June 2007 Archives

Hugh Hewitt Contributor Dean Barnett on non-religious opposition to abortion. I take a more libertarian stance: that seeing as we cannot prove it is human life, we do not have the legal or moral justification for dictating the woman's decision. However, because it is at the very least potential life, abortion should be as strongly discouraged, socially, as possible.

If this was a convicted felon we were talking about, instead of something that's going to be a human being someday if they aren't aborted - a human being who has done nothing illegal, unethical, or immoral - before they were executed, wouldn't we be talking about removing the last possible shreds of doubt, appeals that go on for years making certain the law was applied in an absolutely even-handed manner, and all sorts of humanitarian appeals? Wouldn't they have years, at a minimum, to attempt to justify their continued existence? As opposed to thirty minutes of no communication whatsoever while the would-be mother decides that being pregnant would be inconvenient?

Next to that, seems to me that social stigma is an awfully low price to pay for terminating a potential human life that's done nothing more than have the misfortune to be conceived by a woman who doesn't want to be pregnant (and that is how low we have set the threshold). I think legal abortion is necessary. But I don't have to think it's in any way laudable. And I think that the social stigma should apply to both people that were involved in that act of procreation. If you aren't willing to be a dad if that's what happens, no matter what precautions you take, you shouldn't engage in sexual behavior that could result in pregnancy. The situation for women is no different. If you're claiming the ability to give informed consent to sex, you are claiming to be an adult, and should be prepared to deal with the responsibilities involved. There are extenuating circumstances such as rape, but abortions are never something to be proud of. The thing to be proud of would be being a parent to the child despite the circumstances. There's no shame or stigma in not being a hero. But there's nothing that should increase anyone's level of esteem, either.


Socializing the Free Market of Ideas, or free speech for me, but not for thee.


Explosives-packed car defused in London

In a nightclub district. With thousands of random people who could have been anyone from anywhere in the world.

Just to remind you, Tony Blair is no longer their prime minister, or even involved in their government, after his long-promised resignation. Effectively torpedoes the "it'll go away when Bush and Blair are gone" pie in the sky.


Michael Barone on how we pick Vice Presidents and how it is evolving.

Senate Republicans Block Labor Bill

Senate Republicans on Tuesday blocked a bill that would allow labor unions to organize workplaces without a secret ballot election.

The article makes it plain who the reporter favors:

Unions complain that employers have greater access to workers during secret ballot campaigns and claim that corporate threats, intimidation and eventual firings have become common for union activists. By dragging out the election process, companies often succeed in wearing down union enthusiasm, they add.

No mention whatsoever of the fact that employers aren't the only ones known for intimidation. Without a secret ballot, the boss fires you if you vote "yes", and the Union goons kneecap you if you vote "no."

I know that I have spoken of transparency here in the past. As an ideal situation, transparency is great. However, requiring transparency for the individual workers while allowing the powerful employer or union to remain masked in their activities is a recipe for misery. I'll support individual election vote disclosures when the everything undertaken by the union or the employer (or their respective representatives) is equally available.


Not a good sign for the Iranian regime: Iran fuel rations spark anger, pump stations burn

The central quote:

Despite its huge energy reserves, Iran lacks refining capacity and must import about 40 percent of its gasoline, a sensitive issue when world powers have threatened new U.N. sanctions in a row with Tehran over its nuclear program.

Good to see totalitarian regimes can be as stupid as democracies. We haven't built any refineries in thirty years either.

Gateway Pundit has photos and more.


Liberals vs. Free Speech

Too much generalization to be taken as evidence, yet symptomatic of a real problem. Arguing with the opposition is the sign of a strong rational argument. Conceding the opposition has some points, while maintaining that your own outweigh them, is the sign of a strong rational argument. Suppressing or trying to suppress the opposition, or the opposing argument, is a sign of fear or facism. In either case, those advocating censorship of opposing ideas are indicating that they cannot outargue the opposition rationally.

Yes, people make stupid decisions. That's part of it being a free country. In fact, being able to make stupid decisions is a requirement of it being a free country. But people must be free to commit the stupidity and discover that it was a stupid decision on their own.

And every once in a while, that stupid decision turns out, upon experimentation, not to have been so stupid after all. In fact, it turns out that the "crazy" act was a better way of solving the problem. The fact that we have the economic and political freedom to allow a minority to risk stupidity in order to discover a better way of doing things is one of the central reasons why democracy beats totalitarianism, and why the free market beats central planning every time.

I may occasionally advocate the idea that someone censor themselves, and I heartily believe that divulging information that harms American troops is treason and worthy of punishment up to and including death, but one can make political and economic arguments without endangering our defenders. No matter how stupid certain politicians and talking heads are, so long as they don't endanger the United States by divulging classified information, they must be free to argue their case.

On the same subject, Captain's Quarters has a word on resurrecting the Fairness Doctrine as a cover for a partisan attempt to destroy the opposition.

Michelle Malkin has the political play by play


Victor Davis Hanson on civilization


Wizbang on both what the real problem is with healthcare and why we don't want it run by the government.


Shots Across the Bow on the immigration bill. Adult Language Advisory applies.

If you want the text of the bill, it's here in searchable format


Iraq the Model with some good news that those who are rushing to declare the surge a failure should read.


Finally, something directly real estate related: A cogent, well made argument for repealing real estate licensing requirements

I agree more than I disagree. When I came to this business from financial planning, I was shocked at the lies that get routinely told by some practitioners. Things that would have the practitioners in federal prison if they were in the financial planning industry are completely legal in real estate and mortgage. Not that the financial planning industry doesn't have its issues, chief among which are the impediments to practitioners showing or advertising the actual benefits of their expertise.

Real Estate brokerages control the industry, and through them, the regulators. It is to their benefit to have a large supply of agents while constricting the alternatives for the public. Hence, the current low bar to entry. Unbelievably, even the state exam for California, one of the more difficult, requires only basic four function mathematical competence!

A low bar to entry is no bar to entry, particularly with such high dollar values. I'm not certain that outright repeal is the best answer, but the information clearinghouses that would spring up (analogous to Underwriter's Laboratories) would be far superior at protecting the consumer to the current set up. A very long way from perfect, as I have detailed in Relying Upon Reputation: There Are No Silver Bullets, among other places, but better than the current system.

(Searchlight Crusade is not such a clearinghouse. The emphasis here is on detailing what good practice is and is not and why, so that you can judge for yourselves by the evidence of your experience. I do not remember that I have ever pointed a specific finger for good or ill at anyone in the industry here, only at the advantages and disadvantages of certain practices.)

The only alternative that I can envision is making the real estate license curriculum a lot more difficult. Even the hardest possible curriculum, however, would provide no protection against intentional malefactors. Basically, I would like to remove any possible defense of ignorance from all licensees while dramatically streamlining the disclosures process so that all major issues that should stand out, have to, rather than the current process which is so driven by fear of lawsuits that major problems get hidden behind trivial ones, obscuring the real interests of consumer.

Every so often I get e-mail asking why real estate transactions are so complex. The answer is, "Because they're for a lot of money, and because there's a lot of money involved, con artists and other people will make a lot of money if they successfully con you out of small proportions of it. Therefore, real estate acts as a magnet for the less than scrupulous."

Nor is outright fraud the only issue. If Sellers can persuade potential buyers that their property is 2% more valuable, that's $10,000 on a half million dollar property. If buyers can persuade sellers to sell that half million dollar property for 2% less, that's the same $10,000. Offer ordinary Americans - wealthy by the standards of the vast majority of the world - a chance to make $10,000, and they'll do anything from eating live worms to months of primitive living and Macchiavellian scheming to be the last one voted off the island.

Greed is a very powerful motivator. Because of that, there are any number of scams and games out there. If you've been in either real estate or mortgage very long, chances are that you've had more than one tried on you or your clients. Perhaps one has even succeeded. Sometimes people get taken and don't realize it for years, if ever. Not too far from me, a couple months ago somebody got nearly $600,000 for a property that was really worth $480,000 to $490,000. The buyers are happy, too, according to the listing agent, never mind the fact that they paid $100,000 too much for the property. They'll eventually realize that their property isn't worth that much more than the neighbors', but they'll probably never make the connection back to "We paid too much". Unless the condition was completely misrepresented or something about what the seller says just isn't true, there's a good possibility of getting away with it. Even the sharp buyer's agents who spot the issue just want to keep their clients out of trouble. There's no advantage to me or my clients in publicizing other people's lies. Even on the listing side, the agent either thinks an offer is good or they don't, and the seller ends up accepting or sending the prospective buyer on their way. There's no advantage in warning others about one particular person trying to pull one particular scam.

With the amount of money to be made quickly, a lot of transactions have something fishy about them. I've seen figures and estimates varying all the way from two percent to nearly fifty percent of all real estate and mortgage transactions, depending upon where they set the threshold.

Against this backdrop, security measures have been instituted. Appraisal, inspection, disclosures, title insurance, escrow, notaries, etcetera, etcetera, etcetera. Every single one of them has reasons why they are advantageous and why they are required. Every time you do without one of the security measures that the industry has implemented which is applicable to your situation, you leave yourself open for things which vary from minor games to completely illegal. Yes, they cost money - a lot of money in the aggregate. However, when the alternative is leaving the door open to transactions that are one hundred percent fraud, they have gotten incredibly cheap. Every time you try to cut out the professional who is supposed to protect you or work on your behalf, you leave the door open for losing more than they might possibly cost.

Take out the security measures, and not only do you open the door wider, but the people who are mildly concerned that they might end up imprisoned now will have no real downside to the activity. If there's no real chance of being caught and punished, what rational incentive is there not to do it? Do it, and make an extra $50,000. Don't do it, and the only difference is that you won't make that extra $50k. What's the incentive not to? There just aren't a lot of saints out there. Look at the way people behave in traffic, for a lot less gain, and pretty much every day I see someone getting a ticket that's going to cost them more than getting away with the offense 100 times would save. For this reason, all sorts of folks hope that you can somehow be persuaded not to take advantage of all available protective measures. It means they stand a better chance of getting away with whatever they're trying to pull.

In fact, the level of complexity and detail assists in finding and convicting malefactors. The more information you have, the better you can pin down exactly who did what. By breaking up the charges and the payments to track exactly what went where and for what purpose, a paper trail is created detailing what happened. If the only record made is that A paid B $X for some land somewhere, that says nothing about whether B owned it in the first place, what B told A in order to sell it, what A thought the condition was, or even what exact land was sold. I can go on for quite a while, but the point is that every little finger in the pie should have a good reason why it's there. If you're not trying to pull anything, they're there to protect you. Even if you are trying to pull something, they're there to protect you from the other side of the transaction cheating better than you. Especially if you're honest in the first place, it's a better situation for everyone. Like employment and tort law, real estate law and practice has evolved the way it has as a protection against unscrupulous practices, and short-circuiting any part of it increases the odds that you will find yourself very unhappy indeed.

Caveat Emptor

Article UPDATED here

I have trimmed the site roll. Basically, if there were no posts on a site within a couple months, I deleted it. If I deleted your site and you're still active, send me an email.


Earth's Heat Keeps America Afloat

I'm kind of glad not to be under 3000 feet of water, thank you.


Work on my client's condo continues. Shouldn't be long until we're putting it on the market.

The short answer is "Because it costs less"

There is always a trade-off between rate and cost on a given loan type. If you want the thirty year fixed rate loan half a percent lower than everybody else is getting, you're going to pay for it in the form of discount points. The higher cost always goes with the lower rate. You might as well consider it a law of nature in the same league as gravity, because it is a law of economics. If you don't want to pay high costs, you end up with a higher rate. End of story. There are all kinds of games that can be played with loan quotes, but the fact of the matter is that of the tens of thousands of rate sheets I've seen from over two hundred different lenders from A paper all the way down to hard money, every single one of them conforms to this fundamental truth. A 6.00 percent loan will cost more from the same lender at the same time than a 6.50 percent loan of the same type. Some lenders have different trade-offs than others because they are aiming at different target markets. I could tell you about lenders that rarely have a rate below par on their sheet, and lenders that rarely have a rate above par, par being the point at which there are no discount points to get the rate, but no yield spread either. Some lender's par may be lower than others, or higher. The par on a completely different loan type, or loan program, will be different. Par varies with time, the qualifications of the borrower, the type of loan they desire, the type of documentation they are providing, and other concerns as well.

The cost of a loan is sunk. Once you have the loan, the money you spend to get it is gone, whether you paid it out of pocket or rolled it into your balance. If you sell or refinance before you have recovered it via lower interest costs, you don't get it back. Actually, if you roll it into your balance, the money isn't gone, because you still owe it and you're paying interest on it. If you sell, it will mean you get less money, and if you refinance again, your balance will still be higher. Paying it out of your pocket is no better, because you could be investing that money, likely at a higher rate of return than the rate on most loans.

Now here's a very old rate sheet I saved from a random lender. The rates are much higher now. All of the lock periods are thirty days. I'm going to presume a $400,000 total loan, as if you're doing a cash out refinance to a specific loan to value ratio, but the principles are the same no matter the loan size.

































pts $
















total cost
















net $
















Alternatively, If you owe $400,000 and roll the costs into the balance, it becomes the following. Actually, the costs are mostly higher because points are computed based upon final loan amount, while I was too lazy to recompute from the previous example. Also, the maximum conforming loan is $417,000 currently, so going over that would cause the rates to rise notably, but assuming you have a 7% interest rate now, this is how quickly you would recover the costs of the new loan:

















total cost
















































































*over $417,000 kicks into non-conforming loan territory

People shop loans by payment. They shouldn't, but they do. Furthermore, a lot of people seem to get quite a stroke out of bragging that they have a low interest rate. But if you add $19,000 to your balance and only keep the loan long enough to recover $15,000 in interest, you've gotten a negative 20% return on your money - not including the time value of money. Furthermore, this money usually equates to the fact that you're going to have a higher balance and end up paying more money and higher interest on your next loan.

Now, it may be counter-intuitive, but it is easier to qualify for a loan with a lower rate, because the payments are lower, and therefore the Debt to income ratio is better. So any time somebody tells you that you didn't qualify for the same loan at a lower rate, you know it's nonsense. If you qualify for the program at all, you qualify more easily with a lower payment. This begs the question of whether you qualify for the program at all - your credit score could be too low, or it might not allow a loan to value ratio or debt to income ratio or any of many other situations you find yourself in, but if you qualify for the program, you will qualify at the lower rate. It may be smarter to want the higher rate, but that can be effectively eliminated by debt to income ratio.

So that's why low and zero cost loans are not popular. Most people focus in on either payment or interest rate, and when they discover that the low or zero cost loan means a higher interest rate, they're not interest. But if you don't keep the loan long enough to recover the additional costs, you're wasting money. Only a true zero cost loan can have you ahead immediately, but advertising or selling zero cost loans is like King Canute trying to command the tide to turn. Most people aren't interested.

There are other considerations. I've been telling people interest rates are going to rise for quite some time, and so rates gotten now are not going likely to be equaled for quite a while. This has now become quite apparent, for instance, if you've been pricing loans lately as opposed to when this rate sheet was valid a few months ago. If you're not intending to sell any time soon, it's likely to be a good idea to pay part of a point or even a full one, as you're likely to be keeping the loan longer, and the median time between refinancing is likely to rise. Nonetheless, there are limits on the size of any bet you want to make, and when you pay costs up front for a loan rate, you are betting that you're going to keep it long enough to more than recover those costs. For quite a few years now, the lenders have been winning the vast majority of those bets.

Caveat Emptor

Article UPDATED here

Before you even make an offer, you should be aware that you're going to spend a significant amount of money well before the transaction is consummated. There are methods of avoiding it, but they're a good way to get yourself in serious trouble by short-circuiting safeguards built into the system.

This doesn't include the deposit. The deposit is not, strictly speaking, money you are spending unless you do something that causes its forfeiture. It's relatively rare for someone who has an on-the-ball agent and who isn't trying to play games to forfeit their deposit. In the normal course of things, it will end up being used for loan costs, transaction costs, and possibly for some down payment money. It's mostly money you're putting up as evidence of your ability to consummate the transaction. The larger your deposit, of course, the more you have potentially at risk, but also the more serious you are showing the seller you are about the transaction. If I'm putting up a $10,000 deposit on a $250,000 condo, that's 4 percent of the purchase price. A buyer who's that serious will likely be able to get an offer with a lower purchase price accepted than someone without much of a deposit. Once upon a time, the default was 2%, but that's comparatively rare these days, as most deposits are smaller.

The first thing you're really spending money on is the inspection. The lowest one I've ever seen was over $250, and they go up from there, with the average being about $350. The basic inspection is your best protection against undisclosed major or expensive faults in the property. I've heard of people using the seller's inspection or the previous buyer's inspection. This is a good way to save a few hundred while being out tens of thousands. The previous inspector could well have been instructed to ignore defects, and because you are not the one paying them, they have no responsibility to you. If you engage them and you pay them, you can sue them if they don't exercise all due diligence. It's okay to have your buyer's agent provide a recommendation or even select them - your agent is also responsible to you. But be careful if you're using a dual agent or going unrepresented. I would also never use an inspector recommended by the seller. They could have chosen their friend with malice aforethought. In any case, if you're not writing the check that pays them, they don't have responsibility to you. If they don't have any responsibility to you, what's their motivation to do a full inspection and report everything? Finally, you do want to pay them at time of inspection. Some inspectors will work through escrow, waiting until escrow closes to get paid, but they charge a lot more - and you're going to pay these higher fees whether or not the transaction actually closes. Better to just write the smaller check up front.

The second major thing you'll actually spend the money on is the appraisal. Like the inspector, an honest appraisal protects you. Around here, they start at about $350, and go up from there. Investment property appraisals are more expensive because there's extra work to be done, and so are higher dollar value properties. Never use someone else's appraisal or appraiser. I've written briefly on appraisal fraud before. The games that the unscrupulous can play are legion. Once again, it's okay to trust a buyer's agent or an independent loan officer you select to find an appraiser, but not a dual agent, and not a loan affiliate of the listing agent. The buyer's agent has an unalloyed responsibility to you, and the loan provider has one to the lender, who also doesn't want the appraisal to be for more than the property is really worth. Once again, if you're not paying the appraiser, they have no responsibility to you, so you want to be the one writing that check. Furthermore, many loan providers are willing to pay that appraiser, but you may take it for a law of nature that you're not going to save money that way - these loan providers will charge enough more to more than cover the cost of the appraisal, and they'll get it from you whether or not the transaction closes.

One of the things a good buyer's agent learns are suspect are seller's appraisals. That seller wants to get the highest price possible, and the appraiser they pay has a responsibility to them. Furthermore, in such circumstances, some appraisers don't have any compunctions as to how high they'll go. Last year, I visited an empty mosquito infested armpit of a property that hadn't been updated in sixty years. Okay, it did front one of our coastal lagoons, but even so my best estimate of the current value was about $640,000 - and somebody had managed to borrow about twice that according to public records. Stuff like that doesn't happen without appraiser complicity. So unless you want to take a risk of trusting someone like that, don't trust a seller's appraisal.

None of this includes specialist inspections that are real smart to get if your initial inspection finds something of concern. Of course, if the initial inspection finds something of concern, the smartest thing may be to walk away from the property. It depends upon too many factors to write about with any coherence, and there are no guaranteed answers. Pretty much every real estate transaction is an exercise in controlled risks for the buyer, which is one more reason you want to have a good agent on your side.

Around here, the seller most often pays for the termite clearance, because that termite inspector is making a general warranty to all concerned that the property is in the condition they say it's in, but that's subject to specific negotiation.

So before you make an offer, be aware that you are committing the costs of inspection and appraisal to this property should that offer be accepted. There are ways to avoid paying them, but it's not smart to do so, as it's likely to cost you a lot more than you could possibly save. Before you make that offer, ask yourself if you're willing to put up this money as insurance against all sorts of common issues that properties really do have. Yes, if something goes wrong with the transaction, it's money down the drain, but better several hundred dollars for the inspection and appraisal than half a million dollars or more for a property that isn't worth what you paid for it.

Caveat Emptor

Article UPDATED here

An email:

I purchased a house in DELETED with two friends. Unbeknownst to us, one of them was in a legal domestic partnership relationship that she withheld from us (we knew about the relationship, just not about the legal part). We each had to sign these Domestic Partnership Addendums to our loan application. She did not indicate she had a domestic partnership relationship through that form. She and her partner split. The partner filed for dissolution in November and in her paperwork has named our property as joint property. Our "friend" has denied that her partner has any legal right to the property.

Apart from this mess, this house partner ...DELETED... has been a terror since we got the house. I have offered to buy her out three times since DELETED. THEN I found out she lied about her Domestic Partner situation.

Can I force her off the deed for fraud (since she clearly lied about the DP situation?) OR, can I force her to either get her partner to sign a Quitclaim Deed (or something like that) and, if she can't, then she has to remove herself from the Deed of Trust?

My feeling is that she intentionally committed fraud and therefore the Deed of Trust is either invalid or her part of it is. AND I dont feel like I should have to "buy" her out since she lied.

Please tell me you have an answer!!!

The best answer I can give is that this looks like a matter for an attorney. There's a lot of complexity to your situation, and my knowledge is limited. That said, I'll be glad to share my understanding of the issues.

You have run straight into an issue that bites folks all of the time. My understanding of the domestic partnership arrangement is that it is legally the equivalent of marriage with the exception of a couple of issues of which real estate title is not one. This makes your situation basically the same one as has been biting victims of gold-digging spouses for as long as their has been marriage and law and ownership.

You talk about the Trust Deed and Domestic Partner Addendums. However, those are between the lender and each of you individually, not between your group of partners. The main questions are, "In what manner do you hold title?" together with, "What sort of a business partnership do you have?"

For most people, the default title arrangement is "Joint Tenants with Rights of Survivorship." What this means is that you're all equal, undivided partners. If one of you gets married or domestically partnered, that new member becomes an equal partner. Nice for them. Not so nice for you.

This is a situation where "tenants in common" would likely serve the interests of business partners better. Tenants in common can hold other shares of ownership besides precisely equal. So if they put up only ten percent of the money, they can own ten percent, whereas if they put up ninety percent of the money, they can be ninety percent partners - or whatever arrangement you all agree to. If they get married or become domestically partnered, the spouse or partner only gets a portion of their share under the tenants in common arrangement.

In the case of a trust, it's whatever the trust agreement says. If you have a partnership agreement amongst yourselves, even better, because it can give explicit recourse for situations like this. Corporate ownership has its advantages as well. There are situations where each of these is appropriate. It all depends upon whats important to each of the partners and appropriate to the situation.

That said, whatever you've got is what you're stuck with. You can't go back to the beginning and change the situation now. You've found out first-hand about why the various forms of ownership came into being. If everyone was always a reasonable responsible adult, there would be no need for the alternative forms of ownership to have evolved. Even if you've got nothing written, though, dueling attorneys is a horrible way to settle the matter. It's likely to be a lot more efficient to sit down with a mediator and see if you can come to an agreement everyone can agree upon. When everyone's paying a couple hundred dollars per hour for an attorney, any advantage they might have gotten gets eroded quickly, and it's not very long before everyone emerges poorer for the experience.

At last resort, you do appear to be effectively the victim of fraud and should be able to use that as some leverage, although my understanding is that the law would mostly treat it as an additional side issue rather than the central fact of the matter. But when attorneys and the courts get involved, there aren't any easy answers, and the whole thing leaves your control when you submit it to the law. The plain fact of the matter is that it might be smart or fair to do a lot of things, yet it's unlikely you're going to be able to force anyone to do anything. Even if your partners from the nether regions are completely insane, you're likely to come out better overall if you can come to some sort of mutual agreement you can all live with, rather than paying attorneys and missing work for court. One more example of why, in real estate, an ounce of prevention is usually worth a lot more than a pound of cure.

Caveat Emptor

Article UPDATED here

Two absolutely vile things in the mortgage field that I've heard with my own ears. The first, a radio ad, hyping a loan as a thirty year fixed loan. They quoted a rate that seemed way too low, so being a broker that's approved with them, I hauled out that lender's current rate sheet. Well the rate was for a thirty year loan all right, fixed for two years with a three year pre-payment penalty and with three points of discount. So yes, you could say that it is a thirty year fixed rate loan, but that's not what everyone thinks of as a thirty year fixed rate loan, and it definitely isn't the industry standard name for what they are selling (which translates into polite english as "feces").

The other thing was waiting in line, I heard the guy in front of me (who worked for Big Name Major Bank) bad mouthing brokers, saying "They can charge anything they want, where it's our policy to never charge more than two points." Well, they may not charge the customer more than two points, but they do put them in a higher rate that would get a broker a six point rebate - if the broker was allowed that after charging a customer two points up front, which would be illegal and also not every broker wants six points total compensation for every loan (Most don't. The average loan I work on is about one point total compensation, and less than that for purchases where I'm the buyer's agent). Then, because Big Name Major Bank is a direct lender they sell the note to a third party at even more of a markup. This guy was telling the truth, but omitting the most significant parts of the story, lying by omission. One hopes you see the extent of the mind games this guy was playing. I said, "Excuse me, but don't you hate it when someone slanders your profession by telling half-truths that give a completely false impression? Then why did you just do it to me?" I managed not to call him slimeball to his face, but he deserved it.

The fact is that you need to shop around. Every profession has its scoundrels, and mine is unfortunately no exception. Many of them masquerade as your friend, but aren't. I suggest using my list of questions to ask prospective loan providers here, but remember that the stuff they quote to get you to sign up may be lies, so sign up for two loans. The way to avoid the problem posed by the smooth talker in the second instance is to evaluate all loans by the criterion that matters to you - which means by the loan you are getting, and what it costs you, not by what somebody else is making. If you can buy a widget at store A for $12.00, or at store B for $13.00, and they are in all other ways equivalent, why do you care that store A bought it for $9.50 while store B bought it for $11.00, and so store A is making more? The bottom line is you get the same widget for less money at store A, even if the store makes fifty cents more per widget. The principle is the same whatever you're buying.

Caveat Emptor

Original here

The San Diego Special Edition


More on the client condo

It's looking nice inside!


Volokh Conspiracy on sexual abuse of children in order to "prove" sexual abuse.

Rudyard Kipling had the right idea about what to do in those circumstances...


Many media outlets have banned political donations by their reporters. It seems they were concerned with accusations of bias stemming from the fact that approximately 90% of the donations were to Democratic candidates. So of course, rather than disclose the bias, they've decided to cover it up by prohibiting political donations. This is not only troubling from a First Amendment perspective, but merely hides an existing bias rather than attempting to rectify it. Captain's Quarters has a better suggestion. Let the reporters contribute if they so desire. Just make certain their personal biases are disclosed to the audience. Most Americans correctly no longer trust the media to deliver the news straight up and without bias. Disclosing the existence of such a bias or potential bias actually takes the wind out of the conservative sails, as the audience becomes fully aware of the reporter's biases.

Of course, it makes it harder to influence public perceptions while pretending to be unbiased...


An interesting change in IRS enforcement policy and priorities over at Bloodhound. Expect this to put a severe brake on cash out refinances, among other things.

During the initial interview with prospects, I like to cover the division of the labor that goes into a purchase that makes the buyers happy.

I have to know what's important to the buyers, how important it is, and what the budget I have to work with is. My goal is to get my clients some combination of better property and a lower price that's at least ten percent better than they would have had otherwise. That's a realistic, achievable goal. But in order to deliver it, I have to know what's most important to them, what's not so important, and what's not important at all. That way I can ignore the property where the owner is so proud of some modification my client doesn't care about that they're not prepared to be reasonable.

Once I know what they want and what their budget is, I can tell them how realistic they are being. A good buyer's agent can hit a goal of making a ten percent difference with pretty much every property purchased. I can't guarantee it, but I'm pretty certain all of my clients would agree I made at least that much difference. In some situations recently, it's been thirty percent. But I can't find three bedroom houses in good shape on the top of Mt. Soledad for $250,000. It's not going to happen, and it's no service to anyone to pretend that it's likely to. If your budget and your desires are mismatched, it is my responsibility to inform you of that fact right at the beginning.

Once we have a meeting of the minds on what is possible and achievable, and what may be necessary to do it, the job that comes next is finding "possibles". I define a "possible" as any property which meets the client's essential requirements and might be obtainable within their budget. Budgets should be expressed to agents in terms of purchase price, not monthly payment, by the way. Expressing it in terms of payment leaves you open to being sold a property with a negative amortization loan. You get a higher priced property for a payment that's within the payment you told them, and by the time you figure out the gotcha!, they've already been paid, and now they're going to want you to do another transaction and get paid again!

Back to the "possibles." The primary responsibility for finding them is mine, but if the client wants to suggest possibles, that's fine with me. Once possibles are identified, I've got to do a little records research and go look at them. It doesn't take long - fifteen minutes inside each one is more than enough to tell me if this one makes the cut, as far as amenities and value and condition go. Because I'm looking constantly, I've got a pretty solid sense of where the market in my usual areas is. In most cases, I've been inside several that were initially built to the same floor plan that have already sold recently. I've got a laundry list of common problems I specifically look for and evaluate how bad they are if they are present. I've also got to see if I can find a reason why it's obtainable within the budget I've agreed to work with. The obvious case is that if the asking price is less than the client's budget, that's pretty good evidence. That's not the only possible evidence by any means, but it's a pretty solid indication. Where the cut is varies. The easier it is to find what my clients want within their budget, the pickier I can afford to be. The one thing I don't want to do is waste my client's time with below average properties there's no reason for them to be considering.

If a possible makes the cut for value, amenities, and especially condition, while being obtainable within my client's budget, it then becomes a "likely". This is when I bring it to my client's attention, we go take a look at it together, and I tell them what I see that's right and wrong with the property. Most of my clients aren't real estate experts. On the other hand, they know what they like and are willing to pay for better than I ever can. If the only way you'll ever get take action is if your agent tells you it's perfect and doesn't have any flaws, please get real. No matter how great it is, there's at least a dark lining to every property. If it's huge and beautiful, maintaining it is going to be expensive or you're going to be losing some of your return to deterioration. Fact of life. There is no such thing as the perfect property unless you've got an unlimited budget. Seeing as not even the richest man in the world has an unlimited budget, one hopes that you get the idea.

Agents should tell you about the pluses and minuses of every property they show you. They shouldn't be shy about making recommendations as to which one they like or has the best apparent value. With that said, however, it's not the agent's job to tell you which one you like. You're the one that needs to be happy at the end of things. No matter how much I like a property, if the client doesn't like it, that property profile goes into the wastebasket. Similarly, if the client likes one that I don't, it's my job to report the facts, not to talk them out of it. I can tell them why they shouldn't like it, but if I explain why they shouldn't like it and they still do, well, it's their money and their life. I'm the consultant, not the boss. I'm the hired expert who knows more about the market than they likely ever will, but they're the one that knows their own mind best. It's darned few who are silly enough to disregard my advice, but they must be able to do so. I'm permitted to try to talk them out of making an offer, but not to prompt an offer, and whatever the clients want to do, they have to be the final authority.

Once they've decided to make an offer, it's my job to figure out how to conduct negotiations such that the clients get the best possible price. To this end, I'm always looking for things that aren't money to offer. For instance, with sellers nervous about committing to move out before close of escrow, a short term leaseback can make an offer more attractive. It amazing the difference that can make to the price the seller may be willing to accept.

Finally, the due diligence period is mostly on my head. Getting the inspections and appraisal done promptly is important. It's great if the client is there for the inspection, but despite lawyers who advise agents not to be there, it really is a responsibility that can't be ducked. I can't see how it can not be negligence to be not be present at the inspection. Make certain the client knows and understands what is going on. If I have to call the inspector back to explain something, I have to call the inspector back. Make certain the client understands the title report. Etcetera.

A good agent provides lots of professional advice and input. More than some clients want, as a matter of fact. But real estate is enormously complex and if there were easy answers, everyone could do it. It's my responsibility to help you understand the issues, and also to make certain that you've got the best possible set of choices to choose between. The decisions themselves, however, must be yours.

Caveat Emptor

Article UPDATED here

Over the last few years, a lot of folks have gotten used to zero real scrutiny of transactions. With values increasing rapidly, it was hard to lose money on real estate, whether you were purchaser or lender. One of the most common abuses has been Straw Buyer Fraud. Well, with local prices having receded roughly 25% and no rapid increases on the horizon right at this instant, a lot of lenders are getting burned on loans, losing money, and going back after those who aided and abetted and made those transactions appear more solid than they were.

Against that backdrop I got this email, with the subject, "I am a straw buyer":

I thought I was helping out a friend and HONESTLY did not think and/or realize I was doing anything wrong.

The friend has been making the payments for 10 months and is due to buy the property back from me at the 1 year anniversary (DELETED).

If he can't buy the property back (which I don't think he can), I want to approach the Lender. I can't afford the payments of DELETED and I don't want the property which is worth DELETED.

What kind of trouble could I be in?

Also there is an agent, a broker and an attorney involved in this scenario as well.

Well, California is an escrow state, so this isn't anywhere I can get involved, and the rules are different in every single state. As I've said before, the best thing to do if you find you may have violated the law is consult a licensed attorney in your area, and if it relates to real estate, make it an attorney who's a real estate specialist.

There are some generally applicable principles, but keep in mind that I'm not an attorney, so if there's any conflict between this and what your attorney says, believe your attorney.

The situation is this: You signed a Note, and in most cases, a Trust Deed or the equivalent. The Note says you owe the money. The Trust Deed pledges the property as security for that money.

Now in many states, California among them, purchase money loans are not subject to recourse generally. Unfortunately, you have committed fraud, which is one of the exceptions and therefore subject to full recourse in every state I'm aware of. Furthermore, loan fraud itself is usually a matter that causes the federal government to get involved, as most lenders are federally chartered. So you have a criminal fraud case, most likely at the federal level, quite likely conspiracy added to that charge, and on the civil side, you are going to be at least one target of a civil suit if the lender loses any money. You can also expect to hold a share of liability for the lender's attorney fees. That's the bad news.

The good news is there's quite likely evidence that you were led down the primrose path by those alleged professionals who should have kept you from breaking the law. This won't get you released from your basic responsibility for what you did, but if the feds and the lender bother with you, you're not likely to be their primary focus, and on the civil side, you're not likely to be the deep pockets they are really interested in. While neither the feds nor the lender is going to want to let you off the hook, you shouldn't be their primary target if you can show that you were advised to do this. Ignorance of the law is no excuse, but when comparing the level and degree of culpability, I'd expect that a non-professional led afoul of the law by allegedly professional advice you should have been able to trust is a fraction the culpability of those professionals who willfully advised you to commit an illegal action.

Now before you breathe a sigh of relief, let's consider the following: What if those alleged professionals aren't there any more? What if they're already out of business, broke, and in jail? Now you're the only target left. Ouch. Now you know how the last of Custer's men felt.

Here's another not so comforting thought: What if that property isn't really worth what was paid for it? From what I understand, a large proportion of felons like to combine their scams. For instance, adding appraisal fraud usually doesn't add appreciably to the risk, while adding greatly to the reward. They pay an appraiser to come up with an inflated value, get someone to pay it, and voila! Extra profit! The games that can be played are legion. Usually, the sucker or mark is just so pleased to be getting "such a great property" that they don't really examine what's going on. Sometimes, they're so happy to be qualifying for anything at all that they won't examine the situation at all, for fear that they will won't qualify and it will all somehow melt away. It's been said before, but you're never so vulnerable as when you're trying to get away with something. If something seems to good to be true, it probably is, especially where hundreds of thousands of dollars are involved. Look the metaphorical gift horse in the mouth. If it's real, it will stand up to the examination. If it's not, you might just avoid paying three times what the property is worth, not to mention criminal prosecution.

Read those contracts. Really read them. Pay attention to paragraphs that say stuff like, "It is a felony to misrepresent information on this application." Trust me: With hundreds of thousands of dollars on the line, they mean it.

If anybody claims to be helping you break the law or circumvent safeguards, run away! If they're willing to break one law, or one of their ethical responsibilities, ask yourself what reason there is to believe they won't break others? To be precise, their duties to you? If you're trusting them for advice, it seems likely they know the system a lot better than you ever will. There is a reason for every single law and procedure in real estate. The vast majority of the time, it's to protect consumers. If an alleged professional is willing to admit to doing one thing illegal or unethical, what evidence do you have that you're not going to end up one of the victims?

If there are legal ways around legal requirements and procedures that have been put in place, it almost always involves full disclosure to all parties. There some stuff that's none of the business of some parties, but that's because they have no reason to be interested. For instance, the listing agent in a recent transaction asked me for some financial history on the buyers that they had no need to know - they were just trolling for data which might lead to future clients, i.e. trying to get my clients future business. For that sort of stuff, it's good to tell them something vulgar and report them to the state. But if you know or have been led to believe that the other side of the transaction is being deceived or intentionally kept in the dark, you should be hearing more warning sirens than a ten alarm fire during an air raid. Do all the agents know everything they need to? Does Escrow know? Does Title know? Does the other side of the buyer/seller transaction know? Most importantly, does the lender know? Are you sure? Did you tell them? If not, what evidence do you have that they know?

Nobody should ever rush you into signing anything. Take your time. If you're not certain you understand it, don't sign, no matter who's hopping with impatience. Even me, although I don't recall ever committing that particular sin. Taking your time and consulting disinterested parties may cost you some money, although your agent or loan officer is doing their job if they inform you of what consequences there may be. Not doing so can cost you a lot more money, plus your freedom for years and your credit rating for the rest of your life. Worst comes to absolute worst and you lose the transaction and your deposit, that's better than getting convicted of fraud and owing half a million dollars that the property isn't worth.

Caveat Emptor

Article UPDATED here

One of the things that most mortgage and real estate consumers get mixed up on is the distinction between low-balling and junk fees. Junk fees are when they add fees that really aren't necessary to what you're paying. Low-balling is when there's an essential cost (or the associated rate) that either gets underestimated or they somehow neglect to tell you about. This can also take the form of costs such as subescrow fees which happen because your representatives did not choose your service providers with your best interests in mind.

As I said in Mortgage Closing Costs: What is Real and What is Junk?, "The easy, general rule is that legitimate expenses all have easily understood explanations in plain English, they are all for specific services, and if they are performed by third parties, there are associated invoices or receipts that you can see." In my experience, the vast majority of what extra fees that appear on the HUD 1 despite not being on the earlier forms such as the federal Good Faith Estimate, California's Mortgage Loan Disclosure Statement, or a real estate agent's estimate of seller's proceeds, are not the result of junk fees being added for no good reason, but are the result of real fees that your agent or loan provider knew were going to need to get paid, should have known the amount, and chose not to tell you about them or chose to tell you they would be less than they are. In short, low-balling is a much worse problem in the industry than junk fees. I've had people tell me my closing costs seemed high, because despite the fact that I have negotiated for discounts from providers, other loan providers were quoting significantly lower costs. What's going on is not that my costs are high - in fact they're pretty darned low when you compare the fees my clients actually end up paying - but the fact that a large proportion of my competitors will pretend that a large percentage of those costs aren't going to happen. The penalties for this, in case you weren't aware, are pretty much non-existent.

The reason they do is is to make it appear for the moment as if their loan is more competitive than it is. What happens is that because it appears that their loan is cheaper for the same rate, people will sign up for their loan. They then invest the three to four weeks necessary to fund that loan working with that loan provider. By the time they discover the real costs and the rate of that other loan are going to be much higher than they were initially quoted, there's no time to go back and get another loan - and that's if the people notice, and industry statistics say that over half of the people do not realize even massive discrepancies between the initial quote and eventual loan delivered.

This is why most loan providers don't want to tell you what your loan is really going to cost. It isn't that the extra is junk or in any way unnecessary. It's that they want their loan to appear more competitive that it may really be. All of the incentives are lined up in favor of this behavior - they got you to sign up, didn't they? - and there is no penalty in law. Of those people who do notice discrepancies, eight to nine out of ten will give in and sign anyway.

This applies also to many agents' "estimate from proceeds of sale" form. Despite the fact that the default purchase contract and usual custom may have the seller paying for certain items, such as a home warranty plan and an owner's policy of title insurance, many agents will leave these costs off the estimate. Unless you're selling a fixer in utterly "as is" condition, you're going to end up paying for a home warranty plan. Unless the buyer's agent utterly hoses them, leaving that agent completely open to lawsuits, you're going to pay for an owner's policy of title insurance. Unwillingness to do so is a universal deal killer unless the buyers are getting a price more than good enough to make it worth their while to pay for it themselves. Even if they've deliberately chosen escrow and title providers such that you're going to pay subescrow costs, they'll likely leave those costs off their estimates. Why? To make it seem like you're getting a better deal from them than you actually are.

I've seen more than a few people who signed up with other agents or loan providers based upon ridiculous low-balls (and over-estimates of sale price). Without exception, these people end up paying every single one of those loan costs. It's not like the people who do the work are going say, "Oh well, it's not like we want to get paid for all this work we did." In the case of sales transactions, that's if it sells - and it's very unlikely to sell at all if it's overpriced. Nonetheless, this gives the person who gives the great line of patter - a supposedly "bigger better deal" - a large advantage in getting people to sign up with them. By the time the clients learn the truth, it's too late. Most people don't want to do the research up front to find out what's really going on. They wait until after they've already been hosed to do the research they needed to do in the first place.

Caveat Emptor

Article UPDATED here

What can a seller do to get the deposit when the buyer backed out after the time limit and just won't sign off on the money? My real estate agent is not helping at all. The real estate office was representing both the seller and buyer and I believe they don't want to upset the buyer and that is why they aren't pushing her to do the right thing. Thanks for any help,.

They're not representing your interests in a fiduciary manner as demanded by the listing contract.

Real Estate is not sugar and spice and everything nice. Sometimes doing your job as an agent means that you have to do something unpleasant by taking your client's side. If your agent isn't willing to be a complete jerk on your behalf if they have to, they're not worth a talking to, much less signing a contract with.

This is another reason why Dual Agency is a bad idea from the consumer's point of view. Most of the reasons are from the buyer's side, but here's a concrete example why you do not want to permit your listing agent to also represent the buyer. Since about thirty percent of all purchase contracts fall out of escrow for some reason or another, ask yourself how you'd feel about your listing agent trying to preserve the buyer's deposit even though you, the seller, may be entitled to it. You gave them thirty or sixty days exclusive shot at that property, paid the mortgage and all the other bills for that time period, and could not sell it to anyone else while they were wasting all of that time and money of yours. This is a very common phenomenon when one agent tries to represent the interests of both sides. But your interests call for the buyer to forfeit the deposit, and if they want to continue to represent you, they need to act in your best interests. They haven't done that.

This isn't to say they have to start with scorched earth. A simple request to sign the cancellation and release of deposit is very reasonable - and precisely what they agreed to when they wanted to represent both sides, if the transaction fell apart. When there's no other agent, there isn't anyone else to do the job. They're it, because they tagged themselves by requesting dual agency.

Agents, however, are not lawyers, arbitrators, legal mediators, or judges. They have zero authority to force their other client to sign the cancellation and release of deposit. Some people won't do the reasonable and intelligent thing, whether it's because they're hoping to get away with it, or because they don't think it's the reasonable and intelligent thing, or for some other reason. But a failure to ask, and a failure to do their utmost in persuading the other side is a failure of their contracted fiduciary duty to you.

This means that you quite likely have a valid reason to cancel your listing. Consult with your attorney, but from the information presented, they have clearly failed to represent your best interests in accordance with that listing contract. As far as calls upon agent loyalty go, listing contracts conquer everything but the law, or at least they should. That's why I give each and every one of my buyer clients an explicit written release of any obligation if they should choose buy a property I'm listing. They can always find another buyer's agent to represent them, but the sellers are contractually committed to staying with me for the contracted period. I also tend not to show my few listings to my contracted buyer clients, for reasons I've gone into elsewhere.

One hopes you see why I make such a big deal about putting in the work to find a good agent. Here you are with months and multiple thousands of dollars gone, and you have absolutely nothing to show for it because your agent is a self-serving bozo. You don't need to fret about finding absolutely the best agent there is, but you do need to find one who knows what they're doing and will do what is necessary to represent your interests. I wrote a two part article How to Effectively Shop For A Listing Agent (Part I) and How to Effectively Shop For A Listing Agent (Part II) on this very subject. Chances are, there is more than one good agent in your area, but the good ones are usually outnumbered by the bozos, so just using your relative or friend is like playing Financial Russian Roulette with four of six chambers loaded. Nor is "top producer" any kind of sobriquet I'd want for my listing agent, because they're talking about overall volume of sales, and that's not likely to be present in the agent who can actually get top dollar for your property. All of the agency mechanics that favor mass production of sales work against them getting the best price possible for any particular property. To be fair, this works in the other direction as well, but it's not your problem. You want someone who's going to get the best possible price for your property, not someone who mass produces transactions. If they've chosen the other path, you don't need to feel guilty about passing them up in favor of the boutique agency that busts their backside to satisfy you. That high producing chain is making plenty of money off the suckers who don't know any better.

Caveat Emptor

UPDATED article here

I have a special reason to celebrate Flag Day every year, because on Flag Day of 1997, I married the world's only perfect woman. Yesterday we celebrated 10 years of marriage. So it's not only happy birthday to the world's foremost freedom fighters and the world's foremost symbol of freedom, but it's personally important to me as well.

(Oh, and June 13th is the date I became a homeowner)


Politburo Diktat notes the evolution of online advertising, and gives some investment advice.


10 things Bob Barker waited 50 years to say

One thing that is very common in the mortgage industry is masking loan costs by rolling them into your loan balance. People are less sensitive to being asked to roll this money into their loan balance than they are about writing a check out of their bank account. In the latter case, everybody understands that this is money you busted your backside to earn and save. In the former case, a lot of folks don't understand that the money is every bit as real.

Indeed, one of the standard ways to deflect questions about cost that seems to get taught to every loan officer by every loan provider is the phrase, "Nothing out of your pocket." Sounds like they mean there's no cost. That's not what it means. What it means is that they don't want to talk about what the loan is really going to cost, as they're going to have to do if you're writing a check. Therefore, they want to roll it into your balance on the refinance. Most people in most situations have had their property value increase since the last time they got a loan, which likely means there's plenty of equity to cover it.

For purchases, you can't really do this because your value is never more than the purchase price. There are only three places for loan costs to come from: Your pocket, your down payment, if you have one, which reduces to your pocket, and Seller Paid Closing Costs. Seller paid closing costs are an agent and loan officer favorite, because it makes it look like you're not paying them, even though you are. If nothing else, a smart seller would rather take $10,000 less in purchase proceeds than pay $10,000 of buyer's closing costs, on which they are going to pay commissions and taxes to boot.

This trick of making it appear like you're not paying closing costs is one of the best ways to get stuck with an awful loan, but most folks won't do the research until after they've already gotten burned. You are paying those costs in one fashion or another, I personally guarantee it. There is more than one way to pay them, but if you don't know how you are paying them, you are probably not paying them the way you want to, and you're almost certainly paying too much, to boot.

There is ALWAYS a trade-off between rate and cost in real estate loans. It can be very intelligent to pay some or all of your closing costs by accepting a higher rate, especially if you don't plan on keeping the loan very long. If you know you're going to sell or refinance within a few years, or think it likely that you will, it's likely to save you money if you accept a higher rate that has lower costs. On the other hand, if you're 100 percent certain that you're going to keep this particular thirty year fixed rate loan the rest of your life, sinking a couple of points into reducing the rate can be an excellent investment. However, be aware that if you later decide to refinance or sell after all, you're not going to get your previously sunk costs back.

People get talked into rolling multiple points into their loan because it reduces their rate, and therefore their payment, aka the check they're writing every month. Let's consider two rates and the associated costs I quoted earlier today, on a maximum conforming loan, thirty year fixed "A paper" (those rates are gone now, whether tomorrow's are higher or lower). 6.5 percent was 1.5 points, or $6255 in real money, plus about $3400 in total closing costs when you consider title and escrow and appraisal. You'll find a lot of loan providers will go a long way to avoid quoting you the actual cost of points in dollars. But at 7.00 percent, I could give them back about 15 basis points, or $625, towards reducing their closing costs of about $3400. So assuming a $417,000 loan, this person would really get:




useful $



cost dif






int dif




39.6 mos

39.6 mos

However, that's dodging the real purpose of this essay. Suppose a loan officer was to pretend that these costs didn't exist when quoting you their loan rate. Their loan would appear to be cheaper, so that you would be very likely to sign up with them, but when the facts became apparent later on - that those costs exist in reality, whether your loan provider tells you about them up front or not - you're likely to continue with their loan anyway, because you don't have time to get another loan for one reason or another, or you just decide to stick with what you've started.

Furthermore, by pretending you don't have to pay loan costs, that makes it easier to get you to accept outrageous ones. Suppose your choices were to pay that $9700 in points and closing costs to get that 6.5% rate in cash, or you could pay $15,000 by rolling it into your loan balance. It is a sad fact that most people don't understand that this is about a point and a half more in costs that are every bit as real as dollars coming out of their checking account. However, most people are a lot more careful with dollars in their checking account because they understand that those dollars are real money. They had to earn it, dollar by dollar - in the form of so many minutes out of your life per dollar if you earn an hourly wage. Then they had to not spend it right away, as soon as they got their pay! Most folks figure they have something to be proud of if they save ten percent of their pay, but if you make $5000 per month, it takes over a year and a half to save $9700 if you save 10% of your gross pay. They understand that $9700 in terms of the nineteen months of their life it took them to save it. If they're just rolling it into the balance of their mortgage where it's being paid for by the fact that the home increased in value, it may be more than half again as much money, but a lot of folks somehow think it's not as real, and they'll accept rolling it into their balance much more readily than writing a check. It doesn't matter if you're writing a check or putting the money into your balance - a dollar is a dollar. By accepting the higher cost loan, not only are you wasting over $5000 of your money, but you're paying interest on it in the meantime.

If it's an expensive loan, it's an expensive loan, whether you're rolling it into your balance or out of your checking account. If you're paying too much money by rolling it into your balance, you're still paying too much money, and it's at least as bad as if you wrote a check or even counted out the cash. Doesn't matter whether you're writing a check or rolling it into your mortgage balance. So before you sign that loan paperwork, ask yourself if you'd be as happy with that loan if you had to write a check for every single dollar, or even count it out $20 at a time like an ATM machine. Chances are you'll be a lot more careful with your hard earned money.

Caveat Emptor

Article updated here

I do want to apologize for missing more days than I'd like to. I am trying for four new financial articles per week. However, I'm fighting both depression and being busy with real life, and working for money has to take priority over writing about work essentially for free. Sometimes it's kind of hard to pick a topic I want to write upon. It's not a shortage of ideas. I have over 200 essay topics outlined, and about 90 percent of them are real estate related. Perhaps it's an embarrassment of riches. However, many of the topics require more time than I have to devote to them in a lot of cases. Sometimes, it's also hard to pick one topic out of the list.

If you do have a specific question or topic you'd like to see covered, though, asking it does make me feel like someone out there is paying attention. Sometimes, one question or comment makes all the difference.


Bush pardons Armitage: details at Scrappleface


The new realpolitik from Victor Davis Hanson

Builder Upgrades

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What I still am unclear on is the pool and how (in my opinion) it's crazy to finance $40,000 into a mortgage when you *plan* on refinancing in a few years. By *plan* I mean you take out a mortgage that you know isn't what you want but you took it because the builder forced you into it with "incentives" or they just plain wouldn't build a house for you if you don't use their lender and the builders lender is looking out for the builder, not you. I guess you can't *know* that the pool won't add value . . . especially in a new area where there are no comps . . . but am I crazy here?

Another situation I don't get is with all the "upgrades" they try to get you to buy with a new house. Blinds, paint, water softener, ro water filter, counter tops, cabinet upgrades. I wonder if you would be better off just getting the cheapest options and then upgrading later when you can afford to pay cash. I can guess that's the case but people figure life is too short to live in a a despicable house that has a kitchen with laminate counter tops instead of granite!! (I have laminate and somehow my wife and I manage.)

And that leads me to the pricing on new homes and how the builder sets the price and somehow the lender will lend you money on a house that may or may not be worth what you end up paying (granite counter tops may add value to the house but probably not $10,000). The more I learn the more I realize how much I still have to learn.

Builder upgrades are an almost entirely different set of rules and calculations than after-market upgrades. There are reasons for this that mostly reduce to "The lender can do a lot of things if they really want to, but most lenders don't have a reason to want to." For all of this, keep in mind that my normal stomping grounds just don't have a whole lot of new developments any more, so I don't deal with developer issues a lot, and it's very possible for the rules to change while I'm not doing any developer deals. I'm working with one set of clients right now who might end up buying in a new development, but it's been over a year since my last set of clients who bought just one (although if there's any developers reading this, I do have one investment firm client who wants to buy out the last of any new development that isn't moving quick enough).

The normal after-market upgrade, if you want a normal mortgage loan for it, has to be justified in terms of the property's current numbers. In other words, if you want to take $50,000 cash out to put in a pool, you must already have $50,000 equity available to you. You have to qualify for that loan debt to income ratio and loan to value ratio exactly as if you were going to take that money and buy lottery tickets with it. In other words, without the value of the proposed pool or other improvement added to your property, but solely based upon the situation as it sits now.

With builder upgrades, however, there's a little more latitude built in - especially where the builder controls the lender outright. Sure, the property is really only worth maybe five thousand more with that fifty thousand dollar pool installed, but because the basic number equates to money in their pocket directly, as well as money that they're going to earn interest on, they have a motivation to be more forgiving than in the case of the lender who is not getting $50,000 placed into their left hand while they loan it out - at interest - with their right. In many cases, even if they don't control the lender directly because they're not that big yet, they've made an agreement to indemnify the lender for any losses they take as a result of lending that money. The builder is secure in the knowledge that they'll make a lot more from the increased number of upgrades than they'll lose from the small proportion of defaulters. However, this should explain to consumers why sometimes builder's preferred lenders can do things nobody else can - because they're getting paid to do it. Furthermore, because they can do something nobody else will, they can charge a premium, either in rate, points, or both, over general market rates. Because the consumer wants the home with these upgrades, and because this is the only way anyone will lend on it, there's money to be made! Usually, there's plenty of money to go around - the consumers are, in aggregate, paying for it. Surcharges and premiums on the secondary mortgage market can go anywhere from two and a half percent up to six percent, perhaps more. On a hundred $500,000 homes, four and a half percent is over two million dollars additional clear profit. Even if three of those homes default, losing roughly fifty thousand in each case, they've still cleared more than two million extra profit for having done this.

(This is not to say that many after-market contractors don't have their own finance department cranking out trust deed financing even if the equity may not be there to pay it right now. But this way they get the job, which means they make the money for that job, and most of these contractor loans carry rates well above regular current market, so they can make more on the job as well as on the loan. How remarkably analogous!)

As for whether it's smarter to upgrade with the builder or wait and pay cash, there's an argument for each side. On one hand, the argument for waiting is that you are a lot less likely to owe more than the property is worth if you need to sell. Furthermore, you're not paying interest on depreciating fixtures, a classic double whammy anyone who's even bought a car on credit can relate to. Because you're not asking for anything special or difficult in the way of financing, you can at least theoretically go anywhere for your financing. Builders in California cannot legally require you to use their lender, which is not to say it doesn't happen - sometimes very blatantly in violation of the law - but that's the theory, anyway, that you should be able to shop the market. Finally, the cost of most upgrades is rarely recovered in increased sales price when the current owner sells. Spending a dollar, and paying interest on it, to make back twenty cents in eventual increased sales price strikes me as shooting yourself in the foot. It is to be admitted, however, if it was worth a dollar to you to have the upgrade, the twenty cents is icing on the cake.

Against this, however, is the cold hard reality of labor costs. If you build granite counter-tops in the first place, the only increase in costs is the comparatively small increase for more expensive materials. If you wait until after it's done, you've got to tear all the old work you've already paid for out, then pay the labor costs to put the new counter-tops in, as well as new materials, the cost of haul away, etcetera - not to mention the restaurant meals you'll be eating while it gets done. At anywhere from $15 per hour up, plus benefits plus markup, that labor isn't cheap, and it's usually at least a couple of workers for several days.

Builders know all of this, and that it's very attractive to roll the upgrades into the cost like this. When they build a property "on spec" (meaning it hasn't sold before the framing is done at the very latest), they typically build in all of the upgrades they can, and if you went to them to take a completed property off their hands, but wanted something not upgraded, it's likely they will be unable to accommodate you (This is a negotiating opportunity on the rare occasions it happens!). They don't tend to build very many "on spec" around here, or anywhere else if they can avoid it without worse consequences, but that's what they do when they do it.

There's also one more argument in favor of builder upgrades: You won't get your extra money out of them, but in slow markets like right now, it's more likely the property will sell if you do need to sell it. There are always suckers out there who will zero in on the upgraded property because "it's soooo beautiful!" even though there are better bargains nearby. Real estate fixers and flippers worldwide make their fortunes on the backs of these people, but they're legal adults deciding this stuff is worth their hard-earned money. Who am I to say it isn't?

Builders set their prices on the same motto as Poul Anderson's Polesotechnic League: "All the traffic will bear!" (I highly recommend his Van Rijn and Falkayn stories, by the way.) Profit isn't evil, it's what motivates developers to build places for people to live. But there's nothing that says you have to cater to it by forking over excessive numbers of your hard earned dollars, either.

Caveat Emptor

Article UPDATED here

One of my clients would like me to link to her site so for those of you who might like to see work in progress, here's her most recent post, showing the condo torn apart.

2 bedroom 2 (full) bath condo in El Cajon, CA. 900 square feet. We got it for $197,000. The previous model match had sold for $273,000.


Don Surber on "marriage is hate speech?" makes a point about double standards and double talk. Looks like political and career intimidation to me.

If you're going to allow one advocacy viewpoint, you need to allow the opposing viewpoint. If we can tolerate Nazis and Klansmen and other brands of racial supremacist which are explicitly hate oriented, it seems unlikely to me our society is going to get torn apart by people who merely disagree with gay marriage.

I've said it before and I'll say it again: Political Censorship of opposing ideas is a response to an argument you can't deal with rationally. It is an admission of weakness. The correct response is to out-argue your opponents.


House Democrat warns GOP on earmarks

Saying Republicans indulge in earmarks as much as Democrats do, Obey warned GOP leaders to stop politicizing the subject. If Boehner and his allies "think they can demagogue the earmarks process all the year long and expect Democrats to carry the burden of passing earmarks, they're wrong," Obey said. "There will be no earmarks for anybody."

He says that like it would be a bad thing.


It hurts to think about, but it's also amazing in a way:

19th-Century Weapon Found in Whale

A 50-ton bowhead whale caught off the Alaskan coast last month had a weapon fragment embedded in its neck that showed it survived a similar hunt - more than a century ago. Embedded deep under its blubber was a 3 1/2-inch arrow-shaped projectile that has given researchers insight into the whale's age, estimated between 115 and 130 years old.

While I'm on the topic of politics, during the most recent Republican debate, the candidates were asked if they believe in evolution as opposed to creation.

(See Below for update and clarification) Not to put too fine a point on it, not believing in evolution is not a central flaw in a presidential candidate. It may be silly, irrational, and unscientific. However, it just doesn't impact their judgment in a lot of important policy areas. Education, yes, but the President's role in education is small and should be negligible. For the vast majority of our history, there was no federal role in education, and the schools of that time turned out a more educated, more critical, product in less time, so I find the idea of federal funding and mandates for education being beneficial unpersuasive, and the President's role in education and ability to influence its course is rather minimal. In the last several administrations, the Presidential spouse has given more apparent attention to education than the President themselves.

Let's ask presidential candidates what their economic beliefs are. Do they really believe in supply and demand? The power of the market? Capitalism?

Let's ask the presidential candidates what their diplomatic beliefs are. Do they believe in realpolitik? Do they believe in accommodation and hoping a problem goes away, or do they want to not merely deal with the problem at hand, but work to give us better options next time there's a problem?

Being President is about finding stuff out. Nobody can know everything that's necessary to run a country like the United States. Let's ask the presidential candidates who they listen to. Who are their trusted advisers? How would they go about finding the information they need to make the correct decisions, and what direction to lead us in?

Being President is, most importantly, about being a leader, and getting the country to go in the direction they want us to go. If following the crowd or the most recent poll results was what was important, we'd follow the example of Larry Niven's Puppeteers and name our most important decision-making position "the Hindmost." Let the devil take the Hindmost - the most important thing in a President is a leader. Let's ask the presidential candidates to tell us how they would persuade the country that something very unpopular is nonetheless necessary. Matter of fact, if they're anything like the vast majority of the people out there, they believe in some very unpopular truth. Ask them to pick something they believe in that is unpopular and sell us on that belief. I don't want to vote for anyone that only holds popular opinions. That way lies disaster. If that was a good way to pick a President, we'd all just gather together in one big circle and blow on a weather vane to make our decisions.

Let's take it a step further. Let's ask the presidential candidates to tell us how they would go about the process of persuading the country that something they personally find morally repugnant is nonetheless necessary. Give them a short list of topics from various areas - foreign policy, economics, law - and let each of them choose one that they specifically find repugnant and sell us on it. That way nobody can make hay on the issue without leaving themselves open. But how can we expect someone to lead the country if they can't even lead themselves?

All of this prospects for two very important other qualities that are in extremely short supply in our political classes: rational thought, and the ability to respect the opposing point of view while nonetheless persuading them that your viewpoint has merit. It's very easy to accuse someone of being evil for disagreeing with you, but it accomplishes nothing. Our modern short attention span theater of politics does not encourage either quality - but they are the very qualities we need in a President.

This stuff gets tougher and tougher, I know. But we don't spend two years to pick our most important decision maker so they can avoid solving problems. We don't spend billions of dollars in campaign contributions to pick the President because the job is easy or trivial. And some people might vote for the most popular kid in school like they did for class president, but we don't need to spend thousands of hours of broadcast time to find out who's the most popular. We spend all those resources to pick the best leader who is going to make the best decisions for us as a country.

UPDATE and clarification: Yes, someone who believes in creationism is a moron - on one specific topic and those decisions relating to it. My point is that the major presidential decisions having to do with that topic and related items are few. Bush 43 has actually had one (stem cells). Clinton didn't, nor Bush 41, nor Reagan. But I and the country can cope with a candidate who's a moron on this one fairly narrow issue a lot better than we can cope with someone who's a moron on the subject of economics, or practical applied psychology, or any of a dozen areas that are central to the major decisions a president is expected to make on a continuing basis, and on which the vast majority of the candidates out there have convinced any rational observer that they are morons.

To riff on Monty Python's famous spam sketch, we can have eggs, moron, bacon, normal, normal, normal and normal, where there's not much moron in it, but it does not appear that we have an option where there's "no moron at all."

Market Resilience

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Most Resilient U.S. Real Estate Markets

Market corrections follow three basic recovery patterns. A V-shaped recovery where a market experiences a sharp, fast decline but comes out strong once it hits bottom; a U-shaped recovery, where prices decline gradually and recover slowly; and an L-shaped curve, a hard, fast fall with paltry price bounceback following the market trough.

The differences between a V-shaped market and a U-shaped one has to do with barriers to growth. High vacancy rates and high investor share can hurt a market, but if the local economy remains strong and housing stock affordable it's only a matter of how long it takes to absorb the excess inventory.

San Diego is portrayed as a V shaped market, albeit one whose recovery is dependent upon external factors. However, the fact that there just isn't anywhere new to build is going to be a major factor, as is the desirability of living in San Diego.

Those who wait for confirmation of market bottom are likely to completely miss out on the best bargains. It wasn't until prices had been decreasing for almost a year that official statistics admitted it. October 2005 is generally seen as having been the top, but the statistics confirming this didn't emerge until July or August of 2006.

This isn't any double-talk. I ran an article just a few days ago telling people that it's a rotten time to sell. Inventory is high, and there aren't a lot of buyers who have come off the sidelines yet. But this precise combination of factors is what makes right now one of the best times possible to buy. But it's not going to last forever. The seller to buyer ratio is nearly twenty percent lower than it was last year at this time (32 versus 39). It's getting harder to find the very best bargains. Stuff that's beautiful is selling, but properties that aren't reach out and grab you beautiful are sitting on the market. Great if you can afford to fix it. Not so hot if you can't. On the other hand, if you're willing to be the one to deal with a few minor cosmetic issues, this is a great time to end up with a great bargain. Particularly if you've got a few thousand in your pocket to redecorate once you've bought, now is a great time to be finding those properties where $10,000 in easy stuff like carpets and paint can add $100,000 in value. Whether you then want to live in it for ever and ever or simply take your profits and run, that's not at all a bad situation to be in.

San Diego is a resilient market, and I'm seeing a huge number of people who want to buy but are "waiting for the market to hit bottom." When you've got a situation like that, as soon as those people see some indication that things have turned, they're likely to come swarming, thereby boosting demand and depleting inventory (i.e. supply) over a very short period of time. I haven't been among those thinking San Diego is likely to see any kind of a double digit gain any time soon, but the longer it takes to start getting people off the sidelines, the more demand will build, and the stronger the turn will be. I still don't think we're likely to see double digit gains in the next couple of years, but I'm starting to see evidence that I could be wrong about that. I predicted losing thirty percent of peak value, and we're at about 25% off peak right now. The number of bad loans could make the housing bear run a little bit further, but there's also a large amount of pent up demand, in the form of people who are eager, willing, and able to buy a home, but are only "waiting for the right time". Based upon purely anecdotal evidence, I think we're at the point where the latter significantly outnumber the former. If you're one of those on the sidelines waiting for the right time, I'd be very careful not to be late onto the field.

Caveat Emptor

Precis: Still an excellent good time to buy and a poor time to sell. Matter of fact, don't put the property on the market if you've got a reasonable alternative. If you're looking to buy, though, you're not likely to find a better time soon.

The hard fact is that there's a lot of inventory, and most owners have priced their property over the market. There's an awful lot of agents out there that "buy" listings by telling owners they can get more than the property is worth. There are comparatively few buyers out there, and there are 32.6 sellers for every one of them. I hope those readers who aren't hetero bear with us, but imagine you're at a dance where one sex outnumbers the other thirty to one. Those few members of the outnumbered sex can be incredibly picky, while the multitudes of the outnumbering sex are going to have to do a lot to compete with their thirty plus rivals.

Real estate isn't a dance of course. For one thing, in the real world boys can dance with boys and girls can dance with girls, at least if they're so inclined. But in real estate, two sellers can't really dance - it doesn't do them any good. In the real world, you have the ability to leave this dance and go find another one. In real estate, you can't do that. The property is where it is. You can leave the dance and go home, but there's only one dance to go to.

For sellers, you can either do what is necessary to out-compete the other sellers for the buyer's attention, or you can decide it's not that important to sell. If you take the latter option, get your property off the market. If you want to sell, look at what properties like yours are actually selling for. For most, it's thousands to tens of thousands less than asking price. Properties that are correctly priced are selling, while properties that are overpriced aren't. If you need to sell, it doesn't do any good to price it too high. If you don't need to sell, and I mean need to sell, then why is your property on the market? If you do need to sell, you might as well list it for what it's going to sell for and get it done, because until you're ready to accept an appropriate offer, it's going to sit unsold, which costs you money. You can have $X now, or you can have $X three months from now, after you've spent another $10,000 on taxes and mortgage. Your choice. $X plus thirty thousand is not on the list of options.

For buyers, the pickings are still very rich, if not quite as good as they were earlier in the year. Where earlier in the year you could take all the time you wanted to think it over, no matter how good the bargain was, I've had three properties go "Pending" on interested buyers in the last month. People are out there, looking for bargains. Properties that are priced appropriately are selling.

One thing that distresses me is what a large proportion of Vampire properties are out there, and what some of them are selling for. There was a Vampire some clients of mind got interested in because it had a large lot, four bedrooms and a pool. However, it also had foundation, structure, and settling issues. I talked my clients out of it, but somebody else paid essentially full price despite the fact that the foundation is cracked through and the structure is settling unevenly. Spotting Vampires is one of the areas where a good buyer's agent earns every penny they make - in this instance, my clients aren't going to have to find thirty or forty thousand to fix the foundation and another twenty plus for the structure. It seems like the proportion of Vampire is increasing, also. People are trying to unload their problem properties rather than fixing them correctly - and other people are buying them. It's one thing if it's disclosed and everybody is negotiating on the same page. It's something else again if the sellers are trying to pretend those problems don't exist, or even worse, trying to hide them. If you try and hide it, I guarantee it will come back to haunt you - it's not like those buyers are going to say, "Oh, well, we're just out fifty thousand dollars!" Not that winning the lawsuit is going to be any comfort to those buyers in the meantime, but the sellers can pretty much count on having to make it good.

I've saved the most important recent development for last. Rates on loans, particularly thirty year fixed rate loans, are up. A month ago, I could get 5.875% on a thirty year fixed for one point retail. The equivalent rate today is 6.50 percent. So if someone qualified for a payment of $2500 then, they could afford a loan for $422,500, while at today's rates the equivalent loan is only $395,500 - more than a six percent drop. Now I'm neglecting other factors in the equation, but the point is this: Unless rates go back down, they're exerting downwards pressure on prices. With the trade deficit, budget deficit, and microscopic US Savings rate, I don't expect rates to fall, nor does the federal reserve. In the longer term, prices will continue to rise, but in the short term, together with the huge glut of inventory on the market and the high ratio of sellers to buyers, we may see further price drops until this inventory clears. If you don't need to sell right now, no biggie. But if you do, it's even more reason to price the property correctly and get it sold now, because the odds are that the prices will be at least a little lower in the next few months.

Some people are going to read that and think, "We'll wait to buy until prices have bottomed out!" This is an excellent way to miss the buying opportunity we have now. How will you know that prices have bottomed out? The answer is, "When prices start rising again," but if you wait until then, there's a reason why prices will be rising again. The excess inventory will have cleared, there will be a lower ratio of sellers to buyers, and in general, things will be much better for sellers than they are now, while not being as good for buyers. There is also a tremendous pent up demand out there, people who want to buy houses but figure they'll be better waiting. When those folks finally decide to come off the sidelines, as they will when government starts reporting housing prices increasing again, watch out for another year like 2003 where prices go crazy because everybody wants to buy and nobody wants to sell. But in order to cash in on it, you have to have bought previously.

Caveat Emptor

Have a "looking for cheap" attitude, especially on services meant to protect you.

It's great to have a "looking for value" attitude. If I cost more than someone else, it is in your best interest to ask why, and ask me to justify what I make in terms of value provided to you. I don't resent people that are looking for value. If I can't show them something they agree is more valuable to them, then I can't blame them for going with the person who offers the same exact thing cheaper, and truthfully, I'm probably not the agent they should use. There's plenty of room for all levels of service in the industry.

But to have the attitude that "cheaper is better" presupposes that there is only one possible level of service, and therefore, anyone who provides it any cheaper must therefore be a better value. This is preposterous. I just finished a transaction where my brokerage made about $7000 grand total for the purchase of a condominium and the associated loan. Somebody else might have rebated close to half of the buyer's agency commission - but somebody else didn't get my client a condo for $75,000 less than a model match in the same complex that sold six weeks previous - over a 25% difference in price. Furthermore, that's the grand total. That's not what I get to put in my personal bank account. That's got to pay office rent and electricity and all the costs of staying in business for the brokerage. Once I get my share, I've got to pay taxes and mileage and licensing and continuing education and all the costs I have as an individual of staying in business.

You may get the idea that what's left over isn't as much as most people assume it is. Now you know why discounters cannot afford to provide the same level of service a full service agent can. There are full service agents out there providing discounter service for full pay, but there are no agents providing full service benefits for discounter pay. Even if they were doing twenty transactions per month per agent, they simply aren't making enough to stay in business by doing it that way.

Now, because you're working with an agent who doesn't have the time to do the same due diligence (and may not have the expertise), you're either going to deal with it yourself or hope that the other side of the transaction isn't intending to do anything unethical. Even if they're not intending to do anything, that doesn't mean that nothing will have happened on its own. Sometimes, it really is nobody's fault. I'm working on one now where the septic tank failed the inspection and the inspector said it needs to be replaced. The seller is out roughly $20,000 in order to be able to sell the property. It was fine a few months ago, but isn't now. Nobody's going to buy the property if they can't flush their toilets, so this needs to get taken care of. If I hadn't done my full due diligence, my clients would have had a nasty surprise.

It's not just agents. Appraisers and inspectors are two allied professions where spending just not quite enough can mean they missed what you were paying them to find. Or the appraiser charges you $50 less, but takes three weeks to get it done, during which time you're out four tenths of a point in lock extension fees. On a smallish $200,000 loan, that's $800.

This also applies to loans. It's trivial - and legal - to low ball people who want to know what sort of loan they're likely to get. Are they willing to guarantee their quote? Or are they just getting into the spirit of a game of what amounts to liar's poker where the only way to call the bluff is wait until the end of the process, thirty days out? In such a situation, there's no real reason not to say you've got, "Ten nines," but nobody really has ten nines - I just looked and serial numbers are only eight digits long. But if there's no proof until thirty days out, what happens when they deliver a loan that's pair of ones? I'll tell you: Most people are still going to sign those loan documents. I've gone over how much lenders can legally low-ball quotes in the past. If they can't deliver their quote, they can't deliver it, and it gets you no benefit. I get people hitting the site every day asking questions that indicate to me that their lender presented them with an entirely different loan than they initially told them about to get them to sign up. Consequences to the lender: Zero. Consequence to the borrower: Now you have a choice between signing the documents for this loan, or doing without. Chances are that you're going to sign their papers anyway, which means that lender will be rewarded for lying to get you signed up, and the attitude of "looking for cheap" is what did it to you. I've dealt with any number of people who metaphorically plugged their ears and refused to listen to the downsides of the negative amortization loan. It doesn't change the fact that there are downsides, or how bad they are. It just means you don't know about them. But they sure do have that low payment (for a little while, at least!)

In real estate, breaking the law is only the second best way to create problems for yourself. Since in the current environment, you can count on law breaking being discovered, that should tell you how bad looking for cheap is.

Caveat Emptor

Article updated here

Carnival of Money Stories

Consumer Oriented Real Estate



hits another one out of the park - this time on a compare and contrast between immigration and other criminals.


When my husband and I bought our home 2.5 years ago (two bedroom condo) we qualified for the loan ($250,000) based on both our incomes. Then I had a baby and stopped working. We've never missed a payment or even been late, and we're getting by just fine by being frugal. However, our loan is a 5/1 ARM, and I'm skeptical of our ability to pay the adjustable rates once our fixed years are over. Our original plan (when we got the loan) was to
see about refinancing at the end of those five years. (Five years worked well for us because my husband was still in school and we knew we'd be here about that long, if not longer.) However, now that we no longer have
my income, all the mortgage calculators online are telling us that we can afford a loan of just about half the value of our home. What do we do in a situation like this? Is it possible to do anything other than sell our home once our five years are up?

A few other (maybe) pertinent details: currently we're paying interest only on our first mortgage (4.75%) and a principal and interest payment on our second mortgage (8.75%) Our home has gone up in value since we bought it, and we've made some improvements as well. Likely selling price right now (based on comparable properties that just sold in our area) is $325,000 to $340,000.

What do you think?

The first thing I want to ask someone in this situation is "How long do you have until reset?" The second would be, "Are you going to be able to afford the payments when it hits reset?" These two answers I'm fairly certain of, looking at the information provided. The third would be "Do you intend to change something about the situation before that time?" and "What's your market trends?" would be the fourth. In San Diego, I know the answer to four, but three is a guess, and you're not in San Diego or close to it.

You have the loan. It is already funded. You have lived up to all the qualifications you agreed to in order to get it funded. You don't have to do anything other than make the payments in order to keep this loan. If this were a 30 year fixed fully amortizing loan that you were already making the payments on, there would be no reason for you to do anything, because I certainly can't beat that rate today. Nobody can. If you have already got the loan and you can afford it indefinitely, you don't have a problem.

Unfortunately, that's not the case here. You're fine for now, but not forever. You have a known time approaching at which point you will be unable to make your payments. To make matters worse, there's no way to get that good of a rate now and it's not likely that there will be before your initial fixed period expires. That's the worst news.

The mildly bad news is that you're not paying your balance down much. Assuming you're not paying anything extra, you're not going to pay that $200,000 interest only first down by anything, and you've only paid the $50,000 second down by about $1000 now, and you'll only pay it down to about $47,800 by the end of the fifth year.

The mildly good news is that you've got 2.5 years left to do something with. You could go back to work, and if you do so now, you'll have two years continuous same line of work before the 5 years are up. Assuming you make as much as you used to, you should be able to afford the property.

This 2 1/2 years is time on your side. I keep telling folks time makes a great ally or a horrible enemy, but it's never neutral. Right now, it's on your side - giving you time to do something to change the situation. Once the adjustment hits, or even gets close, time will become your enemy. Don't waste time, but right now it is on your side.

The really good news is that your market has gone up, and you have a good amount of equity. This is about as surprising as gravity, but it is still good news. You're under 80% loan to value ratio if the numbers you gave me are valid. I wouldn't touch your loan right now, if I were you, but if you were in a sub-prime situation to start with, chances are good that you'd be A paper by now. You've got a 5/1 A paper loan with plenty of the initial fixed period left - but there's a lot of folks out there with 2/28 C paper. Especially if your adjustment had already hit, moving from 8% adjustable to a 6.5% thirty year fixed A paper without points (as of when I'm writing this) makes a lot of sense. Even if you don't want to sell o refinance now, know that that kind of equity means you've got some breathing room if you've got to have it.

The bad news is that if you sell, you're going to sacrifice some of that equity. It costs money to sell property. Assuming yours sells for $325,000, you'd probably only net roughly $299,000, of which your loans would eat $249,000, leaving you with $50,000 in your pocket. Right now, a lot of places are in a world of hurt for trying to sell, so your could be out more than that and still have to take a lower price in order to get it sold. If your condo was in San Diego, for instance, you'd be doing extremely well to net $35,000 from an actual sale right now, even if your condo really was worth $340,000. The condo market is just saturated with conversions. I think this will change soon enough to surprise a lot of people, but I don't know for sure.

Let's assume that you don't intend to return to work. If your loan was adjusting any time in the next year, it would be time to sell. However, you've got some time. If your market doesn't look like it's in danger of collapse, I'd probably wait. I don't know about where you are, but here in San Diego, I'd bet the market is going to be better for sellers next year than it is now. Most likely, more than enough better to justify waiting. If your market is just peaking, however, you've got a real issue, and you might want to get out now before you've lost all of your lovely equity.

One final possibility is planning to wait and refinance, doing the loan "stated income", telling the lender that you make more money than you do. This is dangerous. Quite aside from the fact that you are intentionally defeating one of the most important safeguards for your protection as well as the bank's, this is not what stated income was intended for, and you need to be careful that you're actually going to be able to make the payments without going backwards (in other words, no negative amortization). Better would be a fully amortized loan, but since you're already in the property, interest only is acceptable. If the situation is at least stable, why incur the costs of selling while the property meets your needs? However, at this point we do not know what the rates will be two and a half years from now. I don't know what the maximum rate you could afford is. I think 5/1 loans are going to stay about where they are now, in the low 6s. Can you afford even an "interest only" payment on a 6% loan ($1250/month on $250,000), which is roughly 1/3 more than you're paying now? 6.5%? 7%

This isn't a situation that can be tackled using only numbers, but the situation is not likely to be sustainable as it sits. You do have some choices on the table. The three most obvious are that you can go back to work, your husband can start making more money, or you can start making plans to sell the property. Any of them beat the default option, which is "do nothing and let the situation ambush us when time is up." And if you decide it's likely you'll be able to afford to refinance, keep an eye on rates. I think 30 year fixed rate loans are going up to the low 7s, but that's just a projection of where I think the capital markets and our economy are going. I could be very wrong. There is a point at which you will be unable to afford your property. If rates hit that point, your choices become basically, "Start the sales process now or wait?"

Caveat Emptor

UPDATED article here

Carnival of Capitalists


Jury indicts Jefferson in bribery probe. More here: Officials say Louisiana congressman is being indicted

He was re-elected after the FBI found $90,000 wrapped in tinfoil in his freezer. He was using his congressional offices to shelter evidence against him from the FBI, resulting in a big stink when the FBI got a warrant from a judge and raided the offices, and found the evidence, and still he was re-elected. He diverted Army and National Guard resources for personal use during the aftermath of Katrina, and still he got re-elected, documented on 60 Minutes for crying out loud.

He's a Democrat, but it wouldn't matter if he were Republican, Libertarian, Reform, or anything else. This is evidence of a broken system, when somebody this bent can nonetheless get re-elected.


A Bad Day In Africa (Short video)

I'm pretty sure most of us have had days where it seemed like that tree appeared out of nowhere at the last possible instant.


Figures don't lie, but Liars Sure do Figure!

With the loan rates being significantly higher than they were a couple of years ago, we've got a lot of people with loans in the low fives, interest rate wise. One of the tricks lenders are using to persuade them to refinance is Weighted Average Cost of Capital, which really does take a page out of corporate finance books, but ignores a lot of details and alternatives.

This was an actual example that someone put online as an argument to refinance:

Current situation:

$350,000 first at 5.25%
$100,000 second at 8.5%
$50,000 consumer debt at 12%

This person then used standard practice to compute a weighted average cost of capital of 6.575, and justify refinancing all of it into a new first at 6.25%. They also assumed a tax bracket of 40%, which is a little higher than most folks pay, even with state tax figured in. Furthermore, it just took for granted the fact that there's enough equity in the property to absorb the full amount of excess debt without PMI. Robert Heinlein introduced me to this kind of attitude in Stranger in a Strange Land, calling it "straining at flies and swallowing camels," which is an apt description of what's going on, which is basically theater.

What's really making the calculation work in favor of refinancing is that $50,000 at 12% without deductibility, and assuming a tax bracket higher than most people are in. Even the top federal bracket is 39.6%, so if you live in a state without income tax (quite a few), the article was overstating any possible current benefit. Furthermore, those states without income taxes tax mortgage loans on the basis of size, some of them pretty steeply. I just got an email from someone in one of those states back east, and for a mortgage under $250,000, the state was charging about $7000 in taxes. That's almost a 3% surcharge on the base mortgage, and if you're going to roll it into the balance, you're likely to be paying points up front. You're also paying interest on it basically forever.

Doing the calculation on the basis of pure interest rate calculation, like the manuals teach (I've got an accounting degree) ignores the costs of consumer loans. For corporate transactions, the costs are built into the the interest rate of the obligations. For consumers, this is not the case. You're going to be paying thousands of dollars for the privilege of refinancing - points and fees, and in many states, taxes. As I've made clear in the past, there is ALWAYS a Tradeoff between Rate and Cost in Real Estate Loans, and the standard WACC computations do not include cost of the loan in whether it's worthwhile, only the rate. This makes it seem like the rate with three or four points is necessarily better than the rate with none, when in reality it's likely to take eight to ten years before the lower rate pays for its cost in terms of interest savings. Most people will never keep a given real estate loan that long in their lives.

Now just for a moment, let's give the author of that article everything they're asking for. In order to be able to absorb this debt without PMI, the property has to be worth $625,000 minimum, plus 125% of whatever fees and prepaids get rolled into the balance.

What this means is that I could, without touching that 5.25% first, refinance that second into a 30/15 at around 7.25%, and still get paid half a point yield spread to do a very easy loan that costs the consumer less than $1000 all told. You see, not only do we get a price break for the bigger equity loan, but because it's only 80% Loan to Value Ratio (actually CLTV), and so we get a price break of

$350,000 at 5.25%, 40% aggregate tax bracket, 70% of the loan, =2.205% contribution from this
$150,000 at 7.25%, 40% aggregate tax bracket (on 2/3) 20% of loan = 0.870% contribution
$150,000 at 7.25% non deductible on 1/3 10% of amount =0.725%
2.205%+0.870%+0.725%=3.8% weighted average cost of capital, which essentially ties the projected 3.75% on 6.25% which is 40% deductible, but the lowered cost more than covers the difference in interest - $250 per year - for ten full years, just based upon the difference in closing costs, never mind points or cost of interest on the increased balance.

So why do loan officers push a full refinance when there are better options? Quite simply, they make a lot more on first mortgages than second, so it's in their best interest to make it seem like refinancing a first is in your best interest, even when it clearly is not. Second mortgages are something I'll do for existing clients, but it's not business I chase because I just can't make enough to make it worthwhile, and chances are that a credit union is going to do about as well as I can. First mortgages, however, are a different matter - and not just for me. The projected first mortgage would make me roughly 7 times what that second does, and my margins are low by comparison with the rest of the industry.

Because of facts like this, you need to know enough to think about alternatives like refinancing a second and leaving a low interest rate first untouched. This is also why you need to talk to more than one potential provider, to increase your chance of getting one of them to give you a better way of doing things.

Caveat Emptor

Article UPDATED here

Every so often, I review the books I've read purely for amusement value. Most of them are science fiction and fantasy, those being my interests..


Flag In Exile, Ashes of Victory, and War of Honor by David Weber, three books in the Honor Harrington series. I was resistant to these for years, but when I finally tried one I was hooked. Modeled after the Horatio Hornblower books.

Interstellar Patrol by Christopher Anvil is a series of short to novella length stories about the Interstellar Patrol. Reads like kind of a cross between Eric Frank Russell and James Schmidt, except that the main characters are all male. The people are resourceful against everything from tremendous odds to situations intentionally stacked against them. Clever and amusingly written.

Dead Beat by Jim Butcher, the seventh novel in the Dresden Files. I highly recommend this entire series, having to do with the adventures of a real Wizard in modern day Chicago. This one has a climactic sequence not to be forgotten, but I can't say anything more without ruining it.

Homeward Bound by Harry Turtledove, the continuation of the World War and Colonization series, this book largely dealing with our first interstellar voyage, to the home world of the Race.

WebMage by Kelly McCullough. The gods as programmers in a "many worlds" story. Amusing. I liked the way it turns some expectations on their heads.

Chernagor Pirates and The Scepter's Return by Harry Turltedove writing as Dan Chernenko. These are the second and third books in a series. The world set-up seems similar in broad to Eddings' Belgariad, but Turtledove's treatment is very different - things go wrong for the protagonists on a regular basis. The second book was kind of marginal, but I actually liked the third better.

Against the Tide by John Ringo is the third in its series. It didn't seem to be afflicted by the magic bullet solution that detracted from its predecessor, the Emerald Sea. The setup is that high technology earth of the millenia different future suddenly has almost all of its power taken away, so the survivors of the crash have to go back to dealing with things on a more primitive level.


The Hidden Family by Charles Stross. Okay, we get into a bit of actual thought here, but too many characters change their minds too easily, or suddenly go against things they have previously done. It detracts from the story.

Ordermaster by L. E. Modessit is the new Recluce novel. I plowed through it but after I was done I couldn't get over how much it was almost the same story he's told before, just with an older protagonist.

The Shadow of Saganami by David Weber is set in the Honor Harrington universe, but deals with the trials of a new generation of Manticoran naval officers. Dragged a bit, and the ending was just a little too much for what the characters had done.

The Excalibur Alternative suffered just a little too much from convenient coincidences and the fact that it has a technological primitive defeating technology far more advanced than our own - which he just doesn't have the tools to beat. Kind of like a different twist on Poul Anderson's "The High Crusade", but I didn't like the execution nearly so well.

The Hero by John Ringo and Michael Z Williamson is in the future of Ringo's Posleen stories. It had some cute ideas and nice development of one of the alien races, but glossed over too much in the way of main points.

Don't Bother:

Bonds of Vengeance by David B. Coe: third in a series, and just takes too long to go where it's going.

Accelerando by Charles Stross. I figured out a few pages in that it was a Jerry Cornelius novel with the serial numbers filed off. I never did finish the second Cornelius novel, but I did finish this. I just don't know why I bothered.

Singularity Sky by Charles Stross. I just couldn't care about the characters - they were all problem personalities of different stripes. Isn't there supposed to be at least one sympathetic character somewhere in a novel?

Freedom and Necessity may have intended to be a Great Novel a la Dickens, but the beginnings of communism is not exactly my idea of a sympathetic plot. When the main characters are struggling to establish an ideology responsible for over 100 million dead, as well as enormous amounts of human misery, ecological damage, etcetera, etcetera, I can't help but hope the Redcoats shoot them all. The fact that there are other dastards out there in this world in no way alleviates this.

Smoke and Shadows by Tanya Huff. The most recent Henry Fitzroy book, and the last I'm planning to read.

Tong Lashing by Peter David is book three of Sir Apropos of Nothing. It's just not funny or amusing any more.

Phule's Errand by Robert Aspirin suffers the same problem.

Alector's Choice by L E Modesitt is the fourth Corus book. Prequels are tough to bring off, because you have to care about what's going on while already knowing the main points of what happened. The author doesn't manage this one.

Traffic: May set new daily traffic records twice: 7279 visits on the 14th, then 7319 on the 16th. It also set a new record for monthly visits: 144,499 visits from just over 41,000 unique visitors. Thank you all for stopping by.

Page views went way up in the last two days of the month. They had been running about 10000 or so, and suddenly skyrocketed to over 20k. To correct a possible misconception, it doesn't help me to run your normal searches here, although you're welcome to do so. But if you're like me, every once in a while you're looking for some commercial good or service. If you come here to run those searches and click on a paid advertiser when you do, I get the occasional ten cents or fifty cents or dollar - and sometimes a little more - off that. This offsets some of the money I spend keeping the site running. (What I really want, of course, is people coming to me for a loan or real estate transaction. Every time someone says they come to me off the website, not needing the advertising it would have taken to get one client in the door has effectively paid the site expenses for a couple months, but if you're not in California for a loan or San Diego for a sale or purchase, that's not going to work.)


Yes! I tested this URL at Great Firewall of China and it was blocked!

I must be doing something right!


Captain's Quarters on Venezuela and our greatest weapon in the war against tyranny: The truth.


via Instapundit, Indoctrinate U

Note: This article has been updated to more accurately reflect changes in the market since originally written. The update is here

I've been looking around for an answer to this but my searches haven't returned anything useful.

Say you buy a house and with that house you finance in a pool. House was $210,000 and pool is $40k. $250k mortgage. Okay, so two years later (the average!) you decided to refinance. Especially since you didn't get a good deal in the first place because you wanted a new house and to get the incentive you decided it was okay to finance with the company the builder tells you to finance with. Anyway, in those two years the housing market slumps a bit but for the most part after that time your house doesn't loose value. At the same time, the pool does not add value to your house. Comps in the area put your house at $220,000 but you still owe $245k. Is it possible to refinance? Was all the refinance hype only because the markets kept going up? Is this the reason why people who got an bad loan, maybe thinking they could refinance, are going to loose their house because no one will refi a house that isn't worth more than it was when you bought it?

No, the refinancing craze was only partially because values kept going up. Rates kept going down as well. What this combination meant was that not only were better rates coming along all of the time, but that people who were stretching to the utter limit for 100% financing could refinance into more favorable loans as their equity picture improved. If you bought for $180,000, and comparable properties are selling for $360,000 now, that's 50% equity even if you didn't have a down payment. So people who bought for $180,000 were refinancing into single loans without PMI once values hit $225,000. Let's use today's A paper as a comparison. Instead of a first for $144,000 at 6.25% and a second for $36,000 at 9%, with payments of $886.64 and $289.67, even if the rates are absolutely the same and you refinance after 18 months for the $177,000 you owe (paying closing costs out of pocket), when your appraisal says $225,000, that's one loan at 6.25%, with a payment of $1089.82. This cuts $86.49 off the monthly payment, which is how most people think, and cuts your monthly cost of interest by $81, which is how smarter people think. It probably isn't worth refinancing at anything like par for such relatively small savings, but rates were dropping at the same time. This led a lot of unethical agents and loan officers to lead a lot of clients down the primrose path by saying things like "real estate always increases in value," and "You can hold on for a year, right? You'll have equity and we'll be able to refinance you." Lots of folks have a tendency to assume trends of the moment are going to continue.

For the last two years, rates have been slowly climbing. People don't like refinancing when it will raise their rates, and quite often, they can't afford to refinance, even if they have to, if the payment is going to go up. This has caused many lenders to get desperate, and is certainly one of the reasons for the way the negative amortization loan has been pushed. Loan Officers don't get paid unless they are originating new loans this month, and negative amortization loans look wonderful on the surface, when all you know about is the minimum payment. (I'm also working on a post debunking the Weighted Average Cost of Capital scam some lenders are also using to persuade people to refinance out of low rates into high ones).

Furthermore, values have been declining, at least here local to me and in most other major urban areas. The problems this creates are far deeper than the benefits that arise when prices are rising rapidly. When the loans total $500,000 and the property is only worth $420,000, that's a problem. That's a real problem. Lenders do not want to lend more than a property is worth. The highest financing regularly available is 100% of value. The situation I have just illustrated is a 120% financing situation. On a straight refinance, that's not going to happen. Period.

Now before anyone goes too far off the deep end, being upside down is no problem at all if you don't need to sell or refinance. You just keep making the payments and everything is fine. It may be possible that real estate won't eventually return to the pattern of appreciation we've come to expect these last hundred odd years, but that's not the way the smart money is betting. I think that we're going to stabilize very soon and may even start seeing small amounts of appreciation. I was upside down myself for a little while after I bought in 1991. It was no big deal. I just kept making those payments, and the prices came back. By the time I had a reason to refinance, I was back at 80% loan to value. For those people who have sustainable loans, being upside-down is a non-event.

Where it becomes a serious problem is when you've got a non-sustainable loan. Whether it's negative amortization, or something somewhat less hazardous to your financial future such as a 2/28 or something short term interest only, you're looking at a time when refinancing is going to be pretty much mandatory. If you could have afforded the payment it's going to adjust to, you could have had a sustainable loan. But people have a tendency to stretch too far and buy more of a property than they can really afford.

There are some options and potential options if you need to refinance while you're upside down. The one involving the least amount of mental effort is to come up with the difference in cash. Most people don't want to do this even if they have it, but it's an option. Actually, it's a pretty good option.

There second option for refinancing is a 125% equity loan piggybacked onto an 80% first loan. The problem is that the terms on these are ugly. It's not likely to cut your interest rate or your payment, and they are all full recourse loans, where purchase money loans are mostly non-recourse. This won't work for a lot of people, not the least of the reasons for which is that the lenders that were offering these when prices were increasing rapidly have largely withdrawn them from the market now that prices have been decreasing. I can't remember the last time I had a wholesaler offer me one. Still, if you're in trouble it can be on option worth asking your current lender about. If you can't make your payment now and go into default, they lose money. If you can afford the payments on the 80/125 combo loan, and don't go into default, they won't lose money, not to mention they potentially move you from a non-recourse purchase money loan to a full recourse refinance.

In some circumstances, it is conceivable if highly unlikely that the holder of a second trust deed may agree to subordinate their loan to a new first. They're not going to agree if your payment or the loan amount on the new first increases, so you're going to have to pay all closing costs out of pocket. The amount on the new first is also obviously going to be above 80% of value, so you're likely to have PMI on it, but if it gets you from a 2/28 that's adjusted to 9% to a 30 year fixed at 7, it's probably worth doing. If the second goes from sitting behind a $410,000 first at 9% to sitting behind a $410,000 thirty year fixed at 7%, it has become more likely that second loan is going to be repaid in full, where if you default on the first trust deed that second is likely to be completely wiped out. Obviously, the holder of the second would rather not do this - they'd rather be refinanced out of their losing position. But nobody is going to come along and rescue them from their bad decision making if the property is only worth $420,000 and you owe $495,000. If you need to refinance your first in order not to lose the property, the holder of the second can either agree to subordinate, step up to the line themselves and be on the hook for the full amount, or be wiped out completely when the first forecloses.

The next option is the worst of all possible worlds: default and foreclosure. This is something you want to avoid if there's any way around it. Slightly better is a Deed in Lieu of Foreclosure, where you sign the title of the property over to the lender. Lenders may or may not allow this if you're upside down, though. Typically, they want to have at least a little bit of theoretical equity in order to agree to a Deed in Lieu. On the other hand, if they avoid the money that the whole default and foreclosure process costs, they may agree. A Deed in Lieu does hit your ability to get a future real estate loan, although it's not nearly so bad of a hit to that or your general credit as a foreclosure, particularly if you can see it coming and take action before you have a spate of late payments. Most folks won't.

Finally, if you need to refinance and can't, you can get yourself a good listing agent and execute a sale subject to a short payoff. This has potential consequences for your financial situation that start at 1099 love notes and might include a deficiency judgment. This is definitely not something to try "For Sale By Owner" or even with a discount listing agent. You're going to need an on the ball full service agent in order to make it happen, because the lender isn't going to listen to you as the owner, and a discounter is unlikely to be willing and able to devote the time necessary to get the lender to approve it. The big advantage to this is that it doesn't hit your credit nearly so badly as a foreclosure or Deed in Lieu, and if you want another real estate loan sometime in the next decade, you would probably rather do a short sale than go through foreclosure.

None of these situations where you need to refinance a mortgage you can no longer afford, but owe more than the property is worth, is a good situation to be in. But if you take action before you've got late payments or a notice of default, let alone a notice of trustee's sale, you can get away surprisingly little damaged. The worst thing that can happen, will happen if you don't do something to fix an untenable situation before it gets that far.

UPDATE: You may want to consider reading my new article on Mortgage Loan Modification

Caveat Emptor

Article UPDATED here

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