July 2007 Archives

Calif. plan could sway 2008 race

I like it, and not just as someone who tends to vote more for the elephants. I think it would be equally good in right leaning Texas, the second largest number of electoral votes.

Because California hasn't voted Republican since 1984 (When Reagan, who was a former governor, won 49 states), we're basically ignored in the national elections. With the preponderance of people who'd pull the lever for the Democratic candidate even if they ran Pol Pot against Mohandas Gandhi on the Republican side, California as a whole is just not in play. Typically, the networks are calling California for the Donkeys within seconds of the polls closing, making it a waste for Republicans to campaign here and pointless for the Democrats, so neither party pays any attention to the state with the most voters. This would change that, and make it worthwhile and necessary for candidates to campaign here - and it might just cause them to modify their platform a bit, to try and win the toss-up districts. 20 electoral votes is over 7 percent of the number needed to win.

In short, this appears to be in the interests of the people of California, never mind one party or the other.


First the bridge to nowhere. Now the FBI has searched Senator Stevens' home for evidence of corruption. Amazingly, it took them until the sixth paragraph to mention that he's Republican.


Victor Davis Hanson has some perspective we should remember.


Wizbang on how not to fix health care


Captain's Quarters on the Washington Post's measurement of which party is really more partisan? (in the 110th congress)


Volokh Conspiracy on short-sightedness in the confirmation of judges.


"Spacial Profiling" over at Scrappleface. As a Space Cadet myself, I resent this and demand that law enforcement everywhere put an end to this vile practice!

And yes, I'm kidding, albeit not with Mr. Ott's brilliance.


In case you didn't know: 'Cool' Icon Che Guevara Was a Murderous Thug

I've been having a severe and ongoing problem with spammers "spoofing" my domains - sending out emails with false headers that suggest I sent it out. This morning, the catch all account was literally full of "returned" emails. I can't think of any way to stop someone from counterfeiting your domain in a "from" address (as it doesn't come from or go through anywhere I actually control or even have influence), but if someone knows of such a method, it would be welcome knowledge.

I suspect this may be a part of the reason my search engine hits are down. Wonder if anyone has ever sued a spam meister or their ISP for the tort of having caused search engine rankings to decrease? It's obviously something of economic value.


Let the Blame Begin

I don't have much sympathy for Wall Street investment houses that failed to do as much due diligence as the average individual investor. It's an inflexible rule that while derivatives can make more money, they can also lose more. This calls for increased due diligence, not reduced.

Before you volunteer to hold the bag, as these folks did, make certain there's something there worth holding it for.


Scientific evidence for monster fish tales. Now every frustrated fisherman will have evidence to back up their claim about the one that got away


Clinton campaign insulted by cleavage article

Is it just me, or does this read like Hillary is using her cleavage for cash?


Romney Says no to You Tube debate

And there was much rejoicing.


Lose so that we can win!, over at Classical Values


A couple of spoof trailers, for Mary Poppins and The Shining, respectively.

Study: Renewable Energy Not Green

Building enough wind farms, damming adequate number of rivers and growing sufficient biomass to produce ample kilowatts to make a difference in meeting global energy demands would involve a huge invasion of nature, according to Jesse Ausubel, a researcher at the Rockefeller University in New York.

Disputed, of course. I'm amazed there was a grant given in the first place, how politically untouchable this subject is.

However, let's get real. The land, materials and other resources for renewable energy do not come out of some hysperspatial vortex.


Oscar the cat predicts patients' deaths

Is he merely making a prediction, or the actual cause?


Hidden City Found Beneath Alexandria


In Venezuela, Speak No Ill of Hugo

Is there anybody here who still thinks he's some kind of champion of the poor, as opposed to a false-populist demogogue? I feel absolutely safe in predicting he'll preside over mass murder at some point before he leaves power. The only thing that'll stop it is if his death happens first.


"It was only a matter of time" department: FTC exploited in phishing scam. Looks like trojan horses, too.

Lois Greisman, associate director of the FTC's division of marketing practices, said, "We are the agency that brought you the Do Not Call Registry and CAN-SPAM," she said, referring to a 2003 law restricting commercial spam. "We're not likely to send out unsolicited e-mails."


Democrats request perjury probe of Gonzales

It was political grandstanding on both parts. But it appears as if Gonzales may have committed perjury, under circumstances similar to Bill Clinton.

I wonder how many Donkeys who voted to acquit Clinton will vote to convict Gonzales? And how many Elephants who voted to convict Clinton will vote to acquit Gonzales?

A pox upon both their houses.


Unacceptable in any circumstances: Judge: FBI helped frame 4 men for murder

I'd be in favor of repealing statutes of limitations on law enforcement malfeasance. It's time to hold these clowns responsible, and rarely does the evidence come to light quickly, or even within a few years.

Law enforcement is given special powers possessed by no other citizens. When abused, the damage to our society is magnified, and the penalties should be more harsh.

A high percentage of buyers out there have no idea of how qualified they really are themselves. They have no clue as to any of the major factors in determining credit-worthiness. To be fair, there are dozens, if not hundreds, of little details that can kill a loan dead. This is one of the significant advantages to dealing with a loan brokerage instead of a direct lender, because if a loan killing detail strikes, a brokerage doesn't have to start all over from square one. Pretty much all the paperwork is still usable, I just have to submit it to a new lender that can do the loan. But so long as a very few things about the buyer's situation are acceptable, I'm confident that a loan can be done.

Nonetheless, with a large minority of clueless loan officers out there, and still others who will keep stringing people along as long as they can, hoping to get an approval that's just not going to happen, sellers are understandably concerned. It costs serious money to carry a property, and an unqualified buyer stringing a seller out for three months before the transaction falls apart usually runs into five figures. That's what sellers are potentially looking at when they sign a purchase contract. RESPA strictly prohibits the practice of steering, while many listing agents have absolutely no clue as to whether the buyer making the offer can possibly qualify for the necessary loan. A significant number of listing agents violate RESPA anyway by requiring the buyers deal with a given loan provider. The way it was explained to me, even asking a buyer to get qualified with a specific provider and no other obligation counts as steering. Even as a buyer's agent, I can't so much as hint that there's any obligation to do the loan with me - all I can do is offer better terms. Carrots only, never sticks.

The correct way to handle it, of course, is with agreements for deposit forfeiture in certain circumstances. I don't list a lot of properties, and I'm certainly not going to point out something that isn't in my client's best possible interest when I'm agenting for a buyer. I'll tell the listing agent that something seems like steering, and is therefore unacceptable, but I'm not about to suggest terms that could result in my client losing their deposit.

Some agents go overboard with deposit forfeiture provisions, and in a buyer's market like we have locally right now, being too aggressive with those is a good way to lose potential buyers. People are stupid enough to sign up for negative amortization loan that wastes thousands of dollars per year for precisely this reason - they understand money in terms of cash and payments. That deposit is cash, cash they usually spent a significant period of their life setting aside out of earnings. They understandably have a problem with potentially losing it. Even affluent and well qualified buyers may not want to accept the risks, which in a market like this is a good way to miss out on the best buyers, if not upon selling the property entirely.

There's no way to know whether a loan is going to fund until it does. Pre-approval means nothing. In fact, lenders can pull funding back until documents are recorded. There is no guarantee that anyone except an underwriter can make that a loan will fund. Nobody can guarantee a loan except a loan underwriter. Period.

On the other hand, there is a compromise solution. You can't find out if the loan officer is a bozo except after the fact, but you can find out if there's no way in heck that loan can be done. The borrower information you need to know is: Approximate Credit Score (FICO), How much they make, What their other monthly payments total, and whether they have any derogatory notations in the last two years, most notably payments 30 days late or more. You already know what the purchase price and down payment are. With this information, a decent brokerage loan officer should be able to tell if a loan is possible. If the other side is doing a stated income loan, job title can substitute for actual income information. Within a twenty point band is close enough on the FICO score (e.g. 660 to 680), with differences in higher credit scores mattering less. There really isn't a whole lot of difference, even today, between a 721 and an 800, for purposes of whether they'll qualify. There isn't that much difference between 681 and 719. Below 500, of course, regulated lenders can't do business and we're talking hard money only. But the loan market changes over time. If you're not a loan officer dealing with twenty lenders or more, you're going to have some real issues keeping on top of it yourself. Yes, this is privacy act information, but let's consider this: That property owner is risking an amount that's likely to run into five figures when they sign a purchase contract, because that's how much they're likely to be out if the buyer can't perform. It's reasonable to agree to give them a certain amount of information. For instance, a copy of the credit report with social security and account numbers blacked out. W2s or 1099s with anything sensitive that the seller doesn't need to know removed. Bank statements, ditto. The buyers and their agents can combine to make a copy, remove sensitive information sellers don't need, and then give the sellers a copy of the copy. It is to be admitted that many credit providers are prohibiting this now, because they want to sell another copy of that credit report to the buyers, but methods exist to satisfy them.

I realize that these loan officers want something for their trouble, which is one of the two reasons why steering happens (kickbacks, even more illegal, being the other). Steering is nonetheless illegal. An agent whose counter my clients walked away from a few days ago got really defensive about it, but getting defensive doesn't change the fact that you are violating the law by asking the clients to so much as contact any one specific loan provider. If my clients had wanted to go through the hassle, they could have cost that clown his license. Most people don't want to go through the hassle, but all it takes is one who is.

If you know these very few pieces of information, you can figure out things like debt to income ratio and loan to value ratio. You can know if a loan is going to be able to be done. If the buyer chooses a bozo of a loan officer, that's their prerogative, however unfortunate it may be for you. It doesn't change the fact that they could have qualified, which is all any loan officer can really tell you anyway. Matter of fact, a large proportion of the loan officers that agents try to steer towards are bozos. I recently had one agent try to steer my client to a loan provider who had blown a trivially easy loan for a previous client, who would likely have cleared $100,000 profit after fixing the property up, but instead ended up losing his deposit. I get angry about things like that. As I wrote earlier, just because the buyer is my client for the purchase doesn't mean I can force them to do the loan with me. If I can't force them to do the loan - or even put in an application - with me, what gives some lazy (expletive) of a listing agent the idea that they can? Especially when they don't owe the buyer fiduciary duty and I do? Only in as hard a seller's market as we had a couple of years ago is there any prayer of getting your way in that. Buyers with a competent agent now are either going to walk, or use the fact that you violated RESPA as leverage against you. Whichever it is, you've violated your fiduciary duty to your client.

Caveat Emptor

Article UPDATED here

I went home last night intending to schedule a post for this morning. Only my home internet was down. I tried piggybacking on the public library's wireless with my laptop, and they were down as well. It was still down this morning. So that's why there wasn't a post this morning at the usual time. There will be one tomorrow.

Next week, my wife is going to be out of town at a conference, which means I'm on my own with a seven year old and a not quite three year old. The younger's day care is close to my wife's office, over fifteen miles out of my way on freeways heavily impacted at rush hour. It's going to take over two hours out of my day just to drop her off and pick her up - never mind trying to run errands with two children, one of which is in the middle of terrible twos. New articles are likely to be non-existent until I recover from that.


Sometimes, the little things mean a lot. One of the sharper escrow providers I've worked with sent me an email this morning after we closed a deal on Monday

You are a very good agent who takes care of your clients as if they were family.

Okay, so I'd rather have a referral from a client. It's still a good thing when a fellow professional who's earned my respect notices and takes a few seconds to tell me.


House Democrats Pass Contempt Citations

Is there anyone who doesn't believe that the whole thing was partisan political point scoring right from the very beginning?

A pox upon both their houses. Again or still.


Captain's Quarters about the BBC and the con game it hopes to use to convince people they're not dishonest.

Carnival of Personal Finance


Afghanistan's last king laid to rest

I wouldn't return the the days of kings and nobility. But there is something to be said for having a part of your power structure who will be there thirty years from now, and so they're not always focused on how to get enough people to vote them back into power in the next election. Too bad you can't give someone power only to do good. If they've got it, they've got it. Any restraints on applying it can and will be used to prevent them from doing good.


Same old FAA: Air traffic operators fault maintenance

If I flew on any kind of regular basis, I'd be more upset.

Air traffic creates and provides so much economic value that the money to fix the system doesn't amount to passing gas in a tornado. Unfortunately, until they fix FAA management and get rational about the economics involved, things are going to get worse.

Now that I don't work for them any more, watching the air traffic debacle in progress has the same fascination as a train wreck in progress, and about the same amusement value. I'll probably pay for it karmically, but I feel like I'm sitting up on a hill watching it all happen from a safe distance. Anybody want some popcorn?

I read with great interest you article on the internet about pre-payment penalties. I find my self in a situation involving a pre-payment penalty and would appreciate your advice on this. I currently have a loan in which the prepayment penalty is up on DELETED. I have gone to another lender for a refinance and have been approved for a loan. Since this loan process occurred before the pre-payment penalty was up, my current lender has included it in the payoff demand information. My new lender has approved funding a loan with this penalty ($12,000) included. Documents are scheduled to be signed DELETED and the loan will be funded (13 days before the penalty expires). If I try to push back the date of my loan, my interest rate will go up, and I may not even qualify for a new loan since my FICA scores have dropped. My intention is to go through with the loan and have the loan person hold onto the payoff check until DELETED, after the pre-payment penalty has expired. I will then request a refund of this amount from my current lender. Do you think this strategy is viable or can you suggest an alternative without changing the the time schedule or amount of my new loan?

So you're want to be paying interest on two loans for two weeks?

Doing it your way is okay if you want to pay the penalty and are willing to pay interest and points and everything on the extra. If not, just have your loan provider get a rate lock extension. You'll pay about roughly a quarter of a point in fees, but that's less than the interest - or the penalty. Have your new lender get a payoff demand valid from expiration of the pre-payment penalty forward.

Your new lender is not going to tolerate being second in line for several weeks. Until that previous trust deed is paid off, the loan to value ratio is higher than their underwriting allows, and I'll bet that debt to income ratio is as well. Suppose there's a fire during those two weeks? Is there enough money in the insurance to pay both of them? The answer is no. Until that prior loan is paid off, the value of the property is exceeded by the loans against it. This is the purpose of escrow - and there's escrow in a refinance as well as in a purchase. You don't get that check - you only get what's left over after escrow does their job, which includes paying off the prior lender.

As to your personal situation, why has your FICO dropped? Credit scores don't drop without a reason, and one credit check isn't going to make that much of a difference. Basically, it looks like your lender is trying to make more money off you, and feeding you a line of nonsense to facilitate it. By boosting the loan amount, their compensation in the form of origination and yield spread rises. Okay, so 1% of $12,000 is only $120 - but that's $120 more for basically the exact same work. Not to mention the loan is funded now and they get paid now. Loans that are finished don't fall apart. I'd bet millions to milliamps that they're intending to fund your loan before the penalty expires. If they weren't, there's no reason to have you sign loan documents that early. I wouldn't have you sign until your right of rescission runs out concurrently with your penalty.

From the information given, this is not likely to be a lender with your best interests at heart. About the only thing I can even think of where it might be in your interest is if there's a notice of default or trustee's sale looming - and then we have to consider whether paying that penalty and all of the costs of the loan is really in your best interest. And since you didn't say anything about either one of these situations, I have to question the wisdom of basically volunteering to pay 6 extra months of interest plus loan costs. In this loan environment, I just have trouble believing that the new loan is going to save you that much money over the course of the time you are likely to keep it, let alone over the two weeks early you're paying it off. Even if you're at 8% now and moving to a 7 percent thirty year fixed rate without points, that's over $15,000 you are spending to save 1%. On a $300,000 loan, you're just getting close to breaking even at 5 years, which is longer than ninety or ninety five percent of everyone keeps their loans, and your balance is still higher. And yes, rates are going up, but neither I nor any other analyst I read is expecting that much higher, that quickly - even if your rate isn't locked, and rates that aren't locked aren't real.

Rate lock extensions cost money. But sometimes they're still the smart thing to do. In your case, it's spend approximately a quarter of a percent of your loan amount (depending upon lender policy), or three to four percent for six months interest that I can't see any compelling reason for you to owe.

Caveat Emptor

PS next time, you might contact me to give me a shot at your loan before you're in this position. I do loans all over California.

Article updated here

Not too long ago I got an email from an ex-prospect who decided to buy a developer's property without a buyer's agent. They persuaded her that she would get a better deal without them having to pay a buyer's agent commission. They then proceeded to hose her. She wanted to know if there was anything I could do. The only answer I could honestly give was basically, "Sorry! The transaction is already done!" This is the way that developers like it. Once the transaction is complete, the damage is done. You own the property, and you owe the money. The only recourse is through the courts, which takes years as well as lots more money - and that's if you win.

Many folks want a brand new house for one or both of two reasons. First off, there's that new house feeling. Secondly, they don't have to deal with a real estate agent, or so they think.

This is mistaken. The agents who work for developers are very pleasant, very professional sharks. They're not allowed to actually lie, but other than that, they have no significant responsibility to the buyers. Their responsibility is to get the most money on the quickest sale, period. If you let slip the wrong thing that leads them to believe you'll be a difficult transaction, you can be torpedoed before you even start. They're not there to tell you the bad things about a property, or that there's a better deal two blocks over. They have a responsibility to get the property sold. Period. The developers hire them from among the very sharpest, most ruthless agents there are.

Indeed, developers usually have higher hurdles for buyer's agents to jump over than any other seller can get away with. Buyer's Agents must accompany the client upon their first visit, and register them in writing. Seems minor, but anyone else who tried this would be dead in the water as far as getting agents to show their property, but developers will do both of these and more. With anyone else, when an offer comes in through an agent, that's enough. During the seller's market, many developers were refusing to pay commissions to any buyer's agents at all. This left potential buyers to pay their buyer's agents themselves or do without. The feeling on the part of developers was that buyer's agents spoil their party, so since they didn't have to deal with them, they weren't going to. The demand was there to sell the developments out whether they were willing to deal with buyer's agents or not - and if they didn't deal with buyer's agents, they would have things more their own way.

This has changed now. Every last buyer is precious, so developers are grudgingly working with buyer's agents. I went to a development with a client a few days ago, and the developer's agent had no difficulty conveying the same sentiments as that classic San Diego bumper sticker, "Tourists go home - but leave your dollars and daughters." They wanted my clients - but they didn't want me. Some of it traces to the fact that they want the whole sales commission, some of it to the fact that clients with a buyer's agent working on their behalf have a stronger proponent and negotiate better bargains, meaning lower bonuses and less in commission.

Indeed, a buyer's agent is a fairly unique position in sales. A buyer's agent's responsibility is to get you the best bargain possible - lowest price for the best property. Since commission is based upon sales price, this is the only job I'm aware of that gets less money the better they do their job. The idea, of course, is the better they do their job, the more people will want you to do it for them. You may not make as much per transaction, but if you do more transactions than you would, you come out ahead.

Some agents try to leverage this by rebating a percentage of the commission they would get. After all, it doesn't take a lot of time to fill out an offer. However, it does take a lot of time to shop effectively for a given client. I'm making offers now for a client I've been working with for two months. I've probably spent in excess of a hundred hours physically looking at properties just for them, never mind researching the properties before I left, or all of the things that contribute to general market expertise. They looked at a few on their own - and stopped, because they were seeing better values with fewer issues through me. A good agent knows what else is available on the market - but the agent who sits there with a license and a fax machine has no clue. There's nothing ethically wrong with agents getting paid for sitting by a fax machine. I'm perfectly willing to rebate part of the buyer's agent commission if someone doesn't want me to scout and evaluate properties. If, however, you want someone who's able to recognize what is and is not value, and who is going to be a strong negotiator on your behalf, thereby getting you a better property at a better price, you need someone who gets out of the office and looks at property. Agents can't get that kind of expertise sitting in the office. And if your only qualifications are a real estate license and a fax machine, why are you making more than ten dollars per hour? What benefit does that have for the public? I visited a new development on behalf of some clients last week. They had one left, in which I spotted a foundation crack literally from side to side of the structure. I checked the area again today, because we're still looking, and that property has gone Pending. I'm not a licensed inspector or contractor, but if someone can spot this before the sellers have your deposit, it can really save your bacon. If I were a discounter, that would have been my clients, because they loved the property.

People in the financial press like to complain about real estate commissions being too large. But they are not as large as they are by some accident of nature. People didn't just decide to pay five, six, or seven percent of the sales price because someone told them to. Sellers do it because experience has taught them that they end up with more money in their pockets because of their listing agent's expertise. It's not a large jump from there to understanding that if the seller has someone whose expertise for one transaction is worth that kind of money, it's a real good idea to have someone on your side who knows just as much, not only about real estate in general, but your market in particular. Various businesses have been trying to offer real estate brokerage services at discounted rates since at least the mid 1970s from my personal knowledge. Traditional sales models have lost a little bit of market share, but they're still going strong. There are reasons for this. Reasons like how long it really does take to get a property sold, like how much work it really does take to know the market. Reasons like there is no way to evaluate the relative value of the property except by looking at lots and lots of properties. Reasons like the paperwork that has to get done, and the legal liabilities involved if something goes wrong, or the buyer isn't happy, or any of hundreds of other reasons. Not to mention all of the transactions that stop before consummation. Real Estate is the only occupation I'm aware of that anything like the work we routinely do, and doesn't get paid at all if the sale doesn't happen. When discounters work for less pay, the only thing that can give in this whole process is the services they provide.

Developers know all of this very well. They are not charities. They are out to make the largest profit possible. They don't hire discount agents. They hire the best agents they can get, and support them with large advertising budgets, because that gets the properties sold, and for enough more money to more than pay the costs of what they spend. These agents act very friendly, very charming and disarming, and completely ruthless. Developers' strategy of discouraging buyer's agents from being involved is part and parcel of ending up with more money in their own pockets. The only place for the money in their pockets to come from is the pockets of the people who buy from them. If you want to deal with a developer, you want someone on your side who knows enough about real estate and your market to stand up to the experts on the other side.

Caveat Emptor

Article UPDATED here

Hi Dan,
I am a first time home buyer and a big fan of the advice on your blog. I was wondering if you could offer some advice on my current situation. I apologize for sending you this question but I've had many sleepless nights over this and I really respect your opinion.

I've narrowed my search down to two properties, one is a condo in DELETED (where I work) and the other is a new home in DELETED (closer commute for fiance). As a first time buyer I'm looking to stay in this place 5-7 years and then if possible rent it out as an investment.

The new home builder has a 2-1 buy down plan so the rates on a $519,000 5/1 arm would be Year 1: 3.75%, Year 2: 4.75%, Year 3-5: 5.75% on the first mortgage and 9.375 on the 2nd (which I would try to refinance right away).

The condo is $335,000 (a similar model sold on 5/07 for 400,000) and the rates are 7% on the 1st and 8% on the 2nd. Both loans are with 100% financing.

I really like the house but don't wanted to be lured into a larger loan if it might come back to bite me. I would go for the condo if it would be a better investment in the long run but would be sad without a yard. I my income is 94,000 a year and I have good credit, my fiance will also be contributing to the monthly payments.

Thank you for reading my lengthy email, I'd really appreciate your help!

If you really respect my opinion, why haven't you contacted me to act as your buyer's agent and/or loan officer? You are local enough.

I am not going to pass judgment on either property and its worthiness as an investment, its comparative value, etcetera. Those are buyer's agent questions. The real question I can deal with here is numbers: What can you afford? If you can afford both, is the more expensive property worth more money to you?

You make $94,000 per year, which equates to $7833 per month. At a fifty percent debt to income ratio, that is total monthly housing and debt service, you can afford $3916. That's got to cover first, second, taxes, insurance, Mello-Roos and HOA, etcetera, as well as your existing debt. A paper fixed rate firsts allow basically 45 percent, while A paper hybrid ARMs are usually lower, and compute based upon the fully indexed payment, not that low initial payment. Matter of fact, what they're trying to sell you on looks like a Temporary Rate Buydown, so they can sell you the property based upon a low initial payment.

Let's look at these two situations.

On a $335,000 condo, that's a first of $268,000 at 7% and a payment of $1783. On the second, that's a $67,000 second at 8%, which is a payment of $492. At 1.25% (standard California rate) your property taxes would be $349 per month. Insurance is not required for condominiums even though it's both cheap and a really good idea, so it doesn't impact debt to income ratio. On the other hand, there will be HOA dues, and may be other monthly expenses such as Mello-Roos. As long as these, plus your other debts do not exceed your remaining $1292, you're likely to be able to afford it. Add in 75% of whatever your fiance will sign a lease for, as standard allowance for rent, in addition to the $1292. Bottom line, based upon the information provided, it looks likely that you can afford that condo.

On a $519,000 property, that's a first of $415,200 and a second of $103,800. The second gives a straightforward payment of $863. The first has an initial payment of $1923, but that's not the real payment. The real payment is $2423 - $500 more. Nor is this the qualifying payment that an A paper lender will use, which is computed based upon what would happen if that loan hit the end of the five year initial fixed period today. That rate would be 7.125, or a payment of $2797. Yes, I like 5/1 ARMs, but they are perversely harder to qualify for than fixed rate loans. I get that basic California property taxes would be $541, I'm guessing insurance would be about $100. Total is $4301, and we haven't considered Mello-Roos, HOA (if any), or your existing debt. On the plus side, we haven't considered your fiance's contribution, either, but it's not looking good as you're nearly $400 over your monthly total payment limit already, and that's without considering possibly lowered debt to income ratio guidelines.

Now, let me point out a couple of tricks going on here: That temporary buydown isn't free, or even cheap. Nor is 5.75 available on a 5/1 without points right now, from any lender I'm aware of. This developer is not going to do your loan for free just to unload the property, and they used the temporary buydown to make it look like the payment is lower. They came close to hooking themselves a sucker fish, too, from your email. The money to do all of this is coming from somewhere, and the only candidate I'm seeing is the pockets of the buyers. It's almost certainly a waste of money as well as defeating the purpose of a hybrid ARM to pay points and temporary buydowns - and paying them you would be. If not explicitly, through being able to negotiate a lower price on the property without the developer paying for all of that. Which would you rather have: slightly lower payments for a while, or a lowered amount of debt in the first place? They pad the price, so they get more money right away, while paying out a part of it to make the payments look lower for a while. If you offer someone a dollar for thirty cents, most of them will take you up on as many dollars as you have, then turn right around and hand you back a portion of the money you just handed them. When you reduce it to the basic mechanics, that's what is apparently happening here. Of course, the average consumer is clueless about this - all they understand is that they're getting a beautiful property that they didn't think they could afford for an initial payment they're happy with. Well, they really can't afford it, but someone who knows a critical bit more of how the game is played persuaded them they could.

All of this is one more argument why everybody should get a good buyer's agent. If you don't have one, especially in dealing with developers and their lenders, nobody has a fiduciary responsibility to you. That and shopping your loan extensively are the best ways to avoid rude awakenings expensive enough to jeopardize your entire future that there are. In fifteen minutes with a calculator, I may have just saved your financial future. The other side has people whose job it is to get that property sold for the most possible money and make money with that loan, too. They're paid to act like your friend while picking your pocket. If you really want to play that game without someone on your side who knows the same tricks they do, you're a foolhardier braver man than I am, Gunga Din.

Caveat Emptor

Article UPDATED here

Obama: Don't stay in Iraq over genocide

SUNAPEE, N.H. - Democratic presidential hopeful Barack Obama said Thursday the United States cannot use its military to solve humanitarian problems and that preventing a potential genocide in Iraq isn't a good enough reason to keep U.S. forces there.

I disagree. Nonetheless I'm glad he's got the intestinal fortitude to make his case - to acknowledge the opposing arguments and try to win the argument not by kneejerking against the other side, but by trying to build the case that his argument is stronger.

If he's elected President, the voters will have decided he's correct. So he'll be on track to get the requirement for a genocide out of the way early in his term. Carter and Cambodia. Clinton and Rwanda. Can't have a Democrat elected president without a genocide. They have a tradition to uphold!


Swedish woman gets superfast Internet 40 Gigabits - Uff da!

Of course, the bottleneck is far more commonly the ability of the servers to access it and send it to you. Nonetheless, I'm sure there are spam-meisters whose eyes lit up reading that. At 1k per message, they could theoretically send 40 million pieces of spam per second. And you thought your inboxes were full of spam already...


This is just too good: Tiny brain no obstacle to French civil servant

What can you add to a story like that?


Restored Saturn V rocket unveiled

Does anyone care about a rocket in a museum? I'm interested in the ones that actually go into space.


I'm probably going to stay up tonight long enough to walk over to the neighborhood supermarket and buy a copy of Harry Potter and the Deathly Hallows. They're open 24 hours, and I haven't seen a better price advertised. Since it's less than 100 meters, I don't have to pay for gas or shipping. Cheap, quick, and effective. Then I'm planning to do something my wife doesn't expect - let her read it first. Unless she reads the site today, of course, but one of the few downsides of her employer is that they block internet access.

Carnival of Real Estate

The San Diego Special Edition


Victor Davis Hanson surgically eviscerates the New York Times' editorial.

Captain's Quarters with John McCain's elegant refutation of Mr. Reid.

If he hadn't been trying to repeal the first amendment for the last fifteen years, I'd vote for John McCain for President solely based upon his solid understanding of the circumstances our country and our civilization find ourselves in.

I found you on the Web after doing some research for my parents regarding short sales and foreclosures. I appreciate your straight talk regarding the whole loan and real estate process which I know they find incredibly intimidating. Right now, they're sort of putting their head in the sand regarding their financial problems. I have been trying to help them stay afloat but it's becoming tight.

My mom received a default letter from the lender last week since she was two months behind. She sent one payment last week and I wrote a check to her lender for this month's mortgage to bring her current. I told her I couldn't do this again. She wants to walk away from the house, I told her "bad idea." My parents can't make the payments anymore and I am wondering if they should sell or refi. Here are the stats:

They've got a 7% fixed for three years which they are about a year and a half into. The payment is plus or minus $3100. The mortgage is $468,000 with a $12,000 pre-payment penalty. I don't know how they got into this mess but seeing her struggle and cry each month is something I can't watch anymore. My father and she (they're in their early 60s) have 2 pensions and 2 Social Security payments they receive each month. They make enough to make their house payment but not enough to cover all the other bills. My mom's logic is - "If I didn't have the house payment I could pay my bills." I tell her that her home is more important, and looking at your articles it seems to me the consequence of not making your mortgage if far worse then not paying credit card and car loan debt. Their credit is good but they don't want the house because the mortgage is so high. They talk of renting but I am afraid if they walk away from the house-the consequences will be dire.

In your experience is their hope? I've offered to refinance with them, the three of us, but would that help? I already own a home with my husband - I imagine there are occupancy restrictions? I have good credit. If they sell, it would be short with the pre-payment penalty. Are their agents that would sell the house? I can't imagine they'd want to since there would be no money for a commission.

Here's the real crux of the matter: These folks owe $468,000 and have a payment of about $3115 at a seven percent interest rate. Those are cold hard facts. As of this writing, there just aren't any loans out there that will help them enough to be worth paying that pre-payment penalty. Oh, someone could do a negative amortization loan that makes it appear as if they can afford the loan for a while - with even more dire long term consequences. Someone could boost their interest rate by maybe a quarter of a percent in order to cut their payment slightly with an interest only payment - but then the hole would stay just as deep as it is, and all interest only payments eventually start to amortize. The longer it is before this happens, the worse the payment shock when it happens. Most interest only loans adjust upwards on the rate at the same time. Sudden forty percent increases are nothing out of the ordinary. Even a longer amortization isn't going to help very much - even assuming the interest rate doesn't change, by the time you add that prepayment penalty in there, you've got a payment of $2982, even assuming no loan costs or fees get rolled in.

The point I'm trying to make is that I can't see a way for them to really be able to afford this property. Matter of fact, I have a very hard time believing that the agent and loan officer who sold them on this situation didn't do something both illegal and unethical along the way, and your parents should consult a real estate attorney about that. Nor is refinancing with you on the loan likely to help. As of right now (July 2007), there just aren't any loans enough better than what they already have to be worth paying both the pre-payment penalty and the cost involved. Not to mention the fact that the appraisal is going to be problematic. Sure, there are appraisers willing to say that property is worth $500,000 when it isn't, but they're going to become a lot fewer very soon. And if you can't afford to make their payment as well as your own, putting yourself on their mortgage is a good way to sink your credit as well as theirs. Then you have problems down the line with your own property.

I sympathize with these folks and you, but the only way they're likely to get rid of unaffordable mortgage payments is to get rid of the property. Unless, of course, they've got enough cash sitting around somewhere to pay their mortgage down enough to make it affordable. However, if they could do that, why didn't they put the money in as a down payment? I'd need more information to be certain, but I strongly suspect that it's time to own up to the truth, which is that they have purchased too much house and they cannot afford it.

With that said, "walking away" is just about the worst thing you can do in most situations. Now the lender has to go through the whole dreary process of foreclosure, with is going to effectively kill their credit for seven to ten years, and might cause the interest rate on any other debt they have to rise. They need a lawyer to advise them on their situation. Anyone in this situation needs a lawyer, and I'm not a lawyer. With that said, the following options are usually better:

You can talk to the lender about the situation. They don't want to foreclose. They don't make money when they foreclose. In fact, they lose it by the railroad carload. If it'll keep them out of foreclosure, chances are good that the lender will agree to a temporary modification of the note while your parents sell the property. They may or may not agree to accept a short payoff as well. It'll depend upon the listing agent and the lawyer. And yes, banks will usually agree to allow agent commissions in short payoff situations - it gets the property sold, which means they lose less money than if it goes all the way through foreclosure and they have to hire an agent anyway.

Another option that can be worth exploring is the Deed in Lieu of Foreclosure. This is where you sign the property over to them in satisfaction of the debt. It has the advantage that it stops future hits to credit. Although Deed in Lieu is itself one of the deadly sins according to mortgage providers, it's not as bad as a Trustee's Sale in most cases, and you don't have all the individual derogatory reports of the late (non-existent!) payments between now and whenever the Trustee's Sale happens.

One thing to warn of is that all of this, except perhaps for the Trustee's Sale, is the cause for a 1099 to be issued for income through debt forgiveness. Your parents will probably owe taxes on this money, so I strongly advise them to consult a tax professional as well (As best I recall, it's ordinary income, the same as if they had earned it working). In some cases, there may be a deficiency judgment as well, while in others there may not be. Nonetheless, this money is likely to be for a much smaller amount than $468,000, so they can probably dig themselves out, given time, and without living completely poverty stricken and without completely torpedoing whatever financial future they may have.

I know you wrote to the loan officer, but with the rates and loans available right now - especially considering the late payments on the mortgage - there's nothing the loan officer can do that actually helps, although there are a lot of loan officers out there who would say they'd help. If they were sitting in my office, it would be time to put on my Realtor hat and talk about selling that property. I wouldn't be happy about it, but the universe doesn't particularly care about making me happy, and it's the best way I see out of a bad situation.

Caveat Emptor

Article UPDATED here

On a very regular basis, pretty much every buyer's agent who's worth anything gets clients who have difficulty making a decision. Not too long ago, I found a solid property with great potential that nonetheless needed about $20,000 of cosmetic work. In short, right now it was ugly and unappealing, but it had a WOW! view and it was priced $100,000 below a model match a few doors down. They looked at the property five times over the course of a month, and just as I finally had them willing to make an offer, somebody else put in an offer that was accepted.

Immediately, the property went from something they were reluctantly willing to consider living in to something they had to have, but at that point it was too late. The owners were already under contract. Unless the transaction fell apart - and it didn't - there was nothing anyone could do. Real estate needs one willing seller and one willing buyer. If someone else gets there first, you don't get the property. The seller's side has its own version - whomever competes the best for a given buyer wins. There are no prizes for second place.

There is no such thing as a perfect property. Unless you have an unlimited budget - and no one has an unlimited budget - there are always trade-offs. Trade-offs in the form of location, or amenities, or most obviously, price. You've probably heard trite little sayings like "paralysis through analysis" and the pithy "you snooze, you lose." They're trite because they're true. You must be willing to act when things aren't perfect in order to get any benefit. If you aren't willing to act in a timely fashion, you get nothing. The better the situation, the more risk there is of someone jumping in before you. Yes, sometimes this means you're at risk of being conned. There is no way to completely eliminate that risk. If you're only willing to jump into the perfect situation when all risk has been eliminated, you are wasting your time. Somebody else is going to jump first. The only way you're even going to buy - or sell - anything in those circumstances is if you're the victim of a scam. Reward is necessarily coupled with willingness to work and to accept risk.

This isn't just my clients. Seems like every time I've taken something "Pending", the listing agent gets calls from people who are suddenly interested. I finished a transaction back in April where one suddenly interested buyer called the listing agent literally every day while it was in escrow. He was wasting his time. Once it's in escrow, you're too late. Unless it falls out, something that's not under your control, that property is committed to someone else. But it seems like the mere fact that someone wants it brings prospective buyers out of the woodwork, now that they can't have it. Kind of like sibling rivalry, only even more pointless.

I've dealt with several families over the last few months who want to buy, but are convinced the market is heading down further. Fear and Greed is keeping them on the sidelines while the ratio of sellers to buyers has dropped from 42 at this same point last year to 34 last week. This ratio is the best measure of supply to demand ratio there is, and the most important indicator of the direction of the market. I did think we might see a stronger turn this year, but it looks like we're about where we're going to be until the Christmas season. Even during the most gonzo seller's market we've ever had, this ratio was about 4:1, and anything under about 12 or 15 to 1 indicates a seller's market. Furthermore, people who want to buy is building linearly with time, while the ranks of people who need to sell has already seen the strongest influx it's going to have. The main change that's coming up is properties switching from short sales pre-foreclosure to lender-owned post foreclosure. On the buyers' side, everybody is crowding around, trying to get someone else to be the test penguin (1). On the seller's side, there is only so much desperation out there. Eventually, the buyers who are trying to get someone else to be the test penguin are going to realize that the people buying now are not getting eaten - in fact, just about the furthest thing from it - and they will jump in, en masse. My best estimate at this point for when the big jump is going to happen is next spring. If you're still sitting on the shore when that happens, all the best food - by which I mean best bargains - will be gone, and the market will have turned.

All real estate is only "good while supplies last." For sellers, this includes supplies of willing buyers. Since there is rarely more than one of property in a group, bargains only last until one person pulls the trigger. The easier the bargain to spot, the shorter the period to act. Even t

Carnival of Personal Finance


Some good analysis of the North Korean situation over at Willisms


Victor Davis Hanson on Lepanto.

It seems every week I get asked about some new or revived trick that loan providers are pulling. The one thing they all have in common is that they are methods to avoid competing on price. What the basic terms are and how much it will cost you.

First of the big weapons in most loan provider's arsenal is the tendency to most folks have to shop loans based upon payment. Payment has no intrinsic relationship to interest rate, which is what the money is really costing you. But if you do tell people "$510,000 loan for $1498 per month" most people assume that payment covers the loan charges even though it doesn't. People who can afford $1500 per month payments go buy $510,000 properties based upon these payments, and only after they've signed the papers do they figure out that the catch is their balance owed is increasing by $2500 per month! negative amortization loans are the obvious problem here, but less ethical loan providers also use this fact to push interest only loans and temporary buydowns and loans that cost so much in discount points that it would take fifteen years to recover the cost through lower payments - and that is based upon straight line computation, not taking into account the time value of money.

The second tool is the desire of most folks to get something for nothing, or at least appear to get something for nothing. This covers not only mortgage Accelerators, but also Prepayment penalties and biweekly payment schemes and even debt consolidation. They show you an actual method whereby you might hypothetically have your mortgage or debts paid off in a fraction of the time and without apparent discomfort or compromising your lifestyle if you fit their profile and stick with their program. The slight of hand here is two-fold. First, these are distractions, and if you examined competitive products, you can tack these allegedly neat features onto just about any loan or do it yourself, while they're acting like their programs are somehow unique when they're not. Second, these programs see the lion's share of the benefits at least five years out - when for all practical purposes, nobody sticks with the program that long. I lumped pre-payment penalties in here, because they are an often hidden charge that brings the lender more money down the line when you refinance before it expires, or immediately when they sell your loan on the secondary market, but they don't show up anywhere on the loan paperwork as a figure in dollars you are being charged. at the time you agree to the loan. Nonetheless, most folks who accept pre-payment penalties end up paying them, and they are real dollars you end up paying.

The third tool in their arsenal is that if the cost of something isn't explicitly disclosed, most people will assume it's zero. If there's not an actual dollar figure associated with something, many people think it's somehow free. Many loan providers feel no need to disclose escrow charges, or lenders title insurance, among others. They'll mark it "PFC" as if they don't know how much it's going to be. The net result, as I've said before, is that you end up thinking that "$2495 plus third party charges and two of these points things" is cheaper than the provider who tells you they're going to deliver the exact same loan for $6000 all told (on a $300,000, loan, you're looking at over $10,000 worth of charges from the provider who didn't quote a total figure in dollars. People gripe about "junk fees" when the costs are real, but they've been deliberately lowballed. There never was a chance that they would end up not paying those fees - and they're high dollar value fees - but by not associating a dollar figure with these fees, less than ethical providers are causing people to think they're either free or something comparatively small, like the $2 per tire waste disposal fee.

All of these tricks feed upon ignorance. Ignorance of what they are really doing, ignorance of how financial markets work. The fact of the matter is that nobody is going to do a loan for free. There's a very hard line where it's not worth my while to do a loan - I'd rather spend the time doing something else. Same thing with every other provider in the known universe. For some providers it's more than others, while for other providers, it's less. Everyone wants to make more money for the same amount of work. Competing on price is not a way to get a high number of dollars per loan - so they will do everything in their power to avoid competing on price. But there really isn't any other reason to choose a loan, other than that it's offering the same terms at a better price. A loan is a loan is a loan, as long as it's on the same terms at the same price. It's not like one loan is a Jaguar while another is a Prius and a third is a Mustang, or one is a Craftsman while another is a Colonial and a third is a Cape Cod.

Loan providers that don't compete based upon price compete based upon hiding the gotcha!, or pretending it's not important. If you understand the gotcha! associated with a particular loan, and are fine with it, that's great. If you don't understand the gotcha! chances are that it's going to bite hard.

Caveat Emptor

Article UPDATED here

My husband and I are currently in escrow with the sale of our home in California. Our buyers have been " difficult" to say the least. The buyers appraisal of our property came in $6,000 below the selling price which won't make a difference to their lender because the buyers are putting
50% down. Of course, they started threatening us saying, "you need to issue us a $6,000 credit since the appraisal came back $6,000 below our agreed upon price." We paid for a second appraisal through a company that was lender approved. The second appraisal came back $3,000 above the purchase price. We have 2 questions:

Is their lender required to accept or at least consider this second appraisal or can they simply disregard it?

If the buyers try to use the appraisal clause against us to get out of the deal, can we keep their earnest money since we have a documented appraisal showing a value of $3,000 above the agreed upon price on the contract?

Thank you for your insight and expertise.

There are three things to consider here: The contract, potential scams, and what's really important.

The standard purchase contract has two clauses directly relating to this question. The first is the loan contingency, the second is the appraisal contingency. The first isn't really a factor in your case, but it often is, as a failure to appraise can torpedo the loan if the down payment isn't very much. If these buyers needed 100% financing, that would be a dead contract as it's written because the lender isn't going to finance over 100% of the appraised value. The second, more relevant clause in your case is the appraisal contingency. It states that the transaction, as negotiated, is contingent upon the property appraising for the official purchase price. There's an argument to be made that your appraisal is enough to cancel that contingency, but in practice, appraisals can be had for inflated amounts quite easily. If the seller being able to obtain an appraisal for the sale price was the relevant condition, I'm not sure there would ever be a property that would fail to appraise again. Spend $400 for your own appraisal and keep a $5000 deposit. Nice work if you can get it. Acting as a buyer's agent, I would never accept a seller's appraisal under any circumstances. This may be news to all of those who put "Appraised for $X!" in the listing, but there are too many ways to get an inflated appraisal. Point of fact, it's usually someone trying to justify a higher asking price than the market will support. It's never a reason for me to consider a property, and can be a reason why I shouldn't.

To be fair, buyers can get low appraisals too, which leads us into the second subject: potential scams. You're in California. There just aren't many properties I'm aware of in California where $9000 difference is a major percentage of the selling price. If you were somewhere where the average house sells for $40,000, this would be cause for concern. Flipping for an extra 22 percent profit! But when the average property sells for $400,000, it's just too small an amount to be worth scamming someone over. Not that it's an amount to be sneezed at, or impossible, but I just can't see someone running a scam for only 2.25% of the sales price. If this was a scam, I'd expect $30,000 or more in difference. This is too small a difference to be a likely scam in the real world.

Speaking of the real world, what's really important is your market. How many sellers per buyer, how long properties like yours are sitting in your area, what they're selling for when they do sell. Note that I didn't say what the asking price is. Any twit can put an asking price that's 20% too high on a property, and quite a few do - it's a great way to get listings from owners who don't know any better. It's called "buying a listing." The important data have to do with actual sales. Not pending sales, not the pipe dreams of "For Sale By Owner" properties, not what the model match next door is asking, but what they are actually selling for. Coin of the realm passing out of the buyer's hands. A willing buyer is a necessary component of every sale, just as a willing seller is. If you just want to list your property, you don't care about a willing buyer. If you actually want to sell, you need one.

The good news is that you appear to have one. The bad news is that they don't want to pay the amount on the contract any longer. Well, buyer's remorse strikes a lot of folks, but the stronger their buyer's agent, the more they're going to get that out of their system before they make an offer. On the flip side of that is that the stronger the buyer's agent, the more focused they are on value.

Against this situation, you've got to ask how likely it is you're going to find a better buyer soon enough such that you net more money off the sale. If the property is vacant and your carrying costs are $3500 per month, this buyer now will still net you more money than a different buyer who pays the amount on your appraisal three months from now. I only know the San Diego market, and if you're here, why am I not involved in the transaction? But no matter which way you decide, you're taking a risk. Some people will just take the money and run because they're unlikely to have their face rubbed in the fact that they were wrong - the property is sold and future offers are a waste of everyone's time - but that's a putrid way to make a multi-thousand dollar decision. Actually, it's not just a multi-thousand dollar decision. It's potentially the full value of the property and your credit rating as well for years if you default. If you've had a Notice of Default recorded on the property or something worse, they're being a lot nicer than some folks to only mess with you for $9000.

My point is this: There are potential upsides and downsides to every possible decision you can make in this situation. Can I tell you which way to jump? Not without more information. Will I tell you which way to jump? I don't risk my license and my livelihood for free. It's your agent's job to do that. If you're representing yourself, you've just run smack into one of the lesser reasons not to.

Matter of fact, whomever your agent is, the information you've provided draws a pathetic picture of their competence. There could be exculpatory information out there, but this is all basic, "hit the ball with the bat" level stuff that anyone who's been in the business three weeks should be able to deal with, and if they're that new, their supervising broker should have explained it to them, if their supervising broker had a clue themselves. If this transaction falls apart, go find an agent who knows what they're doing. Nor am I impressed with the buyer's agent from the information provided. When something goes wrong, telling the other side "you have to" is a good way to kill a transaction that can usually be saved. You don't have to do anything. You could tell them to take a long walk off a short pier. How smart it is depends upon factors I can't see from here. But this is why negotiation is the biggest factor in the game of real estate. Some folks won't, some folks can't, some folks just don't know how. They're going to suffer unless their agent does. Because all the preparation and work I do is wasted if I don't negotiate effectively. Any twit can say, "No," and quite a few do. They're hosing themselves if it's the wrong answer. The opposing fact is that the transaction doesn't start until you have an agreement, and if the other side believes they've been hosed, they can usually get out of it if they really want to.

Caveat Emptor

Article UPDATED here

Oops! Via Josh Poulson, I got pointed to an article at Intellectual Conservative.

We must consider that the threats to the Spotted Owl ten years ago are not necessarily the same as the threats now. Nonetheless, at first glance it appears that we basically killed most of our domestic timber industry for something that wasn't their fault. This leaves completely aside the issue of whether it was the right thing to do even if the timber industry was the primary culprit, but if this is correct, that does not appear to be the case. Oops.

This oops didn't just hurt big business, by the way. It hurt a very large number of ordinary people. Think they'll forgive and forget if we give them a heartfelt apology? Somehow I doubt it.


Double standards, version infinity: Where are the dead children this time?.

Popular Advice You Shouldn't Take

Four pieces of advice. I mostly agree with the writer's take on Amassing Cash and Buying Big. The time when most people take to amass an emergency fund is precisely the time of their lives when what they save now, correctly invested, will return the maximum return. At that stage of your life in particular, you should be living well beneath your means. Fund your 401k if you've got one, fund a Roth IRA, regular IRA and/or SEP, and then worry about your emergency fund. At that stage of your life, you should be earning and socking away well over 10% of your pay - 25% is a target to shoot for when you start your real career. If you get used to it right away, it becomes a lifelong habit. You get used to the fact that that money is going elsewhere, and you don't get used to spending it. I think regular readers will agree I've said quite a bit on the downfalls of buying too much house.

His advice on go for growth, which is basically don't, at least not right away, is situational. Things like not panicking in a downturn are part of what good financial advisers are for. You shouldn't overload on growth, but market downturns in every sector are a part of life. If you're not ready for it before you put your money on the table, something is wrong.

His advice on cash value life insurance, however, is just plain wrong. It's planning for a couple of decades rather than the rest of your life. It utterly fails to take into account that a twenty-year old has approximately six decades of remaining life expectancy, and today's twenty year old may have eight or even ten. It fails to take into account that someone who starts planning early and works at it is going to have one heck of a nest egg - and all of the better tools to do for indefinite tax deferral, as well as passing it on to the next generation, involve cash value life insurance - the older and more mature, the better. If there's an existing policy, you're not going to get rated for the fact that you just got diagnosed with cancer, or have been diagnosed with cancer, are now old and fat, or any of the reasons people get flat out turned down.

2-1-1. Not a bad batting average for a journalist. Completely unacceptable in a financial planner, but not bad for a journalist.


House panel: Miers wrong to miss hearing

The White House showed no signs of backing down, pointing out that Bush was willing to make Miers and other administration officials available for interviews, but only behind closed doors and without a transcript. Democrats have rejected the offer.

This is political bickering, attempting to score PR points on both sides. A pox upon both their houses.


This isn't the FAA I worked for. Report: Air controllers cover up errors Well, actually it is, depending upon who you knew and what groups you were a member of. A public error was the fastest ticket to management, if you were female, minority, or had a friend who was higher up. If not, well, the agency didn't have any reasons they needed to keep you, did they?


Military Files Left Unprotected Online This isn't a political issue, or an administration issue. It's a procedural issue, and those who leave classified material available to unauthorized users should, at the very least, suffer the penalty of having all future access blocked. Which means no more classified work for those persons or companies.

Debunking some left-wing pravda over at Big Lizards


Q and O on the benefits and drawbacks of the virtual filibuster in the US Senate.

I think the filibuster is a good thing to have, but to use it to thwart the desires of the majority should be an extraordinary act, and should be made sufficiently difficult and obvious as to render it political suicide for all but the most noble of reasons. In order to filibuster, you should be forced to stand there while the rest of the senate is in session and actually talk. Put the C-Span cameras on your ugly face and watch you stop the deliberations and the business of the senate on national TV. I'd wager that it would set the bar just about high enough to discourage the practice for all but the clearest and most sincere issues of morality. There's still a stench attached to those who filibustered the Civil Rights legislation back in the sixties, something that those involved richly deserved. Here's a scary thought: With the Senate rules in effect today, the civil rights filibusters would likely have succeeded. We wouldn't have the Voting Rights Act, or the Civil Rights Act of 1964, or for that matter the Civil Rights Act of 1957 which started it all.

Most of the time, I'm talking and writing about the sort of loan the average borrower is looking for. Up to 125% of the single unit conforming loan limit of $417,000, which works out to $521,250, A paper guidelines are pretty much determined by Freddie and Fannie. There really aren't many breakpoints in policy. Some lenders charge extra for loans under $100,000 or so, but it's really all the same program. Even in pricey Southern California, this is most transactions. Even if you don't have a down payment, anything above 80% Loan to Value Ratio is going to get split into a conforming first and a second for the remainder, so you're still dealing with Fannie and Freddie. If Fannie Mae or Freddie Mac will buy the loan, the lender is happy with it. An acceptance from either of their automated underwriting programs is normally good as gold for getting the loan through. My lowest "no points" conforming rate is currently 6.875, which for a $522,000 property with no second loan, just property taxes and insurance, and no other debt, you'd have to be making $7550 per month to qualify for that loan, or $90,600 per year. Most people, even without debts, don't make that much. Add in an average amount of household debt, a higher rate second mortgage, and increase the loan amount, and you're looking at roughly $10,000 per month to qualify, even without the fact that the maximum allowable debt to income ratio decreases.

However, once you get above dollar amounts that Fannie Mae and Freddie Mac will buy, each lender has their own criteria for the so-called "Jumbo" loans. This used to be a lot more of a factor in 2003 and 2004 when the conforming limits were $322,700 and $333,700, respectively, and still a significant factor in 2005 when the conforming limit was $359,650 and the market was still hot. When the average purchase price is in excess of $500,000 and even 80% of it is well over the conforming loan limit, you've got yourself a jumbo. Furthermore, scenarios that would be perfectly acceptable A paper below the conforming limit - because Fannie and Freddie will buy them, thereby assuming the risk - can often be forced to go sub-prime once you get into jumbo territory. For instance, from one lender whom I've done 100% A paper with below the conforming limit, they won't touch 100% financing once it gets above $417,000. If your first loan amount is for $418,000 and you want 100% financing, your choices are 1) do it sub-prime 2) Find a down payment of at least 5% somewhere, or 3) find some other A Paper lender that will do 100% jumbos. Right now, with the lenders in a panic, that's tough.

Regular jumbos go up to about $650,000 or $750,000. These numbers haven't changed much in at least five years, and we're getting to the point where jumbo limits need to rise. It's one thing when it covers a huge band from $322,700 to $650,000. It's getting to be something else when the band has constricted at the bottom so that it doesn't start until $417,000. Let the conforming loan maximum get boosted again, and regular jumbo loans may become more rare than they are.

Above jumbo loan amounts is "super jumbo" territory. Now instead of being willing to go to 95% financing, albeit full documentation only, now 90% is as high as this particular lender will go. Matter of fact, in order to find a 100% program in super jumbo territory, I have to go to Alt-A programs, which is no longer A paper.

What's going on here? Quite simply, higher dollar value properties are harder to sell, and there's more risk of taking at least something of a loss on them. Furthermore, the lender is risking a higher number of their own dollars. They want the borrower to have some serious skin in the game to motivate them not to lose it. You can find lenders willing to go 100%, even now with the lenders in full panic mode. It will be expensive, no matter how good your credit, no matter how much you make. We can make things better by splitting the loans, but even so, expect the subordinate loans to have rates well into the double digits. Furthermore, you can bet on there being a pre-payment penalty on at least one of the loans, while if you bring a satisfactory down payment to the table, you can find rates that are much better, and without a pre-payment penalty. For example, using the same rate sheet, the add to the jumbo rates is 3/8ths of a point for super jumbo, which means you can have the same rates as a jumbo loan for an additional charge, or go up maybe an eighth of a percent on the rate for the same charge. 3/8ths of a point doesn't sound like much, but when you're talking $800,000 loans, it's a $3000 one time fee, or about $1000 extra per year in interest. However, since in order to qualify for an $800,000 loan at 7%, you've got to be making about $14,000 per month not including the effects of property taxes, homeowner's insurance, or other debts - probably around $18,000 minimum salary per month to qualify with those included - these are not loans for even your average white collar worker.

At $1,000,000 in loan amount, there's another break point in lender policy. For instance, the lender I've been covering closest won't touch anything above 80% financing. Period, end of sentence. Not as a first, not with a piggyback second, not at all. For A paper lenders, that's actually kind of generous. The next two A paper sheets I pulled out max out at 70% Loan to Value above a million. This means come in with 20 to 30% down payment - or go sub-prime, with higher rates and pre-payment penalties. When you're talking about million dollar loan amounts, pre-payment penalties can fund a fairly high end car. For instance, if you have (pinky finger extended, Dr. Evil style) one million dollars at 8%, a standard pre-payment penalty of six months interest is $40,000. Once again, these are not loans for your average person. Even if you have no other debts, by the time you get done with property taxes and homeowner's insurance, you're looking at $24,000 monthly income to qualify. Still, it's nearly two months income for a pre-payment penalty!

Just in case my readers include a significant number of the richest hundredth of a percent of the world population, there are usually break-points at 1.5 million, 2 million, and 3 million as well, and that's if the lender goes that high. The biggest residential loan I've ever done doesn't get into these categories. In practice, the rule seems to be the bigger the house, the bigger the down payment they have, not only in absolute terms but also in terms of percentage. If I got a request for a loan that big, I'd just go ask the wholesale executives if they can do it, and what it's going to take. I have a suspicion that most loans of this size end up being commercial loans in all but name, or perhaps even in name.

Nor is it just the guidelines that get tougher. Underwriting gets trickier the higher up on the scale you go. Loans with characteristics that would be a slam dunk if they were conforming become nightmares above the million dollar line. What's going on, of course, is that the underwriter is more reluctant to sign their name to a loan commitment that exposes the lender to five times as much loss. People get fired when those go sour, and they don't give out a whole lot of second chances for high dollar loan amounts going south. So when they write that commitment, that underwriter is going to make very certain all of their bases are covered.

Pretty much every loan program in existence has a maximum dollar value, above which the lender offering it has decreed that it does not exist. Sub-prime breakpoints are different from A paper - half a million and two million are the most common breakpoints there - but I've never found a loan program from any lender that didn't have a maximum dollar value they'd lend under that program. Even hard money lenders have maximum dollar amounts they'll lend, price and policy and underwriting breakpoints. The average person really has no need to be aware of these breakpoints, but if you do start hitting them, you'll figure it out in a hurry. Things that are easy on conforming loan amounts sometimes cannot be done at all once you're no longer in conforming loan territory.

Caveat Emptor

Carnival of Personal Finance

Carnival of Real Estate

Consumer oriented Carnival of Real Estate


Some people can't hear about a stupid stunt without wanting to try it themselves: 105 balloons put lawn chair pilot in air

An e-mail I got from a single mother I spent two months working with before she found a special low income program for a property she wouldn't have been able to afford through me. The first paragraph is her addition to me on the front of a forwarded message. I've redacted information that might lead to specific identification of the culprits or their victim.

(I haven't been paid anything on this, nor did I expect to be, despite the fact that they told her that I would be to close the deal. She felt obligated to me, but who wants to stand in the way of a single mom finding and affording a better property?).

Dan - This is an FYI. I really wouldn't recommend this program for any of your other clients, or if you do get them involved that you warn them that things stand a good chance of not going as promised. Judging by what is happening to me, I doubt that you ever received your commission from these people.

-----Original Message-----

Good Morning DELETED,

My name is DELETED and I've purchased a condo at DELETED. My close date was supposed to be June 28th. On June 28th I went to DELETED Title and signed off on all the final paperwork and had my bank wire them over $7,000.00. My first scheduled move-in date was on Friday, June 29th. I had to cancel (the move - DM) because it wasn't recorded yet. On Saturday, June 30th I drove over to the DELETED Sales office (my phone and internet has been shut off and transferred) and spoke with DELETED. My next scheduled move-in date was Monday, July 2nd from noon - 4 pm. I asked him if I had to change my plans again and he said "No - because you were supposed to close on the 28th of June and I can go online and see that you have wired your money and completed your paperwork I am going to make an exception and give you your key and let you move in on Monday."

Early Monday morning (we) started bringing all of our boxes and furniture downstairs. At 9 am I rented a U-haul. At 11:30 I went over to the Sales office for my key. I had scheduled someone to pickup and deliver the appliances I purchased for 12:30 pm. (The person who had promised the move in) was "in a meeting" and nobody seemed to know anything about my key. By 1 pm I was quite upset because I still had no answers and only 3 hours left to accomplish my move in.

DELETED sent someone down to try and make things right. I don't think a sobbing woman in their office was very good for business. They went over to the Uhaul place and had the truck reserved until Friday of this week and bought a lock for it. They told me that they would pay my rent and that I could get reimbursed for food if I kept the receipts. Hopefully they will really do this. (it occurred to me later that they also promised me a key and broke that promise) DELETED is calling DELETED (Title officer) twice a day for a status update and what they keep telling me is that the paperwork from the City has not yet been received.

Can you tell me if there is a reason for this and when I might expect this paperwork to be completed?

I'm in a bit of a panic now (to put it mildly) because I need to be out of the apartment so they can clean and paint it over the weekend. I have so little information, I don't know whether to put my things in storage, board my pets and get a hotel for my son and myself. This is also very stressful because most of my money is tied up in the condo and I'm bleeding what little money I have left....sleeping in an apartment on my couch and hoping that the truck on the street in front of my complex doesn't get ticketed or worse yet robbed. Hauling everything back up two flights of stairs was pretty much out of the question (For health reasons - DM).

I feel absolutely miserable. It would be quite ironic to wind up homeless after all this.

If you can shed any light on what is going on, or help me plan what to do next I would appreciate it. I'm really in the dark here.

My phone and internet are at the new place. I had been taking vacation time to move in, but I don't see the point now, so I'm back at work trying not to worry.

This is, unfortunately, not an atypical experience. Public program means you're on a bureaucratic schedule. It's not that bureaucrat's money that's getting spent. They don't get paid any different whether your loan funds and you get your property today, next week, or never.

Furthermore, it has been my experience that companies with the ability to use restricted provider public programs are often looking to boost their profit margin, and because the competition is restricted, they can often get it. That's one of the reason that FHA (among others) is looking to reduce their annual audit requirements, so that the small brokerages and those with thinner profit margins might be willing to sign up and endure the hassles. I've seen firms charge two points and over half a percent higher rate because the competition was mostly eliminated, and what was left was other high margin places. Special programs nobody else has are a license to print money, particularly if access to those programs is restricted by the government. The fewer providers who can do it, the less competition there is, and usually, the higher the mark up they want in order to for the privilege of being one of the selected beneficiaries.

This is not to say that all public housing programs are difficult, or delayed, or costly. There are individual providers who provide just as good a product at just as good a price. However, the statistics seem to be a much higher than usual incidence of delays, costly extras, and just plain gouging going on due to restricted competition.

This is also not to say in any way, shape, or form that public programs aren't worth it. The lady could never have afforded this unit, part of an income restricted program, without a municipal government stepping up to the line on her behalf. Those with a knowledge of economics may realize that this means the other units were made more expensive due to this, likely pricing out other potential buyers so that this particular person could have a better unit. Robbing Peter (and Penny and Porgy and Poppy and pretty much everyone else) to pay Paul and the bureaucrats helping Paul, but that's a matter of housing policy supported by the voters, and my choice is to help Paul or not to help Paul. Peter, etcetera have already been robbed and they're not getting the money back. The bureaucrats will be paid exactly the same whether I help Paul or not. The only question will be exactly who gets this benefit, and I think that under the circumstances I might as well help Paul get them. And if Paul doesn't take it, somebody else will. From an individual choice perspective, such programs definitely assist people in affording housing superior to what they could otherwise afford.

However, you need to realize that there are likely to be delays and unexpected extras in a program like this. One of the requirements of many of these programs is a certain maximum amount of total assets - but if that's all you can have and you have to use some of them for down payment and closing costs, this can mean you're cutting it really tight as far as other expenses go. Indeed, on this scale, paying for an extra few weeks rent at your old place can be a real hardship - but that's the cold hard fact of what happens quite often. If you put in your thirty days notice to the landlord, you're stuck when escrow doesn't close on time. If you don't put in your thirty days to the landlord, you're stuck paying rent for the extra month, costing (in this case) a minimum of about 15% of her total liquid assets, never mind what was left over after what she paid.

There is no universal guide to this situation, and what works in some situations may be totally inappropriate in others. One of the best things is an elected ally in the bureaucrat's chain of command. Another is the willingness of a family member to step in with a gift or extend an interest free loan if you require it, because pretty much all of these first time buyer programs have income and asset limits, and if your cash falls short, everything you paid is pretty much wasted. You won't get the property, and you're unlikely to get that money back.

Caveat Emptor (literally!)

Article UPDATED here

Hi Dan,

I was reading your article on "should you pay off your mortgage faster?" (DM: link here DELETED It'll be a fresh 30 year loan and I'm 44 years old so this discussion has interest, I don't really want to be making a mortgage payment at 74 ;).

I must be really dense but A: I don't get it and B: the table looks like it has an error in it to me.

Start with B: first - the investment column can't possible be correct. The assumption is you save or pre-pay $100 per month and invest at 8%. The amount for year 1 is $1,353.29, if you saved $100 per month at the end of a year you'd have $1,200 in principal + $100 * 12 months @ 8% + $200 * 11 months @ 8% + $300 * 10 months @ 8% etc. Even if you socked away the whole $1,200 on day 1 you'd only have $1,296 and have to pay taxes on $96.

What I don't get is this - by prepaying $100 on my mortgage I get a guaranteed return of 6% or 6.5%, whatever the mortgage rate is. I do not ever have to pay interest on that piece of principal again, it keeps on giving. Yes my payment stays the same but the amount going to principal increases by the amount of interest I am not paying due to the previous principal payment.

Now, the valid comparison to that is a risk free investment alternative no? I've got savings accounts currently yielding 4.5%, 5.3% and 5.4% APY, you might find 6% - might and it probably is an intro rate. Let's be generous and assume I can get the same rate of return on the savings as I pay on the mortgage and put that at 6%. If I pay $1,200 extra in principal on day 1 of the year I don't pay $72 in interest and can't deduct it. If instead I put $1,200 in a savings account on day 1 I earn that $72 in interest. It is a wash, The tax issue is a red herring since not paying the principal gives me a $72 interest deduction but the equal investment return is added to income so (72) + 72 = 0 Could it work out if you put the investment dollars at risk? Sure, but that is a gamble and an apples to oranges comparison.

I have different mental pots of money.

Pot 1 is investment dollars for retirement, 10% or so of income goes to a tax deferred account invested at various risk levels and doesn't get touched - ever. Until I retire at least!

Pot #2 home equity + the carrying cost on the mortgage which is the 25% or so of income that pays the PITI on the house.

Pot #3 is liquid reserves, currently about a years worth of #2's income requirements.

My goal is absolutely to eliminate the P&I part of PITI over time. With enough in pot #3 I'll be plowing as much as possible into principle reduction over the next few years once we get moved in and clear the costs associated with a new house such as drapes and furniture. I make a pretty decent salary but who knows how long that will last? As long as the job is secure I'll keep the current mortgage and pre-pay as much as possible. If a few years down the road I felt a little vulnerable to layoff or whatever I'd seriously consider refinancing the then smaller principle balance for a smaller required monthly nut and keep making the higher payments as long as the income stayed intact. Alternatively I may need to do that in 10 years anyway when my kid goes to College. What we are currently paying in private tuition from current income + available cash flow might be a bit short, or we may be ok - depends on where he goes. I'm a College administrator so if he goes here he gets a 100% tuition waiver, 50% at other state schools. And I did look at saving for College in one of the tax deferred accounts, we don't qualify for all the juicy ones based on family AGI. We could do a 529 but I've made the personal choice that we're better off driving the retirement savings and paying off the mortgage rather than killing ourselves to give the kid a free ride .

I like a guaranteed 6.5% return. With any luck the house will get worth more over time as well making the return even better. I played leverage to the max in 1999 when I bought a townhouse for 78K by assuming a mortgage, I just sold it 2 months ago and cleared $112K cash in my pocket, principle balance was 64K so 14K of the 112K was return of my principle payments. That was great but now we're in a little better position financially and I'd like to preserve it over time. I've owed huge piles of money to CC companies and auto loans in the past - don't ever want to go there again!

One other thought. Despite the current turmoil in the market houses do tend to be worth more over time. Probably not as good as the stock market if the time horizon is long enough but they do go up. In my case 60% of the asset value is borrowed so there is a leverage factor on the return. Here is the thought - under current tax rules that return is tax free where as the stock market return is not. It's all about risk tolerance I guess.

Upon examination, I think you're probably right, although I have assumed "a start of the month/year" program where the question was academic until you actually had some money to put to one place or the other; i.e. an initial $100 today and $100 every month, so a year from today you've got $1300 without interest. Kind of like the old problem where if you've got an eighty one foot wall and beams every nine feet, you need ten beams to have a real structure. One to start (at the zero point), and then another one every nine feet.

The pots of money idea is a good one, but most people shouldn't be limited themselves to theoretically risk free investments, especially once you've got your reserves. 1) They're not risk free 2) The big certainty if you don't take any risk is that you will make less than someone who did. Kind of like being chased by headhunters, and having a choice to sit there and be killed an eaten immediately or jump off a cliff into a river with crocodiles. Sure, the crocodiles might get you, or you might hit the rocks when you land and you might even drown. But if you do nothing, you're going in the stew-pot for certain.

Question: How do you think the bank or insurance company can afford to pay a return on the money? It doesn't come out of some hyperspatial vortex! They take this money and invest it in basically the same places you would. The difference is: They take the risk, they get the reward. This reward is plenty to pay their employee salaries, all the expenses of operating, plus your little pittance, and have plenty left over for the stockholders. If their results are adverse, what's going to happen to your money?

Question: If you never refinance, how hard do you think it's going to be to make a $1500 payment in thirty years? Assuming a 3.5% rate of inflation, about like paying $530 per month now. Shouldn't be difficult at all. If you do refinance, you are making a conscious choice that the other loan is, in total, a better deal for you. Sure you might not have a lot of income. My point is that with time and diversification, the assets you would accumulate from alternative investments will be more able to pay your loan out of interest than any money you saved.

Question: If you can't make the low payment, what will your equity situation be like? Once again, this is assuming you never refinance, but 29 years out, you'll owe roughly $15,000, and the property, assuming average 5% appreciation, while the property will be worth about 4.3 times as much. Even if you never paid a penny of principal down, that's well over a million in equity. This gives you options such as selling (take the money and run), a RAM (take the money and stay), etcetera. Stop thinking of money as something that pays the rent and other expenses, and start thinking in terms of what it can do.

Furthermore, it's not a risk free 6.5%. For most people, it's more like an effective margin of 4.7% or less. I'm not advising anyone to go out and strip equity without a very strong reason to do so so and a clear eye on potential consequences, but which after tax return sounds better to you: 4.7% or 7.2%? I agree with the NASD rule that prohibits member firms from accepting borrowed money for investments, but I have admit that it does work, at least for the numbers in theory. The 7.2% assumes investment income is all ordinary income, fully taxed every year. In point of fact, at least some is likely to be capital gains and some is likely to be deferred. The downside is that any investment return is purely speculative and you could lose your principal. You don't ever gamble with money you can't afford to lose, no matter what the long term odds. Nor do you put it all on the same bet, no matter how you split it up. On the other hand, the biggest risk is not taking any. Instead of paying off your mortgage, diversifying your money amongst a sufficient number of stock and bond investments is so likely to leave you with so much more in total net assets over the next twenty years that the expected exceptions are a statistical non-event.

Caveat Emptor

Article UPDATED here

How Easy Scams Are

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Hi, my name is DELETED, I need help. I bought a house (a few months ago) because my boyfriend persuaded me to. This was supposed to be a real estate investment between us. I put the house in my name and i was supposed to get $9000 and he was gonna keep the rest to do the repairs. I never received my money and he never did the repairs on the house and we ended up breaking up (about a week later). I started getting suspicious, (a few days ago) I found out that the appraiser lied on the appraisal. He lied and changed the square footage of one of the comparable houses to make around the same square footage of my house showing that it sold for the same price I brought my house. There is more to make me think he lied. I found out that the mortgage person, the seller, my ex and the appraiser all know each other I think it was a set up. I have a lawyer, but what can happened after the loan is already in my name. This house is not worth what I bought it for he appraised it around $50,000 more. Will the mortgage company have to buy the house back because they are supposed to check it. When I looked up the appraisal company that he had on the appraisal, it doesn't even exist. Please give me some advise, will I be stuck with this house?

Based upon this information, I'd say you were most likely the victim of a scam.

Talk to your lawyer. It sounds like you've probably got a good case for a civil suit, and can make criminal complaints as well for fraud and conspiracy. However, you have title to the house and a Note that says, "I agree to pay..." and a Trust Deed securing said Note. Just because you are the victim of a scam does not relieve you of your obligations under said Note and Deed of Trust. Not living up to those obligations is one of the best ways I know to make a bad situation worse. It's going to take a while - probably years - before you recover anything of what you've been taken for, if you ever get it. The wheels of justice grind slowly, and require a lot of lubrication in the form of money. Just because you're the victim doesn't change the process. It's conceivable that your lawyer may even advise you to let it go, if in their judgment you're unlikely to recover enough to make it worth your while.

Before we get into the main issue, let me cover a special red flag that was ignored. When you are buying a house, you are not going to get cash back - not with the approval of the lender. As I went over in Real Estate Sellers Giving A Buyer Cash Back, this is fraud, in and of itself.

Lots of people get talked into cutting corners in their transaction or doing without an agent because "agents don't really do anything." However, there are so many scams out there that any time you cut corners you risk getting taken for the full amount of the transaction. Lots of folks discount the possibility - until it happens to them. And it does happen. Real estate is the largest dollar value most folks ever get involved in, and scamming a little extra is likely to be major money in and of itself. A certain percentage of all transactions have issues - and when someone tries to talk you into short-circuiting your protections, that's pretty much a red flag that this is one of those transactions to beware.

Not falling victim is worth a lot more than those protections cost you. As a buyer's agent, I tell people that my goal is to make at least a ten percent difference in the quality of property, the price, or some combination. That's in addition to preventing things like happened to you. Having an agent gives you someone responsible to you. Someone you can sue if something goes wrong, so they have incentive to guard your interests. Someone with insurance (deep pockets!) and a license and a broker supervisor who should have monitored the situation. Not to mention who should be able to prevent the situation happening in the first place.

Can you stop collusion between the appraiser, the loan officer, and the seller? No. Stopping collusion is difficult, as anyone who has ever studied accounting can tell you. A lot of the curriculum goes into the subject of controls, and separating functions so that it's only with multiple people cooperating that assets get embezzled. But with an agent who knows your market on your side and bound to you, it's a lot less likely they'll get away with it. How likely would you have been to buy the property for the price you did if an agent had said, "I can get you a better property for the same money" (or something like it for less)? Kind of likely to short-circuit the entire scam, eh?

Caveat Emptor

Article UPDATED here

One of the giants of the twentieth century would have been 100 today - July 7, 1907 Robert Heinlein was born.

You are missed, sir.


Why do terrorists attack Britain time and again?


Pope eases use of Latin Mass

I've never heard it and doubt I ever will, but I do want to comment on one small detail:

Criticism also came from Jewish leaders, unhappy with the restoration of a prayer for their conversion, said during Easter Week. The Anti-Defamation League called the move a "body blow to Catholic Jewish relations."

As opposed to the Muslim prayers in mosques worldwide for the slaughtering of Jews? Okay, this is something the Pope probably should have fixed*, but let's keep our sense of priorities here. How many religions don't want to convert those who don't follow them? Not many. So long as it's a prayer for the conversion of the "heathen" among those who have chosen to be there, I see no significant sin. "Those horrible awful Catholics are praying for people to convert!" Roll your eyes and move on.

*: he's the pope, and I'm not catholic or any other christian sect. Long as they don't start any religious persecutions, it's more than a little ridiculous for anyone outside of a religion to expect to have an effect upon the practice of that religion. They can sit in church and pray for their idea of god to put crosses on all the hilltops, for all I care. The idea behind not being catholic is that you think your thoughts are likely a truer picture, right? So I might start paying attention if suddenly one morning all the Jews did become Catholics in accordance with that prayer, but until that happens, I'm sort of doubtful, to say the least. This was used for centuries without any apparent effect upon the non-Catholics of the world.


Iran sees "creeping coup" in the press: report

Better explanation?

Activists and Western diplomats say the authorities have become increasingly intolerant of dissent, turning the screws on pro-reform students, campaigners on women's issues and labor movement figures.

I am continually confirming that a large percentage of people can't handle negotiations like an adult. They focus in on garbage and ignore what's really important.

I recently was going to deliver a loan that cost less, as well as being 3/8ths of a percent lower interest rate on exactly the same terms as the competition quoted. Furthermore, my quote was guaranteed where the competition's was not. However, because my company's compensation was disclosed while the competition's was not, they chose the other loan.

Real Estate loans are not something that the minimum wage fast food worker can toss off in a few seconds like filling a soda cup. If we get all of the paperwork just right with no hitches and everything works on the first pass and it doesn't take too long to price it, such a loan can be done in five to ten working hours. But doing so requires not just the right situation, but a lot of skill and a not inconsiderable amount of knowledge of the loan market.

Nobody does loans for free. Typical loan production, even at a busy brokerage, is three to six loans per loan officer per month. That's got to pay rent and utilities and the salaries of everyone from the receptionist to the CEO. Yes, I've done more, but if you investigate you're going to discover that for most loan officers, most of their time is spend prospecting and selling. That's part of the reason why most places have processors and transaction coordinators - to relieve sales folk of tasks that they don't have to do so they can go out and sell more with the time they save. I can point to lenders and brokerages where basically the only work that loan officers actually do is talk to prospects and clients. They don't price, they don't do the application, they don't process, they don't deal with underwriters or escrow or title, they don't attend signing - all they do is talk to the public. The reason for this is so they can talk to more prospects. The time of good sales folk is important, but some of these loan officers have no clue as to whether the loan is ultimately going to be approved. This is one of the reasons why people end up with different loans than they were originally told about. There was a reason why they weren't going to qualify for the loan on which the loan officer gave them a low quote, but the loan officer didn't know, and it's sure as gravity no one else is going to tell you between sign up and delivery, and at delivery, your choices are to sign these documents or don't. If you need that loan at that time, guess what? You are going to sign those loan documents and become part of the statistics.

Last month, I had some people call me through Upfront Mortgage Brokers (UMB). They had heard the UMB way was better, and it is better than most, but it requires you be able to deal with money like an adult. These people wanted a million and a half dollar loan with a low down payment. They had great credit and likely sufficient income, but they wanted an A paper loan with no pre-payment penalty. Now I can get zero down payment A paper loans with no pre-payment penalty no problem up to the conforming limit (currently $417,000), but above that, lenders start making it harder and harder, and there are three break points in most lender's rules between conforming loans and a million and a half. When I'm working under UMB rules, I have to negotiate every penny that my company is going to make up front, and I told these people that my company needed $5400 to make that loan worth our while. This was between three and four tenths of a point grand total, and that included credit and what the processor was going to make. But that sounded like "too much" to these people, who told me that they were going to the bank who "promised never to charge more than two points." When you do the numbers, they were telling me that $5400 was "too much" but $30,000 wasn't - not to mention the fact that I know this lender, and they'd have made another four percent on the secondary market with the loan they gave these people - $60,000. It's to be admitted that the lender I was going to put them with likely would have made about 2.5 percent, or a little under $40,000, selling their loan on the secondary market, but these lowered margins roughly $45,000 total that I and my lender would have made versus $90,000 that the other lender would charge translate directly to less cost, a lower interest rate, or some combination of the two (there is ALWAYS a trade off between rate and cost in mortgages). Indeed, the loan I quoted was better all around to the prospective client - but my compensation was disclosed and theirs wasn't. So this person, a highly paid professional who should have known better, went with the other provider.

So despite the fact that working to UMB guidelines actually lets me quote and deliver loans with slightly better pricing, I have discovered that it's mostly a waste of my time. The client is assuming pricing risk, all I get is a flat, pre-negotiated fee - but they know what that fee is, and it's not what most folks think of as "cheap." Never mind that it's a lot cheaper than the provider they ended up with, people seem to think that the $5400 they know about is somehow worse than the $30,000 they don't.

The smart thing to do, of course, is judge that loan based upon the net terms to you. Type of loan, rate, total cost, and whether there's a prepayment penalty. I can get my commission paid out of yield spread or rolling it into your balance, same as anyone else. You don't have to write me a check just because I'm working for known compensation. In fact, since that known compensation is less, I can get you a lower rate, or pay some or all of the closing costs that you'd end up paying through another provider - sometimes even both. But just because I can't hide my compensation in your new loan amount and rate, or pretend that I wasn't paid somehow, doesn't mean the other loan is better than mine.

Loans aren't free. If you don't understand how someone is getting paid, chances are they are making a lot more money than the loan officer who is willing to go over it. If this seems like too much work to you, judge competing loans by the terms to you: What type of loan is it? What is the rate? How much will it cost, grand total? Is there a prepayment penalty? Will they guarantee their quote, or are they just talking? Ask specific questions, and don't settle for anything other than specific answers. The usual modus operandi is to hide loan costs in your new loan amount after pretending that there aren't any until you go to sign documents. Just because nobody wants to talk about it doesn't mean the answer is "zero." Just because you don't have specific numbers doesn't mean it's going to be better for you - in fact, the opposite is the way to bet.

Caveat Emptor

Article UPDATED here

Happy Birthday to the greatest nation on earth! Some July 4th miscellany

The text that started it all

What signing cost the delegates

Disabled Iraq vets still trying to win one for the U.S.A.

(video) painting Liberty in three minutes

Road to independence was perilous, long

Freedom isn't Free

Calvin Coolidge upon the Declaration of Independence


Clinton criticizes Libby prison commute

"This (the Libby decision) was clearly an effort to protect the White House. ... There isn't any doubt now, what we know is that Libby was carrying out the implicit or explicit wishes of the vice president, or maybe the president as well, in the further effort to stifle dissent."

Had that been the case, the president could have issued a pardon before it even went to trial.

Not that Ms. Quid-Pro-Pardon has any room whatsoever to criticize anyone else's use of the pardon. Mr. Bill issued 140 last minute pardons, and it seems likely to me that his wife participated in the political payback for several of them. (here's a list, that includes persons such as Mr. Symington, corrupt former governor of Arizona)

President Bush really has become Emmanuel Goldstein, hasn't he?

(Run it through a search engine if you've never read 1984)

The President commuted Libby's sentence so that he wouldn't go to jail for an investigation where no crime was committed beyond getting confused in testimony to the investigator.

Politically stupid, but the right thing to do for Mr. Libby. How many people would be ecstatically happy to be put in prison for two and a half years for getting confused in your testimony during an investigation where they knew no crime had been committed before they started talking to you?


Chinese villagers eat dinosaur bones

Kind of makes you wonder if that's not what has been happening to a lot of fossils for a very long time.


Red Mosque students surrender slowly


Pulsing Giant Star Dissected

Red giants are older versions of the sun that, once they have burned off most of their hydrogen fuel, begin to burn helium. This creates intense "flashes" of radiation that puff the star up to more than 100 times its original size as it pushes stellar gas and dust out into space. S Orionis sheds about the mass of Earth each year.


There isn't much the crooked Yemeni regime won't stoop to, as Armies of Liberation notes in Abdulkarim Al-Khaiwani Arrested on Fabricated Terror Charges

The vast majority of the population out there wants single family detached housing. The virtues and benefits of the single family residence have been extolled ad nauseum, and the drawbacks of the alternatives are the stuff of urban legend.

Unfortunately, in San Diego and many of the other densely populated urban areas of the country, the price of single family detached housing has gone beyond what the average person can afford. Even if they fall somewhat from this point, in many areas, San Diego among them, the price of a single family residence isn't going to fall to what the average worker can afford. The supply is too low, and the demand is too high. When you consider economic reality, the evidence is overwhelming that San Diego is at least close to the end of the price decline, and even in other areas where things haven't fallen much yet, there's a limit to how far they're going to go.

So for people earning average wages, the choice becomes purchasing one of those alternative forms of housing, saving until they can afford it, or being a renter for the rest of their life. I went over how little saving for a down payment helps most folks, and how a strategy of buying what you can afford now helps more and faster than saving for a down payment. One further option exists, of course: Move to a less expensive market, but that requires finding a job there. There's a reason that all of the highly demanded urban markets are in high demand: That's where the jobs are!

Still, people will tell me they don't want to buy until and unless they can afford a single family detached house, with no association. That's fine if they're going about the process of saving. Most of them would be better off buying the lesser property and using the appreciation to leverage their savings, but it's okay to decide to take an alternative route to getting what you want. It's a free country.

However, in my experience, it's really rather rare to find people who are actually putting the money aside. It's great if you want a house and are putting the money aside to make it happen. I just helped a young couple that could afford a beautiful house in a great area because they both worked hard and saved something like five years of their combined earnings for a down payment, but they're the rare exception. I know a lot more people that have been planning to buy a house for twenty years and have nothing saved at all, than I do people like that couple.

The cold hard fact of the matter is that if you're making fifteen or twenty dollars per hour, you can't afford the payments on such a single family detached house unless you've got a huge down payment. That's not likely to change unless we start being a whole lot friendlier to development, and in places like San Diego, there isn't room to do so even if we wanted to. There's too many people who want that sort of housing, and not enough land and not enough houses to go around. High demand, limited supply. Remember your first economics class. What does that do to price?

People will tell me in one breath that they don't want to deal with home owner's associations, then turn around and tell me they'd rather continue dealing with landlords. Landlords have more power than HOAs, and are less subject to moderating influence. If you're an owner, you have a vote and a voice in the HOA, and you can even run for the board yourself. If you're renting and don't want to follow the rules, the landlord will evict you and find someone who will. They have all the power they need in a 3% vacancy rate!

There is always going to be a wider market further down the socio-economic pyramid. There are more folks making fifteen or twenty dollars per hour than forty. Even those making more have the option of buying cheaper housing, and there are those who do so, while those who attempt tricks to afford more house than they can afford regret it pretty universally. If you buy the property, you owe the money and are paying the interest. Tricks like negative amortization, that make it look like you can afford more property than you really can, will come back around to bite you, with so few exceptions as to be statistically a non-event.

In California, townhomes and PUD developments are most often legally condominiums as far as title goes. It's just the physical set up that differs. Condominiums are multiply layered, stacked one on top of another all in the same building. Townhomes are typically only one unit high. They may be multiple floors and have shared walls, but no upstairs or downstairs neighbors. This improves the privacy situation, but it also increases the price, because land is what costs the most money, and there's only one unit on any given piece of land. PUDs are one further step up the line: They may be individual completely detached structures, but they share a common lot, so maintenance and such is usually shared, and you usually have to match the neighbor's decor. There may not be much space between units in a PUD, as I've said before, but there is usually some. All three usually have some sort of shared recreational facilities, as well, but not necessarily.

There are ways to do each sort right and wrong. The sin most developers commit with PUDs and townhomes is trying so hard to cram as many as possible onto a given piece of land, that each unit has effectively no privacy. With pure straight condominiums, the main sin committed is failing to insulate each unit sufficiently from noise in the neighboring units. Doing it right isn't cheap, and cuts into the profit margin. This also happens with townhomes and some PUDs, but to a far lesser extent. A complex where the developer did it right will be a little more expensive per square foot, but will be a much better investment. Granite counters and travertine floors get old, get dirty, and eventually do need to be replaced. The fact that you and your significant other aren't entertaining the neighbors every time you get intimate, that you can have friends over without disturbing the neighbors, or even that you have a private little back yard to barbecue in, won't.

If you're careful in your initial purchase, you can be happy and private in a condo, townhome, or PUD for many years. If you fall for a bad unit with nice surfaces now, you're going to suffer. If you pick a good unit, the way that leverage works will quite likely leave you very happy with your investment. If you pick a bad one, not so much. If you pick a good one and decide to stay, you'll likely find that your cost of housing becomes a low fraction of what rent would cost before too many years have passed.

If you can't afford the payments on a more expensive property, it's not a good idea to buy it. But if you don't buy anything at all, the economic prognosis for lifelong renters isn't good. This means that if you can't afford the property you really want, it's still a good idea to buy something your family can live in. Condos, townhomes, and PUDs may not be as great as single family detached housing, but they're a long way better than renting, and you can use the leverage inherent in the way property values has worked for the last century or so to help you get where you really want to be more quickly and more easily. Even if you never move up, you have placed your costs of housing permanently under your own control, given yourself a voice and a vote in how things are run, and the odds are overwhelming that you'll end up in a much stronger economic position.

Caveat Emptor

Article UPDATED here

Carnival of Personal Finance

Carnival of Debt Reduction

Carnival of Capitalists


I apologize if anybody tried calling my office today. I fell and hurt my leg, then by the time I got done with a client, they had the road blocked due to construction. I tried asking a cop how to get there, and he basically said, "You can't." It doesn't look like anyone else managed to successfully run the gauntlet either. Here's hoping it's easier tomorrow.

When I'm doing my initial automated search for properties for my buyer clients, I always pay close attention to listings represented by agents out of the immediate area. Why? Because an agent from fifteen or twenty miles away probably has no understanding of that neighborhood.

There are exceptions, of course. Agents who habitually work Santee despite the fact that their office is in downtown or La Jolla. Agents who habitually work La Jolla despite the fact their office is in Penasquitos. And there are always agents, who have a prospect that motivates them to do the necessary work outside of their usual area. I just finished one set of clients I was looking for in Clairemont, and I'm working with another set even further away. I've been out working for these people most of the month of June, getting an understanding of what their market is really like in their price range, and I'm not showing them any property until next week.

Even a lot of agents don't understand how local markets really are. I just helped some folks buy a property right in the middle of my usual area. But they're looking to turn around and sell a property they have a partial interest twenty miles outside my usual area. I told them I would be happy to help them, of course, but that I'll need some time to do my research as to how to price the property, and while I'm doing that, I'll also have to figure out what the effective advertising venues are in the area. One of their siblings talked to an agent at the other end of San Diego County, and this clown told them, "no problem," and gave them a price - sight unseen - that was appropriate for the high cost area where that agent works, a place where everything is basically completely different. Lifestyle, demographics, commute. I couldn't say for certain yet, but my guess is that this agent missed an appropriate price by at least ten percent.

It took some time to sink through my head when I started acting as an agent, myself. But unlike mortgage information, where the information is good for the entire state of California with only minor changes from some lenders for differing counties, and I can stay abreast of the entire state's lender market for about the same effort it takes to stay current anywhere, real estate is hyper-local. If an agent wants to work outside of their usual area, they're going to have to do some serious extra work. Even within my usual stomping grounds, La Mesa is different from El Cajon is different from Santee is different from the adjacent areas of the City of San Diego. Each of them has neighborhoods and developments of different design and character and things going on, and there are only so many you can keep track of, because there are only so many hours in the day.

Now it is to be admitted that a lot of agents don't understand this. I've met a lot of them who won't do the work to stay current in their specialty areas, let alone outside. Prices move, neighborhoods become hot and cool off, and time of year is a variable as well. Major projects happen. The market you knew cold six months ago has changed.

My point is this: When you choose an agent who doesn't make a habit or working the neighborhood, if they're being honest with you, they'll tell you it's going to take some time for them to learn enough of the market. If you're a buyer, chances are that you've got plenty of time, but if you're a seller with a deadline, the time it takes that agent to figure out the market can take a large bite out of your sale time. The alternative is to take a chance on pricing from an agent who really doesn't know your market, and marketing from an agent who may not know how to get your property sold effectively here.

Caveat Emptor

Article UPDATED here

One of the best ways I have of telling how good a listing agent is is whether they get the counter to me before the offer has expired. Not that someone who gets the counter back to me quickly is necessarily wonder-agent, but that someone who doesn't sure isn't.

The whole idea of the purchase contract is that it becomes a legally enforceable contract when accepted. But if you're missing the "little detail" of timeliness, the contract hasn't been accepted, indeed it becomes impossible for it to be accepted unless someone is capable of time travel.

Missing offer deadlines has become common of late, with sellers hoping for better offers, so they sit on this one until too much time has passed, thus hurting their case further.

The other side missing the detail of timeliness gives my clients power. Now my clients can choose to accept what has become a counter-offer rather than an acceptance, because even if the other side intended to give a full acceptance, they haven't. There's this not so little niggling detail of the fact that the original offer has expired. It's dead. It's an ex-offer.

The other side missing deadline gives me information. After the deadline, I'm pretty certain there aren't any other offers going on, no matter what the other agent says. If there are other offers, they're not good offers. If there were other good offers, better than mine, why are they countering me so late? When I have multiple offers on one of my listings, I get each counter out there as quick as I can, and the proviso that another offer is not previously accepted is on every single one of them.

This means that my client is in a stronger position than they were in initially. Not infinitely stronger, but noticeably stronger. Particularly in the buyer's market we have locally and in most of the rest of the country. Even in a seller's market, it tells me that no one else wants this property at that price. It may be grounds to counter even lower.

This means that an agent who sits on an offer (or counter-offer) is weakening their clients bargaining position, i.e. violation of fiduciary duty. Unless it's the client who just can't respond, that agent has now incurred the possibility of action. Even if the client has been told of the offer, I always feel that I need to tell them that most offers have expirations, and the sooner they counter, the stronger their perceived bargaining position.

It's no better for a prospective buyer to miss a counter than it is for a prospective seller. There must have been something about that property that was attractive to you. Properties for sale never last longer than the first person who does what is necessary to get the seller to agree to terms. Once it's in escrow with someone else, it's too late to decide you want it. Unless it falls out of escrow - something not under your control - you are out of luck. Being a back up offer is most often a sucker's proposition.

This doesn't mean I make a habit of demanding responses within 24 hours. That's overplaying your hand in most situations. But a deadline of three to four business days is quite reasonable, and situations where it may be to your advantage to delay are rare. If you can't respond to an offer or counter-offer in that amount of time, something is wrong.

Caveat Emptor

Article updated here

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