January 2008 Archives

Cavalcade of Risk

(I didn't submit that post, which was previously published two years ago, but they linked it so I'm linking back)

Absolutely disgusting: Blood-boiler: Berkeley vs. the troops

How about DOD or even the entire US Government adopts a policy that there will be no contractors or subcontractors in the city of Berkeley. In fact, No federal services provided at all, since their representatives are unwelcome. Bye-bye, student aid at UC Berzerkley. Good bye, academic grants and matching funds and housing assistance and poverty grants and all of that good stuff. Send a message that if they're a part of the United States, they've got to accept what they may personally disagree with as well as everything else.

There are government programs I thoroughly despise. But it's a package deal - nobody is allowed to pick and choose. Berkeley can work to abolish the military if they want - but unless and until it happens, they need to allow the armed services to do their jobs.

Volokh Conspiracy has much more

I'd like to add to his contrast: "Adult" businesses are not agencies of the US Government. The military is. If the US Government can use interstate commerce to regulate a farmer raising grain for his own pigs, then they can certainly use it to control restrictions upon US Government activity. Suppose the city of Berkeley wanted to ban the Federal Bureau of Investigation? How far do you think that would get? And unlike the United States Military, the constitution does not, as I recall, mention the Federal Bureau of Investigation, let alone BATF. Or most other government agencies. How about if a libertarian state should decide to prohibit the activities of the Social Security Administration?

Abu Laith al-Libi Dead!

I may not be glad he's dead, but I am glad he won't be planning, supervising, funding, or encouraging any more terrorist activity.

For some folks, it's the only way to be sure.

Another cop killed in a no-knock raid over an insignificant amount of marijuana. Another innocent civilian tried for capital murder because the police want to play "Commando". Only the names have changed

This stuff has got to stop. Unless the police have reason to believe innocent lives are in imminent danger, there's simply no excuse for a "no knock" raid.

Of course, I don't agree that consumption of marijuana should be illegal, anymore than tobacco or alcohol. So long as you follow some rules designed not to endanger your fellow citizens, consenting adults and all that. I can't come up with a single positive thing to say about tobacco, and only the pain and nausea control for certain medical patients about marijuana. However, since it doesn't endanger anyone else per se, the government has no business getting involved beyond beyond rules to protect those who may not have made the decision of a competent adult to imbibe. I'm sure someone thinks it's wasteful of my life to play video games, surf the internet, or write an online website. That's no reason why it should be illegal.

HT Instapundit

I think I could support the Greenspan Amendment.

I liked Fred Thompson for many reasons, but one of the lesser ones was that running for President wasn't an all-consuming task for him. Having withdrawn from the race, he's back to doing other things.

A Banking Christmas Carol (part I) and A Banking Christmas Carol (part II)

Insider corroboration of things I was writing two years and more ago.

The Presidential elections are like two marathons. First, two groups of people run one marathon to see who gets to compete head to head in a second marathon. Not only that, but the criteria for competing in the two marathons are different. In the first race, you can only use one leg (right for Republicans, left for Democrats). In the second, you must use both legs.

That said, right now nobody has over ten percent of the delegates needed for nomination. So while the candidates have been training for months or years, they're maybe two miles into the first of the actual marathons. We may be down to five runners already (Clinton, Obama, McCain, Romney, and Huckabee), but it's waaay too early to call a winner even for the first set of marathons.

With that said, I'd rather have a RINO that can win the general than a "pure" Republican partisan who goes down to defeat against a hard left radical in centrist's clothing. Especially since I'm a libertarian in most things.

You want a better candidate to run next time? Start encouraging them now. Start laying the groundwork for them to succeed, even though they might not be the perfect candidate. We don't get the luxury of choosing some hypothetical candidate with no baggage (and therefore, no experience or proven ability). All three of the candidates I really liked have already dropped out, having met little success. Since one of these five people left standing is pretty certain to be taking the oath of office come January 20th, I'm going to vote for the best (or least bad) of the actual choices before me.

I knew this was coming.

With holders of second mortgages not wanting to go above 90% Loan to Value Ratio, sellers of Private Mortgage Insurance, (PMI) have the "less than 10% equity" market all to themselves. The rates had gotten surprisingly low (less than 1% for 100% financing), but there are two factors that combined to make this boost happen:

1) With the risk of default rising, the actuaries at the insurance companies legitimately have increased costs to worry about. With equity being stagnant right now, the risk that mortgage insurance is going to have to pay a claim has risen dramatically in the last year or so. It is nothing except fiscal prudence to raise insurance rates when the probability and likely magnitude of a claim both increase as they have. Insurance companies are so strictly regulated as to reserves and margins and everything else that they probably had no other legal option. This explains some fraction of the increase.

2) "All The Traffic Will Bear" You don't think these companies are in the business of putting their money on the line for free, did you? Furthermore, not only is Private Mortgage Insurance a "wide moat" operation (a business that's hard to get into), you don't see any large number of companies who currently want to get into it. Profit margins are comparatively low, and there is, to their way of thinking, a significant risk the market could get even worse than this. With second mortgage holders no longer lending above 90% CLTV, PMI providers not only have the field to themselves, but they're in a very high demand situation. Increasing demand plus essentially constant supply equals higher prices.

Here's a sample of the rate boosts I was notified of today:

30 year fixed, credit score 620-659, 97- 100% LTV old rate 96 basis points (.96%) new rate 170 basis points.

15 and 20 in the same situation go from 85 to 163 basis points (although I can't remember the last time I saw a 15 year loan with PMI).

Given a 5.75 fixed rate mortgage without points today (rates will change by the time you're reading this), this substantially increases the effective interest rate, from about 6.7% to almost 7.5.

Payment on a $300,000 balance? Goes from roughly $1990 (principal and interest plus PMI) to approximately $2175. That $185 makes a difference of about $415 in the minimum monthly income to qualify for the same loan, in the case of 100% financing. People who may have been able to qualify last week could be rejected in the future. Rates would have to drop by about a full percent to offset this, and between you, me, and however many thousands of other people read this, I don't think that's going to happen. Fed cutting the overnight rates or not, the macroeconomic market pressures are all upwards. Matter of fact, even with the new cut the Fed made yesterday, rates today are higher than they were just a few days ago.

For those whose loans are already funded with PMI, don't lie awake nights wondering when they're going to hit you for more money. The rates on existing loans is already under contract, and they're not able to raise the rates on PMI, as the terms are specified in your loan note - a legal contract. The lender can't alter any of the other terms, either - why should they be able to suddenly boost PMI? It's only for loans that have yet to be funded that the rate increase applies.

For those looking to sell real estate, this puts current owners who are willing and able to "carry back" part of the purchase price into an even stronger position, negotiations-wise. If the prospective buyers can pay you more money for your property or not buy anything, some will pay more money. It's still a situation to be just as careful about as ever, but every bit of leverage helps in negotiations.

As I've said in the past, having a down payment for real estate is not mandatory, but is an excellent idea. That same $300,000 loan at 5.75% only has a payment of $1751 if you've got 20% equity. PMI hits every first trust deed above 80% of the value of the property. Period. It's in the federal banking regulations. Some lenders will hide it in the note rate, but you're still paying it if you're in this situation. Good Credit, excellent credit, perfect credit - the only difference it might make is the exact cost, not whether or not you're paying it. Wouldn't you really rather make the lower payment? The extra money you pay for PMI doesn't do anything towards paying your principal down, either. If you didn't have to pay it, you could invest that money, use it to pay down your principal faster, or just have a good time. You'd be done in 227 months if you made a payment of $2175 on a $300,000 loan at 5.75% - less than 19 years, instead of 30.

If you're looking for a new loan, whether purchase or refinance, don't waste your time calling around trying to find one lender who'll let you slide without PMI. It will be there if the situation requires it - any first trust deed over eighty percent of the value of the property. It can be priced into the loan or broken out as a separate charge, but it will be there when the loan funds. However, there is no requirement to disclose PMI at sign up, or to disclose that a certain amount of what you're paying is PMI, and many loan originators are quite deft at hiding it or deflecting questions about it. Which is likely to be the better loan in the final analysis: The one who hides the real cost of the loan and its nature, or the one who tells you the whole truth in the first place?

Caveat Emptor

The guidelines for this carnival.

As always, I arranged the entries that met guidelines into three levels, based upon originality, usefulness to the consumer, and how much thought and effort and research went into an entry.

STRONGLY RECOMMENDED

There were no posts that made this category, and therefore, no Host's Choice Award for this carnival.

RECOMMENDED

Home Seller's Pain Is My Gain As A Renter - Taking Advantage Of The Mortgage Crisis Makes some good points about short term effects of the mortgage meltdown. In the longer term, however, it's going to put upwards pressure on rents, particularly in densely built areas.

Heard about disgruntled buyer's suing their agent? Your host discusses Buyer's Agency, Due Diligence, and the Illusion of Comity

MET GUIDELINES

Why Buying a Luxury Car is Smarter than Buying a Luxury Home manages to completely miss all of the points, despite directly acknowledging one. Luxury Real Estate appreciates, and for at least the past thirty years it appreciates much better than an average home because they are a scarce resource. You buy a luxury car, and you've got a depreciating status symbol. You buy a luxury home, and you've got a status symbol that will predictably appreciate in value, often at rates that outdo the effective rates on other investments. Not to mention social requirements of those who can afford to purchase luxury homes usually dictate that they do in order to maintain their level of income.

Are you covering more than your rent encourages renters to get renter's insurance, mentioning the so-called HO-4 policy, the standard form for the policy as recommended by NAIC and adopted by most states.

5 Reasons to Invest in Land makes a couple of errors, but it does meet guidelines even with the hit for mistakes.

Housing Crisis - There's Light at the End of the Tunnel really needed some more work and specifics. Keep in mind we don't have one national housing market, we have hundreds of local ones.

Jumbo Mortgage - Stimulus Package may Save You Money discusses a hypothetical boost in the conforming loan limit that's being considered in Congress. It's far from certain it will be passed, and it's far from certain Fannie and Freddie would be able, much less disposed to buy such loans. Will Congress raise Fannie and Freddie's market limit to match? Will Fannie and Freddie want to buy bigger loans? I'm not sure I would in their shoes, and I was lobbying a bit for a conforming boost of a much smaller magnitude (10-15%, as opposed to 75 percent all in one fell swoop). Fannie and Freddie both passed on voluntarily raising their limits only a couple of months ago. Check back in a couple of months for hard information..

SPAM AND OTHER RIDICULOUS SUBMISSIONS

A website called Seasoned Tradelines submitted a solicitation post containing several errors. The article advised purchasing tradelines, which just happens to be what he does with that website. FACT: Fair Isaacsson has recently revised their credit model to remove the benefits to adding existing tradelines. The article advises people to put cashed out equity in a savings plan at 5%. FACT: If you still have cashed out equity, you can use it to pay your mortgage down or to enable refinancing, not put it in a savings account at 5% when your mortgage is higher than that.. Rates are great right now if you can qualify, and this can make a difference. Nor were these the only areas where the advice was questionable, to say the least, but two major issues where you are factually incorrect isn't exactly a recommendation for your services, even if you were selling something of value, which he isn't.

A site named Stephen Dean's Blog submitted a post entitled "Deciphering Cosmopolitan Magazines", which had nothing to do with consumers of real estate, or even with real estate at all. Why he might have thought it was appropriate for this carnival is something that my merely human brain is incapable of understanding. If he can not or will not take the time to comprehend carnival guidelines, how good of a writer is he likely to be?

A site named FYI About submitted a straight shill post for Hawaii vacation rentals. Hello! A hotel by any other name is still a hotel - even if it's in a roach infested eyesore where you have to spend two extra hours traveling to anywhere you might want to go.

A site named KC Lau's Money Tips submitted a post looking for financial planning apprentices. Why anyone would want to apprentice to someone too busy to read carnival guidelines is beyond me. It even came complete with corporate attitude posters. Quite frankly, a visit to despair.com/ is likely to do you more good with less time and money wasted. You can even build your own Demotivator. Having worked with a more than sufficient number of people with attitudes such as evidenced by writing that article and submitting it to this carnival, you'll end up wasting less time and money my way. Not to mention that the "Upcoming Hot Careers" articles I've seen from credible professional organizations do not tag financial planner as likely to be hot any time soon, and competent financial planners don't have to advertise for apprentices. This Demotivator seems particular apt in this context.

For those in the last category who might object to the treatment their submission received, the relevant information has been in the guidelines since before submissions were being accepted for this carnival. Having been told to read the guidelines before submitting, you willingly submitted this fertilizer. Live with it.

(What I really want, of course, is not to have this obviously inappropriate material submitted)

Consumer Focused Carnival of Real Estate will return in two weeks (February 13th, 2008), here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be February 11th.

Carnival of Personal Finance

Carnival of Real Estate Recommended: Gotcha Guide™: Agent Bonuses are Bunk! Offer Real Incentives

The Moral Economy

This is what a dictatorship looks like:

Rally Organizers Face May Death Penalty in Yemen

The Public Security Department (PSD) submitted charges against a top opposition leader and an editor to Aden's prosecutor in connection with a January 13 demonstration at which four protesters were killed when police opened fire on the crowd.

Megan McArdle on pharmaceutical profits and incentives.

Florida votes today. We'll be seeing projections based upon actual votes roughly an hour from now. I'm wishing Rudy Giuliani well, but I would be extremely (if pleasantly) surprised if he were to actually get enough votes to continue his viability as a candidate. Failing that, I'll hope John McCain pulls it out.

Just when you thought being a landlord couldn't possibly get any tougher:

Assembly Bill 976 (law effective January 1st 2008)

SECTION 1. Section 1940.3 is added to the Civil Code, to read: 1940.3. (a) No city, county, or city and county shall, by statute, ordinance, or regulation, or by administrative action implementing any statute, ordinance, or regulation, compel a landlord or any agent of the landlord to make any inquiry, compile, disclose, report, or provide any information, prohibit offering or continuing to offer, accommodations in the property for rent or lease, or otherwise take any action regarding or based on the immigration or citizenship status of a tenant, prospective tenant, occupant, or prospective occupant of residential rental property. (b) No landlord or any agent of the landlord shall do any of the following: (1) Make any inquiry regarding or based on the immigration or citizenship status of a tenant, prospective tenant, occupant, or prospective occupant of residential rental property. (2) Require that any tenant, prospective tenant, occupant, or prospective occupant of the rental property make any statement, representation, or certification concerning his or her immigration or citizenship status. (c) Nothing in this section shall prohibit a landlord from either:

(1) Complying with any legal obligation under federal law.
(2) Requesting information or documentation necessary to determine or verify the financial qualifications of a prospective tenant, or to determine or verify the identity of a prospective tenant or
prospective occupant.

Don't you think citizenship and immigration status might somehow effect a prospective tenant's ability to pay future rents? How are they going to pay rent if they cannot legally work in this country?

Contrast this with the brain damaged rules for what happens if a landlord discovers or suspects drug activity, or if law enforcement discovers such activity on the property.

If you're thinking, "have them furnish a large deposit," the law prohibits deposits above the amount of two months rent.

(sarcasm on)
TIP for Drug Lords: make certain your underlings are all illegal aliens, and keep all your "inventory" and "production materials" in their domiciles.
(sarcasm off)

What are the law abiding citizens (of whatever ancestry) who love this country supposed to do?

Roll Call of Shame in the Assembly:

Arambula Bass Beall Berg Brownley Caballero Charles Calderon Carter Coto Davis De La Torre De Leon DeSaulnier Dymally Eng Evans Feuer Hancock Hayashi Hernandez Huffman Jones Karnette Krekorian Laird Leno Levine LieberLieu Ma Mendoza Mullin Nava Parra Portantino Price Richardson Ruskin Salas Saldana Solorio Swanson Torrico Wolk

Those who actually value their country:

Adams Anderson Benoit Blakeslee Cook DeVore Duvall FullerGaines Garrick Houston Huff Jeffries Keene La Malfa MazeNakanishi Niello Plescia Sharon RunnerSmyth Spitzer Strickland Villines Walters

Roll of Shame in the State Senate

Alquist Calderon Cedillo Corbett Correa Ducheny Florez Kehoe Kuehl Lowenthal Machado Migden Negrete McLeod Oropeza Padilla Ridley-Thomas Romero Scott Simitian Steinberg Wiggins Yee

Those who actually value their country:

Aanestad Ackerman Ashburn Battin Cogdill Cox Dutton Harman Maldonado Margett McClintock Runner Wyland

I see both "my" representatives to the legislature in the rolls of shame.

Last week, I got a call from a hard money lender, asking what I could to to "rescue" one of his clients by refinancing. He was being about as altruistic as a drowning man. What he really wanted was for me to get someone else (i.e. another lender) to voluntarily hold the bag on his money losing loan.

Unfortunately, this guy already had a Notice of Default filed on that loan. When it comes to new loans, I can still get subprime lenders to sign off on 30, 60, and 90 day lates - but drop a notice of default on the property and even the worst subprime lenders won't touch it any more. Had he just held off on the Notice of Default - or even called me earlier, I could have taken care of it. Nonetheless, I have a method of dealing with even Notices of Default. Unfortunately, the one undeniable requirement for "rescuing" someone in this situation currently is a Loan to Value Ratio below 70 percent. That hard money lender had a loan amount about $350,000, and represented it to me as a $550,000 plus property. Therefore, initial indications were that it could be worked with, and we set up a meeting with the owners.

At that meeting, I found out the address and characteristics of that property. That wasn't a $500,000 property. In fact, it might have been worth $370,000, absolute maximum, in the current market. Three words about the likelihood of any new loan: Absolutely none whatsoever. A paper, Alt A and A minus are certainly not going to touch that loan - even if the Default were to suddenly vanish, the effects on the credit score would have driven the borrowers below their minimums. Even with the ability to document enough income, subprime isn't going to touch a defaulting borrower at 95 percent loan to value ratio in the current market - and that's without rolling one penny of costs or penalty into the new loan. That leaves only other hard money lenders, and if there's one great constant about hard money, it's that they absolutely will not go over 75% loan to value ratio, ever. In fact, their limits are usually 65 to 70.

These folks could not refinance with any lender out there. They can't afford their mortgage - no way. Even had they protested to the contrary (they didn't), they wouldn't have been in foreclosure if they could have come up with the money. Unless they've got a wealthy relative who will save them, they're going to lose the property, and if they had that kind of benefactor, why hasn't he appeared before now? The only mystery about the entire situation is the precise mechanism whereby they're going to lose the property, and precisely how badly they will be hurt.

Now from some of the code phrases that the hard money lender they're already with dropped, I am pretty sure he knows this - he's just hoping for another sucker to volunteer to take his loss by refinancing his loan out. Well, I'm not going to knowingly commit that sort of blunder. Nobody sane is. Do you think even brokers haven't figured out they're going to be liable for bad loans by now?

Furthermore, San Diego is a special case. Because we've been on the leading edge of all of this, we've mostly worked through the worst of it already. There are no longer quite as many foreclosures and defaults for sale. If this clown can hold off foreclosing for a few more months, there's a good chance he might get his money in a sale.

But when I asked him about it, he represented that "I need my money now." Well, that's fine and that is his right. However, if he needs it now, he's not going to get all of it. What he was really trying to do of course, is build a path of least resistance where I hose myself, the new lender, and the owner so that he can walk away with every penny that's technically "his." Like any sane loan officer, I'm going to decline to do that - the money I might make no in no way compensates for what's going to happen later. Questions of ethics and whether the loan should have been made in the first place aside, he willingly undertook that risk when he made that loan, and he was richly rewarded for doing so by an interest rate well into double digits. Even the stock market doesn't return that kind of money over time, and it definitely doesn't do so without risk. But evidently nobody covered that in "Loan sharking 101."

So when I did the logical thing and started talking to the owners about minimizing damage, he freaked out. He said I'd lured him there "under false pretenses," and that was before I had said one word about short sales. Nothing could be further from the truth; he was the one who led me to believe the situation was other than it was, and everything I had said was explicitly predicated upon the representations he made to me over the phone. But he saw his carefully constructed scenario collapsing in front of his eyes, and he didn't want to accept that collapse. Unfortunately, the consumers involved were Spanish speakers, and he spoke much better Spanish than I do. I've written about sharks marketing to a given ethnic group in the past, and this appears to be a prime example. He hustled them out of the room, no doubt intending to look for some other sucker. Unfortunately for him but fortunately for everyone else, the loan officers who were willing to do that in my area have long since been forced out of business, and even the ones who may have gotten away with it in the past are not eager to take new chances in this environment, and I think that's a very good thing.

For several years, the real estate and loan market was not much short of an ATM feeding cash out as quickly as it could. That has now changed, and we're back to something resembling traditional lending standards. Many people who became used to the way the market was working in the last few years still don't understand that it has changed, why it has changed, and why it's not going back to the way things were the last several years. They're still in denial that, having bought all the rope necessary to hang themselves, they're now struggling with that rope around their necks some distance above the ground. It doesn't much matter if that distance is half an inch or several miles - they're in just as much trouble in either case.

The sooner you get out of denial and accept the damage that has already been done, the sooner you will be able to limit future damage - and the damage does keep getting worse, There are alternatives that don't hurt as bad as foreclosure. Furthermore, there are those out there who will claim they can perform miracles, but they are almost always setting you up for a scam.

Here's the bottom line: If you don't make enough money to make your payments and pay your real cost of interest, the best thing that can be said for you is that you're circling the drain. But if you'll make up your mind to get it over with, and deal with the situation based upon the facts, you'll come out with less long term damage. Not to mention more life still in front of you than would be the case otherwise. There really aren't any good reasons not to get past an unsustainable situation as fast as you can.

Caveat Emptor

Article UPDATED here

With Rates having dropped again, many people are looking at refinancing their properties.

With the state of financial education in this country, many people will shop for loans by payment, figuring the lowest payment is the best loan. As counter-evidence to that idea, let us consider the negative amortization loan. I've seen them with minimum payments computed based upon a nominal rate of zero point five percent on forty year amortization. This gives a minimum payment of $1150 for a $500,000 loan - but the actual rate on that loan is eight point two percent, meaning if you were just going to pay the interest, that would be $3417 per month. If you made that minimum payment, you'd owe over $2200 more next month - and you'd be paying interest on it as well. By comparison, principal and interest on a six percent thirty year fixed rate jumbo loan is only $2998 - and there's no prepayment penalty either.

Don't get distracted by payment. Look at the real cost of the money - what you're paying now in interest, versus what any new loan will cost, plus what you'll be paying in interest on it. You do have to be able to make the payment, but once that's covered, look at the real cost of any new loan, both in up-front costs and in interest paid per month. Those are the important numbers.

Let's suppose you were one of those folks who had to settle for a subprime loan a couple of years ago. You had something bad happen, but now you're past it. You've been diligent and careful with your credit these last couple years, so you're now able to qualify "A paper". On the other hand, your current loan has now adjusted to nine percent, and your prepayment penalty has expired, while there are now thirty year fixed rate loans in the mid five percent range. I'm writing this on a Sunday, but as of Friday I could have moved you or anyone else able to qualify A paper into a thirty year fixed rate loan at about 6% for literally zero cost, meaning there is no possible (financial) reason not to do such refinance.

The only real question in such a situation is this: "Is it worth the extra money it takes to get a better rate?", because there is always a tradeoff between rate and cost. For instance, to look at the differences for someone who currently has a $300,000 loan, on Friday two of the choices were six percent for zero cost or five point five for about half a point. Both are thirty year fixed rate loans.

The six percent loan has a balance of $300,000, same as your old balance, and payments of $1798.65. The five point five percent loan carries an initial balance of $304,325, and payments of $1727.90. Lest you not understand, that 5.5% loan cost you $4325 to get done, as opposed to literally zero for the six percent loan. This isn't a matter of "keep searching for the provider who gives you the lower rate for the same cost", as this tradeoff is built into the entire financial structure. Some providers may have higher or lower tradeoffs, but the concept of the tradeoff isn't changing for anything less than a complete and radical rebuild of the financial markets. Not. Gonna. Happen.

However, for spending that money all in a lump sum, you get a lowered cost of interest. You save $105.19 that first month in interest, and this number actually increases for the first few years of the loan. In month 21, you've theoretically broken even, even though your loan balance is still almost $3600 higher, you've gotten the extra money you've paid to get the lower rate back. However, because you still owe $3600 more, if you refinance at this point, you're still going to end up behind as that $3600 you still owe translates to $216 per year at 6%, assuming that's the interest rate on your next loan. Maybe you sold the property and bought something else, maybe you refinanced for cash out. In either case. you owe $3600 more than you would have, which means you're paying interest on it when you get your next loan. But something like thirty percent of all borrowers have sold or refinanced by this point, and when they do, those benefits you paid for stop. Nor do you get any of the money you paid in the first place back.

It isn't until you've kept the loan 124 months - over ten years into the loan - before you are unambiguously better off with the lower rate but more expensive loan. That's how long it takes until the balances are even on the two loans. Of course, by then you have saved about $13,000 in interest - if you actually keep the loan that long. Less than one borrower in 200 does.

Real break-even is likely to be somewhere in year four in this case. After three years, you've saved about $3800 in interest, and if your balance is still that almost much higher with the expensive loan than the cheap one, we're getting to the point where time value of money will keep things in favor of the more expensive upfront costs. Of course, last time I checked Statistical Abstract, decidedly less than half of all borrowers kept their new loans this long. Something to think about, because you don't get the money you spent to get the loan in the first place back. By the end of year four, assuming we keep the loan that long, we've saved $5000 in interest, while the balance is only $2600 higher for the 5.5% loan than for the 6% loan. Even without time value of money and with a ten percent assumed rate of return, that's additional twenty years before the costs of the higher balance catches up with the benefits you've already gotten through lower interest. Considering time value of money, it's really never going to catch up.

So when you're looking at refinancing, don't just consider rate and payment. Consider what it's going to cost you in order to get that new loan, and remember what the costs are of doing nothing (i.e. you've already paid for the costs of that loan). Many people refinance every two years, spending much more than $3400 every time they do, because they'll spend two or three points to get the lowest rate. This, as you can see now, is a recipe for disaster.

Caveat Emptor

Article UPDATED here

Michael Barone: The Political Plot Thickens

Obesity surgery seen as diabetes cure

The patients had stomach band surgery, a procedure more common in Australia than in the United States, where gastric bypass surgery, or stomach stapling, predominates.

Gastric bypass is even more effective against diabetes, achieving remission in a matter of days or a month, said Dr. David Cummings, who wrote an accompanying editorial in the journal but was not involved in the study.

FYI, a few days ago I wrote how links to the former Carnival of Debt Management had been redirected/replaced by spam sites? After I deleted my links to them, my search engine traffic jumped by about 40% within 24-48 hours. It could be partially or even completely due to an unrelated cause. Coincidences do happen. However, that's not my primary hypothesis at this point.

Did SocGen trades trigger market rout, Fed cut?

Societe Generale's shock disclosure of a fraud that lost it $7 billion has left investors wondering about a link between the fiasco and Monday's European stock market rout.

The sharp fall, which was followed by an emergency U.S. rate cut, came as SocGen tried to close out positions built up by one of its traders.

I strongly doubt that this was the entire reason, but it was a significant fraction.

History offers lessons for economic stimulus

Even if stimulus packages come late, they have a psychological impact, says Robert Reischauer, president of the Urban Institute and a former Congressional Budget Office director. "Almost always the kick comes too late to moderate the decline or begin the turnaround," he says. "But it does add a little oomph to the recovery that was going on anyway."

No kidding.

Wall Street extends its rebound

Wall Street scored its second straight big advance Thursday after economic figures suggested the job market is holding up and as lawmakers agreed on measures that could ease concerns about consumer spending. The Dow Jones industrials rose more than 100 points, bringing its two-day gain to more than 400.

On a 625-point run, Dow blasts out of deep hole

Wall Street is making a habit of turning stock death spirals into buying opportunities.

This stimulus package is about buying votes, not helping the economy.

Frustrated with air travel delays?

Air Traffic Safety vs. Capacity

Why is your flight so late? Finally, the explanation

I wrote about this almost a year ago.

Somebody sent me this story via e-mail: Feeling Misled on Home Price, Buyers Sue Agent

Marty Ummel feels she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.

Knowing only this, I would have no sympathy. This is part of the risk you undertake with any investment - that it may decline in value. There are no guarantees that any investment is a good one. I worked hard to inform potential buyer clients about the state of the market when it was in the danger zone, and it cost me a lot of money. Quarter million dollars, absolute minimum. Most of them just went over to other agents who pretended that we could continue to gain 20 percent plus per year indefinitely, or were too ignorant to know better. Not precisely the most ringing endorsement possible, but it was hard to get people to hold off when the market was going crazy. Fear and Greed.

The situation now in my local market (San Diego) is 180 degrees reversed from that. This is the best buying opportunity in at least fifteen years, and probably the best we'll ever have from this point forward. I've done everything except promise free beer to try and get buyers off the sidelines now, but they're looking back at what the market has done, not where it is going. Fear and Greed has another side.

Getting back to the subject at hand, however, here's the deadly piece of information:

Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.

The question I want to ask is did the buyer's agent actively hide it or was he unaware of it? Not that being unaware is any excuse. If you have a fiduciary duty to someone who's buying a property, how can you not check out what sales there have been in the immediate area in the last few months, at least on MLS? This was a million dollar property, for crying out loud, but it would apply just as strongly to a "cheap" condo. If you're not willing to do the work, you shouldn't take the client. If you're never willing to do the work, why are you in the business?

If the agent was aware of these sales but actively hid them, that leaves the realm of negligence and into the realm of active malfeasance. He deserves to lose his license as well as the case, and this would be the wedge that might do it.

Now we get to the crux of the matter:

"We have seen so much misrepresentation over the last five years," he said. "So I appreciate where these buyers might be coming from: 'I'm a lowly consumer, you're certified by the state of California, you didn't do X, you didn't do Y, and I got hurt.' "

This is exactly what an agent is agreeing to when they accept the task of agency, real estate or otherwise. This isn't some pick-up game of softball where you pick your friends. Buyer or seller, you're not just picking someone who's going to get a check for thousands of dollars. If that were the case, real estate agency would have died by now. You're picking someone whom you believe is both capable of everything necessary to guard your interests, and willing to speak up even though it may cost them a commission. I get at least one e-email a week complaining about what a rotten job one agent or another did. When I respond back and ask them how and why they chose that agent, the response is always something along the lines of, "I met him and thought he was a good guy."

This isn't about who you're going to have a good time with at the football game this afternoon, which that means of choosing might suffice for. You're not choosing a date for the ball, you're picking an alleged professional who's supposed to competently guard your interests on a transaction that's probably several years worth of your earnings. Whether you pay for the property with cash or with a loan, it's still the same number of dollars, and you're still going to have to pay that loan off if something goes wrong. Treat buying real estate like what it is: putting enough money on the line to quite literally beggar you for life if you make a mistake.

I wrote an article a few weeks ago titled Which Makes More Difference - Buyer's Agent or Listing Agent? The answer was and is resoundingly that a buyer's agent makes more difference. Yet many people who would never pick a listing agent in such a casual manner will choose somebody they meet at an open house or go without representation, trusting the listing agent to look after their interests. But the listing agent has a contractual obligation to get the seller the highest possible price - not to negotiate it as low as possible. If something is in the seller's interest but against yours, you can bet the seller's interests are going to win. It's a win for listing agents if the buyer doesn't have an agent of their own - for perhaps an hour of extra work, they get paid double, and without taking on any new liability if they're even moderately intelligent.

Picking someone you meet at an open house is nearly as bad. HELLO! Earth to prospective buyer! They're a LISTING AGENT with a contractual obligation on behalf of that seller and who knows how many others. If they're not trying their best to sell you that property, they're violating their contract with the seller - but you want an agent who's not only going to tell you about the problems, but also about what it really means to you. There is an irreconcilable conflict of interest there. A good - by which I mean competent as well as ethical - agent will not put themselves or their clients into that kind of situation. I write it into every contract that I will not represent both sides in the same transaction, and make it clear to prospective listings exactly where the line is. If I bring someone I've contracted to represent as a buyer to one of my own listings, I am breaking that fiduciary duty to one or the other of them - perhaps both. It's one thing if someone calls me out of the blue asking to see a property I have listed. It's something completely different to bring someone I already have a buyer's representation agreement with to that listing with an eye towards possibly buying. The same objection applies if I try and get that prospective buyer who called out of the blue to agree to let me represent them in buying. Who gets less than my best efforts, and is that something you want as a consumer with hundreds of thousands of dollars on the line? That's what you're volunteering for when you pick a buyer's agent in either one of these fashions.

It goes back to the illusion of comity. Agents are salespersons, and it's much easier to get a sale, and particularly a better price, if you pretend everybody here is everybody else's friend. In fact, that's pretty much the only way to make Dual Agency fly. Give someone an obvious path of least resistance. But let's consider the nature of the item at issue: A middle of the line detached single family residence is $500,000. How many people would you trust not to try to finagle an extra 2%, when it means they make an extra $10,000 - two months gross wages - whether they are buyer or seller? To very politely and non-confrontationally slip away with an extra ten percent that means $50,000? I've seen people finagled out of forty percent of the purchase price by a sharp or lucky listing agent, and they never did figure it out. I went out and interviewed a few on purpose not too long ago on the subject of their recent purchases. Whether out of ego defense or just sheer ignorance, every single one of them was very happy with the purchase, and they told me they would do the same thing again.

Agents fall into the trap of "go along to get along" as well. It's one thing to be collegial. Two boxers each out to pummel the other into senselessness can be polite. The formality of the old code duello, governing two gentlemen so angry at each other that they're going to shed blood to settle the matter, was faultlessly polite. Often, though, agents go too far and get into you scratch my back and I'll scratch yours mode "You don't beat me up with your buyer, I don't beat you up with mine, and only the buyers get hosed, which we'll make good when they want to sell it with a whole new set of suckers buyers." The whole thing turns into a repeating cycle of suckers who don't know any better.

Well pardon me for not believing that just because you were taken advantage of in the purchase of the property does not entitle you to take advantage of someone else when you sell. Two wrongs still don't make a right, and they never have. The property is only worth what a buyer is willing to pay - if you don't like what is offered, you need to persuade me and them it's worth more - and to do that, you have to risk that I will persuade you it's worth less, because that's what negotiation is. Neither side gets to bully the other, and there are always other properties on the market. The other alternative for the seller is to find a buyer willing to offer more, which brings us back to the illusion of comity again. In this market, that's the real trick, isn't it? It's no coincidence that people find out about issues like this primarily during buyer's markets. When fear and greed are driving prices crazy, a bigger fool is very likely to materialize. When it takes something on the order of a divine command to get someone to be willing to buy, those who are willing to buy have thing much more to their liking.

To give the mass media credit where credit is due, they have managed to cover the basic point that listing agents represent sellers, and have a responsibility to the sellers, not the buyers. Thirty years ago, it's my understanding that Dual Agency was far more common, and the illusion of comity less likely to be dispelled, where now, roughly two-thirds of all transactions at least do have a buyer's agent involved.

But what if that buyer's agent doesn't understand the difference between comity and collegiality? That seems to be the most likely explanation for the situation illustrated in the NY Times article I linked at the beginning of this piece. To be fair, many agents on the listing side suffer this fault as well. The illusion seems to be essentially that as long as we keep it all in the family, nothing will go wrong. Furthermore, the buyers in the article were in exactly the same situation as the ones I interviewed on their overpriced purchases. Fat, dumb, happy - and ignorant, until something went obviously wrong. When prices fell, they went looking for someone else to fix their bad situation upon. And if prices falling was the only concern, neither I nor anyone else should have any sympathy whatsoever for them. But it wasn't just the bad luck of a down market, forseeable or not. This agent not only did a horrible job of discharging his fiduciary duty, he didn't tell his victims about relevant facts which would have made that failure obvious before the transaction was consummated. It's interesting to note that had he admitted his failure, he probably still would have gotten paid, because even if the buyers had moved on, they probably would have kept him - people do the silliest things. However, this was a real estate transaction, where pretty much everything is a matter of public records that are kept forever. The buyers or their lawyer did the work and dug into the records, and predictably, hit paydirt. The agent undertook the duty, should have understood the duty, and basically decided to act like a minimum wage worker with a fax machine despite the fact he was paid $30,000 to guard the buyer's interest. Hello! That commission check is not a reward for a winning personality! Well, I suppose in a market rising 20% per year where it's hard to do anyone lasting damage, it can be, much to the eventual distress of their client. Because no market can sustain that kind of increase over time unless the income of those able to buy the property keeps pace. I don't need to ask for a judge's ruling on that one.

People want their daily routine to be without confrontation, violence, or real argument. It's a temptation to just go along. The little stuff - a dime missing out of your change, having to sit through an extra cycle of the traffic signal - just isn't worth making a big deal out of. It's a path of least resistance thing. But when you accept the responsibility for someone else's interests, it's not your call to make, and we're usually talking months worth of wages, occasionally years. I may advise someone that the deal is about as good as I think we're going to get, but I still have to spell it all out. That's why I make the money I do for the work I do when I'm working on a full service basis - it really is reliably worth several times what I make to my buyer clients. And that's why the agent that just sits in the office with a fax machine can rebate half or two-thirds of that co-operating broker's percentage, and why I am perfectly happy to work on that basis if that's what a particular buyer wants - if my only liability is passing along faxes, I'm making ten times more per hour for less liability. I've written about this before, but pay attention to what you're getting in services as well as what you're spending for them.

The divine only knows how many other people bought property and are now in this situation, and how many lawsuits we're going to see because of it. I have zero sympathy for the agents and brokerages involved. They have richly earned whatever judgments are rendered against them and any license action under taken by the Department of Real Estate. But the consumers involved assisted their own downfall for just taking the obvious, apparently easy path to a transaction, by not taking the time to shop for a good buyer's agent in the first place. If you were getting ready to buy a property, which situation would you rather be in this time next year? Find a dedicated buyer's agent who will guard your interests while explaining what you need to know, or just take the path of least resistance? As of this moment, the folks the New York Times wrote about are out $75,000 in legal fees, and who knows how much in property value, their own time, and the quality of their lives, because they chose the latter path. Nor does anyone know at this point how much of that they're going to get back. But speaking as someone who knows intimately the endpoints and results of both paths, I know which path I'd choose.

Caveat Emptor

Article UPDATED here

The first piece of advice I have for buyers who want to get a fantastic bargain is to find a good buyer's agent (this guy is one of the best in San Diego County). Nothing else will make as much difference as a good buyer's agent who is dedicated to the idea of getting buyers a bargain. They spot problems before you're stuck with them, keep you from wasting time, bargain hard on your behalf, debunk all the nonsense that sellers and listing agents throw your way, and most importantly, know when and under what conditions it's a good idea to walk away.

The second piece of advice I have for buyers who want to get fantastic bargains is to be willing to zig when everyone else is zagging. The gorgeous property in a high demand area of town, the award winning new development that's selling like hotcakes, and the freshly remodeled high end property are not where you're going to find bargains. Timing is as important as location and condition. It's much harder to find a bargain in the spring and summer, when everyone else is looking to buy, than it is to find a bargain around Christmas, when nobody wants to move that tree. You find bargains by being willing to consider what relatively few others will. A buyer's market is where the buyers have all the power simply because there are so few buyers in proportion to the number of sellers. Seller's markets are the exact opposite, but it's pretty easy to get people to want to buy during seller's markets, and difficult to get people to buy in buyer's markets. The psychology of increasing prices motivates greed on the behalf of buyers, but if you want to make a large profit, buy when nobody else wants to.

This isn't to say that every property or every situation that everybody else is avoiding is a ripe bargain. That is not the case. Sometimes the reason why a given property isn't selling is a sane, rational reason. If it's next to an explosives factory or a maximum security prison, there's a good reason why people are giving it a wide berth. There is a reason to do due diligence on every property.

The third piece of advice I have for bargain hunters is that the beautiful, turn key property where you sign the papers, move your furniture in, and you immediately become the envy of your neighbors is not bargain priced. Those properties don't need to be bargain priced, because they appeal to everyone, and people will line up to pay top dollar for those properties. The owners don't have to negotiate much, because everyone's making offers on these. You find real bargains by being willing and able to consider what other buyers can't or won't. I just found a wonderful potential bargain, but the person who buys is going to need a lot of cash to make it happen. The prospective buyer who cannot or will not sink cash into the property can't touch it. The person who isn't willing to work - or pay to have work done - won't be interested..

This segues into the subject for the fourth piece of advice: Being on solid financial footing is worth gold to buyers - lots of gold. Not being on a solid financial footing may or may not be worth waiting until you can fix it, depending upon your market. That's a question that can only be answered on an individual basis. But people with low credit score, low to zero down payment, and insufficient ability to document income will have substantially fewer properties to choose from, and a lot less bargaining power to boot. These challenges become much more difficult if you've got more than one of them. Any one of these issues can be dealt with easily. 100% financing is very available to those with a credit score not horribly below average and the ability to document enough income. People who can't document enough income can still get good loans provided they can put in a down payment and have a quasi-decent credit score. People with bad credit can still get loans if they can document income and provide a down payment - or even if they can't document income with a larger down payment. But put these items together, and you're very constrained as to which properties you have the opportunity to buy, that is, the ones where the owners are willing and able to "carry back" part of the purchase price. Since sellers want cash, not promissory notes, this means the ones who are able to do so have a huge lever to hold on you. You're likely to end up paying full asking price, if not a little extra.

You have cash, or at least the ability to pay the seller in cash via a loan. The sellers have property and they want cash. Every property is not appropriate for every buyer, and I've yet to find a property that's an exception to this rule - but cash is appropriate for every seller. Your cash, my cash, Uncle Sam's cash - sellers are complete agnostics when it comes to whose cash. That dollar from your pocket is worth exactly the same as the dollar from mine. It all spends, and any seller with any pretense to rationality is going to be the ultimate agnostic about who that cash comes from. So long as they get it, it all spends. Cash is always king - but it never produces more cash just sitting there.

But you have needs and wants for the property, and unless you've got a license to run your own private printing press, you don't have an unlimited budget. You have to know what that budget is, and blowing your budget is the mistake most likely to cause a disastrous failure in the home buying process. One of the things I do that my buyer clients absolutely hate is I force them to sit down with me and have a talk about what's important to them in a property, how important it is, and what's not important. Furthermore, I always want to cover alternatives. If they can have two or three features of lesser importance, are they willing to give up one item that may be highly desirable but extremely expensive? People hate this because they hate any indication that they might have to "settle" for anything less than a dream home, but dream homes turn to nightmares very quickly if you don't stay within a budget you can afford. You can always move up again later, but if you can't really afford it now, you will be better off not buying it. A good buyer's agent should give you a very good idea how well your budget and your desires match up before you look at a single property. Furthermore, when looking at properties, always shop by purchase price, not payment. Never never NEVER choose a house or a loan based upon payment!

All of this reduces to one word: Planning. People hate to plan. A good working definition for human beings is, "an otherwise sentient species known for its unwillingness to plan." Me, too, except where there's something important on the line, and getting my clients a better properties at lower prices is a large part of how I feed my family. Effectively planning your purchase will save you many thousands of dollars. Several tens of thousands, around here; perhaps hundreds of thousands in places like Manhattan. I plan everything about my client's purchases except whether they'll like a particular property. There is no way in the known universe to predict that. I've found people exactly what they told me they wanted, at a price within their budget, only to be told "Show us something else." I've had people immediately fall in love with something that I almost didn't show them. I've had people insist they wanted a property even though I gave them a dozen good reasons not to. They're the boss. I'm just the expert. Push comes to shove, people will buy what they like - it's my job to make certain they know about the warts and have a chance to avoid them. People marry people with warts all the time. Most properties, just like most people, have their warts. It's my job to make sure my clients know about them - not to prevent them from exercising adult judgment on whether it's something they can live with.

About warts: If you're one of those people that cannot accept the fact that everything in real estate is a trade-off, you're not going to do well. If you're only willing to buy a perfect property in the perfect situation at a perfect price, there are three possibilities. One: you pay a lot more than the property is worth. Two: You don't buy anything, either because nothing satisfies you or because someone else gets into escrow first. Three: You are the victim of a con where they pretend to have the perfect property in the perfect situation at a perfect price.

There are properties without metaphorical warts of any kind. They all command a premium in any market. If you want a bargain, there are going to be warts. There's going to be a reason why buyers didn't line up to outbid each other, because that's what happens with premium properties in any market. Location, surroundings, condition, size, floor plan, orientation, structure, commute, missing something it needs or has something it shouldn't. Usually, more than one of these. Some things that are a big deal to most prospective buyers are cheap and easy to fix, while other things that don't seem important at first are expensive or impossible. Some things make a large difference on resale, others don't. Some things are impossible to live with, some things trivial. A good buyer's agent will make all the difference in the property you choose, and it's not just knowledge, but attitude as well.

Penultimate item: Sometimes, there are things that are more important to the seller than some amount of cash, and if they are less important to you than that amount of cash, this is a good way to get a bargain. Sometimes there will be clues in the listing that a good buyer's agent can spot. Sometimes, a seller who wants it all their way will give away this crucial information in negotiations, usually by asking for something other than the way things are normally done in your area. Once again, it's the buyer's agent who is going to spot that and know what it's really worth in the way of other concessions. Everything that's unusual, out of place or out of the ordinary is a possible flag here. This works both ways, so if you don't have a sharp buyer's agent and the seller has a sharp listing agent, you can very easily put your foot in your mouth to the tune of thousands of dollars or even blowing the purchase altogether. Get with your agent and plan how you're going to craft your offer to get from where you are to where you want to be.

The final item, and one of the most important: Always negotiate honestly and in good faith. Never make an offer you're not prepared to have accepted. Never represent yourself as being happy when you're not, or being unhappy when you're trying not to chortle with glee. It's amazing how many people simply do not understand how likely this is to bite you. The purchase contract is not the end of negotiations - even the consummated sale may not always be the end of negotiations, but that's the way to plan. It takes two willing parties, a buyer and a seller, to get from the purchase contract to the consummated sale. One side gets too greedy or too demanding, the other side gets disgruntled and walks out. The net result is no transaction, and you're right back where you started from, except you're out the time and probably a not inconsiderable amount of money. Lose-lose, where a viable transaction is always at least commensal, and symbiotic is better.

None of this is "Buying below market." There is no such thing as "buying below market". Market is whatever the price a willing buyer and a willing seller agree the property is worth. End of discussion. If you don't understand this, don't get involved in buying and selling real estate. You would only get hurt. But it is a collection of ideas and principles that enable savvy buyers to get the real bargains - the sort where you look back in amazed satisfaction at how well you did, and if you don't know any better, you'll think it was dumb luck. And luck does happen, but fortune in real estate favors those who are prepared, who get good advice, and who are prepared to undertake reasonable risks when the probability and magnitude of a payoff more than compensate. Real estate is always a competition, and like every competition, you want to practice, you want to prepare, you want to have the best coach and the best strategy, and you have to be willing to take calculated risks. The prize isn't a gold medal - it's a property where you can be happier than in the property you didn't spend tens of thousands of dollars more for, and resell when the time comes faster and for a higher profit.

Caveat Emptor

Article UPDATED here

Fed slashes rates

In a rare action between regularly scheduled meetings, the U.S. central bank cut the benchmark federal funds rate by three-quarters of a percentage point to 3.5 percent, its lowest level since September 2005.

and

Even after the Fed's move, interest-rate futures markets showed a 74 percent chance of another half-percentage point reduction in U.S. rates next week. They also pointed to a federal funds rate of 2.25 percent by midyear.

Market falls on recession concern but Fed cut helps

The Dow was down almost 465 points at its session low, while the Nasdaq, within minutes of the opening bell, dropped to a level indicating it had crossed the threshold of what is considered a bear market -- a fall of 20 percent from its October closing high.

The Dow, which isn't broad enough to be indicative of anything about the general market, nonethess fought back to only close 130 points down.

Emergency rate cut may show the Fed panicked

I'll agree with that. Of course, the overnight rate shouldn't have been at 5.25 in the first place. Kind of like what happens when you ride the brakes too long and too hard in the biggest train you can imagine - the US economy. You've now got to feed it more power that you otherwise would have so you can get up this hill the Fed created.

The cut was "obviously triggered by a stock market fall, regardless of the statement's talk about 'increasing downside risks to growth,'" said Gabriel Stein, an economist at Lombard Street Research in London.

By moving abruptly, the Fed took the gamble of exposing the extent of its own concerns about the deterioration in financial markets, and hinting it knows of even worse news waiting in the wings.

But asking bankers, who are mostly worried about inflation, to take action that might result in higher inflation before there's an obvious emergency, is expecting a little too much.

Don't ever confuse economists with bankers. To put it on a Sesame Street level, "one of these things is not like the other."

Dang, Darn, Drat, Phooey, Rats and Consarn it!

Fred Thompson quits presidential race

He was that rare candidate that the more I found out about him, the more I liked him as a leader, and the thought processes where he reached his decisions. I haven't been able to say that about anyone since Paul Tsongas (who made the mistake of alienating the Communist America-hating wing of his party with plans to economically revitalize the country).

All isn't necessarily lost. Thompson would be a good vice presidential pick for just about anyone, especially John McCain. But while Vice President has a lot of influence if he uses it correctly, he isn't the one with the big policy decisions to make.

With him and Duncan Hunter out, my hopes are pinned to Rudy Giuliani, after which I'll hold my nose and vote for John McCain. As far as I can tell at this point, everybody else would actively work to destroy the country.

(In case you haven't figured it out from the fact that I like Rudy Giuliani and really liked Paul Tsongas, I'm not a conservative. Indeed, I'm more Libertarian than anything else in my politics.)

Dems Feel Urgency to Enact Stimulus Plan

The only thing the Democratic leadership feels an "urgent need" to do is perform a bodily function with the taxpayer's money.

Okay, that's not quite accurate. They also feel a need to quit chasing the tail chasing impeachment and all the other Inquisistion-style hearings they've been holding about the Bush administration for doing things quite a bit milder than any other administration in recent memory. They need some kind of concrete accomplishment to take to the voters in November, or the Republicans are going to be back in the majority.

"The urgency that we feel at home is now even more urgent as we see the impact of our markets on others," House Speaker Nancy Pelosi said after lawmakers of both parties met with Bush at the White House.

Cross your legs and hold it, Nancy. We'll be paying interest on that money, and it'll be dragging us down until someone finds the integrity and courage to cut spending enough to pay it back.

The president also expressed confidence but said any deal must be done right, not just fast.

Right would imply that he has decided to do the intelligent, principled thing, which in this case is nothing. This whole call for economic stimulus really isn't going to help. There are things that would help, like, say, making it easier to do business and earn a profit. But that's not on the table.

This is called, "Voting with your feet":

More Jerusalem Arabs seek Israeli citizenship

After decades of living under Israeli rule and years watching the Palestinian Authority struggling to govern, more Arabs in Jerusalem are casting their lot with Israel.

Last year, as peace talks revived the possibility of handing over parts of Jerusalem to a new Palestinian nation, the number of Arab residents applying for Israeli citizenship more than doubled.

One party can't defeat jihadism

Campaign vows of "bipartisanship" are like New Year's resolutions to eat less and exercise more: ubiquitous, well-intentioned and usually forgotten.

Yet if anything has become clear since 9/11, it's that the war against jihadist terrorism must be owned and fought by both Republicans and Democrats. The war against jihadism is a long-term struggle to defend religious freedom, civic tolerance, democratic self-governance and other core Western political values. It's a war against an enemy with a different view of the human future. And it's a war that must be fought on many fronts -- military, political, intellectual, moral and economic -- simultaneously. A war this complex can't be the project of one party alone.

Read it. With less than a year to go in George Bush's term, if we don't get both parties on board, we're doomed. And I don't mean that in the "Charlie Brown" sense of the word. I mean in the literal sense of the word.

With rates having dropped in recent weeks, it seemed a good idea to go over the thought process behind a successful refinance. Other than the two issues, of loan to value and whether you're really able to qualify for a traditional mortgage loan, things are pretty similar to other refinancing mini-booms. I've seen some people claiming that you should go up to forty-five day rate locks instead of thirty, but I must disagree. With underwriting times at five days, you should not need longer than a thirty day rate lock (or purchase escrow) if you and your loan officer have your act together. Purchase loans go through different underwriters at most lenders, and they have no right of rescission. Even in summer 2003, when refinance underwriting was at 33 days, purchase loans were still getting turned in no more than four, and funded in two to two and a half weeks. Even refinance loans can still be done in under 30 days - if your loan officer submits a complete clean package to begin with, something there's no reason not to do in the case of a refinance. Furthermore, if you make a habit of submitting nice clean complete packages, underwriters will start cherry-picking yours out of the pile when they don't have enough work time left for a piece of garbage. You can't really control this or count on it, but it sure was nice to have the loans come back approved in three or four days, when the competition was taking four weeks. My median last year was seventeen calendar days from lock to fund - adding five days of underwriting only brings us to twenty-four (Don't forget the weekend), and that's forgetting that underwriting was talking a day or two even then. Longer rate locks are more expensive, so you don't want to pay for what you're not going to need. But you do have to have your ducks in a row from the beginning to make it happen.

There are two component costs of getting a loan done. The first is closing costs. This is what is necessary to pay all of those people that work on your loan. Appraisal, escrow, title, notary, processor - not to mention things like credit report charges and recording fees, and in some states, taxes levied upon mortgages. I knew things were getting cheaper with virtual escrow and flat rate title insurance upon refinances, but it was just a few days ago I really looked at how much this was. It's now running much lower than the $3400 rule of thumb I've been using. I quoted two yesterday, and the higher added up to just over $2800. Of these, the only ones that usually need to be paid in cash are the appraisal and the credit report. There are certainly lenders who offer to pay for the appraisal, but I've gone over the traps there before. The others can be rolled into your loan balance. Unfortunately, you'll be paying interest on it there so it's not something I like to recommend, but it can be done, and if you need to do it, it's part of the calculations on whether you should refinance. Actually, it's a part of that, either way.

The second part of the costs are in the points. Actually, this separates into origination and discount, where origination is more properly a closing cost, but most providers (including me!) quote origination and discount together in points verbally, but points of origination is computed exactly the same as points of discount, and when they're disclosed in writing on the paperwork, they add up to the number quoted, at least for the more ethical providers. Note that unless that quote is backed up with something like a Loan Quote Guarantee, these numbers don't mean anything you can hold the lender accountable for, so signing up for a backup loan is a really good idea.

If you choose a higher rate, the lender might not only not charge points, they might cover part or all of your closing costs.

There are other potential costs as well. If your current loan has a prepayment penalty, you can figure you're going to end up paying it in order to refinance. There are only four ways to get out of paying a prepayment penalty, and the two best are not having one or waiting for it to expire. The standard pre-payment penalty is six months interest, so if you've got a $200,000 loan at 6%, you can figure paying that penalty is going to cost $6000. Some penalties are only 80% of that amount, but either way this can entirely change the computation as to whether it's worthwhile to re-finance, and I can think of half a dozen instances off the top of my head where the client swore that they didn't have a pre-payment penalty - but they did. Sometimes this is a rude awakening as to whether the loan officer who got you that loan however long ago really did as good a job as you thought they did. In the illustrated case, it also adds $6000 to the cost of refinancing until it expires. This isn't the fault of your new loan officer - unless they're also the one who did your current loan, they had nothing to do with it. People have gotten angry at me to no good purpose any number of times on this point, when that pre-payment penalty had nothing to do with me. I didn't put them into that loan, I didn't put the loan contract with a pre-payment penalty in front of them, I didn't sign the contract without understanding it, and I certainly didn't get paid for doing that loan. Kind of like trying to blame your neighbor for the crimes of Attila the Hun.

There are other things that need or might need to get paid. Every refinance loan has thirty days interest attached to it. But this isn't a cost; it's only money you would have paid anyway. Some lenders will roll it into the loan and tell you that you "skip" a payment. This may be technically true, but is nonetheless incredibly dishonest. It's much more correct to say "you made one mortgage payment a little earlier." You never really skipped a payment, you only keep the money in your checking account because you added the amount of the payment to your balance. And of course, there's the impound account if you want one, to pay your taxes and homeowner's insurance. Avoid rolling this into your balance if you can.

Just because rates are lower now doesn't mean it's necessarily worthwhile to refinance. Let's work with an example. Let's say the property is valued at four hundred thousand - that's what the current appraisal will come in at. Current loans sum to $260,000, at six percent. No pre-payment penalty, the clients don't want an impound account (be thankful for the one thing the California legislature has done right in the last twenty years). Total closing costs, $2800. Plus whatever cost in points or minus whatever rebate you can get.

Here are some options available a couple days ago (Rates actually dropped again today), all retail rates for thirty year fixed rate loans:

at 6.125, a rebate of 7/10ths of a point or $1820, cutting closing costs to about $1000. But there's no benefit whatsoever to doing that. Not only does the cost of interest go up if they get this loan, they've spent $1000, and the cost of interest goes up to $1332.19 per month from $1300 even, assuming you roll it that $1000 into your balance, but even if you don't, you're not cutting your cost of interest. Unless you're in some kind of loan that's going to somehow get worse, like if the current loan is adjustable, there's no reason to do that. There's no benefit whatsoever, even though the overall tradeoff between rate and costs is now lower.

5.875% was retail par, no rebate but no points to get it either. Total cost $2800. Let's assume you pay it out of pocket, so your balance stays the same and you actually cut your cost of interest by $27.08 per month. Would you pay $2800 in order to save $27.08 per month on your mortgage? I wouldn't. Even without considering the time value of money, it takes 103 months - over 8.5 years - to break even. Most folks don't keep their loans three years, let alone eight, and if you haven't broken even by the time you sell or refinance, you're just out the money.

at 5.625%, you would have paid half a point. Assuming you pay it out of pocket, that's $1300. Added to $2800, that's $4100. You cut your cost of interest to $1218.75, so you're saving $81.25 per month, but when you divide it out into $4100, that works out to 50 months, not counting time value of money. I probably wouldn't invest $4100 for that, but some rational people with a long record of keeping loans ten years or longer might think it was a good investment.

At 5.375%, you would have paid 1.5 points - roughly $3900. Added to $2800, that's $5700. If paid out of pocket, it cuts your cost of interest per month by $135.42, which divides out to a breakeven of 42 months - three and a half years. It's not that good if you roll it into your balance - cutting your monthly interest savings to slightly less that $110, and your breakeven is moved back to essentially 52 months, still not considering time value of money. I wouldn't do that, but it doesn't mean there aren't rational people who would.

Notice that all of these rates but one are lower that what these people have now, but in no case have I been enthusiastic about the refinance from the client point of view.

You may have noticed I haven't used payment to compute any of this. That's because payment is much less important than most people seem to believe. Yes, you need to be able to make the payment, but with that said, You should never choose a loan based upon payment. Even if you were paying off other debt with payments of hundreds of dollars per month, you shouldn't choose your new loan based upon payment. Focus on the real costs of money - what money you need to spend to make the change, the difference it makes to the monthly interest. Even if you have a real cash flow problem you need to solve because you are barely able to make your current payments, you'll go a lot less wrong by focusing on cost of interest.

However, let's see what happens if these folks have forty-five thousand dollars at an average of eleven percent in consumer debt they want to pay off. True that the monthly payments are $800 and it's really crimping them. They're just barely making all the payments every month, and if anything happens like, say, a car repair bill, they'd be completely hosed. That is another reason for doing something, but it's not a reason to focus on payment, but only to make certain that the new payment falls within the range of what they can really pay. As it sits, their real ongoing cost of that money is $1300 plus $412.50, or $1712.50 per month. Many people will tell them that consolidating that debt moves it from non-deductible to deductible, but a strict reading of the tax code says that is not the case (deductible interest is based upon purchase price, normally amortized). I'm not going to tell you that people haven't gotten away with this deduction, but the IRS has had their eye on enforcing it of late, so I'm not going to assume you're getting a deduction out of it, and in fact, I'm going to assume the deductibility issue is a wash.

We haven't changed the basic rates, which are the sum up to the conforming loan limit (currently $417,000). Paying off consumer debt makes it into a "cash out" loan, and a balance that includes paying $305,000 of debts puts you over a seventy percent Loan to Value Ratio, possibly over eighty if you choose a high cost loan and or roll impound accounts into your balance as well. The lender whose sheet I got this from has a
adjustment - an additional charge for risk - of half a point for cash out loans between seventy and eighty percent of value, 3/4 of a point for 80% and over. So all of the above rates have their costs increased by half a point.

So 6.125% now only carries a rebate of two tenths of a point. The moderately good news is that this is on a larger amount of money, and the closing costs are the same (I deliberately picked these numbers so that the cost for the lender's policy of title insurance stayed the same on a refinance, but it usually won't) But I'm also going to presume that you don't have the money to pay these cash out of pocket - you have no choice but to roll loan costs into your balance. After all, if you had thousands of dollars sitting around cash why do you have all of these consumer debts? I'll still have you paying prepaid interest out of your pocket instead pf pretending to "skip" a payment, and no impound account, but you don't have the cash to pay everything out of pocket.

At 6.125, your closing costs are still $2800, and the slightly over $600 rebate you got means that the balance only increased to about $307,185. Total cost, of refinancing to you, $2185. Monthly interest charge is now about $1567.93 - so you're saving $144.57 in real money per month, never mind that the payment is going to have a much larger difference. Would you spend $2185 to make $145 per month, potentially for thirty years? I sure would! Your breakeven is just over fifteen months, and most folks keep the loan significantly longer than that! Every month you keep the loan over 15, you're $144.57 further ahead of where you would have been without refinancing.

At 5.875%, the loan costs half a point now. Your new loan balance would be $309,346.73 and change, which in the real world gets rounded to $309,350 and putting the difference of $3 plus loose change back into your pocket somehow, but I'm going to deal with the non-rounded number. You paid $4346.73 to get that loan done, and your monthly cost of interest goes to $1514.51. You're saving $197.99 per month, but you spent about twice as much to make it happen. Breakeven is not quite 22 months as opposed to your current situation, but longer than that as opposed to the competing loan, which is over $1000 to the good by the time this loan breaks even. Indeed, this loan won't catch its 6.125 competitor for 44 months or thereabouts. In the absence of other choices, I'd be willing to spend this money for this benefit for myself, but over three and a half years is a longer than median time to refinance. I'd rather have the 6.125 loan in this instance. You will get more benefit out of this loan in the long term if you keep it, but most people won't keep it long enough.

At 5.625%, this loan now costs one full point, and your new balance would be $310,909.09. Like it or not, you spent $5909 to get that loan. Your monthly cost of interest drops to $1457.39, saving you $255.11 per month. Breakeven: A little over 23 months. Everything that I said before about the 5.875% loan is also true for this one, except that because the monthly benefit is larger, it catches the 6.125 loan that is your best alternative thus far faster - a little over another ten months, or between 33 and 34 months until it's the best alternative thus far, and once it's in first place, it pulls away from the others quickly.

At 5.375%, this loan now costs two full points, and your new balance would be $314,081.63 if you chose it. You spent $9081.63 to get it, while your monthly cost of interest drops to $1406.82, saving you $305.68 per month. You break even after 29.7 months. If it were the only alternative other than "do nothing", I'd still be willing to do this for myself, but since it takes longer to catch up to some of its competitors, it wouldn't be my first choice from among the presented options. Mind you, if you kept it for the full 30 years, it would be the best possible alternative, but most folks don't keep their loan even three years, let along thirty. By the time this has broken even, the 5.625% loan is about seventeen hundred dollars to the good, and at $50.57 per month lower interest, you're looking at over 32 more months until this is the best alternative. 62 months is over five years. I'd rather do 5.625 for me in most circumstances, thank you very much.

Circumstances alter cases. If you have some knowledge about the future of the situation, any of these can be the best possible loan. For instance, if you know you're going to have to move and sell in two years, or if you're retiring (but staying put!) and it's going to be difficult to get loans from here on out, those would each alter which decision I'd recommend. If loan rates are expected to continue declining or even to be volatile in about this range, I'd choose a cheaper alternative trying to get as close to a True zero cost loan, while if all the top analysts are saying that rates aren't going to be this low for another ten years, I'd strongly consider paying the points to get the low rate.

There is more to the decision of refinancing than just rates, and choosing a mortgage loan by payment is one of the best ways I know of to waste large amounts of money. Unless rates nose-dive even further than this, like they did in 2003 (It sure was nice telling people I could get them 5.375% for literally zero cost when most of them were around 7%), for most people there probably isn't a choice that both saves you money and has you ahead of the game right away - and even so, that may not be the best choice in your situation. Calling loan officers to demand "What's your lowest rate?" isn't going to help anyone - especially not you. You need to have some good conversations with several loan officers

Caveat Emptor

Carnival of Real Estate Recommended: #1 Question You Need to Ask Your New Stager

FYI:
For all you folks who may have linked or submitted to the Carnival of Debt Management in the past, it was brought to my attention that every single one of those carnivals has now been replaced by or redirected to a spam page (and vile lying spam at that). I have therefore removed all past links to the Carnival of Debt Management. This is not the only carnival that particular person runs. If you have past links to other carnivals run by the same person, you may want to see that linking to a spam site isn't hurting your search engine ranking.

"Help Wanted" highlights skills drain in U.S.

Tell people there's no future in an industry enough times, and nobody will train for that industry.

Some 20 percent of small to medium-sized manufacturers -- those with up to 2,000 workers -- cited retaining or training employees as their No. 1 concern, according to a survey by the National Association of Manufacturers. The survey was carried out in 2007 but has not been published yet.

A separate study in 2005, the latest available, said 90 percent of manufacturers are suffering a moderate to severe shortage of qualified workers.

This headline is basically what I was thinking Saturday night:

McCain Gets Rebound Win, But No Clincher, in South Carolina

33-30 over Huckabee, with Fred Thompson 3rd. I'm sad Duncan Hunter dropped out, I'm even sadder that Fred Thompson (my current 1st choice candidate) didn't do better, but at least Huckabee didn't win. I do think Huckabee's campaign is on the verge of losing all credibility, both as far as with voters and as far as ability to win. If he couldn't win South Carolina, where his message could be expected to resonate far better than (for instance) Florida, California, and New York, he's toast. Furthermore, it was a big win for Senator McCain, in that he took on opponents with a more regionally appealing message and won anyway. Fifteen years of trying to repeal the first amendment or not, I could live with John McCain as president. He is able to lead, he is able to compromise, and he has steadfastly maintained a correct stance on the War on Terror, no matter how politically unpopular at the time. I'd much rather have Fred Thompson or Rudy Giuliani, but if the choice on the ballot in November is John McCain or any of the leading Democrats, I'll hold my nose and vote for McCain.

On to Florida, where Rudy Giuliani (my current second choice candidate) has staked his candidacy. Rudy wins Florida, we've got a whole new ballgame. If McCain or Romney wins Florida, chances are that everyone else should depart the race, and I would really rather have McCain, flawed as he is, than Romney. If Romney wins the Republican nomination, it's very possible that I might vote for the Democrat in November. If Huckabee should somehow pull out the nomination, it's all but certain that I would.

With rates having nose-dived in recent weeks, we're experiencing a refinancing mini-boom. Now that rates have fallen by about a full percent from where they were most of the last year, people are waking up to the fact that refinancing now can save them some serious money. Things finally got low enough a couple days ago that I sent out individual e-mails to most of my clients for the past two years. Underwriting times are up to five business days - a full week. Mind you, refinancing booms are not going to save the lenders' who are in trouble, and 90 percent plus of the refinance dollars are just lenders feeding off each other. But the choice for any available lender is to offer the lower rates and compete for clients, or don't and lose them. It's not like people are settling for free toasters any more.

Unlike all of the recent refinancing booms, this time a lot more people have a couple extra issues.

The lesser one, measured by number of people who have this issue, is being able to qualify for a loan. A year ago, while make believe loans were still happening. people were being qualified for loans on the basis of being able to detectably fog a mirror. Loans for 100% of the value of the property were being done on a Stated Income basis by even A paper lenders. Forty and Fifty Year Loans, interest only, and even negative amortization loans - unsustainable loans were over half of all purchase loans locally. Anything to make it look like the payment was affordable, even if it wasn't. But if that's the only way the people were going to qualify for a loan, what happens when they're not available any longer? That's right - they're stuck with what they've got until they can qualify for something more traditional. Lower rates may help a few around the margins, but most of these folks who signed up for Make Believe loans are going to have to sell before they're going to get their lives back on track.

The other issue, that loan officers mostly haven't really had to deal with for years, is impacted Loan to Value ratios. When prices fall, as they have locally, that's a problem. Locally, the average properties are down about 25%, but that's an average only. So properties that people bought at the peak of the market might be 75% of the value they paid, and unless they put at least a 25% down payment into the property, they're "upside down", and owe more than the property is currently worth. Being upside-down is no big deal if you have a sustainable loan. You keep on keeping on, and eventually things will go back to normal. You pay the balance down, values will go back to at least where they were, and all will be right with the world. But if rates drop while you're upside down, you're not really in a position to take advantage of them. I've written an article on how you might be able to refinance if you're upside down, but those steps are not going to get you the great rates people who have more traditional loan situations will get. Even people who have been in their properties for much longer are finding out that they don't have anything like the amount of equity they had two years ago. Even if they bought a decade ago, if they've taken cash out, they may quite likely be in a situation where don't have twenty percent equity. When this happens, people are going to either split their new loan into two pieces or pay PMI. Since holders of second trust deeds are not currently willing to go above ninety percent of the value of the property, if you're above that threshold, it's PMI or no loan. I've talked to any number of people in the past week who don't want to pay PMI, and that's fine, if they don't mind not getting the loan. It's not like you're shopping for produce at the market, and can pick and choose what you want. PMI goes with all first mortgages over eighty percent of value - it's banking regulations. Regulated lenders cannot lend on those conditions without it. Some lenders may camouflage it with lender-paid mortgage insurance, but you're still going to pay it. Lenders don't have to tell you about it at sign-up, either, and they don't have to disclose the fact that lender paid mortgage insurance is built into the rate they quote. But don't let fear of PMI control you - just add the additional costs into the computations of whether a particular loan is better than another, or worthwhile at all.

Other than these two issues, things are pretty similar otherwise. I've seen some people claiming that you should go up to forty-five day rate locks instead of thirty, but I must disagree. With underwriting times at five days, you should not need longer than a thirty day rate lock (or purchase escrow) if you and your loan officer have your act together. Purchase loans go through different underwriters at most lenders, and they have no right of rescission. Even in summer 2003, when refi underwriting was at 33 days, purchase loans were still getting turned in no more than four, and funded in two to two and a half weeks. Even refinance loans can still be done in under 30 days - if your loan officer submits a complete clean package to begin with, something there's no reason not to do in the case of a refinance. Furthermore, if you make a habit of submitting nice clean complete packages, underwriters will start cherry-picking yours out of the pile when they don't have enough work time left for a piece of garbage. You can't really control this or count on it, but it sure was nice to have the loan come back approved in three or four days, when the competition was taking four weeks. My median last year was seventeen calendar days from lock to fund - adding five days of underwriting only brings us to twenty-four (Don't forget the weekend), and that's forgetting that underwriting was talking a day or two even then. Longer rate locks are more expensive, so you don't want to pay for what you're not going to need. But you do have to have your ducks in a row from the beginning to make it happen.

Caveat Emptor

The San Diego Special Edition

I have to agree with Don Surber on the economic stimulus package.

Yes, there are people who are getting hurt by the mortgage meltdown. The stimulus package won't help those who are consumers. The ones who are corporations made a bet and lost. That's why they make the big bucks - because they're supposed to, in theory, deal with it themselves if it all goes wrong.

Those corporations made those choices in full cognizance of consequences. Far as I'm concerned, they can. Suck. It. Up.

Photographs are easily understood. Unless they've been altered, they tell truth. Unfortunately, they only tell that portion of the truth seen from that camera's viewpoint when the shutter clicked. Neo-neocon has a beautiful example of how photographs can be used to lie.

I was 11 in 1972. I remember the reactions to those photos. For one, I found out the real truth almost immediately. For the other, I was in college (late 70's/early 80s) when I found out what had really happened. In both cases, however, the editors of the newspapers involved knew the stories at the same time they got the photographs, and nonetheless used these two very famous photographs to twist their representation of those events in the furtherance of their preferred narrative. For me, It was an early education in the way smart people get others to believe lies: Tell the truth, but only that portion of the truth that agrees with your agenda.

Whatever our opinion of our current governmental mess, we can all give thanks to whatever we worship that we don't live in Yemen, as Jane over at Armies of Liberation covers their seemingly escalating civil conflict.

Jeez, keep people in poverty and under the oppression of a ruthless dictatorship for a measly thirty years, a mere half dozen or so stolen elections on one hand, turn a blind eye allowing religious nutcases to arm themselves and organize...

And you have a recipe for disaster like any number of others. You really want the litany? It just makes me even more depressed.

Every single one of the people of Yemen is a human being, with as much human dignity and value as anyone else anywhere in the world. That we don't have to put up with it and they do is nothing more than an accident of birth, and I am embarrassed and mortified that the people of the developed world have let it come to this pass, and that I among them haven't done more to shut it down. I weep that there is no way any of the so called "wealthy, developed" countries of the world is going to do anything to help remedy the situation, and that many of the very people who pretend to care the most about the downtrodden have caused this in the name of immediate political expediency. I am deeply sorry that the people of Yemen, once one of the more promising countries of the region, have been sold down the river one tiny bit at a time over the last six decades in the name of what was convenient at the time.

Words fail.

When are we going to face the fact that anyone living in a repressed state anywhere in the world is the problem of everyone else everywhere in the world in these days when one mentally imbalanced "revolutionary guerrilla" with access to the right weapons can potentially murder hundreds of thousands of people that have nothing to do with their conflict? There may not be any immediate solutions, but that's no excuse for allowing these problem areas to fester. Can't we at least adopt, "Set up the conditions to make it better. Never let it get any worse" as a working creed?

To all the "international realists": Your butcher's bill has come due. Again.

Jawa Report is asking for help getting some terrorist websites shut down. If you want to feel a little bit better about yourself after the above, take some action in the propaganda war against repressive murdering scum that are also trying to kill our soldiers and a few million-sized lots of us civilians, if they can.

Christopher Hitchens on bigotry in The Perils of Identity Politics

I have nothing but contempt for anyone who votes for or against anyone upon the basis of such superficialities as skin color or gender. It is just as bigoted to vote for someone because they are black or a woman or a giant three toed tree sloth as it is to vote against them because you're not. Please, can somebody kill this undead horse of an idea once and for all so we can all stop beating it? Otherwise, we're going to end up in a tribalized mess like the former Yugoslavia, or any number of countries in Africa, to name only the most obvious examples.

I am not going to vote for a bad candidate because "it's time" for a member of whatever group they supposedly represent to be elected. Any representation that doing so can in any way be represented as sane or rational behavior is pure Male Bovine Fecal Matter.

Captain's Quarters on "Politicizing the Office"

Or, to use the morality of an eight year old: "It's okay when we do it because we're the good guys."

That one won't wash with anyone past middle school.

Much much more at Judicial Watch (via Michelle Malkin

Unpermitted additions are popular in California because of property tax implications. You see, due to Proposition 13 back in 1978, taxable assessments are based upon purchase price plus no more than 2% per year since acquisition (although if you bought prior to 1975, it's based upon the taxable basis in 1975). Let me say that this is a very good thing, because someone who buys property today has a reasonable assurance they won't be taxed out of their property, something you could not say prior to the passage of Prop. 13, where the legislature had more than tripled property taxes in the three years before it passed. Indeed, Prop. 13 has been one of the background factors leading to the elevated values today. If you bought a property for $40,000 in 1975, your taxable assessment 33 years later would be a little shy of $77,000. In the open market, it would probably be about a $500,000 property, perhaps even $600,000, even with the market having taken its recent tumble. People who bought in the early nineties are sitting around $200,000 assessments for the same property, and even those who bought back around the time of 9/11 have assessed values of perhaps $300,000.

However, one exception to Proposition 13 is if you build an addition. New additions are assessed based upon the value it adds to the property when it is built. So in the case of the person who bought in 1975, expanding the living room or putting in a new bedroom could double the owner's property taxes. A new master suite could go much further than that. Building a second story to add multiple rooms could make your tax bill resemble a new purchase.

But if the county never finds out about it, and never updates their records, they don't make the new assessment, and the property taxes don't go up.

The way the county keeps track of all of this is via building permits. The theory is that anyone making an addition is going to get the proper permits, have all the inspections done, and happily pay their newly increased taxes.

Yes, I'll wait until you're done laughing, but it works out to be the intelligent thing to do, as we'll discover.

This is aside from all the usual headaches of dealing with your self-interested bureaucracy. Predictably, a lot of people decide that they will do anything they can to keep the county from finding out about that addition. No permits, no plans, no inspections, no bureaucracy, just do the work and enjoy the results.

Well, not quite. Licensed, insured contractors have legal and insurance based requirements to make certain any work they're involved in has all the necessary permits, inspections, etcetera. Go to Bureaucracy, Go Straight to Bureaucracy, Do Not Pass Go, Do Not Collect your nice little tax evasion. So this also encourages the use of unlicensed contractors, who as a group aren't precisely known for their unswerving dedication to high standards of construction and repair. Their work may or may not adhere to code, it may or may not do what it was supposed to, it may not continue to do so even if it does initially, and it may or may not even be structurally safe. Not to mention you're going to need Divine Intervention if someone gets hurt building it, or even on that portion of the property at a later time. Homeowner's Insurance companies have been known to be sticky about such details, and for excellent reason.

But if the county finds out about it, you've got all the issues you were trying to dodge right back at you with penalties and compound interest. I said if, but it's really more a matter of when.

You see, most folks want to sell the property at some point in time. When they sell it, they want to get a price appropriate for the property. They've got a 4 bedroom 2000 square foot property now, so the owners want the price 4 bedroom 2000 square foot properties are bringing in the market, not a 3 bedroom 1400 square foot price. When that happens, somebody usually notices that what they're trying to sell doesn't match county records for the property. It's one click on MLS to find out. The Era of Transparency bites everyone with something to hide. An agent I know told me he once asked someone in the assessor's office how they found out about cheaters. The answer? Mostly Real Estate Agents, but the context and way he told the story leads me to believe that the real answer is more properly "people unhappy with some other party to a transaction that may or may not have come off." It doesn't take much. Given even an anonymous tip, there isn't a judge in the world that's going to deny the assessor the right to investigate, especially given that you're on record trying to claim it had something more in order to sell it for a higher price. It's not like MLS records are private, or that the county assessor doesn't subscribe. Unless you've got some trick to make the extra room vanish when the tax man knocks on the door, they're going to find out the truth.

If the addition happens to be to code - current code that is - you can get a retroactive permit. The process isn't too horribly much worse than if you'd done everything legal in the first place. But you're still going to pay all those back taxes, plus penalties and interest.

However, it's rarely to current code. Building codes get updated all the time, and when you get a permit legally and dot all the i's and cross the t's, you almost always get grandfathered into any code updates along with everyone else. It was fine and to code when you built it, so unless it has somehow become unsafe, you're still cool as far as the code goes. I see stuff every time I go looking at property which couldn't get approved now, but because the permits were obtained, the work was done, and everything was legally signed off forty years ago, it's still legal today.

Grandfathering doesn't apply, though, if you didn't do things the legal way. It's the code now that's important, and if it's not to code now, they can and will make you bring it up to current code standards. This often entails completely demolishing it and starting over, or simply putting things back to the way they were originally, if anyone can figure out what that was. Whatever happens, you're going to have the county inspectors looking over your shoulder every minute until the situation is resolved, and the licensed contractor you're going to have to retain isn't going to have much sympathy for what you did to yourself without paying a member of his brotherhood (most contractors are male). Upshot: It's going to be a lot more expensive and time-consuming than if you did it correctly in the first place.

It can be, and often is, worse than that. If the addition is unsafe, if you don't bring it to code within a specified period of time, they can make you demolish it. Actually, they can make you demolish the entire structure if it's bad enough. Suppose there's other stuff done there that was legal at the time, but there were no permits needed then? Nobody believes liars and cheats, and that's you at this point.

Sometimes, the additions are not compatible with zoning, set back regulations, etcetera. In that case, they're coming out, end of story, and the entire structure may be condemned. Granny flats are one common issue that often impacts setbacks and or zoning. I may not like it, but it's not like I've been elected dictator for life. We've got to deal with the law as it is, not how we would like it to be. We can work to change it, but in the meantime, it is what it is.

Now, about buying such a property: Are you really comfortable plonking down your hard earned cash for a property where part or all of it may be at risk of being demolished, when (not if) the county finds out? Particularly the same price the your new neighbor paid for his fully permitted property? I don't think that's likely. Not many inmates of insane asylums are purchasing real estate, and when they do, they need to get their trustee involved. I can't see any trustee agreeing to it either.

There is one potential loophole: If you can show the property was as it is when you bought it, then the addition will be treated as part of the sales price, and you can potentially get forgiveness as an innocent purchaser, but it's still got to be to current code. See above for issues with that. There's a also time limit on this, usually two years is my understanding. The issue is this can be difficult to show without the cooperation of the former owner, who's going to be assessed for the difference, plus penalties and interest, and is therefore unlikely to cooperate! I understand there are other limits upon this loophole, but these are the most important ones.
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Even if you manage to unload one of these white elephants upon some unsuspecting fool, you're not in the clear. It can come back to bite you. I heard about one case not too long ago where the seller bought in 1986 and sold in 1999, and they swore it was like that when they bought, that they had no reason to suspect it was unpermitted. All to no avail. The judgment was rendered against them, and they're going to have to find the people who sold it to them to get any satisfaction in return. Good luck with that, especially if they're dead.

One final issue: In the era of make believe loans, anything went, but lenders are once again balking at lending at properties with unpermitted additions. In particular, they're not willing to lend based upon the current configuration, but based upon what's in county records if at all. As one lender fairly close to my office found out when they tried to sell their 1500 square foot lender owned property that the county records showed as 640, this can put the kibosh on the vast majority of potential sales. How good of a price do you think you're likely to get when the buyer can only get a loan for about fifty percent of value, and the lender wants to treat that as 100 percent financing? Result: It sat for eight months until a buyer came along with the resources to deal with it, and that buyer got a fantastic deal.

(Question: How many "get rich quick in real estate" seminars mention that most of the very best deals happen for buyers willing and able to sink a lot of cash into the property for the time it takes to deal with the issue that's preventing everyone else from buying it?)

in short, unpermitted additions are a landmine waiting only some random event to explode, and it can do so years after you thought it was no longer your problem. They can be good news for buyers with the resources to deal with them, but they can cripple your ability to sell the property, particularly for a good price. They can actually cause you to be forced to sell for a price below what you'd get without doing any of the work at all. Looking at the costs, I find it difficult to believe that anyone considering things rationally would willingly do this, but in looking at MLS and visiting 20-30 properties most weeks, I see a lot of hard evidence that not everyone thinks these things through.

Caveat Emptor

Article UPDATED here

There's really nothing mysterious about this. There are some subsidiary tricks and issues, but the most important thing is obvious. The economic games theory is crystal clear, as is the research into what really happens. But most people don't like what the theory says, and think it somehow doesn't apply to their ego wonderful property.

Price the property correctly in the first place.

Negotiating strategies are variable. In seller's markets, your optimum marketing and negotiation strategies are far different that in buyer's markets such as most of the country has right now. But every optimum strategy, in every market, starts with the same piece of advice. Price the property correctly from the moment it hits market. That price won't be the same price it would have been six months ago, and it won't be the same price it would be six months from now. But just because it changes over time does not mean there isn't an optimum price now, and now is when you're trying to sell it.

A good listing agent can keep you from under-pricing the property, and can keep you from giving away the farm or losing the sale in negotiations. But nobody can reliably get you more than the property is really worth, and the attempt is almost certain to end up costing you lots of money.

Here's how things work if you price the property correctly. You put it on the market, you get people coming by to view it because they can afford it and the basic numbers fit. If middle class properties are priced correctly, you're going to get offers within the first two weeks - probably more than one, even in the buyer's market we have going right now. You all negotiate in good faith, you reach an agreement with one of the prospective buyers, you go through escrow in 30 days or less, and within sixty days the property is sold.

But when you over-price it, here's what happens: When buyers compare your property to the others that are available and competing with yours, yours falls short. Result: They make offers on other properties, not yours. It's as if you wanted to sell a $20 bill for $50. Guess what? It's precisely the same situation with a different commodity.

Time goes on. You spend money on the mortgage, the property taxes, the insurance, and the upkeep. Plus any number of other possibilities, for instance if there are HOA dues. Even if there aren't, let's consider a median sales price in the zip code my office is in: $390,000. Let's say you've got a loan for eighty percent of the value at 6%, pro-rated property taxes at 1.25%, and $100 per month for insurance. You paid $1560 in interest charges for one month. That's cash, right out of your checking account! I don't count the cost of principal because you're paying that to yourself, but pro-rated property taxes would be slightly over $400 per month, and add the $100 per month for insurance and you're well over $2000 that not selling for that month actually cost you, plus the phantom of another couple hundred dollars principal out of your checking account that you're essentially giving the bank to hold for you until the property sells - unless that extra month decreases the eventual sales price, which it will. It's worse than this if your property is highly encumbered, or caught upon the fact that prices are receding in most of the country. That $390,000 property today would have been $500-$520,000 at the peak of the market, and lots of folks were buying then and are discovering now that those prices weren't real. So if your property doesn't sell for 4 months (the average days on market locally), that's nearly $10,000 out of your pocket that you're not getting back. Actually, it's worse than that.

Your period of highest interest is right when the property hits the market. The longer it's on the market, the fewer people will come by. The buyers who already looked have already made their comparison and decided they're not interested. The buyers who are new to the market will see that it's been on the market for thirty, sixty, ninety days or more and wonder "What's wrong with it?" The larger the "Days on Market" counter goes, the less inclined they will be to go view the property. Remember, at this point it's all numbers as far as the buyers are concerned. You can stage the house, paint it, remodel the kitchen, replace the carpet, landscape the yard, and nobody will notice because these don't translate to attention grabbing numbers. The property is what it is, has what it has, and the counter is ticking up, and every day this property sits . The only number you can change to induce people to come back is the asking price, and guess where it has to go? That's right, down. At this point, you have to give them a reason to come back and look that has its root in numbers. If you're now the cheapest property in your class in your area (or more precisely, the lowest asking price), that has a good chance of working. Maybe if you're now the second cheapest, you'll get a smaller amount of interest. But if there are still a significant number of lower prices in your class, this won't work. Nobody comes back to look at the 18th cheapest 3 bedroom home, even if there are 1000 others in the zip code, despite the fact that these numbers say you're in the best 2%. You've got to be priced significantly below the market to drag people back, where you didn't have to be nearly that low if you priced it correctly in the first place. Furthermore, attempting to negotiate the price back upwards is extremely unlikely to work. People came to look and made an offer based upon your implicit representation that the asking price would be an offer you'd be happy to accept, and if that turns out not to be the case, expect them to walk away no matter how hot the seller's market.

Tricks exist to reset Days on Market, of course. The various MLS affiliates are wise to most of them and getting better at catching them. Not to mention that the buyer's agent is going to check back and see if it's been on the market anytime recently, if they don't happen to recognize it off the top of their head. Listing Agents are becoming correspondingly more reluctant to play games to reset that Days on Market because they can lose the ability to place properties in MLS altogether. Buyer's agents are tired of this game, and many of them are perfectly willing to put their competition out of business by bringing their malfeasance to the attention of the MLS operator. I haven't done it yet, but I'm becoming more tempted in a couple of cases.

I see a lot of nonsense put into MLS by owners, and by agents who know better about how high the automatic valuations, CMAs, and appraisals for a given property are. These are all worthless. For one thing, this data can be manipulated, and sellers have just a little motivation to want it manipulated in their favor. More importantly, none of these influence sales price, and representations that they do or should is worthy of ridicule. What influences whether you get any offers, and from that, sales price is how good of a deal prospective buyers think they're getting, which in turn flows from the asking prices for comparable properties, as well as recent sales. If there's only two properties available for sale in the Zip Code that thousands of buyers want, sales prices are going to be increasing rapidly. Reverse this if the opposite situation applies. Incidentally, these are reasons a buyer's agent needs to be a fount of information on both the attractive points and the not-so-attractive ones.

With this information freshly in mind, what does all this say about the competence and ethics of an Agent who accepts the listing at a too-high price "to see if we can get it"? Nothing good. They're deliberately inducing the seller to harm themselves in order to get that listing. It's hard to put a monetary value on hurt feelings of betrayal when the agent starts pressuring them to drop the price the instant they have the signature on the listing agreement, but for a lot of folks, that's even worse than all of the cash it's going to cost them.

Lest anyone mistake me, this is no way relieves the need for an agent, and a good one. How many of the comparable properties that sold in your area in the last few months were you in? How familiar are you with all of the competing comparable properties? Try and put it on the market without that knowledge, and you're basically spinning the roulette wheel as to whether you're in the right ballpark, price-wise, with completely predictable downside if you're not. Who's your target buyer? What are the effective ways to attract their attention to the property? How to convince them they need to make a better offer? I guarantee that buyers don't care about "what you want to get" for the property! If real estate were easy and obvious, anyone could do it about as well as anyone else, and that is definitely not the case. Finding a good agent isn't trivial, and their pay isn't what most people think of as "cheap" but it will more than pay for itself in time and money.

The attitude of the seller is also critical. Sellers that expect to be treated like royalty are royally hosing themselves. If everything has to be convenient for you, you won't get as good a price as if you make everything convenient for the buyer, and in buyers markets, it often makes the difference between a good price and not selling at all. What are you willing to do in order to sell your property, to make it more attractive to buyers with special issues? Especially, what are you willing and able to do if it will get a higher price? Being willing and able to offer things that other sellers are not is an excellent way to appeal to buyers with special needs, perhaps even to the point where they have a choice of your property or none at all, no matter how many properties are "for sale" where the owner can't or won't. Do you think that might induce someone to offer a good price? To use some examples I've encountered recently, are you willing and able to carry back part of the purchase price? That's one way to give yourself an advantage over competing properties in any kind of market. Are you willing to work with someone who has a need for immediate occupancy? Can you carry the property for an extended escrow period if you're properly compensated for it? A good agent can use all of these, and others, as wedges to get the property sold, sooner and for a better price, but they can't do these things for you. You have to be willing and able to do them.

There are a few other things: Have the property ready to show before it hits the market, do what you can to enhance visual attractiveness (it's amazing the difference polishing furniture that's going to leave with you can make!), and especially make showings absolutely as easy as possible. It's a better sales tactic to get the family heirlooms and other valuables out and type, "Just Go!" in the showing instructions than just about anything else (although "5 minutes notice so we can leave!" is even more effective), and permissive or restrictive showing instructions can make all the difference. If you've got tenants in the property who want 24 hour notice, you're in a world of hurt in a buyer's market, and even in a seller's market you're going to find that your traffic and final sales price will suffer because of it.

The asking price should take all of these factors, and more into account (and almost entirely as subtractions from a theoretically perfect sales situation), but choosing an optimum or near optimum asking price in the first place will make more difference than anything else, because the money a seller ends up with is about the time it takes to sell as well as final sale price.

Caveat Emptor

Article UPDATED here

Carnival of the Capitalists. Looks like Bizosphere has come to a similar conclusion I have as regards Consumer Focused Carnival of Real Estate

Recommended: A post summarizing mortgage securities from Econbrowser. Nothing that regular readers shouldn't be familiar with (indeed, I've gone into greater detail on some points), but worth reading for dealing with it all in one place.

A worthy discussion of rational libertarian views versus irrational ones over at Q and O

I have no use for anyone who substitutes jingoism for thinking a problem through, even if they might happen to agree with me on some subjects. Dale's done a good job of thinking it through. The people complaining to him (about his voting as a juror to convict a drug trafficker), not so much.

Note to politicians: A telephone is a two way communication device. When my phone rings, I expect to be able to hold a conversation. You are, after all, asking for my attention right now. Using automated message delivery frustrates this. If you just want to send me a message, use mail - whether electronic or snail. Believe me, you're better off if I drop your message in the trash unread or consign you to the email blacklist than when I get a phone call from a machine. It wasn't for nothing that people demanded the Do Not Call list, and nobody likes political calls any better than telemarketers. It's not like you're not after my wallet just as much as they are, if not more. Just because it's not illegal doesn't mean you have to be that stupid yourself. Just sayin'.

Looks like Romney finally won one. Of course, he's from Michigan originally, his father was governor of the state, and he heavily pandered to his audiences in the state, which his major competition (John McCain) declined to do. Furthermore, the weather was reported as being bad in most places, bad enough to keep the independents McCain was hoping would cross over home. If Romney hadn't won under such circumstances, it would be time for him to go home. As it is, a 39-30 victory allows him to stay in the race, but it isn't as strong as he should have been under those circumstances.

I've decided Romney ranks behind John McCain, ahead of only Ron Paul and Mike Huckabee on my current list of Republican preferences. Judging Romney by his record (MassCare and electoral pandering are only the most salient), I might even vote for Hillary if she appears on the ballot opposite Romney. At least everybody knows she's the enemy of fiscal prudence and civil rights and individual responsibility. But with her only winning by 15 points over "None of the Above" since her supporters kept Obama and Edwards off the Michigan ballot, it's looking less likely she'll even win the nomination.

(My first choice at the moment is still Fred Thompson, followed by Rudy Giuliani, then Duncan Hunter. John McCain would still get my vote over any of the current crop of Democrats, but I'm not so sure the same thing can be said for Romney. Huckabee, who seems to be running upon his credentials as a minister, is Right Out for that reason as well as his record in Arkansas. Obama talks a good game right now, but his record indicates his real sympathies are elsewhere. Edwards is a false-populist demogogue in the worst tradition of Elmer Gantry, albeit with false populism substituted for religion. Ron Paul is as crazy as "Mad Cow" Kucinich, and the only thing we'd accomplish by electing either one is making Jimmy Carter's record as president look good, because there's no way they could lead Congress or the Courts where they want to go, and that is a requirement for a successful presidency. After about two months, even if it was a national emergency, Congress would be trying to figure out which of half a dozen congressional plans they'd enact, instead of anything proposed by either one of them)

the guidelines for this carnival.

As always, I arranged the entries that met guidelines into three levels, based upon originality, usefulness to the consumer, and how much thought and effort and research went into an entry.

ANNOUNCEMENT for the carnival: Effective with the next Carnival, I'm going to start a "Spam and Other Ridiculous Submissions" section. At the host's discretion, there may or may not be an actual link to a site (it all depends upon the host's judgment as to whether the public shame will offset the search engine value of the link), but I'm going to mercilessly flay the ideas. The guidelines have been updated.

I'm just tired of getting the same things that are solicitations for business based upon ideas that are incorrect, poorly researched, and often, just plain wrong. I'm not intending to use it for anyone that I believe might have been made in good faith with attention paid to the guidelines, but the submissions I've been getting just cry out for some kind of answer. You're willingly submitting this garbage, or having your agent do so. Deal with it.

There were no "Strongly Recommended" articles this time, and therefore, no Host's Choice Award.

RECOMMENDED:

From Canada, Reverse Mortgages warns about a very real threat. The math very strongly favors downsizing over Reverse Mortgages. In the United States, if you must do one of these, please look for one that meets FHA guidelines.

Mortgage Loan Calculator gives us a few basic flaws with Rent to Own from a buyer's standpoint in Do Not Fall for Rent to Buy Mortgage Loan Schemes, but what he's really talking about is Lease with Option to Buy. With a little more work, this could have been a really excellent article, but it's worth reading as it sits. There are problems with Rent to Own, even though they are surmountable. Nonetheless, it's a good idea to know what the problem areas are.

Boozwatt presents How To Estimate & Determine A Property's Value Accurately!

You host submits Real Estate Agents and Mortgage Loan Officers Don't Want to Compete, and covers why you should make them do so.

MET GUIDELINES

Understanding Closing Costs

Consumer Focused Carnival of Real Estate will return in two weeks (January 30th, 2008), here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be January 28th.

It's the same reason the phone company doesn't want to compete, General Motors doesn't want to compete, Wal-Mart doesn't want to compete, Disney doesn't want to compete, and Microsoft will do everything in its power to appear as if it doesn't have to compete. They make less money when they have to compete, and they have to provide a better quality of product.

But people know that all of the above have competitive alternatives. If you don't like one brand of automobile, there are dozens of competing alternatives. Ditto retail outlets. "Kid safe entertainment" is a bit more of a niche market, but there are competitors if you'll look. Finally, we should all be aware that computer OS's are one of the biggest Drazi Wars there are. But there is competition.

But many agents and loan officers make their living by pretending there is no competition, or by actively manipulating consumer choices to preclude the possibility of competition. This takes many forms, from requiring large deposits for loan officers through exclusive agreements with agents. There's nothing fundamentally evil about this - everyone needs to make a living. But there's nothing that says any particular consumer - by which I mean you - has to put up with it. Furthermore, the agent or loan officer who is confident enough to work without these devices is likely to be a better, stronger practitioner. Ask yourself who you'd more easily believe has more on the ball: Someone who tries to keep you from considering the competition, or someone who's happy to compete? If you were interviewing two applicants who want to work for you, who'd be more likely to get the job: The person who walks out as soon as they find out you're considering someone else as well, or the person who gets their act together and out-competes the other applicant? If you were interviewing with two companies who wanted to hire you, which offer would you be inclined towards: The one where you have to hide the other interview, or the one who's willing to compete head-on for your services?

Nobody's going facilitate competition for the job they want. Nonetheless, it is to your advantage to force them to compete. If you don't understand why, consider that for all the griping about various phone companies, the situation is far superior to what it was when there was only one. Here's a particularly poignant reminder of that era.

Here's the facts of the situation: If you're only going to talk to one provider, they can quote you anything they want. There is no check upon the situation. If I were the only loan provider in California, I could charge anything I wanted. I'd auction my services to the highest bidder, work a couple hours, one day a week, make as much money as I wanted and go on to spend the rest of the time having fun with my family. If anybody didn't like the level of service, that would be their problem. But that's not the case. In fact, the further it is from being the case, the harder I have to work, the less money I make per transaction, and the better the service I need to provide. It's also the case on the voluntary level, which is to say if you voluntarily restrict yourself to one potential provider, as well as the involuntary. It doesn't matter how many loan providers and real estate agents there are, what matters is how many you talk to.

People in the real estate business get told all the time that the way to success is to avoid competing, especially to avoid competing based upon price. If ever a week has gone by without some clown wanting to charge me a thousand dollars to learn how to avoid competing on price, or avoid competing, period, I certainly can't remember it. They work, by and large, on two levels - pretending you're the prospect's friend while engendering fear of the competition. "You know I'm your friend, George. You know there are sharks and cutthroats out there who will take your money and leave you high and dry, but you know I won't do that, George." And there are sharks and cutthroats out there. The guy talking to his pretend friend George here is one of them. This is the way he talks George out of checking up on him, comparing his services and prices to either objective standards or to any other provider's. Nor are women any superior - in fact, I've had a report of one of the worst sharks I'm aware of preaching a "female solidarity" line of attack to cut out her competition. Other sharks attack via ethnic or religious solidarity, or even political similarities. What these have in common is that none of them have anything to do with competence at real estate, and they may not have anything to do with conscience. I've seen people preaching the gospel about taking care of your fellow man while extorting thousands of dollars from their client's pockets. Newsflash: The sale of Indulgences went out with the Reformation, and for good reason, too. I'm certain it happens with other religions, as well, it's just that there's fewer members of those religions around.

One of the ways I constantly see this abused is even people who should know better advising their readers to "ask someone you trust for a referral." Well, referrals are great - if the person making the referral knows what they're talking about. If they don't, it's just another goat lined up for sacrifice, willingly led in by the previous victim, If not worse. Here's an article from just a couple days ago (HT: FraudBlogger.com, who always has a relevant example of bad behavior handy). No matter how trusted the source, it still needs to be fully vetted - you need to do your own due diligence, and part of that is comparing them to some other potential service providers.

There just isn't any valid advantage from the consumer's point of view to forking over a large deposit or the originals of any documents to a loan provider. They don't need originals, and the only thing that large deposit does is give them some money to hang onto if you find a better loan. All of the better loan providers I'm aware of work on the basis of "fees at point of service," not requiring a deposit in advance. In fact, a cash deposit can induce people to accept loans that are many times the amount of the cash deposit worse than other, available loans. People understand that check they wrote out of their account is real money, where most of them are a little bit hazy about loan costs paid by rolling them into the loan balance. I saw someone pass by a loan I had that was four thousand dollars cheaper up-front and would have saved them $1000 per year they kept it because another lender already had a $1500 deposit from them. Here are a few more pointers on shopping for a real estate loan.

Admittedly, I have come to the reluctant conclusion that it is in the consumer's interest to list their property for sale via an Exclusive Right to Sell. However, this doesn't mean you shouldn't shop agents extensively before you sign on the dotted line. This only means that you're going to make that commitment to one agent once you have done that research. Failing to do so risks locking your property up with an incompetent agent. When you ask "what's so bad about that?" ask yourself if you'd be happy taking ten to twenty percent less for the property (or worse!), after you keep paying the mortgage six more months? Around my area, with the median sale being $423,000 last month, and assuming a loan at six percent on eighty percent of value, not only does signing up with someone who can't get the job done cost you $42,000 on the sale, it'll cost you about $2200 cash for every month that property doesn't sell! Realize it or not, you're risking a lot of money on an agent, and just because you're not writing a check to them directly at sign up in no way changes this. However, I don't advise going with the agent who asks for a short term listing, either. That's an appeal to cowardice - decide by theoretically not deciding, and make no mistake, you are deciding when you sign a listing agreement for any period of time. This isn't to say you can't bargain the time for commitment down if you're willing to take a chance on a less experienced agent - it's just saying don't decide by pretending not to make a decision. That way lies disaster. Here are a few more tips about Shopping for a listing agent.

For buyer's agents, there really isn't a reason for an Exclusive Agency Agreement, except to allow an agent to wrap up your business for whatever period of time. There isn't hardly an excuse. The only place I can see it being an effective alternative for the consumer is if they're working the foreclosure market, and that agent is spending the money for all of the "quick notification" services so that the client doesn't need to. But the vast majority of the time, agents are locking in people who simply don't know any better with an exclusive agency agreement. I've seen listing agents who wouldn't show a property without an exclusive buyer's agency agreement - a clear violation of fiduciary duty to the seller, not to mention a huge Conflict of Interest if they actually want to put an offer in on that property. Non-Exclusive Agency Agreements protect the buyer's agent just fine, but they also give you the right to fire non-performers by just not wasting any more of your time. You can also use them to separate the wheat from the chaff among buyer's agents. Sign any number of Non-Exclusive agreements you want. The good agent will still do their work; while the lesser agents will select themselves out. While we're at it, here's a few more tricks to finding a good buyer's agent.

Agents and Loan Officers don't like this. It means they might not get the business when they're exposed for the buffoons that some of them are, and it means they might not make as much money for the time they put in. Nor is exercising your choices as an informed consumer simple - far from it. You also need to consider what agent services are worth how much to you. But considering the average price of real estate around here, and the cost of the loans that most people need in order to buy, doing proper diligence beforehand will save most people more money than they make in a month - perhaps more than they make in a year, possibly more. When you consider the differences in that light, the hourly pay for doing your due diligence about agents and loan officers and forcing them to compete is absurdly high.

Caveat Emptor

Article UPDATED here

Carnival of Personal Finance

I don't often link or even read "aggrieved relatives" letters, but Armies of Liberation has one worth making an exception for. A letter from Gary Swenchonis, who was the father of Gary G. Swenchonis Jr, murdered on the USS Cole in Yemen. It's damning.

(it's also cross-posted at Jawa Report, which is a general anti-terrorism site worth reading)

What is the biggest concern amongst financial advisors right now? The sub-prime meltdown? The housing downturn? A possible recession? No, no, and no. It's a Democrat in the White House

"[Departing from] the Bush administration's approach to taxation will have a large impact on advisers and their clients," said John E. Coyne, president of Berwyn, Pa.-based Brinker Capital, which manages $9.4 billion in assets. "When taxes begin to erode returns, equities remain less attractive."

This doesn't just influence financial advisors' standard of living, you know.

Separated-at-birth twins get married

Nope, wasn't talking about the Clintons. These folks weren't even from Arkansas!

Private Papers has a review - from a historian's viewpoint - of Jonah Goldberg's new book.

The. Truth. Hurts. (in ways that lies cannot)

Why Comments here require login:

I had sent email to my hosting service asking why pages were loading so slowly (the main control panel and email pages were the worst - my browser was timing out half the time - but it impacted basically every page on the site)

Here is the response I got:

There are repeated passby attempts of spammers to hammer away at your comments script. A look at the overall resource usage on the server indicates that your site is actually the highest in terms of usage. We do, however, want to move the site to a beefier server of a higher specification than DELETED (and brand new, since we just set it up last week) to see if that will take away some of the load created when the spammers make their runs through the sites.

By the time you're reading this, the change should have been made, completely transparent to the readers. I may have to modify a bookmark or two.

Between the two sites, I've been averaging 2000 to 2500 actual human visitors per day and less than 30,000 total page views even counting all the bots and search engines. It's all text, so I'm not even averaging a Gig per day bandwidth. But spamster scum and their bots evidently really want to put links to all the usual spam here. This site is not THAT big. Okay, it's not as far out "the long tail" as some, but still, even if they were to succeed, I'd rip it down next time I looked at comments (every day, usually more than once. How about a few more folks speak up?)

(I told them what my bandwidth usage was when I signed up with them, and I have yet to equal the bandwidth I used in July with the previous hosting service).

FYI: the Guidelines for Consumer Focused Carnival of Real Estate have been amended, adding the following:

"UPDATE: (January 11th, 2008): I am so tired of getting the same crud time and time again that effective with the submissions for the Carnival for January 30, 2008 (everything submitted after January 13th, 2008), I'm going to be starting a section entitled "Spam and Other Ridiculous Submissions" There may or may not be links, depending upon whether the host believes the public shame will offset the search engine value of a link in a given case. I'm just tired of getting the same things that are solicitations for business based upon ideas that are incorrect, poorly researched, and often, just plain wrong. I'm not intending to use it for anyone that I believe might have been made in good faith with attention paid to these guidelines, but the submissions I've been getting just cry out for some kind of answer. You're willingly submitting this garbage, or having your agent do so. Deal with it."

(Yes, I know it's been a while since I did a full article outside my specialty. This one just flowed out)

You know, even as often as the candidates use the word "change", I'd be okay with it if they told us precisely what they want to change in the same breath. If they're really for changes the public wants, they wouldn't have a problem with this. If, on the other hand, the change they want is stuff like more privilege for politicians, more bureaucracy, more government control over individuals, I'd like to find out about these things before I cast my primary ballot on February 5th. I'm not voting for anyone who says they represent change without saying precisely what changes they want to make. There's a lot of things I'm happy with about this country and don't want to see changed. There are many more that, as bad as they are, could be made a lot worse, and are likely to.

When I hear a new program proposed, I want to know how they propose paying for it. Who are they going to tax to pay for this, or what other program are they going to cut? Much as I think the budget is too big, I want to know what cuts the various candidates want to make when they say they want to cut it. Not that I think there's a lot of programs that it's not worthwhile to cut so the people who pay taxes keep more of their own money, but I think it's important information to know. There may be people that don't agree with me on the ideal size of the federal government (small enough to drown in the bathroom sink), and they're entitled to the information. That way, whatever candidate gets elected, there's no crying that he or she didn't campaign on the issue and acknowledge the costs.

So far, precisely two candidates that I'm aware of have gone beyond the cult of personality and given the public some specific plans for what they would do if elected. Rudy Giuliani has done a considerable amount of this, but Fred Thompson is the current front runner in detailing specific plans. No coincidentally, they're the only two who could claim popular support for specific ideas if elected. Not to mention that the voters would have vetted the consequences of those plans as well.

Also not coincidentally, they're at the top of my "likely to get my vote" list on February 5th, and both are lagging their former support in the polls. It isn't surprising to anyone above the age of eight that it's more popular to run a "promise the moon, but don't mention how we're going to pay for it" campaign. Easier to get elected when entrenched interests don't have concrete reasons to oppose you. But by the time you get to voting age, you should be conversant with the fact that government programs don't magically pay for themselves. Before adults tell the salesperson they've got a sale, we want to know and agree upon the price we're going to have to pay.

One instance of collateral damage from our current legal system.

My wife would have loved an effective morning sickness pill, such as Bendectin is supposed to be. Her morning sickness with our first was something awful. But she couldn't, because lawyers and people looking for jackpots and scapegoats caused the manufacturer to remove it from the market in the United States.

The "first listed" plaintiff against Indiana's Voter ID Act is registered to vote in Florida.

She has a Florida Driver's License.
She has homestead exemptions in two states. The legal limit is one. Two is tax fraud, as well as the voter fraud she committed.

She represented herself as a Florida resident in order to get a Florida license and Florida property tax exemption, and willingly registered to vote in Florida as well as surrendering her Indiana drivers license as part of the process. Then she wonders why her vote is challenged in Indiana.

Time to have the property tax people pay her a visit for tax fraud. As well as introduce evidence that this law has actually prevented voter fraud in the case of one of the plaintiffs against it.

She claims she never voted in Florida, which isn't directly answered yes or no in the article, and therefore am inclined to give her the benefit of the doubt. But I doubt that all Snowbirds shared her restraint. I seem to recall more than one call on leftist sites for snowbirds to vote in two states back in 2004. Even if they share my views, nobody is permitted to vote twice, or even register in two places which renders such voting easily achievable. State voter registries are not set up to catch people registering in multiple states. But here's one who has now been stopped. And a tax cheat frustrated as well. I'd say that's two benefits from one law.

Nor do I see anything in common with the old Jim Crow "keep the black folks from voting" Poll taxes (together with grandfather laws, the origination of the concept).

Fare the well, Sir Edmund Hillary.

He seems to have done an awful lot of good with his fame.

He will be missed.

Thanks to Don Surber for his link to my article on the future of agency!

I just haven't felt much like writing these past couple days. I have lots of ideas blocked out, but nothing inspires me right now. Mind you, Wednesday's article was a monster. I've also been playing a game of Stars!, which is quite time intensive (it's only a few Meg - not much for graphics, but for someone who likes high level strategy games, quite addictive, and available shareware). Maybe I'm just a little burned out, and will feel like writing in a few more days. If you've got any questions you'd like to see addressed, now might be a good time to ask!

Expertise and attitude, not control of an informational chokepoint, is the way that things are going.

Let's analyze this from both sides of the problem. The current owner looking to sell really needs a marketer. For better or worse, most of their choices have been made; their main dilemma reducing to how to get rid of the result of those choices in the most effective manner. If I were Ambrose Bierce, I'd say their problem was how to convert their mistakes into cash, because they have that property, and they want is the person willing to pay largest amount of cash possible as quickly as possible. It's worth what it's worth; mistakes and omissions can cost them a huge percentage of what the property might have sold for but it's unlikely that even the best marketing program is going to sell the property for more than it's worth. Here's a beautiful explanation why.

It's the buyer that has more need of an all-around expert on housing. They have cash or the ability to get it via a loan, and the want the property that best meets their needs for the lowest possible price. Note that nobody has an unlimited budget; despite all the attempts to pretend otherwise in the era of Make Believe Loans. Even if you're wealthier than Midas (Which many of the wealthy are, if you really think about it. Gold just sits there - it doesn't produce more wealth), you have to accept some constraints upon the property you decide to purchase, and knowledge of how those constraints compare to each other and how they work out down the road can keep you from being in the situation I joked about above, of needing to convert your mistakes to cash, later on.

But the current business models are all built around listing agency. Especially, the large nationwide chains and huge brokerages. Ridiculous as it may seem upon sober reflection, people do approach listing agents about buying property, especially the ones they have listed. I've written more than one article covering how Dual Agency is an invitation for disaster, especially for buyers, as have others, but still it happens. It's not like it's risk free for sellers, either. Some agents do get listings primarily for "buyer bait" and lose their best bait when the listing actually sells, and that's fairly benign compared to some other things that really do happen. The entire current model of agency is built around listing, with only minor exceptions around the edges, and it's mostly oriented on the big name national chains with ongoing advertising campaigns. Those chains control pretty much everybody from the NAR on down, and through the NAR's ownership of MLS. Due to the way the business is structured, It's very hard to succeed in real estate without listings, and it's much harder for independents to get listings than it is for the major chains. This is going to change, at least to a degree and possibly completely.

This whole set-up is a holdover from days when agents and brokerages could control access to market information. I shouldn't need to say this era is over, and the agent (or brokerage) that pretends they are entitled to three (or six) percent commission for access to the market is doomed, but the NAR seems to be leading the charge off the cliff, most recently with the move towards requiring agents to have hardware "dongles" in addition to a user ID and password to access the various local MLS services. They justify it as security, but what they're really trying to do is "protect agents from themselves" by making it difficult to share their MLS access with outsiders - attempting to control information. Where 99% of the information needs no access to MLS in order to obtain, this is ridiculous. Note to NAR: Most real estate information is public record, and can be obtained these days by visiting the appropriate county website. A lot of it can be retrieved automatically, via what we called "batch file" thirty years ago. There are dozens if not hundreds of places to obtain information on properties for sale, and a goodly percentage of them do not have their sources in MLS. Therefore, trying to justify what you make by creating an artificial information chokepoint is not going to succeed - all you're going to do is succeed in encouraging alternate pathways to the information.

There is no reason why any given local MLS can't have competition. The NAR doesn't own the concept - only the name. There's no reason why some smart techies can't set up their own service in competition, national or local, supported by whatever mechanism they can get to pay their bills. Furthermore, agents (Realtor or not) will line up to submit their properties to any competing service - it's fiduciary duty, after all. It's only the non-existent policing efforts of most such sites that have prevented them from taking more market share from official MLS affiliates. When this changes, so that a member of the general public can read a listing advertisement on competitor A and have some confidence that it represents a real listing, these competitors will lose most of their handicap. If I had a dollar for every time a client called me asking why I hadn't shown them this wonderful bargain they found on a non-policed site, I could pay my office rent for a couple of months at least out of it (Buyer's agent recording 2201: "Because it's not a real listing - it's someone chumming for leads, and to avoid wasting your time with salespeople advertising things they haven't got is a very small part of why you hired me"). It is only this lack of policing that is holding the competition back now. But sooner or later, those that are trying to be destination sites will figure it out. When they do, you can kiss MLS' dominance goodbye, and with it any illusions as to holding an information chokepoint.

Eventually, people will be able to put their properties on the market by going to a website and entering the information, or calling a toll free number if they're luddites. They'll need to show they are authorized to do so, but that will be the essential nature of the process. Buyers will be able to access the information for some very nominal price, like putting up with advertising or paying some nominal fee. That's where we're heading; the only items in doubt are how long to get there and what the exact pathway will be. Agents are in no way mandatory to this process of putting a property for sale on the internet or finding out which properties are for sale on the internet. The only way to survive and prosper as a profession will be to provide expertise that the average person has little to no opportunity to acquire. In other words, really learn things such that buyers and sellers of real estate can make a profit (or avoid a loss) by paying you, and make a living selling that expertise, not access to the system. Question 1: In the general economy, are there fewer expert consultants today than thirty years ago, or more? Question 2: Do the good ones among them command lower fees (even adjusting for inflation) or higher?

The issue lies in convincing people your advice really is that good. Holding an information chokepoint won't do it, and the chokepoint is going away within the next few years. But knowing what to make of that information is an expertise for which well-informed clients will pay and pay well, knowing that they'll be passing along those costs (along with a hefty markup) to those too stupid to pay. In other words, we've got to demonstrate and emphasize the fact that our compensation is an investment that returns more than it costs.

I'm not going to be saying listing is easy - it isn't. I learn more about the listing game, and how much more there is to learn, with every one I list, and not infrequently, I learn something important about listing from working the buyer's side (and vice versa, as well). As I have said in the past, I figure I'll have it completely down sometime in the next century or so. That said, the future of the listing game is easy enough to predict: How to make this property stand out amongst all the others, and how to attract the attention of the buyer who is suited to the property. Every property is unique; but for the vast majority of all buyers, there is a substantial list of properties that will serve their needs about as well. If you're any kind of a decent listing agent, you're going to be able to answer the questions of why this property is worth more to that buyer than the alternatives that are cheaper, and why the alternatives that are more expensive aren't worth the extra, secure in the knowledge that if they don't agree, they aren't the right buyers for this property and another set will be along shortly who are. If you're a top-of-the-line listing agent, you can do this without ever meeting prospective buyers. The seller's problem reduces to how to attract those suitable buyers, and the value of the listing agent to sellers lies in getting them a better offer sooner (Hint for those consumers reading this: It's not agreeing to list the property for a higher price! That's actually counter-productive on both counts).

That said, everything the listing agent needs to know pales beside what a good buyer's agent needs to take into account. I doubt I or anyone else will ever have the buyer's game completely down. It isn't that I know everything or will ever be some sort of shining exemplar of buyer's agents; I'm simply one of the best that happens to be available. I look at between 20 and 30 properties most weeks, every week of the year - 1000 to 1500 properties per year - and I learn new things pretty much every time I go looking. I learn things about the clients needs and desires by listening, and keep on listening. The future of the buyer's agent side is making sense of the information overload, debunking bogus information which lazy sellers and listing agents insist upon proliferating, and sorting better alternatives from those not so good, including knowing how to spot a Vampire Property. This starts at learning what a given buyer's priorities and needs are, and figuring out what areas they may be happy in and can best afford, and going from there to making comparisons between available alternatives.

In neither of these alternatives is simply having your real estate license and NAR membership certificate up on the wall going to help you extract an agent concession, particularly a larger one as opposed to a smaller. That license may get you in the door at the dance, but it's not going to fill your dance card. For that, you've got to bring something real to the situation, and the one thing clients are after, and always are going to be after, is expertise. Access, they're going to be able to get anywhere, but someone who really understands what's going on in this hugely complex transaction involving debt that most people are going to be paying for the rest of their life, and distills the specifics into something these clients can understand. Furthermore, agents relying upon chain affiliations to bring walk-ins to their door? The days of that happening are numbered, and the number is no more than the number of days until someone puts their ducks in the row to really compete with the MLS.

You're also going to need the right attitude. People are getting better and better at identifying shills. Even if you've got an exclusive contract, which are going to become more scarce, even those aren't forever and the chances of an agent being able to enforce it in spite of whether they helped an actual transaction or not are shrinking faster than Lily Tomlin ever did. Whether agents like it or not, it's becoming easier all the time for consumers to walk out on contracts with losers who conned them into exclusive contracts. If you want people to keep working with you, you need to demonstrate that this client's good is the most important thing in your world, and that's not something anybody can fake for very long. If they understand this and the expertise you're bringing to the table, they'll stick with you by choice unless they're con artists or agents themselves. I had one client in last year who admitted they'd been planning to ditch me for a part-time relative and decided not to because I was providing things they knew the relative wouldn't. The non-exclusive contract which is all I ask for is plenty to discourage that, while leaving them feeling free to ditch me if I don't get the job done - so I'm motivated to get the job done, and they can know they're getting my best efforts risk free for them, not to mention that it would be entirely pointless for me to try and hold them to an exclusive contract they wanted out of. It's both pointless legally and bad business - so why ask for an exclusive in the first place?

However, the real estate profession has made a horrible botch out of stressing expertise and education thus far, which is one reason why discounters have thrived by offering nothing for less. The reason for this is that it would interfere with the profits of those national chains that control NAR. They can't hire newly licensed agents that used to work fast food fresh out of the local shake and half-bake real estate school, dress them up in a suit, and expect them to bring commissions into the brokerages if it's easy for consumers to sort out who has real expertise and who doesn't. The licensing exams themselves are pathetic, and intentionally so, in order for the brokerages to have a steady supply of inexperienced shake and half-bake licensees. No math more complex than a four function calculator, and you can use a four function calculator on the test in California (which is supposedly one of the harder exams). How can it be acceptable for someone who hasn't even been tested on the ability to set up a mortgage calculation on a calculator or spreadsheet to have a real estate license? It'd be bad enough if that license didn't include the ability to originate loans, but it does. There are a couple of questions on "what is this type of structure called?" but none on usages, advantages, disadvantages or weaknesses! I understand there's only so much that can be covered in 150 questions, but the NASD has 250 questions on their series 7 exam covering a far more limited expanse of material. There is no good reason why the real estate exam should not be a minimum of three full days, and requiring all previously licensed agents to take the new exam as well. No reason except that would constrict the supply of naive freshly licensed shake and bakes (For that matter, the most important knowledge for agents can't be tested, because it's both local and changes too quickly with time. It makes no sense to ask me about the neighborhoods and market in at the other end of the state - I not only don't know, I can't take the time to learn without forfeiting the time to create and maintain the requisite market knowledge for the area I do work). Alternatively, the state can do away with licensing altogether in favor of simple registration, and let the market develop informational resources as to the competence of a given agent. Consumers would demand it, and they'd be willing to pay for it. Finally, don't get me started about all the "designations" NAR has cooked up that amount to a way to impress the ignorant and gullible ("Sell the agents the right to put some meaningless initials after their name to impress the marks!")

Above all, however, the future of real estate agency is going to be about accountability. If the industry won't develop real and reasonable performance metrics for individual agents, somebody else will. That's living in the age of transparency for you. Furthermore, you can't stand up and say you're the expert in their corner unless you're willing to defend your performance later in a court of law. Brokerages have a proliferation of forms that add nothing to the process except to make it more difficult for them to be successfully sued and distract clients from what is really important. But you can't tell the client you're an expert worthy of hiring, that's going to get paid however many thousands of dollars from their point of view, if you're going to ask them to sign fifty forms that say you're not responsible for the results of your work. Well, I guess some slick salespeople could and do, but it's hardly the sort of thing to inspire confidence in any rational client. We're neither inspectors nor appraisers, and especially not lawyers, but that doesn't absolve us of trying to solve those issues before members of those professions get involved, and do our best to help the clients understand and interpret when and if those professions do get involved. In my admittedly somewhat limited experience, ninety percent of inspector issues and ninety-nine percent of appraisal issues should be solved by the agent before there's an offer, and about the same percentage of legal problems can be prevented by agent diligence beforehand. Especially the major ones. But if you make clients sign forms that say you're not responsible for this, what are they really getting in the way of an expert they can hold accountable? And if you can't be held accountable, what are you really selling besides your winning personality? They can get a better stand up set for forty bucks down at the local comedy outlet. Why should agents make a hundred times that if they can't be held accountable for performance later? The short answer is that we've got to make this confusing process that kills a dozen mature redwoods for pulp understandable and transparent, we've got to perform by making certain our clients can show a profit on the money spent hiring us (at least in the aggregate), and if we're not to be held accountable, what real assurance does the client have that what we have represented is true? Everything we add to the process that doesn't further one of these client goals is either obstructionism or distraction from what's really important, and a counter-balancing reason not to do business with us.

Caveat Emptor

Article UPDATED here

Carnival of Personal Finance

Carnival of Real Estate (Thank you for choosing to highlight my submission!)

Be Prepared: Boy Scout Saves Maldives President

Makes the cut for me.

Four health changes can prolong life 14 years

Pretty much the ones you'd expect.

The lifestyle change with the biggest benefit was giving up smoking, which led to an 80 percent improvement in health, the study found. This was followed by eating fruits and vegetables.

My thoughts on today's New Hampshire primaries: If we were to go by what the candidates are telling us today, I'd be voting for Obama or McCain if I lived in New Hampshire. However, since I believe upon going by records of actions, neither one is my first choice at this point.

Once again, no matter who the winners are today, the rest of the country loses.

I have said repeatedly that buyer's markets is not the time to be selling a property if you have any choice.

There is one exception: People looking to turn around and buy a more expensive property.

It's still better if their budget will stretch to hanging onto the current property while buying the new one, because when the market turns they'll still be able to sell the first property for more than they can now. Nonetheless, it's still a good idea to move up in a buyer's market if you can.

Let's do some math! I'm going to use a local example. Let's say you bought a condominium ten years ago for $150,000. At peak of the seller's market, it was probably worth about $330,000. Now it might be worth $260,000. Even if you bought with 100% financing, as long as you haven't taken cash out, you only owe roughly $130,000. Less 8% cost of selling, you're netting about $110,000 from the sale. Less roughly $10,000 for closing costs, and you're looking at having a 20% down payment for a $500,000 property, and you're still a conforming loan. In my favorite zip code while the market was down, that bought a really nice 4 bedroom 2000 square foot detached home with a panoramic view of the city and no Homeowner's Association! Not to mention the commute is pretty darned friendly for most folks and the public schools are top notch. Total monthly outlay, for loan, taxes, and insurance: just under $3000 per month ($2987). Income to qualify: Just under $6650 per month, and that's with a thirty year fixed rate loan that I could lock right now without any points to the borrower, so the closing costs for the loan and property would be well under $10,000. About half that, in point of fact.

Now, let's say you wait for the market to recover. Let's say everything is a straight linear computation, even though it won't be - I'll bet you money that the more expensive home goes up further, faster, not to mention relative bargaining positions of a condominium owner versus a detached property owner. Let's say the loan rates stay exactly the same as today, which they won't, because in a period of high demand and increasing prices, there's more competition for money and therefore, higher rates. If you waited for that condo to be worth $330,000 again, that property you can get for $500,000 today becomes a $635,000 property. Straight line proportionality. You net roughly $173,000, again less $10,000 for closing costs on the new property. Now you do have slightly better than 20% down payment, to be sure, but you've still got to borrow $471,000. You can either do so with a Jumbo loan, or via a conforming first with a Home Equity Loan on top of that. Even using the full $10,000 for closing costs, your rate ends up higher. Equivalent cost per month that way: $3760. Income to qualify: a little over $8350. For making the exact same exchange, under conditions that I'll bet money are going to be less favorable than this. At this update, the market for desirable single family residences has definitely come back strongly; the market for condos is still languishing.

Even though there is a new category of loans (Jumbo conforming, currently with a limit of $697,500 in San Diego), I'm going to leave these numbers alone. If you decide to go the route of the conforming first with an equity loan on top, it's a little more favorable: Assuming a 720 credit score, you can have a rate of 8.25% on a fixed rate 30 due in 15, giving you a total of just over $3650, saving you about $100 per month and cutting your income to qualify to about $8120, as opposed to the $6650 you'll need to document to make this exact exchange right now. Some people can work a little harder or longer hours, charge more for their services, etcetera, but most people make what they make. The one is less than a standard deviation over area median income; the other is almost two and a half. That's an awfully large number of people priced out. Assuming a normal distribution of incomes and given San Diego's median and standard deviations, (via Hyperstat) we're talking about the difference between 20.46 percent of the population and 1.30 percent of the population, a factor or 15 decrease. The difference between more than one family in five and less than one in 75 being able to afford said property, holding assumptions constant.

It is to be admitted that market constraints in the latter case might keep the prices down somewhat, but that's only as a counter-weight to all of the other forces, and it is quite easy for a mathematician or economist to prove that the actual equilibrium point will still be significantly less affordable than the current state of affairs. Don't worry, I'm not going to drag you through that. Nor are we talking properties that the average family can afford with this particular example, but the principle applies to every affordability range, from a bottom of the market condo to the top of the line. Nor does it take any great mathematical skill to tell you that the affordability of a good that everybody is trying to buy right now is less than that of the same good when large numbers of people are trying to sell and very few people want to buy. Think any number of hot tech gadgets or "must have" Christmas toys. Real estate isn't that much different, economically, but people can have perfectly great financial futures without the latest tech gadget. It's unlikely they will have an equally bright future without owning at least the property they live in. Right now, property is affordable because lots of people want to sell and very few want to buy, leading to a huge disparity between the number of people who could afford a given property if they wanted, and the number of people actually willing to buy, and thence to greater affordability. When a larger number of people are ready and willing to buy, the affordability will decrease. It's all a matter of simple supply and demand.

Caveat Emptor

Article updated here

Quite some time ago, I wrote Fear and Greed, or How Did The Housing Bubble Get So Big?. I re-ran it just a few days ago, to once again illustrate what went wrong.

But Fear and Greed can keep the market down as well as send it up.

Right now, rates are pretty darned good. They're not going to shatter any records, but 5.875% on a thirty year fixed rate loan for less than one point retail is nothing to sneeze at. With a 20% down payment, a family making San Diego Area Median Income of 69,400 per year can afford monthly payments of $2600, which works out to about $433,000 for a single family detached property. That's full on PITI payment. With no down payment at all, this same median income family can afford a condo costing about $301,000, and that's with association dues and PMI included as well. Keep in mind this is the median income family, where half the population makes more, half less, no tricks, no government assistance, no stated income, no negative amortization - just a thirty year fixed rate loan where nothing changes (except in a good way, when PMI gets canceled if they have it) until and unless the consumer decides to change it. If you don't know where to find perfectly good homes meeting this criteria, and in areas with great schools and convenient commutes as well as convenient shopping, give me a call because I do. They won't be billionaire's homes in Rancho Santa Fe, but your family will be perfectly happy there. I've been lazy of late, but I have a whole category for bargain properties. As of the time I'm writing this, the most recent posting was Nov 12, 2007, and there isn't a property in the last dozen that one of the families above couldn't buy. A lot of the ones I've posted on are still on the market, though. Why? Partially because most agents have forgotten how to sell the property that fits in a budget (if they ever knew), but mostly because the media keeps telling everybody how bad things are. Hello! These are the same bozos that were telling you real estate can't miss as even a short term investment in late 2005, and running specials on "What's a fair margin for a negative amortization loan?" right up until the day Business Week ended the party by calling them "Nightmare Mortgages," and in some cases, after. Media makes their money by convincing people who don't know any better to pay attention to them so they can sell advertising space. They are not about Truth. They're about getting people to pay attention to them, and Fear and Greed $&euro££ pap€r$ and indu¢&euro p€op£&euro to pa¥ att€ntion. The cold hard fact is that prices, at least in my usual stomping grounds, are affordable for average families - more affordable than they've been for years.

It's not like there's any shortage of people that want to live here in San Diego. Nor are people packing up and leaving in droves, like they did in the early 1990s. Land itself is expensive here, the total amount available is sharply limited, and almost all of the places than can be built upon, have been. Nor are any of the municipal governments doing anything to encourage higher density so more people can be accommodated. The one city government that hasn't been completely hijacked by the "keep housing scarce so we can make a big profit when we sell" lobby is El Cajon, which even has a few older detached single family homes in decent areas below $300k, and a development of brand new 1800 square foot townhomes being sold out at an asking price of about $350,000. That same price buys about 1100 square feet right next door in La Mesa, while in the suburb on the other side or El Cajon, Santee, the best equivalent is about 1700 square feet with an asking price of about $380k. Nor do I expect the grip of the "we've got ours!" lobby (even if they do pretend it's all concern for the environment) to weaken any time soon. It's all the same to me, professionally, but folks hoping their children can afford to live here so they can see their grandchildren grow up might want to reconsider voting to restrict development next time it comes up.

Those who are counting upon the rental market to stay the way it is should rethink. The last ten years rents have stayed almost constant due to people wanting to keep the places rented, in order to have some of the mortgage offset, lest their tenants (who are usually focused upon cash flow) go buy something. Especially considering the easy credit that was available in the era of Make-Believe Loans. However, the rental vacancy factor is only 2.6%, and there are now an awful lot of people who have ruined their credit and do not have the option of buying for at least two years. Add in the fact that (as I warned almost two years ago) landlords are not seeing the huge capital gains that motivated them to keep rents low, and we're starting to see rising rents. High demand, low supply, and a significant captive market. What would you expect to happen to rents?

But until inventory starts dropping and people wake up to the high demand low supply situation we have here, it's a buyer's opportunity. Actually, I've seen considerable evidence that the high end market has already begun the process of recovery. Executives, entrepreneurs, and highly paid professionals - properties with an asking price of a million or more have an average 118 days on market, as opposed to 103 for all properties, when it's usually at least forty to fifty percent higher, not a mere fifteen. Of the properties that have sold in the last six months, the average days on market was 81 for sales prices in excess of a million, as opposed to 71 overall, again a 15% differential, and the percentage of listings over a million asking price that sold was within 1% of the overall figure, which is highly unusual, because the people that make enough money to qualify are a very small part of the population. Nor can they get 100% financing - it doesn't exist right now for those properties. I've got lenders that'll go up to three million residential, but even full documentation they want to see a minimum of 10% down right now once you get over a million dollar loan, no matter how good the credit. (Loans under the conforming limit, it's still pretty easy to get 100% financing done, so long as you're full documentation of income)

My point is this: The only thing holding the local market back right now is mass psychology. Fear and Greed being fed by the mass media, just as they were being fed when the market was rising thirty percent per year. There are more people that want to buy than there are properties available - particularly properties below half a million dollars. It's just Fear of losing some money, albeit temporarily and only on paper, and Greed for an even better price, that is keeping people on the sidelines. Meanwhile, those sidelines are getting more and more crowded all the time with people "waiting until the price is right." When Fear and Greed stop holding people back, it's quite likely going to look like the Oklahoma Land Rush of 1889.

Unlike the Oklahoma Land Rush, though, nobody's going to shoot "Sooners" this time. Actually, I'd expect them to welcome you the same way potential buyers have been welcomed these past two years, with low prices and a lot of seller cooperation, because until both the market turns and the average seller realizes it, buyers have all the power in negotiations. And there really isn't a reason other than Fear and Greed to be hanging out on the sidelines. We've all seen how Fear and Greed can hurt when the market is rising. If you wait until it has become obvious that the price fall has reversed itself, well, you're not going to get directly hurt, but you will have missed what may be the period of lowest prices from this point going forward for the rest of most people's lives.

Caveat Emptor

Here;s a good page covering the due on sale clause of mortgages.

While I'm at it, Default Lines: The New Math Of Credit Scores

Two people with the same FICO score currently could see their scores diverge under the new system. One possible reason: FICO 08 gives more points to consumers who maintain a variety of credit types, such as credit cards, a mortgage and auto loan, because it shows they can manage payments on different kinds of loans. On the other hand, the new scoring system penalizes to a greater degree borrowers who use a high percentage of their available credit.

So maxing your credit cards will hurt more, as will serious and repeated delinquencies. They're also closing the "authorized used" method of credit repair, despite the fact that it may hurt some legitimate users, as it has been abused too much. No word yet on whether they've implemented the massive hit for negative amortization loans they've been talking about.

Scotland Yard Joins Bhutto Probe

I have a hard time believing anybody really falls for a "pump and dump", but here's evidence they do: "Spam king" indicted in stock fraud scheme

$3 million in the summer of 2005 alone. That's a lot of cheez whiz. And every penny made from suckers who thought they were getting something for nothing.

Almost makes me want to invent a Santa Claus con...

There is no such thing as a free lunch, but lots of people will pretend there is.

It seems to me that many people consider compensation earned by real estate agents as paying some kind of toll. They think of it as admission to the world of MLS, to showings and writing offers. Kind of like a tollbooth on a road somewhere. If there's another place just down the road that offers the same access cheaper, it makes sense to pay your access fee there.

If you think of what an agent or loan officer makes as a toll, just a cost of getting into the arena, it makes sense to go cheap. If you think of it as a payment for knowledge, expertise, service, someone who not only helps you CYA and prevents major mistakes, but makes a positive difference to the result, a different dynamic emerges.

There are existing offices modeled after every level of service from zip on up. It costs them nothing to say "Full service for a discount price," but that doesn't make it true. Like a certain ex-president who "did not have sex with that woman!" you have to consider what definition they're using in making that claim. If sitting in their office with MLS access and a fax machine is "full service" for them, by their lights they are providing "full service for a discount price." Remember how in my loan article Questions You Should Ask Prospective Loan Providers, I listed a whole bunch of questions the intent of which was to nail down how much of the truth they were telling you, and whether they intend to Guarantee their quote, you want to ask prospective agents what services their fees cover. Among other things, this exposes the "full service for a discount price" claim to be yet another Great Lie on the level of "I gave at the office," "The check is in the mail," or "Yes, I'll respect you in the morning."

The bottom-most level is essentially a fax machine and MLS access. I've met some where the fax machine was purely a service that converted email to and from from fax. I've even met some where I suspect they didn't have MLS access and were working off one of the free public real estate sites. They never leave the office; all they are about is access. This level might be good for you if you know as much as a good agent, like say, you were a good agent but lost your renewal application in the mail. Otherwise, you're setting yourself up for an experience like my first purchase.

Above that is the level of service that actually help you with paperwork. They still never leave the office, but at least they've got access to WinForms and some kind of checklist for paperwork. They're still not helping you with your investigations or marketing, but at least you might get some kind of more or less complete list of the disclosures you're required to make as a seller, while as a buyer you're going to be quite firmly told to get an inspection. Not that they're going to be there for the inspection, or help you interpret it, or help you figure out if maybe you need something more. They may or may not be aware of a large percentage of traps for the unwary that lie in these documents and the inspection, but at least they help you with the most basic level of CYA.

Assistance in negotiation may or may not become an option at this level. Since the ones at this level never go out and look at property, they can't have any real clue as to its virtues and faults, especially as compared to whatever else has sold in the area in the last few months, but at least they have may have enough of a clue as to general market conditions to keep you from making or accepting the wrong kind of offer. This is the level of the CMA, or comparative market analysis, which takes somewhere between 5 and 20 minutes and about the intelligence of Mongo from Blazing Saddles. At least you shouldn't make an offer or accept an offer that is completely and totally off base for your type of property in your area. The higher up the ladder of service you go and the more involved with the specifics of your market and your property the agent is, the more valuable this service becomes. Top agents that know enough about the property and the "comparables" can potentially negotiate the other side ten to fifteen percent (or more, in a market that favors you) from the numbers that someone using a lesser agent might be stuck with. I know because I've seen it happen - I've made it happen or not happen, and in one case, seen the next buyer pay more than fifty thousand dollars more than the contracted price I negotiated for one buyer who suffered an attack of insanity at closing.

At the next level above paperwork, you've got the agent who may go out and visit the property. For a listing, they're going to measure your property, take some notes for the listing, and maybe give some advice as to how to stage it or put you in touch with a stager. For a buyer, they're more or less willing to open the front door on properties you've told them you want to view. Both sorts will make the effort to sell the property, the listing party more than the door opener. The listing agent's client is only happy when the property sells while most buyers bristle at more than a certain level of sales talk. In both cases, however, they're trying to get that buyer to sign up with them, preferably (from their point of view) with an Exclusive Buyer's Agency Agreement, so the pressure won't be real high in either case. This is also the level at which open houses become something that agents really want to do, in order to snare buyers' business. It is to be noted that there are a lot of agents who think they really are providing as much service as any other agent with this level of service. They aren't. They're still clueless or nearly clueless as to how it compares with everything else on the market in the area, or that was on the market, because they haven't gone and visited any on their own.

Somewhere along about this level of service and above, the agents may actually be willing to get out of the office to meet the inspectors and appraiser. After all, they've now got a negotiated agreement and it's in their interest to further the transaction so that they can get paid. They may also help you interpret what all of these reports say. Not necessarily; but at least it starts being a possibility, rather than pushing all of this off onto the clients or the other agent. This is where a lot of lawsuits start, so many brokerages actually prohibit their agents from being present at inspections - at most they can open the door and leave. I'm not a lawyer, but if I'm presenting myself as being an expert at real estate, not being present for the inspection seems to be evidence of gross negligence, just on the face of it. On the other hand, if the clients are representing themselves as being competent in this area in order to receive discounted service, that's fine with me. I actually make more per hour of my time with less legal liability.

Above this level of service, the services provided by good listing agents and good buyer's agents diverge dramatically. So much so that they cannot even be meaningfully discussed at the same time. Since a listing agent is essentially a marketer while a buyer's agent is charged with analysis and comparison among alternatives, this shouldn't surprise anyone. They are different functions at the heart, and many agents who are very good at one are considerably less proficient at the other. Fact. I can point to great listing agents who are putrid on the buyer's side, and vice versa. Often, it's as simple as attitude. Some listing agents can't stop thinking like listing agents, while some buyer's agents can't stop thinking like buyer's agents, and they are completely different thought processes. It took me a while to learn this, and I can point to a lot of agents whom the evidence indicates have not yet done so.

For the listing agent, the question largely resolves to pricing, plus what degree of staging and precisely how much marketing they are going to do. Note that even the most exhaustive marketing campaign is not likely to get more than the property is worth, but it can mean you get top dollar instead of significantly less, particularly if you price it correctly and have the property ready for the market when it hits the market. Pricing too high to begin with "to see if you can get it," is the mark of an inferior agent "buying" the listing, as you won't be likely to get the higher price and it will almost certainly reduce the final sales price by more than any lucky windfall might be. Particularly in the buyer's market most of the country has right now. These are all obvious things of value - when that agent spends time and money marketing your property, they're spending their own resources, not yours. How to word an advertisement, when to run it, where to run it - all of these are expertise. Go check out how much marketers with far lower sales who don't use their own resources and who draw a salary get paid make in the corporate world before you make a snap judgment as to whether it is or is not worth the money. Here's one example, and keep in mind that this is only a part of what a good listing agent does.

On the buyer's agent side, the question is more singular: How much property scouting are they going to do? Are they going to wait until the client asks to check out a property or are they going to go check out every possibility in the market? Are they going to go out on their own to eliminate definite turkeys before telling you about the cream? Still more important is are they going to tell you about good and bad, reasons why it's good and why it may be deficient, on every property, but that's something you can only observe in action. This is the paramount and unanswerable reason why you shouldn't sign any exclusive buyer's representation agreements unless you are so certain of this agent that your spouse can tear your arm off and beat you to death with it if you're wrong. They need to cover what the property has and what it doesn't, and what it's going to take to bring it up to an acceptable level where it is deficient. Structural flaws, basic amenities, floor plan, lot layout, etcetera, not to mention location location location. Not just now, but for any future sale that you might later decide to make. This whole thing is so time intensive it can't profitably be done on any basis other than the complete combo package of buyer's agent services, and it requires a level of expertise and market knowledge that cannot be acquired on the fly, and aren't cost effective to learn for one transaction. You'd make maybe thirty cents per hour. I might believe fifty or even seventy-five cents per hour in a high cost area like mine. However, if you have an agent with this knowledge and the right attitude, there's nothing else that will make nearly so much difference, both in terms of price and in terms of final satisfaction with your purchase.

If you don't want "the full package", that's fine with me and every other agent I know of who's capable of the full package. As I said, we make more per hour with the lesser packages even if we get paid less. But we can also work with a lot more buyers wanting less intensive service, or a lot more sellers, and make more money overall. Furthermore, it's a lot easier for someone who makes a regular habit of doing "the full package" to perform lesser services than it is for someone who doesn't to perform greater. That market knowledge we get from the other clients we have? It doesn't magically disappear because this client isn't paying me to run around scouting properties. Usually I'm working with multiple clients in my area and while one wants the whole nine yards, another doesn't. Just because I'm not scouting for you doesn't mean I'm forgetting about all the stuff I scouted for someone else. But someone who doesn't make a habit of it is working from the same zero base I'd be working from outside San Diego County.

Somebody once asked me about Hourly pay instead of commission for agents. Just as you'd expect, agents can charge less if the client is going to pay an hourly rate for their time regardless of whether there is a transaction. That's called transaction risk, and is a real risk of this business - the chance that, if you're paid on commission, you can spend dozens to hundreds of hours with someone, as well as lots of money, and not make a thing. If the client chooses to bear the transaction risk, that's fine with me, and they'll at least have the opportunity to pay me less for a successful transaction - although they'll still pay the cash if there's not. As I just wrote, that's the risk they are choosing or not choosing to take. The cash alternative is potentially a lot less expensive, but I haven't met a whole lot of people who like the idea of writing me a check for actual dollars they earned and saved without any certainty of a happy outcome for them. When you get right down to it, most clients do not want to assume transaction risk. But neither agents nor clients can have it both ways.

Some agents have huge lists of what they do, specifying point by point all the services they provide, splitting the services up into the largest number describable to make it seem like more. Others lump them together by more general categories, and may do anything that belongs within the due diligence and responsibilities they agreed to, where the "splitter" figures since it wasn't covered, they aren't doing it. Nonetheless, either way is basically valid. A written representation that they perform specifically named services obligates them to do so, but there is rarely a significant difference between someone who does that and someone who lumps them into more generic categories. I suppose it's all a matter of whether you want someone with a detailed checklist and someone who goes around looking for something they might have missed even though it may not to be on a checklist - but it applies to your transaction.

You may have noticed that I haven't attached any specific numbers to any of this. That's because it's both variable by market and negotiable within a market. The more services you want, the more money the agent will want to make. Ditto with resources, both time and money, you ask them to invest. If you're determined to get the best bargain you can, you need to shop agents and compare their competence and their attitude as well as their price. If you want to negotiate pay with a professional negotiator, well I've got admiration for your chutzpah. Plus I have to admit that it's a fair test of those abilities. Even if those negotiations turn out bad for you, imagine where OJ Simpson would be today if he had a cheap lawyer. Or Britney Spears. Or Bill Gates, the massiveness of whose fortune lies in one legal victory over IBM, as well as his lawyers outlasting the government anti-trust lawyers at a later date.

My service bundle is 100% negotiable, and not being a slave to NAR or the brokerage oligarchy that controls it, I'll fight any effort to change this. My understanding is that any such effort is doomed under California law (at least), but I am not a lawyer and I'll defer to other expertise there if it wants to chime in.

But I do think it reasonable that agents and brokerages be forced to specify what services they do and do not offer, and what they are and are not responsible for in a given transaction, at least by category. Good full service agents do this now. The next dedicated discounter I see who does this will be the first. The very services which are most time consuming and lead to the largest liability are the very ones that dedicated discounters will not fulfill and will do their darnedest to pretend don't exist. But they're also the ones that make the most difference for most clients, and would rank as most important for those clients if they were asked to rank them.

Caveat Emptor

Article UPDATED here

Carnival of The Capitalists

via Liberty Papers, The Media's Top 10 Economic Myths of 2007

Allow me to state that the airlines don't get off the hook entirely. How many flights are theoretically scheduled to depart at 8:00 AM? How many actually can? Now ask yourself how many are scheduled to arrive at peak times? Sequencing arrivals is a real trick - sequencing for LAX covers the whole of the southwestern United States. And even though there may be four parallel runways there, it's real tough when you have a twenty way tie.

My predictions for the Iowa caucuses: Someone will win for each of the two major parties. Whoever it is, the rest of the country loses.

Bills that came due, over at VDH's Private Papers.

December 2007 visits were up significantly from November, weirdly enough, and page views by visitors skyrocketed thirty percent! 60,021 visits, 757,248 page views (There were an additional 505,000 page views by automation, such as bots and web-crawlers). Running totals, 2,244,807 visits, 8,834,644 page views

Thank you all for stopping by

I recently read that Hello Kitty was going to start marketing to boys. I was thinking, "Yeah, right," but it appears someone has a suggestion which may make it happen.

Scrappleface has the best take on Huckabee's holier than thou dirty tricks.

Samizdata and Instapundit on Fred Thompson: "Too sane to be president."

I must disagree. I think he's sane enough to be a great President. Unfortunately, he's much too sane to be elected President.

Bill Whittle has posted another of his Magnificent Works, over at Eject! Eject! Eject! Make time to read them. Part I and Part II.

Here are the guidelines for this carnival.

As always, I arranged the entries that met guidelines into three levels, based upon originality, usefulness to the consumer, and how much thought and effort and research went into an entry. Unfortunately, nothing made the cut for the highest category.

Due to the season, I wasn't expecting a lot of entries,and indeed, there were only eight, of which four were essentially advertisements and link-chumming, while one was a business post. There was no Host's Choice this time.

Recommended

Salt Lake Real Estate Blog gives us Safe Real Estate Investments for 2008, some advice for investors that cannot be repeated too often. It can be very hard to meet, but that's what it takes to be safe.

Your host submits Getting Another Mortgage Loan After A Short Sale

Met Guidelines

Debt Free sends us Tips For Selling Your Own House, which isn't bad advice, but is so general and so vanilla that it won't help. It also makes a couple of minor mistakes and omits a lot that's more important than what it does say.

Consumer Focused Carnival of Real Estate will return in two weeks (January 16th, 2008), here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be January 14th.

Over the course of the last few months, I've gotten mass messages from basically every lender I do business with, saying it's time to "get back to basics". About a week ago, my favorite A paper lender became the last to do so. This is a company that to the best of my knowledge, never offered a negative amortization loan, never had a stated income loan for 100% of value, and was steadfast about avoiding all the problem loans that the rest of the industry dived headfirst into. As a result, not only could they offer beautifully clean underwriting and rates that varied from pretty darned good to absolutely unbeatable, but they're sitting pretty today, their loss rate being not significantly higher than it was five years ago, and what little difference there is being attributable to declining values that are a background to the industry rather than loose loan practices.

My response to each and every one of these messages, however, has been, "What do you mean, back to basics?"

The dynamics of how to create a happy customer never changed. Oh, you can make them happy right now by getting them into the beautiful McMansion they have no prayer of really affording. But debt to income ratio isn't just for the lender's protection. If you use one of the many tricks available to circumvent it, you can video-record them jumping up and down with excitement and crying for joy on move-in day, but they'll also remember you all through the long process of losing the property, and by the time it comes to move-out day, they'll know that you failed to do your real job. What do you think the prospects of referrals and repeat business are? Well, maybe referrals to attorneys and repeat business from the FBI fraud unit, but those aren't things most of us want.

Many people, sometimes surprisingly sophisticated people who should have known better, were ignoring critical factors about personal finance and economics because after six to ten years of the housing markets going crazy, it must have seemed as if the laws of economics had been somehow repealed. Nope. Not ever going to happen. They're a bit more complex than physics such as gravity, and they are subject to distortion through mass psychology in the short run, but the bottom of that canyon is still waiting, no matter when Wile E. Coyote looks down. You'd think people would learn something through experience after a few repetitions.

Yes, most people want the huge mansion on 64,000 acres. People want hot and cold running servants and manna from heaven, too, but very few people get it. But there are reasons things like that are beyond the means of the average person, particularly in high demand urban areas where all the jobs are. Most of us have budgets that won't stretch to any of the above, and we're better off understanding this fact from the get go. As real estate agents and loan officers, it's part of that fiduciary duty we learn about getting licensed to make them aware of these facts as they pertain to real estate and mortgage loans, not encourage them to stretch beyond their means for a property and a loan they can't really afford.

During the era of make-believe loans, it became possible to pretend that somebody could afford a bigger, more expensive home than they really could. Many alleged professionals, both agent and loan officer, became aware that they could make the easy sale and a much higher commission check by fudging a number here and a key fact there. They made quite a good living by doing so, rationalizing that if they didn't, somebody else would. Those agents and loan officers who stayed on the right side of things lost a lot of business to people who didn't. And it's always possible to talk a bigger better deal, and the last few years have taught those of us who don't how to deal with those miscreants. But whether you believe in karma or not, stuff like that will come back around to bite you. It's one of those laws of economics that can't be repealed by the legislature. One way or another, their time of reckoning is coming. We all know what happens to those hogs at the trough.

So it's not "back to basics." Basics have always been there. Basics has always been the way to make the clients happy, not only on move-in day, but for the rest of their lives - long after the neighbor who didn't pay attention to basics has lost their home and their financial future to the foreclosure process. Basics, and explaining how they benefit the client, is how you build a real book of business, instead of one-time scores that are going to have you fighting lawsuits from jail. This has never changed, and it never will. Basics are the world we all live in, and when you understand them, you understand why.

Caveat Emptor

Article UPDATED here