February 2007 Archives

Free Money Finance's March Madness continues with Contests 17-24

My Votes:

17: Avoid 10 Common Debt Reduction Mistakes

21: Why Aren't We All Wealthy (Yet)?

22: What's it Worth to You? Liquor, Lotteries, and Cast Iron Pans

23: Liberal arts to law school?

The others were byes and no preference contests.

Contests 25 to 32

My choices:

25: 12 Mistakes to Avoid With Your Retirement Savings Plan

27: I Do Not Use Credit Cards

28: Solving Customer Service Problems

(A very close call. If the opposition hadn't made the "low expenses = better fund" error, he'd have won my vote. Low expenses is one possible indicator of a better fund, but some fund management teams are worth their premium several times over.)

29: A Step-by-Step Guide to Reducing Debt on an Irregular Income


Sorry, it's been one of those weeks. No need to be shy about asking me if you've got something good, though.

Not very long ago, a woman who was impressed by my website called because she wanted to get pre-qualified for a loan. "Great!" I told her, and proceeded to ask about her income and her monthly obligations and everything else, and came up with a figure of about $220,000 that she could realistically afford. If you're familiar with San Diego, you know that that's a 1 bedroom condo, or maybe a small two bedroom in a not so wonderful area of town. With a Mortgage Credit Certificate, it got to maybe $260,000. If she bought somewhere there was a Locally based first time buyer program, that would add whatever the amount of the program was, but the only one with money actually in the budget was a place she didn't want to live. If we went so far as to go interest only, we might have boosted the base loan amount as high as $300,000. Severe fixers might be had for $350,000 or so - and she had the literature for a brand new $700,000 development. She had her upgrades and drapery all picked out, too. So I tried to be gentle in pointing out that the property appeared to be a bit more than she could afford.

Was she grateful? Heck no! She then asked, "How am I supposed to afford a house with that?" She was spitting mad! She acted like I was personally standing there saying "None Shall Pass!" (about a minute and a half in). "Well, if you won't qualify me for a house, I'll go find someone who will!"

I'm sure she did find someone to tell her she could have a $700,000 loan if she wanted it. Put negative amortization together with Stated Income or NINA, and there are any number of people out there who will not only keep their mouths shut about the consequences to you, but aid and abet you in staying ignorant about those consequences - at least until they've got their $25,000 commission check. And you know, I can do that loan also, if you don't mind that real interest rate adds $100,000 to what you owe over the course of three years and the payment all of a sudden adjusts to over four times what you can afford, and you lose the property and your credit is ruined for at least ten years. Not to mention the fact that rarely do people allow the mortgage payment to go south on its own.

There is no conspiracy keeping you away from home ownership. There is no smoke filled back room deal setting the price of properties such as the one she wanted out of her reach. Lest you be unaware, here in Southern California, we haven't been building enough new housing for the people who want to live here for thirty years now. Those desirable properties are highly priced because they are scarce, and the prices are where they are because that's where the supply of such properties balances the number of people who want them badly enough to pay those prices. Notice that I did not say, "The number of people who can afford those prices," or "The number of people who can afford those payments." This is intentional. If you want them bad enough, there are lots of loans out there, and lenders eager to make them, such that you can have that dream house - for a while. But the way financing works is like the laws of physics. Specifically, like gravity. It's there, all the time, pulling away, and there is no analog to the ground that holds us up. Think of it as an very tall elevator shaft going both directions from where you start. This month's interest is gravity, pulling you down. What you're paying is like the upward thrust of a rocket, pushing you up. When you make an investment (and a property is an investment), you want to go up, but if pull down is more than thrust up, you start going down instead. Furthermore, we are talking in terms of acceleration, not just velocity. If down is more than up next month, too, you're now going down even faster. And so on and so forth.

But the elevator shaft is never infinite going down, and now ask yourself what happens when you're going down, at a speed you've been building up for months and months, and the elevator shaft ends? I've noticed that they usually don't show Wile E. Coyote's impact any more, but what just happened to you makes the time he got caught under the anvil, the lit cannon, and the huge falling rock look like a love tap.

Real estate agents don't set prices. The market does that in accordance with supply and demand. In southern California, there's twenty million plus people demanding housing and not enough being built. You want to change this, take it up with politicians. All buyers agents can do is try and find the best bargain out there, while listing agents are trying to get the most possible money.

Your budget is your budget. You make what you make. You spend what you spend. Your savings is what you have saved plus what it has made. You can afford more for a home if you make more, spend less, save your money, and invest it effectively. If you don't do these things, you can't afford as much. Indeed, most people kill their budget voluntarily, by spending more than they need to. But it isn't my opinion that matters. All of these are cold hard numbers. You know what you make, you know what you spend. If you could do better, that's something for you and your family to work with. All a loan officer can do is work with the numbers as they are.

These numbers give the payments you can afford and your down payment. The rates are what they are. The variations in available rates are smaller than most people think. Actually, the largest difference in rates and their associated costs is how much the loan providers want to make for doing your loan. Not the only difference, but the largest one. The second largest difference is in finding the loan program that is the best fit. When you put all of these factors together, if you come up with variations of more than half a percent for the same loan at the same cost, then I will bet money that either the higher quote wants to gouge you badly, the lower rate is not quoting something they can really deliver, or possibly both. The point is this: If someone working with real numbers says that you can afford $X, I'll bet money that any pre-qualification or pre-approval you get that's more than about 5% different should set alarm bells ringing.

So now let's revisit Ms. Eyes Bigger Than Her Wallet. She thinks all she has to do is say "Abracadabra!" and the whole thing will work out. But the interest rate is what it is, which means the monthly cost to have that loan is fixed - if she didn't bump it up by wanting something she can't afford. That lender is run by some pretty smart people, who understand all of this extremely well. They have the assistance of some very sharp lawyers in writing those loan contracts. One thing I can absolutely guarantee is that if they don't get their money - all of their money - you will be even unhappier than they are. The upshot is that the vast majority of the people who think they're solving their problems with a wave of some magical wand and the phrase, "Abracadabra!" are in fact doing something Unforgivable to their own financial future, roughly equivalent to pointing that magic wand at their own finances and mangling the pronunciation to "Avada Kedavra"

Caveat Emptor

Article UPDATED here

Carnival of Personal Finance

Carnival of Consumer Oriented Real Estate Recommended: Salt Lake City Real Estate Blog (you're not priced out, it's your expectations)


Free Money Finance is running a Personal Finance Edition of March Madness. 128 posts competing head to head for best post of the year. His first two brackets are up. Go over and vote for your favorites!

Games 1 to 8

I voted for

Game 2: Only Free Lunch in Finance: Diversification

Game 3: Getting Rid Of Your Debt Without Worrying About The Latte Factor

Game 7: Why I pay cash for a car

Game 8 Tips for a successful budget

(two byes and two no preference)

Games 9-16 (I have a post, but it's got a bye)

I voted for:

9 Tips for choosing and using frequent flyer programs

10. Make Multiple Debt Payments Every Month

12. Understanding Your Financial Fortress

14. 7 Steps That Made Me Debt-Free

16. Ten Simple Ways to Cover Your Ass(ets)

(two no preference and my post with a bye)

People ask for referrals all the time, and many folks will stumble all over themselves to provide referrals. Some of them really are excellent providers. Others are not so good, but the person providing the referral has an agenda of their own, and you have to be aware of the possibility. Never give anyone your business without shopping it around just because someone referred you to a certain provider.

In many cases, the reason why you are referred to Company X Realty or Company Y Loans has nothing to do with any allegations of them being an efficient, diligent, effective or inexpensive provider of those services. Number one on the list of reasons why people tell you about X Realty or Y Loans is because company X or company Y refers business back to them. This isn't illegal, but when you ask a real estate agent for a referral to a low cost mortgage provider and you get referred to one of the ones that's competing on the basis of consumer name recognition, you should realize that the mortgage providers with national advertising campaigns are not among the low cost providers. For analogous reasons, I usually advise people to stay away from the national realty chains, even if they're not local to me. But I digress. The point is that the person who refers you to this person is effectively getting paid by referring you to them. Not exactly a sterling reason to trust their motivations in making this referral.

Indeed, this is one of the ways that lenders in particular avoid competing on price. Ladies and gentlemen, so long as it is the same type loan on the same terms, a loan is a loan is a loan. The only real difference is the tradeoff between rate and cost, or, in other words, price. But lenders do not want to compete on price, because that means they don't make very much money. In fact, they want to avoid competing on price, and the captive audience from referral business is one prime example of how they do it. Joe Realtor sends Jane Lender business because Jane refers business right back to Joe Realtor, and because the client has been told that Jane Lender gives great loans at a great rate, the client doesn't shop loan providers like they might otherwise have done, leaving Jane a freer hand to charge a higher markup.

These are not the only reasons why referrals happen. For instance, here in San Diego, many real estate agents will refer to one particular loan officer because they know that loan officer won't tell the client any inconvenient truths, such as, "You cannot really afford this house." They refer to this loan officer because that loan officer will just keep their mouth shut and put the negative amortization loan through, and everybody gets their commission check. But this sort of thing happens in markets where there are affordability issues for the average person.

Finally, explicit kickbacks are illegal, and there are limits on how often Joe and Jane can buy each other dinner out or whatever arrangement they have to transfer wealth, but that doesn't mean it doesn't happen sometimes. After all, there aren't any Department of Real Estate employees following Joe and Jane around 24 hours per day, so this kind of stuff gets hidden all the time. I've had more than one blatantly illegal offer of referrals for kickbacks since I've been in the business. Some of these folks are brazen. No, there's no percentage in turning them in, either. This is one of those situations the saying about, "No good deed goes unpunished," was invented for. One guy who did turn someone in years ago told me about the thousands of dollars in legal fees he incurred, plus three years of investigation that shows up on your license as an unresolved complaint. No thank you. Sometimes, you have to content yourself with remaining apart from any illegalities, while warning people that this sort of thing does happen.

Caveat Emptor

Article UPDATED here

I had made a request to repair that included $3700 credit for closing costs. I wanted to get things done like safety issues and more critical maintenance issues done. Our estimate said that it would be about $4900 to do all the maintenance we were looking for. The seller was doing a bit, but not all.

The seller apparently balked at giving us any credit. He felt they conceded all they could. Anyway, my agent convinced them to at least counter. I was a bit angry at the initial balk. (the emotion part of the deal). After the initial anger, I went looking for problems and found one that frightened me. My agent had given me the inspection report from the seller's purchase of the home six years ago. There were things on there that were still a problem two years later. Primarily, high water pressure in the house (with the dire warnings of damage to pipes and fixtures as the potential side affect). Secondly, ants. The report six years ago had mentioned ants. Every time I looked at the house, (we visited it 5 times), I always saw ants not many usually only 1 sometimes 2. So, my residual anger ballooned these concerns way up. My ignorance was on the pipes. I have since talked to one plumber and an extended family member who is a retired contractor, home builder and home inspector. It was his comments that alleviated my fears about the pipes and allowed me to calm down a bit. He basically said, "Wow, six years of a pressure test - and it passed. Great! We usually only do two hours." He also said, get a regulator on it, but you shouldn't have a problem.

So, emotions, ignorance and too much time to think - nearly killed the deal.

Sometimes, people get all worked up over the little stuff.

On the other hand, sometimes people don't get worked up when they should. This person wasn't clear, but I'd get upset if my agent tried to placate me with a six year old inspection. If it's just compare and contrast with a brand new inspection, fine. But if someone else paid that inspector, they may not have any responsibility to you, and you want them to be responsible to you. I wouldn't accept the inspection that the previous prospective buyer had done. Sometimes, agents trying to make sure a transaction goes through will try to give you an existing inspection, because they know what problems that will show. This is always the hallmark of a commission grabber, and you should fire them. Then start looking for something else.

An inspection around here will almost always reveal some defect which wasn't dealt with in the first round of negotiations that resulted in the purchase contract. Usually, they're dinky little stuff. Replace one light bulb, brace the water heater, maybe replace the garbage disposal. Sometimes, however, it is major work: rotting substructure to the roof, foundation damage, etcetera.

It does not matter if it is major or minor. It needs to be fixed. The way I usually explain minor stuff to sellers is, "You don't want to lose a $500,000 sale over $30 in repair work, do you?" It does sound rather silly, doesn't it?

If it's major, it still needs to be fixed. Here's a new defect in your property that causes it to be worth less than the agreed upon price. You can often get the buyer to accept the property for a lesser price - estimated cost of repairs plus an allowance for them being the person who has to deal with it. You're not getting out of major repairs on the cheap unless the buyer's agent hoses their clients. I want a reliable contractor out there to give my buyers an estimate for major repairs, and you'll find that's about par for the course. As the seller, you can have your choice between fixing it, giving them an allowance that makes your buyer happy, or losing the transaction.

Lest you think, "I'll just forget about that prospective buyer," even in seller's markets the next one that comes along is likely to find exactly the same set of defects and want exactly the same set of repairs, which is going to cost - you guessed it - pretty much the same amount of money. The only differences are one, in the meantime, you've spent some money on your mortgage, taxes, etcetera, and two, the earlier offer is usually the better one. In other words, same situation, but you're out more money.

Somebody's going to ask about "as is" sales. They really don't make much difference to this fact. I'm not going to let a buyer put in an offer on an "as is" property without an inspection contingency. The inspection shows something major that we didn't already know about, the choice is going to be give us an allowance, fix the problem, or lose the transaction. It's only an actual "as is" sale if the inspection doesn't reveal anything new and major. Matter of fact, selling "as is" is a red flag that tells me the seller probably knows about something major, unless it's a lender-owned property. If it is lender owned, "as is" and "without warranty" are the ways that business is done. Otherwise, it really doesn't mean a lot beyond that you are indicating that you would rather give an allowance than pay for repairs.

For buyers, you don't need to freak out about every last little thing. If you're getting a screaming deal, the fact that you need to put a handrail up in the stairway at a cost of a couple hundred bucks shouldn't cause you to pull out of the deal. If the owner doesn't want to make repairs, be willing to accept the cost plus something reasonable to represent your time and the decreased utility in the meantime. Don't demand triple the cost of major repairs unless you really are going to have to spend that much sitting in hotels and eating out until the work is done.

A reliable contractor is your best friend in subsequent negotiations. First off, it should tell you what it really is going to cost. If they've said that it's going to cost $7500 to fix, that's better information than any agent or inspector can give you. This does wonders for peace of mind, knowing that it's going to be $7500 to fix the problem after you're in title, not $75,000.

An allowance for construction work from the seller can be a great opportunity if you've got some cash left in your pocket after the sale. For example, if you're going to have to replace the green board in the bathroom anyway, it doesn't cost that much more to add some nice updates and upgrades. An extra $500 for better materials can really go a long way. When you go to sell, more money in your pocket. In the meantime, a much nicer bathroom. Even more to the point, one much more aligned with your personal tastes.

Every negotiation after the initial purchase contract is at least as dependent upon the good will of both parties as the initial purchase contract. If one party or the other thinks they got the worst of the initial negotiations, you can expect that to be reflected in how far they are willing to go for you when the inspection reveals defects. You want the person on the other side of the transaction to be thinking they get a decent bargain, one that they would make again. That way, they won't want to blow it off before it happens, by being unreasonable about the repair negotiations. Yes, this is one more reason that you want a buyer's agent to help with negotiations.

Caveat Emptor

Article updated here

All too often, these days, I have to tell desperate people who've found me on the internet some bad news.

Nobody can match the rates they've got at a price worth doing.

This is just a sample of what I've seen:

I bought a house in DELETED in Aug 04. It was my first house, and I was pumped about it. Now, it's become a liability. I want to leave soon, and pursue an (advanced degree). I've been extensively preparing for my (test), and I expect to qualify for some 'almost top-tier' schools out east. So what do I do with my house? Bad market = hard for me to sell.

I am looking to rent my house out. The largest hurdle comes from the fact that DELETED has very low rents, and very high housing prices. To give you an idea, a typical 4-plex has a yearly NOI of around 5% of the total property cost. Yeah, a 5% return. My mortgage (I'll detail it later) costs $1500/month (PITI). Market rent is about $1k-$1200/mo. I looked at other mortgages, but it seems to me that most brokers are a waste of oxygen. You say what you need, and then they offer you a loan that makes them the most commission. I had a few people try to talk me into a Neg AM/option ARM loan. I did some math... Total waste of money. What I need is something to lower my payment while I hedge my position.

Rents are increasing, and I believe that the market will be less of a buyers market in a few years. I am working with a mentor and put together a Lease to Own deal, which may solve my issues, but I would like a Plan B.

My house is worth no less than $268k (zillow estimate, I think it's low. $275k would be better) I owe ~$253k

I have an 80/20. The 80 is 5.125% interest only for 5 years, then goes ARM on me. The 20 is a HELOC currently at 10.125%. My FICO is between 750-775. The property is located at DELETED. It is a normal detached house. This would only be a refinance for a few years, until I can sell the property in a better market, but if a locked option presents itself, I would continue to rent that place forever! I don't need any cash out money, but I will take any available, because I am getting around 10% return on my Funds.

Now this particular person makes some errors in his thinking and in the email, but they're forgivable in non-professionals. The meat of the matter is that he, like so many, cannot afford the current payments under the new circumstances.

This guy has a 5.125% interest only loan. Last I checked (a few days ago) I could just barely do that with one lender for something north of four points, and could not do 5.00 at all. Even if adding roughly $15,000 to his loan amount was worth keeping the same interest rate a little longer, just the fact of adding $15,000 to his loan is going to raise his payments.

In this case, like so many, there literally is no loan I can do for this person that's worth the cost of doing it. I could cut his payment for a while with a negative amortization loan, but only at the cost of raising his real interest rate about 3%, which means it's really costing him about $6000 per year extra, while sticking him with a prepayment penalty in the area of $8,000. A classic case of pay me now, keep paying me, and pay me later, too. Well, I couldn't do that to anyone, much less someone wearing the uniform in times of war, as this man is. Even if this guy had been in California, I would have told him the same thing I did: There's no loan out there right now that will help him in the classical sense of the word help. What he needs is cash flow and time. A negative amortization loan would provide that, but at a much higher cost later - too steep for me to believe it's worth paying. A lower interest rate or longer amortization or even interest only might help some people, but none of those options make sense for someone who has already got 5.125% interest only. I can tie 5.125 by adding over four points plus closing costs to his loan, but I don't need to consult my rate sheets or get out the calculator to know that adding $15,000 to break even on the interest rate is not going to really help him.

Now, this is not to say that refinancing into a higher rate is never justified. If it was going to do something he needed it to do and it makes sense in other ways, yes, I can see it. For instance, if he was going bankrupt due to some bills, but consolidation will prevent that from happening, it might be the lesser of two evils. But that doesn't appear to be the case.

Now when his loan hits it's first adjustment, chances are pretty much 100% that I'll be able to do something worth the cost of doing it. But that adjustment would be to roughly 7.25% if it happened right now. Whatever it is, the way that rate adjustments work is underlying index plus a set margin, determined by your contract. Lenders think of hybrid ARMs as teaser rates; they're always offering rates less than the index plus the margin to start with. Which is one reason to be careful with hybrid ARMs. I love them, I do them for myself; but they will go up when they adjust.

This man is only one of millions out there in similar situations. I can't speak to his specifics, but there were lots of people who bought with loans such that they could only afford the payment interest only or worse. The fact of the matter is that they were poorly advised, or not advised at all if they kept everything quiet and never told the person who might have warned them. They probably should not have bought the property they did, but somebody talked them into it. In most cases, it was someone with a fiduciary responsibility to them who should have known better.

I don't have a problem with interest only loans as purchase money. I do have a problem with negative amortization loans as purchase money for a primary residence. Interest only, though, can be okay if they can afford the fully amortized payment but choose not to. For instance, this gentleman could have afforded more, but was getting a better return on his money elsewhere. Sophisticated user and all that. He knew the risks going in, and chose to take them.

However fantastic an investment real estate is, however, it is not a risk free investment, and sometimes the bet does go sour. Members of the real estate profession were doing all they could to push rapidly appreciating prices, and members of the loan profession were doing everything in their power to aid and abet. Both groups were pushing past results to illustrate future performance, and I saw or heard the phrase, "nobody loses money on real estate," so often and in so many places I stopped getting angry at it for a while. Both groups were pushing people into bigger and bigger loans for bigger and bigger properties, and more and stronger bidding wars, and rationalizing it on any basis that happened to be convenient and hadn't been debunked in the client's presence within the last fifteen minutes.

Once again, I'm embarrassed by members of my professions, and not just for their avaricious advice to the unwary, but also for their limited understanding of economics and markets. Trusted professionals are supposed to know better. People with fiduciary relationships are supposed to know better. People earning thousands of dollars more for their "expertise" per transaction should definitely know better.

So what do you do if your payment goes up, and the best rates available to you don't help the situation enough?

Sell for what you can get.

Right now, this is a really rotten thing. Many markets are in the tank completely. If you don't have to sell, you shouldn't be in the market when there's thirty sellers per buyer. That being said, if you can't make the payment, selling is the least bad alternative available to you. Even a short sale is not as bad as being foreclosed upon, and if you don't make the payments somehow, foreclosure is going to happen. It's only a question of when. You want to have sold before that happens.

There are a very few exceptions. But pretending that you are one of them when you're not is a good way to take a very bad situation and make it worse. The first rule of getting out of holes is to stop digging, and denial digs deeper.

Please, if you're in a hole, don't keep digging.

Caveat Emptor

Article UPDATED here

How stupid are the Democrats?

Dems Move to Limit Bush's War Authority

Key lawmakers, backed by party leaders, are drafting legislation that would effectively revoke the broad authority granted to the president in the days Saddam Hussein was in power, and leave U.S. troops with a limited mission as they prepare to withdraw.

1. On a course for a Constitutional crisis. The Constitution gives Congress the power to declare war, but once declared, the conduct is under the President. The ability to "undeclare" war is not explicitly granted or denied Congress in the Constitution, because our founders didn't believe anyone was that stupid. If Congress had refused to give President Bush the authority to invade, that would have been one thing. But now that we're in the middle of shooting, Congress wants to take the war back to Nordies and say, "I don't like how it looks on me." There is a reason this doesn't happen in the real world: If you want to stop shooting at Al Qaeda, it would be intelligent to get them to agree to stop shooting at us. Three words: Not Gonna Happen.

2. Joe Lieberman has made it clear that his loyalty to the Democratic Party ends at a bug out. This would change the senate from 51-49 to 50-50, with Dick Cheney holding the deciding vote. Can you say, "Majority Leader McConnell?"

3. Most importantly, the American people want a victory. Most of them have a pretty good idea how important a victory is, and how costly a defeat would be, and not just in terms of international prestige. We're talking about the war coming here.

4. I said months ago that the greatest gift the voters could give the Republicans was a Democratic victory in 2006. With Bush's ratings having climbed fifteen points since the new Congress took office, he could be our most popular president ever upon leaving office. If the Democratic centrists don't do something soon to wrest control of their party back from the anti-war moonbats, we're in severe danger of one party having more control over the entire political system than has been the case since 1977-78, and we all know how that turned out. Okay, so this time it would be the Republicans, with no danger of the mainstream media singing Kum-bi-yah for them like they did for Carter and still do for the Democrats, but one party systems are no good for anyone. Democrats: Where are your adults? Mardi-Gras is over. Show us your sanity!


This is an excellent idea: a commodities exchange in Ethiopia. Once again, capitalism rises to the rescue!


Security professionals gloomy on terrorism outlook

No. Really?

Just because half the body politic wants us limited to defensive measures, and defensive measures have never once won a war? (Never will, either. At most they buy time.)

If you want to understand it in common sense terms: How many games of football do you think your favorite team might win if they were never allowed to have possession of the ball? If their entire game plan consisted of keeping the other team from scoring? That's playing for a tie, at best, and in unstable conditions.

Even the best defense is going to allow the enemy some points. Furthermore, because they don't need a defense themselves, the opposition can devote more resources to offense, scoring more points than they might otherwise have done.

The only 100% effective defense in this case is to wipe out the terrorists, and prevent any more such organizations from forming. You don't do that with defensive tactics.

Last week I wrote about the Ryan White AIDS funding, and Senator Feinstein's office at least wrote back on topic, which is a good sign:

Dear Mr. Melson:

Thank you for writing to me regarding reauthorization of the Ryan White CARE Act. I appreciate hearing from you on this important subject and welcome the opportunity to respond.

I view HIV/AIDS as a major public health emergency, and I will not be satisfied until we can say that AIDS is a disease of the past. When I was the Mayor of San Francisco, I had firsthand experience with the tragedy of AIDS and its devastating impact. That is why, in 1981, I began the first local AIDS program in the nation and made sure that all

AIDS budget requests were fully funded during my tenure as mayor.

I support reauthorization of the Ryan White CARE Act, which is critical to prolonging and improving the lives of many people living with HIV/AIDS. I am pleased to inform you that both the House of Representatives and the Senate have passed H.R. 6143, the Ryan White HIV/AIDS Treatment Modernization Act of 2006. The measure provides for a three year reauthorization of the program and will ensure stable funding for HIV/AIDS patients in California. Be assured, I will continue to work with my colleagues to address the long term needs of those living with HIV/AIDS.

Except that the issue was defunding the program via budget bill (actually, prohibiting funds being spent on it), not authorizing it in the first place. Still, we'll see what shakes. A much better response than the one I got from the Greater California Moonbat (Senator Boxer, for those of you outside the state).


Bill Ardolino interviews some Iraqi soldiers.


via Q and O, Thomas Sowell on the importance of price.


Required Reading: Power, Faith, and Fantasy in the Middle East

RINO Sightings, noir style.

Carnival of Debt Management (Link redacted due to disappearance/redirection), Recommended Free Money Finance (Don't loan money to friends and family, but be willing to give it if you've got it), Queercents (how to handle windfalls, and why it can be a good idea to get a tax refund)

Carnival of Real Estate

Carnival of Personal Finance


Pointless information: Right now, Sitemeter is recording just over 6% of the visits logged on the server for Searchlight Crusade (345/5690 averages over the last week), and slightly over 10% (42/402) of the visits logged on the server for Dan Melson's San Diego Real Estate and Mortgage Website.

If any readers have their own sites tracked to both Sitemeter and some other source, I'd be interested in the data. I've been told it's better the higher up on the page it is, and my Sitemeters are at the bottom of long pages, but I want them unobtrusive.

Still, if Sitemeter didn't give me better tracking data than my server log on the visits it does catch, I'd ditch it.

And this information could indicate that personal websites and weblogs are significantly more popular than most people think.


Meant to do some more stuff around the 'sphere, but I've been out looking for bargains for clients, and I can't let the carnival linkage slide any further.

Once we figure out when we are going to be ready to buy, how early is too soon to get a buyer's agent and start looking.

You are ready for a Buyer's Agent when you are ready to act on it if your agent finds you something that meets enough of your criteria. By act, I mean put in an offer and consummate the purchase. If you're not ready to act, you are just wasting everyone's time. If you are ready and willing to act, then there's no reason to wait.

If you are not willing to act, you're engaging in mental onanism. Kind of like fantasy stock market traders. Doesn't matter how well you do, it's not real. As Sir Sidney Poitier once observed, it produces nothing. If you don't understand the difference between playing with real money and playing with meaningless number scores, get a guardian. It frustrates the agent and wastes the time that they might spend prospecting for you, and productive agents have to be jealous of their time. If you waste their best efforts when you aren't ready to act, don't be surprised if you're not their top priority when you are. You avoid this trap by not approaching them until you are at least willing to act.

It does no good to store up "prospects for later." Good stuff doesn't last for months. It probably won't last for weeks. It may not last to the end of the day. It only lasts until one person who is willing to act discovers it. If you're not willing to act right then, you are wasting your time.

Markets change over time. The market today where I am is a very different market than two months ago, which was different from two months before that, and also different from the market as it's going to be two months from now. This is one of the many reasons why attitude is worth more than experience in an agent, but it also means that market research you do now is worthless a few months from now. The markets vary not just with macroeconomic factors, but also with time of year. The upshot is that the market today is different than it will be in two months, different than it will be in late summer, and is already different than it was a few months ago. You try to look at your fifteen to twenty-five properties today with an eye towards buying in six months, you are doing worse than wasting your time. You are actually confusing yourself with data that is very likely to be outdated by the time you go to apply it.

Furthermore, there's a well-known comedy schtick routine in the industry: Q: How often does the deal of the century happen in real estate? A: About once a week. The point of the matter is that if you are looking for a property that's a real bargain, they aren't that hard to find. The more difficult skill is recognizing them when you see them. The average buyer is looking for something that is both perfect and a bargain - and the intersection of those two sets is pretty universally null. The reason the current owners spent all that time, effort, and money fixing them up is because they expect that effort to be handsomely rewarded by buyers who don't understand the economics involved.

You probably want to talk to someone who does loans before you talk to a buyer's agent. Find out from them what real rates are that can really be done for you. This, together with how much you make, gives you your budget. It may change, going down if rates rise or up if they fall, but this way you know how much you can afford to spend. I have said this many times, but it's a good idea to repeat it: Shop by purchase price, not by payment. If you shop by payment, you are laying yourself open to all kinds of games by unscrupulous lenders and agents looking for quick, easy sales. Of course, if you find somebody who does both, that's fine, as long as they pass the tests you'd administer to both. Among which, of course, are Questions You Should Ask Prospective Loan Providers and being willing to work on a non-exclusive buyer's agent basis.

Caveat Emptor

Article UPDATED here

First, I just got engaged, and my fiancee and I have been discussing what we want in a house after we get married. It will be the first house for both of us. She spent the last two years living with her parents to pay down her credit card debt.

So she doesn't have a current rental history. Given that she makes more than I do, if we purchase together, my understanding is she will be the primary borrower. Thanks to your site, I've figured out what I can afford without her, and it isn't what we are looking for.

My questions are:

1. Are lenders going to be reluctant to loan to us if she doesn't have a recent rental history? If so, how much time would a lender require.

2. Once we figure out when we are going to be ready to buy, how early is too soon to get a buyer's agent and start looking?

Yes, lenders are more reluctant to lend to you with insufficient rental history. What they are looking for there is a verifiable history of making payments for housing.

Used to be, A paper lenders wanted two years history of making housing payments on time, and might have waived it down to twelve months in some cases. Sub-prime generally wanted the same two years, but it's pretty easy to get it waived down to one year, and occasionally possible to get it way down. Three months in one loan I did about two years ago. All the way down to zero? Probably not.

However, with the general loosening in underwriting requirements, this has largely gone by the wayside. One of my favorite A paper wholesalers just called (on President's Day!), and I asked him about Verification of Rent, and he said "We just don't require it any more unless there's something fishy about the situation." Basically, it's up to the underwriter and whether they make it a requirement for the loan. You can never count on getting it waived, but it's no longer a huge obstacle.

Now, there are potential ways around the requirement, even if they're being a stickler. If your fiancee has been paying rent to her folks, it's likely that the lender will accept canceled checks for six to twelve months as evidence that she has been paying rent. In the case of family situations like this, they want to see real solid evidence of the rent payments being made on time, they want to see that the checks were written and cashed at appropriate times, and they will not, generally speaking, accept a family member's word for it unsupported by paperwork. When you're renting an apartment or something from an unrelated third party, that third party has no particular motivation to paint your situation as being better than it is.

I've seen people advocate this as an application for a stated income loan, where you qualify as a lone individual, but state your income as being enough to qualify for the property and necessary loan that you want. The thinking goes that combined, you make the money, and it's only the fact of some "obnoxious administrative rules" that you can't use her income to qualify. That much is true enough, and that such rules are relaxed now is one thing in their favor. However, it's still lying on a mortgage application (i.e. fraud), and that lender can make life very sticky for you if they should desire to. For one thing, you are de facto using her income to qualify for the loan without giving them a chance to scrutinize her credit record. For another, it's very possible that stating enough income is something the underwriter will challenge (which will happen if you go over the 75th percentile for your occupation), at which point you're not going to get the loan. I wouldn't want to do it without notifying the lender's representative in writing as to what was going on, and it's unlikely that they would approve and fund a loan under such circumstances, but doing otherwise is fraud. I'm sure everyone is all excited by the prospect of doing business with a loan provider who's "only a little bit crooked," right?

Now there is one issue I haven't dealt with that relates to all of this: Payment shock. The idea behind payment shock is that you're used to living on so much money, and people (in the aggregate) strongly tend towards living the same lifestyle over time. Payment shock becomes an issue when your new payments for housing (loan, taxes, insurance, etcetera) are a certain percentage more than you are used to paying for that same thing (rent, in your case). How much more varies from lender to lender and even according to circumstances. For instance, many sub-prime lenders will take into account all of the bills you are paying off in a refinance. Exactly what percentage increase triggers the "payment shock" is lender specific. I've seen it be as low as 25% and as high as fifty. Nor does every lender have payment shock guidelines.

When payment shock is a factor, they are going to require you to have some cash reserves somewhere. Typically, it's two to three months PITI, or principal, interest, taxes and insurance, on your new loan. It generally needs to be in checking, savings, non-restricted investment accounts - some form where you can get to it, not IRAs and 401s, which have restrictions on access. This needs to be left over after your down payment, closing costs, etcetera. So even though you are not making a down payment on the property, you can need to have the money to do so available to you.

Payment shock is one of those things that can make a situation look fishy. If you are trying to avoid payment shock requirements and state that you are paying an amount of rent that is clearly above market rates, they will want to verify it. Can you say, "Out of the frying pan and into the fire?"

Caveat Emptor

UPDATED Article here

Carnival of the Capitalists Recommended Wisdom From Wenchypoo's Mental Wastebasket (success by changing your attitude), David Maister (binding a client even tighter to you by admitting to a mistake - and fixing it)


A few days ago, I wrote to Senator Boxer regarding the Ryan White AIDS testing program. This is what her office sent back:

Dear Mr. Melson:

Thank you for writing to express your views on the high costs of health care. I appreciate hearing from you on this important issue.

For the past six years, the Bush Administration and the Republican Congress have failed to respond effectively to rising health costs. As you know, health care costs and insurance premiums have soared in recent years, putting heavy strains on employers, workers, and families who are struggling to keep up. The average annual premium for family coverage has skyrocketed 81 percent since the year 2000 to over $11,000 a year. Currently, over 46 million Americans have no type of health insurance at all.

President Bush recently proposed a health care initiative that would use tax subsidies to encourage more people to purchase their own health insurance while imposing additional taxes on those who have comprehensive health policies. The President's proposal, if implemented, would do little to help the uninsured, most of whom have limited incomes and are in low tax brackets.

I believe the health care crisis demands a comprehensive solution that lowers the costs of medical care and makes health coverage available to all Americans. I am hopeful that the new Congress will move beyond the President's inadequate proposal and effectively work to meet the health care needs of hardworking Americans.

Thank you again for writing to me. Please do not hesitate to contact me again about this or any other issue.

I'm pretty sure you were elected to represent all Californians, Barbara, not just Democrats and people who hate Republicans. As a matter of fact, the Presidents health care proposal is a very good one, as it would, if enacted, lower the costs of the uninsured obtaining insurance (particularly the self employed and those whose employer does not provide it), and without robbing anyone else of money in order to pay for it. Give President Bush his due on the subject: he listened to real experts and came up with what would be, if Congress were to take him up on it, an effective Aikido blow against the problem of uninsured Americans.

Additionally, if I were going to change one other law to make it easier for health insurance to happen, it would be the California law that mandates the employer pay at least fifty percent of the premium. Of course, that's not politically popular with the "I hate capitalists" crowd, is it?

And we keep electing this Piece of Work to the Senate? The only time I don't wonder about the intelligence of my fellow Californians is when I'm sure they're three points dumber than a rock. Yes, they re-elected Arnold governor, but I'm not certain most of them were voting for his policies, and not for the Hollywood actor.


Friday is usually a light traffic day, and Saturday is usually lower. Nowhere in the league of the first four days of the week. Nonetheless, my server logs say that February 16 was a new traffic record: 6410 visits and February 17th beat that by three: 6413. Interesting.


Tapping Ahmadinejad's Egg over at VDH.


Captain's Quarters notes polls that the majority of Americans want to win in Iraq.

This question brought someone to the site

Can I change lenders after the loan is approved?

The answer is yes, if you don't mind starting the loan process all over again.

Actually, you can change lenders any time you want to. It may be expensive, it may be counter-productive, and it may or may not be an intelligent choice, but it is your choice. It's not like the lender can do anything about it.

There can be external factors that prevent you from doing so. If you owe $500,000 on a property that has fallen in value to $450,000, you're not going to be able to refinance on any kind of decent terms unless you pay that loan down. If your credit is no longer as good as when you last got a loan, if your monthly bills are too high a proportion of your income, or any of a couple dozen other possible reasons, you won't be able to obtain financing as good as your current loan. This doesn't mean that you cannot legally decide to take something less advantageous. People voluntarily take out negative amortization loans all the time, no matter how much they hurt themselves with them. It's all tied up in the freedom thing, even if it does mean you're free to make mistakes.

Just because you are free to change lenders, does not mean that there will not be consequences. That's also part of the freedom to make your own mistakes. It can be very expensive to change lenders. You are basically back to square one when you change lenders, a fact many loan providers make rapacious use of when they pull a bait and switch routine. I add that in the vast majority of these cases, that bait and switch was planned with malice aforethought, as you know if you're a regular here.

When you decide to begin the process over, you may or may not have to do everything over. If you're at a direct lender, there's no alternative. You have to do the loan paperwork all over. Credit Report and everything else, application and all the disclosures. If you did some work ahead of time so that you're the one who controls the appraisal, you may not have to pay for a new appraisal, but most folks have to get a new appraisal. If you put down a deposit with the lender, you're likely to lose it. They did all of this work, and they're not getting paid for a funded loan. It's rare that lenders will refund deposits. That's why they require them, to commit you to the loan and prevent you from changing your mind. Mind you, the consequences of agreeing to a bad loan are usually much worse than losing the deposit, but people are silly about cash deposits.

When you change lenders even though you're staying with the same broker, the consequences are much smaller. Since the application, etcetera, should have all been done in the broker's name, the loan officer has to begin the underwriting process all over, but the basic paperwork is pretty much the same. They have to give you new copies of the required paperwork reflecting the new loan, but that's it. On the other hand, if there's something underhanded going on, it's almost certainly the doing of the loan officer, so staying with the same brokerage is likely to be perpetuating the problem. This applies to direct lenders as well.

There is always a moment of truth in every loan, when the final loan papers are presented. If they do not reflect what you were led to believe in order to get you to sign up, you probably shouldn't sign them. Many people do sign loan documents that amount to shooting themselves in the head financially. Refusing to sign can cost you money, make no mistake. But agreeing to bad loans will usually cost you more. Nor are you legally committed to that lender until, well, at least after you sign the note, and not completely until the loan is funded and recorded.

It is comparatively rare that you should sign loan papers if the loan you are agreeing to is not what you were lead to expect. There is no "Get Out of Contracts Free" card in the real world, and once that loan is funded, you are bound to all of the terms of the contract, and this includes not only high potential costs and rates, but prepayment penalties and everything else.

With that said, I should talk about one reasonably common exception: Purchase money loans. The escrow period in purchases runs only so many days, and you have to have everything done during that period, or the deposit you made to hold the property is at risk. It's still usually a good idea to negotiate an extension on your purchase escrow rather than agree to a bad loan or even a less good loan, but there are cases where it can be smarter to sign the loan documents now and refinance later.

Now, for refinancing your primary residence, just because you sign documents does not mean you are stuck. There is a federally mandated three day right of rescission when you refinance your primary residence. It's not a good idea to sign just because you can rescind later; that three days is gone before most people are realize it. The rescission period is a last chance to avoid disaster, and signing loan documents can commit you to paying certain costs and fees even if you later rescind. Better not to sign in the first place if you find a problem, and you should always look for problems before you sign.

Just because you signed and the loan funded does not commit you to it for ever and ever. You are always legally free to refinance or sell. There may be prepayment penalties, and you won't get the costs you paid to get the loan you are replacing loan back, but if you're at nine percent interest rate and you can have six on terms as good or better, it's likely to be worth going through the paperwork and paying any prepayment penalty. The math may say otherwise in specific cases, but that is once again a matter of specific situation versus broad rule. Prepayment penalties don't mean you cannot refinance, they only raise the opportunity costs of doing so. Lenders put them into contracts because they not only raise that opportunity cost, they also provide a good boost to their profit if you do jump over that raised bar.

So you can change lenders at any time. There may be reasons not to do so, but that doesn't mean you cannot do it. In every situation, the answer as to whether you should is in your contract and in the math, and it may take a good amount of informed professional judgment to help you make the choice, but that choice is always yours.

Caveat Emptor

UPDATED article here

I got an email asking me about whether purchase money loans were risk free, as in the buyer could walk away without consequence. Well, it's not the case: There are consequences to credit, tax consequences, and consequences to future financial ability.

Now this was a real estate agent, but it could have been any other kind of financial advisor, or anybody at all. I've seen members of just about every financially related profession who were completely ignorant of one of the most fundamental facts of investment: There is no such thing as a risk free investment.

There are all kinds of risk: investment risk and currency risk on one side, inflation risk and reinvestment risk on the other. There is even solvency risk (the risk that the entity that owes you the money will be able to pay) and guarantee risk (the risk of the entity standing behind an investment that is guaranteed being unable to pay). Real Estate has liquidity risk, which most investments do not have to nearly the same degree. There are more sorts of risk than I can really go into here, but there is no such thing as a risk free investment. Each possible investment has varying levels of different kinds of risk, but there is always risk, even in government insured investments. Successful investing is managing the level of risks versus the rewards. You may be able to load the dice, but you always have to roll them, and no matter how well you load them, they will come up snake eyes sometimes. There are risks in government bonds, government insured bank accounts, insurance - everything, including keeping your money in a mattress. Whether or not you understand them, risks are present. There is no such thing as a place to keep your money that is free of risk - not even in your mattress (which has inflation risk, theft risk, and destruction risk)

Investment profit is a reward for overcoming risk. If it were automatic that you make money every time you make an investment, more people would do it more often. Of course, if that were the case, the rewards would also be much less. Supply and demand: If demand remains constant, and the supply increases, then the reward you have to offer them as an inducement becomes much less. The fact that there is a downside is one of the reasons the upside is as high as it is. If Aunt Edna could risk her pension money and be certain of getting it back with a profit, what reason is there not to do it? So she would. So would a lot of other people.

But there is the risk of effectively losing some or all of your principal. Fear of risk, particularly risks they do not understand or cannot control, keeps a lot of people on the sidelines, which means there is more reward for the rest of us and thank you very much. But on a regular basis, some clown tries to pretend that there is no risk so they can lure unsuspecting thralls of fear (many of whom have money) into making some investment they would not otherwise make.

Forgive me if I get angry for a minute: You have no business anywhere near a profession that has responsibility for other people's money if you don't understand that there is no such thing as a risk free investment. Furthermore, you have no business anywhere near a profession that has responsibility for other people's money if you are willing to say that there is such a thing as a risk free investment. Get out now before you go to prison. For that matter, have the courts appoint a legal guardian for you, because you are clearly not a responsible adult. Nor am I talking solely about financial advisers. Accountants, insurance agents, real estate agents, loan officers, lawyers, and any number of other occupations are part of this. Dishonest lazy selfish cheating alleged professionals use the "no risk" come on somewhere in the country every day, and every day it results in people losing large amounts of money or worse. If you cannot "sell" someone on the benefits of your chosen investment even with a frank discussion of the risks, then you should be barred from the industry for life. Life is risk. You win some, you lose some, and sometimes the Fickle Finger of Fate ends your game permanently for no good reason. But if someone wants to avoid a certain kind of risk, nobody should be talking them into on the basis that there is no risk. Explain how the risk works, yes. Address any irrational fears, yes. Explain precisely how you intend to "load the dice" in your favor. But claiming the risk doesn't exist because you get paid if they believe you is criminally irresponsible in every case. I can point to real estate agents and loan officers who have dates with a prosecutor coming up, and more who should have dates with a prosecutor scheduled, because they made this claim.

If anyone ever claims that "there is no risk" in some investment, walk away. Quickly. Actually, you should probably run. Because there's a con game going on, and you don't want to be one of the ones left without a chair when the music stops. Better not to get in in the first place, but get out immediately if you're already in. The ones who get greedy while thinking, "Just a little longer, just a little more" are the ones most likely to get burned.

Caveat Emptor

do you agree that a non recourse loan on a single family home is loaned with out financial risk to the borrower... if they do not want to keep their home when the market drops below what they owe, they can walk away with immunity to any financial loss & the most the lender can do is take back the home, & if the borrower has made all their payments on time & have returned the home in the same condition as when they moved in, their credit will not be negatively, by the lender??? my reference is http://wwlaw.com/forecl.htm

Yes, it is true that purchase money loans are largely non recourse in California. However, I do not agree that there is no financial consequence.

First off, there are credit repercussions for up to ten years. Among other things, this will make it more difficult for the buyer to rent the next property they will live in, as well as making it more difficult to obtain financing on the next property they want to purchase, when they really are ready to join the grown-up world.

Second, just because the lender cannot seek a deficiency judgment does not mean that the IRS will not tax them for debt forgiveness. If the lender loses $50,000 in debt forgiveness, they will report it to the IRS, because they want that deduction from income. The IRS will then tax the former owner whatever tax would be due upon the residence. Income from debt forgiveness is ordinary income, and it is fairly likely to boost the taxpayer up in tax bracket in such a case. So now they have to come up with thousands of dollars. If they had those thousands of dollars, they probably wouldn't have lost the property. So now the IRS is looking for other ways to get their money: attaching wages, confiscating other property, etcetera.

I should also note that there are all kinds of exceptions to the law limiting deficiency judgments for purchase money loans. Fraud is one such limitation; if the buyer had to state more income than they in fact make, that would certainly prove to be an interesting case. I don't do it, but that doesn't mean it never happens. Furthermore, just because the buyer doesn't fall into one of the exceptions does not mean the lender will not contend in court that they do. The law doesn't actually prevent the lender from seeking a deficiency judgment; what it says is that they're not entitled to one if certain conditions hold. Proving that proposition in court is expensive, and the lender can always hope that you simply default by not showing up or something similar.

There are very definitely negative consequences. Buying a property is a complex decision, and should not be done lightly, on the basis of "Walk away if it doesn't work out." The consequences, even if not direct, spread out like ripples in a pond when you drop in a stone. Real estate is a fantastic investment, properly approached. With the tax code and the way leverage works, among other things, it trivially beats anything of equivalent risk for potential reward, or alternatively, beats anything of equal potential for reward as far as low risk. But that risk is not and never will be zero. Indeed, it cannot be. Real estate isn't liquid, and you never get to play with someone else's money risk free. That's two of the many reasons why you need competent professionals on your side.

Caveat Emptor

UPDATED article here

Flight Delays

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Push grows for flier 'bill of rights'

"You gotta realize the frustration -- you can look out the window and you can see, there's the gate, and if you let us off the plane, we can walk there," said Farrell, one of hundreds of passengers stranded on planes held up by the bad weather.

When they're already where they're going, that's one thing.

When they're haven't departed yet, that's quite another.

Here's the situation: Since 1970, there have been two - count them, two - new commercial airports in the country. Dallas-Fort Worth and Denver. Nor have there been any new runways at older airports. Meanwhile, the increase in air traffic is something like ten-fold.

How many aircraft can use a runway at the same time? One.

How many aircraft can use a gate at the same time? One.

Separation and Safety standards have evolved over many years in response to many issues. Decreasing them endangers everyone, and has a very small effect upon air traffic. The rule is that there has to be one form of separation in effect at all times. Five miles or 1000 vertical feet in centers. Approach controls have more options: diverging courses, visual separation, etcetera. But towers have to have and maintain 6000 runway feet minimum for jets or aircraft over 12,500 pounds of any description, and there are wake turbulence rules in addition to that which are measured in minutes. This amounts to one aircraft on the runway at a time, and the larger the plane, the longer it takes to clear the runway, either on arrival or departure, and the more time after it that the next aircraft needs before it is legal - or safe - to use that runway.

It may be frustrating to sit on the ramp, but there's never been a mid-air collision between two airplanes on the ramp. If they do bump, the worst that happens is that the airlines need another airplane for those passengers. Nobody dies.

Now, launch them into the air, and throw them into the mix at their arrival station, which is having difficulty dealing with what it has and getting them down onto the ground. Usually the reason for delays has something to do with weather. So now you've gone from a situation which is difficult but manageable to one which is an outright nightmare. Put more airplanes into bad weather longer, and you're going to have more mechanical incidents. Airplanes declaring emergencies and throwing everything even further into chaos because now they've got to be taken out of turn, or they need more resources (airtime, runway time, airspace). And when airspace is cramped and getting more so, there are going to be more mid-air collissions. I'm unaware of any mid-air in which any of the passengers (or crew) of any airliner lived to tell about it.

I was a controller for twelve years. If there is going to be a delay, it's better for everyone if the delay is taken on the ground. I've seen what can happen when severe weather unexpectedly hits. For instance, there's a gap of eleven miles between restricted airspace northeast of Los Angeles (near Barstow), and through that gap all of the aircraft coming into and out of Southern California to and from areas north and east must go - or it has to go 200 miles north, or south to Palm Springs (another narrow busy corridor for stuff coming into and out directly east), or almost to the Mexican border, where there is an even narrower gap between the Mexican border and restricted airspace. When a thunderstorm hits any of these areas, the aircraft cannot go through it and expect to emerge in one piece. And in all of these places, you have aircraft climbing and descending in each other's face on directly opposite courses, and not much lateral room to work with. What are you going to do? There are contingency plans to use most of the restricted airspaces, but they take some time to implement, and in the meantime you have airliners all over the sky. The last thing you want to do is add more airplanes into the mix. So they start holding aircraft or re-routing them, and now other sectors are trying to deal with more aircraft holding right in the way of traffic flow, or putting them through in ways that the airspace wasn't designed to accommodate. It gets to be a large mess very quickly.

The only way to really remove airplanes from the problem is to put them on the ground, or keep them there. You can't pull off to the side of the road at 37,000 feet. Nor can the airplane sit on the freeway at 35,000 feet. We should all know what happens to airplanes that try either or these. Now keep in mind how many new airports (two) and new runways at existing commercial airports (zero) have been laid down since 1970. The best control system possible can't put you safely on the ground unless there's a runway available for that airplane to use. In other words, if you want to get on the ground sooner, you need to have some serious discussions about the factors that have been keeping runways from getting poured - NIMBYs and BANANAs, environmental regulations, court delays, and political wimps in office. If your portion of the economy is tied to the availability of air travel and you're part of the reason why no new runways have happened, you can look in the mirror for the responsible party. Nor will complaining do you any good.

Now, perhaps the airlines can come up with a better alternative as to how to handle the delays. For example, loading passengers only when they are expected to depart within 30 minutes. Perhaps just informing people about lengthy expected delays and letting them make their own call, knowing they might have to take the next flight. This would necessarily involve a lot more flexibility on gate use and perhaps even necessitate more gate sharing agreements. Both of those can certainly be done, but they are really a matter of logistics. The real issue is too many airplanes trying to do the same thing at the same time. Either some of them are going to be delayed, or there are going to be accidents. Airline accidents have a near certainty of being fatal to everyone on board and often, to some people on the ground who didn't even agree to board that airplane under those conditions. As frustrating as delays are, given these facts, they are the least bad option.

Mississippi AG seeks legislation on State Farm

Mississippi Attorney General Jim Hood said Friday he will seek legislation aimed at blocking State Farm Insurance Cos. from refusing to write new homeowners and commercial policies in the hurricane-battered state.

He said the plan was modeled after actions taken by Florida and would require any company that writes automobile insurance to write homeowners policies as well.

"We're looking at a robber baron in the face that is trying to make an example of Mississippi," Hood said of State Farm.

So the Mississippi Attorney general wants to make it tougher and more expensive to buy auto insurance as well as homeowner's insurance?

State Farm is not a "robber baron." Nor is any other insurance company. At least here in California, they have to defend their rates to actuaries working for the state.

But when you make them pay for things which were explicitly not insured, don't you think they're entitled to second thoughts about whether to do business in that state? State Farm is not a charitable organization. They are entitled to charge enough to make a profit - otherwise there is no reason to be in business. If they decide they cannot do that within the environment in a given state, they are entitled to decide to leave. If they can't do it at all, the correct decision is to go out of business.

Add hefty punitive fines for not wanting to pay out claims for things which weren't insured, and it's a miracle that anyone is willing to issue homeowner's insurance in Mississippi. Make them write homeowner's insurance in order to write automobile insurance, and some insurers might do it - but others will cancel their policies of automobile insurance. Exactly how bad does the state of Mississippi want their insurance situation to get?

Now there is a solution. It's not a good solution, but it is a solution. Suppose the state of Mississippi decides to step up to the plate and insure its citizens? It certainly has the assets and the ability. Of course, then they might discover exactly how hostile the environment they have been fostering for insurers is.

The course they are on is on a collision course with this rather elegant piece of prose:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

We throw one part out, the whole thing goes. So much for one of the biggest checks upon the advance of the statists. Not to mention that if they decide to take the property of the wealthy, politically powerful insurance agency, what is there to stop them from taking yours?

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Your blogsite is great; I stumbled on it and find you very credible and knowledgeable.

I have two questions for you, if you are looking for things to write about:

1) What are your views on the DELETED area? That market is so high, and I wonder if it will follow the pattern that San Diego sets for price adjustments in the market this year. I'm looking to relocate there from San Diego, so I've started researching that market. And I thought San Diego was expensive... the DELETED area is unreal.

2) As a law student, I've had five professors mention that it's a good idea to get a broker's license in order to represent ourselves as our own buyer's agent when buying our homes (if we can ever afford to with those huge students loans to pay off!). The upside is getting back the buyer's agent commission as a sort of "rebate." To support this, a couple of professors framed the issue as roughly: "most agents you would work with only have a high school degree and a few real estate courses under their belt... and could know nothing about property law. Do it yourself, control your own contract, save a lot of money." What do you think about attorneys who get real estate licenses to represent themselves, having lots of knowledge about legal issues and contracts, but no practical experience and training?

Have a great weekend!

In theory, it's a really great idea.

In practice, unless you're out there in the market all of the time, learning all of the tricks that get played or attempted, learning what the market is actually like, etcetera, you will fall into that group of persons known by the technical description "sucker."

Some lawyers apply for their broker's license and use it constantly. Those folks do fine. They know that being an agent is not just about that subset of lawyer functions that agents are allowed to perform, and if they learn about the rest of the business and keep their finger on the pulse, they are formidable.

Those who just use it to do their own occasional transactions, on the other hand... Let's just say I've had to explain to lawyers who took that kind of professorial advice exactly how they got "taken" more than once. Loans are also the same license, but there probably isn't enough money in the average loan to interest the kind of lawyer that does well in the real estate market, and what clue do they have who are likely to be the best lenders who give the best rate for a given client if they won't spend the time learning the loan market? Truth be told, they can make more money with the same time representing those who've been raked over the coals than they can working their own transactions.

The lawyers that the good agents know about and go to when there's a question or a problem? They strongly tend to use agents and brokers for their own transactions. My last boss did half a dozen transactions in the year I worked for him, for one of the best regarded real estate lawyers in town.

Your professor appears to me to be making a "does not follow" error. By the logic of "not much education", he'd be fixing a car himself, rather than using a professional mechanic. Once upon a time I was a pretty fair amateur mechanic. I haven't done more than an oil change in twenty years. I know better.

The real problem here is confusing general education and specific expertise.

In order to be a good agent, you have to spend time constantly keeping up with the state of the market. If you think a given property is worth less than it is, no transaction. If you think it's worth more, your client is wasting money. The questions I keep asking myself have to do with the utility of this one specific property for one specific client, and at what point, in my estimation, they're better off just walking away from the negotiations.

It's true that some agents are just barely high school graduates. Others have MBAs. More important than level of education, more important than how much business they do, more important even than experience, is attitude. Just as important as attitude is market knowledge. And right up there with both of them is negotiating skill in the context of real estate. None of these three skills is certified by a law degree, passing the bar, or anything else.

The result? Lawyers who work at real estate make formidable agents and brokers. Lawyers who get their broker's license because they think they're going to save themselves money by doing their own transaction are lawyers who represent themselves. And we've all heard about lawyers who represent themselves having a fool for a client. The amounts at stake in real estate are large enough that items which are small differences relative to the size of the entire transaction are nonetheless, significant amounts of money. Getting paid all of a three percent cooperating broker's concession can end up costing you ten percent easily. And that is in addition to the costs of doing real estate (MLS access, agent keys, licensing fees, etcetera) and the economic costs of the other money you could be making if you were doing what you're really trained for.

Caveat Emptor

UPDATED Article here

Bush: Iran supplying weapons in Iraq.

Challenged on the accuracy of U.S. intelligence, President Bush said Wednesday there is no doubt the Iranian government is providing armor-piercing weapons to kill American soldiers in Iraq. But he backed away from claims the top echelon of Iran's government was responsible.

And the top level of Iranian government isn't responsible for what their subordinates do?

If either of the Roosevelts or Truman had been President when things like this happened, US troops would be in the process of conquering Iran right now. Jefferson, Jackson, Wilson, Lincoln, ditto. Basically any president and any congress we've ever had that was worth a damn.

And Bush is supposed to be a warmonger?

What has happened to the American people?

Where is the sense of outrage that this slimeball escaped, or that he was allowed to operate so long.

The Christian Science Monitor thinks the US is trying to get Iran to negotiate. The Universe knows that's a busted flush if ever there was one. Effective negotiation requires the realistic ability to do something that the Iranian regime does not want more than they do want nuclear weapons. The only thing that fits that bill is decapitating the Iranian regime, something I can't see the United States doing, despite the fact that it would be the best solution to the problem.

Looks like it's 1975 all over again.

More at Q and O

Captain's Quarters has the goods on the guns used to kill American troops. Austrian weapons, from a total sale of 800 to the Iranian government, of which over 100 have been captured in Iraq. Not allegedly used, captured. As in captured in raids, in combat, etcetera. Our troops have possession of them and have compared the serial numbers.

Here's a question for any military intelligence types that may see this (if it's not classified): If American espionagei types were to ship 100 special sniper rifles to the insurgents in Iran, how many would we expect the Iranian government to capture (as opposed to destroy, run out of the country, or just plain miss), and in how long? My guess is maybe 25, but that's a never played the game Monday morning quarterback guess. What's the ratio of weapons captured to casualty rates?

My point is this: "Over 100" out of 800 rifles that were sold to the Iranian government is a lower bound to the number that were supplied to Iraqi insurgents. So an absolute minimum of 12.5 percent of rifles sold to the Iranian government for "police" work went to kill American troops in Iraq. The Austrian supplier was specifically warned about this possibility in advance. I find protestations of ignorance and innocence utterly unbelievable.


Joe Carter of http://www.evangelicaloutpost.com/ sent an email requesting publicization of Congress Blocks Funding of "Baby AIDS" Program, and you know, I think this is the sort of thing that personal websites should be very good at countering.

Here is what I sent to my senators:

I do not see anything undesirable about identifying children for purposes of treatment, and then treating them so that they can have the best chance at long healthy lives possible. As a matter of fact, this strikes me as a highly useful and efficient use of public resources.

I do not see any advantage to prohibiting funding for this purpose UNLESS it is competing with funding with something else even more beneficial to the public, in which case I would like to know (specifically!) what that competing project is. I certainly couldn't find anything online attesting to the existence of such a competing program.

In the absence of such a competing program, I strongly urge Senators Boxer and Feinstein to support Senator Coburn in restoring funding to this program.


Because he's stupid enough, egotistical enough, and gosh darn it, people loathe him: Franken saying he'll run for Senate

Congratulations, Al. You've just flunked another test Rush Limbaugh aced when he said (from memory) "In entertainment, ten percent audience share is fantastic. In politics, it's a joke." as he declined to run for office.

So what's less than one percent?


State Farm: No New Policies in Miss.

"I view this decision as the inevitable outcome of the increased uncertainty and cost associated with the litigation that has developed post-Katrina," said Robert Hartwig, vice president and chief economist for the Insurance Information Institute in New York, an industry-funded group.

The state's courts and some state officials have created a "virtually impossible working environment for insurers," he said.

What did I tell you?


Iran on course for nuclear bomb, EU told

Basically, the article says that negotiations can not stop the Iranians from obtaining nuclear bombs at this point. To which I say, "Really? No Kidding?"

Talk is all very well and good when both sides have a stake in the success of those talks. That is not the case with a nuclear armed Iran.

HT Argghhh!

I thought I'd share this with you as an example of the sort of mind set to beware. This is a real email I received a few days ago, with identifying information redacted

I found you through the DELETED web site and I thought you might appreciate the following idea for GENERATING MORE REFINANCE BUSINESS:

What would happen if you sent the following email to your email list of former and prospective clients?



Dear (former or prospective client):

We recently found an interesting 23 minute video on the web that shows you how to Bring MORE MONEY into your Life, OWN YOUR HOME FREE AND CLEAR IN 8-11 YEARS - instead of 30 years, AND SAVE 66% in Total Mortgage Interest. The video is about a computer program called the DELETED (May be a propreitary name). You can view this video by copying either of the addresses below into your browser and press "Enter":


(Please Note: Your default video player will play the video, and your browser will stay blank.)

If you like the idea of bringing more money into your life, if would like to own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and if you would like to save about 66% in total mortgage interest, get back to me at (123) 456-7890. We can make it happen for you.

Best regards,

(They had the gall to sign my name to this abomination!)

Here's WHAT YOU GET OUT OF THIS as a mortgage broker:

If your client wants to go ahead, a HELOC (DM: Home Equity Line of Credit) is required to implement the program, so they will need YOU to arrange an "Advanced" (Home Equity) Line of Credit for them (earning you a fully disclosed HELOC fee). Plus, you will Earn a $900 to $1500 fully disclosed commission for each DELETED you arrange, depending on your cumulative sales of the DELETED Program. All you do is help your client save tens of thousands of dollars (or more) in mortgage interest. They can also pay off credit card and other debts more quickly at the lower (HELOC) interest rate, and be guided step-by-step to become DEBT FREE.

This MMA program is a great RELATIONSHIP BUILDER. It will stimulate discussion with your clients and get you MORE REFINANCE BUSINESS.


As an alternative, if you don't want to send out special emails like this, you certainly talk with people every day who decide NOT to refinance, or NOT to refinance with you. What if you were to ask "one more question"?

FOR EXAMPLE: "By the way, if you don't want to refinance, I know of a way you can bring more money into your life AND own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and save about 66% in total mortgage interest, WITHOUT REFINANCING. Would you like to know HOW to do this? (Yes/No)

(If yes): "Point your browser to DELETED. This will play a 23 minute video that explains how the DELETED works. Will you watch the video? As soon as you've watched it, call me, OK?"


Some clients should not have a HELOC because they do not have the financial discipline to handle easy access to credit responsibly. The factor of financial discipline could be part of your discussion with the client.

In any event, the above email gets you into direct contact with clients you would otherwise NOT connect with, without bringing up the subject of refinancing their loan. This allows you to assess and attempt to meet the client's needs in a perceived context of genuine service.

Sounds good? Get back to me at DELETED for more information and to get started!

Best regards - for increasing prosperity all around,


Offer some brokers a way to make money, and they won't care if it hoses their clients. Others just won't examine the program, because it looks like it helps clients while it makes them money, although in fact it does not help clients.

Now their web video wouldn't run, and I wasn't going to lower my computer's security settings for SPAM. But I found their information elsewhere. It's an accelerator program combined with a debt consolidation program. But I found their information elsewhere. It didn't take much work.

Lowlights include

$3500 sign up fee for something that should be free, as it cuts the lender's risk factors significantly.

Multi-level marketing scheme. I sign up other folks to sell it, I get paid for their production. Now there is nothing intrinsically wrong with multi-level marketing, but it does serve to inflate costs. Sometimes it is less expensive than retailer's inventory carrying costs and marketing costs, but for financial services it is a dead give away that something is not right here because there are no inventory costs, and they're certainly spending enough money on marketing - $900 to $1500 commission plus over-rides per program sold. What a beautiful idea, to get the suckers to pay for your marketing!

Unrealistically low mortgage balances, and outrageously high assumptions of extras payments under the program. This has the effect of magnifying the apparent benefits. In reality, your average total benefits will be half a months interest savings on anything deposited. So if you deposit your entire $5000 paycheck and you have a $2000 mortgage payment, that's about half a months interest on $3000. At 6%, that's about $7.50 per month gain. Certainly not worth all the hoopla, is it? Definitely not worth thousands of dollars in sign up fees, not to mention the costs of that Home Equity Line of Credit. Considering the costs involved, you'd do better to ignore the program (which has a monthly cost of more than that), and just send the lender $10 extra per month. As a matter of fact, most of the increased benefits these programs claim has to do with the bank retaining a certain amount that they claim you just end up not spending - and I can do better than 6%, even net of taxes, with that money if I invest it elsewhere. If you can't do better than 6%, just add whatever you want to your regular monthly payments when you send your lender their money, and ask them to apply it to principal. You will come out ahead. Not to mention I don't have to take out a second or refinance to get money out of investment accounts if I decide to do something else with it!

And that's the real kicker. There is no benefit to these programs that mortgage consumers cannot do cheaper or better themselves. The real benefits obtained by these programs are comparatively small, and in no way justify sign up expenses of hundreds to thousands of dollars, or monthly fees above $1 or so. Don't waste your money. If your lender will give you one of these for free, that's one way to get five or ten dollars extra applied to your loan principal per month. If they want to charge you, don't waste your money on the sign up or the monthly fees. Instead, add whatever the program's fees are to whatever amount you would ordinarily pay, and you'll be ahead of the game.

I keep saying this, but mortgage lenders do not want to compete on price, so they will try offering all kinds of bells and whistles that might appear to be neat stuff but are really a distraction from what's really important. Some very big names are trying to use these to sell much higher rates than people would otherwise be able to get, by distracting people with this shiny new toy of Mortgage Accelerator Programs that don't make nearly the difference that some folks say they do. Take your time and do the math. If you can save a fraction of a percent on the interest rate, or even just cut your closing costs by a thousand dollars because the other lender's trade-off between rate and cost is a little better, you'll be better off going to the other lender. Mortgage Accelerator Programs like this are an expensive waste of your money,

Caveat Emptor


Carnival of Consumer Oriented Real Estate

Not often that this happens, but I have to say that this was far and away the best carnival I read this week. I didn't agree with everything and I didn't see an individual post I could wholeheartedly recommend, but original writing, the worthless, reptitive schlock was left out (How many times can you read the same thing and think it's worth your time?), and the carnival host didn't pull any agenda-driven tricks that run counter to the charter. Well done.


If you're in Dallas (or Fort Worth) and have some time, you could do a lot worse than standing with these folks, as they Welcome returning troops home.

Their web page is here


Today marks eleven years since The World's Only Perfect Woman and I had our first date. We're going to another branch of the same resturaunt chain where we met for lunch and spent the next four hours talking (The branch we met at is just too cramped and crowded). Of course, we'll have the girls with us this time, but that's a good thing that the girls see Mommy and Daddy still celebrating the anniversary of their first date, and in a non-extravagant manner.

(February 13th is the perfect anniversary of a first date. It's a pain to deal with restaurants on Valentine's Day, and no one expects to go out two nights in a row, right?)

Dear Mr. Melson,
I was wondering if you could offer some insight re: the other side of the equation: what to do *after* you've bought a vampire property.

We bought one, quite by accident, despite a house inspection by a certified inspector and an additional mechanical inspection. Turns out we had a huge lemon. It was a combination of inexperience and bad luck. Some things were hidden really well. The owners were drug addicts, and their agent spent $6000 making the place look nice (we learned this upon closing, when we saw that $6000 of the profit was
being paid to the agent on top of her fee). For the things that were more obvious, we thought the costs of fixing them wouldn't be as bad as they were, and our inspector didn't do a very good job of explaining his findings and their implications. The mechanical inspection was a joke. Our agent didn't represent our interests very well. And we were stupid, too caught up in the process to understand the red flags. Despite some poor representation, we blame ourselves.

We're not going to pursue a lawsuit with deadbeats since collection notices for their accounts continue to come to our house. So I guess I'd like to hear a professional perspective on how to handle a house like ours. Yes, we're looking into more work and income, but we have some limitations in that arena. We can't be the only idiots! If you have any suggestions, I'm sure there are a lot of us who'd appreciate it.

This is why I emphasize the importance of education and prevention. I am once again embarrassed on behalf of my profession, and offer you loads of sympathy, but there is no way to make it not happen. Unfortunately, this kind of scenario is all too common. People get caught up in the emotion of the fact that they're Buying a House! That We Will Own! It will Be Our Very Own! and then, because they were so caught up in the emotions of the moment to really examine the situation, they ended up buying a Vampire Property.

Indeed, a very large proportion of my profession makes a habit of building those emotions specifically so that you won't examine the situation. Not so much that they're intentionally trying to mess with folks, just that they don't care. They want a fast, easy transaction that results in a commission check, and they just don't care very much what happens after that.

I encourage everyone who reads this site to test their Buyer's Agent for attitude. Anybody can point out nice things in a property. But the true test of the attitude you want your Buyer's Agent to have is "Are they willing to say bad things about a property?"

Properties that are real bargains are never perfect. Actually, if it is perfect, odds are overwhelming that it will be overpriced. That's why the current owners put all that work into it: They want some innocent suckers to come along and plonk down way too much money because the property is "Just soooo beautiful!"

Now, as to your situation. You're right not to sue the broke deadbeats - sue those alleged professionals who did not represent your interests despite being paid to do so. To wit, the inspector and your buyer's agent brokerage. Depending upon your state, it may be that you even have a good shot at the listing agent and that brokerage. It's one thing if they honestly didn't know about the property's faults, but it's quite a different thing to spend $6000 hiding problems. That evidence puts a good strong bit of presumption on your side. Talk to a lawyer.

Not an optimal solution, but the reason I'm so big on education before hand and preventative measures is that once it's done, there is no going back to the way things were before. A lawsuit takes a long time, and doesn't make it all better, but it may give you some of the wherewithal so that you can make it better yourselves. In the meantime, of course, you're miserable.

Now the neighborhood must have been attractive to you, and odds are that you can improve the situation with some work. It might not be wonderful, but you probably have a property you can live in while dealing with the problems as you get the time and money to do so. "Make the best of the situation" is a rotten thing to be telling someone who thought they were getting their dream home, but we're all adults in the real world here. It's going to take time and money and a lot of work and it isn't going to be pleasant, but you can almost certainly improve your situation if you make the effort.

For Buyer's agents, it really is all about attitude. I can teach newer agents everything I know about construction and negotiations and all that agent stuff a million times easier than I can teach attitude. It's about being willing to walk in and tell people "Don't buy this POS, let me find you something better," instead of trying to sell every property. That's the listing agents job. The Buyer's Agent's job is to debunk the Male Bovine Fecal Matter. It's about honest evaluation and compare and contrast the benefits and drawbacks of each property with those of similar properties, and working within your budget, instead of grabbing commission checks as fast as possible. Sure, I do it because I want to get paid, but when the transaction closes I want to be proud of myself, not want to take a long hot shower to get the slime off.

Preventative measures: If you know about an issue, don't take an agent's word, or an inspector's word, about what it's going to cost to fix. Get a contractor out there who's willing to give you a repair estimate during your contingency period at the latest. If someone who can fix it tells you how much they'll charge, that's better information than anything anyone else can give.

A good Buyer's Agent is not afraid to give you their best honest evaluation of the good and bad points of a property - not just for living in, but for resale when you eventually do. When I take prospects out hunting, most of them drop their jaws the first time I say something uncomplimentary about a property. How can you honestly represent someone's best interest if you won't tell them about the flaws you see? Nonetheless, many members of my profession won't.

You can sell properties by being honest. It just takes a little more effort. And everyone except the owners of Vampire Properties are a hundred times better covered against "unhappily ever after" I'm making two offers right now with prospects who know all the warts that I do. What happens if they find something else after it closes? They are going to know that it was something I had no clue about. They'll call and tell me, I'm certain, and I'll go look so as to increase my knowledge. But that will be the end of it as far as I'm concerned - they're not going to sue me. Even if they try, a good lawyer is going to tell them they're wasting their money. But they are going to know that I did my best to protect them, no matter what happens.

There is a move afoot to make being a real estate agent into being a transaction facilitator. Many agents, particularly at the big chains, are trained to make it clear that that's their job function. They are not inspectors, market evaluators, or anything else. But they simultaneously want to be paid an expert's commission. Not going to happen. If that's all you've got, disintermediation is going to eat your business for lunch. There's no reason why the same person who processes the loan can't do that for an extra $500 - as opposed to regular real estate commissions. The first question I ask discounters is why they should get paid as much as they do, because I can point to flat fee open listing services that work just as well for far less. But the average home buyer is not an expert, and is not financially equipped to undertake, or even to understand, the risk that the person at the beginning of this article was on the losing end of. The reason that I'm worth every penny of what I get paid is because I've taken the time to learn what is necessary to act as their expert, as well as coordinating the real specialists, and prevent this sort of problem before it happens.

After the above was written, I got a follow-up email:

Thanks so much for your response. I usually reply a little faster to emails, but I have a sick toddler and was in crisis mode for a couple of days. I do really appreciate your taking the time to write.

I'll talk to my husband about approaching a lawyer. I think he feels it's probably not worth the effort and money, and that given our situation, we should save what we have to fix the house. He might be correct, but we should talk to an attorney anyway.

I agree with you that it's about attitude. We asked our inspector and agent for their opinions on the house, and they both hedged. We asked because we didn't understand everything, and when we didn't get a real opinion from those folks, we tried to educate ourselves and get estimates. We didn't see the red flags, both with the house and with that type of situation.

It's a learning experience, albeit one that keeps us up at night. I'm looking for some resources/books on what to do when you're in a vampire — where to skimp or delay, where to put more effort and energy. Some of these decisions will be made for us, since things break pretty regularly. I'm also thinking of bringing in a realtor in a year or two to make suggestions (we might have to sell in 5 years) on what would make the place more appealing. If you think that's a terrible idea, I'd appreciate your thoughts.

I hope your article prevents others from making the mistakes we made. I tell everyone about what we've gone through. I know that people don't like to hear about negative things, but we want people to know that this can happen even when you think you've educated yourself & chosen good representation. In the days leading up to our closing, I had a really bad gut feeling, and I was talked out of it. People need to know that they should listen to their guts!

Not certain that it's always a good idea to listen to your gut. Allowing gut level, irrational fear to overcome reason is a recipe for disaster - or at least huddling in caves in the shadows of modern skyscrapers. But there's usually an unexamined aspect to the whole situation, that as soon as you do investigate, it becomes obvious that you were heading for the abyss, awaiting only that quintessential moment when Wile E. Coyote (Super Genius!) looks down. Since real estate transactions are so large, there are a lot of people out there hoping you don't notice the ACME logo, so that they can go their merry way with your money. Kind of like those old Medeival period maps that say, "Here be Dragons." You need a guide who, if they haven't been precisely there before, is at least a trained explorer. That's why you need someone who's determined to be the best advocate they can for you. I'll take a first time agent with the right attitude over a commission grabber with forty years of experience, every time. That newbie agent can get the guidance they need from veterans in the office. The commission grabber won't even try to spot the issues. In fact, many of them do their best to collude in covering them up, as you have unfortunately discovered.

Now, "Vampire Properties" is just a label I invented because it seemed particularly appropriate. I've never seen it used elsewhere, although it's likely that I have "independently re-invented the wheel", because it seems like such a logical, appropriate, memorable phrase in retrospect. And it's not for nothing that they say, "Experience is what you get when you didn't get what you wanted."

Caveat Emptor


New addition to the blogroll: The Victory Caucus

Whether or not the average citizen realizes it, we are in a fight for the life of our civilization, and there is no acceptable substitute for Victory.

Their first substantive post is here.

The text of the Democratic House Resolution:


Disapproving of the decision of the President announced on January 10, 2007, to deploy more than 20,000 additional United States combat troops to Iraq.


Mr. SKELTON (for himself, Mr. LANTOS, and Mr. JONES of North Carolina)

submitted the following resolution; which was referred to the Committee

on ______


Disapproving of the decision of the President announced on January 10, 2007, to deploy more than 20,000 additional United States combat troops to Iraq.

Resolved by the House of Representatives (the Senate concurring), That--

(1) Congress and the American people will continue to support and protect the members of the United States Armed Forces who are serving or who have served bravely and honorably in Iraq; and

(2) Congress disapproves of the decision of President George W. Bush announced on January 10, 2007, to deploy more than 20,000 additional United States combat troops to Iraq.

1 and 2 are not quite explicitly contradictory, but you can only claim that they are not by completely ignoring the political environment that has given rise to this movement. Lie, Cheat, Steal, Invent Things, Make Mountains Out of Molehills, anything to disadvantage "those evil Rethuglicans and George W. Chimpy McHitlerBurton."


Carnival of Personal Finance

Carnival of Investing

Is it just me, or were the carnivals this week basically hard vacuum? The ones I linked were comparatively mild examples of what vacuum does, although the host of Carnival Of Investing did their best with the material submitted. There were three carnivals that I was glad that I was free not to link, as I hadn't submitted. Bleah! Of course, Carnival of Capitalists isn't up yet. Let's hope it's the exception.


China's life expectancy to jump: report

Average life expectancy in China will jump 13 years to 85 years and all households will be lifted out of poverty by the middle of the century, Chinese academics forecast in a report issued in state media on Monday.

The number of years a Chinese child spends in school will almost double to 14 years and an increasingly affluent population will spend a far smaller proportion of their income on food, the official China Daily said, citing a 20-volume report called an Outline for China's Sustainable Development.

Is it just me, or does this seem like another Five Year Plan or Great Leap Forward? "We'll just pull ourselves up by our bootstraps and go" Kumbiyah, my party, Kumbiyah.

Looking for advise on Neg. Am. loans.

I live in DELETED and I recently went into an office with a buddy asking about a refi and cash out loan on my existing homes in order to help with cash flow. I briefly talked to the broker who was trying to close two loans for my buddy. He said yeah I could probably get you a similar loan 1% or so and cut your payments in half. You'll need to refi in 3 years or so.

I Left my old job ( Sales ) and I am in my first development project subdividing 2 lots in to 4 with custom homes on each. Time line has dragged on dramatically ( approaching 2 years ) and budgeted money is running thin. Should start building within next few months and complete with in 15-18 months. Should make good profit.

In addition I own two SFR's and I have 549K loan on primary and 297K on non owner. Each appraises over 800K.

To help with purchase of the other properties and need of cash flow I also exercised LOC's of 150K and 90K on these properties so total mortgage debt is :

* $ 1,087,550 payments of $6152
* new loans proposed are 650K primary and 595K non owner for total of :
* $ 1,245,000 payments of $3442 saving $2710 per month.
* terms 40 yr : 1.25% on 650K
* terms 40 yr : 1.75% on 595K

* Question are :

1. What should the fees be on these type of loans ?
2. It looks like little over 27K, is that high, seems like it ? Isn't the broker getting kicked a high commission on the back ?
3. Should there be prepayment penalties ? I'm/ /being told can only sell after the first year and cannot refi for 3 years.
4. What index should this be based on ? Think he said one that is constantly moving ?
5. Approximately how much is being added to the principle each year ?
6. Should I be allowed to make extra principle payments each month or at my discretion without incurring penalty ?
7. *** Should I do these loans ? What are the main things I should ask for and stand firm on ?
8. Am I being duped ?

Thanks for any advise. The broker has avoided specifics for the month and now sent an email saying docs should be ready tomorrow and location of Escrow office. When I asked what the specifics were, penalties, stipulations and what would be added to each principle per year ? and if he could get me something in writing he said " When you came into my office, we sat down and went over each program. If you'd like, you can call me and I'll be glad to explain exactly what your loans are going to be. There aren't different scenario's. You told me what you wanted and I got it for you at the price/payment you wanted. "

Coincidently, my buddy was called day before his docs were ready, they were sent to his house the next day with a Notary to sign on spot. While looking over he noticed things they discussed had changed and called him on it, he said take it or leave it, and he opted to leave it.

Seems odd to hear nothing and be avoided on questions other than its what we discussed in the office which was very brief and non specific. Now he's ready for me to sign. Really concerned about fees, penalties and addition to principle.

Answers to your questions:

1. Closing costs on NegAm loans are about the same as any other loan. $3500 as a rule of thumb, perhaps a little more because your loans are bigger (so title and escrow cost more, appraisal is a little more). Even if you're adding impound accounts and paying 30 days of interest, I can't see closing costs of $27k.

2. Yes, $27 k is too high. But every dollar they can skim is a dollar in their pocket, and since what you are looking for is a low payment, it doesn't make much difference to the payments, so they figure you'll sign. As I've said before, these loans are a way for them to appear to compete on price without really competing on price.

3. I do not know of any negative amortization loan where the pre-payment penalty can be bought off completely. It's built in to every single one I've ever found. I occasionally use that as a come-back while I'm throwing the idiots who wholesale these out of my office; "You say you've got something worth my time, and then you tell me about these POS loans that everybody else is pushing for all they are worth. Were you lying, or do you have one without a pre-payment penalty?" To date, nobody has said yes. The prepayment penalty he quotes, is one of the less bad ones, but I'll bet, sight unseen, that he boosted your margin above index rate to buy it down. The best one I've got, the penalty is "soft", waived if you actually sell the property.

4. Negative Amortization loans are pretty much all based upon COFI, COSI, or MTA. All of them are moving rates that change slightly every month. I do know of one where the underlying rate is fixed for three years, but the minimum payments are higher, and it wasn't exactly a great rate when I was told about it some time ago (6.9% plus adds that depend upon the situation)

5. That depends upon the underlying rate, which is your index plus a set margin. Most of them are sitting in the range of 7.75 to 8.25%. (I initially assumed 8%, but it was 8.4) 8.4% times your total balance is about $104,500 of interest per year. Less your payments of about $41,300 adds roughly $63,200 per year to your balances, not including compounding or shifts in the index. Incidentally, you are not saving money on the real cost. You're simply deferring part of the cost until later and allowing it to compound. Comparable "A paper" rates on 30 year fixed might be about 6.25 and 6.5% respectively, or about $80,000 per year of interest, which would save you about $2000 per month in the real cost of the money, interest.

6. The reason they're called Option ARMS or Pick a Pay by some people is that you get a choice of four payment options every month. Nominal, interest only, 30 year amortization, and 15 year amortization. Depending upon the lender and the product, the prepayment penalty can be either "first dollar" (i.e. pay anything other than one of the four payment options and gotcha!) or 20% (you're allowed to pay down 20% of the principal each year without triggering the penalty).

7. I advise very strongly against these on your primary residence, and on investment property there are usually better alternatives. However, you're kind of in mid-leap, and from what you say, it seems like you have a cash flow problem. You're committed, and there may not be a better alternative to doing a negative amortization loan. If your project doesn't work out, you've got serious issues, and you can't not start at this point.

8. It does appear likely from where I sit that there are much better bargains out there. I avoid these loans like the plague on humanity that they are, but if you've got a valid reason why they are the least bad alternative for you (and it seems like you might, with your impacted cash flow situation), chances are excellent that I can do something better. I don't know enough about your situation to make any type of guarantees, but if you're not in an emergency situation where you need the money within the next three weeks, I suggest you shop your loans around. This place is making about 3.75% on your loans, or $46,500 for the two loans, plus junk fees. These loans aren't that tough. Whereas the important thing to you is not how much they are making but the bottom line to you, I suspect that you can find other folks willing to do both loans for considerably less, by giving you a rate that doesn't add nearly so much to the underlying index (Wall Street, and therefore the lenders pay based upon the margin, which is quite simply the addition to the underlying index that you agree to pay in your contract). Furthermore, good loan officers live on specific numbers. I'm delighted to discuss exactly the loan I'm going to deliver to my clients once I have shopped it around and know what that loans terms are. Every loan I lock has a Guarantee attached to it: These are your terms, or I pay the difference. The upshot is, I strongly suspect you can find someone who will deliver a better loan cheaper, whether you stay with a Negative Amortization loan like I suspect you will, or go with something with a better rate fixed for a longer period.

Caveat Emptor

This question brought someone to my site:

If my house is going into foreclosure but the house is also in probate, can the lender actually go forward with the foreclosure sale while the house is in probate?

The short answer is yes.

The Trust Deed (or Mortgage Note) that was signed by the now deceased undefined gives a security interest in the property to that lender in exchange for money. The lender lived up to their end of the bargain. That security interest is valid until the loan is paid off. It is not removed by the death of the person that signed over the security interest.

Probate takes an absolute minimum of nine months. During this time, the court will likely allow those members of your family to continue to live there, but they will not likely approve disposition of the asset except in an emergency, and that emergency is going to cost your heirs money for the courts, and money for the disposition. On the other hand, the lender still needs to get paid according to the terms of the contract, and they are entitled to foreclose if the terms are not being met. I'm not a lawyer, but I've never heard of an estate being permitted to declare bankruptcy, which some living folks use to temporarily stave off foreclosure, almost always to their eventual major detriment. Since your executor is claiming that your estate cannot pay its bills and rarely are you earning any more money, declaring bankruptcy would seem like an open and shut case of "the creditors get all of the assets and your heirs get nothing." Probably not what anybody who's part of the situation wants.

There are simple steps possible to avoid probate for major assets. A trust is probably the most flexible of these, in that the trust owns the asset and the successor trustee takes over the management and within the limits of the trust, does what needs to be done without the courts getting involved. Flexible, much cheaper than getting a probate court involved, and your heirs get control right away. But it requires planning ahead (which many people are loath to do, being in denial about the idea of death) and an upfront investment.

Given the fact that there is a loan and a Trust Deed against the property, somebody is going to have to make those payments until the loan is paid off, whether by outright payoff, refinancing, or sale. Given that in the absence of a trust, your heirs probably are not going to have access to any liquid wealth you left either as it is also locked up in probate, the odds are that your heirs are either going to have to come up with the cash out of pocket, or the property is going to be foreclosed upon.

Now there are some good options. If your heirs are wealthy and have the cash, perhaps some one or combination of them will make the payments in the interim if it's been agreed they will be compensated later. Not likely, I'll admit, and they're likely to drive a bargain for larger eventual replacement. In some instances, the probate judge may agree to taking out a Home Equity Line Of Credit (HELOC) to make the payments, but somebody's going to have to be able to qualify to make the payments, and a dead person is not on the list of options, which means somebody still living is going to have to do it. The rates on these are typically horrendous, and cost a lot more than a little bit of planning.

Another excellent option is life insurance. Life insurance passes (usually) tax free on death outside of probate to a named beneficiary. Therefore, it's available pretty much right away to pay bills and stuff. It's also leveraged money, so a few dollars now buys more dollars when you need them. The difficulty is that you've got to have it beforehand. There's that planning thing rearing it's ugly head again, and the upfront investment of the premium dollars for the life insurance policy. Finally, any money created by this becomes the property of those beneficiaries, and there is no way to compel them to spend the money on bills of the estate. If the beneficiary is the estate, well, the money is locked up in probate again, and you've got to get the probate judge to agree with doing the necessary.

Another option is the named beneficiary Transfer on Death feature of most investment accounts. These also transfer outside of probate to named beneficiaries. Problem is, they require the investment of those dollars beforehand, and they also require that you keep the beneficiaries current, and all of this requires, once again, planning. The money also becomes the property of the beneficiaries, just like life insurance, and if there's no named beneficiary, it gets locked up in probate.

There is no free, no-planning-necessary, magic bullet. I strongly suspect it's all part of the various Lawyers Full Employment Acts, but you've got to take the system as it exists. At the very least, you've got to do some planning ahead, and an upfront investment is probably going to return itself several times over. Remember, everyone is going to die sometime - I know of precisely zero exceptions thus far in the history of the world. Denial of this simple fact simply digs you in deeper, and puts your heirs in line to have to lose or waste a major portion of what you would have left covering for your deficiency, as is evidenced by the person who asked this question.

Caveat Emptor.


Second Trust Deeds are something few real estate loan officers really understand well, mostly because the good ones don't make much money on them. Predatory lending laws in most states, limiting total compensation and total expenses to a given percentage of the loan amount, mean that brokers usually can't make enough to pay their expenses unless there's a first trust deed involved as well. Direct lenders can, because neither the premium they receive on the secondary market nor the interest rate is usually restricted. As a result, many direct lenders can get away with highly inflated rates on second mortgages. Most of the people who approach them won't know any better. I've lost count of the number of fourteen and sixteen percent rates I've seen, when eleven is a rotten rate for a sub-prime borrower. But if you will look, second mortgages can be found at surprisingly low rates and surprisingly low cost. If you've got decent credit and a verifiable source of income, fixed rate Home Equity Loans can be had under 8%, and variable rate Home Equity Lines of Credit can be found for 8 to 8.25%. Even sub-prime borrowers can usually find something around 11% if they'll look a little bit.

Second (and Third) Mortgages come in two basic flavors. If you get the proceeds all at once, they are typically fixed rate Home Equity Loans. These are essentially traditional loans. There are also Home Equity Lines of Credit, where you are approved for up to a certain amount, and you can take distributions any time during a draw period that varies from five to ten years in length. These work more like credit cards: You pay interest only on the the outstanding balance at any given time. If you pay it down during the draw period, you can then take it out again.

Once upon a time, both products typically had all of the closing costs that first mortgages did. In the last few years, this has changed, largely driven by competition from credit unions, and I always suspected that second mortgages was why the banking industry was lobbying for restricting credit union membership a few years ago.

There are also two styles of obtaining a second mortgage. "Stand Alone" Second Trust Deeds are done on their own; when they are done in conjunction with a First Trust Deed, they are called "Piggyback" loans. With their popularization as a way of avoiding Private Mortgage Insurance (PMI) on low down payment purchases, pretty much every lender in my database does piggyback seconds. However, only about half will do stand alone seconds. With the regulations the way they are, even the higher interest rates are not attractive enough to get them to do the loan, because it takes basically the same amount of work.

Because "piggybacks" are done in conjunction with first mortgages, everybody wants them and everybody does them. Additional lender charges can be small to non-existent. They benefit from having the first done at the same time, and since all that work has already been done for the first, the additional work is kind of minimal. Whether they're a broker or direct lender, they make enough on the first that they don't have to charge as much for a second.

Good "stand alones" are harder to find. For instance, here in California, predatory lending laws limit both total broker compensation and total costs of the loan to six percent, but it still costs about $3500 to do the loan unless the lender relaxes one or more of the traditional requirements. For brokers, this means that they can't jack the rate up to pay for the costs of the loan. If the loan is $50,000, $3500 is seven percent of the loan amount. If brokers try to make it up via yield spread, Section 32 limiting total broker compensation to six percent kicks in, and they cannot do it. Note that this limitation does not apply to direct lenders, as their eventual premium on the secondary market is not covered, and the amount of interest they receive if they hold the note is only subject to very weak governance rules. Upshot: Stand alone second mortgages, unlike first mortgages, are a very hard area for brokers to compete well in. I've got a couple internet based lenders for higher loan amounts (about $75,000 and up), but for smaller loans than that I will usually tell folks straight up that credit unions are likely to give a better deal than I can. For first mortgages, or firsts with piggyback seconds, that situation is reversed.

In some certain situations, due to the low cost of doing second mortgages, I can actually get a client a better loan by doing a purchase money loan under a program traditionally associated with stand alone second trust deeds. With some credit unions and major lenders offering them at 8% or even under, and up to $500,000 with minimal paperwork requirements and low to zero closing costs to the client, it can be a good way to get someone who cannot qualify full documentation anyway enough money a loan for a low end property, particularly if they are making a substantial down payment. If you're buying a $150,000 one bedroom condo, avoiding the $3500 to $4000 for closing costs associated with a first mortgage can cut your effective interest rate for a loan you keep two to three years by about one percent.

Caveat Emptor


One of the things I see all the time is notations made on the listing that demotivate buyers agents, or give them a reason not to show the property. This practice has had a drastic fall off of late, with listing agents and brokerages desperate to sell after nine months on the market, but it's still there, and it's never in the client's best interest to restrict the field, or to give other agents a reason not to show your property, but that doesn't stop some listing agents from doing it, particularly in hot markets or particularly desirable neighborhoods.

"Seller to select all services." Well, duh, if they're paying for them, which they are in the case of owner's title insurance, and half for escrow. But my client is paying for lender's title and the other half of the escrow, and to say it's not even on the table for discussion tells me that the listing agent or brokerage likely has their hands out behind their backs, and that's a transaction I'd prefer to avoid. Either that, or they want to steer revenue to an escrow company in which the brokerage has an interest. Escrow officers with "captive" brokerage clients have a very high percentage of cluelessness, and their motivations to give top notch service aren't exactly stellar, either. Furthermore, in such cases my client is likely going to end up paying sub-escrow fees due to splitting the title and escrow, and if that's not the most useless waste of money in the business it's darned close. Suppose my client gets cheap rates for title or escrow, or free? Suppose I've got a contract with a different company for cheaper rates? Suppose I simply know of a company that gives better rates for the same product and still has top notch providers? If you're not willing to discuss it with my client and I, there are most likely some issues going on, and unless the seller gets reduced rates or free escrow and title, something that is far more rare than the notation, there is no reason for this notation. A major variant on this is "Title and Escrow already open." This makes me ask "Why?", and the only answer I can see is that they are trying to preempt the choice. The vast majority of buyers need loans, and the title and escrow are going to be ready long before the loan. Yes, the seller could already have filled out a statement of information with them, but that's not important to my clients.

"Buyer must be prequalified" or "Buyer must be preapproved." Neither one of these means anything real. They are both garbage requests. Minimum wage earners can be "pre-qualified" for million dollar properties. Even "pre-approval", which is supposed to be stronger, suffers a very high fall off rate when they actually have a purchase contract. In theory, pre-qualification means that you should be able to afford the payments on the type of loan you pre-qualified for, and pre-approval should mean that the application will be approved as soon as the blanks for the specific property are filled in. In neither case is what's really being done by most loan providers even vaguely in line with the billing. In many cases, the buyers have a hidden issue that has not yet come out, but with several hundred thousand dollars on the line, you can bet that the lender will find out about it before the loan actually funds. In a large number of cases, it may look like they're going to qualify, but their loan officer wants to make a little too much money.

Neither one of these makes difference to the purchase offer I write. No buyers agent wastes their time working with people that they do not believe will qualify for the required loan. Once I've got a credit report, income information and a liabilities statement, I ask if there's anything else that's going to show up, and ask about any changes or bumps in their career situation within the last two years. Providing a good loan officer gets the whole truth at that stage of the game, the loan should go through. However, I've learned the hard way never to trust a prequalification or preapproval that I didn't do, and when I'm on the listing side, I ask for certain concrete information, or failing that, I'm very hard nosed about the deposit in negotiations. If I could get the loan done based upon the information, we've got a live one. If my listing clients gets the deposit if it falls out, they come out okay. But neither prequalification or pre-approval means anything real unless it's done by a loan officer with realistic expectations and the right attitude, something a listing agent has no real way of knowing. Indeed, the request tells me it's a lazy listing agent who doesn't understand how to separate the wheat from the chaff, or is unwilling to do so.

"Must be prequalified/preapproved with lender X": This isn't a demand I'll even consider giving in to. Indeed, under RESPA, it's teetering right on the edge of being illegal. Thou shalt not require the other party to use your lender. Even as a buyer's agent, I would never consider requiring a client to use me for the loan. Carrots only, never sticks.

In most of the cases, the lender specified is one that I wouldn't wish on my worst enemy. Especially not if I want the transaction to close on time. High margin providers who promise something great to get people to sign up and then show up with something completely different at closing.

In a significant number of these cases, the agent has their hand out behind their client's back. Whether it's explicit compensation or just wanting to put the buyer in a situation where they're using a lender that's indebted to that particular agent, and they refer clients back and forth. "I want the listing when this buyer goes to sell, so I'll send all the buyers to the loan officer who will refer them back to me." Agents and Loan officers go to seminars devoted to the idea of cutting out the competition, so they don't have to compete at all. It's not in your best interest to allow them to do so.

Some of them will follow the requirement they are trying to impose about being pre-approved with lender X with "Ok to use own lenders for the transaction." As if that lender doesn't have all my client's personal information. From my first week in the business, I was smarter than that. Of course, my brokers told me about the experiences of other loan officers: Their client was bombarded with multiple calls per day from that loan provider, and when the client tells them never to call again, they sell the client's information to dozens of other loan providers, and so the bombardment gets worse. A prequalification certainly counts as a "business relationship," and it's amazing how often "opt outs" aren't even offered until thirty to sixty days later. So as I said, the smart thing to do is ignore the request. "Here's an offer, take it to your client like you are legally required to do". Many agents won't even honor that, but those agents will get caught eventually. I can understand that they want a certain transaction, but there is no such thing. If they're going to serve their clients, they should know something better to ask for in negotiations.

Finally, it's often a way for listing agents who want both halves of the commission to discourage other agents from showing the property. If I see a demand that a client be prequalified with a particular lender, I'm either going to ignore it completely or not suggest that property to my clients. Perhaps I'll even show them the listing (usually on paper), and tell them why they should stay away or make a really low-ball offer because of how much of a pain the listing agent is trying to be. It all depends upon how good a deal I think the property might be, and whether I think the agent is desperate enough to be reasonable yet. But as a buyer's agent, I don't have a responsibility to any given seller - the listing agent does. Furthermore, neighbors talk. If George down the street gets twenty showings and four offers on a less attractive property than this agent's client, who gets only two showings and no offers (or nothing but low-balls), that listing client is probably going to ask their agent some hard questions. What comes around, goes around.

Caveat Emptor


I am not sure that this is best explained by racism: Scientist: Racism hurt him at MIT

Blacks are under-represented at MIT. Perhaps that and the fact that the elite university mindset can be more easily manipulated by that charge explains the strategy of attempting to use that tack to attain tenure. Inside Higher Ed does make the racism case.

But the case that looks like it hangs together better is challenging scientific orthodoxy.

Or should I say ideology.

Specifically, on adult versus embryonic stem cells.

Seems like he has not only challenged ideological dogma by challenging cloning, and embryonic stem cell orthodoxy. Furthermore, he seems to have demonstrated most achievements that embryonic stem cell activists claim embryonic cells will eventually be able to accomplish, but in adult stem cells, not embryonic.

He got a PEW Grant and other awards for his work.

Admittedly, he hasn't been shy about sharing his opinions concerning embryonic stem cells, which is not conducive to gathering evidence and evaluating it even-handedly. But there are enough irregularities and apparent inconsistencies in this case to more than warrant a thorough, public, examination of Professor Sherley's work.

Challenging scientific orthodoxy is never easy. It becomes much harder with anonymous faculty votes which can effectively exercise a veto over which scientific questions are asked by vetoing the possibility of even asking the question through the convenient dismissal of inconvenient persons who are willing to ask.

I'll be the first to admit that I'm not qualified to judge the research on its own merits. But this looks to be coming from the same impulses as those at the beginning of the previous century, who could not master relativity and quantum mechanics, and took refuge in anger at those who had the critical insights. Check out Rutherford's final experiment (sorry about the weird format - pdf does weird things to my computer in conjunction with Firefox). He was so certain tritium wasn't radioactive he never aimed a Geiger Counter at his samples!

For Professor Sherley, a thorough, open evaluation of his work is the least he is due, especially given that many of his accomplishments seem to stand out among his peers. Nobody ever made a critical scientific breakthrough by hewing strictly to the established orthodoxy, let alone ideology. And if Professor Sherley's distaste for the ethics of cloning and embryonic stem cell use motivated him to find a process that renders them unnecessary, that is cause for celebration by any rational standard, not censure. Faced with an ethical dilemma, wouldn't anyone rational rather have another alternative that enables them to avoid the dilemma?

Unless, of course, you want to insist that there is no dilemma.

And if those who examined his case for tenure are uncomfortable with a public examination of the evidence, that's a definite sign that something is wrong, and that there is something in the process in which he was denied tenure that will not stand the light of day.

(There is an on-line petition for granting Professor Sherley tenure. Sign the petition here)

Carnival of the Capitalists Recommended: Anti-Sisyphus (combating the employee pits of despair)

RINO Sightings Recommended: Techography (fisking William Arkin - offensive language warning)

Carnival of Investing

Carnival of Real Estate Recommended Zillow blog (how to get good comments), Bryant Tutas (debunking the "realtors have a monopoly" canard)


The Right Place on Another Reason To Not Raise Minimum Wage


Don Surber on The real danger from global warming


Iran sets up 328 centrifuges at big atom site Anonymously sourced, but not a good sign.

Call me prejudiced, call me racist, call me an Islamophobe. I don't think it is in anybody's best interest - except the mad mullahs - for the current regime in Iran to have access to nuclear weapons technology. Not the developed nations, not the developing nations, not their neighbors, and especially not the people of Iran. Matter of fact, I'd estimate that the mad mullahs of Iran getting nuclear weapons would be far more likely to lead to the use of nuclear weapons than all other current possessors of them combined. But consider: I am not saying this about the Pakistani or Indian possession of such weapons, already a fact. Those two nations and their leaders understand the need for some kind of status quo. Nor Israeli or South African possession. Both of those nations seem to go out of their way to avoid rattling their sabers. Even North Korea seems to understand their use as a bargaining chip is greater than their utility in winning a war with any likely opponent. Iran's rhetoric, backed up by long term sponsorship of Hezbollah and similar organizations, is of an entirely different sort, the language of jihad.


His motive may be politics, but it makes sense also: Bush Proposes Litany of Tax Cuts

The lion's share of the president's proposed tax reductions would come from making permanent his signature cuts enacted in 2001 and 2003, at a cost of $1.6 trillion over the next 10 years. Those cuts would otherwise evaporate at the end of 2010.

"Well-timed, pro-growth tax policies helped create the right climate for innovation and entrepreneurship," powering a resilient economy, Bush said in his budget message.

His motive might be politics: force the Dems to get in his face about their agenda, so that they can't campaign both ways in 2008. But I'm glad he's making economic sense while he's doing it. That's much better than his opponents are doing. Even if he loses this battle - and he will almost certainly lose this battle - he sets the Republicans up to win the war. Politically speaking, of course.

The Democrats and their leftist supporters will howl about how this hurts the little person, meaning, of course, that there will be less patronage to hand out. Unfortunately for them, the Laffer Curve won't go away simply because they don't like the implications.


UPDATE: I am going to conduct an experiment with comments. I'm going to allow guest posting of comments, but require approval of comments before they post (to discourage spam)

The changes have already been made. If I get enough more "real" comments to justify having to deal with the spam artists, I'll leave it the way it is. If I don't, I'll change it back.

The experiment is tentatively set to run the rest of February, but that is subject to change if the experiment becomes an obvious failure.

Hello Mr. Melson,
Let me start off by saying that I am a big fan of your "Searchlight Crusade" website. I happened upon it a while back after I had already purchased my house. I've found a lot of useful information and I try to refer my friends and family to your site when they ask me home-buying/mortgage questions.

I am emailing you because I am considering a refinance. Just a little background info: I purchased a 3bedroom/2bath 1183 sq ft home in DELETED for $323,000 in Nov 2004. I am a DELETED with a credit score of 801. My wife is a part time DELETED with a credit score of 814.

I put no money down. I have my mortgage split into two loans (80/20). My first mortgage is $259K interest only with a rate of 5.375 fixed for 5 years with a payment of $1157.42. My second loan is about $64K HELOC interest only with what seems to be a monthly adjustable rate with my payments now close to $600. Both loans do not have a prepayment penalty. I've only been paying the interest every month. We plan to stay in the home for at least another three years (we are from out of state and might move back there when my son goes to high school - he's currently in the 5th grade). There is a possibility we might stay in DELETED at which point we're likely to stay in the house.

I was thinking about refinancing my HELOC so that the rate would be fixed. I spoke with my lender and I was offered a 15 yr loan with a fixed rate of 7.5% with a payment "around $600" with a prepayment penalty before 5 years.

Based on recent sales, my house is worth about $350K. Because of this I was told I could not refinance both loans into one.

Do you think it would be worth it to refinance. If so, what type of loan should I do? Or should I figure out if I'm staying in DELETED or moving back?

Any advice would be greatly appreciated.

I would love to give you my business if you know of anything that will work in my situation.

My first reaction was that there is no way anyone should accept a HELOC with a five year pre-payment penalty such as described.

You are going to need to refinance your first in November 2009 if not sooner. When that happens, there are going to be issues with subordination which are likely to cause you to want to pay your new second off, especially as the lender you mention has a policy of no subordinations.

This is an excellent question. Truthfully, an 8.00 or 8.25 percent Home Equity Loan (usually 30 year amortization, with the balance due at the end of 15 years in a balloon payment) will likely do better for you. Now my calculator says that a 30 due in 15 at 7.5 will have a fully amortized payment of $447.50, while a 15 year payoff is $593.29. Don't accept approximate payments, even as a quote - exact numbers tell you far too much about what's really going on. Also, you are and should remain at or below 95% Comprehensive Loan to Value (CLTV), which makes a difference on rate.

Some seconds have smaller penalties, so that may modify the answer. For instance, one lender I do a fair amount of business with has a very low closing cost second with a $500 prepayment penalty, in effect for three years. The cost to buy it off? $500. However, the standard prepayment penalty would be 80% of six months interest, or about $1920. Assuming you refinance in exactly three years, that boosts your effective rate by one full percent.

Now I'm happy to do whatever "stand alone" seconds come my way, a "stand alone" second trust deed being one where the primary mortgage is not being refinanced at the same time, as opposed to a "piggyback" where there is both a first and a second trust deed. However, the truth is that the best source for "stand alone" second mortgages is usually a credit union. I've got a couple of internet based lenders that are very competitive for high dollar value seconds, but for stand alone seconds below $75,000, credit unions rule. It was more cost effective to do our second with my wife's credit union than to do it myself. Just has to do with the mechanics of how brokers are set up and the way that most second trust deed lenders work.

Now you do have to be able to make those payments. But what you should really be paying attention to is the total cost of the money. How much in closing costs you have to pay to get the loan done, plus how much the loan is going to cost you in interest every month. It was only a couple of years ago that most traditional lenders would charge the same closing costs for a stand alone second that they would for a primary mortgage. For a $64,000 second, that $3500 in closing costs is almost 5.5% before you get to the actual interest charge - the equivalent of a 1.8% surcharge to the rate, assuming you kept it three years. You're better off taking a 9.5% rate that carries no closing costs than you are with an 8% rate that carries traditional ones, and that's not even considering the fact that you still owe most, if not all of that extra $3500, when you go to sell your house or refinance.

The situation, luckily for borrowers, has changed. Many lenders have very low cost stand-alone second trust deed programs, whether you are looking for a fixed rate home equity loan (HEL) or a flexible Home Equity Line of Credit (HELOC). The rates are higher than first trust deed loans, but the requirements are lower. Because the rates are higher, lenders are competing for these loans, with credit unions leading the charge. If there's a first mortgage involved, things are different. Most credit unions don't really have the resources to handle first trust deeds, with dollar values having appreciated the way they have. So they partner with major commercial banks, becoming essentially dedicated brokers for first mortgages, while competing ever harder for second mortgages in their own right. Nonetheless, because lenders want second trust deed loans, the result of their competing with each other has been a drastic drop in closing costs for second trust deeds over the past few years.

Caveat Emptor


When I'm driving, and get to busy main streets, I hate turning left unless there's a light there. Traffic is coming hard both ways, usually at high speeds, and with only intermittent breaks in each direction. If you're turning left, you've got to wait for those intermittent breaks to happen from both directions simultaneously. So for at least the past twenty years, I've employed an alternate tactic. Instead of sitting there waiting to turn left, hoping the deities of traffic are kind or risking an accident by pulling into traffic and stopping, I'll turn right instead, go down a block, and shoot a U turn. At least nine times out of ten, the person who was there ahead of me waiting to turn left will still be sitting there when I go by, already on my way despite having gotten there later than him.

Real estate can be a lot like that. Sometimes the best way to get what you really want isn't the direct and obvious one. Sometimes, taking what looks like a detour can help you.

This can take various forms. Every once in a while, a question hits my sight like "Lenders who do 100% financing with a 520 credit score." Three words: Not. Gonna. Happen. But there are alternatives. Seller carry-back or raise your credit score are the first two that come to mind. Given the market right now, a seller carry-back can be the little detour that gets both of you to where you want to be, if the seller has the option of doing it, which a good agent can find out. You'll pay a more than you might have with a good credit score and 100% lender financing, but it can be done. Raising your credit score is also surprisingly easy in many cases. I've gotten people's credit score up to 660 or even 680 in a couple of months. Pay your bills on time, know how to get rid of old derogatory items, a few other tricks. It takes some time and a surprisingly small amount of cash.

Those are comparatively easy. There's a much harder hurdle: "I can't afford anything I want!" The obvious - and deadly wrong - solution is an unsustainable loan like a Negative Amortization Loan or another unsustainable loan. What those have in common is that they are short term patches to a longer term problem. There are several better alternatives.

You can make your stuff last longer. No $600 car payments or $400 per month credit card obligations means that you can afford more for a house. Pay them off and keep the cars running and don't charge up any more. Assuming a 45% debt to income ratio, I've just added back as much into your housing budget as getting a $2250 per month raise - $27,000 per year. People who keep buying SUVs as opposed to compacts must want them more than they do a better dwelling place - and if they do want to drive an new SUV instead of an older compact more than they want to own a house, they are making the correct choice.

First time buyer programs such as the Mortgage Credit Certificate and Locally based loan assistance can help you stretch what you can afford. Between the two, it can make a difference of as much as twenty or possibly even twenty-five percent of your budget. They cost a little money and you have to jump through their hoops, which can include where and when you buy, but they make about the same real difference as choosing some of the more dangerous loans - and instead of a risky gamble, they turn it into something sustainable.

You can find a partner. Sure, you can only afford $275,000 by yourself - which might be enough for a two bedroom condominium. Put two people who can afford $275,000 together, though, and that's a $550,000 house. That's an above average 4 bedroom house with money to spare in a lot of areas. Put three of you together, and you've got an $825,000 mini mansion big enough for the three of you to rattle around in. It takes some legal preparation to protect the partnership from a bad partner, but it's not that difficult or that expensive. And it needn't be permanent. Let's say two of you buy that $550,000 house with zero down payment, instead of saving for a down payment at $500 per month each. If you were to save that money, earning 10% tax free for five years, you'd each have just over $40,000 each, or about $81,000 grand total. If the house appreciates at 5% per year (low for this area by historical computations) and you make regular amortized payments, the home is worth $702,000, you owe $515,000 if you never paid an extra cent, and net of the cost of selling, you're splitting $137,000 two ways, or not quite $69,000 each. That $425,000 3 bedroom house you really wanted to yourself has appreciated to about $542,500, but now you have a $70,000 down payment. Assuming you got annual salary increases of 3%, it's 7% more affordable now, instead of only 1% - equivalent to boosting your monthly savings to $850 - and it's unlikely you'll make 10% tax free, which that assumes. If you last ten years in the partnership, you come away with $183,000 each instead of $112,000 by investing your $500 per month tax free at 10% and the house you really want is seventeen percent more affordable instead of only five.

Another way of putting leverage to work for you is to buy what you can afford, now. If you can only afford a two bedroom condominium, better you should buy that and the kids have to share a bedroom in a property you can afford, than that you buy something you cannot afford. My uncle raised a family of four in an 762 square foot two bedroom place - and he had my grandmother living there also when his daughters were teenagers. Most two bedroom condos are bigger than that now. If he could do it for twenty years, you can do it for five. This is why, for example, certain Asian and African immigrants are doing very well despite being only a few years from having nothing and living in an apartment. It certainly beats the alternative. $69,000 and change net proceeds from the sale in five years, and once again you've got that 7% affordability increase after five years, and seventeen after ten - without saving one extra penny.

When you buy with a sustainable loan, you place your cost of housing forever under your own control. You step off the escalator of rising rents, and rising housing costs. The math in my examples assumes marriage, but it's more strongly in favor of ownership if you are single because the standard federal tax deduction is lower.

You can rent a storage closet for the stuff you don't use every day.

You can drive a couple miles further.

You can rent out a room.

You can take a second job, and use the difference to save money. It'll also leave you less likely to buy stuff you don't need.

You can invest some time and money and effort in improving your value to prospective employers.

I am well aware that "settling" is not attractive to most folks. I'm also aware that some neighborhoods are less desirable, and others are considerably more so, some living conditions less desirable and others more. We live in a culture accustomed to instant total gratification. Nonetheless, if by accepting some delays and some costs you get what you want and end up in a better situation, isn't that something to consider, as opposed to crying that you can't have what you want right now and so you're not going to do anything?

Doing nothing means that you miss out completely because the situation isn't perfect. How does that help the situation improve? Do you just wait and hope that housing values crash? What is likely to cause such an event? Interest rates rising drastically is the only thing I can think of, but then the loans and their payments get commensurately more expensive. Instead of being unable to afford it when it costs $425,000, now you can't afford it even though it only costs $225,000. It also leaves your future subject to factors beyond your control. Suppose housing prices don't crash? We're twenty percent plus down, locally. Suppose that's all the further down prices go? We've got an ongoing and increasing scarcity problem - not building enough new housing to cover the population increase. Even if rational growth policies took over all the planning commissions and departments tomorrow, do you think the environmentalists and NIMBYs are just going to roll over and play dead in court? I can hope, but that's not the way to bet.

I hope this gives all of you some you some useful alternatives to consider. There is usually more than one way to get something that you want. Sometimes it means that you have to go a bit out of your way, or do something that isn't quite as satisfying for a while. And if you're not willing to do a little bit extra, but expect it handed to you, then either you don't want it very badly, or you are extremely likely to get burned by people who put you into a situation that you were trying to avoid.

You can usually get what you want. Sometimes it just takes intelligent planning, and a step or two in between.

Caveat Emptor


One of the most important things for the buyer in any transaction is confidence that the seller has disclosed all known problems. One of the things most people don't realize, or act like they don't realize, is that it's at least as important to the seller.

The California Association of Realtors (CAR) has a program called Winforms that lets me ask all of the little niggling questions about the home. Very convenient, very nice, and I've done my duty when I fill it out with a listing client.

This does not mean that I or the seller can ignore any metaphorical elephant in the room not covered by the form. If there's something that's obvious, I have a duty to ask about it and record the answer, even if it isn't on the form. The seller has a legal duty to disclose anything they are aware of that might cause a reasonable buyer to change their minds or their offering price. A cracked light switch protector plate is not a big problem and you're going to either fix it or agree with the seller that you won't. But past termite damage, whether someone has died in the home recently, soil subsidence (even on the far side of the property), and any number of other factors can be reasons why prudent buyers may no longer be interested, or may wish to re-evaluate their offer. The rule for smart people is "disclose everything and let the buyer decide if it's important." A certain percentage of sellers, however, just want to get through the transaction without the buyer changing their mind. For Sale By Owner (FSBO) sellers seem to be significantly worse about it, by the way, which is one of several major reasons I'm always leery of FSBO properties with my clients. These sellers either don't realize how strongly omissions can come back to bite them, or are hoping they will be gone by the time it comes to light.

First off, unless you're planning on dying, you can be found. I know a lawyer that makes a good living at it. Furthermore, failure to disclose frequently makes your liability worse, in that you had a duty to disclose and you did not. It is possible that failure to disclose means a judgment for punitive damages in addition to increased economic damages is in your future, whether you are seller or agent or even buyer's agent if it was bad enough. Furthermore, you can count on the damages being larger because the problem has had time to get worse, paying the costs incurred in order to find you, and so on, when if you had simply disclosed in the first place you would have been off the hook.

Now, your real estate agent is not (generally) a building inspector, tax records expert, or any of those kinds of specialist. I recommend an inspector for every purchase, because I'm certainly not qualified to do that job. But if I spot something that may not be right, I have a duty to disclose it to my principal, and find out if it really means anything from a real expert. Sometimes there's a tax assessment that has passed or pending that doesn't have numbers associated with it yet. If it's passed, the title report should have the information, but they've been known to miss one occasionally. If it's pending (e.g. bond measure on the next ballot), it's a good idea to tell the buyer, or at least tell the buyer about where to find out.

For an agent, failure to disclose may mean that your professional insurance won't cover it. The professional insurance is for errors (honest mistakes) and omissions (errors of ignorance), not intentionally hiding something. This liability can easily run to several times any commission you made, so it's a really bad idea to hide anything. Agent or seller, if they buyer can prove you knew, or that you should have known, you're basically up the creek.

Caveat Emptor (and Vendor)

Original here


I enjoy your web page and have found your series on the costs of waiting to buy a home to be very illuminating. However, I recently read this web page:


...which comes to the exactly opposite conclusion (in the "Who Disagrees" section). I wonder if you would comment on it.

Don't your two views hinge on an assumption of what housing prices will do in the future--something about which we really can know nothing?

Thanks for your thoughts on this.

Well, if you read my oldest articles (for instance Cold Hard Numbers ) I spoke quite strongly about San Diego being in a bubble condition. I used the metaphor of "When Wile E. Coyote looks down" more than once. What has changed since then? Quite simply, I think that we've seen most of the overall hit that we're going to get. Sure, there are still idiots who think it's 2003, but if you look at the transactions that are actually happening - willing buyer, willing seller, etcetera - we're a little over twenty percent off peak prices, at least in the areas I mostly work. I consistently predicted a thirty percent decline up until about a year ago. We've now seen most of that. Prices might drop a little bit more, but (I think) they've dropped most of what they are going to, and due to some additional considerations, I think that now is most likely the time of greatest leverage for buyers. They might lose money on paper for a while, but right now, they can make sellers do more than they will be able to later. With a decent agent (c'est moi) they can parlay that into a greater bargain than they will be able to get later.

Why do I think now is the time to move? Quite simply because working the market like I do, I am seeing an enormous pent-up demand that has been building since about October 2005, when the general public finally got the message that maybe prices were a little higher than they should be. There are a very large number of people out there on the sidelines who want to jump in, and are able to qualify, but have convinced themselves that prices are headed even lower. And you know, I can't prove that they aren't. Only time can do that. But I'm seeing demand and interest. The only thing stopping the market from breaking wide open right now, IMHO, is fear that maybe if they wait, they'll be able to get something better, cheaper. Kind of like the "test penguin" thing. They're all afraid there might be a leopard seal, but once somebody gets pushed in and doesn't get eaten, more jump in, then everybody. But real estate isn't like jumping into water in which there may be leopard seals. The greatest rewards accrue to those willing to do what nobody else will - jump in first - and if they're wrong but have a sustainable loan it will work out fine anyway.

Furthermore, it's not the overall proportion of people who can afford current housing prices that is important. It's the marginal demand and the marginal supply. If I already own, it doesn't matter that I can't afford the prices now. The price will stabilize where the number of people who can afford current prices matches the number who want to sell.

Fifteen years ago, we were hearing exactly the same sort of crud about bursting bubbles that weren't coming back for decades. I bought anyway, almost exactly at peak (one neighbor did spend almost 20% more than I did). Yes, I could have gotten a better deal if I'd waited, and I was upside down on paper for a couple of years. Right now, I'm very happy with the results of my decision. Even coming down off peak value, my CMA is still showing the equivalent of almost 8% annually compounded increase for those fifteen years.

San Diego has been, for the past several years, a bleeding edge market. So perhaps part of my disagreement can be attributed to the fact that San Diego is further along in the process than most of the country. Perhaps part can be attributed to the fact that while their one trick for readers has been the bubble, I'm a working agent with a responsibility to my buyers who nonetheless wants to sell some properties (to keep it even handed - giving them a reason to be overly pessimistic and me one to be insufficiently pessimistic). I'm still going to have readers after any talk of the bubble is long gone - them, not so much. Perhaps there's even some of the positive feedback effect you see so much of if you read political weblogs of either extremity. Those who won't consider both sides of the issue, and only hang with those who agree with them, get ever more extreme in their views.

I will readily admit, like I do to my prospects, that the market could go down further. Significantly further, even. Mostly due to the number of bad loans that were made, we could all be in for an ugly surprise. But Southern California is not Holland, not for any number of reasons, and for as long as records have been kept, our market's been increasing at an average annualized rate of about 7% per year, through up cycles and down cycles. I don't think even Holland is Holland the way they present it on that page without some pretty significant cherry picking of the data. If land ain't so valuable, why are they spending so much effort to reclaim more of it from the North Sea? If it were a debate, I would challenge just about all of their claims. Economics and the financial system just don't work like they claim it does. Demand is there. It's almost scary how much deferred demand there is. Affordability is there now, where it wasn't eighteen months ago. When the excess inventory dries up, look for the power to swing back from buyers to sellers. I don't think we're going to see twenty percent per year appreciation any time soon, but five to seven, average years or maybe a little less.

But my disagreements with them are more a matter of degree than of kind. There have been some serious abuses in the real estate marketplace, and they're not all straightened out, by any means. I just think that in my particular market, we've reached the right time to come off of the sidelines. I could be wrong, and I'm willing to admit the possibility exists, and examine the data, but the only way to be certain is to wait and see.

Caveat Emptor
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