August 2007 Archives
This is to clean out the Links and Minifeatures from stuff I've noticed over the past few days.
I've found a forum that might have the information on Movable Type 4 I need. Hoping to have the switch made before next week.
U.S. sees "precarious" year for Iraqi government
The biggest US failure in Iraq has been failing to force the Iraqi government to solve problems, rather than fighting over control.
Of course, we have just a little bit of that problem here at home.
U.S. missile shield is provocation: Austrian minister
Like wearing body armor is provocation for mugging?
The article didn't indicate what reasoning the man might have had. Likely, he doesn't have any. He is the defense minister for a state that might as well not have a military. Don't expect him to be a genius. Expect him to be a political hack, with a lot more concern for what is easy politics right now than for actually defending its citizens.
Mortgages: Smaller Banks Smell Blood
I keep saying there are lenders out there who want to lend money. And I'm always looking for more wholesale providers. Not that it's hard to find them if you know where to look.
Subprime Mortgage Crisis Spreading to High-End Housing Market
If that sounds familiar to you, I wrote about it over three weeks ago as the first entry in Links and Minifeatures 08 09 Thursday. AP's just picking up on it.
I do apologize that this is going to be extremely basic, as I'm in the midst of moving this site to a new host. I received six entries, of which I accepted five.
Host's Pick of the Carnival: The Digerati Life gives us a really terrific article on home improvement projects, Beyond Home Buying: How Building And Renovating Can Be The Biggest Investments Of Your Life, a sobering before the fact look at remodeling your home. My father was a small contractor, and the stories I could tell you about remodeling and renovation would have anybody sane thinking three times about home remodeling, and Digerati Life gives you some excellent procedural advice, as well as a little bit of a "gut check." Seriously folks, sometimes it's quicker, less expensive, and far less stress inducing to just move instead.
Salt Lake Real Estate Blog gives us Don't Take No For An Answer On Your Mortgage, talking about how you shouldn't just accept it if the first place you apply turns you down. At the risk of beating our own drum, right now brokers are especially important for those with a lower credit score or less of a down payment or less equity than ideal. Why? Mortgage brokers deal with lots of different lenders, all of whom want that broker's business.
Myth # 6 Sellers Are Often Told That If The Buyer Cancels, They Can Keep The Deposit (easier said than done) from Silicon Valley Broker makes a good point. Agents can never honestly tell clients that the deposit will or will not be forfeited - all you can do is say what may place it in jeopardy. The only way to say for certain who gets the deposit is to answer the question "How did the courts rule?"
Edith Yeung.com Dream Think Act gives us The Money Series - Books that You Just Cannot Miss
My entry for the Carnival is from my other site, Good Intentions and Over-Extended Homeowners, looking at proposals to mitigate the current meltdown and the law of unintended consequences.
The Consumer Focused Real Estate Carnival will return in two weeks. Contact me if you'd like to host!
(I do use one piece of non G-rated language below. I hope you'll agree with me that it was necessary to convey the proper sentiment)
USA Today had an oped, "3 ways to help borrowers without bailing them out"
Their suggestions?
Bankruptcy reform. About the only debt a bankruptcy judge can't modify is a home mortgage. Borrowers used to get into trouble not because of unsustainable mortgages, but because they lost a job or got ill. Now homeowners commonly fall behind because they can't keep up with their mortgages. Bankruptcy judges should get more latitude to rework mortgages along with other debt.
That's because it's a secured debt. Indeed, it's a debt secured by a specific asset.
Indeed, mortgages on owner occupied property are already subject to more and stronger protections than any other kind of debt. It takes a minimum of just under 200 days for a foreclosure to happen in California, and we're one of the shorter period states. Notice of Default can't happen until the mortgage is a minimum of 120 days late. Once that happens, it cannot be followed by a Notice of Trustee's Sale in fewer than sixty days, and there must be a minimum of 17 days between Notice of Trustee's Sale and Trustee's Sale. Absolute minimum, 197 days, and it's usually more like 240 to 300, and it is very subject to delaying tactics. There are lawyers out there who will tell you if you're going to lose your home anyway, they can keep you in it for a year and a half to two years without you writing a check for a single dollar to the mortgage company. It's stupid and hurts most of their clients worse in the long run, but it also happens. Pay a lawyer $500, and not pay your $4000 per month mortgage. Some people see only the immediate cash consequences, and think it's a good deal.
While all this is going on, the mortgage company is losing money. That money isn't free to them; at the very least it has opportunity costs - other things they could be doing with the money and earning a profit. But lenders are paying a daily fee for almost every penny in their portfolio. They make money off of the spread between what they pay and what they earn. But if their earnings are zero for this particular debt, they're losing money on this particular debt, and they've got to make it back elsewhere - which means that everyone who doesn't default is paying a premium on their loans for everyone that does. This would cause future mortgage rates to rise, further exacerbating the decline in housing values and putting even more people into trouble. If you don't understand this, you need to go back to high school or read an elementary economics text.
Now allow bankruptcy judges to play with mortgage indebtedness, and there just isn't anything they can do that doesn't result in the lender losing money involuntarily. This is a government taking of private property, explicitly and without possibility of exception for private use. Anybody remember the Fifth Amendment? If it doesn't protect all of us, it doesn't protect any of us. The Kelo decision, which generated a huge flap, at least had a public entity taking title before deeding it over to a private developer. None of these cases would have even that fig leaf. Not to mention that in many cases, the lenders themselves are victims of fraud to one degree or another. In a large fraction of these cases, the borrowers and loan officers were assisted by the lenders employees and policies, but in others they weren't and the lender is just as much a victim as someone who's been mugged - and now we want them to get mugged again by the legal system?
A few more things on this topic: Real estate, being for high dollar amounts, is one of the most profitable targets for scams and confidence games. I can see the general outlines of half a dozen scams that would be enabled by giving bankruptcy judges the ability to modify mortgage indebtedness. I mean legally. Most people wouldn't do it to start with, but the temptation of having your mortgage debt legally reduced, or the payments that go with it, would quickly become very attractive. Get your mortgage debt reduced by $100,000 because that's what you can afford to pay and now you can turn around and sell for a profit. Get your mortgage payment permanently reduced from $4000 to $2500 per month, and either you have a negative amortization loan imposed by judicial fiat, or you have a loan that the lender is stuck with that's only worth about sixty percent of its face value. Especially given the general non-enforceability of "due on sale" clauses, this is not only taking property from the lender, but it's essentially going to require them to hold it for the full term of the note, as nobody in their right mind is going to want to refinance or pay that loan off. Net result: everyone starts working these scams. You think the situation is bad now? If the lenders were subjected to that, rates would go sky high, minimum down payment requirements would skyrocket, and housing values would crash worse than stocks in the period 1929-1932, because nobody would be able to get a loan on any sort of terms even vaguely comparable to what we've got now. We'd have people putting their houses on credit cards, not only because the rate would be comparatively attractive but also because most folks would be able to get a credit limit high enough to finance 100% of a property. Statistical Abstract has there being 123 million pieces of real estate with a median price of $206,000, giving an approximate total value of $25.3 trillion dollars. Under such a scenario, I'd be surprised if prices didn't collapse by 80%, wiping out $20 trillion dollars in wealth directly, or about twice the size of the national debt. Second order effects would increase, if not multiply, the size of the loss. The Great Depression would look like an economic paradise by comparison. All because you want to give people "a little help" and don't think about the consequences.
Lenders will modify notes on their own without compulsion from the courts if you can come up with a scenario where it's in their best interest - by which I mean they'll get more of the money they loaned you back, complete with interest. And if you cannot supply such a scenario, the lenders are correct to foreclose as promptly as possible. That's not just their money. More than half of all Americans have bond investments. It spreads out the risk and the pain, but don't kid yourself that corporations are the only ones hurt. They're not.
Tax code changes. Sometimes, badly strapped homeowners can persuade lenders to reduce the size of a mortgage to reflect a home's plummeting value or the homeowner's inability to keep up with the payments. Sometimes, the lender forecloses and a homeowner can walk away with no house, but also no debt. That would seem to be the end of the story, but it isn't to the IRS, which often considers either action as income to the borrower, and sends a big tax bill. It makes sense to alter the code to keep the tax collector from making a bad situation worse.
I've written on this tax consequence several times in the past. There are good reasons why tax law and tax policy are written that way. What we're trying to do is give people the greatest reasonable incentive not to try scams of this nature. Not to go into debt figuring that if it all doesn't work out, they can just walk away. We're all supposed to be adults. One of the things adults are is responsible for their debts. This is one reason why lenders are willing to loan money - because there are concrete reasons why it is in the borrower's best interest to pay those loans back. Remove that fact, and you've removed the underpinnings of our entire banking system. If you don't understand the economic consequences of that, at least in broad, have the courts declare you legally incompetent and appoint a guardian. You are not competent for any economic matters. You shouldn't be voting. You probably shouldn't be crossing the street without supervision and assistance.
Lenders give great rates on real estate because secured real estate loans are comparatively low risk. Secured real estate loans are low risk because people will do basically anything not to lose their house. Take away the risk of losing their house, and people will do a lot less. It's effectively no longer a secured loan. Combined with the protections mortgages have already, rates will be higher than any credit card. For all the beating of breasts and loud flapping of keyboards that goes on, most people are still handling their loans. Yes, lenders lose lots of money every time a loan goes bad. Ninety-eight percent of all real estate loans are still performing. Let that change, and risk goes up, rates go up, and nobody can get a loan and nobody can make the payments, and nobody will be able to buy, so prices come crashing down in such a way that everything we've seen so far will be as flatulence in a hurricane compared to what will happen.
The number one thing that puts people into home ownership is the ability to get a loan. Rich folks are going to be able to afford property no matter what. Those of us who are somewhat less well off depend upon our ability to use someone else's money. Take away that, and watch ownership rates plummet. As a society, we'll go back to living in rented massive slum tenements, simply because that's what'll get built because the average person simply won't have the economic leverage to afford decent housing, or to incentivize those well enough off to finance housing to build the sort of housing we want. Lionel Barrymore's character in "It's a Wonderful Life" seems like a caricature to us, sixty years later, but it wasn't a caricature at all at the time. The people who made that movie saw stuff like that and its results on a daily basis. Many of them - the ones who never became big stars or powerful producers and directors - lived through it. It only seems like a caricature now because the lending environment has become such that the average person can easily get a loan.
Education and advice. Sometimes, a home could be saved if its owner only knew that it was possible to renegotiate the mortgage -- and that a lender might prefer getting smaller payments to no payments at all. Scores of state organizations and non-profit community groups are working to educate and counsel homeowners, and in many cases to help them renegotiate their mortgages to keep their homes.
And 100 percent of those people could be saved by people doing a very small amount of research before they signed the contract. No sometimes or occasionally about it. But people won't do it. A lot of the people who did these loans to themselves were warned, and chose to not to believe the warnings. Poor disclosure requirements, blind trust in someone who acted like their friend. Lack of elementary common sense. When someone tells you that your payment on an $800,000 loan is $2573 per month (and there are many loans even worse than that out there), all it takes is the mathematical ability of a fourth grader, at most, to realize that even if it's interest only, you're only paying 3.8 percent interest and there just aren't any other loans out there anything like that, and maybe there's something going on that you don't understand. I told hundreds of people first person (never mind the over two million visitors to my websites) about the perils of those loans, and the vast majority of them bought the complete bullshit that someone else fed them because they wanted that house and this was the only way they could "afford" the payments, so they did the loans with other people. If I had just kept my mouth shut and done ten percent of those loans, I'd be richer than if I had won the lottery, instead of scrabbling for the occasional person who wasn't looking to buy a property they couldn't afford.
I'm not saying don't counsel people on how to make the best of a bad situation. But that's happening now, without this prescription, making it a null act, simply posturing for the cameras. One of the great things about the internet is that you can find the information you're looking for if you will keep looking, and cross check its credibility. "I found it on the internet," may be a joke when it comes to serious research, but you can find the correct information if you keep looking and cross check credibility, rather than just believing whatever you may find on the Flat Earth Society website.
I'm saying that the best time to stop this problem was before it started. People will fool themselves. Indeed, one of the most important measures of how free a society is, is the ability of an adult to decide to do something stupid after being fully informed of the consequences. Indeed, that's also a good definition of an adult - someone competent to make their own mistakes.
However, the law and our governments aided and abetted the sharks who took advantage of these people by making them appear to be in compliance with extensive disclosure rules that allow the sharks to hide all of the really important and nasty things behind a smokescreen of unimportant trivia. The people got so bored of details that just aren't important that they signed off on things that killed them financially without reading, presuming it was more of the same nonsense. The stupidity wasn't informed stupidity, because the lenders and agents were able to conceal the real mechanics of what was going on, and what would happen in the future. This gave even the shadiest operations enough of a veneer of legitimacy to pass the casual inspection given by someone who wants to believe it. There was nothing in all of that government mandated paperwork that explained the consequences that would follow, as certain as gravity. If there was anything, it was obscured by all of the nonsense. I can write (and have written) a one page loan disclosure that would guarantee nobody would ever sign off on one of these things without being informed, in big bold type, about the consequences. Such a disclosure is found nowhere in the requirements of any state, and even if it was, government requirements would allow it to be hidden in hundreds of pages of stuff like equal opportunity housing and equal opportunity loan disclosures, things that everyone knows about, and it's often in the lender's interest to comply with anyway (I can't imagine anybody in this day and age being stupid enough to practice loan or housing discrimination, and even if they were that stupid, I can't imagine them getting away with more than a very few instances before the law put them out of business). How about re-writing the disclosure rules so the deadly traps are as obvious as possible, and the sharks can't hide deadly financial traps behind the insignificant minutiae?
This article got a lot longer than I wanted it to be. The point that I am trying to make is that it's very easy to make the damage orders of magnitude worse by trying to be compassionate after the fact, thinking that you're "only" damaging "major corporations who can afford it", when the fact of the matter is that these measures would bring our entire mortgage and real estate system to a screeching halt. The correct tack to take for the future is to make it impossible for people to fool themselves before they get into trouble. As for the present, yes, people are going to get hurt. But the system will work its way through the problems. I am opposed to any mass bail-out of lenders or those who voluntarily signed upon the dotted line. Especially if it's taxpayer financed. Indeed, I want to see the lenders and brokers who did this stuff sued and bankrupted by the investors and borrowers they suckered, and the money managers who should have known better sued and bankrupted by the people whose money they mismanaged. Such results discourage and prevent repeat performances of the sorts of things we have just lived through far more effectively than any mitigation proposal I've heard, with far less long term damage. Bail-outs allow the offenders to escape the full consequences of what they did, much like during the savings and loan crisis, which in many ways, set the stage for what's happening now. The best thing we can do, the best proposal I have heard, is to allow the consequences to happen. Otherwise, we'll be going through the same sorry mess, even worse, in a few years. As hard as it may be to stand by and watch people get hurt, I have yet to hear any better proposal that will help them without making the problem an order of magnitude worse.
Caveat Emptor
UPDATE: Welcome Daily Pundit readers and thank you Bill.
Article UPDATED here
Victor Davis Hanson with a long but wonderful article upon the study of war.
Here's a contest:
How many things can you spot wrong with these prescriptions: 3 ways to help borrowers without bailing them out
They propose:
-allowing bankruptcy judges to modify mortgages
-doing away with taxes on mortgage debt forgiveness
-education and advice (actually, I don't spot anything wrong with this one, at least not immediately, but it would be better before the contracts are signed).
Respond in comments. I'm going to try to have a full article on this sometime soon.
Got a search engine hit for
do I make a big down payment on a home or should make a lump sum payment after the mortgage
It's very hard to construct a scenario where using it as "purchase money" doesn't come out ahead. Not to say it can't be done, but it's highly unusual.
Here's the basic rule: You're allowed tax deductibility of the acquisition indebtedness, amortized, plus up to a $100,000 Home Equity Loan. For many years, the universal practice has been to deduct all of the interest on a "cash out" loan even though it's not permitted by a strict reading of the rules. That is now changing, and the IRS has served notice that they are going to be scrutinizing mortgage indebtedness to compare it to acquisition indebtedness, and disallowing anything over what they figure is the amortized amount of purchase indebtedness. For example, if you originally bought your property for $120,000 in 1991, and your original loans totaled $108,000, sixteen years later you might persuade the IRS that your deductible balance is about $85,000, as ten percent loans were common then. But if your property is now worth $500,000 and you've "cashed out" to $400,000, the IRS is likely to prove supremely skeptical of that deduction.
The other reason not to use your down payment money for a down payment is to save it for repairs and upgrades. There's only so many places that the money might possibly come from, and your own pocket heads the list. Cash back from the seller not disclosed to the lender is fraud, and if you do disclose cash back to the lender, you've defeated the only rational purpose for it, because they will treat the purchase price as being the official price less the cash back. You're not legally getting any extra net cash from the seller. Period. If you put the money down and then try to refinance it out, the refinance becomes a "cash out" refinance - the least favorable of the three types of real estate loan. Unless the rates have gone down or your equity situation has improved, you'll get better rates on a purchase money loan, not to mention not spending the second set of closing costs for the refinance because you only did the purchase money loan. So if you need the money for repairs or to make the property livable, you're probably going to want to keep it in your checking account rather than using it as a down payment.
On the other hand, the search question postulates that you'll use the money to pay down what you owe, whether immediately at purchase or later on. After you put the money down, you'll have an improved equity situation, which means that you are likely to get a better price on the loan - a better rate-cost trade-off if you put the money down. Not guaranteed, but it is highly likely. If it's the difference between 100% financing and 99% financing, most lenders treat 99% financing the same as 100%. But if it's the difference between 100% financing and 95% financing, you're likely to get a better loan, or more likely a better set of two loans. Which means you either spent less in costs, got a better rate, or some trade-off of the two. Less money spent equals more money in your pocket, or more money for the down payment, which translates as more equity. Better rate means lowered cost of interest. The fact that it's on less money also means lowered minimum payments, although you shouldn't be shopping loans based upon payment. More importantly, you don't pay interest on money you don't owe. If your balance is $10,000 lower on a 6% loan, that's $600 less interest per year - $50 real savings per month.
If for some reason you want to pay extra, and you're holding on to the money so your minimum payment will be higher, don't. Most loans allow you to pay at least a certain amount extra, and if you're one of those unfortunates with a "first dollar" prepayment penalty, I have to ask, "Why?" There are sometimes reasons to accept a so called "80 percent" pre-payment penalty. There's never a reason to accept a "first dollar" penalty. Not to mention that your lump sum will get hit with the penalty anyway, where if you used it as a down payment, it wouldn't.
Finally, I should note that there are arguments against paying off your mortgage faster. Paying extra on your mortgage does sabotage the gain you get from leverage. You could typically take the money and invest elsewhere at a higher rate of return. Psychologically, however, there's a peace of mind to be had from not owing money, or not owing so much money. The only sane way to define wealth is by how long you could live a lifestyle comfortable to you if you stopped working right now, and if you don't owe as much money, that time frame that determines your real wealth is obviously longer.
The point is this: There are arguments to be made on both sides, and the circumstances can be altered by the specifics of your situation. My default conclusion remains that if your mind is made up that you're using a certain amount of money to reduce debt on the property, either from necessity or because you want to, then you might as well use it in the form of purchase money down payment.
Caveat Emptor
Article UPDATED here
A few days ago, I had an agent get angry at me about an offer below a range asking price. I had submitted the offer with extensive justification as to why it was an appropriate offer. Basically, this clown had overpriced the property, and thought that because he had put a range on it, people were somehow not supposed to make offers outside the range.
Just because you put range pricing on a property, does not, by itself, mean anything. As I've said before, you can ask for any price you want for your property. It doesn't mean the asking price is realistic. It means that you own the property and have the ability to put a price on the property that you want. This doesn't do you any good if the price is above what similar properties are selling for. Having been told it's for sale, buyers have the same options the seller does - they can offer any price they would be happy paying. The seller doesn't have to accept. In fact, the seller probably won't accept. If the buyer offers less than the property is really worth, than the seller is correct to reject the offer. On the other hand, if the buyer is offering what the property is really worth and the seller doesn't accept the offer, they are hurting only themselves.
Right now, most sellers and their agents are shooting themselves in both feet by overpricing the property. Right now there are some special circumstances in effect - the lending panic, the be precise. It's mostly psychological, as there are any number of very solvent lenders willing and able to fund loans, but hysterical reporting grabs attention (which is why they do it). The net effect is that many buyers who would otherwise be in the market are still sitting on the sidelines, and so the ratio of sellers to buyers locally has ballooned to 47 to 1. Imagine yourself in a situation where the ratio of men to women is 47 to 1. The social dynamics are going to favor the women. Even if she's a fat slovenly harridan at the tail end of middle age, she's going to have her pick of men. The men, for their part, are going to have be both good looking and well off to attract even the woman in the previous sentence, and keep working hard to keep the woman around. If you're not willing to do what it takes, and keep doing what it takes, you might as well not bother. Now imagine that people who want to sell are the men, and people who are willing to buy are the women. If you're not willing to out-compete the other 46 sellers, why is your property on the market? If you need to sell, then you need to do what is necessary to out-compete those other sellers. Make it pretty. Make it cheap. And you still better be willing to work when an offer comes calling. If you're not, get the property off the market until the climate changes. I don't think it's going to be long.
Range pricing a property at a value you're not willing to accept is a waste of everybody's time. There was a property on the market variable priced over $125,000 range, and my client made a very strong offer about $15,000 over the minimum. Lots of cash, good deposit, short escrow, no contingencies, etcetera. Under the circumstances, a very good offer considering what the property was really worth. Yet despite all the information we put in front of them, this seller kept countering at the same number, which was more than my client was willing to pay for that property. Net result: the whole process was a waste from the time we started driving to the property. Yes, they got a lot of activity, but since they weren't willing to sell for the price that generated the activity - or anything like that price - the property didn't sell. Since if the property doesn't sell, every penny you put into trying to sell is wasted, as is every second of your time, plus all of the carrying costs that you may incur. So the listing agent told me they'd had a dozen showings in a week - but if they're looking at the property because it's variable priced $75,000 below any offer the seller is willing to consider, well, self-stimulation may feel good but it doesn't produce anything. This entire situation is a failing on behalf of the listing agent, who is theoretically earning money because of their knowledge of the market and should know precisely how likely it is that buyers will agree to pay more than the comparable properties are selling for, which is to say, Not. Particularly in this market, which is still very weighted towards buyers, and will continue to be until Spring 2008, even after the lending panic subsides. Indeed, if you need to sell, you're almost certainly going to have to settle for less than comparable properties are asking. If you don't need to sell, get your property off the market, now. The sooner excess inventory clears, the sooner the turn towards sellers is going to happen. Not to mention your days on market keep climbing, and there's nothing beneficial about having a failed listing in a property's immediate past. The longer it sits unsold now, the harder it's going to be to sell for a good price later.
Properly used, variable or range pricing can increase the sales price of a property. But the catch is that it must still be priced correctly. Range pricing is not an excuse for a lazy or incompetent listing agent to build owner expectations above market level. The rule of thumb is that the bottom of the range should never be lower than a good "all cash, no contingencies" offer, and the top of the range should never be more than market plus a reasonable premium for dealing with the uncertainties of financing and contingencies. Both figures should be modified downwards if the seller is asking for something extra in the way of consideration from the buyer - for example, leasebacks of more than a week or two, seller contingencies, etcetera.
Matter of fact, the way the market is right now in most of the country, I'm inclining against range pricing. If it's priced correctly, that range is information I can use as a buyer's agent. Why would I want to hand the other side information I could put to use were I on the other side, especially when they already have the whip hand in negotiations? Range pricing is something that's primarily useful for sellers when the sellers have the power, and right now, it's the buyers that have the power. If it's not useful for the seller, why in the world would you want to put range pricing on a property? With blortloads of highly upgraded properties for sale right now, I have absolutely no hesitation in telling my buyer clients to offer what we think the property is worth to them under the circumstances, and let the sellers decide if they want to do what's necessary to get the property sold. If they don't want to play, somebody else will. Either way, the buyers are happy. This seller can either decide they'll be happy with an appropriate amount of money, or the property can sit unsold. Which is pretty much the situation as it always is.
Range pricing is not a panacea. Range pricing is not something lazy or fearful agents can use to "buy" a listing with impunity, confident it'll work out in the end (it won't). Range pricing is not an excuse not to price your property to market, or not to negotiate hard with all of the facts at your disposal (if you don't have enough favorable facts at your disposal as to what comparable properties are selling for, your negotiating position is not strong). Range pricing is a way to offer clues to buyers and get them to the table with an appropriate offer when sellers have significantly more negotiating power than buyers. Since in most of the country right now, sellers have no power, range pricing is something to use sparingly. There's nothing that says buyers have to offer you what you want. Not now, not ever. The only leverage sellers have over buyers is the fact that if this buyer won't offer something that is appropriate, somebody else will, and that's very weak leverage when there's 47 properties on the market for every buyer.
Caveat Emptor
Article UPDATED here
If anyone out there still thinks John Edwards is really concerned about "the little guy": Edwards linked to subprime foreclosures
The further down the sewer we flush this false populist demogogue, the safer we are as a society. It occurs to me that perhaps he is a result of the Democratic bigwigs looking for someone that makes Kerry (2004) and Hillary (2008) look good. Kind of like Pat Buchannan and George Bush the elder. The difference is that nobody made excuses for Pat Buchanan.
Via Carol Platt Liebau
Captain's Quarters has much more.
Via Dean's World, something to think about: The King of Anti-Fascism
This prediction required about as much thought as watching a rock that's already falling to the ground. Needless to say, it's been borne out.
I'll try and have more than two new specialty articles next week.
Looks like I'm going to be the new keeper of the list for the consumer oriented real estate carnival.
This site (and my other one) have been experiencing service interruptions of late.
Furthermore, I've been trying to contact my hosting service for several months to send them money and upgrade my service plan, without response.
It's time to consider other hosting services. Actually, it's probably long past time, but the hosting service used to be so darned good I've been trying to stay with them - not to mention I'm going to have to go through a data port when I move.
My apologies if you are having difficulty accessing the site. I am trying to get it dealt with.
Carnival of Personal Finance Recommended: Beware of the Invincibility Complex
Alternative Medicine Threatens Beasts with Extinction
One reason who ecology minded folks should be grateful for the invention of Viagra:
On occasion, medicines that work help reduce the demand for medicines that don't: David Stryker, a New Mexican physician on safari at the Kenyan game park, noted that one unintended consequence of Viagra is that it has slowed the poaching of rhinos and other endangered species.
One other thing that doesn't get emphasized enough:
In his book "The Devil's Chaplain," Oxford University's Richard Dawkins states: "There is no alternative medicine. There is only medicine that works and medicine that doesn't work."
I'll stick with medicines that have been successfully vetted by clinical trials, thank you very much.
Wannabe Snakes on a Plane
It has become very trendy to ask for pre-approvals on loans, because so many escrows are falling through. Unfortunately, as I hhttp://www.searchlightcrusade.net/2007/04/loan_preapproval_means_nothing.html"target="_blank">Loan Pre-Approval Means Nothing, and prequalification means even less. Both are literally wasted paper. As far as actually meaning anything you can hold someone to, they're useless. Worse than used toilet paper, which was actually put to some useful purpose once upon a time.
I never trust either a pre-qualification or pre-approval unless I did it. As I've said before, there is no accepted standard for either. Furthermore, I doubt there ever will be. Agents aren't asking for these pieces of waste paper because they're concerned about their listing clients. They're asking for them to cover their own backside so they don't get sued when the transaction falls apart.
Now there's no way on this earth that you can promise that owner that the transaction isn't going to fall apart. Accepting any offer always has some attached risk. If the buyer can't actually get the loan funded, the seller is out of luck as far as getting that purchase price for the property, and you'll have to go back to square one.
This isn't to say that the seller is out the whole amount. The buyer risked whatever good faith deposit, which should be at least enough to pay the costs of carrying the property for a month or two. This isn't to say that the seller is necessarily entitled to the deposit or that escrow will automatically remit it to them. There's rules about that. But the contract is very carefully written to limit the amount of time before the seller is entitled to the buyer's deposit. If you're concerned that the buyer may flake, or not be able to qualify, the correct thing to do is negotiate more of a deposit and more favorable terms for it to come to the seller in the purchase contract. If listing agents were really trying to protect their seller clients from failed transactions, they'd be focusing in on larger deposits and trying to get them paid to the seller while the property is still in escrow. That's real protection for the seller. Of course, many buyers will walk away from such terms, meaning that it goes from a possibility of that listing agent getting paid to no possibility of that listing agent getting paid.
Buyers understand the deposit in cash terms. They scraped and saved this money in real time, dollar by dollar. It's real to them, and they don't want to risk it. You've got a better chance of getting $10,000 more on the price with most buyers than of getting a $1000 higher deposit, or more favorable terms for forfeiture. Of course, a lot of buyers choose to go unrepresented or use the listing agent to represent them. Both are silly, when you understand what's really going on. But demanding a high deposit, or harsh terms of forfeiture, is a good way of scaring off potential buyers. Savvy agents understand that an increased deposit is a way to get a better price for their buyers. If you require a high deposit and harsh terms of forfeiture, you are discouraging certain buyers, shrinking the pool of potential purchasers, thereby lowering the likely eventual price.
Of course, being able to negotiate a good contract is a major part of what an agent's getting paid for. In some circumstances, high deposit will be appropriate. For instance, if the buyers are getting a really good price. If I'm getting a property $100,000 cheaper than comparables around it, I shouldn't mind putting up a bigger deposit, or agreeing to more stringent terms for forfeiture. On the other hand, if I'm paying top dollar for the property, I'm going to be a lot more guarded. Mind you, I don't make offers without evidence that my clients can qualify for the necessary loan, but I'm going to want that seller to assume more of the risk of the transaction falling through. If they're getting a good price, they should be willing to. If they're not so willing, they're basically saying that the transaction isn't worth the increased risk. Remarks about having your cake and eating it apply to this situation. I'm certainly willing to persuade my clients to offer a better deposit to get a lower overall price. But I'm also perfectly willing to tell an overaggressive seller to go jump in the lake if they want harsh terms for the deposit without my client getting something tangible in return. The reverse of each applies when I'm listing a property. If the buyer is offering - or willing to offer - a large deposit or terms that are generous to my client, I may counsel acceptance of such an offer where I wouldn't of an identical offer with a smaller deposit or less generous terms for its forfeiture. It tells me that the buyer is willing to risk something real if they can't qualify after tying up the property.
There is another alternative, if you are or have a loan officer that you trust. Get their credit information. After all, a buyer is in a position where the sellers are in fact considering extending credit. Income, FICO, credit score, other debts. Ask your loan person if they could do a loan for this buyer. Of course, if your loan officer is a bozo, or if the buyer's is, all bets are off under this option. Under RESPA, you can't make them so much as put in an application with any loan provider not of their choosing.
If the sellers are not concerned enough about the buyers' ability to qualify to be willing to accept a lowered sales price for better terms on the deposit, I'd say it's not very important to them. If they're not willing to keep looking for another buyer, they want to do business with this one, and they must be getting something worth their risk out of the prospective transaction.
I recently had an agent tell me that requiring a pre-approval was part of their due diligence. Nonsense. I'll go so far as to say it's preposterous. The deposit is real. Information on creditworthiness is real, if subject to more interpretation. Pre-Approvals and Pre-Qualifications are a waste of space in the file, approximately equivalent in worth to an attestation that there is indeed a screen door in this submarine. There is no rational reason to choose one buyer over another, or accept one offer and refuse another, that has its roots in the pre-qualification or pre-approval. There's nothing there that you can hold anyone responsible or accountable for if the buyer does not actually get the loan funded, and if there's nothing there you can hold anyone accountable for, it's not anything real. Which makes it purely a CYA on the part of agents. Some of them may think it means something real, but it doesn't. Those agents need to be educated.
I'll admit I hate being asked for pre-approvals, even though I should probably love it as the sign of an agent that doesn't know what they're doing. But all too many times in the current market, a listing agent that doesn't know what they're doing is a sign of not being in touch with the current market, that I'm spinning my wheels in any negotiations, because the listing agent has no idea what properties like this one are actually selling for. It feels like you're trying to get useful work done on a computer that's frozen up and gone to blue screen of death. Not useful, and not helpful to either my client or theirs. You do have the option of behaving like a recalcitrant mule. Nobody can make you stop, but it's not likely to be beneficial to your bottom line.
Caveat Emptor
Article UPDATED here
No, this isn't the Hitchhiker's Guide to the Galaxy
But having written half a dozen articles roundly critical of the way in which these loans are generally sold, it's not unusual for me to get e-mail like this one:
Hi, Dan:
Okay, I'm absolutely PANICKED after reading your article on negative amortization loans as I have one! I thought it was an "option ARM" and that my entrusted Realtor's entrusted loan officer was wise beyond his years in his financial advice. He was semi-retired, wealthy, and said that this was the only loan he'd ever use for his own substantial real estate portfolio. I even reassured a good friend of mine who is economically savvy not to worry as it wasn't a negative amortization loan!
I purchased December of 2006. The home I was going to purchase was appraised at $780,000 eight months prior to my purchasing it for $570,000; I put $100,000 down, had a good credit score, but the stickler was my monthly income. I knew I would make a substantial bonus and raise June of 2007, so DELETED sold me on the Option ARM. The bonus was one third what I expected ($2700) and my raise was only 4% rather than 7%.
My question is this - what do I do now? Is the loan okay as long as I pay the principal and interest amount of payment? I've only been paying the minimum, but could swing it by squeezing. It's a high rate - 7.5%. And I would have a prepayment penalty if I refinanced. I'm a single mom, 46, with two kids and annual earnings of $64,000. I have $50k in savings.
Yes, I am that poor sap you speak of in your article, completely trusting, desperate for my dream house, blind sided and now stuck. Any advice would be helpful! Thanks so much...
First rule of getting out of holes: Stop digging! Pay at least the interest every month!
Now, let's look at your situation. You owe $470,000 on a $570,000 property. The real payment on that is $3286.30 per month, as opposed to a "nominal payment" of $1511.70 at 1%. Actually, by my calculations, you owe about $483,000 now and will over $527,000 by the time your pre-payment penalty expires, if you make just the minimum payment.
Now, let's consider what's actually available out there. Picking up one rate sheet at random, it shows a 30 year fixed rate loan at 6.375% costing half a point retail. Let's figure out if you're likely to qualify for that. $64,000 divided by 12 is $5333 per month. 45% of that is $2400. Both of those are potentially important figures. Let's assume your value is still $570k, so 80% of that is $456,000. Paying the penalty and costs of the loan via rolling it into your balance, I get that you'd be left with a balance of between about $507,000. The payment on the first mortgage would be $2845, which is more than you can apparently afford right there. On the other hand, many single parents have alimony and or child support that can be used if they so desire that they don't include in their income.
On the other hand, I'm not building fairy castles in the air. From the information presented, you can not afford the loan by standard measurements. The flip side of that is you don't have to qualify for the loan you already have, and you say that you actually can afford to keep making at least the interest only payments. As long as you do so, you're not digging yourself in any deeper. If you can actually afford to make at least the interest only payment, there is no reason to panic.
Furthermore, getting yourself that 6.375% fixed rate loan would cost you roughly $24,000 - $18000 plus in pre-payment penalties, about $6000 in loan costs. To save 1.125 percent, albeit fixing the loan. Your current cost of interest at the $483,000 balance is $36,225 per year. Cost of interest after refinancing: $32,321 per year. Interest savings $3904 per year. Your break even on this is about 6 years, 2 months - if you could qualify, which you don't appear to.
If you make the payments for the next 27 months until the penalty expires, that higher interest rate will have cost you roughly $8900, offset to a certain amount by loweerd income taxes. But here's where everyone's getting ulcers right now: That 6.375 is a "right now today" good only until tomorrow morning at most. Not that I expect tomorrow's rates to be much different, but I won't know until I see them. The cold hard fact is that only some kind of deity might know at this point what the rates are going to be like in December 2009. I certainly don't, and neither does any other human agency with which I'm familiar. There's a lot of estimates out there, but nobody knows. Furthermore, with a negative amortization loan, you don't know what your rate will be a year from now, as most of these abominations adjust month to month. So no matter which way you choose, stay or refinance, there are pitfalls, and there's no way to tell the right decision except in retrospect - in December 2009.
In your situation, I'd probably sit tight. As bad as it is, the alternatives all look worse. I wouldn't refinance into a loan that took me six years to break even on the costs of, and I doubt whether anyone else should, either. Alternatively, keeping in mind the fourth solution to Getting Out of Paying Pre-Payment Penalties, some people might want to see if their current lender will refinance them into a thirty year fixed, although in your case that does not apparently help because you don't appear to qualify.
But your situation is not the same as the person who is only looking at a negative amortization loan. Like it or not, you've already done it. That narrows your choices to "What do I do from here?"
The first thing to set in motion is a consultation with your lawyer. I'm not a lawyer, but I've been reading about the courts ordering these abominations rescinded, brokers paying damages, etcetera. The wheels of justice grind slowly, but that means the sooner you start them grinding, the sooner they get there. It seems likely to me that there were some misrepresentations and gross negligence somewhere along the line there.
I think that the local market is likely to turn away from buyers and towards sellers very soon. So that colors my perceptions, and what may be appropriate for San Diego may not be appropriate elsewhere, but as long as you can make at least the interest only payment, and make it long enough such that your prepayment penalty expires, I think you're likely to see a profit on the sale of the property then, provided things go as I think they will. It might be rough in the mean time, and preliminary numbers indicate that you're not likely to be able to afford to keep the property then, but panicking rarely does any good. There's nothing you can do at this point that does not have significant and costly risks. But from what you've sketched out, holding on until the penalty expires seems to be the least risky, most attractive alternative to me.
Caveat Emptor
Article UPDATED here
In the last week or so, nonconforming A paper has really been hit. While available conforming rates have actually gone down, nonconforming has gone up by over half a percent. Picking one of yesterday's rate sheet at random, I can do a 30 year fixed rate loan at 6.5 percent at retail par (in other words, no points to the consumer). I appear to have picked one of the worse spreads because I know I've got better than this, but the lowest fee from the same lender on the nonconforming table is 8 percent - which costs 2.5 points retail (I just priced one at 7.25 for 2 points retail).
Fannie and Freddie backed loans are doing just fine. The issue is that "stated income" loans of conforming size traditionally use the same rate table as larger "full documentation" loans. Since the real problem appears to be stated income - even at high credit ratings - tarring both customer classes with the sins of one is not exactly the most competitive thing that lenders can do. I can think of three or four possible fixes to the situation right off the bat. I expect that the smart folks who are paid the big bucks by the lenders to be able to think of all of these and more. I further expect the lenders will do something on the individual lender level as quickly as top management can agree upon what to do.
Now conforming is what those whose properties are worth up to 125% of the conforming limit of $417,000, or $521,250, should be looking for. This is most folks, even in high priced San Diego. As long as Fannie or Freddie likes your loan, rates are still good and the loans are easy to do. This is part of the reason for my mantra about "guard your credit and only sign up for loans you can afford."
For Fannie and Freddie, investing in mortgages is what they specialize in. In fact, it's the only thing they're allowed to do, assuming I understand correctly. Other investors are allowed to do other things, and right now The Word is out the mortgage investments aren't as secure as they usually are, so investors are panicking and doing other things even more than is rational. Panicked people do strange and silly things, as anybody who watches the financial markets knows. It'll likely settle out fairly soon. Meantime, the tightened supply of mortgage money means that if Fannie and Freddie don't like your loan, the price of the money is going to be higher.
via the puppy blender, Thomas Sowell saying a few things that should sound familiar to my readers.
For example, here and here and here
Winter Soldier Syndrome
Think it doesn't make a difference? Imagine where Sen. John Kerry would be now if the Internet had been around in 1971.
On the other hand, we might have President John Edwards. Some prices are just too high to pay.
Here's something useful, with many properties locally worth less than their purchase price. If you're one of those who paid more than the property is now worth, you can have your property re-assessed downwards in value - if you file by September 15, 2007. I did this back in 1993, and it lowered my taxes for a couple years. They restored it to original purchase price, compounded, when property values went crazy in the late nineties, Of course. Nonetheless, my assessment now is a fraction of what comparable properties are selling for.
Of course, it's probably not a good idea to be telling the property assessment board one thing and a lender something else at the same time. Just saying.
Application For Changed Assessment - PDF Version
Application For Changed Assessment - Microsoft Word Version
If for some reason, one of the links doesn't work, here's the page I found it on: Assessment Appeals Board
Iran sees U.S. plot to topple its leadership
An Iranian minister said he believed the United States had dropped the idea of attacking Iran but wanted to topple its leadership through what he called a "soft revolution".
Intelligence Minister Gholamhossein Mohseni-Ejei, a cleric, said Iran's enemies had waged "psychological warfare" to prepare for military action against the Islamic Republic.
And the fact that your people have been oppressed for thirty years to the point that they hate your guts has nothing to do with it?
Oh, I'm sure if George Bush could topple the Iranian clerics with some little nudge, he'd do it. Failure to take advantage of such an opportunity would have anyone rational calling for impeachment. But it's going to take quite a shove to topple the Iranian Imams, and we'd have to sustain it for years. Neither the political concensus nor the will is there, and everyone in this country knows it. Which means that the Iranians are pretty much stuck doing their own heavy lifting.
The air traffic mess from a passenger viewpoint and from an industry viewpoint
The critical point?
* Third, give commercial flights a higher priority than other system users to protect schedule integrity; the passengers and airlines that fund more than 90% of the costs of air traffic services deserve nothing less.
Industry has been wanting priority over other flights for decades, but AOPA has quite a lobby. Nonetheless, management has been known to accommodate industry. One guy I knew was called into the air traffic manager's office, yelled, at, and told, "Put the (commercial airliner) out first!"
"You mean, give them priority even though the other plane's been waiting longer?" This is contrary to the handbook and stated policy of the FAA, by the way.
"No, I didn't say to give him priority, but put him out first!"
This kind of speaking out of both sides of their mouth is one reason I'm glad I don't work for those bozos any longer. I actually think it's most reasonable to charge for landing and departure slots according to how impacted the airport is and how much time you take up. Industry would likely be willing to pay more for the privilege, which reduces to their customers paying, of course, but how far do we want to go?
My take is here.
The buyer's market is rapidly aging. Properties that are priced correctly are moving, and moving well. On properties with potential for profit, they're moving fast, and sometimes getting multiple offers. Of the last twelve properties clients of mine were seriously interested in, four went "Pending" before they put an offer in, and three more were situations where the listing agent claimed there were multiple offers, and in retrospect, I believe that contention. Bargain property is moving.
This isn't just personal experience. I do get a fair amount of exposure to the experiences of other agents. Four other full time agents in my office, and dozens of others through property scouting. Another agent in the office had a Notice of Default hit her listing. We told her she'd get an offer if the client reduced the price to where we told her. She didn't get one offer. She got four offers within forty-eight hours, and we were able to play them against each other to get almost the previous asking price. I wouldn't say that's a statistical argument that can be extended to the entire San Diego market, but with as much direct evidence as I've accumulated, I'd say it goes beyond merely anecdotal evidence. The market is getting ready to turn.
This isn't to say it's a great time to be a seller. It isn't. Many sellers - and listing agents - seem to have their heads stuck in the days of two years ago, where a highly upgraded property meant a major boost in selling price. No longer. The buyers out there now are highly sensitized to both price and condition, and they are looking for the best overall bargain. Not just beautiful, highly upgraded properties, but at a competitive price also. With the seller to buyer ratio having ballooned to 42 to 1 as of the start of August, they are getting both.
Here's what I'm telling my buyer clients: There's nothing out there right now that's worth getting emotionally attached to before the sale is consummated. If you like the property, make an offer of an amount you would be happy to pay for that property. If the seller will sell for a price you're happy with, great. If not, I'll find you something just as good where they will. If this seller won't deal, the next one will. A large proportion of sellers don't have any choice. They have to sell, most of them because they really couldn't afford the property in the first place. Security guards making $33,000 per year should not be getting $800,000 loans, to name one situation I walked into not too long ago.
What I've told prospective listings is "If you have any choice, don't". I've got signed instructions to keep my one listing as a "pocket listing" until next Spring. In other words, if I can bring him a buyer, great, but don't market the property via MLS or other mass media. But he doesn't have any particular need to sell. If he did have a need to sell, I'd tell him to make it as pretty as possible as cheap as possible, price it as low as he can stand, and be willing to negotiate his price so low it hurts - and maybe a little bit more. If he doesn't need to sell so bad that he's willing to do that - and he's doesn't - then he doesn't need to sell and should wait for a better market for sellers. The only way to attract a buyer is to out-compete the other 20,000 sellers out there for one of the about 500 serious buyers' business. Location and physical size are fixed. Condition and price are not. The buyers out there are highly sensitized to everything. Instead of a beautiful gourmet kitchen boosting the sales price by $25,000, what this market means instead is that an otherwise identical property is more attractive at the same price than one that hasn't got it. You are unlikely to get enough extra money to notice. What you are likely to get is the property sold, while the otherwise identical property sits on the market for the same price.
Indeed, the property in less than desirable condition is going to sell at a substantial discount, if it sells at all. There's starting to be substantial opportunity for flippers once again, albeit with the mirror image of the way things were going two years ago. Instead of buying at the market price and selling the upgraded property at a premium, now they're buying at a large discount and selling the upgraded property at about market price. It may be intelligent, but the average buyers out there aren't interested, and they're not willing to deal with the ten people who'd rather be foreclosed upon than take the only offer they're going to get to get to the one who will take the offer. I hate short sales and I admit it. Most of the profitable opportunities for buyers out there right now are nonetheless ugly properties in a short sale situation. Not just for flippers and investors, either. A family that wants a place to live that they're willing to fix up can do extra-ordinarily well for itself right now. It's better to buy at a discount now, when you are in complete control, than to hope for a premium when you eventually sell. This is also the historically normal way of the market.
The San Diego market has been on the bleeding edge of the national trends through this whole boom and bust cycle. The "good news" that came out of that was that all of the exotic programs that are usually dead were still available to the less ethical loan officers, at a point in the cycle where they're usually historical toast. The bad news was that while the rest of the country was still going gangbusters, we were basically banging our heads on concrete walls in trying to get short sales approved by lenders. Well, the lenders now have their heads in the right place to approve short sales, just when there's signs of a rebound in the local market.
Indeed, the slopes and inflections in trend lines had me believing we might see a small bit of recovery this year, and we actually have, if only at the most competitive edge of the market. Now, with the peak spring and summer season largely past us, I think we're going to see the buyer's market mostly continue until spring of next year. This means another several months where those buyers who are willing to come off the sidelines at a time of year when most buyers aren't are going to be able to drive hard bargains. Sellers can either choose to out-compete other sellers for the buyers that are out there, or have the property sit unsold until the market turns. Even in trendy, highly desirable communities, buyers currently have the power. As a seller, you can accept this or your property can sit unsold. The longer it sits unsold, the less bargaining power you have.
Here's the statistical run-down on the most recent six months: 13,272 properties sold, 3335 in escrow - versus 19,265 canceled, withdrawn, and expired. Assuming seventy percent of those in escrow eventually close, that's about a 43.5 percent probability of any sale at all - in the best time for sellers there is. On the other hand, the comparable figure last year at this time was 39.8% - and last year I didn't discount pending sales by thirty percent - I just took them as presumptive sales.
Furthermore, we're now in the period where most of the unsustainable loans that were written have already bitten the people they are going to bite. We're coming up on two years since the music stopped and everyone ran for the sidelines locally, which means that most of the two year fixed rate loans have already adjusted, and many, if not most, of the negative amortization loans have already hit recast. Furthermore, unless they've been living in a cave, and they haven't - they bought a home - almost everybody who has an upcoming adjustment they can't afford has figured it out. Their homes are already on the market. The difference between selling now, before the Trustee Sale, and later, after the Trustee has deeded it to the lender, are not large as far as the buyers are concerned. The only difference is that after the Trustee Sale, the lender knows how much money they're losing every day.
My point is this: There's only so much desperation out there, and we've already seen the largest influx of it into the sellers' listings here locally. San Diego is a resilient market, one of the most resilient in the country. People want to live here. People are willing to pay higher prices to live here. The ones making more income than national average - a large percentage with technology and biotech and defense and other highly paid industries here - can afford to pay those prices. That's the demand side. On the supply side, there just isn't a lot of dirt left. Unless we change our laws and attitudes about what constitutes a buildable lot and the acceptability of high density housing, there just isn't a lot of room for our population to grow further. We're hemmed in by immovable obstacles on about 330 degrees of the circle (The Pacific Ocean, Mexico, Camp Pendleton, and Cleveland National Forest). Since this is the United States, and we don't tell our citizens where they can live, the way we discourage people from living here is that the price will keep going up until enough people decide voluntarily that they're not willing to pay it. Thus far, we haven't lost as many people to out-migration this cycle as we did last cycle. Back in 1991 and 1992, U-Haul was essentially allowing people to move here for free, there was such a demand for their inventory on one way trips out. They haven't gone nearly so far of late.
I'm also seeing a lot more pent-up demand this cycle than we had last cycle. Instead of moving out, people are waiting for the market to hit bottom. Well, the local market isn't going down as far as most people think it is. As I've said, at the most competitive edge of the current market, sellers are seeing not only fast action but lots of interest. People are willing to pay those prices. People are very willing to pay those prices. Even with the psychological fear of further market decreases, those who are willing to buy are not only willing but also able to pay current prices. So much so that they're practically racing to be first in line when they find something that is a worthwhile bargain. What do you think is going to happen as soon as the average buyer, who's been holding off for two years, gets it into their head that the market may have hit bottom? Without the psychological fear that's keeping them on the sidelines now, expect to see a large influx of serious buyers, drastically curbing the ability of buyers to drive harder bargains. In short, a seller's market. It's a positive feedback effect. The more people come off the sidelines, the more strongly the market will turn, and the more people will want to come off the sidelines.
As I said yesterday in my loan market article, the gonzo 100% stated income low credit score programs are gone, and they're not coming back any time soon. This means you're not going to see the same kind of frenzy as drove the market three or four years ago. Personally, I doubt that sellers - or listing agents - are ever going to have that kind of power again. The loans that enabled that stuff are no longer being offered. People are going to have to have at least two of three things: Good credit score, a significant down payment, and ability to prove they make enough to afford the loan. Failing that, they're going to pay very high interest rates, high enough to keep them out of properties that they could otherwise qualify for. That's going to keep a damper on market increases, at least until the lenders develop collective amnesia again.
At this point, where most of the buyers who are going to buy this year are already out there in the market, I don't think the market is actually going to turn until next Spring. Meanwhile, those buyers who are willing to come off the sidelines now, before the market has actually turned, are going to be much happier than those who wait until the market has already turned. The time of very best bargains locally is already past, but since I don't know anyone with a time machine, we have to consider what we've got looking forward.
Caveat Emptor
While the subprime meltdown continues, A paper rates have actually dropped a little bit in recent weeks.
Subprime is in a world of hurt. Lenders are fleeing the market for below average credit in droves. It seems like every day, we lose the capability to do something or other, and the rates have gotten high as well. I just priced a 580 credit score on an 85% loan. Rate/term, no cash out. Six months ago, I could have found something around 7% par. Today's best rate? 10.7% at par.
The last several years, with real estate values rapidly appreciating, it was hard for lenders to lose money. Even if the property did go into foreclosure, it would have appreciated in the meantime, and the lender would get their money. That's no longer the case. Properties aren't appreciating, and as a result, subprime lenders are now having to price loans for the borrowers to bear the full risk of their low credit score.
I've been saying for some time that if you don't have good credit, the rates are going to have to rise. That prediction has now come true. As of when I'm writing this, I could do that same loan A paper at 6.25 at par. Cost of having a below average credit score? 4.45 percent! If your loan balance was $400,000, that equates to $17,800 per year in increased cost of interest!
Alternatively, that below average credit score means that instead of a $400,000 loan someone with good credit and a monthly income of about $7000 can afford, you can only afford a $265,000 loan. Instead of a 3 bedroom house with a decent size lot, you're in a two bedroom condo, at best! If you could have paid the bills but chose not to, you have only yourself to blame. It's hard for me to imagine anything but a house or a business that's worth spending that kind of money, and credit scores can be improved if you're willing to try.
Furthermore, it's getting harder to find subprime lenders willing to loan at high Loan to Value ratio (or CLTV). This means that you have to have a bigger down payment than someone with a better credit score. I can still do 100% loans, usually split 80/20, pretty darned easy if you qualify for A paper. It's getting to the point where it's a waste of breath to ask subprime lenders for 100% financing. This means that you can either have a substantial down payment, or you can improve your credit, or you can remain a renter. Given the economic advantages of home ownership, you don't want to remain a renter. Of the remaining two options, it's usually quicker and easier to improve your credit than it is to save 10% of the price of a $400,000 property. How quickly could you save $40,000 if you had to?
Stated Income, especially for low credit scores and high Loan to Value Ratios, is rapidly going the way of the dodo. 100 percent stated income is essentially gone. The lenders want you to have some serious equity, so that if the property gets foreclosed upon, they're likely to get their money back. The lower your credit score, the more of a down payment you're going to need. negative amortization loans are finally hitting this wall, as well. Not only do those lenders living on those abominations want a higher rate, they also want you to have enough equity so that they're going to get every penny when they foreclose. As a result, fewer people are willing to sign up for them, and fewer still qualify, a development I am all in favor of.
Lenders, specifically sub-prime lenders, have in the past few months suddenly re-awakened to the possibility that they're going to lose money in the real estate market. Those who have been advising people that they're not risking anything with 100% purchase money loans because "purchase money loans are non-recourse" are soon going to be the subject of court and regulatory action, not to mention that the lenders are no longer willing to cater to that line of thinking - at least not for those who have demonstrated that their credit rating isn't important to them.
It is not difficult to qualify A paper. I have in the past done A paper loans with 100% financing at a 630 credit score. More people qualify A paper than think they do - and if you'll work at it, getting yourself a thoroughly acceptable credit score of 680 or better usually doesn't take very long. Now, more than in the last few years anyway, being able to show that you make a habit of paying your bills on time is worth some serious money. It also means you can get the loan now, instead of several months in the future at best. And, as tomorrow's article will attest, you really want to buy now if you can.
Caveat Emptor
Someone sent me this link to Jim Cramer losing his cool.
Well, coming from where he's coming from, I don't blame him. The fact remains that he's wrong about "you can't get loans." I actually already have an article set to go tomorrow (August 7th, 2007 ) about the lending meltdown from a consumer standpoint (it'll be here when it publishes). There are solvent lenders who badly want business.
We always knew that the 100% Stated Income, Stated Asset loan was not going to be around forever. Problem is, most agents and loan officers don't know how to tell people to stick to properties they can really afford. Many don't know any other way of doing business. When you can make it look like a minimum wage employee qualifies for a $500,000 property, what do you think most sales persons are going to do? The money I could have made these last two or three years if I was willing to do that would have me set for life.
From the point of view of certain investment managers, who have only been paying attention to the reward and not to the risk of mortgage related securities, there's about a decade of reckoning coming. Many of the fixed income investment folks really are in a world of hurt, and I do expect rates to continue to rise in broad, as the supply of easy money dries up. This doesn't change the fact that these investors and managers did it to themselves. Yes, I'd like to see rates dropped, but we're looking at the impetus for a period of heightened inflation if we do, because the economy is so good, and that would hurt a lot of people, not the least of whom are bankers. The Federal Reserve Board is composed of bankers, not economists, not investors. I expect the Fed to sit tight. I could be wrong, but if I waited until the facts were incontrovertible, my predictive value would be zero.
Bad Thai cops to endure Kitty shame
Police officers caught littering, parking in a prohibited area, or arriving late - among other misdemeanors - will be forced to stay in the division office and wear the armband all day, said Police Col. Pongpat Chayaphan. The officers won't wear the armband in public.
If this doesn't work, they'll go to really drastic measures: Barney
Not that I thought the Breck Boy was any kind of economic heavyweight, but Edwards jabs at former President Clinton shows how stupid he really is. It's one of the few things President Clinton got mostly right. Of course, Clinton inherited a mostly negotiated treaty from his predecessor...
All Edwards is doing is feeding his populist image, even though his populism is not even skin deep.
Captain's Quarters lambastes a partisan response to California's proposed change in how it allocates electoral college votes.
I don't think it'd be just a good idea in the big states. The more I think about it, the more I think it's a good idea for everyone.
I wouldn't have believed this one if I hadn't been there when it happened.
Another agent has a listing where the property went into default. We just happened to find out about it; the seller tried to keep it a secret because they were embarrassed. Silly, but it happens. Suddenly, the sharks started swarming, of course.
One agent brought an offer in. Among other things, that offer called the property, "a dog." It's not a dog. It's not a place where I'd expect to find a billionaire living, but if someone gave it to me, I'd have no problems either living there as it sits, or renting it out.
Never insult a property you're interested in. It's smart to explain the facts of the situation that are in your favor, but calling the property "a dog" conveys no information, is completely subjective, and is usually construed by the owner as a direct personal attack. If you want them to agree to sell you the property - which should be the reason you made an offer - it's a great way to sabotage that goal. If it's got holes in the wall or cracks in the foundation, by all means remind them. But don't get personal.
Then this clown not only sabotaged his argument, but violated his fiduciary duty, by bringing in a competing offer.
This just blows my mind. Not only is the property now obviously not a dog, since you have multiple people clamoring to buy it. How many buyers can one agent work with at a time, anyway? My absolute limit is six. If two of them want the same property, there must be something pretty darned attractive about it.
This also increases the leverage the seller has, raises the sales price for the one that gets the property, and means that one of them doesn't get the property. How can this not be in violation of fiduciary duty?
No matter how good the bargain, as a buyer's agent, I never ever initiate showing a property to someone else until the first buyer has told me they're not interested. I can't stop them from seeing the property, but I can avoid personal responsibility for encouraging someone else to make a competing offer. Especially now - it's not like there's any shortage of bargains out there. Sure, the incidence of multiple offers has risen dramatically, and properties that are priced competitively are moving (both of these are signs of a buyer's market that's about to turn, by the way). Nonetheless, there's a lot of good stuff out there if you know what's really important and how to look. A buyer's agent should know both. That knowledge is a significant fraction of what we're selling. I found four great bargains, even considering the market, one morning two weeks ago, which was the last time I got out just on a general search, not associated with any particular client. All I had to do was get off my backside and out of my office and look. I don't accept clients if I haven't got the time to look for them.
This clown was thinking about getting paid, not the client's interest. Furthermore, unless he told them, which I will bet he didn't, those two sets of clients have no way of knowing that the agent has hosed both of them. It is one heck of a bargain as it sits. Either one of them should be ecstatically happy with it and a good bet to come back on their next transaction - provided they don't know how the agent hosed them.
Now in the case of this particular property, both the MLS and the foreclosure list are public knowledge. It's not like there's any deep dark secret about it. Perhaps this agent is even selling foreclosure lists as a way to procure business, and both clients independently spotted the property and asked about it. He still owes it to the client who put in the first offer to do what he can not to sabotage them. This is the one exception I can think of to Agents Refusing to Make an Offer on Real Estate. As a buyer's agent, I have a firm policy of one outstanding offer per property (As a listing agent, I love multiple offers and do everything I can to encourage them). It's a minor encouragement for fence sitters to pull the trigger now, when I tell them that if another of my clients makes an offer, I will decline to submit an offer from someone else until that one is off the table. This protects both clients by keeping them out of a bidding war I would have facilitated. I'll find the second client something else. In this market, there's nothing so good it's worth getting into a bidding war over.
Caveat Emptor
Article UPDATED here
Good Evening!
My name is DELETED and my wife and I recently signed papers to purchase a property from DELETED in DELETED, CA. After our options, their lot premium, and the elevation charge, the house is listed at 425,000. We have 90,000 in incentive money to spend which we would like to lower the overall cost of the home to 335,000. We only receive the incentive money if we get the loan through (their in-house lender). We were interested in a 30yr fixed rate mortgage that is 100% financing and will pay the closing costs out of pocket. I feel like I am being stiffed by their loan guy. Back in late May or early June, he told me that we could get 30 yr 100% financing with HOA, Mello Roos, PMI, PITI out the door for $2889 on some 6.75 percent loan (which still seemed high to me) but just last week he told us that we are now looking at 7.8% with out the door payment of $3250 because 100% loans are harder to finance now. I guess my question is how do I not get stiffed by their loan agent and what proper steps do I take to ensure the best loan and rate for us? I think that 7.8% is ridiculously high for this market! Here is some background info on us:
Credit scores of 750-780 for both of us
21,000 in bank accounts
2 car loans with 3 yrs remaining on each (238 and 210 per month)
Current renters with 80k gross yearly combined salary
1st time homebuyers
Any help regarding this matter would be greatly appreciated! Thank you for your time and consideration. If there is any other information you need us to provide I would be more than happy to provide it.
First off, check with your local authority to see if you qualify for a Mortgage Credit Certificate. It looks likely. Whether or not the developer's lender participates is a question, but it's a question that needs answering.
Now this is definitely a situation where you needed a buyer's agent to deal with a developer. Unfortunately, at this point it's too late to get one involved, and kind of pointless, as you've already signed the contract. The work a buyer's agent does is pretty much moot. You've already signed that developer's contract. I'll bet a nickel they'll be able to keep your deposit if you back out, and likely sue for more. They are now in a win-win situation.
Here locally, I could tell you if it was a good idea to pay that developer's extra charges or just take their basic unit. Elevation premium? What's the view now, and is it likely to stay that way? Lot premium? How many extra square feet are you getting - or is it just a junk fee? You're not local to me, so I do not know.
What I can assess is numbers. Just picking a rate sheet at random (it will have changed by the time you see this), right now I've got an 80% first with zero points and no pre-payment penalty at 6.75%. On $268,000, that's $1738. The 30 due in 15 second would be at 7.75%, with a negligible cost, for a payment of $480. Assuming that your official purchase price is $425,000, add about another $443 for California property taxes and just a guess of $100 for homeowner's insurance, and that's a payment of $2761 plus Mello-Roos and HOA, which I have no way of knowing. Never choose loans by payment, but it cuts your cost of interest more than it cuts your payment.
However, at $425,000, you've got a first of $340,000 and a second of $85,000, giving us payments of $2205 and $609, respectively, and that's what we'd be looking at if you came to me for the loan right now. Add that $543 taxes and insurance, and your payments would be $3357. Not having that $90,000 in your balance makes a huge difference, and not just to the payment, but also to the cost of interest.
Here's another point on which developers hose unsuspecting buyers. Is that property, as it sits, going to be worth $425,000? Is it going to worth $335,000? If I were in your shoes, I'd hire an appraiser right now. here's one easy place to find an appraiser in California. That approximately $400 they'll cost is looking like a really cheap insurance policy, right about now. And you do want an independent opinion. The chances of that developer's appraiser rocking their boat are nil.
Here's one thing to seriously consider: Take their financing offer, even if it includes a pre-payment penalty, which I'm betting it will. Of course, if they offer you the option of buying it off with a higher rate, that's something you're going to want to do in this scenario. Then, providing the property is really going to be worth enough, refinance immediately. That pre-payment penalty isn't going to be $90,000, even with the costs of the new loan included. But you want an independent appraiser's opinion before you jump into this, to find out if it's likely you'll be able to refinance. What you're essentially doing is taking the $90,000 incentive money and then paying a toll of about $13,000 for the pre-payment penalty plus whatever the costs of the new loan are (the ones I outlined would be roughly $3000 if you accepted a 3 year penalty of $500 on the second, or $500 higher if you didn't). Net to you: roughly $73,000 - if the value of the property will cover the refinance, and you'll get better terms if the value is actually $425,000, because the Loan to Value Ratio won't be 100%. It'll be about 83%, which translates to an 80/5. Provided, of course, that the purchase contract says $425,000. If your official purchase price is $335,000, your monthly property taxes will be about $349, but then we're dealing with whether or not the lender will believe your appraisal. A paper lenders quite likely won't. Most of the time, your official sales price will be the full amount, but every once in a while developers like to throw a curve in. On one hand, a lower sales price reduces your property taxes, while on the other it means that you'll have difficulty refinancing for a while.
If you had a good buyer's agent, you'd likely already know the answers to all of these questions, and you likely wouldn't have fallen into a couple of traps, but that's water under the bridge. We have to deal with the situation as it exists, and figure out the best way to deal with the facts looking forward. If an appraiser tells you the value is there, I'd take their loan on a short term basis for the incentive money. If the appraiser tells you the value is not there, it's probably time to see a good lawyer about getting out of that contract. If you lose your deposit, that's usually not as bad as spending more than the property is worth and getting stuck with a rotten loan you can't refinance out of.
Caveat Emptor
Article UPDATED here
July set another new traffic record at 149,342 visits, for a running total of 1,960,932 visits. At this pace, the two millionth visit should hit sometime in the second week of August. 17 months for the first million, not quite 9 months for the second. I doubt I'm going to continue to see that pace of increase, but it's a good boost for the ego.
Thank you all for stopping by.
Congressional Privilege 535, Accountability 0: Court: FBI violated Constitution in raid
A visual rebuttal to those moonbats claiming the war in Iraq caused the bridge collapse in Minnesota.
National Defense: 19% of the national budget.
Entitlement Spending: 21+14+13+10= 58%
Not to mention a little thing like the bridge was known to be in need of upgrade before Kuwait was invaded in 1990, leaving a minimum of 12 years during which there was no Iraq invasion and nothing was done.
Don't get me wrong. I'm plenty upset that the bridge collapsed. I'm just not willing to blame it upon the scapegoat of the moment.
Entitlement spending is found nowhere in the Constitution as a power or responsibility of the federal government. I'm not saying repeal it, as many of those receiving it were forced to pay into the system their entire working lives and are counting upon it now that they can no longer work. But we can certainly work to trim a budgetary category that is three times the size of the much maligned defense budget.
Congress and the state legislatures have made other things a priority because infrastructure projects don't buy very many votes for their cost, unlike checks in the mailbox on the third of every month. For their part, corporate America hasn't exactly helped the situation. The whole thing is one more tragedy of the commons, and there's more than enough blame to go around to every single legislator and congresscritter of both major parties who has served in the last twenty years or so. I am angry and disgusted. But I won't let myself be distracted by a scapegoat. If the commerce clause of the constitution permits federal involvement in the construction of infrastructure, that and basic fiscal prudence require the performance of much cheaper maintenance once such infrastructure is in place.
Ramona is back! No more three hours on the freeway just to drop off little Ramona and pick her up! I've even got a new article set for tomorrow!
Veterans Administration, or VA loans, are government guaranteed loans available to veterans and active duty members of the armed services, that enable them to purchase homes for no money down. In fact, VA loans go up to 103 percent of purchase price to allow for some closing costs as well.
VA loans are a unique creature in the world of mortgages. Because there is a government guarantee on the loan, they are available, usually at the same rate/cost tradeoff, whether your credit is perfect or abysmal. They have a qualification limit equal to the conforming loan limit from Fannie Mae and Freddie Mac, $417,000 as of this writing.
Now, the Veterans Administration runs a website where you can get all kinds of information on VA loans, but I'm going to touch some high points.
VA loans are available both for purchase and for refinance. There is a streamlined program for pure interest rate reductions that can sometimes be at documents in as little as a week. This is called the Interest Rate Reduction Refinance Loan program, or IRRRL, but usually just called a VA streamline. There is, or so I understand, a cash out program as well, but I've never done one of those.
All VA loans have two important feature: Government Guarantee and Assumability. The government will guarantee a certain percentage (usually 25% of the original loan amount), which is more than enough to persuade most lenders that these are loans worthy of a fairly low rate, as they are low risk. A person with a VA loan can allow anyone else to assume it, with the approval of the lender and the VA. They have to prove they qualify for the loan, and the veteran still has responsibility for the loan, and it does count against the total of all VA loans that individual is allowed. Last I checked, prepayment penalties on VA loans were prohibited.
Now the bad news. Even with the government guarantee, the rate/cost trade-off isn't the best. Most VA lenders want at least two discount points for their VA loans, a fact which makes low cost and zero cost VA loans problematical. Even with those discount points, the rate will probably not be as good as A paper. Veterans with good credit, particularly if they have a good amount of equity or a decent sized down payment, will generally be able to obtain a better rate at a lower cost in the A paper marketplace. Even so called A paper "jumbo" loans over the $417,000 limit, or A paper "stated income" loans, will usually have a significantly lower rate/cost trade-off than the VA loan. They're better than just about all sub-prime loans, but they lose out to A paper.
If you have good credit but not much of a down payment, the VA loan can be an option worth exploring. VA loans have no mortgage insurance requirement (aka PMI), that purpose being served by the government guarantee, and so splitting your loan into a first and a second mortgage in order to avoid mortgage insurance, with the second being at a higher rate, is generally not necessary, and your full loan amount can be at the lower rate of the first mortgage. But be careful, because once again, most VA lenders want their two discount points, and maybe more. You might want to read my article on the Trade-off between Rate and Cost in Real Estate Loans and Why You Should Ignore APR for more as to why. Nevertheless, this could go either way and is well worth shopping the loan both ways.
If you have rotten credit, a VA loan can be the only way you can purchase a home, particularly if you have no down payment. Since credit is irrelevant and there's a government guarantee, I used to know a couple lenders that didn't bother to run credit for VA loans. Even the ones that do, it's just a checked box that plays no part in the decision making and underwriting process. Furthermore, you get a rate of a sort that would normally be available only to someone with a much higher credit score than yours.
Now in addition to relatively high closing costs, there are some other games that get played with Veterans Administration loans, of which the Rate Buydown is probably the most pernicious and widespread. But if you're one of those veterans who thought they could never be approved for a loan on a home, VA loans can make it happen where nothing else could.
UPDATE 2/14/2008: With 100% financing programs difficult to come by right now, the fact that second trust deeds don't want to lend over 90% of the value of a property currently, and PMI rates skyrocketing, VA loans have become the absolute best route for 100% financing as of this update. I did the math, and the fact that VA loans are the only 100% financing available right now without PMI or lender paid mortgage insurance saves someone making San Diego Area Median Income over $600 per month, which works out to qualifying for the loan with over $1400 per month less income - $17,000 per year.
I have written a new article, most recently updated here, about the VA loan's status in the new lending and buying market
Caveat Emptor
Original here
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