September 2007 Archives

A coffee break for Sisyphus! Even if I don't drink coffee and that's making way too big a deal out of it, the internal links should now be all fixed. What this means is that for those folks who find the article they were looking for, they can now find the linked and related articles as well.

So if any internal link of Searchlight Crusade comes up with a 404 error (page not found - and I have a customized 404 page that says it's a 404 page), please email me to tell me I missed one.

I'm going to be fixing the external links (via a 404 redirect function) as soon as I can.

I know I only put out three new articles this week. Trying to Rehabilitate the Negative Amortization Loan - NOT! really did take a lot of work, basically every spare minute for two days, mostly reminding myself of what all that math really meant, and then I ended up not using most of it. Fixing the internal links was also a pretty significant project. Still, I'll try to do better next week.

UPDATE: Almost forgot, but I believe that I have also fixed TypeKey registration, so you should be able to log in and comment via TypeKey. Let me know if that's not the case!


Conforming Loan Limit Guessing Game!

I got an emailed question about the raising conforming loan limits. We're coming up on that time of year, as they usually announce the decision within two weeks plus or minus of the beginning of November, to be effective January 1st. Last year, there was no significant upwards pressure on the limit, as they'd just raised it all the way from $359,650 the year before to $417,000, a nearly 16 percent rise, so it was left alone. I expect that to be very different this year.

For full documentation conforming loans, the fact remains that we can do basically anything we used to be able to. The rates have even improved a little. However, for stated income or non-conforming loans, this has changed, and the loan prices have gone very high, proportionately. When the willingness of lenders to touch non-conforming financing plummets, well, that increases the demand for conforming financing, and translates to pressure to raise the conforming limits, as Fannie or Freddie standing behind it means the lender isn't stuck with the loan, and doesn't have to deal with the rest of the secondary market.

Furthermore, due to the need to substitute PMI for a second mortgage loan in the current market (as I discussed here), the conforming loan limit has become a lot more relevant to the average person than it was even a few months ago. When you can use a conforming loan coupled with a piggyback second to purchase a property with a value of up to about $522,000 without any down payment, well, that's more house than the average person can afford. When that option goes away, as second lienholders don't want to go above 90% CLTV lest they lose every dollar, now we're talking about the conforming loan limit (currently $417,000) suddenly becoming a lot more constricting in practice.

Finally, with efforts to tie the FHA maximum to the conforming limit while other parties in Congress want it raised above that, this creates even more pressure to raise the conforming limit. This is the sort of back door approach that's very common in legislative circles. "Okay, the president says he'll veto the bill if it goes over the conforming limit, so we'll give him what he wants in the bill, and then get the conforming limit raised."

The upshot of all of this is that I would be surprised if the conforming loan limit doesn't get raised this year. I'm going to enter $460,000 as my guess for single unit residences, as opposed to $417,000 currently. Depending upon the strength of behind the scenes pressure, it could well be more. I wouldn't be surprised to see $480,000. I would be surprised to see less that $440,000.

Roofable has today's Consumer Focused Real Estate Carnival.

It will return in two weeks, at this site unless I get another volunteer. I'm still recruiting hosts.

I also need to put up a post iterating the guidelines.


Victor Davis Hanson, as always, well worth reading on the geopolitical state of things.


I wish I were making this up: A lawyer who was convicted of aiding and abetting terrorism (serving as a communication channel to help a jailed terrorist leader continue to manage his terror network) and disbarred over the same, is going to be a speaker on the subject of ethics


Brainpower short circuits


The Soros threat to democracy


Funny! M&M duels

"Think of it as evolution in action"


Hillary: "inherent" U.S. authority for force in Iraq since 1991


Armies of Liberation on Yemen's despotic ruler with an electoral figleaf.

The negative amortization loan is a very popular loan with certain kinds of real estate agents and loan officers. It has two great virtues as far as they are concerned. First, it has a low payment, and despite the fact that people should never choose a loan - or a house - based upon payment, the fact is that most people do both, and the negative amortization loan enables both sorts to quote a very low payment considering how much money their client is borrowing. Furthermore, because it has this very low minimum payment, it enables these agents and loan officers to persuade people to buy properties that they cannot really afford. When someone says, "I'll buy it if the payment is less that $3000 per month," this brand of agent goes to a loan officer that they know will reach for a negative amortization loan, without explaining this loan's horrific gotcha, or actually, gotcha!s. Instead of someone ethical explaining that the real rate and the real payment are way above $3000, and this is only a temporary thing, they keep their mouth shut and pocket the commission.

This commission is, incidentally, far larger than they would otherwise make, and that's the second advantage to these loans from their point of view. When the pay for doing such a loan is between three and four percent of the loan amount, with most of them clustering around 3.75%, and they can make it appear like someone can afford a much larger loan, that commission check blows the one for the loan and the property that this customer can really afford out of the water. When they can make it appear like someone who really barely qualifies for a $400,000 loan can afford a $775,000 loan, and the commission on the $400,000 loan is at most two percent of the loan amount, that loan officer is making over twenty-nine thousand dollars, as opposed to between four and eight thousand for the sustainable loan, and that real estate agent (assuming a 3% commission per side) is making over twenty-three thousand dollars as a buyer's agent for hosing their client, as opposed to $12,000 for the property the client can really afford. Not to mention that if they were the listing agent as well, not only have they made $46,000 for both sides of the real estate transaction, but they have found a sucker that can be made to look as if they qualify for that property, making their listing client extremely happy - the more so because one of listing agents standard tricks is talking people into upping their offers based upon how little difference it makes on the payment. Ladies and gentlemen, if the property is only worth $X, it's only worth $X, and it doesn't matter a hill of beans that an extra $20,000 only makes a difference of $50 on the minimum payment for an Option ARM, as these loans are also called. Indeed, Option ARM (aka negative amortization) loan sales were behind a lot of the general run-up in prices of the last few years. By making it appear as if someone could afford a loan amount larger than they really can, this sort of real estate agent and loan officer sowed at least part of the seeds by making people apparently able, and therefore willing, to pay the higher prices because the minimum payment they were quoted fit within their budget. When someone ethical is showing you the two bedroom condo you can really afford, fifteen years old with formica counters and linoleum tile floors, these clowns were showing the same people brand new 2800 square foot detached houses with five bedrooms, granite counters, and travertine or Italian marble floors. Talk about the easy sale! Someone who's not happy about what they can really afford now finds out there's a way they can apparently afford the house of their dreams!

So now that the Option ARM has finally been generally discredited by all the damage it has been doing to people these past three to four years, and has become well known, and deservedly so, by the moniker "Nightmare Mortgage," among others, this type of agent and loan officer are jumping for joy and shouting from the rooftops that a couple of professors have done apparently some work showing that "the Option ARM is the optimal mortgage." It was reported in BusinessWeek, which would have reason to celebrate if this defused the mortgage crisis, and therefore the credit and spending crunch that comes with it.

The problem is that the "Option ARM" these professors are talking about has very little in common with the Option ARMs, or more properly, negative amortization loans that are actually sold for residential mortgages. If you read their research, the loans they describe actually look a lot more like commercial lines of credit secured by real property. There really isn't much more in common between the two than the name.

The characteristics the professors describe in their ideal loan include first, it being the lowest actual rate available. This is not currently the case. In fact, since I've been in the business, it has NEVER been the case - or even close to being the case. The nominal rate can't be beat, but the nominal rate is not the actual interest rate you are being charged. Ever since the first time I was approached about one of these by a lender's representative, I have always had loans at lower rates of interest, with that rate fixed for a minimum of five years. For the last year and a half or so, I've had thirty year fixed rate loans - the paranoid consumer's dream loan, which usually carries a higher interest rate than anything else - at lower real rates of interest than Option ARM. When you're considering the real cost of the loan, it's the interest you're paying that's important. The lender, or the investor behind them, isn't reporting the payment amount as income. They're reporting the cost of interest to the buyer as income, and that's what they're paying taxes on as well. But because people don't know any better than to select loans on the basis of payment, lenders can and do get away with charging higher rates of interest on these. The suckers pay a higher rate of interest than they could otherwise have gotten, and their balances are going up, which means they're effectively borrowing more money all the time, on which they then pay the inflated interest rate that is the real cost of this money. What more could you ask for, from the lenders and investors point of view?

Now there is a real actuarial risk associated with these loans, as well, which does increase the interest rate that the lenders need to charge. This is that because there is an increased risk that the borrower's balance will eventually reach beyond their ability to pay, a risk which is exacerbated by how these loans are generally marketed and sold, a larger number of borrowers will default than would be the case with other kinds of loans. So these loans aren't all fun and games from the lenders point of view, either - as said lenders have been finding out firsthand for the last several months as the loans go into default. This leads us to the second dissimilarity between these loans as they exist, and the loans said to be optimum by the professors research, and this one is a real problem from the lender's point of view.

You see, the professors' study assumes that the lender can simply foreclose as easily and as quickly as sending out an email. That's not the way it works. First of all, foreclosure takes time, and it costs serious money. The law is set up that way. To quote something I wrote on August 23rd, 2007:

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.

So that loan is non-performing for a time that starts at just under nine months, and goes up from there. This costs the lenders some serious money - money which they expect to be actuarially compensated for, which is to say, everybody pays a higher rate so that the lender doesn't lose more money on defaults than they make on the higher rate. I checked available rates on loans this afternoon, and for average credit scores on reasonable assumptions, the closest the Option ARM came to matching the equivalent thirty year fixed rate loan was 80 basis points (8/10ths of a percent), and that wasn't an apples to apples comparison, as the Option ARM had a three year "hard" prepayment penalty, while that thirty year fixed rate loan had none, as well as the Option ARM had the real rate bought down by a full percent by a lender forfeiting sixty percent of the usual commission for the loan to buy the real rate down. How often do you think that's going to happen? Sure, the *bleeping* Option ARM had a minimum payment of about $1011 on a $400,000 loan, as opposed to $2463 for the thirty year fixed rate loan fully amortized, but the real cost of money was $2350 per month, as opposed to $2083 for that thirty year fixed rate loan, and the equivalent payment for the Option ARM was, that accomplishes the same thing $2463 does for the thirty year fixed (theoretically paying the loan off in thirty years, providing the underlying rate remains the same), was $2675. Not to mention that the thirty year fixed rate loan has the cost of money locked in for the life of the loan, where that *bleeping* Option ARM can go as high as 9.95%, and the prepayment penalty for that *bleeping* Option ARM starts out at $14,100, and is more likely to go higher than lower for the three years it's in effect. You can't just handwave $14,100 that the majority of people who accept a prepayment penalty are going to end up paying, for one reason or another.

Another characteristic of the Option ARM envisioned by the professors is a so-called "soft" prepayment penalty, where no penalty is due if the property is actually sold, rather than refinanced. That's not the case with the vast majority of real-world Option ARMs. With only one exception I'm aware of, they're all "hard" pre-payment penalties, and the one lender who offered the "soft" penalty has discovered it's not a popular alternative, because they had to charge a higher nominal rate in order to make it work. Since the minimum payment was higher, and it wasn't quite so easy to qualify people quite so far beyond their means, that particular lender had been contracting operations, even while the rest of the Option ARM world was going gangbusters. Indeed, their parent company sold that lender earlier this year, because they just weren't getting any profit out of them, and at one point, they had been a very major subprime lender (They were extremely competitive on 2/28s and 3/27s and their forty year variants, as well as versus other subprime lenders on thirty year fixed rate loans). Until I checked their website just now, I was not certain whether they're even still in business. I haven't heard from my old wholesaler in eighteen months now.

The Option ARM envisioned by the professors lacks the "payment recast" bug present in all current Option ARMs. Indeed, under all currently available Option ARMs, it is difficult to avoid this issue, because they recast in five years no matter what. Furthermore, they professors' assumptions as to the longevity of the loan were open ended - essentially infinite in theory, although no loan given to individuals can be open ended in fact because we're all going to die someday, and most of us are going to want to retire before that, at which point these loans would definitely not be paid down to a point where they're affordable on retirement income under anything like our current system.

One final crock to the whole Option ARM concept as envisioned by the professors seems to be that the borrower gets a reserve amount if ever they default. The obvious retort is "Not in the real world." That is contrary to every practice of lending as it currently exists. That is the very basis of the real estate financing contract - the lender gets every penny they are due, first, and the borrower/purchaser/owner gets everything that's left over. As the authors themselves note, this does create a moral hazard for the lenders. Furthermore, and I must admit I'm not certain I'm reading the relevant passage correctly, another characteristic of the "Option ARM" they propose is that the lender gets primary benefit of any gain in value, and at least under certain circumstances, takes primary risk for any loss. In case you were unaware, this would completely sabotage the benefits of leverage that are the main reason why real estate is a worthwhile investment. This would certainly make the communities that make their living off selling other sorts of investment happy. Lenders, and especially current owners, not so much. Furthermore, I'm pretty certain that if they think about the economic consequences of this, real estate agents and loan officers don't want this to happen, either.

Those aren't all of the differences or relevant caveats, by any means. I took quite a few notes that I haven't yet covered, but it's bedtime, and by this point it should be obvious to anyone who took the trouble to read through the above that there really isn't a whole lot in common between the Option ARM as the contracts are currently written, and it is currently marketed and sold, and the loan of the same name as envisioned by the professor's research, except that name. Any claim that said research rehabilitates the Option ARM aka Negative Amortization Loan aka Pick a Pay aka "1% loan" aka (several dozen words of profanity), is based upon nothing more than the similarity in labeling, as if claiming a Chevette was the same thing as a Corvette, because they're both Chevrolets. Someone reading the professors' research would not recognize anything like the loan they are promulgating in any Option ARM currently on the market, because those currently offered are not based upon any of the same principles.

Caveat Emptor

Postscript: Lest I be misunderstood, I had previously come to a lot of the same conclusions that the professors had, although I had never integrated it into a single article, here or anywhere else. A lot of what they conclude, while pretty much theoretical, has some significant real world applications. Indeed, I have said several times in the past that leverage works best when it's maximized, and when you pay as little as possible towards paying off the loan, although that one result has to be modified for real world considerations like mortality, morbidity, and various psychological factors, which the professors mention in passing but do not really address or answer. I think I have some real academic appreciation for the value of Professors Piskorski and Tchistyi's work, and what went into it, and the results they have achieved. I had to dust off some portions of my brain (and mathematical textbooks!) that I haven't used in almost twenty five years, which was a treat of a certain kind once I got into it. Nonetheless, the products that go by the same name in the current world of loans have nothing to do with what these two distinguished gentlemen are talking about. The loan product I'm aware of that comes the closest is, as I said, a line of credit on commercial real estate.

Article UPDATED here

Carnival of Personal Finance

Carnival of Capitalists


Upon several occasions, I've mentioned that initially overpricing a property is a good way to get less than it's really worth, and less than you could have gotten by pricing it correctly in the first place. Here's the best, most graphic illustration of why that I have yet come across, as well as the most understandable.


Sorry I haven't had the time to link out much of late. It's more important to get the internal links fixed (I'm into April of this year, and hoping to at least finish it before I go home), and then institute redirects for external links that have gone bad (I looked a few days ago, and had over 250k "404" errors at that time. I'm working on it!)

On the professional front, I have been finding some WOW! bargains in my usual stomping grounds in east county. There's a lot to be said for the older cities of east county (and adjacent areas of San Diego City). You tend to get a lot more for the same price than Clairemont, University City, Mira Mesa, etcetera, while the schools and construction standards are mostly better and the traffic is easier to handle. I've had two sets of clients change their own minds about where they wanted to buy, so far this year. As I said a few days ago, Affordability has improved a lot over the last year while people have continued to make more money.


Almost forgot! It was 29 years ago today that PSA Flight 182 landed in the North Park area of San Diego.

I have to admit I'm uncomfortable with it and don't like it. As a buyer's agent, here I am getting paid by someone who not only is not my client, but whose interests are aligned, in most issues, opposite to my clients. They want the highest possible price, my client wants the lowest. They want out of the property without spending money on repairs if possible, my client wants the necessary repairs made. The list goes on and on. About the only issue on which the two sides are in agreement is that they want the transaction to happen. Yet it has become essentially universal for the seller to pay the buyer's agent. Indeed, this is basically the only fig leaf protecting Dual Agency. If the money to pay the listing agent came from the buyers, they'd have to ask themselves "whose interest is this agent looking out for?" with the result being that dual agency would die overnight, and if staking dual agency through the heart doesn't appeal to you, you're unlikely to be on the consumer's side. Not to mention the myth of "Discount price, full service" would die just as quickly, on both buyer's and seller's sides of the transaction. There are protections in place to make it both legal and ethical, but getting paid by the seller when I'm acting on behalf of the buyers still makes me profoundly uncomfortable, and that's aside from facilitating these urban legends.

That said, let's consider why it happened, what it would take to make it change, and what the cost of that change would be.

The first paragraph makes obvious the benefits if no sellers were to pay buyer's agents - if what the seller paid out in agency fees was reserved solely to the listing agent, usually contingent upon a successful sale. No "Co-operating Broker" percentage. Not to mention the fact that the seller would come away with a larger percentage of the value of their property. Instead of seven to eight percent, the cost of selling the property would fall to between four and five percent. Not paying the buyer's agent sure looks like a win for the sellers, and one would think explaining that it would be part of an agent's fiduciary responsibility to explain, right?

But the reason that it is in any given seller's best interest is almost as obvious. Ask any agent and any loan officer what the number one obstacle to buyers being able to buy a given property is buyer cash. Okay, there are those unethical persons who will tell you that the problem is qualifying people for property beyond their means, but I'm talking about people who want to buy properties they can otherwise afford. Once they get the loan and the property, they will be able to afford the payments - the real payments on a sustainable loan - and keep up the property and all of the other stuff that essentially goes with "happily ever after". The number one constraint upon people wanting to purchase property they really can afford is cash in their pockets (or equivalently, bank account). The cash for the down payment, the closing costs of the loan, and everything else involved. It takes a long time to save that money, over and above the daily expenses of living. Some people find it difficult; others, impossible. Add the buyer's agent commission to that, and that sets the bar of cash they need to save that much higher.

The seller has the built up equity in their property, from the loan they've been paying on and usually, the increase in property value, and if that property commands a higher sales price, this equity is greater, and therein lies the reason for them being willing to pay the buyer's agent. This willingness means that the pool of potential buyers doesn't need so much cash, which means that more potential buyers are able to afford this property. The more potential buyers able to potentially afford the property, the higher the likely sales price. The greater the economic demand, the higher the price, holding the supply constant, and there is only one such property. In fact, this increase in the sales price is typically much larger than the cash they pay, thus furnishing incentive for the sellers to be willing to pay the buyer's agent as part of paying their own. By shrinking the necessary pool of cash the buyer needs to a smaller percentage of the purchase price, they increase the potential selling price by more than they cash they put out. Furthermore, if everyone else is willing to pay this money and they aren't, by making it harder to purchase their property than the competing ones, they shrink their pool of potential buyers, thus costing them more in eventual sales price than they are likely to recover. If my clients have just enough cash for closing costs plus down payment, they're not prospects for that property, because if they had to write the check for the buyer's agent, they fall short. One alternative is to lump the buyer's agent commission into a seller paid allowance for closing costs, but the six percent aggregate limit that most lenders draw in the sand for that can make it a real constraint. Considered on an individual basis, it's better to simply agree it's your responsibility in the listing agreement, thus removing the money from that allowance.

Indeed, an argument can be made that offering a high incentive (locally, 3% or more) to a buyer's agent is one of the better ways to get the property sold. Not only do many buyer's agents shop that way explicitly, but if they have an exclusive contract that says 3% (as many do, because their clients aren't educated enough to know what a crock exclusive buyer's agency agreements are in the first place, but they'll also willingly trust the chain agent as to what is "standard"). If the Cooperating Broker's percentage is lower than what it shows on the buyer's agency agreement, that buyer will need to come up with more cash to pay their agent, from out of their limited pool of available cash. When that buyer's agent is in a position to demand 3% whatever property their victim buys, even if they didn't find it and weren't involved, that means properties paying less than that aren't contenders for this buyer's business, unless they've got so much available cash that it just isn't a constraint, and that is rare. A better buyer's agent puts a lower number on a nonexclusive contract, and if they get more, that's certainly fine with them, but because they have a non-exclusive contract, they don't get anything if the buyers become disenchanted with them and stop working with them. This gives a buyer's agent with a non-exclusive contract the incentive to find the property that's a real value to the clients as quickly as possible. I care far less about whether I'm getting two or three percent or something in between on a particular property, than I do about finding the property my clients want that's within their budget. My incentive is to make the clients as happy as possible so that I do get paid, because if I don't, I won't. But the buyer's agent with an exclusive contract that pays three percent has a different set of incentives, which is another reason I advise strongly against signing exclusive buyer's agency agreements, and the existence of such creatures is the reason why it may be a good idea for sellers to offer a higher percentage to a buyer's agent. (There is no consumer oriented reason to keep the amount of the Cooperating Broker's percentage secret, and I strongly support making it part of the general public's available information, which it currently is not on the local MLS.)

So sellers offer it because it shrinks the percentage of purchase price that buyers need to have, competing for buyer business as well as expanding the pool of possible buyers theoretically able to consider this property, both of which increase the purchase price more than enough to balance the money they spend. If by paying someone three percent, I increase my take by five percent or more (and the numbers I've seen indicate that the seller's increased take is about ten percent of gross price, which translates to almost seven percent more money in their pocket), that's money any rational person will spend. On a $100,000 property, you spend $3000, get that money back and another $7000 besides - wouldn't you do that? Doesn't happen on every transaction, but those are the statistical averages. It might not be that much in your particular case - but it could as easily be more as less. If the dice were loaded on your behalf like this in Las Vegas, and that the expected value of a $3000 bet was $10,000, most of those reading this would quit their jobs and move there (at least until the casinos went bankrupt).

We've seen what a winner this bet is, in the aggregate, and therefore why rational sellers who are allowed the option will opt to do offer a cooperating broker's percentage, which essentially goes to pay the buyer's agent. The economic incentives under the market therefore reduce it to something like one more tragedy of the commons, although unlike the classic example, it doesn't really hurt anyone directly, it just shifts the market price upwards. The only way to change it is therefore to pass a law prohibiting it. Leaving aside the mechanics of such a law and considerations of whether people could find loopholes in such a law (they would), and consider such a law as being proposed. Consider such a theoretical law as perfectly written and trivial to enforce, such that nobody could successfully get around it. I know that this is ridiculous (as should any adult), but let's pretend to believe this fairy tale for just long enough to tear it apart even under ideal circumstances. What happens? Well the market is priced to include the shift upwards in prices that sellers paying buyer's agents causes. It's just a one time shift, but we've already had the up, so now we'd get the down. Obviously, it would further damage current owners who would like to sell, and make prices more affordable to those who want to buy. Okay, so far we have a 1:1 correspondence between who gets helped and who gets hurt, and even, arguably, a $1:$1 ratio in hurt versus help. For every potential buyer who qualifies on the basis of income but no longer has the necessary cash in hand for a down payment, closing costs and a buyer's agent, to boot, we now have someone new qualify who has the money for the down payment, etcetera, and can now qualify on the basis of income. Like I said, direct effects help someone for every person they hurt. Before we leave direct effects, we might ask about how likely people are to vote to harm people who bought into the current system of homeownership based upon the status quo, in order to benefit an equal number of people who aren't - or aren't yet - part of that system at all. That equation doesn't play well very often in the United States.

Now let's consider the indirect effects. You see, people who want to sell and people who want to buy aren't the only ones affected. People who own, but want to hang on to their current properties will also be hurt. When prices fall 10%, everyone with less than 10% equity is suddenly upside-down, with all of the problems that brings. In the current market, the chances of them being able to obtain refinancing are essentially nonexistent. Maybe you're been paying attention to the news recently, maybe you haven't. There's an awful lot of people who want to hang on to their properties right now, and are having a very hard time. Just because I don't think the one proposal that's been made to bail them out directly is a good idea, doesn't mean I want to actively sabotage their efforts. This would flush all but a vanishingly small percentage of them out of their homes and back into rentals.

Furthermore, there's a ripple effect across the rest of the loan to value spectrum. People who now have significantly less equity find it harder to refinance, and end up with higher rates, higher cost of money, etcetera. When prices shift downwards by ten percent, someone who had ten percent equity suddenly has none, making their loan much more difficult and costly. Someone who had eighty percent loan to value is now essentially at ninety. Someone who was at seventy is now almost to eighty, and indeed, a a 77 percent loan to value ratio is an eighty percent loan. It's not until you get below sixty-three percent of current value (which becomes seventy once values have shifted downwards), that the differences become small enough to ignore. In a significant number of those cases, this is going to make enough of a difference such that these owners will not be able to refinance even though they need to, or they'll have to accept loans they can't really make the payments on. Whichever is the case, they lose the property. How many people who bought in the last few years have a loan to value ratio below 63%? Not a whole lot, it turns out. Even when value increases would have more than caused that level of equity, they've taken out equity lines to pay for improvements, cashed out for toys, or even in order to put the down payment on more real estate. Maybe they shouldn't have done that. It's not my place to make that kind of judgment. I'm only going to say that they did so having no reason to believe the status quo would change, and intentionally shifting it even further on them is moving the goalposts, and to the extent it causes current homeowners to fall short of their goals of meeting their financial obligations and lose their homes, is vile.

All this leads up to the killer reason: As I noted a little while ago, residential real estate in the United States is valued at about 25.3 trillion dollars. Let it be devalued by ten percent, and that's 2 trillion, 530 billion dollars in real wealth, just gone. I could freak out enough people just by talking about the thirty billion, or roughly $100 for every man, woman, and child in the United States, but that's only the third decimal place of the loss, in this particular case. Accounting phantom consisting of numbers on paper or not, this is real money, every bit as real as that $100 in your checking account. Every penny that vanishes means that someone doesn't have it to invest in the economy. Whether it's an individual, a corporation, a lender, or what have you, it means that suddenly the last year or so of economic expansion goes poof!. This two and a half trillion dollars vanishing has second and third order consequences, each dislocation causing more troubles further down the line. The global depression of the 1930s had much milder causes, even considered proportionately. You want to know who gets hurt? The little guy and the emerging entrepreneur, who would have been responsible for most of tomorrow's growth. Old Money comes out fine, by and large. The depression was an inconvenience to the Astors and the DuPonts, to be sure, but that inconvenience didn't much effect their personal lifestyle. It economically killed a generation of innovators in addition to causing well documented economic misery among those who were less well off.

So now you know why the sellers pay the buyer's agents, you know why it is in the individual seller's best interest that it be so, what it would take to change this, and what the results of such a change would be. I still don't like it, but changing it would cause more damage, and more immediate damage, than allowing the status quo to continue.

Caveat Emptor

Article UPDATED here

Hi, Dan!
I just came across your website and you strike me as the type of guy who has answers for our situation:

My husband and I built our home 2.5 years ago. We took out a second mortgage last year which brought us up to financing basically 100% of the value of our home. We owe a total of about $305,000 on the home, and even though it was appraised for around $305-310K. if we sell, we have been told we won't get a price anywhere near that, because it is not in a development.

Do you have any suggestions, comments, opinions...which could help us out. We would really like to relocate closer to my brother out in the DELETED area-but we seem to be stuck right where we are given the circumstances-are we?

Gee, around here custom homes usually command a premium over cookie cutters, other things being equal. Not necessarily a huge premium, but a premium.

Nonetheless, I'm hesitant to second guess the agents on the scene when I have zero personal knowledge of your local market. You basically have four options: Stay where you are, rent it out, default, or sell.

You don't state whether you are having difficulty affording the payments, or whether you've got one sort or another of unsustainable mortgage. If you're not having difficulty affording the payments and you're in a sustainable loan, there's no need to do anything. If you're at or close to 100% financing, and you need to refinance, you're looking at right around 6.25%, plus PMI of about 1% until your equity improves. It would be better if lenders were giving second mortgages above 90% financing, but that's not happening right now. I'm going to presume that all refinanced, you're looking at a mortgage balance of $310,000, which may be a little low. Payment works out to $1909 on a thirty year fixed rate loan, fully amortized, plus PMI of $258. If your income situation isn't cramped, you may be able to get "interest only" for five years (or longer!) at a slightly higher rate. If you do an interest only loan, that would be a payment of about $1680. although you need to be aware before you do it that it is a calculated risk. I don't know your market, but mine is preparing to recover and I don't see anywhere not recovering within five years. Nonetheless, getting an interest only loan sets up a deadline for doing something again, and your market isn't under your control or anyone else's. I think it's a reasonable bet given that you already own the property, but it remains a gamble.

Another word on the viability of refinancing: It hinges upon your ability to either get an appraisal that covers the amount of the new loan balance, or to come up with the difference in cash. It is theoretically possible to finance more than the value of the property, but the rate and terms of those loans are ugly. If you're looking to refinance because you can't afford your mortgage, refinancing more than the value of the property is unlikely to make it more affordable. It's probably better to consider another option.

You could rent the property out. I don't know what rentals are like in your area, but if you can get enough rent to cover the monthly expenses (mortgage, taxes, insurance, and an allowance for upkeep and management), that becomes a possibility. If you can cover the difference, that's fine, also. Remember, I think the markets are going to do well once they've digested the hairball caused by the speculative practices of buying with unsustainable mortgages. If you're short $200 per month and in five years you can sell for $50,000 more, that's an investment I'd make. The question, unanswerable by anyone at this point in time, is where your local market will be in five years. $50,000 is about 16% of $310,000. Here in San Diego, I'd leap at that - I think we're going to see that within three years or less, as opposed to current prices. In your area, I don't know. In either case, it's a risk, and you need someone who knows more about your market than I do to advise you on the probabilities.

You could just default. I'm not recommending it. It's a bad option, but it is there. If you want to buy, or even rent, after your relocation, your credit will be hosed. I don't know your state law on deficiency judgments, but that's a concern. Under this same heading is deed in lieu of foreclosure, with most of the same problems. The reason people are willing to grant credit is that we're legal adults, and supposedly responsible. If you give them evidence that you're not, you may not pay for it in dollars directly, but you will pay for it, and typically the interest rate is usurious.

Or you could sell, most likely a short payoff assuming what you've been told is correct. It costs money to sell a property, more so in a buyer's market. Figure it'll cost you about 8 percent of whatever the gross sale price is to get the property sold. Using this as the basis for an estimate, even if you sold for $310,000, that'd only net you about $285,000, so you'd be short roughly $25,000. If the lender forgives the difference, you'll likely get a 1099 love note adding it to your taxable income. If they don't, you could be sitting on a deficiency judgment for the difference. I don't know your state's law, but around here, if someone was liable for the difference, I'd suggest saving the legal fees by agreeing to sign a promissory note. If you fight, you're likely to be wasting the money as well as digging yourself in deeper. They're going to win, and they'll almost certainly get to add their legal fees to what you owe. So unless you really like subsidizing the legal profession, if you're in the situation, I'd suggest considering agreeing to pay without a judgment. Talk to a lawyer in your state about what the law says about your situation, of course, as spending the money for a half hour of a lawyer's time is likely to be considerably less than $25,000 plus interest.

Now if you accept such a promissory note, I actually have no idea what the rate will be, but even if it's 18 percent, you're still talking about owing only about a twelfth of what you do now. I'm not saying it'll be easy, but you can pay it off in a few years, and it's probably cheaper than the costs of defaulting, even though it does hit your debt to income ratio. People choose defaulting and bankruptcy because it's easier now, but when you go through the total costs rather than just the immediate cash, you're likely to come to a different answer.

Caveat Emptor

Article updated here


You Go Girl! Should teachers be allowed to pack a gun? Talks about an Oregon teacher who has filed suit to be allowed to carry on campus.


I was interviewed by Channel 10 news about the local real estate market yesterday. I actually watched their 5:30 news, and it came across pretty well. They went so far as to mention my locally oriented website.

Here's the video, although I don't know how long it'll last. The website shown is my locally aimed, professional voice only site.

Here's their website linking to mine


Progress report: I've now got the internal links fixed through the end of September 2006. I seem to be averaging about a month's worth of articles per day. When I've got them all fixed, I'll go back and add re-directs so the existing external links go to the article they wanted in the first place.

I know I've already written four new articles this week, but I'm going to try and squeeze in one more new article if I can.

Let's consider where the rates are: Ever so slightly higher. With the Fed boosting liquidity and cutting their short term rates, I expect this to change rapidly, but let's take a look at the actual cost of money on sustainable loans - those same boring thirty year fixed rate loans that ethical providers have been pushing this whole time, rather than the negative amortization loans that has a low payment for a few years while the principal keeps going up every month - just long enough to put you into financial purgatory or worse for the rest of your life. When the forty to sixty percent payment increase hits for those or a short term interest only loan, you're hosed, because if you didn't need all of those tricks to qualify for the loan, you could have had a solid, sustainable loan at a lower interest rate.

One year ago, for one total point retail, I had a thirty year fixed rate loan at 6.00 percent for loan amounts up to $417,000, and not exceeding 80% of the value of the property. If you had credit that wasn't too far below average, you could get a second mortgage back then for the remainder of 100% financing at about 8.25%. Nowadays, second mortgages to bring your CLTV up to 100% just aren't available, so until this changes, if you want financing over 90% of the value of the property, you're probably stuck with Private Mortgage Insurance for a while. In all of the below cases, the best loan for 100% of value I could get right now was a 6.25% 30 year fixed with Private Mortgage Insurance (PMI) of just barely below 1%, which I'll call 1%, until such time as you've got 20% equity. Before I go any further, I want to emphasize that if you don't need 100% financing, all of these current properties are even more affordable now as compared to then. If you could put 10% down (or more), you'd come away a lot better! But the object of this exercise is to shine the hardest, most unfavorable light on today possible. I'm going to assume all monthly homeowner's insurance is $110, either then or now, and I just went through my usual area of operations and found the first 10 properties that were on the market both then and now. Nor am I going to use any qualifying tricks like a Mortgage Credit Certificate or any other form of buyer assistance. These are qualifications for straight up A paper loans with average credit scores, doing it all completely on your own.

Exhibit 1: I noticed it early in the spring of 2007, when it was priced at $399,000. I thought it might be worth $340,000 back then. Now, it's priced at $324,000. (This article should also serve as a warning to owners of the dangers of overpricing the property, especially when you first put it on the market). Monthly Income to qualify then: $6810, now: $6027, an 11.5% decline.

Exhibit 2: This sold in June 2006 for $445,000. It's on the market for $375,000 now, and they're not going to get anything like it, but I've got to be true to my assumptions. Monthly income to qualify then: $7567 Now: $6938, a decline of 8.3%.

Exhibit 3: This is a very nice property I noticed in March when it had a $515,000 asking price on it. I thought it was maybe worth $470,000 then. Now, the asking price is $420,000. Monthly income to qualify then: $8,719. Now: $7,687.59, an 11.8% decline.

Exhibit 4: This is a nice older home on a good size lot with mature trees. It expired last December at $440,000, and I thought it was maybe worth $410,000. It's back on the market now for $380,000. Monthly Income to qualify then: $7,485. Now: $7,027, a 6.1% decline.

Exhibit 5 Is an older home in a really nice suburb. It was put on the market for $440,000 in August of 2006, and if they'd priced it just $10,000 lower, it probably would have sold then. They just put it back on the market for $410,000. Monthly income to qualify then: $7,469. Now: $7,563, a 1.3% increase, due to PMI being more expensive than second mortgages.

Exhibit 6: This was a blue collar redneck neighborhood when I was growing up. Now it's suburbia. It was priced at $470,000 last summer, and was probably worth $440,000 and would have sold for $420,000. Now it's a severe distress sale at $350,000, with the trustee's sale coming any day. Monthly income to qualify then: $7,962. Now: $6,492, an 18.5% decline.

Exhibit 7: This property really does have a nice view. When I first noticed it last year, it was on the market for $499,000 and the agent didn't want to let me preview it even though it was empty. "Bring a client, or not at all," she told me. I told her "then not at all," and my clients ended up with a much nicer property. It's gone into escrow and fallen out twice, but the agent doesn't know a qualified buyer from a hole in the ground, either. It's now on the market for $395,000, and they might get $370,000 if they're lucky, but we're still going to use the asking price for comparison. Monthly Income to qualify then: $8,390. Now $7,295, a 13.1% decline (Meanwhile, the owners are out over $40,000 cash - not exactly a sterling performance on behalf of the agent).

Exhibit 8: Post Probate estate sale in a neighborhood with pretty darned good schools. The heir owns it essentially free and clear, but I first noticed it priced at $480,000, and thought it might have sold for $420,000 then. Now it's priced at $400,000, and I would be astonished if they came within $20,000 of that. Monthly Income to qualify then: $8,143. Now: $7,384, a 9.3% decline.

Exhibit 9: This property gets some significant freeway noise, but the previous owners sold it to someone through Dual Agency about a year ago for $585,000. No way was it really worth anything like that, even then. Maybe $470,000 at the most, but it was marketed on the basis of payment on a negative amortization loan, and a sucker walked into the trap. One hopes regular readers understand by now why I keep saying to Never Choose A Loan (or a House) Based Upon Payment. If I sound like an infinitely repeating loop on this point, you should understand why. Now they're in foreclosure, and the property is on the market again with an asking price of $425,000, which they're not going to get with a recorded Notice of Default. Monthly Income to Qualify then: $9,871. Now: $7,830.38, a 20.7% decline.

Exhibit 10 is the star of the show, a relocation company owned property originally priced at $530,000 in summer 2006. I noticed it back then, and thought it was worth every penny at the time. Actually had a client offer $490,000, and they blew us off without a counter. We were within 10% in a very strong buyer's market, so this was pretty silly. My client found just as good of a property, and now the asking price on this property, which has been on the market the whole time, is $450,000, which I'll bet you they're not going to get. Monthly Income to qualify then: $8,966. Now: $8,277, a 7.7% decline.

Average the monthly incomes to qualify a year ago, and you get of $8138. The average now is $7252, a 10.9% decline. It's not like they're making a whole lot of new properties around here. Indeed, the easiest place to find a buildable lot is by tearing down an older existing structure.

These are not really "starter homes." Those are condominiums, these days. These are homes that are really priced for families that have owned condominiums for several years and been well started. Many people may want to move directly into a single family detached home, but most lack the necessary self-discipline. And yet, you can now afford them, with no down payment, with a family income not much over the area median income of $5408 per month, provided you have lived within your means otherwise. If you have a 10% down payment, they become more affordable yet. Even if you don't, as soon as you've got enough equity to get rid of PMI, things become more affordable yet. A few days ago, I found a nice solid four bedroom home that a family making $5000 per month should be able to afford on a currently available thirty year fixed rate loan, in a pretty decent area with above average schools.

My point is this: The days of only 9% of the population being able to afford a single family home are behind us. Rents are experiencing upwards pressure like they haven't seen since the early 1990s, as those people who bought too much home with a loan they couldn't really afford lose them and now have to fit into rentals. Where before landlords didn't want to raise the rents because their tenants would buy, now the people who are looking for rentals have hosed their credit and do not have the option of buying, and will not for several years. The supply of rentals is just as constricted as ever. Last summer the vacancy factor was 3.4%, tight enough in any market. Now it's even lower. I just did a search, and the vacancy factor as of a few days ago was down to 2.6%. Increase the demand side of the equation while constricting the supply, and what happens to price, aka rent in this situation? Add that to the fact that landlords now have to make the cash flow work, as the ability to flip for a profit in a year has dried up, and you have even more upwards pressure on rental rates. Landlords can not only get it, they need it.

Purchasing housing has become much more affordable in the last year. Furthermore, upwards pressure on the price of rentals is increasing, as I have repeatedly predicted over the last year or so. With the federal government looking like it's ready to take over all the bad loans the lenders have made, I wouldn't expect the market to get significantly lower than it has already gotten. Furthermore, another point I and others have repeatedly made is that San Diego has just about saturated its natural and legal boundaries. There isn't a whole lot of dirt left to build more homes upon. It's still a rotten time to sell, but if you have a desire to own the property you live in here in San Diego, I would start looking right now. Because unless something about the situation changes for the worse, I think the market is going to turn from buyers to sellers in the spring of 2008.

Caveat Emptor

House passes HR 1852. This raises the limit for FHA mortgages, appears to lower equity requirements (to less than zero) in certain circumstances, lowers their mortgage insurance ceiling. It also lowers the credit score minimum, and prohibits failures to pay from being reported to credit reporting agencies.

CBO report here, which quite frankly looks like a whitewash. You're making it easier for people with credit way below average to obtain financing for which the government is going to be liable, and giving them more favorable terms, to boot. Maybe I missed the part where they clicked the ruby slippers together three times and said, "There's no place like Oz!" (yes, I'm aware that's not the original quote)

Maybe it will straighten everything out before anything worse than what's already happened, and like the beginning of one of the episode of Hitchhiker's Guide to The Galaxy, where the illustrate the illumination of the ultimate question to life, the universe, and everything (which the Vogons blew up before it could be communicated), really nobody will have to get nailed to a cross this time. Nevertheless, I'm thoroughly skeptical.

As a loan officer and real estate agent, this is going to make a very positive difference to my business.

As a taxpayer, here we go with multiple high speed stainless steel counter-rotating shafts, which we're all going to pay for, while those who entered the biggest transaction of their lives without any research are all going to benefit from. As tens of thousands of loan officers and real estate agents who've been setting their clients up breathe a huge sigh of relief.

At first glance and first thought, this appears to be a very poorly thought out and poorly targeted bill. Yes, it's going to save a lot of people, the consumers of which I'm glad of. But it appears to heavily reward severely irresponsible behavior by insulating those practicing it from the consequences of their actions, thereby encouraging more of the same. This is the sort of heavy-handed vote buying that I'd expect from a nascent communist state.

Considering my own individual interests, I'm all in favor of this bill. Considering those of the country as a whole, I find myself hoping the Senate has the intelligence and intestinal fortitude to produce something better. Right now, it's not looking good. There's no way the minority Republicans can filibuster this politically, and the Democrats look like they're ready to run off the edge of a cliff with it. The best hope of fiscal sanity is the President vetoing it (which is probably the funniest joke you've hear today, but there's more chance of that than anything else stopping it).

Reno Realty asks "Maybe I'm missing something here, but if distressed homebuyers can't afford the homes they're currently in, how does making it easier for first-time home buyers to purchase more expensive homes "return stability to the mortgage market"?" (The answer is in economic aggregates, of course, but it's a good point in the context made).

National Taxpayer's Union
recommends a "No" Vote

an apparent foreclosure and short sale specialist doesn't like it either - of course a foreclosure interests as an individual align perfectly with those of taxpayers, here, but the sentiment is correct "Trying to turn FHA into an ATM".

Seattle Real Estate Professionals do note that the President did at least refuse to support expanding the conforming loan limit.

The builders are happy (predictably) with the passage.

Honeycomb Properties sees good and bad.

The answer is yes.

As with everything else pertaining to real estate, there are potential upsides and downsides. First of all, lenders in short sale situations often demand agents reduce their commission, so the agents are not likely to start from a discounted or low end commission. If it takes $12,000 to break even on a full service transaction, and you have to reduce your pay to make the sale happen, you're going to want more than $12,000 before the reduction. Discounters usually demand their money up front, but discounters aren't selling many properties in this sort of market. Along these same lines, it's a good idea to offer a larger than average commission to the buyer's agent. The average buyer's agent sees a short sale, and they say a transaction that takes twice as long as average, and that they have to accept reduced commission for while handling a whole lot of additional concerns. It makes the loan officer juggle rate locks and possibly submit multiple sets of paperwork. It makes the escrow officer juggle the entire transaction schedule, usually several times. Sometimes, the transaction approval with the seller's lender takes so long that an inspection or appraisal has to be re-done in order to satisfy the buyer's lender. It's tempting to just consider the property next door or down the street, even if it may not be such a bargain. With short sales, everybody marches to the beat of the seller's lender, which means I (as the buyer's agent or loan officer) have a whole slew of things that can go wrong beyond my ability to control, any of which results in my client ending up unhappy by costing them more money. Unhappy clients are poison to my business, no matter how great the deal they actually got was. Furthermore, I'm a lot more willing to not worry about my pocketbook than many other agents.

The person who drives this whole process, and makes it happen or fails to make it happen, is the listing agent. So if I see anything that tells me that listing agent is a bozo, or doesn't have their act together, I'm going to recommend that my buyer clients pass on the property, and I'm going to tell them precisely why. Pricing, staging, marketing, it's all got to have the fingerprints of a professional. If that listing agent has overpriced the property, if they have allowed the owner to leave excessive clutter, if they're saying things about the property that are not borne out when I go to view the property, I'm going to spell it out to my buyer clients why it's a bad idea to make an offer. I won't even look at "For Sale By Owner" properties trying to execute a short sale. I know, from experience, that I'm wasting my time, and my buyer client's as well. Lender approval of the short sale is not going to happen without an expert who is motivated to get the best possible price. You, as the owner, don't want to turn off either the buyers or their agents. So you want a listing agent that's demonstrably up to the task.

Now just because the lender accepts a short payoff in satisfaction of the debt, doesn't mean that all is forgiven. In some circumstances, they may go so far as to eat the loss entirely. I'm not certain I've ever seen such a case. They may report the loan as being paid satisfactorily to the credit bureaus, avoiding further hits to your credit, but they've just taken a loss. They want to deduct that loss from the earnings, as tax law permits them to do. But in order to do this with the IRS, they pretty much need to send the borrower they forgave a form 1099, reporting income from forgiveness of debt. Since this is taxable income under current law, expect to pay income taxes on the shortfall. President Bush has suggested a temporary halt to this practice, but to the best of my knowledge it has not yet been enacted by Congress.

For those agents who promise that the lender will forgive your debt completely, it really isn't under their control. You're trying to get the lender to forgive many thousands of dollars in money you owe them, plus you want them not to hit you with a debt forgiveness 1099, so they end up paying the taxes as well? Remember that not going through the entire foreclosure process is a benefit to the current owner as well as the lender, and there may be the possibility of a deficiency judgment as well. I'd be extremely skeptical of any promise to get you out of both or all three. If someone comes to me for a short sale, I can promise to try, but I can't promise to deliver. Nor can anyone else - it's not under our control. That's a cold hard fact.

So even though you're not really paying the listing or buyer's agent directly, as you would be in most normal transactions, you can expect to end up paying the tax upon whatever it is they end up making. After all, $10,000 paid to the listing agent and $10,000 paid the the buyer's agent means $20,000 that didn't go to your lender. As I've said before, that lender is going to want to see real evidence of poverty before they accept the short payoff. Getting short payoffs approved is not about "it's difficult!" or "I don't wanna!", it's about showing that there isn't any way that nets the lender more money. If it looks like they'll lose less if they foreclose, expect the lender to go the foreclosure route. They're not going to accept a short sale just because it would be uncomfortable for you, financially. You are (or actually, your listing agent is) going to have to persuade them that all of the other alternatives result in them losing more money than approving the short sale.

Agent commissions mean you'll owe more money in taxes, or deficiency judgment (if applicable) than without an agent, but that's only considered in isolation. If they convince a buyer's agent to show it to their client, if that results in a client being willing to make a larger offer, or an earlier one, if they negotiate the offering price upwards, and most especially if they get the lender to quickly approve a short payoff rather than dragging it out, or going through that whole dismal foreclosure process, all of these mean you ended up owing less money than you would have without that agent - precisely analogous to any number of research studies and studies that show that people who pay full service agents end up with more money in their pocket, even after paying the agent. It's very easy to look at the HUD-1 and ask yourself what an agent could possibly have done that's worth 3 percent of the sales price. There's no way to show or track, on an individual sale basis, the added value that the agent brought to the transaction. Those numbers just don't show up on the individual HUD-1, because there's nothing that documents them. On the other hand, they've been documented any number of times in the aggregate. The bottom line is that if the lender ends up losing less money, you end up with less in the way of potential tax liabilities, less in the way of judgments against you, and less damage to your long term financial picture, not to mention that the lender comes away better and the agent gets paid. If that's not the perfect picture of win-win-win, what is?

One last thing before I close: this presumes you have some reason why you need to sell the property. The local market being what it is, I am straightforwardly advising people not to list their property for sale right now if they have an alternative. It may be a great time to buy, but it's a rotten time to sell. If you can afford the payments, if you don't need out from under the mortgage as quickly as possible - in short, if your situation is sustainable - there's no need to do anything, and you'll be able to sell on better terms when there aren't forty sellers per buyer in the market.

Caveat Emptor

Article UPDATED here

Carnival of Personal Finance

Cool! Gregg Swann thought my post on "Should Lenders Be Permitted to Sell Real Estate?" worthy of his Odysseus Medal.

The San Diego Special Edition


FTC Warns Some Mortgage Ads May Violate Law

I'm shocked, I tell you, shocked.

If you're hoping this means the FTC is not going to be missing in action anymore, well it's a good sign, but I wouldn't hold my breath.

Every so often, I write about professional responsibility.

Every month I get a couple of magazines because I'm a Realtor. In one of this months, was a letter from someone who was proud of the fact that he had never asked someone if they could afford the property, despite having been in the business for decades. Essentially, this reduces to, "I'm in this for the commission check, and what happens after that is none of my business."

Contrast this with investing in the stock and bond markets, where the SEC and NASD have mandated an entire slew of regulations and practices. Before any financial licensee accepts your money, he or she is obligated to ask enough questions about your situation to have a reasonable basis to believe the investment they recommend is appropriate. A large proportion of financial licensees breach this, but the requirements are there, and upon those occasions where the investment turns out not to have been so well advised, they are both civilly and criminally liable. They are supposed to question you about reserves, and a will, and life insurance. Occupation, income, necessary expenses. They're supposed to encourage disability insurance and long term care insurance, where appropriate. The list of questions goes on and on, and if the questions don't get asked, those advisers who fail to ask are going to hear about it. The penalties start with fines that are larger than whatever loss the client may have taken, and include permanent loss of license, jail time, and being a convicted felon for the rest of your life. Among the regulations is a very stiff requirement that the money being invested cannot be borrowed except under strictly circumscribed situations (Margin accounts being the only example I'm aware of).

The idea that you can encourage someone to make a half million dollar investment with borrowed money, get paid thousands to tens of thousands of dollars for it, and have less responsibility than the guy who makes $1.25 signing someone up for mutual funds with $100 they saved out of their pay this month, is preposterous. It's wishful thinking, and lying to the The Guy In The Glass. It is completely unacceptable if those in my profession want to be treated as anything other than snake oil salespersons. Every time someone makes an easy property sale, or an easy loan sale, without ascertaining that they are, in fact, putting the person into a better situation, the fall-out down the line hurts every single one of us in the profession. In fact, the prevalence of discount solutions in real estate can largely be attributed to those unethical members of the profession who have failed to take the real interests of the consumer into account. When someone figures that they likely won't get the sort of real advantages that accrue from using someone knowledgeable and ethical anyway, they don't see themselves as having given up anything when they go the cheaper route.

The absolute worst case from someone investing $1000 in mutual funds is they lose that $1000, which hurts their ego and their pocketbook, but if they had to have that money to live on, they shouldn't have invested it, and the person who solicited that investment will need to answer to the SEC, the NASD, and the criminal prosecutors for their area. As many people are finding out first hand now, that isn't close to the worst case for someone put into a property they couldn't afford. Those people are finding themselves with their credit ruined, owing thousands of dollars in taxes, in many cases homeless, and without anyone willing to rent from them. Life savings may have been completely depleted in a vain attempt to keep the property, and in many cases, there are deficiency judgments against them. In some cases, where a Realtor or loan officer had to exaggerate income in order to qualify them for the loan, they may even face criminal prosecution for fraud. It's like the difference between having your TV stolen, and having your life ruined.

Thirty years or so in the past, the listing services were reserved to Realtors, and so if you wanted access to MLS, you had to hire a Realtor. These days, due to restraint of trade suits, that's not the case. Not only are those days gone, they're not coming back (and that's a good thing, in my opinion). If all you are is MLS access and transaction facilitator, prospects are correct to pass you by in favor of the discount options that accomplish those same services far more cheaply. Every time some Realtor pleads that they're only a transaction coordinator, everyone who hears about that is driven straight into the office of the discount service providers. It's only by being more than that, and being willing to stand up in court and say that you're responsible for more than that, that you earn the additional money over what a discounter will charge. Most lawyers and all of the big chains tell their member agents not to be present for the inspection. My question is, "If you're claiming to provide knowledge or experience that the average person does not have, how can that possibly be anything other than gross and intentional negligence?" I'm there with a notepad, every time - lawyers be damned. As I have said, I'm perfectly willing to do discounter work for discounter pay - I make more money, more quickly, by limiting my responsibility and involvement to running the paperwork, even if I only make half or less of a full service commission. I never try to "upsell" those people who want discounter service. Truth be told, it's easy for someone is used to providing full service to provide better discount service than the discounters. But if you want a client to happily pay a full service commission, you've got to convince them you've earned that money, by providing something real that they would not otherwise have.

One of the most basic of those services is as a check of their ability to afford the property. This is a major psychological stumbling block for a lot of property purchasers. Many very qualified buyers don't understand that they are qualified. Part of this is simple anxiety, part of it is so many loan officers telling people what difficult loans they are to discourage them shopping around to different providers. If you're willing to go over the numbers and tell them what kind of property they can and cannot afford, many people may buy who otherwise would not trust their ability to afford the property. If they tell me to butt out when I ask, that's their prerogative - I tried to do my duty and they absolved me of that portion of it. It's not acceptable if they want me to do the loan (a loan officer has to have the information to do the loan), but I can't force anyone to do their loan with me. Nonetheless, even the most jealous guardian of personal information will concede it was a professional necessity for me to ask. What actually reassures a lot of people, particularly in this market environment, about what they can afford is being told what they cannot afford - information I cover with everyone who'll let me. This information has lost me more than one prospect, but it reassures and solidifies the commitments of most.

If you cannot agree to find them something they want within a certain budget - purchase price budget, not monthly payment - you need to sit down and have a frank discussion about where the market is, and what their budget will actually buy. If their budget won't stretch to what they want, where they want to live, it's part of earning that full service commission to inform them of that fact. If they're going to have to settle for a fixer, a lesser property, or whatever in order to live within that budget, well, managing client expectations is part of every job that has clients. Unless you're personally going to extend them a loan they can really afford in order to buy the property, this means working within what they can afford with a sustainable loans at current market rates that they can actually qualify for, and explaining what they can afford if their eyes are bigger than their wallet. If I ask and they tell me that they don't want to share the information with me, it's a free country and that is their right. It may be hurting themselves by dismantling one of the checkpoints which is there to keep them out of trouble, but it remains their right. I'm fine with them refusing because it means I don't have to do some of the work I have to do for other clients, and have less legal responsibility, to boot. It still doesn't completely absolve me - I've still got to pay attention to any other clues that may be present - but it greatly lessens what I'm responsible for. Failure to ask about their budget and financial situation is prima facie evidence of gross negligence.

Putting clients into property you know they cannot afford, or can afford only with the aid of temporary and unsustainable financing arrangements, is a violation of fiduciary duty, and willful ignorance is not an excuse. If you don't want to be responsible to a client's best interest, find another line of work, like cell phone sales, where you'll fit in just fine.

As far as being a loan officer goes, the question is rarely "Can I get this loan through?" Much more often, it's "Should I? Am I really helping these people if I do this?" Not to mention whether or not I'm likely to end up buying the loan back from the lender. It doesn't benefit me to get a $1500 check if I were to end up paying out potentially $400,000 for a loan that went bad, any more than it benefits the client to be put into a loan where they can afford the payments now, but sure as gravity they won't be able to two or three years down the line.

You cannot provide service or expertise, and be compensated for it, without the associated liability. I'm not a lawyer, but that's my understanding of the law in a nutshell. You can try and duck out, sabotaging your business, your career, and your profession as a whole, or you can stand up and say in a loud clear voice that you are worthy of every penny of what you make, because you accept the challenge of that responsibility. Our profession is better off without the former sort, and they are unworthy of our protection. We should gladly cooperate in hounding those sorts out of the business. Not only is the profession better off without them, we'll be better off without them. On the other hand, there's room for as many of the latter sort as want to practice real estate.

Caveat Emptor

Article UPDATED here

My answer is yes.

National Association of Realtors is very proud of their sponsorship of legislation to keep lenders out of the business of real estate. They quote the legislation keeping banks out of the real estate business as being one of the reasons they're worthy of our dues money. They quote all kinds of justification, centering on the fact that they fear that the banks would "drive all the independents" out of business.

Folks, the vast majority of market share goes to a few big chains. You've heard the names. You know who they are. One belongs to one of the world's biggest financial corporations. Four of them, that most people think of as being competitors, are nothing more than different brands owned by the same company. On that scale, independents like the one I work for - thousands of brokerages nationwide, some of them in multiple locations - account for a grand total of about fifteen percent of market share, last I checked. The big national chains get the rest. They're just as corporate as the lenders, and they're anxious to protect their turf from the one group of potential competitors who have some kind of understanding of the business and otherwise low barriers to entry.

In fact, the lenders would compete primarily with the chains. Corporate marketing channels all look remarkably similar, and reach pretty much the same audience. Sure, lenders would probably take some transactions I'd otherwise get, but most of what they'd be getting would be feeding off fellow corporations. If you're the sort of idiot who believes that Major Chain Real Estate is better because you've had their television commercials tell you so, you're also part of the lender's target market.

Now, let me ask about the interests of the consumer, which are supposedly paramount. Our current system amounts to an oligopoly, controlled in fact by fewer than ten chains who can easily control the market, and practices of everyone, based upon what is in the best interest of those chains. How many lenders are there? I know I've done business with dozens, and even if the current meltdown ends up shaking them out to the point that there are only a couple dozen holding corporations, that's still expanding the choices of this sort of consumer by a factor of three. Furthermore, because there are more corporations in the power circle, it becomes easier to get one (or a few) to break ranks, and harder to get all of them to agree to protect each other.

Let us ask about real estate which has become owned by the lender. Why should lenders lack an ability shared by every other citizen, resident, illegal alien, and even people who have never set foot in the country - the ability to sell their own property? There's no requirement for anyone else to use an agent. It may be smart to use an agent, but everyone else has the legal right to go it on their own. Why not lenders?

I'll tell you why. Because not only would lenders being able to get into the business threaten the interests of the major chains that control most real estate, but this requires lenders to pay those same firms money if they want to get the property from their bad loans sold - and they need to get the property sold.

I have to admit, I'm not exactly eager to compete with yet more big corporations with huge advertising budgets. It remains the right thing to do. Right for the industry, and right for the consumers. As I've said many times before, rent-seeking is repugnant, and that's what NAR is doing - seeking rent from lenders who are not permitted to be in the business themselves.

Mortgage brokers have been competing successfully with lenders for decades, to the benefit of consumers. There's no reason real estate brokerages can't.

Caveat Emptor

UPDATE: Cool, this post won Gregg Swann's Odysseus Medal

Anyone want to take credit for submitting it?

Article UPDATED here

There are several possible options to deal with this issue, depending upon the exact situation.

For A paper, both spouses must qualify, credit score-wise. The way around this is a quitclaim to the spouse who has a good credit score as sole and seperate property. The catch is that then the good credit score spouse has to qualify for the loan on their own. If the other spouse is the one that makes all the money, if the good score spouse is in a profession where the needed income isn't believable for stated income, or a whole list of other possible reasons, you may have to go sub-prime.

For sub-prime, the spouse who makes more money is the one that will be used as the determination, so as long as the second spouse is in the same vague general ballpark, scorewise, you can still use both incomes to qualify. If one spouse makes slightly more money but the other spouse has a much higher credit score, it can be to your advantage to do it stated income with the spouse who has the better score primary. You can't do this if one spouse is a doctor and the other works fast food, but you can if they're both in the same industry, or in industries where the incomes are roughly comparable, so long as the job titles and employment history don't render the claim unbelievable. The classic example of this working is both spouses in sales, paid on commission. In some instances, a quitclaim can still be the way to go.

Now if you do a quitclaim, the property doesn't have to stay quitclaimed. As soon as the loan funds, you can quitclaim it back to husband and wife as joint tenants with rights of survivorship, or whatever you want. Quite a few spouses are understandably reluctant to give up all ownership interest, but it's a temporary measure; it doesn't have to stay that way. As soon as the loan funds, you get the spouse who qualified for the loan to quitclaim it back to husband and wife, or the trust, or however they want the vesting to be. The better escrow officers I work with will usually have the quitclaim back made up and sent out for signatures without even being asked (I found this out one time when my clients didn't want it quitclaimed back, and called me when they got the form in the mail. I just told them to shred it, and called the escrow office to tell them not to bother).

Caveat Emptor

My new host has a function that tracks the most recent few hundred visitors. I just went over this log, and counted a visit a "success" if any of the html codes for the visit was not 404. Success rate: Just over 15%, and a large number of the successes were web crawlers. I've explained the situation about as thoroughly as I can on the 404 error page, and people just aren't following directions. Through the first 10 days of September, I'm showing 143,000 404 errors, and only 29,000 successful page requests.

I'm working as fast as I can, but there's only so many hours in the day. Anybody have any ideas to raise the success rate until I can get everything fixed?

UPDATE: I've been made aware of an issue viewing the site with Internet Explorer. Evidently, on the main page only, the dark footer on the bottom of the page overlays everything starting about a paragraph down. In Firefox, the main page is the only one with the huge gap in the left sidebar. So I think these problems are likely to be somehow related, but unfortunately, I haven't been able to figure them out yet.

To quote Shrek, "It's on my To Do List" If anyone with more knowledge than I would like to help, I'd appreciate it. In the meantime, Firefox is both free and much closer to compliant with standards.


Evidence that there are gaps in our knowledge about the universe: Kilo prototype mysteriously loses weight

I'm not going to get all mystical on you. It's possible that the custodians have gotten careless and left fingerprints or partial fingerprints on the bars, although I'd think it likely they would deal with that possibility before discussing it with the news media. This sample mass and several exact copies were made at the same time, from the same material, to the same standard. Measurements to this standard were well within the capabilities at the time. The difference between the masses now is significant, even by the standards of when they were made. This difference cannot be explained by any known phenomenon. Therefore, there's something we don't understand going on. This is not to say that there's anything supernatural happening. I suppose that's possible, but it's not a leading hypothesis. But known masses that start identical should stay identical, according to theory I remember studying. Perhaps there's some natural process going on on the quantum level, and over 118 years, it has become noticeable. And just to point this out, should there be some sort of matter creation or destruction going on, by Einstein's famous e=mc squared, 50 micrograms is 4.5 billion Joules (300 million meters per second squared times 50 times ten to the minus 9th kilograms). The Solar constant is 1366 Watts per square meter. So if you had a solar power array in orbit, 100 meters on a side (roughly the size of two football fields), pointed straight at the sun, it'd take just shy of 330 seconds, or five and a half minutes, to generate that much energy. If your car engine generates 200 horsepower, that's 28,300 seconds or almost eight hours of that engine running flat out, to match the energy of 50 micrograms of matter.


No I haven't forgotten 9/11. I've said what I have to say. Nothing has changed, except how shrill those who blame the United States have become. Since I have nothing new to say, I'm going to adhere to Tom Lehrer's advice and shut up.

September 12, 2007

Your host's entry is Refinancing Out of A Negative Amortization Loan Before The Penalty Expires, discussing the fact that even once you discover the trap, it will often be in your best interest to stay with that lender. Unfortunately, that's one of the marketing goals in selling them, so you're rewarding scum. Nonetheless, we're trying to figure out the least bad way to deal with the situation, and if that rewards scum, it still means you're not wasting any more of your money.

Mortgage Refinances for Subprime Loans talks about how few people are likely to qualify for refinance based upon government programs. I disagree with the conclusion and the source is not exactly high on the list of companies I've found that offer competitive financing options, but they're entitled to state their point of view. The elephant in the room is people that were put into unsustainable loans they couldn't afford instead of being sold properties that they could afford.

GOYB Challenge: Lower Your Property Taxes talks about what you need to do to get your taxes re-assessed in California. FYI, the deadline for submission is September 15th, so hurry.

6 Crucial Changes Coming To Lake Martin Real Estate actually applies to a much broader area of the country, as regular readers know.

Come on, folks - You can do better than this. Eight entries, of which only five were acceptable, and one was from the same entrant as another. One entry per entrant or website per carnival, please (if you submit multiples, the host will choose which to include, assuming any of them are acceptable). Stay on topic. If marketing your professional service or website is the main purpose of the entry, it's spam. Please do some research or fact checking. If you make a sufficient number of real errors, it's garbage. I am not going to uncritically link something that is factually incorrect, and I don't expect that of other hosts, either. If you want to challenge accepted realities, don't just state advice that conflicts, build a case that your contentions are correct.

With that said, The Consumer Focused Carnival of Real Estate will return in two weeks, at Please make your submissions via Blog Carnival no later than midnight, Monday September 24th.

I am still soliciting future hosts. Please email me if you'd like to host dm (at) searchlightcrusade (dot) net. Future Carnivals are October 10th and 24th, November 7th and 21st (which will likely be moved up to get more exposure prior to Thanksgiving), and December 5th and 19th, then we'll be into 2008. I am open to increasing the frequency if we get the quality and quantity of posts required to support it.

Once upon a time, this was a good way to get more money for your listing. This led to a classic tragedy of the commons. Because it didn't take hardly any extra time, and there was no reason not to do so, listing agents will claim there are multiple offers with practically every property. It's not like they are expected to furnish any evidence.

Because of this, in the last few months, I've had listing agents try to tell me that there were suddenly multiple offers on property that has sat on the market for months. If I don't see any evidence that there's a reason for it to suddenly have multiple offers, such as a recent massive drop in the price, I find these claims dubious at best. It might be believable if the property has been on the market for three days, and has not recently been listed before that. If it's been on the market more than three weeks, such a claim is dubious at best. I recently talked a pair of clients into making an offer on a property that had expired twice and been re-listed for a third time. A week prior to that, a special incentive to buyer's agents had expired. In short, there was every reason to believe that that we had a clear field, with nobody else making offers. As I always do, I included information on comparable properties that had recently sold in the neighborhood, of which I had inspected two, and the issues that this property had. The listing agent claimed there were multiple offers and gave the kind of counter I hadn't seen since the height of the seller's market three years ago, demanding a "best and highest" counter. I and my clients jointly countered back that we'd agree to their conditions, if they'd agree to our price, and gave them 24 hours to take it or leave it.

Now before you pull something like this, you do need to have multiple counters in point of fact. Because the flinty-eyed buyer's specialists know better. Even if they do, in fact, believe that you've got multiple offers, we're going to tell our clients that it's best to counter back as if the seller is lying. Essentially, we call their bluff. If they do have multiple offers and someone is stupid enough to play ball with them, that's no skin off my client's nose. With over forty properties for sale for every buyer, if this seller doesn't want to be realistic, we can keep looking until we find a seller that will.

For an intelligent buyer in this market, even if there are multiple offers upon a property, it doesn't make us willing to offer more for the property. It means we want to expedite our deadlines for the sellers to respond, and it means we're likely to make subsequent counters with a multiple offer contingency (in other words, we're making offers on multiple properties now. If another offer gets accepted before you accept ours, we're going with that one). Mostly though, it means that this seller, and their listing agent, have their heads stuck in the land of wishful thinking, and it's time to consider another property. Nobody can make them sell against their will, but we can find another property where they seller isn't so far gone in denial, and where the agent has done a better job of explaining the realities of the current market. It's not like there's any shortage of choices.

Let's face it: Unless you fax over the offer, complete with all terms and the competing agent's name and their contact information so I can verify it, there is no reason for me to believe that you have a competing offer. If you do this, the offer is either better than my clients', or not as good. If it's not as good, the leverage is provides is minimal, in any market. If it's better than my clients' offer, it's either something my clients are willing to beat or it isn't. If it isn't, your leverage is still negligible. It's only if the other offer is better, but my clients are willing to beat it, that this trick offers you any leverage whatsoever. In this market, it's more likely to make us act like I discussed in the last paragraph - because in this market, no property is worth getting attached to before you own it. Let me baldly state that I also understand the potential benefits of collusion with your friend the agent from another office. She colludes with you on your client's property, and you collude with her on hers, each stating that they do, in fact, have clients making thus and such offers on that property. Since once again, it's trivial to convince yourself that it's in your client's best interest, even verified offers aren't going to mean a whole lot to a smart buyer's agent in this market. The buyer's market may not last much longer, but while it does, there are still no properties worth a buyer getting attached to them before closing. And for all the properties I've made offers on where the listing agent claimed there were multiple offers, I've never had one of them offer any real evidence.

People willing to price their properties to the market, and negotiate realistically, can sell properties very quickly due to the fact that comparatively few sellers are competing well for the buyers that are out there. In the last couple months, I've been involved in the sale of two beautiful properties - and two others that were plug-ugly, but sold quickly because the sellers and their agents had their heads in the right place. In one instance, I even had someone bidding against my clients, but we nonetheless consummated the sale quickly.

If you're trying to sell in this market, and you negotiate unrealistically, you are only hurting yourself. That buyer's agent can find them something better, cheaper, making the agent's client much happier. Even if you do have multiple offers, it might be a good idea not to particularly act like it. You can check the multiple offers box without being aggressive about it.

The property I mentioned earlier? Where the agent and seller acted like it was still a seller's market? It's still for sale, and my clients have moved into another property. The relocation company that owns it is out roughly $6000 per month. Had they priced it to market, and negotiated reasonably, they likely would have sold. If they simply negotiated reasonably, they would have sold it to my clients. My clients have their new home - they're happy. The sellers? Not so much. They're paying about $6000 per month for an empty property. It's been on the market for a year now, and it's not like they have any real alternative to selling. That's $70,000 they've flushed down the drain to no good purpose, and it's not like there's any chance of them getting more than the property is really worth.

For listing agents who refuse to act like their clients are competing for buyer business, and have to compete hard under current conditions, they are violating client interests no less than if they counseled the client to accept an offer from someone acting as a straw buyer for the agent, personally. In fact, I rather suspect this particular agent of being Sherrie Shark, but there's nothing I can do for the owners as a buyer's agent. It's not legal for me to so much as contact them without going through Sherrie. Nor would it benefit my clients in any demonstrable way. It just gets me and potentially my clients caught up in a legal morass to no beneficial purpose. So the owners are high and dry on their own. It's our profession's problem, but there's nothing I can do about it as an individual.

Caveat Emptor (and Vendor!)

Article UPDATED here

Victor Davis Hanson on what schools do and do not need.


Best Markets For Landlords

Foreclosures and risky lending have dogged the housing market. As lenders have tightened their standards, attractive mortgages have grown harder to come by. Yet rental fundamentals have remained strong, especially in the 10 areas that made our list of Best Markets for Landlords.

I've only been predicting this for two years now.


Quis custodiet ipsos custodes? Oversalted Burger Leads to Charges. Anyone else would have complained to the manager and gotten a new burger plus maybe a discount on the next one or a freebie. But because it happened to be a cop, the person who made it - and properly informed their supervisor, who made the decision to serve it - gets to spend a night in jail. Does this strike anyone else as police brutality or intimidation? Use of office for personal ends? Or maybe just petty vengeance and abuse of authority, which is something we're trying to weed out. Time for a certain cop to lose his badge.


FYI, as I'm going through fixing the internal links in old posts and adding tags for indexing, for some reason a lot - not all - are re-sending trackbacks. I'm not certain why this is happening on some posts, but I do apologize for it.

My younger daughter turns 3 today. I'm going to try to have a new article for tomorrow, but it might get delayed by the fact Daddy needs to be at the party.

One of the casualties of the current lending meltdown is the high loan to value second mortgage. With many properties locally having lost twenty percent or more of their value, a second mortgage on a property that ends up in default may well lose every single dollar the lender put into the loan. It shouldn't surprise anyone that lenders don't want to get into that kind of situation. Even though I (and most other credible analysts) are convinced that the values are stabilizing locally, the money markets are still in fear mode over the money they have lost or are on track to lose.

The result is that lenders of junior financing aren't nearly so willing to go to 100% financing any longer. Even when the same lender is lending the money for both loans, the people who underwrite the second mortgages are (usually) a different division. So when the property goes to foreclosure, the division who underwrote the first mortgage may end up with every dollar or nearly every dollar of their invested money, and they come up smelling like a rose. The division that underwrote the second mortgage that got wiped out and came out with 10 cents on the dollar loses their shirts, and everybody gets fired. The lender I've probably done the most business with just did away with all programs offering over 90% financing - doesn't matter the credit score or how much we can prove they make (UPDATE: My mistake - it was only subordinate financing over 90%, which further emphasizes my point). This is going to impact how much business I do with them, of course, but they've decided they're not willing to accept the risk in order to get the business - which is their prerogative.

They're hardly alone. It has been increasingly difficult to get second loans over the last couple of months. With the situation as I've have discussed, and second mortgage lenders in the process of losing every penny they put into loans, they understandably don't want to do it.

There is an alternative. There are still any number of lenders who will accept 100% financing on one loan with Private Mortgage Insurance (aka PMI).

Private Mortgage Insurance is an insurance policy that the borrower pays for but which insures the lender against loss. It does get the borrower the loan, but that is the only good the borrower can expect to get out of PMI. It does not prevent your credit rating from being ruined, it does not prevent any deficiency judgments that you may be liable for, and it definitely won't prevent the 1099 love note that tells the IRS you owe taxes on debt forgiveness. All it does is shift the entity that loses the money from the lender to their insurer, so that if you default, you'll be dealing with the insurer instead of the lender via subrogation.

What is going on here is that lenders are shifting the risks to insurers, who are in the business of taking risks via the Law of Large Numbers. Yes, the insurers know they will lose a certain number of these bets, but they are comfortable that overall they will make money at it. It is to be noted that lenders can improve their profit margins by self insuring, but they're not in the business of insurance. I'm certain some of them insure themselves in one way or another, but they isolate the risks away from their lending divisions, which are in the business of making money by loaning it out and having those loans repaid in full. When a lender loses a dollar because the loan wasn't repaid in full, that hits them where it really counts - bond rating, stock price, value of their mortgage bundles on the secondary market. When an insurer loses a dollar due to paying a claim, that's part of their daily business. They're in the business of paying claims, fully expecting premiums to more than pay for those claims.

As I said in One Loan Versus Two Loans, PMI is more expensive than splitting your mortgage into two loans, but when nobody wants to do second mortgages with less than ten percent down payment, the choices may narrow down to accepting PMI or not buying the property. The only other alternative that comes to mind is a private party loan, either in the form of a Seller Carryback (which comparatively few people are willing and able to offer) or the "good in-law" loans that were popular before lenders started liberalizing their standards in the 1970s.

(I haven't been in the business that long. I've never heard the phrase actually used by another professional, although I actually did a transaction that involved one earlier this year. I learned it from textbooks, as even in the early nineties when I both bought my first property and went back for my accounting degree they were a fading memory)

Paying PMI does have the net effect of decreasing the loan that potential buyers will qualify for, so this development should cause some small amount of additional downwards pressure in prices. For those interested in irony, the lenders are contributing to their own immediate losses by bailing out of the low equity financing market. People who have to pay a higher effective rate for the money can't afford to spend as much for a property, which means that current owners, whether they're borrowers or lenders, won't be able to get as much money for them.

One last thing before I finish. Don't get too hung up on the fact that you may end up paying PMI when experts (myself included) advise you not to. It's one of those voodoo words and concepts like "points", that people freak out about because they've been warned about them but they don't really understand. Just like points, many experts, myself included, often advise you not to pay PMI. But if you have one loan that is over 80% loan to value ratio, you are going to be paying PMI in one form or another. As I said in How Do I Get Rid of Private Mortgage Insurance (PMI)?, it can be a separate charge or camouflaged by being built into the rate, but you're still paying it. There are advantages and disadvantages to each choice, as I explained in that article. Choose your alternative with your eyes wide open and an understanding of the consequences, not because someone scares with with the voodoo phrase, "PMI."

Caveat Emptor

Article UPDATED here

HI, My name is DELETED and my husband and I are searching for a way to get out of our Negative ARM loan before we get upside down.

Our problem right now is our loan to value. Our loan right now is at $547,367.80 and is only getting higher. Our house just appraised at $620,000.00. We have a prepayment penalty of $20,000.00 and would just like to get that covered. We feel we need a Jumbo loan if possible.

Our wish is to get into a 40 or 50 year fixed. My husband makes good money and I will be working in a couple of months making a decent income. Right now I am doing temp work. We can afford payments for our mortgage if we were to refinance but we are having a hard time finding someone who will take the risk with us. If there is a risk. We are just trying to get out of this loan that is going to end up taking our house from underneath us. Our credit is good and I feel there is a way something can be worked out

Can you help us?

I will try, if you're in California. First, let's stop and think a minute about your situation and what will benefit your pocketbook, rather than mine.

If you pay the penalty, your new loan is going to be approximately $570,000, even without points, something I truthfully don't think is going to happen the way jumbo rates are. Neither I nor any other loan provider can get you a loan that isn't available. $580,000 is more likely, considering prepaid interest, etcetera, unless you have some cash to pay it down. $570k and $580k are both within the band of 90 to 95%, so I have to price it as a 95% loan to value ratio.

But what if you don't have to pay the penalty? Now staying at or below 90% loan to value is a real possibility, and the loan can be priced as a 90% loan, giving better trade-offs. The way we might be able to do this is to check if we can get your current lender to refinance you. It'll likely mean renewing your prepayment penalty, but better that than paying $20,000 in penalty. Even if you end up with a higher rate than you might otherwise get because your lender doesn't have the lowest rates, $20,000 is almost four percent of your loan amount. Over the course of the 3 years of the new prepayment penalty (since that's standard for negative amortization loans), you'd have to save over a percent per year to break even with another lender. As I said in "Getting Out of Paying Pre-Payment Penalties", sometimes lenders will not require you to pay a penalty if you refinance with them and accept a new penalty.

In short, if we check with your current lender first, we might save you $20,000 cash plus the interest on it. So let's figure out who your lender is and ask.

The second alternative is to find out how long until the penalty expires. Make at least the interest only payments every month until your payment expires. How long do you have left on the penalty? If you've only got six months or a year left, rates just aren't low enough to make it worth your while refinancing right now, especially Jumbo loans, which even if your loan to value ratio was below 80% would still cost you nearly two points for a 7% loan. If you pay at least the interest only payment, you're not getting in any deeper. When the penalty expires, maybe rates and the market will be in better shape and you'll get a better loan. Matter of fact, with the current mostly psychological meltdown in the loan market, it's a moderately good bet, especially as opposed to just flushing $20,000 paying that penalty. If you have less than a year left on the penalty, I strongly urge you to make the interest only payments (or more), and come back to me about three weeks before it expires. From that point, by the time I can get your new loan funded, the penalty will have expired.

Even if you're only six months into your loan, we'd have to save you about about 1.5% on the rate for you to come out ahead by paying that penalty. $20,000 times 12/6 divided by $547,000 gives a current rate of 7.3%. As you'll see, a blended rate of 6.67 is about as low as I can get for this situation. Your rate would have to be at least 8.2% now for paying that penalty to be in your best interest.

The loan market today is a very different creature than it was a few months ago. Let's look at the alternatives, assuming your lender will waive prepayment with a new loan. Even so, let's look at a loan amount of $558,000, which is about where you're going to be with closing costs and one point.

At 90% CLTV, I currently have a 30 year fixed rate loan at 7.375%, with PMI of about 0.7% on top of that. At $558,000. Payment would be about $4180, of which roughly $325 is PMI, $425 is principal, and $3430 is straight interest. Real cost of the loan would be roughly $3755 per month. Even if I could get you a 40 year amortization at the same rate, the payment would be $3945, and at 50, the payment would be $3843.

Or we could split the loan into a 80% 30 year fixed rate first at 7.375 without PMI and a 10% second at 8.55%. Payment on the first, about $3426, of which $3048 is interest and $377 is principal (numbers don't add due to rounding to the nearest dollar). On that 30/15 second of roughly $62,000, the payment would be $479 and the interest $442 while the principal is $37. Real cost of the loan, roughly $3490 per month, $265 less, and more of it is likely to be tax deductible. Plus, in terms of payment, I've saved you more than the difference between the thirty and forty year amortization, and almost the difference between the thirty and fifty year amortization.

Or, we could split the loan into a conforming first at $417,000 with a $141,000 second, again on a 30/15. Now that first mortgage is at 6.125%, for a payment of $2534, of which $2128 is interest and $405 is principal. The rate on the second drops also, to 8.3%. Payment, $1064, of which $975 is interest and $89 is principal. Real cost of this loan, $3103 per month, and the total payment is only $3598, another $307 per month less than the second alternative and $582 less than the first alternative.

Before I close, it occurs to me to ask if you are actually able to make those payments. Because the fact is that you owe $547,000 right now, and that's a cold hard fact that nobody is going to change. Quite often, people get put into negative amortization loans because that's the only way they're going to make the payment on that much debt. If you cannot realistically make these payments, delaying the inevitable will only cost you more. As things sit, you might come away with a few thousand dollars if you sold now, and then you can buy something you can really afford. If you wait, things are going to get worse, and you're going to end up with a short payoff and a 1099 love note that says you owe taxes, plus maybe a deficiency judgment, having your credit ruined, and still not having the home of your dreams. This doesn't make me popular right now, but what people like you are going through now is the result of people in my professions who wanted to be rich and popular, rather than actually doing what was best for the clients. Were I in your shoes, I'd likely be asking a lawyer if there's some liability on the part of your lender and real estate agent.

Caveat Emptor

Article UPDATED here

Progress Report

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I believe that I have now fixed all of the internal links over on the website, and added tags.  Since there are less than half as many posts over there, I figured I'd start with the smaller site.  If you're looking for something mortgage or real estate related, it's likely easier to find over there for right now.

I'm now going to start the same work on Searchlight Crusade.  I'm also going to add tags while I'm at it.  Appears to serve the same functions as chains did, only better because they can be multi-relational.  In the meantime, Google search appears to have re-indexed the pages, and using a browser's Find on Page function on the Archive page is a good way to find articles relevant to what you're looking for.

If anyone's willing to give me a hand with html, I've got a long blank space on the left sidebar of the main page that doesn't appear on any other page I've found on the site.  I know there's always a reason computers do the things they do, but I've been unable to find that reason.

There should be some new original content here next week, and there will be a Carnival of Consumer Focused Real Estate, as well.  We'll be completely back on track as quickly as I can find the time.  Of course, if you have paying work you want me to do, I might be able to afford to pay someone else to fix the website!

Aggregators and Sidebars

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Okay, I'm still struggling a little with a long blank space on one sidebar (composing this entry while the site republishes to see if I've fixed it), but it appears that all the aggregators and social media links are present, even if a few are not quite where they belong.

If any of the aggregators you're used to are missing or nonfunctional, please email me.  If there is one (or more) you would like me to add, also please let me know.

Still remaining: Fixing all of the internal links, importing unpublished articles, and finally I'm going to try to fix it so that people coming in on a link to the old naming scheme get redirected to the correct article, as there seems to be a tool for that  You'll need to email me, but please wait until I have the internal links fixed!

Domain Pointed to New Host

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The domain has now been pointed at the new host.  Still have the vast majority of the work to do.  All of the internal links are broken, every post needs to be categorized, and I have to restore all of the aggregator stuff.

If You're looking for something specific, go to the Archive Page at the bottom of the main page.  That's the best way to find stuff right now.

E-mail also needs to be fixed.  The only real way to send email right now is by leaving a comment.

UPDATE: Looks like I'm now able to send and receive email at the usual addresses
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