

I've got an article with the same genesis as today's ready to go for tomorrow, and I'm working on a major current events article (which I'm aware that I have neglected here for quite a while. I'm loath to repeat the same arguments over and over when nothing about the underlying situation has changed).

If you're in the mood to help someone for Christmas (or whatever holiday you celebrate, or for no reason at all)

Soldier's Angels could certainly use some help. Turnabout is only fair.

I got this email the other day, responding to one of my Hot Bargain Properties posts on my other site:

I am currently working with a coworker with no agreement. However, she has offered to rebate 50% of her commission. Are you negotiable with your commission?

I am very ready to buy a place at a bargain or discounted price. I have been pre approved by DELETED for $550 but I do not want to spend more than $525, preferably around the $450 range.

I have sufficient liquid funds for 10% down and have an excellent credit score...score 3 months ago was 752.

Let me know.

Now, I do have lower cost and commission rebate packages for when buyers bring me transactions that have the property at least settled upon. The reason is that not only is there much less work to be done done, but I'm providing a lot less value in those circumstances. I'm not going out and going over dozens of properties, eliminating eighty percent of them before taking them around to see the good stuff. I'm not doing background checks on all those properties, looking for issues. At the point that the property is settled on, at least half of the value a good buyer's agent brings in is already moot. We've already dealt with the issue of which property (or properties) are worthy of making an offer on. Now we're down to negotiations, where I still provide a lot of value, facilitation of the transaction, which any real estate agent worthy of their license can do, and looking out for problems, which starts earlier when I'm locating the property, but when you have title companies and building inspectors and appraisers getting into the act and getting paid, it becomes easy. It's no longer a matter of spotting the issue before an offer is made, it's a matter of dealing with the issue if and when it pops up. Much easier, much less time consuming, and much less liability on my part. When you've decided to make an offer before I even come into the picture, there is no issue with did my representations cause you to make an offer on the property when you would not otherwise have done so. I haven't been sued yet, but that's the number one cause of real estate lawsuits. Sometimes it's an unscrupulous agent telling the folks that the airport is going to close, but sometimes it's also people who think the agent said something they did not in fact say, and sometimes it's people who make something up stuff due to buyer's remorse. If you've already decided to make an offer, that whole issue is gone. Liability? Much less. Amount of work done and time invested? Way less. Amount of value provided to buyers? Also much lower. So yes, I'll work for less in those situations.

When I find the property, I retain the entire commission.

Yes, getting half the buyer's agent commission seems like a good idea on the face of it. One to 1.5 percent of a purchase price in the hundreds of thousands of dollars. But how much value do those agents really provide? Consider: Did that agent find you something as interesting as the property they emailed me on? If the agent they were working with was finding them properties like that, there would be no need and no interest in working with me. If she spent enough time shopping the market that she even knows what is and is not a bargain, this person would never have contacted me. Does she look for problems and issues or does she just say "Here is the living room," and try to talk you into making an offer on every property? What value is that other agent providing you? If the answer is, "not much," then no wonder she's willing to rebate half the commission! As far as she's concerned, the half she does keep is free money for going around and looking with you. My goal is that my clients end up with at least 10% they would not have had without me - either a better property for the same money, or the same value property for a lower price, or some combination of the two. Now, if getting half of a two point five percent commission via rebate sounds better than saving 10% of the value of the property, or getting a property 10% more valuable for the same price, by all means keep shopping agents who rebate commission. If getting a property that is worth more, or paying less for the same property, is what you are after, you need someone who is likely to deliver that, and those discounters business model does not allow them to invest the time and energy to do so. Quite frankly, if they don't make a habit of it, they aren't likely to have the necessary expertise, even if they wanted to.

You may ask about how this squares with my attitude about loans. Yes, I'm one of the deepest loan discounters there is. That's because a loan is a loan is a loan, as long as it's on the same terms, and most folks qualify for better loans than they get. A thirty year fixed from National Megabank is the same loan as a thirty year fixed from the Bank of Nowhere in Particular, provided the rate, costs, and terms are the same. Only difference is who you make the check out to.

No two properties are alike. Especially in the current market, the difference between shopping smart and not doing so is multiple tens of thousands of dollars, far more than a commission rebate. I don't rebate buyer's commissions because I provide more than that in value. In my estimation, and that of the people who are working with me, it's money well spent. You get what you pay for.

Good buyers agents make a habit of looking for real bargains, whether or not they have a client it's appropriate for. It's called market knowledge. With market knowledge, a good agent can not only identify the ones that are bargains, you are able to negotiate better terms on those bargains. Good buyer's agents usually have bargains they know about that they just haven't found the appropriate client for yet. If you'd like to work with them and get shown these bargains, or have them go looking for bargains specifically for you, there is a price to be paid, and that price is that they make a little more money than the do-nothing discounter. You don't pay it, at least not directly, the listing agent does, and through them, the seller. If you believe that the final price might be somewhat higher to reflect that, you would have some justice on your side, provided you don't consider the value in locating the bargain property, the value in negotiating for a better price, and the value in avoiding problems before they happen, or dealing with them in initial negotiations rather than at the end of escrow. If you don't see the value, then not only are you saying that you don't see the solution, but that you don't understand that there is an issue. This indicates someone on the first level of competence: The unconscious incompetent. Not only do you not know how to do it, you don't realize that there is acquired knowledge and acquired skill involved.

Now a good agent who knows they provide value should have no difficulties asking only for a non-exclusive buyer's agent contract. if you don't like what that agent does, if you do not agree that there is value in that agent's approach, this leaves you free to stop working with them at any time and go work with someone else. If the agent doesn't perform, as in find and deliver a property that you agree is more "bang for the buck" than you would otherwise have gotten, by all means go work with the bump on a log who splits the buyer's commission with you.

If you want a Yugo agent that breaks down in the middle of the transaction and leaves you stranded, that's no skin off my nose, but you are not the client I'm looking for and the bargains I find are for my clients. I am neither obligated nor inclined to share them with people who want to use some other agent. Go find them yourself if you don't think I'm providing value. Just the knowledge that something like that is available should be a large amount of help. But if you can't, perhaps you might consider that perhaps I might be providing a certain amount of real value for my pay?

Very few people reading this are likely to be receiving minimum wage for their employment. If you are not prepared to concede that it is possible for more skilled, more knowledgeable people to deliver a more valuable product, whether that product is service or commodity, what possible justification do you have in making more than minimum wage? For that matter, unless you are one of those people whose work has to be done on site, why isn't your job being done by some subsistence level worker in a Fifth World hellhole? Even if we limit ourselves in the application of this principle to qualified and licensed people here in the United States, my guess is that your boss could probably hire other people to do your job more cheaply, but his additional investment in you probably makes him more money than that cheap replacement worker would save, and that's the reason you are worthy of your pay. This very same reason is why I am also worthy of my pay.

By the characteristics they are claiming, the person with the email at the top of the article is a very qualified buyer. Don't you think that should be working with someone who knows how to use that as leverage to get them a better bargain? Suppose they weren't. Don't you think it might be in their best interest to have an agent who knows how to structure a transaction so that it can work, and can help avoid wasting time and money on properties and transactions where it can't and sellers who do not have the option of working with them in the requisite way?

Or you can pay full price for a mediocre property, and console yourself with a much smaller amount of cash, that when you consider the entire situation, is a fraction of the money that came out of your pocket but didn't have to. Pay too much, and get a check back for maybe a fifth of it in cash. Sound like a good deal to you? Maybe you didn't pay cash for the property, but then you've got a loan, and you paid additional fees based upon the size of that loan, and interest because you borrowed that money, and more in property taxes because you paid more than you should have. All of this eats away at money you would otherwise have in your pocket and equity that you would otherwise have in the property. Just because there's no explicit dollar figure on it doesn't make it any less real. How would you feel about writing a check drawn directly on your net worth for some unknown amount? Not so hot? That's what you are doing by using some bump on a log discounter who basically allows you to keep a percentage of what they provided no real value to earn. This is one of the largest transactions of your life. Scrimping on the compensation of the person who has the knowledge and skills to save you many times what they cost is almost as intelligent as OJ Simpson hiring a cheap lawyer. Even though I hope that you haven't been accused of murder, using a less skillful agent means you wasted money. Even though that's not a crime and you did it to yourself, it's still nothing beneficial to your overall financial picture.

Caveat Emptor


Most of what you read on financial planning in the media is garbage, but here is one of those occasionally useful pieces: IRA Rollovers Could Have Tax Implications.

Here's the idea: You keep company stock in your qualified plan aside from any rollover you may do. Leave it with the company. Convert it to non-qualified money, which means you take the hit for ordinary income at whatever you paid for the stock, or its value at time of acquisition(consult a tax professional. There used to be some circumstances where you could substitute other assets of equal value, and avoid the ordinary income hit altogether). Hold them for one year or more after conversion.

Now, if you sell them, you're talking about long term capital gains, rather than ordinary income tax, a much lower rate, and subject to your control as to when you realize it.

Because it's no longer part of your IRA, you are not paying ordinary income tax rates on the whole amount as you take it out of the account. Nor is it subject to Required Minimum Distribution (RMD) rules that the IRS has. You pay only capital gains tax when and where you redeem them, as you redeem them. Capital gains is a much lower tax than ordinary income, provided you hold for at least one year.

This is not for every qualified account. Since the brand new Roth 401s are after tax accounts, the whole thing is rather self defeating if the assets should be held in one of those, or in a Roth IRA for that matter. Why would you want to do this to conserve taxes if there are no taxes due if you just do nothing?

Now, by and large, I recommend moving your money to an IRA of equivalent nature when you leave a company. Traditional 401k to Traditional IRA, Roth 401k to Roth IRA. But as you can see from this, there are exceptions to that general rule.

Caveat Emptor

(Postscript: My wife is the IRA clerk for a fairly large local institution. You would be amazed how often people get bad advice from generic tax farms, and how often theoretically competent professionals do the rollover forms wrong. This highlights the fact that just because they work for Famous Well Known Corporation, doesn't mean they know what they're talking about. Matter of fact, I've regularly seen people working for Famous Well Known Corporations give awful advice that cost clients money, and would lose the business permanently to anyone else. But people cut Famous Well Known Corporations way too much slack. It is a better strategy to consider the individuals who will be performing your services.)

That was a question that brought someone to the site and the answer is very simple: they don't give you the loan. You haven't agreed to pay them back, so why should they?

There are two major cases of this, one of which has two sub-cases. The first case is that if it's a purchase money loan. Because you don't get the loan when you don't sign mortgage documents, there may be issues with whether or not the seller is entitled to keep your good faith deposit. Now, if you can come up with the cash to pay the seller from somewhere else, for instance, if you have it sitting around and just would have preferred to get a loan, no worries. You still have the option of hauling out your checkbook, and you can get a loan later, although it will be "cash out" loan which generally has a rate and term trade-off a little bit higher than "purchase money". If you applied for a back-up loan, you can sign the other loan papers. But since most people don't fall into either of these two categories - people with the cash lying around and people who applied for more than one mortgage - you are probably looking at the unpleasant reality of not having the money to purchase the property. In most cases, the loan contingency has expired, assuming there was one to start with. Matter of fact, usually all of the contingencies have expired, leaving you without anything to excuse not consummating the transaction. Therefore, any good faith deposit is at risk, not to mention that the transaction may well be dead. The seller only agreed to give you that exclusive shot to buy the property for so may days. If you want to extend escrow, most sellers will require some additional consideration in the form of cash in order to allow the extension. In fact, many agents and loan officers have gotten very lazy and lackadaisical about deadlines, with potentially severe repercussions to you, their client. Once those contingencies have expired, usually on day seventeen, you typically are stuck. Consult a lawyer for the exceptions, but there really aren't very many. This is one of the many reasons why being successful in real estate is about anticipating possible problems and taking precautions. If you wait until the problem crops up, it's usually too late, and often, the best thing to do is sign the loan documents even though they are nothing like the loan quote that got you to sign up with that company, because otherwise the consequences of not signing are even worse than signing. Many loan companies target the purchase money market with this in mind.

The second major case is if you are refinancing, which leaves you in pretty much the same boat you were in before you started the transaction. You own the property already. You have a loan now. Unless you have a balloon loan coming due, you just continue on with what you were doing before you started the process of refinancing.

There are two major reasons why people refinance: Better terms, or cash out. If you are doing it for better terms, and the new loan doesn't deliver, there pretty much is no reason to sign those documents. This includes if they are actually willing and able to deliver the rate, just not at the cost they indicated when you sign up. There is always a trade-off between rate and cost in mortgage loans. Usually, the lowest rate will not be worth the costs you have to pay to get it, but if they lie about what it really costs to get you to sign up, those final loan documents are going to have a rude surprise if you look at them carefully. All but the worst scamsters will usually deliver that rate and type of loan they talk about. Where they fall short, or actually, go over, is in the costs department, because a loan with $5000 more in costs will likely have a lower payment than the loan where they don't hit you for those extra $5000 in costs, but do give you the rate that the costs they talked about really buys. Most people shop and compare loans by payment. It may be short-sighted and the best way there is to end up with a bad loan, but they do it anyway. They are more likely to bail out of a loan where the monthly payment is $60 more than they were initially told but has the same costs, then they are to back out of a loan where the payment is $25 more, never mind that the former is probably a better loan for them.

Refinancing for cash out is a more nebulous area. Since it's a refinance loan, you probably don't have a deadline, so you can go back to the beginning and start all over if you want to. Sometimes, however, rates have shifted upwards since you started the process, and so it can be to your advantage to go ahead and reward the company that lied to you in order to get you to sign up. If they haven't done so, however, dump that problem provider and see if you can go find someone honest! Furthermore, sometimes people have absolute deadlines as to when they need that cash, or it saves them so much money that they are better off signing those documents anyway, or the improved cash flow means they don't have to declare bankruptcy. Most often, there is plenty of time to go back to the beginning and try again, but there are exceptions. In this situation, I'd be particularly careful to sign up for a back up loan, or require a written loan quote guarantee, but people don't always understand the problem until they have been bitten.

Now when you don't sign loan documents, if you have put down a deposit with the lender, you are going to lose it. Low cost ethical loan providers who really can deliver what they talk about, and whose rates really are competitive, do not typically ask for deposits, and are willing to work without them if they do ask. They know their rates are competitive, that they intend to deliver what they talked about and that there are any rates significantly better out there. It's only when the company fails one of these tests that they have a real need for a deposit, in order to commit you to their loan.

One more item needs to be covered: Irrelevant documents aren't needed. I don't need anybody except those folks who are getting a negative amortization loan to sign a negative amortization disclosure. The same thing applies to pre-payment penalties. If they don't apply to your loan, they shouldn't be required. If they can't fund your loan without it, there is a reason, so don't sign disclosures you aren't willing to accept the implications of. If you sign a negative amortization disclosure, the legal presumption is going to be that you realized it was a negative amortization loan and accepted it on those terms. Ditto a pre-payment rider. Of late, unscrupulous companies seem to be asking people to sign these after loan funding "for compliance". Consult with your lawyer, but I wouldn't sign them at all. If they were able to fund your loan without them, they are obviously not a necessary part of the loan structure. If not, why did they fund your loan without them? The only "compliance" aspect is to this is complying with them getting paid more money. Admittedly, it's small-minded to refuse to sign the pre-payment rider when you were informed at sign up that the loan had a pre-payment penalty, but bottom line, they shouldn't fund your loan if they aren't willing to accept it as it sits, and that's not the situation most folks are running into. They are asking the questions and being told the answer is "no," only to discover later that the answer was really "yes," but by lying to their prospective customers, some loan providers can get paid large amounts of money and pawn bad loans off on most of their customers.

Caveat Emptor


Drew over at zillow asked me to do a short little Q & A piece for them. It went up a few days ago, and I thought I'd post my original piece here as well.

What are some online resources consumers should be using to find loan rate information?

None that are any good, as in the sense of providing good relevant information that's applicable to specific cases. There are many loan quote forums that will quote you a rate. They quote you a low rate or a low payment to get you to contact them - and that's all that it is, a teaser. I have literally gone right down the line in two different comparative quote forums, contacting every company and asking for quotes that comply with the standards they are supposed to quote to. Not one company was even prepared to quote me what they were advertising. Nor did the forums themselves do anything when I complained - they are not interested in policing the quotes, as to do so risks losing some hefty income when the companies quit subscribing to their service. The few companies that advertise honest rates that are really available have given up on those forums in disgust - they attract clients in other ways.

Unpopular as this truth may be, you need to shop live loan officers and have real conversations and ask a lot of hard-nosed questions. Here is a list of Questions You Should Ask Prospective Loan Providers. If you want to suggest any additions to this list, I'd love to know.

What should a 1st time home buyer look for when comparing and contrasting loans?

1) Make certain you are really comparing the same type of loan. Asking about the industry standard name for the type of loan contemplated helps. Even if you don't know what it means, the other loan officers you talk to will. 2) There is always a trade off between rate and cost for the same type of loan. One lender's trade offs will be different than another lender's, but you always have a range of choices, even with the same lender. Just because one loan has a lower rate or lower payment doesn't make it a better loan. Find out the total cost of getting that rate, and figure out how long it will take you to recover costs via the lower interest rate. Given how often most people refinance, a higher rate with a higher payment but lower costs is often the better bargain. There is no sense in paying four points for a loan you are only likely to keep for two years.

What is the biggest mistake you see 1st time home buyers make?

Three most common disasters: 1) Buying or wanting a more expensive property than they can afford. Any competent loan officer can get you a loan that you can not afford, but you still have to face the consequences later, and these consequences can be well buried. Find out what you can really afford with a sustainable loan, and stick to it. Settling for a lesser property is much smarter than buying something you cannot afford. 2) Not shopping around for services. Even if you trust your brother in law the real estate agent, or your sister in law the loan officer, shopping around gives them concrete reason to stay honest. The worst mess I ever cleaned up was caused by someone's favorite uncle trying to make too much money, and the niece was blissfully unaware until her husband brought me into it - six weeks after it should have closed. 3) Believing that because someone puts some numbers onto a Good Faith Estimate (Mortgage Loan Disclosure Statement in California) that they intend to deliver that loan on those terms. This is, unfortunately, not the case in the industry at large. If they do not guarantee their quote in writing, the Good Faith Estimate (or Mortgage Loan Disclosure Statement) is garbage, along with all of the other standard forms that you get with it. The only form that the law requires to be accurate is the HUD-1, which you do not get, even in preliminary form, until the loan is closing. Big national lending institution everyone has heard of? Doesn't mean a thing. Ask the hard questions, and do not permit yourself to be distracted.

When do 50 year mortgages make sense?

Perversely, rates on 40 year amortizations are usually comparable to interest only, and fifty year amortization rates are usually higher. Nor are any of the these usually a good choice for a purchase money loan. All three are strong indicators that you are trying to buy too expensive a property for your budget. See Common Mistake Number One above.

What do you think about Adjustable Rate Mortgages (ARMs)?

I am a big fan of certain ARMs in most markets. Most of the time, a fully amortized 5/1 ARM will be at least one full percent lower on the rate than a comparably expensive thirty year fixed, and the vast majority of people refinance within five years anyway. Why pay for thirty years worth of insurance that your rate won't change when you're likely to let the lender off the hook within a few years anyway? With that said, however, right now (late November 2006) the spread in rate is only about a quarter of a percent or less between a 5/1 ARM and a thirty year fixed - and at the low cost end of the spectrum, the thirty year fixed may actually be less expensive for the same rate, so I'm recommending thirty year fixed rate loans quite a bit right now.

Is there a certain number people should be looking at when determining if they should refinance?

Forget payment. With no other information to go on, I would bet that someone trying to get you to refinance based upon a low payment was pushing a bad loan, and probably low-balling the payment as well.

Once again, you've got to have a good conversation with the loan officer. Look at the the money you will save from the lower interest rate - the interest charges to a loan. If you're saving half a percent on a $400,000 loan, that's $2000 per year. Compare this to the cost, and how long the rate is good for - or how long you're likely to keep it, whichever is less. If the cost is zero - and true zero cost loans do exist - you're ahead from day one. However, if it costs you $12,000, it's going to take you six years to break even, and most folks will never keep the same loan six years in their lives. Since there is no way to know for sure unless your prospective lender will guarantee the quote as to rate, total cost, and type of loan, you need to go in to final signing with the idea firmly in your mind that unless they can show both the cost and the benefit, you're going to walk out without signing. Indeed, many companies are very adept at pretending costs don't exist, and hiding costs at closing. Industry statistics: over half of all potential borrowers won't even notice discrepancies at closing, and of the ones who do, eight to nine out of ten will just sign anyway. This rewards people who lie to get you to sign up. Haul out the HUD-1 form at closing and make certain it conforms to what you were told when you applied. Most don't, and the loan officer knew it wouldn't when you signed up. Read the Note carefully also, before you sign.

More questions? I'd love to answer them! Contact me and ask!

Caveat Emptor


Carnival of Thoughtful Consideration


Ban Sworn in As U.N. Secretary-General

He started off right:

He pledged "to set the highest ethical standard" and "work to enhance morale, professionalism and accountability among staff members, which in turn will help us serve member states better, and restore trust in the organization."

However, he then followed it with:

Ban also paid warm tribute to Annan, saying "it is an honor to follow in your revered footsteps."

"Your tenure has been marked by high ideals, noble aspirations, and bold initiatives," he said. "Your courage and vision have inspired the world. ... You have given the United Nations new relevance to the people's lives."

ROTFL! You know, I'm pretty sure you're supposed to tell the icebreaker joke first.


Palestinian PM returns to Gaza, leaving money behind

Sounds like Israel is being the bad guy, until you are reminded of this:

Israel, the United States and the European Union regard Hamas, which is sworn to Israel's destruction, as a terrorist organization, and imposed sanctions after the Islamist group rejected their demands to recognize the Jewish state, renounce violence and accept existing interim peace accords.

In short, money in Palestine under Hamas control becomes terrorist money. If Mexico was at war with the US, I wouldn't want us to allow people to bring money to the Mexican government, either.

Want evidence?

Gunbattle Prompts Gaza Crossing Shutdown

After dark, two loud explosions rocked the area and police said militants blew a hole in the border fence about a half-mile from the crossing. More gunfire was heard, as witnesses said Hamas gunmen were firing at the Egyptian side, drawing return fire from Egyptians and presidential guards from the rival Fatah movement.

One very interesting moment as a Palestinian leader inadvertently admits to the media the way Palestinians work:

Abu Mujahid, a spokesman for the Popular Resistance Committees, said his group supports efforts to arrest those responsible for the killing. "Any person found guilty of killing children deserves to be killed in front of the people, even if he belongs to the PRC," he said. "His factional immunity is lifted, and the PRC is ready to help with any investigation."

Emphasis mine. Until this changes, and Israel can count upon the Palestinians to police their end of things and keep their own people under control, there will be no real peace. Whatever the Palestinians want to call it, when one side gets to attack the other that is not peace, and you shouldn't expect the Palestinians to keep it. Suppose a US Army brigade invaded Mexico, blowing large pieces out of Ciudad Juarez or Tijuana, and when the Mexicans demanded we do something about it, we just told them, "Oh, that was just Colenel Jones, who doesn't like you," and kept Colenel Jones in command of his brigade, maybe even promoted him. You think the Mexicans might have a valid complaint? You think they might be justified in trying to get a little of their own back? That's what Israel deals with every day, and this momentary slip admits to the world how the Palestinians think, and how Palestinian politics work.

They are talking about killing Palestinian children, of course. Killing Israeli children gets you a medal, a bonus, and a promotion.


Serious developments: Sen. Johnson Critical After Surgery

I hope he recovers, and quickly. I make no secret of the fact that I prefer Republican politics right now, because of the War on Terror and the economy, but the Republicans keeping control of the Senate in this fashion would leave a bad taste in voters mouths while serving no particularly good purpose.

Sorry moonbat conspiracy theorists: No Republican "dirty tricks here, just one of those things that happen sometimes.

Johnson's condition, also known as AVM, or arteriovenous malformation, causes arteries and veins to grow abnormally large, become tangled and sometimes burst. The condition is often present from birth.


Arteriovenous malformation is believed to affect about 300,000 Americans, according to the National Institute of Neurological Disorders and Stroke. The institute's Web site said only about 12 percent of those have any symptoms. The symptoms, which range in severity, can include severe headaches, memory loss and dizziness.


Iran nukes prompt concerns within Mideast

Ambassador Ross, now at the Washington Institute for Near East Policy, also said at an event Tuesday that the Saudis are telling the US, "Stop them - or that [nuclear power] is the way we go, too."

If that doesn't get the attention of the Indians and Pakistanis and Russians, I don't know what will. That would leave a Wahhabist Arab nationalist state with nukes when the Saudi monarchy finally comes apart.

"They are saying that if there is to be a Shiite bomb, then they will need a Sunni bomb to counterbalance it," he says. "They don't want that, but if their neighbor Iran goes nuclear in this climate of deepening Shiite-Sunni divisions, they don't see how they could sit aside and not match it."

Civil wars are always the nastiest.


Foreclosure auctions up. The reason why?

"In California, I saw a billboard that said, 'Own the home you want, not the one you can afford,' " says Thomas DiMercurio, a Denver real estate broker who specializes in bank-held foreclosures. "That was so silly."

Yes, but it's also a widespread attitude. I've had at least eight prospects dump me in the last year because I tried to tell them what they could really afford, so they went and found somebody who would pretend that they could.

You are only kidding yourselves if you buy a property that you cannot afford. Sure you might get lucky and get raises and be able to afford it later. But you also might lose your job, need to relocate to keep it, or any of a host of other issues.


Calif. Company Faces Immigration Charges

A Southern California fence-building company and two executives pleaded guilty Thursday to knowingly hiring illegal immigrants and agreed to pay a combined penalty of $5 million. The executives could also go to prison.

Put those executives away. The fact that people are willing to hire them is why they break our laws to come here. This was willful and blatant:

"You have show a kind of criminal conspiracy," said Steven Camarota, research director of the Center for Immigration Studies in Washington, a group that advocates tighter immigration controls. "The mere hiring of illegals is not enough."

The illegal hiring took place between 1999 and 2005.

U.S. immigration officials said last year that 100 employees at Golden State Fence's Riverside office were unauthorized to work, including three whom the company had been ordered not to employ after a 1999 audit by the government.

Our daily dose of irony:

Among Golden State Fence's projects in recent years was construction of part of a 14-mile border fence in San Diego in the late 1990s.


It's US vs UK in online geography battle

take the quiz here before the end of the year.


I think I've been pleasantly surprised! The spokesperson for a national group has declined to claim victim status! Don't change $$$ for us

Perhaps we should chip in and get the man a bodyguard before the professional victims send out a hit squad...


neo-neocon on war, and how winning decisively is the more merciful option.

Neptunus Lex on the Long War.

Can I Afford This Property?

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Cold Hard Fact for today: The average Real Estate Agent or Loan Officer is not motivated to tell you that you can't afford your property.

For the agent you are trying to talk people out of a property after they have already fallen in love with it. Let's face it, if it's higher in price, it should have features that lower priced properties do not, and it should have fewer things that consumers do not want. Indeed, one of the easiest and most common ways unethical real estate agents sell properties is by showing you several lower priced properties, fixers which lack those attractive extras, then show you the blinged out immaculate property while whispering sweet nothings like, "I can show you how you can afford the payments!" (which is not the same as being able to afford the property!)

All agents learn that by telling the client "no," or anything that sounds like "no," they are likely to lose that business. Good ones know that putting a client into something beyond their budget is a good way to have the transaction come back to haunt them. But for most, the temptation of the easy sale that made itself if too strong. They want that commission check. Nothing wrong with commission checks. If they provide real value to the client, they are a way of showing the world that you have done something valuable, same as a doctor, carpenter, or computer programmer. It's when you use your position of trust to sabotage them that problems start - and you should experience problems. Many agents have not been around long enough to understand flat or declining markets. In truth, I wasn't in the business the last time we had one, either. But I am old enough to remember, and careful enough by nature that I refuse to assume that a rapidly rising market will save my bacon, as many agents have become used to.

And for the foreseeable future, rapidly rising markets are unlikely to save anybody's bacon, because the market isn't going to be rising rapidly. Inventory is high, long term rates are set to rise, and we're just seeing the leading edge of a wave of problems caused by over-the-top practices of the last few years. I think we're past most of the price decline locally, but conditions aren't there for a return to the market we had most of the last decade.

Lest you be wondering, the loan officer is even more unlikely to counsel you on whether you can really afford the property. Between Stated Income, Negative Amortization Loans, and loans that are both of these, you can get anybody with an income and a not too putrid credit score into the property. In fact, I heard some real howls of outrage from certain brokers when lenders tightened their recourse on brokers this last year. Even so, the paycheck is now and certain, the risk of default vague and indefinite, and for most loan officers, there's another concern as well.

You see, most loan officers cultivate some friends who are real estate agents, and that's how they get their business. That agent brings them business because they have a history of getting the loan through, so that agent gets paid. Sometimes they may have their hand out for a referral fee as well, but the important thing for you to know as a consumer is that referral you get from an agent to a loan officer has nothing to do with how great their rates are, and everything to do with how creative they are in getting some sort of loan approved so that agent gets paid for the house they sold. Tell just one prospect who has made an offer on their dream house that there is an issue with being able to really afford that loan, and the word will get around the real estate community in no time. Result: For causing one agent to not get paid, Joe Loan Officer not only will not get any referrals from them in the future, if the client does find Joe Loan Officer on their own, the agents are going to do their best to talk them away from Joe, who, from their point of view, "stole their paycheck" by telling the client that they really could not afford the loan that was necessary to make the transaction work! Even if they took that transaction to some other loan officer who got it closed, Jane Realtor doesn't want her clients to have anything to do with Joe, lest she lose another potential commission check!

So what can you, the consumer, do about this? Well, I can't tell you all about the special cases, and I lack the programming capability to embed a spreadsheet and loan calculator. But I can give you some good general rules of comparison, and guidelines laid down by lenders as to whether or not you can actually afford that loan.

Start with your total monthly gross income. Assuming you printed this out, write that number here:

Loan Type

A Paper ARM

A Paper fixed

sub-prime general

sub-prime severe

sub-prime extreme

Multiply Income by (DTI*)















*DTI: Debt to Income Ratio


A: use fully indexed rate for qualification purposes. This means the underlying index plus the margin after it adjusts, assuming current values.

B: If interest only, use fully amortized rate for qualification purposes.

Any four function calculator will do this much. Now this is the largest number you will qualify with. As you should be able to see, it's more difficult to qualify for A paper, even though that is where you want to be. But we're not done. This is total housing and debt service, the so-called "back end ratio." So from that number, you need to subtract your monthly debt service: Car payments and other installments, and minimum credit card payments. You pay this much already. You obviously cannot afford to pay it out for housing also!

So add up your credit card, car payment, and other monthly debt obligations. Subtract it from your numbers for back end ratios, computed above. This will give you a set of five numbers that tells what you can afford for housing costs, depending upon how far you want to go. But we're not done! This is total cost of housing; the so-called "PITI payment." It includes not only principal and interest on the loan, but also property taxes, homeowner's insurance, Condominium Association dues, and Mello-Roos assessment districts (or their equivalent outside of California, if applicable). So from this, you need to subtract all of the known stuff or stuff you can make a close approximation on, like Association dues and insurance and taxes, to arrive at how much of a loan you can afford. Please note that for Negative Amortization Loans, loan officers may use the minimum payment for qualification, but you are still being charged the real interest rate! Still, it should become obvious as to why Negative Amortization loans are so popular in high priced areas right now. Not only will the lenders pay between 3.5 to 4 percent commission for them, not only do they allow lower payments to be quoted, but they make it look like you qualify for a bigger loan than you can afford, which means the real estate agent gets a bigger commission from selling you a more expensive property, and the loan officer gets paid more, also, because now you have applied for a larger loan! I have heard every rationalization under the sun from loan officers and real estate agents on this score, but they are still inappropriate for the vast majority of people who have them. I can get a better interest rate on a better loan for less cost, every time, but then I have to tell the client about the full amount they are really being charged every month, and they might have to content themselves with a less expensive property, meaning that real estate agent is going to have to do some real work. Go out onto the web and look for some loan calculators (Auto loans use slightly different assumptions, so don't use those calculators), or if you have a financial calculator, use it! Use the real interest rates that are available, and if the number you get comes out much higher than your quoted payment, they are trying to snooker you with a negative amortization loan. There is no magic about loans, and a healthy skepticism will help you prevent problems from happening in the first place.

Now add the down payment you intend to make to the loan you can afford, and that tells you whether or not you can afford the property.

Caveat Emptor


Carnival of The Capitalists Recommended: Professor Bainbridge (executive pay)

Carnival of Personal Finance

Carnival of Debt Reduction


This week's supreme irony of life is that the same public school that calls it "Winter Festival," and utterly refuses to permit the "C-word" anywhere on campus, now wants us to buy overpriced presents through them for a fund raiser. My wife (a Catholic) is more than a little irritated, and justifiably so. I just sent it back with a note saying that I'm ill-disposed to buy Christmas presents from any place that refuses to utter the word "Christmas."

And yes, this same school has no problem with Kwanzaa or Ramadan, among other things. I could understand and I would agree if they were equally strict about leaving everybody's special agenda outside school grounds, although this spiritual humanist still wouldn't shop for Christmas presents through them. But to single one group out for special exclusions isn't even-handedness. It's discrimination, and I would be very glad to see them successfully sued for it.

And since it's less than two weeks to Christmas, one of my favorite seasonal songs, Tom Lehrer's A Christmas Carol seems somehow appropriate. (I had to scroll down to find the "Listen" link)


A sad day. The actor who played "Young Frankenstein"'s monster has died

But I was going to make Espresso!


Raids in 6 states may be largest ever

Homeland Security Secretary Michael Chertoff said Wednesday the investigation uncovered a "disturbing front" in the war against illegal immigration, in which illegal immigrants are using the identities of U.S. citizens to obtain jobs.

Right up to date on the latest thirty year old trends, Homeland Security is.

During a raid Tuesday at the Swift plant in Greeley, Colo., a frustrated Tony Garcia watched as Immigration and Customs Enforcement agents swarmed inside to arrest illegal immigrants. "We need help, we need answers," he said, questioning who would take care of the children whose parents were arrested.

Who takes care of the children of anyone else who's arrested? I'm sorry the kids got caught in it, but if we're not willing to enforce our immigration laws on people with children, then illegal immigrants will, amazingly enough, treat children as a "get out of jail free" card.

Immigration officials last month informed Swift that it would remove unauthorized workers on Dec. 4, but Swift asked a federal judge to prevent agents from conducting the raid, arguing it would cause "substantial and irreparable injury" to its business.

No sympathy whatsoever. Haul those doing the hiring to jail right along with the illegals.


Senator Wants Universal Health Care Plan

I want a cheap reliable faster than light drive. It appears that Mr. Wyden is doing about as much in a direction that will benefit his objective as I am to achieve mine. His way still amounts to "fiddle at the edges and make corporations pay." Repeat after me: Corporations never pay for anything. Their customers, and their customers customers, do.

Good basic universal health care is very easy to figure out, but politically DOA.

The group, created in 2003 by legislation sponsored by Wyden and Sen. Orrin Hatch, R-Utah, recommended that the government take steps to guarantee that all Americans have basic health insurance coverage by 2012.

And it gets paid for how? With what revenue? I'd like to see basic universal health in some form, but I keep coming back to that killer issue. It's one of those issues where everybody is trying to make everybody else pay for goodies accruing to them. There are names for this: "Rent seeking behavior" and "Tragedy of the commons," being two of the best known. It sounds callous to talk about money when people are suffering, but improperly done universal health care will not only cost our economy far more than the current state of affairs, but it will cause more human misery as well. When you're ready to make the hard choices that make economic sense, I'll be ready to help. Until then, go bark up some other tree.


The Fed Hedges, Citing Housing Woes

The Fed began the year with a quarter point hike to 4.5% and followed with three additional hikes before leveling off in June--a cumulative 425 basis point tightening for the cycle in just over two years. All the while, the Fed has maintained its vigil against inflation expectations taking root and, barring a "smoking gun" (like an adverse financial event in the mortgage or auto sectors), the central bank still appeared set against a policy reversal. Yet when the Fed finally took its foot off the rate-hike pedal in August, the pause was viewed by many as a concession to bond-market participants with a more pessimistic view on the economic trajectory.

Any cuts at this point will be "too little, too late." Had they wanted to avert the problems, they wouldn't have gone so low, and would have raised rates slowly and gingerly. But the Fed is always over-reacting to events at least a year after it should have. When they talk about stopping hikes in the overnight funds rate as a "concession" to the bond markets, you know they're acting like bankers, not economists.


Speaking of "too little, too late": The Baiji Yangtze Dolphin is with all probability extinct.


Why they got it wrong.


Anybody want to bet me that "dirty tricks" accusations are flying on the moonbat sites? Sen. Johnson suffers possible stroke

He is a Democrat. The governor of South Dakota, who would appoint any replacement, is Republican. Since a Republican replacement would bring the split to 50/50, Vice President Cheney would hold the deciding vote, and the Republicans retain control. I don't think the American people wold be happy, and it might set the Republicans up for more punishment at the polls.

On the other hand, the stroke does not seem bad from the reports, and "caught very early," among other verbiage, is always an encouraging phrase to hear regarding strokes. If some hypothetical Republican "dirty tricks" squad was responsible, I suspect it wouldn't have been nearly so minor. So even if Senator Johnson is out for a while, my guess at this point is that it's going to be obviously temporary, and Democrats will still control the senate, leaving us stuck with majority leader Harry Reid.

Short answer: It almost certainly won't sell!

The first thing that happens is that when it goes onto the Multiple Listing Service, all the agents who see it know that it's overpriced. Even on the public part of MLS, the members of the public who see it wonder, "Are the walls gold-plated or something?"

The first thing you want when you put a property on the market is for everybody who is looking for a property of that nature to come and see it. Overpricing it is the best way I know of to cut down drastically on the level of interest. If they don't come see it, most people are not going to make offers. Most particularly, they will not make good offers if they don't come see it. If they do come see it, they are going to be expecting something better, and disappointed people don't make good offers, if they make one at all. That high asking price communicates that this property has something above and beyond the competition. If it doesn't, they're going to wonder what in the heck you and your agent were thinking. They're going to go away shaking their heads at the waste of their time. If they make an offer, it will be a desperation check.

The agents in the area are going to avoid the property, also. They know what similar properties are going for. Why should they try to sell yours for $10,000, $25,000, $50,000 above market comparables? Yes, they'll make a little more if they do sell it, but it's much easier to sell a property that is a real bargain. I'd rather sell sell a real bargain at $400,000 than an over-priced turkey for $450,000. The difference in compensation isn't that much, and I'll work much harder, and I'll lose most prospects by trying. I try to sell them an over-priced turkey looking for the sucker of the year, and a large proportion of clients won't want to work with me any more. I can make the commission off of a $400,000 sale, or I can lose the client by trying for $450,000. If they can afford $450,000, I can find them a better property at the same price. Happy clients bring me more clients for free, and as any real estate agent or loan officer can tell you, getting potential clients in the door is the hardest and most expensive part of the business. I assure you that every real estate agent who has been in the business more than about three hours knows this. If you were priced right, I might have shown that client your property, but you weren't, and so I didn't. Either you have placed yourself beyond their budget, or I can find something better for the same price.

Furthermore, overpriced real estate tells me that not only does the listing agent not know what they are doing and does not know what appropriate pricing is, but also that the seller likely does not have their head in the right place as to what the property is worth. Six months or a year down the line, it's time to make a low-ball offer and see if you're desperate yet. And if you needed to sell in ninety days, you will be. Right now, if I bring in a client who offers what the property is really worth, that's so much wasted time on my part and that of my buyer prospect, because I'm fighting two people with their heads stuck in the Land of Wishful Thinking, and I cannot force either one of you to listen to reason.

If people do come see your property, most of them won't make an offer. Most people don't look at just one property, even if they like yours. They may not look at enough properties, but they will look at more than one before they write an offer for anything. And since they have seen at least one other property, unless it's as overpriced as yours is, they're not going to make a good offer on yours. Many times, it may falsely communicate to them that the other property is a heck of a good bargain, and you just sold that other property, for which that other property's owner and listing agent surely thank you.

By over-pricing the property, not only do you set yourself up for all of this, but you miss the period of highest interest in your property, which is right after it hits the market, tapering off after about a month. One of the hardest, most pernicious ideas for a good agent to fight is the idea of putting it on the market over-priced "just to see" if they can get thousands of dollars more than comparable properties are selling for. The other is the concept of "bargaining room." Not only are you unlikely to get more than the market comps, but by over-pricing the property during the period of initial interest, the owners have almost certainly frightened away potential buyers who might well have offered market value if the property was priced correctly. Nor do these people come back later. They're looking at the stuff that hit the market this week, not four, six, or ten months ago. The agents in the area remember that it sat on the market for six months even if you somehow manage to get the days on market counter reset. Foot. Bullet. No assembly required, because you did it to yourself. If you had a need to sell by a certain time, or for the best price, it's not going to happen.

Indeed, several months out, you'll start getting those low-ballers I talked about earlier. They really do want to buy your property, but they won't offer anything like what you might have gotten earlier, because your property isn't worth that much to them. It's no secret that just waiting a little while on over-priced property is one of the best ways to get a bargain that there is. Most people put the property up for sale because they have a reason they want it sold. Most of those reasons are time-sensitive, and many are time critical. Wait until the deadline looms, or has passed, and the seller has no bargaining strength. I don't care how much "bargaining room" you gave yourself. Bargaining room is nothing. Bargaining strength is everything. When your best alternative is losing the property to foreclosure, you have no strength. If you won't deal, these folks will wait until the lender owns it. It's all the same to them, but it isn't to you.

Now right now, with prices falling, the appraisal isn't quite the problem it usually is for over-priced real estate. But usually, if you actually do win the lottery - and the odds you are facing really are in that league - and your listing agent sells it to the Sucker of the Year for more than the comparables, the appraisal isn't going to support the sales price. This means they can't finance the full sales price, and the Suckers of the Year are even less likely than other people to have the money for a down payment. I've said this more than once, but I don't remember the last time a first time buyer had a significant down payment. Even people who aren't first time buyers usually want to buy with as little down as possible, and you've just boosted the amount they have to come up with out of their pocket if they want your property - not to mention that most purchase contracts these days have appraisal contingencies built in. Even with prices falling, many appraisals are falling short. A couple of nitwits just put the house I grew up in on the market for 630,000! I took a look for grins and giggles. The owners have gussied up the back yard a little, but other than that it's the same as I remember. No way is that appraisal coming in even if they do find the Sucker of the Year to make an offer, so the Suckers of the Year have to front all those thousands of dollars to make the transaction work, and Suckers of the Year are just that - suckers. The chances of them having that kind of money sitting around where nobody else has conned them out of it are miniscule, to say the least. The only alternative I'm aware of is a seller carryback, and there are some real issues and problems with those. Meanwhile, of course, you are stuck in escrow with them and the clock is ticking and they may have grounds for a lawsuit if you are not careful. Even if they don't, they may sue you anyway, and tie up the title until the court gets around to ruling, or until the arbitration hearing and all of the appeals are over.

In short, over-pricing your property is the best way I know of to get yourself very frustrated, waste time, and end up forced to accept an offer that's less than you could have gotten if you had simply priced the property correctly in the first place.

Caveat Emptor


I get people asking me about how much their mortgage loan providers make, usually with an idea towards negotiating it down but often with the idea of choosing one loan or the other based upon the loan officer's compensation. This is a bad idea.

First off, there are several forms loan officer compensation takes. There is so-called "front end" compensation paid directly by borrowers. There is "back end" compensation paid by lenders, also known as yield spread. There are also volume incentives given by most lenders, and promotional give backs and offsets. Then there are times when the loan officers is holding out their hand for kickbacks behind your back or by "marking up" third party services that they order on your behalf. This is illegal, but it still happens. Trying to judge a loan by loan officer compensation is actually fairly difficult if they are trying to hide it.

Furthermore, it's actually a distraction from what is most important, namely, the best possible loan for you. For instance, a couple of weeks ago I was shopping a loan for a decidedly sub-prime prospect. The lowest quote I got enabled me to give a quote of a 7.25% retail rate at par, which is to say no points to the borrower. But that lender was better than half a percent better than their nearest competition because he fit neatly into one of their targeted niches. Had I merely not shopped that loan with that lender, the best I could have done would have been 7.8 percent at par, and one full point from the borrower would only have driven it down to 7.3 percent. Now suppose I didn't shop that one lender who gave me the best price, and my competition had found something even better, say a 7.00 percent par rate loan. For that particular loan, they could have made a full percent and a half of that loan amount more than I did, and still delivered a better loan for the client.

Now in point of fact, I actually beat my competition by quite a bit, and I was willing to guarantee my quote where they were not willing to guarantee theirs. But the point I was making is still valid. Judge the loan by the best loan for you: Type of loan, rate, and total cost in order to get that rate.

Furthermore, brokers and people who work at brokerages legally must disclose their company's compensation from other sources, while direct lenders do not. Direct lenders are making, if anything, more for the average loan than the brokerages, but because they do not have to disclose compensation not paid by the borrower, if you try to use loan officer compensation as a way of judging the value of the loan, the direct lender will look better than the broker for most loans. Until you go and compare the loans they actually were prepared to deliver from the most important perspective: What it means to you, the consumer. A 6 percent thirty year fixed rate loan with no pre-payment penalty that cost you a grand total of $3500 is a better loan than a 3/27 that has a pre-payment penalty, cost you $8700, and is at a rate of 6.25%, regardless of how much the respective loan officers or their companies made, or would have made. Loan Officer compensation is a distraction. Much more important is the loan they are willing and able to deliver, it's type, rate, costs, and whether or not there is a pre-payment penalty.

Caveat Emptor


65 Years Today: Survivors Honor Pearl Harbor Victims

Fewer of the survivors are left every year. There will now be people drawing full social security who were not born then. If they were 17 when the attack hit, they are 82 now. Every one of them survived not only Pearl Harbor, but the rest of World War II in military service. It's been said before, but these people did nothing less than save the world.

Thank You All. You're heroes in my book.

The ending of the article is encouraging:

Some Japanese veterans and American survivors have reconciled in the decades since.

Japanese dive bomber pilot Zenji Abe has apologized to American survivors for the sudden attack, ashamed his government failed to deliver a declaration of war in time for the assault.

The Japanese aviators who carried out the attack thought the declaration had already been made by the time they started bombing, Abe has said.

Fearless Philosophy contrasts Pearl Harbor with 9/11 and finds the current generation wanting. I have to agree.


Yet more evidence for the power of transparency and accountability: China and Taiwan: Two Chens face two systems

The most recent hot thing in mortgage circles is a mortgage accelerator program. Now I've heard other things, most notably biweekly payment programs, called mortgage accelerators in the past, so let me take a moment to define exactly what I'm talking about.

A mortgage accelerator is essentially a combined mortgage and checking account, where every month you deposit your entire pay, and then write checks out of it as the month goes on to pay for your living expenses, and the mortgage interest of course accrues on a daily basis. The good things about it for consumers (and it is a good thing, as far as this goes) is that the entire paycheck is applied against your mortgage balance on day one, when your pay is deposited. This means that instead of just the minimum monthly payment, your entire pay goes towards the mortgage, lessening the amount of interest you pay in any given month. The bank, for its part, gets your entire paycheck and a significantly lower incidence of default.

This isn't a new concept. Several banks had somewhat different versions back in the late eighties. It went away. Why?

Several reasons, some administrative, some financial. First, the administrative. This bank has basically your entire financial activity. Let's say someone gives you a better deal. Now you either have to stick with a mortgage accelerator program, or go through the hassle of coming up with enough cash to start a new checking account if you go back to having a standard mortgage. Furthermore, when you do refinance, what happens to outstanding checks? That payoff is as of a specific day at a specific time. Your escrow officer comes in and gets the payoff demand, and then more checks clear and everything has to be re-figured. The alternative to this is freezing the account as is done with Home Equity Lines of Credit. So all of a sudden while you are going through this refinance, you have to come up with the seed cash for a new checking account, get new checks rushed through, and then pay your bills with the new checks. May the Universe Help You if you normally pay by automatic debit or any of the primary variants, because you have to set that up as well.

So what else does the bank get out of it, looking at the above? Increased opportunity costs for refinancing. In short, it makes it more difficult for you to take your business elsewhere. Cha-Ching! as the bank officer's eyes light up with dollar signs.

Now obviously, this mortgage accelerator saves you money, if you assume it's just a matter of math, and that math shows how much interest you save as opposed to the same loan at the same interest rate, providing you keep money in your checking account, of course. But how many people do? Not that many, these days.

Furthermore, it assumes you get the same loan at the same interest rate that you normally would. I haven't comparison shopped many of these yet, but my general impression is that the rates, and costs to get them, are higher than you might otherwise get. The assumption that it is the same rate and the same costs on the same type of loan is just that, an assumption, made for modeling purposes. I have used the metaphor of the matador in the past. The bull (consumer) wears himself out on the obvious large red cape, namely the cool service and the fact that all your pay is applied to your mortgage, and never sees the sword, which is the fact that your interest rate is half a percent higher than you might have gotten, you paid an extra point of origination as well, and you're being dinged $10 per month administrative tracking charges for this cool new toy you just got, the accelerator mortgage. Let's say your mortgage is $400,000. Half a percent of $400,000 is $2000 extra interest per year. An extra point of origination is $4000. And $10 per month is about what the average person might save on their mortgage interest if they weren't paying a higher rate, which they are.

($6000 per month deposited, instead of maybe $2500, leaves $3500. You save an average of one half months interest per month on this difference. $3500 at 6% divided by 24 is $8.75. If they bill you $10 per month for the service, you are out $1.25 per month net, on top of the additional interest charges and the one time fee of several thousand dollars of origination)

So lenders with mortgage accelerators charge you more money, charge you more up front costs, and you pay higher interest charges, as well as making it more difficult for the consumer to refinance into a better deal somewhere else. The banks love this one. Only the fact that your parents figured out what a rotten deal most of these are kept them from becoming a permanent fixture of the mortgage landscape nearly twenty years ago.

Now if you can find a mortgage accelerator at the same interest rate, for the same costs, and without the monthly fees that you don't have to pay for your other mortgage, then YES it makes a huge amount of sense to have one of these programs. But that's not what most of the lenders are offering. They are hoping that you are so distracted by the mathematics of how much you will save if you keep your mortgage until it's paid off, that you will never see how much extra you are really paying. Nor do most people keep any given mortgage longer than a few years. In fact, the median time living in a particular piece of real estate is only nine years - less than one third of the time until payoff. The metaphor of the matador is extremely apt. This is precisely what the matador does with the bull. Distracts them and wears them out with the cape so that they never see the sword. The banks dangle this wonderful mathematical concept of what might happen thirty years down the line for that one tenth of one percent of people who actually keep the loan that long, while hoping you are so fascinated by it that you never notice that they're charging you more up-front fees and a higher interest rate than you would have gotten with a traditional mortgage, and often, more in monthly maintenance fees that you save by depositing all of your pay. In short, the lender is making more money off of you by pretending to do you a favor.

So shop loans by interest rate and cost, and then if they'll let you put a mortgage accelerator on it for free, great! If not, they're just trying to distract you from what is really important by offering you a convenience and a cool-looking trick, while charging you hefty amounts of money and tricking you into thinking you are getting something beneficial.

Caveat Emptor


Litvinenko's death to be treated as murder

Captain's Quarters has some spot on anlysis.


Tinkerty Tonk found information that thoroughly debunks the claims of the "flying imams". Basically, they were trying to be noticed, trying to provoke an incident.


Victor Davis Hanson contrasts the treatment of Haghia Sophia with Al Aqsa


Truth Laid Bear has the Iraqi study group report. Haven't read much, but from what I can tell by skimming, my only comment is the classical definition of insanity: Doing the same thing over and over again, and expecting different results.

Sigh. I don't know why I was hoping that those tired old men would recommend anything different than the failed policies that got us into this situation. I knew better.


Will We Ever Win Another War?


Via Instapundit, A short course in Brain Surgery


Why Newt Is Right


Today would have been my father's 76th birthday. It's been roughly four and a half years, and I miss him just as much as the first day. Take some time to let the important people in your life know they are appreciated.

One of the things that sticks out about buyer's markets is that there are two sorts of listings: Those who are willing to do whatever it takes, anything it takes, to get the property sold, and the other who apparently just likes having the property in MLS.

Many listing agents have made a habit of telling people that they can get more for the property than the next person over. Well, some can. But there really is no secret as to how they do it. They have the discussion to price the property correctly in the first place, and if the listing price isn't appropriate, they will not take the listing. I don't list many, but if someone is insistent upon a listing price that is too high for the market, I am better off not being part of that listing. Even if it does sell after two major price reductions for less than I likely would have gotten straight off, that client is going to be angry, not happy, and tell everyone it's my fault.

Indeed, if there ever is a market where listing agents can reliably get more than the value of the property, something I am pretty sure doesn't exist, the buyer's market is the furthest thing from it. What a good listing agent can get you is the full value of the property, but that's a very different value, and a very different mindset, in a buyer's market than it is in the seller's market San Diego had for most of the last decade.

Now, you need to ask yourself, "Why is this a buyer's market?" The answer is as simple as supply and demand. High supply and Low demand. Many people who want to sell, not very many at all who want to buy. Result: Those few buyers who are willing to be out there have all of the power. If this particular seller won't take the offer they make, the next one over, or the one after that, will.

Now most sellers would agree that this is a challenge. Buyers think it's great. This last week, sellers outnumbered buyers 44 to one. Inventory is off over 3000 units since the beginning of November, but the number of buyers has fallen by almost half. Normal for the time of year, but not so hot for sellers anyway.

What's a seller to do about this? Quite simply, ask yourself if you have to sell or if you have other options. If you have to sell, make up your mind that you are going to do whatever is required to make a transaction happen. This can be a lot: cleaning your house up, making it attractive, pricing it better than the competition, and not kidding yourself. The offer you are going to get still won't be anything like what you might have gotten two years ago, but two years ago the ratio of sellers to buyers was about three to one, often less. You will be much more likely to get an offer, and remember, you decided that you need to sell.

Lest you think you aren't competing with other sellers, go find a real expert in your area to help you right now. In the entire history of the United States real estate market, no buyer ever bought a property because it was that seller's "turn." You are always competing against other sellers, but this market makes it far more obvious. Buyers make offers on your property because something is attractive to them where other properties are not. This can be features, this can be location, this can be willingness to do what other sellers are not, or this can be price. Usually it's a mixture. In this current market - remember that 44 to 1 ratio of sellers to buyers - it's likely to be all four in great heaping gobs.

If you don't need to sell, get it off the market! If you are not going to accept a much lower price than it might have gotten, you are wasting your time. Those few buyers who are willing to get off the sidelines are bottom feeding and bargain hunting. If you have a better choice than feeding the bargain hunting and bottom feeding buyers, take it. If your property sits on the market, then when the market does turn back, the fact it sat on the market is going to count heavily against you. The agents in the area know that it sat, believe me. I was in a half day class today with several hundred other agents. Everybody I talked to agreed that the only transactions that are happening in the current market are all happening completely on the buyer's terms. If you are not willing to meet those terms, you are not merely wasting your time, but actually sabotaging your future prospects of selling for a price that you would like.

If you are not willing to do what it takes to sell, get it off the market. Not only are you sabotaging your own future plans, you are adding to all of the excess inventory that's out there as a glut on the market. Indeed, for every additional property for sale in the neighborhood, people who are willing to do what it takes to sell the property are going to have to do a little bit more. Most often, this means "settle for a lower price than they might have gotten otherwise." Just the fact that there are 238 three bedroom houses listed in the same zip code gives buyers substantially more leverage than if there were fifty, or twenty. This drops the market that you are hoping you can use to sell the property two or five years from now, and gives it further to come back, which means that the pricing level will be lower when you go to sell yours for real. Individually, they may not make much of a difference, but collectively, they certainly do.

If you do need to sell, get all traces of the seller's market we had for most of the last ten years out of your head. This isn't about pride, this isn't about profit, this isn't even about breaking even. We have established that if you do not need to sell, you shouldn't have your property on the market in this environment. But you do need to sell, which makes the alternative of taking less than you think the property might be worth better than the alternative of losing it completely. And make no mistake, for as long as this market lasts, that is the attitude I (or any good buyer's agent) am cultivating in my buyer clients. If you won't sell, I'll talk to your lender after the foreclosure - if someone else has not already sold to me by then. Right now in San Diego, the only power sellers really have is the power to say, "no," and if your alternative is losing the property to foreclosure, a rational, informed person will pay thousands of dollars out of their own pocket instead, accepting offers way below what they owe on the property. And if that or something similar is not your alternative, then why in the heck is your property on the market? Why are you contributing to the apparent glut of supply to no good purpose?

Caveat Emptor


Online Mortgage Quotes

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I got a question about what I think about those online quote services.

The answer is that they vary from okay to putrid.

There are two sorts of online quote sources. The first is where mortgage companies have their rates online, and people come along and browse. Those are pretty much a waste of your time. Here's why: Those companies have absolutely no hold and no real tracking on the people who come to browse. They might put a cookie on your machine, but it's hard to parlay those into contact information, which is their whole entire goal: Getting loans out of it. Unless they have some way of contacting you, which they don't, they need to use that forum to get you to contact them. They do this by low-balling their quotes, making it look like they are offering something nobody else has. Unfortunately for consumers, that's not even an estimate. Here in California, the one caveat is that the rate must exist, but the real costs of getting that rate can be many times the costs they quote. This suffers from all of the limitations that a Good Faith Estimate does, plus more. They can say that they've got a 3.625% rate, and as long as they have a 3.625% loan, they are in the clear. Never mind that it costs a full six points and adjusts every month, that sounds like a great loan to the uninformed. Furthermore, many places will quote the nominal ("in name only") as opposed to real interest rate on the negative amortization loan. When there are people apparently offering you 0.5%, that's who most consumers will call, ignoring the people who have and can really do 5.5% thirty year fixed rate loans, more so on those forums where they include a payment quote as well. I've got the same 0.5% nominal rate forty year amortization loan available to me, but it will always be a putrid loan, as the real rate is a little over 8% and the rate is subject to change every month. I should note that lenders pay a lot of yield spread to brokers who do those loans: How often do people sign on the dotted lines for mortgage rates in excess of 8% (with a three year prepayment penalty!) when 5.5% is available on a thirty year fixed rate mortgage with no prepayment penalty at all? I'll tell you how often: Whenever people aren't smart enough to realize that that $960 payment on a $417,000 loan isn't the real rate. Indeed, they'd have to pay $2794 per month just to pay the interest - while the fully amortized payment on a thirty year fixed rate loan is only $2368. But there are an awful lot of people who aren't smart enough right now.

Furthermore, those online forums are supposed to enforce their quotations policies. I've never heard of one that enforces real concrete penalties for violators. On two separate forums, I went straight down the line contacting every listed company, using a loan scenario that was close enough to what they were supposed to be quoting to that I should have gotten the same quote or a little bit better, if they could really do those loans. Not once did I get a rate that was within half a percent of the rate listed online, and most of them were over a full percent off, and with negative amortization loans, most are not even in the correct ballpark. When I contacted the forums themselves, neither of them was interested in enforcement.

In short, those online quote forums tend very strongly to get business for the company that tells the biggest, most boldfaced lie. Often, the consumers are lulled by the existence of the forums into thinking they're getting a deal, and they don't bother going through the necessary steps to shop their loan around. Meanwhile, the companies that will advertise honest rates quit those forums in disgust. Since there are a lot more companies playing games with their quotes than honest ones, the forum wins by not enforcing their rules. However, since the consumer wants to find companies that really will deliver the loans they advertise, consumers lose. Matter of fact, I don't think I've ever seen a real rate on a loan I would be willing to sign up for advertised in any forum: online, newspaper, or otherwise.

The second type of online quote forum work like the advertisements plastered all over the internet. "$510,000 loan for $1698 per month!" (to use the first I found just now). They show a couple dancing happily, having a party because their mortgage payments are reduced, or so they think. Another shows a guy jumping for joy. What they don't show is those same people when they figure out all of the downsides to the negative amortization loan that they signed up for. "This is Jack calling his lawyer again, only to be told there's nothing the lawyer can do again. This is John and Jane losing their home to foreclosure."

Their come on is that you're supposed to get four competitive loan quotes. The company advertises negative amortization loan payments because more people will click on them and sign up for the service if they think they might get something so great that anyone would want it. Unfortunately, just like every other negative amortization loan out there, the payment or interest rate they quote to get you to click their ad and complete their form online is not the real payment and it is not the real rate. Yes, they will accept that as a monthly payment. But the interest you are being charged is based upon a rate of 7.87%, and you have to pay $3345 per month just to break even on the interest - that other $1647 gets added to your loan, so that next month you owe $511,647. Doesn't seem like a lot of extra, but go along for three years until the pre-payment penalty expires, and even if your rate doesn't adjust upwards, your balance is now $576,600. If you go the full five years that the minimum payments last, you owe $630,000, and now your payment jumps to $4813, and you can't refinance because you are upside-down on your mortgage, and your credit score is 100 points lower!

The games don't stop here, by any means. You'll be told that there are "no costs out of your pocket," and even though they'll be rolling $23,000 in costs and points into your loan, they give you a quote based upon the amount of money you tell them you need. No, $23,000 doesn't make that much difference at half a percent forty year amortization, but it lets them quote that payment just a few dollars lower, even though they know that you want the $23,000 rolled into your loan. Nor is what they're telling you about a good loan in any way shape or form, but most people shop mortgage loans based upon payment.

Furthermore, they aren't telling the truth about four mortgage providers calling you. They may sell the lead to four different places, but those four places turn around and sell them to four others each, and each of those sells them to four more. There may be as many as six levels of this going on, and the average person who does fill out their form will be called by at least fifty providers in the first week, with others trailing out for potentially years. The lead seller doesn't care - they made their money, and they don't give refunds simply because the loan they talked about is toxic. Nor does it matter to them that the loan they talked about puts the loan providers paying them for leads in the position of either telling people - honestly - that the loan that was used to get you to sign up is a piece of garbage that causes people to lose their homes, or just selling you one of the abominations. They don't get refunds from the lead seller in the first case; they're just out the money. In the second case, they get paid roughly 3.75% of the loan amount by the bank ($19,125 on a $510,000 loan), plus whatever points of origination that they can con you out of. Finally, if they don't, they know that one of the fifty or more other companies that will be calling you will sell you one of those loans. So their motivations are not on the side of telling you the downsides of their loan. Matter of fact, their motivations are never aligned with telling you the downsides of the loan, so if you find someone willing to talk frankly about good and bad, they are a treasure and it is worth keeping their contact information, and making a habit of talking to them first about future loans.

Once upon a time, if you could cut through the morass of fifty or more companies calling, those "competitive quotes" ads were a great way to find a good loan provider. Ethical low cost loan providers could make a very good living buying those leads. Unfortunately, that is no longer the case. First off, ninety-nine percent of the leads you pay for were lured in with the promise of a negative amortization loan. You don't get refunds for those. You are just out the money, time, and phone expense of calling those folks - unless you make a habit of selling negative amortization loans, which low cost ethical providers do not. Furthermore, even on the few leads that are not lured in by Negative Amortization payments, just because you don't try and sell them a negative amortization loan doesn't mean that one of the other fifty companies won't. Having been there and done that, I can tell you from experience that trying to talk people out of negative amortization loans is usually a waste of breath - the competing company will use conspiratorial tactics like, "That's because this mortgage is too good - they don't want you to have it!" People want to believe in Santa Claus, the Tooth Fairy, and Negative Amortization Loans. Bottom line for ethical loan providers: paying these services for leads no longer works. You cannot make any money at it. Since making money is what you're about, and the payoff is too low to survive on the thin margins of good providers, you are driven elsewhere for your business leads. Since that's the type of loan provider you want, it's a waste of time to go to either sort of online mortgage quote service.

Caveat Emptor


Passive Asset Allocation

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A while ago I talked about Passive Asset Allocation as a way to beat market return as a strategy. So I'm going to write a bit about what it is, why it works, and how to do it.

Passive Asset Allocation is very simple at its heart. What you are doing is keeping the balance between asset classes that you have decided is best for your situation.

The way you do it is simple. The objective is to maintain a certain investment mix. You allocate your investment pool among the asset classes, and at strict intervals, rebalance to that allocation from whatever has happened over time. Typical period is once per year. You can do it either with individual stocks and bonds, or with mutual funds, variable sub-accounts, or even a mix. For most folks, bonds especially are going to require mutual funds or variable sub-accounts, as individual bonds tend to be high dollar values.

Here's an example, based upon an established portfolio of $100,000. Average market growth is 10%, but it's not evenly spread:

Large Cap growth $10000 @11%=$11100

Small cap growth $10000 @14%=$11400

Large cap value $10000 @14%=$11400

small cap value $10000 @20%=$12000

developing world $10000 @-5%= $9500

developed world $10000 @-2%= $9800

sector investment $10000 @24%=$12400

short bond $10000 @ 7%=$10700

intermediate bond $10000 @ 8%=$10800

long term bond $10000 @ 9%=$10900

The portfolio is now $110,000. Rebalancing (note that this is a taxable transaction unless it's tax sheltered) to the original percentage allocation, we get these returns the next year:

Large Cap growth $11000 @18%=$12980

Small cap growth $11000 @ 4%=$11440

Large cap value $11000 @25%=$13750

small cap value $11000 @ 6%=$11660

developing world $11000 @20%=$13200

industrial foreign $11000 @14%=$12540

sector investment $11000 @-12%=$9680

short bond $11000 @ 6%=$11660

intermediate bond $11000 @ 8%=$11880

long term bond $11000 @11%=$12210

Total is $121000. Seems like right on 10% compounded, right? But look what would have happened if you didn't rebalance:

Large Cap growth $11100 @18%=$13098

Small cap growth $11400 @ 4%=$11856

Large cap value $11400 @25%=$14250

small cap value $12000 @ 6%=$12720

developing world $9500 @20%=$11400

industrial foreign $9800 @14%=$11172

sector investment $12400 @-12%=$10912

short bond $10700 @ 6%=$11342

intermediate bond $10800 @ 8%=$11664

long term bond $10900 @11%=$12099

Total is $120,513. You've added $487 by moving money from where assets were relatively expensive, to where they were relatively cheap.

Let's do it on more year:

Large Cap growth $12100 @-5%=$11495

Small cap growth $12100 @14%=$13794

Large cap value $12100 @-9%=$11011

small cap value $12100 @12%=$13552

developing world $12100 @18%=$14278

industrial foreign $12100 @20%=$14520

sector investment $12100 @24%=$15004

short bond $12100 @ 8%=$13068

intermediate bond $12100 @ 9%=$13189

long term bond $12100 @ 9%=$13189

Total is $133,100. If you rebalanced once per year. If you didn't, here's what you end up with:

Large Cap growth $13098 @-5%=$12443.10

Small cap growth $11856 @14%=$13515.84

Large cap value $14250 @-9%=$12967.50

small cap value $12720 @12%=$14246.40

developing world $11400 @18%=$13452.00

industrial foreign $11172 @20%=$13406.40

sector investment $10912 @24%=$13530.88

short bond $11342 @ 8%=$12249.36

intermediate bond $11664 @ 9%=$12713.76

long term bond $12099 @ 9%=$13187.91

For a total of 131713.15, a difference of 1386.85 you lost in just two years.

This works even better in real world circumstances. Here, I used a larger number of asset classes than most folks use, forced them to be exactly equal, and then forced the yearly returns to average exactly 10% in order to isolate the effects of rebalancing versus not rebalancing from all other concerns. The real market is not so neat. Some years you'll be on top of the world because you gained 40 percent, some years you'll be picking up pennies on street corners because you lost twenty (and it's been better as well as worse than that within the last ten years).

The whole thing that makes this work is that you are moving money from where assets are relatively expensive to where they are relatively cheap at the moment. This is another real world example of the principle behind dollar cost averaging.

It would fall apart if one asset class outperformed all others, or underperformed all others, consistently over time. But this hasn't happened yet. Even in the asset classes that do outperform others over time, the consistency is not there. These classes are volatile. They will do very well one year or two, then do very poorly. When I see or hear people talking about "letting their winners run" over a multi-year period, particularly if they're talking mutual funds or the equivalent rather than a particular security, I know I shouldn't trouble myself about their advice. If an individual security was bought as part of an asset class, that's fine - as long as it still meets the definition of that asset class and you deal with it appropriately.

The one thing that kills this strategy is not sticking to it. "Google has doubled and is still going up!" (or Qualcomm, or Microsoft, or...). The idea is lock the gains in, buy where stuff is relatively cheap. The same asset classes do not do equally well from year to year. It is rare to find one year's superior asset class among the next year's superior performers. This can be hard with individual securities, so most folks who adopt this strategy use mutual funds or variable insurance instrument sub-accounts.

What can sabotage you is a fund company or variable sub-account who will not sit on their fund managers and make certain they adhere to stated asset class. When a Large cap value allocation has forty percent of its stocks in common with a small cap growth allocation, you've got a problem, no matter how wonderful that forty percent performs. It's likely buying apparent performance through demand, which only works short term. One mutual fund company got away with artificial inflation of this kind for about two and a half years back around the start of the decade before the market caught up with them. People are still holding their funds, though, confident that they'll recover because they were doing so well for a while...

Speaking of which, I left financial planning a couple of years ago, but my former clients who did this had amazingly resilient accounts when the market went bust in 2000-2002. Nobody went much below peak account values, and they were all ahead of previous high account balances by the beginning of 2003 (even discounting the effects of contributions). One's balance went from $44,000 to $86,000 over that period with about $10,000 in contributions. Why? Because they didn't let greed rule them.

And before I close, I do need to say that past results are not guarantees of future returns, and this is not a panacea. Consult a currently qualified professional. If an asset class is getting obviously overbalanced or under-represented, it may be time to deal with the situation even though it's only been six months, or one. If you're holding security X, and you keep getting tips on how hot it is, it's probably time to sell.

Caveat Emptor

Just got email notification that the Housing Enterprise Oversight office has decided to keep conforming loan amounts the same for 2007 (I did think last year's jump, from $359,650 to 417,000, was a little large). So the conforming loan limits for 2007 will remain:






48 state




AK and HI






Iranian Weapons Arm Iraqi Militia. They mean terrorists, of course. But they actually reported it this time! This is at least the third such incident in the last year.

Evidence is mounting, too, that the most powerful militia in Iraq, Moktada al-Sadr's Mahdi army, is receiving training support from the Iranian-backed terrorists of Hezbollah.

You don't say. Well, having Democrats coming in to government power certainly makes a difference in the reporting. Already the economy has miraculously improved and now they are admitting that Iran is supporting the terrorists.


Hezbollah-led rally demands Lebanon govt quit

Hezbollah has been at loggerheads with Siniora's government over what it says was its failure to back the group during the July-August war with Israel.

Gee, ya think? Of course, in any normal world view, the failure would be failing to hunt every last one of them down and put them in prison or expel them from the country, bringing down the wrath of Israel, a much stronger power, by firing rockets from Lebanese soil.

Druze leader Walid Jumblatt, the most prominent anti-Syrian leader, urged supporters to remain calm and avoid street confrontations. He said Hezbollah wanted to install Syrian and Iranian tutelage over the country.

"We will remain steadfast," he told a news conference on Friday. "We will confront (the opposition) calmly. We will remain in our houses and fly the Lebanese flags...We will wait for a month, for two months...and watch them."

Well, it's not tossing them in prison or out of the country. But it's something.


Despite compromise, Iran sanctions measure elusive

The United States and the European drafters of the document -- Britain, France and Germany -- want the 15-member council to impose sanctions on Iran's nuclear and ballistic missile programs after it refused to suspend its enrichment activities, as demanded in an August 31 council resolution.

But Russia, backed by China, has chopped off close to half of the original European text.

Anyone who listens to what the Iranians tell their own people knows that the Iranians are attempting to create nuclear weapons. Russia and China are likely to obstruct themselves right into the fallout pattern of nuclear war, if not into becoming the targets of nuclear weaponry themselves.


Dead spy's wife contaminated with radiation

Meanwhile, Ex-Spy Claims Litvinenko Was Targeted

A former Russian security service officer said he warned a former KGB agent who was fatally poisoned in London about a government-sponsored death squad that intended to kill him and other Kremlin opponents.

In a letter released Friday, the former officer for the Federal Security Service, or FSB, said he refused to cooperate with the team, whose task was to kill Alexander Litvinenko and others.

Anybody have any doubts about whether Russia is back in the Soviet Empire mindset?


The headline is enough to make anyone cringe: Is this spray can the condom, or the mace? They're working on a spray-on condom.


Venezuela's Chávez nears a victory fed by free stew

Yet these days, on her walk home up the steep slope of El Valle, one of the poorest neighborhoods in this capital city, she passes a free medical clinic staffed with Cuban doctors, a supermarket that sells discounted rice and tomato sauce, and a state-funded kitchen that prepares and gives out free meat stew and cookies - programs called "missions" that are the cornerstone of President Hugo Chávez's domestic policy.

However, Chávez's latest enemy: beer trucks

On his road to Sunday's presidential election, which pits the former military colonel turned president against Manuel Rosales, a conservative candidate backed mostly by Venezuela's middle and upper class, Mr. Chávez has ordered the National Guard to stop delivery trucks from selling beer in the streets of poor neighborhoods.

Only licensed establishments can sell alcohol legally here.

"It's the degeneration of society," Chávez said in a televised speech in October. "It's one of the causes of public drunkenness in the slums.... No more trucks."

Or is it?

Guy Taylor, an American journalist working in Caracas, says Chávez rallies he has seen were marked by colorful street theater, pro-Chávez rappers, scantily clad women and, of course, plenty of beer.

"It really resembles a carnival," he says. "People start drinking early at the rallies and by the time Chávez shows up, a beer-fueled hysteria has taken hold."

Maybe he just doesn't want the opposition to get any good will and votes from the schtick he uses?

By the way, does this tactic sound familiar to anyone?


Towering Ancient Tsunami Devastated the Mediterranean

To create their computer simulation, researchers at the National Institute of Geology and Volcanology in Italy used sonar-equipped boats to survey seafloor sediment displaced by the Mt. Etna avalanche.

Their recreation suggests the tsunami's waves reached heights of up to 130 feet and maximum speeds of up to 450 mph, making it more powerful than the Indonesian tsunami that killed more than 180,000 people in 2004.

The world is a dangerous place.

Startling Discovery: The First Human Ritual

Older than bad-mouthing the opposition?


Hard landing fears hit dollar

This has been a long time coming. We've been so certain that foreigners were going to keep propping up our currency.

Of course, this has some good side effects. Not only are foreign goods more expensive here, our goods will become cheaper overseas. The best news manufacturing has had in a long time.

Of course, 1% isn't the end of the world or the dawning of a shining new ear for US manufacturing, either.

Thank foreign investors

Look who owns U.S. debt now

Supposedly, these are opposing viewpoints. But they're painting the same basic picture.


I've been pretty ill all week, but I'm starting to hope that the anti-biotics have finally started to get some traction.

from an email:

First let me say that I really learned a lot from your postings/articles/website; its awesome that a resource like yourself exists.

Now to the problem. I recently refinanced and the mortgage broker lied to me about many, many things. I was sold a negative amortization mortgage. The broker provided me a chart showing my payment schedule for 30 yrs; it showed my payment split between interest & principal. I was told that my rate was fixed for 5 yrs and that it would go up to as high as 9% after the 5 yr period. When the closing came and I inquired about the 9% highlights in the docs and the negative amortization disclosures he stated that they didn't apply to me or this loan. He pointed to the section of the doc that stated that my payments would be fixed for 5 years and that my interest rate would also be fixed for that 5 year period. After closing I received the docs from the lender which outlined the fact that I had 4 choices for payments and when I called for the explanation I almost died. The broker apparently didn't really understand the loan at all; he has now offered to refinance me without any fees...but I am supposedly stuck with the prepayment penalty. When the broker and I originally discussed the penalty he explained that I would probably want to refinance at the end of the 5 yr period anyways so I shouldn't worry about it. The broker also took my lead from a mortgage company he was working with when I originally inquired about the refinance. About 2 weeks into the process he told me that he had quit his job @ the mortgage company and was now out on his own as a broker (emphasis mine DM). Only now did I just realize that he really didn't have the ownership of my lead as his original employer paid for it & provided it to him during his employment. I'm sure that his original employer would be very disappointed to learn that he had taken the business with him when he resigned.

Now that the problems been explained my questions are as follows; Can I sue the broker to recover the refinance fees and the prepayment penalty?

Can the broker that lied to me and provided all the false info be sued or charged; can he lose his mortgage brokers license?

Any advice as to what I can do/what I should do at this point? Thanks in advance for any info you can provide. Please let me know if you respond directly to emails or if I need to go to a specific website to look for a reply.

There are several issues raised here. The largest major red flag is about the Negative Amortization Loan Disclosures. If it didn't apply to your loan, why did they present them to you? There isn't a good answer to that question. If something does not apply to your loan, you are within your rights to not sign. If they don't apply to your loan, then the lender doesn't need it. I don't have my clients sign negative amortization disclosures for thirty year fixed rate loans, or anything else to which they don't apply. Now there are any number of disclosures that legally have to be filled out for every loan and sometimes multiple disclosures for basically the same purpose. I had to do four "equal opportunity" disclosures for my most recent loan. But those are utterly harmless, simply informing you of your rights. A negative amortization disclosure isn't. With that, they can prove that you were told that your loan was negative amortization, and you must have been expecting it, because you signed it, didn't you? That's the lawyer's logic.

I am rapidly becoming more aware of a trend with unscrupulous mortgage lenders: Instead of putting bad stuff in the actual Note, they are adding it on as part of the all the disclosures people have to sign, hiding it in packs of supplemental stuff along with all of the standard stuff that everyone knows have to get signed. Sometimes, they are even coming back to people after funding and asking them to sign horrible things, prepayment penalties and negative amortization disclosures, among others, "for compliance." I want to see a standard booklet or checklist of forms that actually are required by law for every loan, so that innocent consumers who are trying to do the best they can know what is and isn't required by law.

If disclosures do not apply to your loan, do not sign them. They don't need it to fund your loan. There is no reason why someone who's getting an amortized, or even interest only loan, needs to sign a negative amortization disclosure. Just refuse to sign. If it doesn't apply to your loan, then they don't need it to fund your loan. If they then fund your loan and it is negative amortization, you have a good case, so they're not likely to fund it. Refusing to sign stuff that does not apply to your loan protects you.

Now, as to the broker not understanding that the loan was negative amortization: I suppose it's possible. There are people out there in my industry who are mind-numbingly stupid. But the odds are overwhelmingly in favor of the likelihood that they lied to you. There are required submission forms on every loan that most consumers will never see, but it's a requirement for the loan officer to fill them out. They are filled out and submitted with your loan package, and they quite clearly indicate all the relevant facts of your loan.

Now, as to your options going forward. There's nothing wrong with people quitting their employers and going into business for themselves, if they provide good loans at a good cost. Yes, his former employer may want to sue him for the commission he earned, and such might be one way of extracting vengeance, if such is your mindset, but it's not going to help you at all. Nor should you care about who "owned" the lead. You as a consumer are not obligated to anyone except the provider who delivered the best loan at the lowest real cost. And of course the broker who did your loan wants to get paid again with a new loan. Since they are claiming to be stupid enough to drop your state's average IQ by twenty points, you may have to give him directions as to exactly which tall building or cliff you want him to jump off of. They have proven that they are not worthy of your business or anyone else's. Please do make a formal written complaint to your state department that regulates mortgages. In most states it's the department of real estate, but if it's not, they will know who to direct you to. They should lose their license and be barred from the industry for life over this. Unfortunately, your complaint alone probably won't do it, but people who get multiple complaints do lose their licenses, and sometimes, one is enough, if it's egregious enough.

The next issue is what can he sue for? I'm not a lawyer, but every adult in the United States should know the answer to that question is "anything at all," or even "nothing." The better question is where are you likely to recover money, and how much? Once again, I'm not a lawyer and you should talk to one, but I strongly doubt that you've got a good case for anything in civil court. He's got all of those documents you signed ("the weight of the evidence"), and even if you get some jury to agree that you are owed money, it's likely to be overturned upon appeal. This is why unscrupulous folks want you to sign all those documents.

What do you want to do? You indicate your interest rate is fixed, and it must have been low enough to be attractive. If this is the case, make your monthly payments on time, and make the fully amortized payment, usually the third payment option on Negative Amortization ("Pick A Pay") loans. However, I don't believe that is likely to really be the case. I have literally never seen one of these abominations where the real interest rate was fixed, or where the real interest rate was competitive with amortized loans. The attraction of these loans is low payment, and the real interest rate is usually at least 1.5% more than I could get the same person on a fully amortized 5/1 ARM, and right now thirty year fixed rate loans are about the same as the 5/1 ARM. People who don't know any better get the low payment, the bank gets your signature on a loan that's 1.5 percent higher than you could have gotten, and people who don't know any better will line up and fight for these loans! They are easier to sell than free beer to people who don't know any better! The hard thing is selling them something else when other providers are telling them about Option ARMs. So you're probably going to want to refinance, as over a three year period, 1.5 percent rate differential will save you a lot more than the pre-payment penalty.

I answer question emails directly. It may take me some time, but I do answer them, provided they don't get lost in the spam filter. If it's an issue I haven't covered before, or only tangentially, I do like to use questions as the basis for new articles, but I answer questions asked via email by return email. If there are already good answers on my site, I'll send you the link, because it was obviously too hard to find it. If there aren't, you'll get your question answered before any article appears.

Please ask if this does not answer all of your questions!

Caveat Emptor


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