March 2008 Archives

Carnival of Insanities

Carnival of Personal Finance


Greece wants the Elgin Marble back:

Greece to Britain: Hand over artwork

Lord Elgin, a British diplomat, removed about half of the sculptures and friezes remaining on the Parthenon between 1801 and 1805. He had the permission of the Ottoman Empire that then ruled Greece. The British Museum obtained them from Elgin in 1816 and has displayed them free to the public since. Last year, 5.4 million people visited the museum.

I'm inclined to believe they should be returned. This situation is roughly equivalent to if the US had given permission for them to remove Iraqi antiquities in 2003. Only the fact that it's been 200 years gives the British any kind of claim. Yes, the Ottomans were the legal authorities in control of Greece at the time. So what?


Want a license to behave illegally? Get elected to Congress!

Court won't review FBI's Congress office raid

The U.S. Supreme Court said on Monday that it won't overrule a decision that FBI agents violated the rights of a Democratic congressman during a search of his office, a decision the Bush administration says will hamper future public corruption investigations.

He must have really gone over the line. No "Name that Party". On the other hand, it is Reuters, not AP.

The appeals court ordered the FBI to give Jefferson back all privileged legislative files and copies of files taken from his office during the 18-hour raid in May of 2006.

The appeals court said FBI agents should not have viewed documents in the office without first giving Jefferson the opportunity to say the material involved legislative business.

Jefferson was charged last year with racketeering, soliciting bribes for himself and his family, fraud, money laundering, obstruction of justice, conspiracy and violating the Foreign Corrupt Practices Act.

They found $90,000 cash in his freezer, wrapped in aluminum foil. They had a valid search warrant, issued by a federal judge, to search his office.

So congressional offices are off limits without warning. With warning, he can move incriminating evidence elsewhere - and that's if another court will even sign another warrant with precedent thus.


Hot Air catches another of Obama's Bill Clinton imitations.

Including his campaign's method of denial, even though it was Obama's own handwriting:

Through an aide, Obama, who won the group's endorsement as well as the statehouse seat, did not dispute that the handwriting was his. But he contended it doesn't prove he completed, approved - or even read - the latter questionnaire.

Remember the Columbia Noose Incident, where a hangman's noose was found on the door of a professor, and Columbia suddenly clammed up after reviewing the tapes? They're not going to be able to sweep it under the rug. A Manhattan grand jury has subpoenaed the records

Does anyone want to bet that the tapes show something other than the professor herself or a close associate placing the noose?


I'm planning a light week this week. I'll have reprints at least every day, but an encounter with a willfully ignorant troll has me feeling demotivated.

The IAEA and Script Zombies

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Attack of the script zombies: In the three days since the last time I've checked referrals, I've gotten 9500 zombie referrals tagged as coming from this page. Why am I not surprised that the International Atomic Energy Agency is not up to the task of keeping their computers under control?

North Korea, Pakistan, and Iran off the top of my head are reasons why I'm not surprised.

By comparison, my next biggest source has sent me 530 hits for the entire month of March.

Or maybe all their employees are looking for San Diego real estate because that's 8000 miles away from the damage they are doing. Fallout carries.

Why Do Palestinians Get Much More Attention than Tibetans?

The answers reveal a lot about our failings as a society.


Open letter to Obama concerning his pastor, who apparently was the beneficiary of an upper middle class childhood


Lenderrama on what's really important to loan consumers. I've been telling people this here for almost three years now, and in person for a lot longer than that.


Classical Values on an FBI scheme to entice people into clicking on a link, thereby causing the FBI to get a warrant to ransack their computer and dwelling for child pornography.

Simply speaking, this is vile. People need to get fired and maybe even go to jail over this one.


USA Today actually likes something George Bush did. No, don't have a heart attack or look around for flying swine. It happened while he was governor of Texas.


Private Papers has ten issues that need less emotion and more thinking.

Our political dialog has been controlled by emotional two year olds for long enough.


The Blog-O-Cuss Meter - Do you cuss a lot in your blog or website?
Created by OnePlusYou - Free Online Dating


Q and O on the real situation with big oil. It isn't ExxonMobil and Chevron profiteering.


Why I love the internet, part sixteen gazillion and forty-three

Video at Bloodhound

Don Henley has a fun song off his second solo album called "Driving With Your Eyes Closed". I can't find a video performance, but here's an MP3. It's got a chorus that ends with the line, "You're gonna hit something /but that's the way it goes."

A lot of what I read about the real estate markets reminds me of that song. Mostly, people are looking in a rear view mirror myopically, and think that's going to tell them where the market is going. Not so.

Let me tell you the most important "secret" about the real estate market - or any other market. Short term results are mostly about mass psychology. People are so into what is happening right now that they will react to it the same way as everyone else without thinking, whether it's fear and greed driving the market up or fear and greed driving it down. The short term, in real estate, is this year, next year, and maybe the year after. But the actual real estate transaction is expensive. It can cost you a couple percent just for the transaction to buy real estate, seven to ten percent to sell, so you've got to clear ten to fifteen percent higher price just to break even on the costs. Those costs will more than pay for themselves, but they are there. An average year in my market is about 5% up, and 20% up in one year is one of the best years local real estate has ever had. Short term flippers work by different parameters than most consumers, but these are the market factors most people have to deal with. It takes about three average years to break even on the costs you have to pay for the transaction.

This is enough to take the majority real estate investing out of the frame of the short term market, controlled by mass psychology, and into the realm of the medium to long term market, where psychology is a factor, but as time goes on, more and more of your investment results are controlled by pure economics. Supply versus demand. What people who want housing make. What the interest rate environment is like. Oh, and don't forget the effects of government and public policy. When somebody says, "The market has dropped in the last three months, therefore it's going lower" that is no more correct than the opposite which we had four or five years ago: "The market has been going up - five percent in the last three months alone! Therefore it's going to keep going up!" In either case, making this sort of claim is functionally equivalent to blacking out your windshield and driving by the rear view mirror. "You're gonna hit something, but that's the way it goes!"

Furthermore, there is no such thing as a national market for real estate. It does not exist, and anybody who claims it does is either so clueless as to the nature of real estate markets that you should pat them on the head and say, "That's nice dear. Now run along and play with your Duplos&trade," or they are actively lying. There are factors such as the interest rate environment that influence real estate markets nationally, but there is no national real estate market. In order for a given area to be considered one market, the properties within them must be functionally equivalent for the residents as to location. Let's look at the City of San Diego: No way is San Ysidro, right by the Mexican border, functionally equivalent to Del Mar Heights, thirty-five miles away along the coast on Interstate 5 just north of all the corporate buildings in the Golden Triangle, and neither is equivalent to Rancho Bernardo, which is about that same distance north inland along I-15. All three are part of the City of San Diego, and we haven't even gotten to the suburbs yet, they are three very different markets, with different demographics, different lifestyles, different building styles and all that that implies. For my real estate work, I specialize in and around the City of La Mesa, which borders San Diego on the east, and is different from all three previously described areas, and there are areas of La Mesa which are decidedly different from other areas of La Mesa. These markets are close enough physically to have market interactions, but different enough to constitute different markets - never mind Idaho, Georgia, or Vermont, which are not part of the local commuting area. Talking about a unified countywide market is occasionally a useful fiction, as there are interactions. People are able to commute from home to work and back again, no matter their respective locations within the county. Talking of a national real estate market is blatant nonsense. At most you can talk about a national amalgamation of local markets - a statistical hash of what is going on in all of the individual markets. Even right now with real estate markets in the tank in all the headlines, though, there are local real estate markets that are doing very well, and others that are poised to do so.

You can talk about national factors influencing all of the local real estate environments. Interest rates, lender requirements, legislation in Congress, federal rule-making in general, all of these have a national influence. The markets themselves remain local.

For longer term analysis, you've got to talk about the economics of an area. Current supply versus demand, and where that ratio is going. What do people in the area make? What is the regulatory environment? How difficult is it to build more housing? What are the population trends? What is the economy of the area doing? What are the factors influencing rental price and availability? How likely is any of this to change in the future? It doesn't matter whether people are getting "priced out" or even how many people are getting "priced out." People have been priced out of Manhattan for decades; it hasn't stopped Manhattan real estate from rising in value. What does matter is whether enough people with the economic ability to pay the current prices are available to buy up the new inventory that hits the market. It doesn't matter that people who bought twenty years ago could not afford to buy their properties at current prices. What does matter is that enough people who can afford it will buy to more than balance out the people who want to sell at current prices.

So while you can talk about national trends, any given property sits in a particular local market, and any discussion of whether to buy a given property has to be rooted in the local market situation. National trends may have an influence upon its value. If interest rates go to eight percent, people can only afford about seventy percent of the loan they can afford if interest rates go to five percent, so falling interest rates are a time of rising prices, other things being equal. Of course, we've had falling interest rates the first three months of 2008, and that's not the case. The explanation is that there are stronger factors at work.

Nonetheless, if a million people want to own property in an area (say, La Jolla) and only 40,000 people can, then the price will be determined by the 40,000 people willing and able to pay the most. If twenty million people want to live in San Diego County and only three million can, the prices will be determined by the three million people willing and to pay the highest prices. End of discussion. Not all properties in all locations are equally valuable of course, but the mix will be determined by what prospective buyers are willing to pay the most for. Note that not all costs are in dollars. Sometimes it's opportunity cost, sometimes it's any number of other costs, such as the risk of earthquake, the heat when the Santa Anas roll in, etcetera. Some people absolutely require living in a six bedroom 3000 square foot house, and if they can't afford the prices those command here, they'll go elsewhere despite the fact that they could easily afford something less expensive. Others will put up with living in a broom closet so long as they can go surfing every day.

Analysis focusing on a market's short term results are largely a study in mob psychology. Three years ago when property was overpriced locally, I couldn't slow people eager to follow the other lemmings with a locomotive. The last year or so, with available property prices well below historical trendlines locally, it's taken entire battalions of wild horses to pull people off the sidelines due to media coverage. But mob psychology is a changeable thing. A co-worker and I were talking about modifying an old T shirt the other day. The original version has two vultures sitting on a tree limb, discussing the negative utility of patience: "Patience MY ASS! I'm going to KILL something!" (pardon the vulgarity.) We're going to change the second line to "I'm going to BUY SOMETHING!" That's the mood of the market we're encountering now. The people who have been holding off seem to have realized that this is about as good as things are going to get for them. Maybe they're tired of waiting. Maybe they've realized things are more affordable for them now than they were in 2000, let alone 2004. Maybe they got "priced out" during the bubble and want to move before it happens again. Once you buy, it's not like the seller can come back and ask you for more money later because it turned out to be such a wonderful bargain - you're locking in your cost of housing. Putting it under your own control forever. The vultures are starting to swoop.

Analysis on a local market's longer term prognosis have to ignore mob psychology. It's unpredictable on that scale, and nobody ever knows just when it will turn, or how. But there's only so long mob psychology can trump practical economics, which is the norm that any particular market will follow ever more closely the longer you run the experiment. With the recent decline in values, San Diego has dropped significantly below long term value trends. This means that considering current supply and regulatory barriers to increasing it, demand of people who want to live here, the values that those people can afford to pay, and increasing demand for housing in San Diego, not to mention the changing dynamics of the rental situation (be prepared for rapid increases in rental rates), right now is an excellent time to buy, as prices are below where you would expect, given the longer term factors influencing the San Diego regional housing market.

Articles which consider only short term price fluctuations are looking backwards as we go into the future. They're looking at where we've been, not where we're going. And as always when you're effectively driving with your eyes closed: "You're gonna hit something, but that's the way it goes..."

Caveat Emptor

Article UPDATED here

First off, let me make something very plain. All a CBB can do is give good agent an incentive or disincentive to look at the property. A high one will not, by itself, sell the property. A low one will not prevent it being sold. Buyers, being interested in their own bottom line, will persist in choosing the property that offers them the best property for their purposes at the lowest price, and agents with about an hour in the business should understand this. I not only cannot sell a buyer on a property that isn't at least as good a bargain for them as the competing properties, I won't try. It's contrary not only to my client's interest, which should be the ultimate consideration of any agent, but it's not in my interest either.

Now with that said, you really don't want to do is give agents a reason to sell the other property instead of yours. A cheap CBB does not motivate the agents to work. Suppose a boss told their workers "You will be paid $10 for every green widget you sell. You will be paid $15 for every purple widget you sell." Assume the widgets are identical in every way except color. How many green widgets do you think would get sold versus purple? Sure, they'll sell green if the customer wants it, but that's not going to be what they suggest first. If a customer came in the door wanting a green widget, they'd get a green widget. But if they walk in the door and aren't sure they want a green widget, the sales staff will quite predictably see if they can sell them the purple widget first. If they can, the green widget sits unseen, untried, and unsold.

In real estate, the person who sets that compensation is the owner of the property. There are lots of properties out there, even in a seller's market. Do you want your property to be treated like a green widget, or a purple one?

This isn't evil. Agents have to eat, pay the mortgage, pay expenses, etcetera, and we don't make as much money as people think. Even less so than most people, agents don't get to keep every dollar their company gets paid for their services, and they don't get paid instantly for waving a magic wand. It takes time, work, and expertise - I've spent six months, hundreds of hours, and over a thousand dollars just in expenses working with clients to close a deal. If the company gets paid $10,000 and the agent has an 80% split (better than most), they get $8000 gross. Less monthly desk fees, less per transaction fees, and less fixed expenses of staying in business, that's maybe $6500, and social security eats twice as much of that as normal, leaving about $5400 - and we haven't even considered income taxes or advertising yet. For a solid month of work, and who knows how much time looking before the clients made the offer that was accepted. With practically unlimited liability, and requiring continuous training and work to keep their edge. If it takes 3 months in all, that's barely minimum wage, and most agents work sixty hours per week at a minimum. Quite often, we've got to reduce our commission to put some money back into the transaction so it can close. Sound like a cushy sinecure to you?

Of course, most agents are working with more than one set of clients at a time, but as you can see, a $10,000 commission doesn't translate into a huge windfall for the agent. If the company only gets paid $8000, that translates into maybe $4100 that the agent can use to pay their family's living expenses and taxes. Which do you think they'd rather have, the bigger check or the smaller? Ask yourself what you'd do in their place. If it's a question of the smaller check or nothing at all, there's no question, but there are a lot of properties competing with yours for the available buyers, and more coming onto the market all the time. Do you want to give agents a reason to try and sell your property, or a reason why they'd prefer to sell someone else's property?

With all of this in mind, a screaming deal will sell. You don't have to worry about whether or not the agent is going to be on your side. Buyers will beat a path to your door, with or without an agent. However, pricing your property as a screaming deal is not something most rational owners want to do. They want to get top dollar for that property, and it takes at least ten percent below the rest of the market - more likely fifteen - to get attention as a screaming deal. I've said this before, most notably in How to Sell Your Home Quickly and For The Best Possible Price, but this is fifteen percent off the correct asking price, not the owner's fevered dreams of greed. The average CBB around here is three percent. So, save three percent to lose fifteen? Not something I'd do. Furthermore, you're not going to put up a CBB of zero, no matter how low it's priced. I've explained before why the seller pays the buyer's agent. Finally, if you end up needing to give the buyer an allowance for closing costs to get the property sold, you're quite likely giving out with the other hand the same money you withheld in the first place, as buyers paying their agent is a closing cost. Why not put it out there in the first place, where it is likely to do you some good?

The differences a higher CBB makes for the seller are three: You don't have to worry that buyers needing to come up with cash to close for their agent will impact buyer cash to close, you get more attention for your property more quickly and more consistently, and you don't have to worry about buyer's agents creating reasons not to buy your property. Put yourself in this situation: Most buyers are reluctant to pull the trigger on a half million dollars. They need some good hand-holding and reasons to buy, and instead, their agent is looking for a reasons to help convince them why they want to buy some other property instead. Do you think it might take longer for the property to sell? With carrying costs of somewhere around two-thirds of a percent per month for most properties, if a CBB a half percent higher gets the property sold three weeks faster, you are ahead of the game. The time difference will almost certainly be more than that, and - statistical fact - the longer your property sits unsold, the lower the price it will sell for.

If you want to offer a low CBB, that's your prerogative. The property had better sell itself enough better than anything comparable to still the doubters - and practically every buyer is a doubter. The lower it is, the worse it will be, the longer you'll have to pay carrying costs, and the lower your final sales price. A low CBB, especially in conjunction with other factors about the listing can advertise to buyer's agents that you aren't ready to sell yet, warning them of a difficult transaction. If I can find a model match with an obviously motivated seller around the corner, why should I take my buyer to yours? We're going to get a better price on the same thing with the property around the corner, there will be fewer issues with the transaction, and the fact that I'll make more money even though my client got a lower price is pure bonus for being a good agent. Call it karma.

On the other hand, offering a significantly higher than average CBB doesn't work as well as some people seem to think it does. It definitely won't sell the property for more than it's really worth. Furthermore, it raises all kinds of red flags in my mind, and, I imagine, in the eyes of most agents. "Why do they think they need to offer five percent when the average is three?" springs to mind pretty much unbidden. Most often, the property is overpriced. Almost as often, there's something wrong with it that only an experienced investor is going to be able to deal with - and experienced investors don't pay top dollar for a property. Ever. Quite often, there's something unrepairable detracting from the value of the property. It might get the property sold much more quickly - most agents have some investors I can call if we have reason to, and if you get our attention with a high CBB, both we and our clients are happy. So if you're stuck with a property that has something seriously wrong with it, a high CBB and a low price will cause it to see a lot more action. But they have to be coupled together. High CBB won't do it on its own. On its own, high CBB is pointlessly wasted money.

An average CBB or maybe slightly higher will quite likely accomplish what you want; a quicker sale and therefore a higher sales price. If you're a half percent above average, that's not enough to raise red flags, and it will get you attention. Good buyer's agents will still require that it be an above average value for the client, but they will look, where they might not otherwise. It also stands a good chance of motivating them to really take a good long look at the property.

Short Sales are worse than everything else, as far as CBB goes. Short sales usually take much longer, are more often than not overpriced, and there's a much higher chance of transaction falling apart and the agent losing the client as a result. In my area, over eighty percent of all short sales fall apart, and there's not much the buyer's agent can do to alter the odds - it's in the hands of the listing agent. The lender is going to require the agents involved to reduce their commissions. Agents know this, and they can't really fight it. If you're out there on the cheap end of CBB before the lender wants to grab money we've earned away from us, and four out of five self-destruct and lose the client without closing, what reason is there to show your property, as opposed to the one down the street that's not a short sale? Cost my client money and time to no good purpose, when I can usually find them something just as good at a better price that closes faster and without the eighty percent chance of fallout. But there's always a reason for a short sale. I've never seen one yet where the owner didn't need to sell for some reason or another. Why doesn't matter; If a short sale is the least bad thing that can possibly happen to you, the one thing you don't want is for the property to fail to sell, and a below average CBB on a short sale will practically insure that the property won't sell.

If I had my druthers as a buyer's agent, I'd rather buyer's agency commission be set as a flat amount, regardless of the actual sales price, so that the agent isn't shooting themselves in the foot if they can negotiate a better price. On the other hand, it's not a crime for the seller to structure it in a way that produces dissonance between the interests of the buyer and the interests of that buyer's agent. I may not like it, but I take shameless advantage of it when I'm listing property - I advise owners to make CBB a percentage. Just because I understand a happier client is likelier to bring me more business doesn't mean every agent does. Maybe it's because I read Sun Tzu and von Clausewitz at an early age, and military history has always been an avocation with me. Maybe it's because I took almost enough probability and statistics courses in college for it to count as a major. Maybe I'm just competitive by nature. Whichever it is, I believe in taking every opportunity to load the dice in my client's favor before they get tossed. Anytime there are large amounts of money at stake, you're either in it to win or you are a sucker. There's a lot more money involved in real estate than almost anything else.

At higher valuations, reasonable agents expect CBBs to go down. There's not much difference in the actual work between a half million dollar property and a full million dollar one. Higher liability exposure and a little more hand holding and a little more service. Furthermore, the kind of people who buy million dollar properties tend to be better qualified to do so, leading to fewer escrows failing due to buyers failure to qualify.

One of the things I don't understand is that many agents are the worst about CBB. They should know the power, and yet when it comes to their own money they disregard the facts and try and to do it on the cheap. I make a special note when I notice those listings, because it's like they're shouting, "I'm just out for a quick buck! I don't really know what I'm doing!" to those with the ability to hear it. With that information, I keep a special eye on their listings for other clients. Just part of my desire to look for opportunities to depth charge fish in a barrel. When I find one, it always results in a happier client.

Caveat Emptor

Article UPDATED here

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, there were no "strongly recommended" articles submitted this time, and therefore, no Host's Choice.


Never Pay the Dealer Up Front has some words of warning about pre- and during construction purchases.

Buying a Foreclosure Property is a little short on analysis and how to put the odds on your side, and some of the details are incorrect, but it's a good article for consumers to have read.

Your host presents Non-Exclusive Buyer's Agency Contract - A Bet Consumers Can't Lose



Adfecto Abundantia - Aspire 2 Wealth submits House Lust. He's going about it in a way that's practically guaranteed to end up hosing himself (setting himself up for all the classic traps), but it does meet guidelines.

Tallahassee Real Estate - Area Analysis is very specific to one metropolitan area.

How to Make Sure this is your Dream Home: 7 Practical Tips gets the permissible debt to income ratio wrong, but it's a solid basic article otherwise.



A site named Bond Index Funds wants to sell you bond index funds. Unfortunately for them, that has nothing to do with the carnival at hand. But their advice would be hazardous to your financial health even if it was germane. You might be better off claiming to be the long lost relative of a dead Nigerian millionaire.

American Consumer News submitted a straight shill post. This is not consumer news, except by how many people you can sucker into making a major financial mistake. Absolutely no understanding of the business model of the business they're pitching, or even just the basic facts of the situation. These people have about as much concern for American consumers as Osama bin Laden.

KC Lau needs to buy a clue. He can't keep to the one submission per carnival guideline, and he can't or won't comprehend that the post must be related to real estate. I wouldn't trust my money to the advice of someone like that.

No Load Index Mutual Funds submitted a straight shill article that had no relation to real estate. my thoughts about index funds are that they're for market timers, and that's about it. Just Say No to clueless internet shills.

For those 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, you willingly submitted these posts. Live with it.

Consumer Focused Carnival of Real Estate will return in two weeks (April 9th, 2008), here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be April 7th.

Carnival of Personal Finance

Carnival of Real Estate


I guess it's not just local: Existing home sales post surprise rise


Volokh Conspiracy on the Taiwan presidential election.


Earth a little more resilient than computer models

What a shock. Until we figure out a way to control for variations in the solar "constant", it's going to be very difficult to make a solid case that humans are doing anything significant.


American Media found the space to rehash all of their old discredited allegations about Iraq over the weekend, but for actual news, we have to go to the BBC: Iran 'behind Green Zone attack'


You want "Speaking Truth to Power?" This is speaking truth to power!

In order to be worthy of praise for confronting something, there must be an element of personal risk, and not just that that Horrible Power Structure Will (gasp!) Ignore You.

In converting away from Islam, he's earned himself a death sentence from every Islamic fundamentalist out there. It's been centuries since the Treaty of Westphalia in 1648 cemented freedom of worship for all the world - at least as far as Christianity is concerned. You can dislike Christian fundamentalists and their preaching all you want - but they're not going to try to chop off your head.

People sometimes ask, "Why should the lender care where I got the money for the down payment? I earned it, it's mine - cash is cash!"

They're right as far as they go. In general, the lender doesn't care whether you got your cash. It could have been by selling off your first-born child, moonlighting as a drug dealer, or embezzling the funds from your employer. It's not usually a good idea to get a real estate loan if you're facing criminal charges (and you must disclose it if you are), but if you aren't facing charges, the lenders don't really care.

What they do care about is money appearing for no known reason just prior to purchasing real estate. Quite often that money is an undisclosed loan, on which you are going to have to make payments, which are going to influence the debt to income ratio under which you qualified for the loan you want them to issue you. Debt to income ratio is the most critical measure of loan qualification. If you're going to be making payments of $400 to pay back the person who loaned you that money, the lender is required to consider whether the money you are making is going to enable you to pay back that loan as well as their own.

So the lender is going to want to know where any sudden influx of money in the last few months came from. This is called "sourcing" the money. They want to know where it came from. Did you sell another property? Then they want evidence, in the form of a HUD 1 that shows that money. Did you get a bonus? Let's see the remittance advisory. Did you sell stock? Did you sell your collection of rare Roman gold coins? Each of these has paperwork to attest to the fact, and the lender will want to see it.

If some friend or family member wants to make an actual gift, that's fine also. What the lender will require is a letter from that person stating that this money is a gift and comes with no strings attached. What they're looking for is an explanation that doesn't involve the money being obtained through a loan.

If you've had the money for a while, or have been building it up over time, your account statements will demonstrate that fact. Six months ago, you had $100,000. Since then, you've saved another $3000, earned another $5000, and your balance is now $108,000. This is called "seasoning" the funds. Nobody wants to have a loan sitting around longer than necessary - particularly not a loan for a significant amount of money. Seasoning the funds reassures the lender that this is not an undisclosed loan.

Suppose the money in your checking account that suddenly appeared two weeks ago is a loan? That isn't necessarily insurmountable. Let's get the loan paperwork out there where the lender can see it, examine the repayment schedule, figure out what it does to your ability to make the payments on this new real estate loan you want. If you qualify by debt to income ratio with these payments included, it's pretty likely your loan will be approved. There are exceptions, but I'm going to let those go uncovered, because I'm not real big on telling the general public how to get fraudulent loans accepted. There might be politicians reading this, and letting them know all the answers to that would be irresponsible of me.

The main reason why we have to source and season cash in every transaction is quite simply so people aren't able to hide the fact that they've recently gotten a loan. It seems paranoid at first, but it isn't paranoia if people are out to get you, and lenders have gotten burned many thousands of times over this point. People quite often don't even think it's wrong to keep silent, even though it is fraud. So if they don't require sourcing and seasoning of funds, the lender grants the loan based upon known information, only to later discover that the borrower is unable to make payments due to also needing to make payments on an undisclosed personal loan.

Caveat Emptor

Article UPDATED here

I just picked a random ZIP code in my local MLS, and out of the first twenty listings I came to, ten had explicit violations of one or more of the sections of RESPA regarding steering right there in the listing. This did not include lender-owned real estate, which has its own set of issues in this regard. All I did was count two common violations.

The first was "Buyer must be prequalified by X", where X was some loan originator. In a way, I understand this. Forty percent plus of all escrows locally are falling out, and the vast majority of them because of unqualified buyers who cannot qualify for the loan. This wastes a minimum of about a month, plus when it goes Active again, it looks like it's been on the market for longer than it really has. Bad thing all around for the seller. The justification used is that for some reason, the agent trusts that particular loan officer to render a real opinion. Perhaps occasionally, a lender owned property will even try to require prospective buyers to prequalify through them. While it might seem reasonable, here's some relevant law from RESPA

Business referrals

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

They mean that "any thing of value" bit, if you peruse down the the definitions. It's defined very literally by about a paragraph of text that boils down to four words: ANY thing of value. You refer business to them, they give you approvals you can count on. It doesn't matter if you require "only" a prequalification - they now have the prospective borrowers information, including credit information and home telephone number. This means that even if there's no application fee, no deposit, not even a credit report fee, you have still given that loan originator a "business relationship" with the borrower. That makes for legal consideration on both sides of the equation, and both the originator and agent are guilty. This is just as hard a violation of RESPA as a fraudulent HUD 1 form. It hasn't been enforced much of late, but I believe that the State of California could probably put over half the brokerages and lenders in the state out of business over loan steering. I only counted four out of twenty actual explicit requirements to pre-qualify with a specific lender this time, while the last time I conducted the exercise it was eight. Maybe it's getting better, maybe it's not, but twenty percent of a representative sample of listings having an explicit violation of the law right there for everyone to see is not something agents should be proud of. When it comes to holding someone responsible for their representations, pre-approval doesn't mean anything. If you're a real estate agent who doesn't do loans, talk to a lender you trust about necessary information to determine whether a loan is doable. I've created a special form that I send to agents making offers on my listings. Nothing in the way of personally identifiable information except the borrower's name - no social, no contact information - but it does have credit score, late payment history, income information, etcetera, to the point where I can tell whether or not I could do the loan on the terms necessary to make the transaction fly. Furthermore, it does require the loan officer to sign a representation that they aware that a decision as to whether or not to grant credit - in the form of agreeing to enter escrow - will be made based upon this information. They don't need to make representations of opinion - all I'm asking for is verified facts. Armed with those facts, I have a pretty darned good idea if this borrower is capable of consummating the transaction. Doesn't tell me whether they will or not, but that's not what wanting a prequalification or preapproval is about.

But when I'm a buyer's agent, which is most often, I simply ignore these requests that violate the law. Furthermore, this puts me in rather a strong negotiating position if the listing agent repeats the request or brings it to my attention. Now they've compromised their client's interests, by giving the other side (me) a concrete legal issue to aim at them. Game, set, match. As I said, four out of the first twenty listings in a random ZIP code explicitly violated RESPA right in the listing, without counting the ones that say "Contact us prior to making an offer," where that's usually what they want. Four out of twenty where there is precisely zero doubt that they're violating the law.

Actually, that wasn't the most common violation, either. That goes to "Seller to select all services," at six out of twenty - thirty percent. Also from RESPA:

Sec. 2608. Title companies; liability of seller

(a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.

(b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.

Even though in California the seller usually buys the title insurance for the buyer, I've had more than one lawyer tell me that failure to negotiate is construed as a violation of RESPA by the courts. It works like this: In the case of simultaneous owner's and lender's policies from the same company, there's a discount for the lender's policy, essentially requiring the lender's title insurer to be the same as the owner's title insurer. Since this happens on every purchase transaction where there's a loan, you have the requirement to negotiate. Seller and buyer negotiate until they come to a mutually acceptable compromise. Neither one of them gets to dictate to the other. Furthermore, failure to consider the best bargain for the client is a violation of fiduciary duty for the agent. It's not the sellers who want to choose services. Other than corporate owned property - lender owned and corporate relocation properties - there just isn't a reason for many sellers to care. The only reason is if they're employed by a title or escrow company, and their fringe benefits include free title or a free escrow. I've seen that once in the last four years.

What's really going on here is title insurance companies providing free farms, or subsidized mailings, or any number of other freebies they use to attract real estate agent business. Or the brokerage has a captive escrow company they're required by the broker to use, despite the fact that failing to negotiate this point is a violation of the law. I've had agents or their idiot assistants tell me that they get "discounted service" even when I've got a lower quote from the competition. Furthermore, the interplay of title company and escrow company is important. If there's no common ownership between the two, the title company will charge a "subescrow fee" that I've seen be anywhere from $100 to $450 (usually about $350) because they're the ones who are actually set up to accomplish some things that are legally the escrow company's responsibility. For instance, recording. What this means is that even if the actual quote is lower from unaffiliated companies, the clients are quite likely better off choosing escrow and title companies where there is common ownership, even if the quote is a little higher - because there won't be subescrow fees, and quite likely not messenger fees between title and escrow. To paraphrase an common saying, $350 is $350, even when there's a half million dollar deal happening. Make certain you get a guaranteed total fee for services quote based upon the actual escrow and title relationship to each other. I'm quite sorry for independent escrow companies - I have no reason to believe they're any less competent or charge anything more than title company affiliated ones - but they're competing at a disadvantage because the title company wants to charge more to work with them, and this is quite reasonable given that they will be performing services that are the escrow company's responsibility. They waive subescrow for their own affiliated companies simply because, one way or another, they're responsible for the work.

I've also heard all sorts of nonsense about competence of title and escrow officers. The fact is that most of them are perfectly up to your transaction. Even corporate owned relocation properties, where there may be some complex tax issues, aren't significantly more complex than your garden variety individual buyer - individual seller, and don't get me started about 1031 exchanges. Any good agent's agenda is very simple - competent service providers for the lowest total price. The vast majority of the time, this means a title and escrow company with common ownership. Note that I don't care which title company and affiliated escrow company. I'll do business with anyone that hasn't hosed a client, and even if they have, I'll simply require a different title or escrow officer - just because John has a recto-cranial inversion doesn't mean Jane, another officer at the same company, does. Even lender-owned property will negotiate service providers if you approach it right - which is how it should be. Oh, you'll end up with their choice of providers most of the time, but you can get them to pay for subescrow and messenger fees, and quite likely an allowance to meet your lowest quote elsewhere - meaning your client doesn't really have a reason to care. Essentially the same product at the same price to them. Why would most clients raise a fuss about that? Indeed, the only thing worthy of most clients raising a fuss would be if you didn't negotiate for that. Indeed, explaining the whys and wherefores of the whole service provider quandry has gotten me a seller or two working at cross-purposes to their listing agent, who had someone all picked out without informing their seller. When this happens, my buyer wins. How could I not use every weapon at my disposal?

The intent of Congress on steering is quite clearly spelled out:

Sec. 2601. Congressional findings and purpose
(a) The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country. The Congress also finds that it has been over two years since the Secretary of Housing and Urban Development and the Administrator of Veterans' Affairs submitted their joint report to the Congress on ``Mortgage Settlement Costs'' and that the time has come for the recommendations for Federal legislative action made in that report to be implemented.
(b) It is the purpose of this chapter to effect certain changes in the settlement process for residential real estate that will result--
(1) in more effective advance disclosure to home buyers and sellers of settlement costs;
(2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services...
(emphasis mine)

Whatever forms those kickbacks and referral fees may take, if your agent is violating this, do you really want to do business with them?

Caveat Emptor

Article updated here

Fed Cuts Rates by 3/4 Percentage Point

Bankers are absolutely consistent. Live in fear of inflation. Leave money too tight for too long, then panic and over-react when the what you've done becomes undeniable. Then when the problem passes, crank things up too tight again and wait for the cycle to repeat.

Rate sheets today (March 18th) seem consistent with yesterdays, though - very little difference thus far from the sheets with the massive retail cut that came through yesterday afternoon. Ya think maybe the Fed tipped off the banks? Bankers tipping off banks? Nah, couldn't happen (end sarcasm). But they only dropped rates by about 1/4 percent, so we might see a little more in the way of retail rate cuts as the week goes on. Market forces will determine, of course.


Sad News: Arthur C. Clarke has died.

He hadn't written anything I enjoyed for a while, but his earlier career is awe-inspiring. "Reunion" is and remains one of my favorite stories of all time. It's less than two pages, but you'll remember the last sentence. Childhood's End, City and The Stars, and many others. Compared to those, "2001" was enjoyable enough, but limited in imagination.

And Still I Persist has a very cogent explanation of his influence.


Victor Davis Hanson makes quite a cogent point about Gaza and Hamas


Dalai Lama says he's ready to meet Chinese, but is rebuffed

The Dalai Lama said he'd like such a meeting to occur outside China but would travel to Beijing if the outlook seemed positive. "If there are concrete indications, I am ready, I am happy, after this crisis -- in a few weeks, in a few months," he said.


Foreign Ministry spokesman Qin Gang said at a news briefing that China hadn't softened its stance on dialogue with the Dalai Lama, and likened the Nobel Peace Prize laureate to a gangland figure.


"We must judge the Dalai Lama not merely by his words but also by his actions," Qin said. "As we have repeatedly pointed out, Dalai is a political refugee engaged in activities of splitting China under the camouflage of religion."

Qin said the exiled Tibetan leader was the head of a "Dalai clique" that orchestrated criminal unrest, which began in Lhasa last Friday as Tibetan mobs torched scores of Han Chinese-owned stores, set street bonfires, threw rocks at police and overturned vehicles. Since then, ethnic unrest has spilled outside Tibet to three neighboring provinces.

Actually, he threatened to resign as head of Tibet's government-in-exile if the rioters didn't stop the violence.

If the Dalai Lama wanted, he could trivially have made Tibet into another Kashmir or Chechen war. The mountains of Tibet are more forbidding than Afghanistan, where the Soviet empire met its end. But he has chosen a Gandhi-like path of peaceful resistance. Unfortunately, the Chinese government is not the British, and so instead of independence (or autonomy, which seems to be what he's really after) after considerably less than 49 years which Gandhi achieved because the British behaved decently, we have the least publicized genocide in the world still ongoing because the Chinese government will not.


Fannie and Freddie Set Free

Another stone fell into place in the federal government's plan to build a path to credit market recovery. On Mar. 19, the Office of Federal Housing Enterprise Oversight, or OFHEO, said it was reducing the amount of capital it requires Fannie Mae (FNM) and Freddie Mac (FRE) to maintain on their balance sheets above statutory requirements. By reducing the capital surplus level from 30% to 20%, the regulator will provide up to $200 billion in immediate liquidity to the distressed mortgage-backed securities market.

Stuff like this does more than anything else to restore liquidity. However, I'm going to be the first to say that I don't currently understand why the requirement was in effect, so I'm not certain loosening it is a good idea.

But while the extra capital will set the jumbo markets moving again, Larkin says he doesn't expect spreads between mortgage rates and 10-year Treasuries to shrink meaningfully until the government says it will guarantee Fannie and Freddie paper. That would trigger a wave of refinancing, he believes: "You'd be creating a floor in housing. You'd be stimulating a whole bunch of new demand."

Well, duh! But I don't think the government is likely to do that, and I'm inclined to believe that it would be a bad idea. I'm sure Merle Hazard will have something to say about it soon.


Q and O on free markets and government subsidies causing disruptions therein.


Video: Gingrich lowers the boom on Obama


Leery lenders demand more from borrowers

ust when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow - even for those with good credit.

Man, those crack professional reporters at AP are right on top of the phenomenon - a mere forty days after I covered it all this and more in The Self-Fulfilling Prophecy of Lender Fear

More and more, we're approaching a stage where in order to make sense on many subjects and be in touch with developments, you've got to be a working professional in that field of expertise - not journalism.


Why I love San Diego: It's still winter by the calendar, and today my clients, an inspector and I were out at a property we have in escrow. All of us were in shirtsleeves enjoying the sun. The inspector said he was going to wear shorts for his work tomorrow.

Mortgage Accelerators, or Money Merge Accounts, have become the thing that everyone's pushing of late. I have gotten so much junk mail about this from more originators (who don't know who I am) and wholesalers (who should) in the last few days that I'm going to have another whole go at the entire concept. The claim most often advanced is "pay off your mortgage in a fraction of the time!" In fact, typical numbers say they're only going to do a fraction of the good done by biweekly payment programs, which effectively make one extra payment per year. Money merge accounts or Mortgage Accelerators (to use the term I originally learned years ago) have been pushed and over-promised so badly of late that I hope whoever manages to do an elementary search will be able to find a voice of sanity.

These wasteful loans that waste a homeowner's money are fast becoming the current market's negative amortization loan as far as marketing goes. These things are being pushed hard, consumers are being led to expect far greater results from them than they are likely to achieve, with the results being that those consumers who sign up for them are wasting their money. If they're not as bad as negative amortization loans, that's still damning with faint praise if ever there was such a thing. Not as bad as the loan that encouraged people to buy a more expensive property than they could afford, put them more deeply into debt with every passing month, ruined their credit ratings, and caused them to lose the property they over-extended to buy, as well as setting the United States as a whole up for the worst financial crisis we've experienced in the past eighty years. Well, it is kind of a high bar for lenders to get over, and they haven't done it here - but that's not due to concern for consumers.

What goes on with these accounts is complex, and they're not all identical. The basic idea is the same, however. You create a special account of some nature, where you deposit your entire paycheck in the mortgage account, where it lessens the amount of interest you pay on a day-to-day basis. Then you pay your other expenses of living out of the account, gradually increasing the amount back up until the next time you get paid. The idea is that by paying down the balance with your entire paycheck, less interest accumulates and people making the same regular payments will pay their balances down faster with the same balance.

Sounds like a cute idea, right? If it was free, they would be a pure gain for the consumer. Unfortunately, they're not free, and I've never yet seen one that wasn't more costly than it could possibly be worth.

Lenders like these things for a lot of reasons. Most obviously, they're getting pretty much all of a consumer's banking business. Checks come in, go out, clear or don't; all those lovely fees. In the vast majority of all cases, there's the initial cost and interest expense of an associated home equity line of credit. This also raises the bar to make it more difficult for a consumer to refinance away from their loan if someone offers them a better deal. Furthermore, there's usually an explicit charge of about $3500 to set the thing up. I'll show where this money would be better spent on a direct paydown of the mortgage.

Also, the people who sell these things have these beautifully intricate presentations. While people are watching the money whizzing about between one account and another, they're usually not considering whether those figures are reasonable, typical, or even anything like the numbers they personally experience.

Most importantly if consumers are shopping for a new loan, their attention is distracted from the most important part of shopping for a loan - getting the best possible tradeoff between rate and cost, focusing instead on this fascinatingly complex toy that doesn't make nearly the difference most of the people pushing it say it will. Taking the attention of consumers off the question of what rate they are getting, on what type of loan, at what cost, means that they don't have to compete nearly so hard to give you the most competitive rate-cost tradeoff. In plain English, their loans can charge a higher rate of interest. In fact, this difference will cost the typical borrower far more than they could ever hope to save via a money merge account. I'll go over that in this article, as well.

So, first off, let's consider what typical numbers are. Here in San Diego, the median property sale is $558,000. In order to qualify for the loan, consumers need a back end Debt to Income ratio of 45%. Front end will most typically be around 36%, with property tax, insurance, vehicle payments, credit cards, student loans etcetera. I'll be really nice and say 32% - chances are that if it's lower than that, the people would have bought a more expensive property. I'm going to assume 20% down payment or equity, which is, if anything, larger than typical. We'll postulate a rate of 6%, which is probably a hair higher than most folks with conforming loans have - and more favorable to the money merge account - and I'm going to put it all into one loan even though that's theoretically a jumbo loan amount, just to give the money merge/mortgage accelerator every possible benefit of the doubt. After all the smart thing to do is split the loan amount, which leaves roughly $30,000 out of this account in a higher interest rate loan, and so the scenario envisioned is more beneficial to the Money Merge than what happens in the real world.

This gives a loan of $446,400. At 6 percent, the payment would be $2676.40. Assuming 32% front end ratio, that's a gross monthly pay of $8365. I don't have withholding tables, so I'll use the actual tax rate for couples making slightly more than $100,000 per year with about $55,000 taxable, which is $7400, plus about $8700 in Social security taxes, plus state taxes which I will assume to be roughly $2000. This money gets withheld - it never comes to you in the form of a check. Since you don't get it, when your check goes into the money merge, it doesn't help you pay the interest. This leaves $81,900, or $6825 in take home pay. I'm not going to worry about other deductions like health care, or how your pay is structured, which further erode the benefit. I'm just going to assume it hits your account in full on the first day of the month, maximizing benefit, although I'm still going to assume all of the excess goes out every month. If nothing else, for investment accounts. It's pretty silly to have your money paying off a 6% tax deductible debt when you can have it earning about 10% elsewhere! But this isolates the benefit gained from the actual Money Merge, and separates it from any benefit derived from making extra payments, which is another way the people selling these play "hide the salami" with consumers, distracting them from what's really causing the benefit - the extra payment, which almost anyone can do, anytime they choose, for free. I'm even going to assume that you don't have an impound account, so the money you eventually spend for property taxes and homeowner's insurance goes to help the money merge as well.

So you get $6825, less the payment of $2676.40, leaves $4148.60. Over the course of the month, money goes out to pay for all of your expenses. They people who sell money merge accounts urge you to leave paying your monthly bills as late as possible to get the maximum benefit from these accounts, completely ignoring the costs of the occasional late payment this is going to cause, as well as detrimental effects upon your credit when it does happen. In fact, a certain amount of these bills are going to wrap into the next month, meaning that under the conditions we've agreed upon, you write that check to your investment account for this month and pay that bill out of your next month's pay if you're smart. Since you're going to write that particular check ASAP if you're smart, that's going to diminish the effects of the $4148.60. But I'm going to be nice and give you a $1000 "cushion" that you carry into the account from month to month (again, you won't do this if you're smart), while the $4148.60 is going to be paid out evenly over the course of the month, giving you a mean daily amount of $2074.30, plus $1000, or $3074.30 per month of temporary principal reduction. This reduces your interest paid by $10.37 that first month! I'm going to assume this is pure gain, every month, and that it continues to compound. If you do this every month for thirty years, you'll actually pay off that loan a grand total of three months early, and the last payment is reduced to a shade over $400! All of this hooting and hollering and shouting and frustration over three months of paying your mortgage off - in an absolutely optimized, perfectly favorable environment where the Money Merge account didn't cost you a penny in set up fees or monthly cost. And even in this ideal situation, with the maximum reasonable advantage compounding over the course of the entire mortgage, out of $963,000 in payments, the money merge saves you about $10,000 at the very end - just over 1% of total payments, heavily discounted for time value of money thirty years from now. That's not the "pay your mortgage off in twelve years for the same payment!" come on used by the most popular of these! Were I the regulatory authorities, I'd be looking very hard at their advertising!

But most people don't pay their mortgage off in this fashion, and these accounts are not free - or at least I've never heard of one that was. Most people refinance or sell within three years. When they do that, the accounts have to be set up again - which requires new set-up fees. In the example given above, that $10.37 per month compounding for three years is worth $407.92 - and that's if there are no countervailing expenses.

In point of fact, most of these accounts charge a monthly fee that ranges from roughly $1 to whatever they think they can get away with. Plus, there's an upfront cost that ranges from $1995, the cheapest I've seen, up to nearly $6000 depending upon the plan, with most seeming to fall in about the $3500 range. Plus, most of them require you to use a special Home Equity Line Of Credit (HELOC), which costs money in and of itself. The rates on HELOCs are higher than for regular mortgages, forcing you to effectively pay a penalty in interest of having $2000 or $5000 or whatever it is at a higher rate of interest, by usually about 2%. Keep in mind that this is ongoing, and for the entire month. The $2.30 to $8.30 per month this costs directly soaks off a large percentage of the $10.37 putative gain you get. Not to mention whatever the initial costs of the HELOC are. Some are cheap - I've seen others that had thousands of dollars in upfront costs. The HELOC costs, both upfront and monthly, are not relevant to the few plans that don't require HELOCs, but most do.

So with a middle of the line account, you've spend $3500 just to set the money merge (or mortgage accelerator) up, versus $407.92 in benefits over three years, which is longer than most people keep a given loan. Would I do that? Not on your life or mine! Why should I expect one of my clients to do so?

Now, let's consider some alternatives. Remember I told you the money merge account saves you $10.37 per month in optimal conditions, which works out to just about $10,000 saved at the end of thirty years? Well, let's ask ourselves, "What would be my benefit if I just took the $2000 the cheapest one of these costs me and instead used it for direct principal reduction?" In other words, what if you added that $2000 to your regular mortgage payment once? The answer is, for the example above, that you pay off your mortgage four and a half months early, as opposed to about 3.8, saving an additional $1800! Using the upfront costs for the cheapest of these that I'm aware of pays the mortgage off sooner than the accelerator account! After the three years that's all most people keep their mortgage, you're still $1985 and change ahead of the poor stupid schmoe who signed up for the accelerator account! For a middle of the line $3500 set up fee, the difference, mutatis mutandis, is $3780 and growing at the end of three years, to the point where that mortgage is paid off 6.7 months early, as opposed to the mortgage accelerator's 3.8, saving thousands of dollars more than the "accelerator"! This doesn't count the monthly costs, HELOC set up fees, or additional HELOC interest charges that the vast majority of these accounts require, and which do siphon off the benefits as noted above.

Keep in mind that with all of this, I've been building a "best reasonable case" to maximize the money merge's advantages. I've mentioned several assumptions that I was making in the account's favor. If any of them changes, the putative benefits basically vanish entirely, or even go decidedly negative.

Now, let's ask ourselves if getting distracted by a mortgage accelerator caused us to not shop as aggressively, or not pay as much attention to the tradeoff between rate and cost as I should have, and as a result, I end up with a mortgage rate that is a mere 1/8th of a percent higher for the same cost. An eighth of one percent is the smallest rate bump in the "A paper" world, and quite often I see differences of a quarter to half a percent for the same loan between various A paper lenders when I'm shopping a loan. What would that cost me if I could have had 5.875% for the same cost instead, even keeping the benefits of the accelerator?

The answer is $35.77 per month on the payment, but more importantly, $46.50 the first month on the interest, and this adds up to $1641.77 less interest paid over the three years most people keep the mortgage, while the $10.37 per month benefit of the money merge put the 6% loan as having a balance that's actually $20 lower. Not counting fees of the money merge account, or anything else - just pure difference on the actual cost of that loan, in the form of interest you paid that you wouldn't have had to. How does that sound: Even if everything about the money merge was free, you'd be getting a $20 lower balance over three years in exchange for having spent $1600 more on interest. If you offered people $1600 for $20, what proportion do you think would take you up on it? If you offered them $20 for $1600, how many suckers do you think would go for it, even if you personally begged ten million people?

For those of you who may be loan officers - or real estate agents - reading this, can you point to one single putative benefit that you would think worth the cost that lenders charge to sign up for these programs yourself? As I've said, I can't. There is nothing here that justifies the wild ways in which these are being marketed, and the ridiculous promises that are being made about them. In point of fact, I can think of only a few possible reasons to sell these:

  • Eyes only for a commission check (probably number one in terms of the overall market)

  • You don't understand what's going on, took some marketers word, and haven't done the numbers yourself (hardly a recommendation of your services or professionalism)

  • You just don't care about your clients welfare

A year and a half ago, when these started being marketed, I wrote about the broad outlines. Never had the urge to hose a client by selling one, so didn't really investigate any further, although I wrote that the benefits were quite minimal as compared to the costs a few months later. But the ridiculous promises and over-aggressive marketing these have been subjected to in recent weeks have finally motivated me to do a rigorous analysis, and what I see is not "merely" of minimal benefit in even the scenarios most amenable to said benefit, but actually costs more than any putative benefit. I can see precisely zero justification for counseling any client in any situation to pay the money that every one of these I have yet encountered to set it up, as the benefits derived from any of these programs with which I'm familiar never do manage to equal the opportunity costs.

Now before I sign off, the point needs to be made that the psychology the account engenders in the consumer is likely to be beneficial, rewarding themselves psychologically for making what are extra payments on the mortgage, and as far as that goes, the account does accomplish something praiseworthy. But the vast majority of all mortgage borrowers can make extra payments of principal any time they want, for free, and when you consider these accounts strictly on the basis of actual numerical advantage over real alternatives, the costs of the program are literally never recovered.

Caveat Emptor

Article UPDATED here

There are two sorts of buyer's agency contracts, exclusive and non-exclusive. Note that this has nothing to do with Exclusive Buyer's Agents, who do not accept property for listing. I disagree with their reasoning on the virtues of doing so, but I can see a reasonable person making the arguments that they do. Despite the fact that ninety percent of my business is as a buyer's agent, I have no plans to become an Exclusive Buyer's Agent. The line their organization takes is that agents tend to work on behalf of their listing clients, neglecting buyers even when they're representing them as well. To be fair, I do see that happening in the industry. The solution is quite simply to refuse Dual Agency. I get referral business by making each individual client as happy as I possibly can, not by hosing one class of clients so that I can make another that little bit happier. I'm only on one side of a given transaction, and my clients will tell you I'm not in the least hesitant to advise them if something isn't quite like I would like it to be. Furthermore, I learn things by listing properties - things that I can turn around and use to help my buyer clients - just as I learn things by representing buyers that I can turn around and use to help my next set of listing clients. Without that feedback between the two very different tasks of representing buyers and representing sellers, I'd be a much weaker agent, whichever side of the transaction I was on.

Now some states permit agents to call themselves "exclusive buyer's agents" if they work with exclusive buyers agency contracts. An exclusive buyer's agency contract, however, does not mean that all of that agent's business comes from representing buyers. It means that they require buyers to sign a contract that essentially prevents those buyers from working with another agent. An exclusive buyer's agency contract says that no matter which property these buyers buy during the period it runs, that agent will get paid. End of discussion. Since the buyers accept responsibility to pay the agent if the seller or someone else doesn't, which isn't a problem if there's only one buyer's agent, because it is in the seller's interest to pay the buyer's agent. However, what the seller pays only covers one agent, so if there's a second agent involved, the buyer has to pay that second agent out of their own pocket. This essentially constrains them to work with the agent they've given that exclusive contract to. Many very weak agents require exclusive buyer's agency contracts because they're scared of the competition - they know they don't measure up, so they cut the competition out by binding them with an exclusive agency contract. They've got good advertising campaigns in effect, good networks of people, whatever - the essential element in their strategy is that the prospective buyers talk to them first, before those buyers understand what's really going on. Not to mention that this does, in some states, allow them to designate themselves as "Exclusive Buyer's Agents." This is confusing nonsense, and not beneficial for consumers.

There is, however, an alternative. This is the Non-Exclusive Buyer's Agency Contract. This is a standard contract, available in all fifty states through the work of the Association of Realtors (self-interested dinosaur controlled by major chains though the organization is, it does do some beneficial work). In California, it's put out as a part of the WinForms program of standard forms, and I suspect the same is true elsewhere. When you strip it of all the legalese, what it says is that If you buy a property that agent introduces you to, then that agent will be entitled to a buyer's agency commission. Notice that construction, straight out of you high school geometry or logic course? If A then B. If not A, then nothing. In other words, if some other agent introduces you to the property you buy, you owe this agent nothing.

Consumers can be working with literally any number of prospective buyer's agents through non-exclusive contracts, and be perfectly safe. There's only going to be one commission due - to the agent who actually gets the job done. Because of this, consumers can sign one of these and start working with any agent, safe in the knowledge they're not stuck with that agent if they find out they're not doing the job they should. The only thing consumers are giving up is the ability to cut out the agent who actually finds the property they want to buy at a price they're willing to pay. Since this is the hardest, most difficult, most time consuming and most liability ridden part of a buyer's agency job, this is only reasonable. You don't go down to the premium mechanic, have them fix your car, and get out of the bill by paying the cheap shop on the corner. That is the real work for a buyer's agent, not the paperwork of the offer and escrow period, or the gladhanding, or even the showing. The ability to recognize and negotiate a bargain are closely related, however, so even if you get a lower buyer's agency commission by cutting out the agent who finds the bargain, or a cash rebate, you're likely to end up paying more overall for the property. How is saving one or two percent and missing out on five percent, ten percent, or more a good investment? The lowest difference I've made in the last year was over fifteen percent, by CMA of properties sold. That's what a buyer's market will do for you. But you're unlikely to find the agent who makes that kind of difference in your area first time out of the box. The non-exclusive buyer's agency contract lets you give every agent you meet the same chance to earn your business - which means consumers get to force the agents to compete on the basis of who actually does the job!

This makes signing such an agreement a bet the consumer literally cannot lose. In fact, the more such bets the consumer makes, the better it's likely to turn out for them. The weaker agents will self-select out of the process in most cases. What this means in plain every day talk is they won't exert themselves because they know they're not likely to end up with the business. The consumer who signs ten non-exclusive buyer's agency contracts might have, at most, two or three agents who actually work for the business. The others simply won't. They know they can't compete, and simply won't bother. Actually, most of them won't sign the non-exclusive agreement. They'll try to talk you into an exclusive agreement, but don't let them. For the consumer's part, they can simply keep looking for agents until they find the ones that will compete.

Indeed, it's only when signing an exclusive contract that consumers are making a bet they can lose. Not only can they, they are extremely likely to. Remember the ten non-exclusive contracts you signed in the last paragraph, out of which you got two agents who were willing to actually do the work? Look at that the other way around. Eight out of ten didn't, and the real proportion is probably higher than that. So if you sign an exclusive buyer's agency contract, those are the kind of odds you're facing. Eighty percent or more chance you're locking your business up with an agent who won't really do the most important parts of the job. I get calls from these people's victims all the time, asking me to work for them without any chance of getting paid. My answer is no. I'm perfectly willing to compete for the business, but I'm not willing to work without pay so that someone else can get paid. I'm eager to make the bet that I can out-compete other buyer's agents, but if someone else has already been awarded the gold medal, I'm not going to so much as head for the stadium. How hard do you think the person who has been pre-emptively awarded that gold medal is likely to really work for you? If the answer you got is, "not very" then you understand why you shouldn't sign an exclusive agency agreement. But buyer's agency is one competition where "time in the competition" doesn't control who wins. If you don't award that gold medal before the competition is held, good agents will compete, and they'll work all the harder because if they don't measure up, you can always find some more agents who will. Isn't that what you really want as a consumer?

Caveat Emptor

Article UPDATED here

Effective April 1st and for the rest of 2008, Fannie Mae and Freddie Mac will be buying loans above the current limit of $417,000. The is a result of the economic stimulus package signed by President Bush on February 13th. They will begin purchasing Fixed Rate Mortgages on April 1, 2008, and hybrid ARMs on May 1, 2008. Due to the length of time it's taking to actually fund said loans, several major lenders are now offering the opportunity to register and lock the new loans. The new limits, which vary by Metropolitan Statistical Area, do not appear on either Fannie or Freddie's web page yet, but the FHA Mortgage Limits page seems to have correct data for every county I checked, which was about four counties.

Fannie and Freddie have recently announced their policy as to what they will and will not fund as far as these loans go. In fact, Fannie seems to be taking the lead, issuing the letter I've seen.

The standards are significantly more restrictive than Fannie and Freddie's standards for conforming loans. The first difference is no automated underwriting, at least not yet. You have to live and die by the specified underwriting standards, including debt to income ratio, which under automated underwriting I've seen much higher than guideline approved for people with stable income like government pensions, good assets and good credit. Here's the quote:

All loans must be manually underwritten. The jumbo-conforming loan limits, eligibility, and underwriting guidelines will be added to Desktop Underwriter® in a future release.

Keep in mind that that the Jumbo Conforming loan, as currently written, expires at the end of 2008. I suspect there'll be some sort of extension going in to 2009, but at this point there is no guarantee there will be anything. For those who are wondering, this doesn't mean the loan will vanish or anything. It just means that there won't be any new ones funded after that unless something happens to extend the program - which I do expect but cannot guarantee. It would be pretty pointless to have this be one of the keystones of the economic stimulus package if everybody concerned intended to let it collapse at the end of the year - and the Federal Reserve, at least, knows that.

The written standards themselves are more strict as far as loan to value ratio goes. Freddie (at least) is still perfectly willing to buy mortgages at 100% financing for purchase money conforming loans - it's just the actual lenders who are not willing to fund them in the first place. Credit scores down to 620 are at least theoretically possible for conforming loans, but "jumbo conforming" purchases are limited to 90% with a credit score of 700, 80% with a credit score of 660. Those are fixed rate. hybrid ARMs are limited to the 80%, and require a 660 credit score. For Fannie and Freddie's "Limited Cash Out" definition, which is essentially a rate term refinance, 75% is as high as they will go. Cash Out Refinances, Fannie and Freddie won't buy, even on a primary residence. On second homes and investment property, 60% is as high as they will go, even for purchase money or "limited cash out".

For Jumbo Conforming, all housing debts must be in "0x30" status for the past twelve months, which is mostly a little bit stricter than the conforming standard. This means that you can't have any rent or mortgage payments that were 30 days or more late - not just on this property, but on any property you owned or rented in the last twelve months.

Thus far, the only two loan products that I'm certain will be included are the fully amortized fifteen and thirty year fixed rate loans, and the fully amortized 5/1 ARM. The 5/1 Interest Only for ten years that they have also included is not a standard loan product. The 7/1 and 10/1 appear on some rate sheets, though, so I'm thinking that the specifications are minimums: In other words, it must be fixed rate for at least five years, it must begin amortizing within 10 years. Indeed, I've just had this mostly confirmed by a couple conversations with wholesalers. Also, interest only fixed rate mortgages are specifically disallowed, but The Word is that interest only periods of up to 10 years are acceptable for those as well, and that the prohibition applies only to fixed rate loans that don't begin amortizing for longer than ten years. For instance, a loan that was unamortized for its full term would be unacceptable to Fannie and Freddie, which is nothing new. Fannie and Freddie have always required that the client begin actually paying off the loan at some point be built into the loan structure.

Some folks are making a big deal out of "no consolidation of existing first and second liens," in the guidelines, but that just goes to show how little A paper they've done these last few years. That's a standard criterion for Fannie and Freddie's Limited Cash Out refinances. So anyone that has an existing Second Trust Deed is going to have to subordinate the existing loan. I don't know that refinancing each loan simultaneously would be rejected, but the Official Word I have is that Subordination Is Your Only Option. That would be a loan killer if the current second mortgage holder refused.

Residential mortgages are for 1 to 4 units, but for Jumbo Conforming loans, Fannie and Freddie won't buy anything financing more than one inhabitable unit. Condos, townhomes, and PUDs are all fine, but no two, three, or four unit properties under a single title or deed of trust. Interestingly, Co-ops are also disallowed by the guidelines for Jumbo Conforming loans.

Finally, rates are higher than regular conforming rates. For fixed rate mortgages, there's a minimum of a quarter of a percent hit on the rate, as opposed to regular conforming mortgages. That's a price hit direct from Fannie and Freddie. The actual differences on the price sheets I've gotten are much higher than that. The thirty year fixed rate loans seem to be about 1.25% higher for the same cost as conforming, the fifteen year fixed rate about 1.5%. That the differential is actually higher for the shorter term loan is astonishing to me, and I can't think of a reason why at the moment. For hybrid ARMs, the pricing adjustment from Fannie and Freddie is three quarters of a percent, and the actual difference seems to be about 1.75% higher for the same cost. However, for fixed rate loans, this is about 1 full percent lower than regular "non-conforming" rates, while the "non-conforming" rate pricing for hybrid ARMs seem pretty similar to jumbo conforming. For fixed rate mortgages, at least, this provides a constructive alternative for full documentation type loans above the regular conforming limit, which have suffered severely by association with stated income loans these past several months. They're no longer completely joined at the hip. Now, up to San Diego's limit of $697,500 anyway (limits in your area may vary), full documentation loans are going to get a better loan than "stated income" borrowers.

I've had my suspicions from day one of this whole thing that Fannie and Freddie don't really want to fund these loans, but they want to stay on Congress' good side in case they ever need something. There's no longer a legal commitment that the US government will backstop Fannie and Freddie as far as losses go, but there is a strong feeling that they will, and doing the bidding to Congress at least this much gives them the moral ability to go to Congress for relief if this all goes south on them. "We did this because you wanted us to!" may not obligate the taxpayers directly, but many corporations have received public assistance on far weaker claims - while if they refused, Congress could well decide not to bail out what are, in fact, privately held corporations that are run for profit. So Fannie and Freddie have made the fact that they're not happy with this quite clear to those with the skill to read between the lines - but they're going to go along as far as they are with what the government wants them to do, because you're never certain that you won't need help somewhere along the line.

Caveat Emptor

UPDATE 5/8/2008: Fannie and Freddie have changed things a bit, and now the temporary Jumbo Conforming Loan rates have dropped like a rock, to the point where there's only a quarter to a half point difference in cost between them and regular conforming at the same rate. Now that will make a difference for full doc borrowers. Stated Income is non-conforming, and those rates are still significantly higher. I've said all along that Jumbo borrowers were suffering by association with stated income, due to the fact that both traditionally used the same rate table for A paper borrowers. Now that Jumbo Conforming loans have broken that association, the rates (up to the new limit) have dropped. This is about as surprising as gravity.

Carnival of Real Estate

The San Diego Special Edition


Science of sleep

Lack of sleep is unhealthy. After only six nights of four hours of sleep, test subjects were in a pre-diabetic state! Leptin levels were depressed, causing people to believe they were hungrier - and they ate more, gaining weight. All sorts of other issues documented at the link!


Much ado about nothing: CAN SPAM act

The fine is the largest ever imposed for a violation of the federal CAN-SPAM Act, the Federal Trade Commission said. The act, approved by Congress in 2003, bars deceptive practices in e-mail advertising.

$2.9 million? That's nothing on the scale of their revenues or income.

Shares of ValueClick fell 90 cents, or 5 percent, to $16.57 in midday trading. The company has traded between $16.24 and $36.70 in the past year.

When it gets de-listed, then we'll have made some progress.


Here's something I don't understand. Alimony, etcetera is a hold-over from the days when women were essentially property. Why isn't NOW looking to put Alimony in the past along with Jim Crow?

Mills Awarded $48.6M From McCartney

The answer, of course, is that NOW isn't an equality-seeking group. They're a power-seeking group, and alimony and asset judgments give power to women.

It appears from the story she married him in 2002. Even if divorced today, that's only six years. Paul McCartney has a large, pre-existing net worth that she made no significant sacrifices and did no significant work to help earn.

$48.6 million for six years. $8.1 million per year, not counting however long since they stopped sleeping together. Yes, they have a daughter together, but this is totally separate from child support. This is pure ex-husband to ex-wife transfer. How would he not have been better off hiring one of Elliot Spitzer's girls? $1000 per hour times 8640 hours per year equals $8.64 million per year, and you wouldn't need them more than one third of that time at most - or about $2.9 million per year. In reality, what do you think the average time per day would be? Maybe an hour every two days? With the leftover change, he could have hired a surrogate mother, and had millions left in his pocket. And women wonder why men don't want to get married? It's not like she's not much further ahead of the game than she would have been without him, simply due to the people he introduced her to and the opportunities she had because she was married to him, without any transfer payments at all.

I'm also wondering exactly how she is morally superior to a prostitute. Without some sort of "by definition" fiat (as in "religious fiat"), I'm not getting there. Quite the opposite, in fact.


The bloom is definitely off the media rose: Obama walks arrogance line

Voters won't cut Obama as much slack on the humility test because he's sold himself as something different. While rejecting the "me"-centric status quo and promising a new era of post-partisan reform, Obama has said the movement he has created is not about him; it's about what Americans can do together if their faith in government is restored.

The power of his message lies in its humility. As he told 7,000 supporters at a rally last month, "I am an imperfect vessel for your hopes and dreams."

Nobody expects Obama to be perfect. But he better never forget that he isn't.


Stunned Bear Stearns investors eye legal claims

Here's the deadly line:

Nobel said his firm has been contacted by investors who bought the stock as recently as last week. Some of these buyers, he said, took their positions after Bear CEO Alan Schwartz said in a televised interview on Wednesday that the company does not see any pressure on its liquidity and had about $17 billion in excess cash on its balance sheet.

"You have investors who are upset because they feel as though the company was not truthful in reporting its financial condition," Nobel said.

Gallows humor, realtor greet Bear's stunned staff


Actions speak more truth than words

Always, always, ask yourself "What benefit does this person derive if I believe what he tells me?" They may be telling the truth anyway. But just because you don't understand they benefit doesn't mean they aren't getting one.

The answer depends upon what they're doing for you.

If you contact them because they're the listing agent for a property, they shouldn't ask you to sign an agreement at all. They have a fiduciary duty to that seller to get the property sold. If the act of asking to sign the agreement causes you not to buy, or not to view the property - something that cannot be known in advance - they have violated fiduciary duty. They've just caused potential buyers to be discouraged. That's as hard a violation as it gets. It doesn't stop a lot of agents, as I've written before about Tina Teaser and Sherrie Shark, but it is a straightforward, no nonsense, no kidding violation of fiduciary duty. You don't want to do Dual Agency anyway, as I've written on many occasions. There are many reasons why you want a buyer's agent representing your interests, especially if it's a new development. There are all sorts of issues that will bite people without buyer's agents ten to a hundred times or more frequently. Issues that arise directly because of Buyer's who don't want buyer's agents are about nine of the top ten reasons why buyers get burned, including the top three or four.

If all an agent is doing is setting up an internet gateway, or search, that's no big deal either. MLS will allow me to have something like 120 client gateways at a time. I've never had half that at any one time. I can't serve that many people. I can only work with an absolute maximum of about six sets of full service buyers at a time - and that's if I don't have any listings. A smart agent will quite happily set up and internet gateway on the speculation of getting a transaction out of it. I'll call or email these folks periodically to see if they want to look at anything, or anything has caught their fancy. I'm not investing any significant time with them; they don't count against my (self-imposed) limit of six clients at a time. In fact, I make a lot more per hour with these clients than any others. Indeed, those of these folk who only want me for the paperwork will ask me for a contract that says I will rebate part of any buyer's agency commission at that point in time. If my liability is less and I'm not putting in anything like the time I need to for a full service client, I'm perfectly willing to work for a lot less money.

If you come to me to put an offer in, I don't need a contract there, either. The purchase contract specifies that I'm the buyer's agent - I don't need another one. Some agents use this moment as an opportunity to "lock up the business" by insisting people who want to make an offer through them sign an exclusive buyer's agency contract, but there is precisely zero need for any kind of agency contract at that point in time. The agency is created for this offer by the purchase contract itself, either explicitly (as in the California standard contract) or implicitly, by agency law. There's absolutely nothing wrong, ever, with an agent who asks you to sign a non-exclusive buyer's agency contract. You can walk away from a non-exclusive agency agreement at any time, but an exclusive agency contract requires that you stick with them even if this one falls apart. Suppose they do something to sabotage the transaction? It happens.

It's a rare client who requires something I have to pay for, but It does happen. Mostly, it's fresh foreclosure lists when it does happen. I haven't been subscribing consistently, as right now the well-aged ones are mostly better, but I know the ones that work for when I do have clients that want them. I can get them starting that day, and going back. I don't charge for this - but that's the only time I ask for an exclusive buyer's agency contract. Not only am I putting out a significant stream of money for their benefit, these people do count against the limit of six clients at a time I can work with - they count double! Working the fresh foreclosure lists is a lot more demanding than anything else I do, because it's all time critical. I can't put it off a day, and often not even an hour, even if there's something else going on with another client - it's got to be done NOW, and there are a lot of misses for every hit. It's kind of like been married to the ultimate high maintenance spouse. If that spouse is not willing to give just as much, nobody rational wants any part of that relationship. If you want an agent to put in that kind of work, you're going to have to commit to that agency relationship.

But the one common time a good agent will ask for a buyer's agency contract is when someone wants a real full service package. Property scouting is far too time intensive to do on speculation that you might want to do the transaction with me after I invest the time to find a real bargain. The agent has to invest usually weeks of time up front, culling out the bad prospects in favor of the better ones. This is, by the way, far and away the hardest work of the transaction, and the work that gets done has most of the liability of the process. A good agent - one who knows how good he or she is - will still only ask for a non-exclusive contract here. I'm perfectly willing to bet that I'm going to find you something you want to buy, and if I don't, then you owe me nothing. I'm eager to make that bet, as a matter of fact. I am not frightened of people who want to work with multiple agents. I know that the vast majority of them won't get out of their offices to go look. But if I do find something you want to buy - I take the time and do the work, and my experience and training spots a superior value - then I'm not going to countenance you then taking the transaction to some other agent. Kind of like a mechanic who gets the problem fixed - and then you decide to take the car to another mechanic. You're still going to have to pay the mechanic who actually solved your problem, and you're still going to have to pay the agent who finds the bargain. You don't think the agent did anything to deserve getting paid? Then don't buy that bargain property they found for you! But if you want to buy the property they found, then there is, by obvious fact, something particularly valuable, both about their property and about their work in finding it! If that were not the case, you wouldn't want to buy it.

So it's reasonable to be asked to sign a non-exclusive buyer's agency contract. As a matter of fact, agents that actually do this work have learned that if they don't get you to sign it, a very large percentage of people will then go to a discounter or rebate house, or even just buy the property without an agent, thinking they'll get a better bargain that way. Not only will you get a better bargain through the agent who understands the property and the market, that agent can then stay in business for the next time you, your friends, or your family wants to buy real estate. That's a win-win. But trying to cut out the agent who found the bargain is a lose-lose. You'll get a cookie cutter transaction from someone who doesn't understand the market and can't bargain as well - you'll end up paying more, and if there comes a point where you should walk away, they won't know it and won't tell you if they do.

Caveat Emptor

Article UPDATED here

USA Today has the right point of view on the Air Force Tanker Deal. Boeing had the deal locked up - until Senator McCain blew the whistle on illegal payments they made to get it.

The contract was then re-bid, and a consortium that included Airbus and Northrop won the contract, fair and square under heavy scrutiny. The deal and jobs that would have gone to Washington and Kansas instead went to Alabama and Florida - as the plane is still being built in the US. In fact, about as much of the aircraft will be US made as would have been the case had Boeing gotten the contract.

Senator McCain deserves praise, not just for blowing the whistle, but for being willing to stand up to the smears of opposition party lawmakers in Washington as well as corporate dissemblers who know darned well that their company would have gotten a very sympathetic contract had they not paid kickbacks. Indeed, Boeing was very lucky it wasn't barred from the process of the re-bid of the contract entirely.

Let's see. Company pays illegal kickbacks and bundles campaign contributions in way to get around law, and is awarded huge Air Force dollar contract for billion dollar planes. Whistle blown, at considerable political risk, by John McCain. Contract re-bid under intense scrutiny. How is this not a good thing for citizens of this country? Do we want to encourage corruption in our government contracting system? Has some sort of "spoils system" for government contracting become the main point of the system?

Personally, I think blowing the whistle, as John McCain did, is precisely what we should be able to expect from our public servants, and the Washington state politicians who are decrying what he did are covering themselves in even more shame. I think the fact that Senator McCain was willing to do what is best for the country, while so many other politicians were not, is a major point in his favor in the current presidential campaign - especially against two of the senate's biggest porkmeisters.


Don Surber has some very cogent questions that need to be asked at the next debate.


Obama's choosing his position based upon politics of the moment

neo-neocon contrasts with John McCain


Reading this over as I get ready to publish, I wasn't intending to make this a "support John McCain issue" of L&M. Nonetheless, all three prior items that caught my interest have something indicating one or more reasons to do that. I'm going to let it stand. What's more important than making a sane rational decision about who's going to have the most important and influential job in the country (if not the world) for the next four years?

Given the candidates on the table, I'd support John McCain if the parties of the candidates were switched.

I'd support John McCain if the sexes of the candidates were reversed.

I'd support John McCain if the races of the candidates were switched.

It's not just about character. It's about leadership ability. It's about voting record. It's about deeds. It's about where I think the country should go - where I think the country needs to go. I have my quarrels with John McCain's version - but they're a lot smaller and more subject to accommodation than the differences I have with the alternatives.

Finally, sometimes events can force a President to act now. I believe John McCain has the ability to act for the good of the country, without first convening focus groups on the political consequences to him and best possible spin to put on it. I do not believe that about either of the alternatives.

I believe John McCain has demonstrated himself more capable of owning a mistake than either of the alternatives ever will. McCain-Feingold notwithstanding. For instance, Keating Five is a dead issue precisely because he owned up.

Things happen in the four years the next president will be in office. Unforseeable things. I believe Barack Obama and Hillary Clinton capable of the sort of leadership that takes the country where it wants to go anyway. I believe John McCain capable of the sort of leadership that takes us somewhere we don't want to go, but can be persuaded.

I'd rather have a lot of people for our next president. But they're not running for the job, or they're not running any longer. The three choices we have at this point in time are John McCain, Hillary Clinton, and Barack Obama. Of those, there is precisely zero doubt in my mind at this point that John McCain is the best choice. Yes, it might be possible for events to move me off my support of McCain before November. But I don't think it's very likely.

Readers and Commenters are welcome to disagree (so long as kept within standing comments policy).

I know I've been predicting this for eighteen months, first from a trendline and later from watching the local market in action. I was hoping to see the recovery start last summer but that was when the national media finally picked up on how bad things had gotten. When masses of people are hearing gloom and doom daily, they're not likely to take out mortgages to buy real estate.

But in the last month, things have turned around so much it's actually a little scary.

The last three properties I've been involved in negotiations for all had bidding wars going on. Right now, I'm waiting to hear back from a house my clients have put in an offer on. I said an offer, but it's really more like a bid, because I know of thirteen competing offers on the property. It has been on the market for precisely six days as of right now, and today was the deadline for a "best and highest" from everybody. My clients offered almost ten percent over the asking price. At that price, I'm still seeing excellent value and if we get it, everybody will be happy. If we don't, there are still other properties they'll be quite happy with. But previous to that, I helped other agents with four and five offers competing against their client, and that was only in the last two weeks.

Even the kind of buyer we're getting has changed. I don't know where they all came from, but offers with twenty and thirty percent down payment are coming out of the woodwork. Maybe they're all investors that sold at the top of the market and think the time is right to jump back in. Maybe they're representing foreign investors looking to buy at a favorable time. Suddenly, I've got a couple sets of clients with more of a down payment, on average, than I've seen since I've been in the business.

Now, before all of the desperate overpriced sellers and their listing agents start singing "Hallelujah!", these properties are special cases. They're in desirable locales, mostly with good schools, they're attractive properties, and they've been priced correctly from day one. Actually, the one that saw the best bidding action was somewhat under-priced to start with. Indeed, there's a property on the same block going through what has been the story for the past two years: Start overpriced, come down slowly bit by bit, until nine months or a year later someone like me notices there's value there and they've been on the market long enough that they're likely desperate enough to deal, and my clients come in and get it for twenty percent below what they might have gotten if they priced it correctly in the first place. It's a story that's been played out thousands of times here locally. I can sing this hymn verbatim with my eyes closed and no accompaniment.

But what happened is that these owners and their agents came out and listed the properties for just noticeably less than market on the first day. Exactly like I keep telling people, it generated enough traffic to more than bid the price back up and make up for whatever underpricing they had done. Furthermore, the properties are coming off the market and going into escrow within a very short time - a week or two, instead of several months. No carrying costs of thousands of dollars per month, or only very small ones. No trying to find the money for multiple mortgages, or rent plus the mortgage on the property they're selling. No stress of wondering when it's going to sell. Multiple offers came in from quality buyers with significant down payments and plenty of income to justify the loan. No stated income 100 percent financing, 2/28s, or negative amortization here. Sustainable, longer term loans are the order of the day - and A paper, too.

So far, this is a limited phenomenon, even if it is expanding. The sellers and their agents are still having to make the correct moves to get this to happen. Omit one of the critical items (correct price and attractiveness), and the property will still sit on the market. Mind you, bargain properties have always been able to move, even at the nadir of the market, but now more properties are moving more quickly, and the ones that stand out for value are seeing multiple highly competitive offers very quickly, something we weren't seeing the last couple of years.

So even though the headlines today are screaming that housing prices fell 13.5% from February 2007 to February 2008, those are sales which started six weeks or so earlier than that, due to the refinance mini-boom we had. The actual experience I and other agents are having out in the market these last couple of weeks has been painting a very different picture. Yes, it's all anecdotal, but if you put enough anecdotes together, you get a trend - and it seems like every agent I'm talking to is reporting the same thing.

There's a huge amount of pent-up demand for housing locally. I've been noticing people talking about holding off for better than two years now. Waiting for the market to show signs of bottoming out. Well, it's showing signs of the bottom having been sometime in the past now. I did call market top almost a year before the local Association of Realtors admitted it, and the current consensus by local economists has that I only missed it by a month. I just made appointments to see some properties with some clients on Saturday, and three out of three agents where the property wasn't vacant told me they're in counteroffers right now, and they may be in escrow by then. I told them to call my cell if that was the case, and we'd pass the property by.

For those who have been holding off, we have hit bottom. I've been saying all along the economic support was there for $350,000 to $400,000 starter level single family residences, and it now appears that has been borne out. If there are still a few thousand sellers whose property is sitting on the market because they're in denial of the decline, that's their problem. The people who are serious about selling, properties are not only selling, but they're seeing bidding wars like I haven't seen in five years. From this point on, the longer you wait, the higher the price you're likely to pay. When the word gets around, and the kind of pent-up demand that has been keeping the market depressed these last two years plus gets ready to strike, expect to see a significant recovery in prices before the media starts reporting a trend.

Caveat Emptor

how soon should I start shopping around to refinance my home? I have a 2yr interest only and it's up in (four months)

Okay, the 2/28 loans which you are describing all have prepayment penalties for at least two years. Figure it's going to cost you 6 months worth of interest, on top of the cost of the refinance, if you refinance before the penalty expires.

(OK, you could have specifically bought it off by accepting a higher rate, but that's unlikely to have been the case)

That said, about three weeks before the penalty expires you can start the refinance process. Be advised that until the day the penalty expires, the current lender will be quoting a higher payoff, but once it has actually expired, the payoff should be correct, at least in theory. You should not sign final loan documents until such time as your penalty will expire with or prior to your Right of Rescission expiring. No more than two to three days prior to expiration.

Indeed, sometimes lenders will want to keep charging penalties even after they're no longer due. I'm not certain if they just don't update the payoff correctly or what, but I've seen lenders try to charge penalties a month after they expired. Once they've got your money, they can make you pay a lawyer and go to court to get it back.

For this reason, I would avoid "cash out" refinances any time within three months after the penalty expires. Matter of fact, if you're refinancing during that period, not only don't refinance for cash out, but don't have an impound account for taxes and insurance, and don't plan to put any money at all into the loan balance if you can avoid it. Here's why: When escrow officer goes to request a payoff from the soon to be former lender, the payoff quote may include the penalty even if it's no longer due. if they money they have from the current lender covers the whole thing, they have two choices. Pay it and have a completed transaction (not to mention getting their company paid), or don't, and leave everybody hanging. If they pay it, this means that you, the consumer, only get a much smaller amount of money, but I'm disgusted at how often consumers are shorted by the loan process, and this is one more way it happens. You're expecting $20,000 cash, and that $20,000 was the entire reason you did the loan. Comes the proceeds check, and you've only got a check for $9000. You want the other $11,000, you're going to have to go through the whole process again. Not the kind of situation you want to be in. Not the kind of situation I want my clients to be in.

If, however, the escrow officer does not have enough money available to them to pay off the loan plus the penalty, they have no choice but to leave the transaction at that stage until the quote is correct. They won't let it sit - they'll find out what's going on and everybody involved will be doing what's necessary to resolve the conflict between the two issues. Not having any more money in the loan than necessary to pay off the old loan is a good way to insure that the escrow officer won't pay a penalty you don't owe.

Don't let the rush to pay off the old loan cause you to cut corners on either your shopping for a new loan or asking all the questions you should ask prospective loan providers. Rushing into a refinance because your loan is going to readjust is one of the best ways to waste large amounts of money that there is. To illustrate, let's look at a larger than average loan amount that sees a huge jump in the actual rate. $400,000 at 6%, and it goes to 9%. This makes a difference of $33.33 per day, or $1000 per entire month. That's the equivalent of a quarter point on the cost - basically nothing on the scale of differences between subprime loans, and not very much on the scale of differences between A paper loans. I'll usually beat the retail branch of the lender I place a loan with by at least twice that. If it makes a difference of 0.25%% on the rate, that's $1000 per year that you're going to be stuck with the new loan. If you're still a subprime borrower, multiply that by the length of your new prepayment penalty in years. Doesn't it sound worthwhile to take an extra day which your old lender bills you $33 extra for, to shop the loan around for real and ask the hard questions that enable you to save $2000 or more on the new loan. Even if you're putting the money into your balance, you're still paying the extra. Not only that, but you're paying interest on it as well. On the scale of costs for a new loan, paying the soon to be former lender for a few more days at the increased cost is likely to be a wonderful investment if it gives you the opportunity to find a better loan.

On a note of personal relevance, at the time this is written rates are higher than they were two years ago, and you're in an interest only loan now, while interest only loans are difficult to do right now. Your payment is probably going to end up higher, especially if you roll loans costs in. If the reason you were in an interest only loan was that your debt to income ratio couldn't qualify for the real payment on a sustainable loan, that refinance is probably not going to happen for you. With prices having decreased locally by 25 to 30 percent, your loan to value ratio may not support refinancing either. If a refinance is not going to happen, and you can't afford your current payment, it's time to sell now. The new FHA Secure program helps some people, but requires documenting enough income to afford all of your payments. You owe what you owe and the rates are the rates. If the numbers don't work, get it sold.

One more piece of advice: Start improving your credit score now. Four months is plenty of time to bring your credit score up fifty points or more. If you can get into "A paper" loan territory, where penalties are much less common, you'll be much happier with your new loan than you are with this one. If you're in subprime territory and able to improve your loan to an "A paper" loan, your rate may go down despite the fact that the rates are higher.

As I cover in Getting Out of Paying Pre-Payment Penalties, if you're willing to refinance with the current lender, either directly or through a loan broker, your lender may be willing to waive the penalty in favor of sticking you for a brand new prepayment penalty on a larger amount. This is usually making a bad situation worse. As I said, you're likely to get a higher rate, be limited to an amortized payment on the new loan, and the new loan amount is likely to be higher (people in the situation usually roll the costs in), and all without even the benefit or lowering the tradeoff between rate and cost like penalties usually do. This seems pretty much the definition of lose-lose-lose-lose to me. Longer prepayment penalty on a higher balance at a higher rate, without getting any benefits in exchange. This is kind of why the best way to deal with prepayment penalties is not to accept them in the first place.

Caveat Emptor

Article UPDATED here

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.


Despite misinformation about deferred annuities, I'm going to give a strong recommendation to The Good, The Bad, and The Reverse Mortgage. The author doesn't know nearly as much about deferred annuities as they think they do. For instance, NASD rules explicitly prohibit investing with borrowed money, so only a fixed deferred annuity is possible. The so-called "Equity Indexed Annuity" is the prime culprit in these schemes, and there have been recent rulings making those substantially more difficult to sell without an NASD license that puts the seller under the purview of NASD rules. Any of these instruments can still be annuitized without penalty, so the money is not out of reach. I could go on, but the primary thing here is the reverse mortgage - on which I agree completely. If you think you have a need the reverse mortgage, you are so much better off "swapping down" or even just selling completely that I have yet to find a scenario where a reverse mortgage makes financial sense for the client. Selling the family home, that your kids grew up in, can be emotionally difficult, I know. However, RAMs are costly, high interest rate loans, and the numbers speak eloquently against them. But since they're high commission products also, people interested only in a commission check will try to sell them - and they're often not telling "The truth, the whole truth, and nothing but the truth." I have in the past made jokes along these lines

Q: How do you know someone trying to sell a RAM is an unethical shark selling an overpriced worthless product?

A: By the fact that they're trying to sell a RAM!

I have yet to see any exceptions. However, there's an eventual bright side to the whole equation. Demographic trends are looking likely to hurt lenders who do RAMs worse than ordinary subprime mortgage companies' worst nightmares. The whole RAM industry is starting to look like a Ponzi scheme, at least in my opinion. I'm not exactly a member of the Council of Economic Advisers. But when numbers calculated on a ten to fifteen year remaining life expectancy start encountering a 25 to 30 year remaining life expectancy paired with long term care expenses so the mortgagees max out the draw, the ability to make a profit in the industry is going to be closely correlated with the ability to find a bigger fool to buy the note.

Your host presents Real Estate and the Four Levels of Competence



Personal Financier has an article on Understanding Important Hidden Psychological Aspects of Rent vs. Buy Comparisons. It's a little older than I like to see, but I do think it's worth reading. He overstates his case a little - it is sufficient that the properties be functionally equivalent.

Tallahassee Real Estate Blog submitted Rent Versus Ownership - A Tallahassee Real Estate Case Study. Unlike most of the country, the rent there more than covers ownership costs. He neglects a few variables, but it shows just how easy the question gets when rent covers mortgage.

Salt Lake Real Estate Blog submits New Loan Limits - Are There Strings Attached? having to do with underwriting standards on the new "Jumbo conforming" loans from Fannie and Freddie. I have some email from some wholesalers that I haven't had a chance to write an article on yet, but reading between the lines of what Fannie is saying, I get the strong impression they do not want to fund these loans and will be pretty hardnosed about their requirements.



Paying Off Your Mortgage is basically a good article that makes one major mistake (market timing is a matter of luck, not skill - as any number of studies have shown) and does get way too commercial with what are probably paid links, including to applications to a money merge account that wastes your money. On the other hand, even with the mandatory deductions, I think it meets the guidelines..

The Foreclosure Crisis Continues from the Tri-State Better Business Bureau doesn't really give any useful information. But it does meet guidelines.



A site named "Life. Money. Development." submitted "Diet Tips for Preventing High Cholesterol Levels" How this relates to real estate is a mystery to me. Gotta watch that lead paint, and those old asbestos tiles are murder. Maybe he should add "Illiteracy" to the title of his site.

A site named 401 Lookup submitted an article called "A Close Look at 401k Retirement Plan - How It Works, Contributions, Withdrawals, Advantages/Disadvantages". Since they don't understand elementary written guidelines, it's not surprising that they're full of fecal matter on 401ks as well. Please people, don't believe everything you read on the internet. This is the sort of article a C minus high school student would write - including about a third of it being errors and glaring omissions.

A site called Public Flirt wanted me to link an article called "How to Use Compliments With Women". So they'll offer more for your property? So they'll let you have it for less? Sadly, no. Public Flirt was too busy flirting with women to read the guidelines for the carnival. Not to disparage the skill, the pasttime, or the intended end result, but it has nothing to do with the subject matter here. Let's all refrain from the obvious sexist comments, and hope that they keep to their red light district in the future.

KC Lau's Money Tips seems unclear on the concept of the "Consumer Focused Carnival of Real Estate," submitting a post about how inflation is bad with no consideration of real estate. For instance, considered strictly on its own, inflation is a good thing for a homeowner with a fixed rate mortgage, and still mostly good even if the interest rate on their loan isn't completely fixed. Inflation is one of those two-edged swords - a winner for every loser. I'd be extremely leery about following the money advice of someone who doesn't understand that.

Celebrity News and Gossip can't read guidelines either, submitting a vapid article about celebrity homes. While it did mention real estate, it had nothing to do with consumers, gave no information about actual real estate, had zero educational value, and just plain had no value unless you're one those folks who keep paparazzi in business. When aiming for the lowest common denominator, be prepared for the occasional division by zero.

I have been far too kind to some sites in the past, who submitted not only spam but something that was merely rejected, and so I let the spam slide. American Consumer News is one of those sites. Well, Mr. Nice Guy is over. 'How To "Go Green" And Mean It' doesn't even mention real estate. Their brains must have gone green some time ago, oozing out their ears and forming a slime pool for them to slip on the floor. Laying such a trap must be the best way for the zombies who evidently write for the site to catch prey ("More brains!"). Luckily for the rest of us, the zombies are more likely to slip on the slime than we are. From what I've seen of this site's expertise on subjects where I have professional knowledge, I wouldn't trust their writing on anything.

For those 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, you willingly submitted these posts. Live with it.

Consumer Focused Carnival of Real Estate will return in two weeks (March 26th, 2008), here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be March 24th.

Carnival of Real Estate


The New York Times is reporting that John McCain lost his temper when a reporter asked him a question about his conversation with John Kerry exploring a 2004 VP slot. Judge for yourself.

This and the accusation of marital infidelity - despite a four month investigation they did that revealed no evidence of this. The Times may have endorsed John McCain for the Republican nomination - but given the evidence of the Times' other behavior towards him, that's should probably be taken in the same kind of context as saying, "If the Nazis had taken over the world, we would want Hermann Goering in charge." In other words, in their viewpoint, still a murdering war criminal - just not as bad as the other murdering war criminals.

In point of fact, John McCain isn't a war criminal at all - results of North Vietnamese torture notwithstanding. He wasn't my first choice, but he's worlds better than any other alternative still standing. In fact, the reason for the Times' endorsement of him as Republican nominee can basically be reduced to "He's demonstrated himself capable of working with Democrats better than any other Republican." But as far as the Times thinks, the worst Democrat is better than the best Republican, and they've demonstrated they're willing to first smear, and now, in my opinion, flat out lie to further that belief. They have forfeited any claim to impartiality (again). You might consider this in the context of their treatment of our current Republican president as well.


Instapundit: THEY TOLD ME THAT IF GEORGE W. BUSH WERE RE-ELECTED, lawyers who challenged the powers-that-be would be subjected to secret disbarment proceedings.

And they were right!


Multiculturalism cannot survive


Anti-war judge rejects foster teen's bid to join military

Seems to me the people of the state of California need to impeach this judge for denying the development of her charge due to her personal prejudices.

Much more at Argghhh!

Still, in the end, the judge gave the wrong reason to keep the boy out of the Marines. She didn't say that Marine DEP was dangerous to his health right now. She says that she is against the Iraq war (how does she know he'll even go there? Marines are getting ready to deploy to Afghanistan, go to Ethiopia, Djibouti, El Salvador and many other places on humanitarian and relationship building programs).

The Marines, contrary to many idiotic anti-military people like this judge, do much more than go places and break things, though that is often their favorite. They teach more skills than killing people. They teach discipline. They teach thinking. They teach exactly what the judge thought they didn't care about: camaraderie, team work and taking care of the members of your unit.

In short, they teach brotherhood.

Has the California foster child system ever been able to teach that

How is this judge going to keep him out of the military when he turns 18 in a few months? And if the $10,000 bonus he would have gotten isn't available? I'd think that should be actionable, as failure to discharge her duty as a trustee, which is the only duty higher than fiduciary.

Here's the legal definition:

TRUSTEE - Person or institution that oversees and manages a trust.

A trustee is one to whom an estate has been conveyed in trust.

The trust estate is not subject to the specialty or judgment debts of the trustee, to the dower of his wife, or the curtesy of the hushand of a female trustee.

With respect to the duties of trustees, it is held, in conformity to the old law of uses, that pernancy of the profits, execution of estates, and defence of the land, are the three great properties of a trust, so that the courts of chancery will compel trustees, 1. To permit the cestui que trust to receive the rents and profits of the land. 2. To execute such conveyances, in accordance with the provisions of the trust, as the cestui que trust shall direct. 3. To defend the title of the land in any court of law or equity.

It has been judiciously remarked that in a great variety of cases, it is not easy to say what the duty of a trustee is; and that therefore, it often becomes indispensable for him, before he acts, to seek, the aid and direction of a court of equity.

Methinks a certain judge failed in that regard to so much as consider her legal duties as opposed to her personal prejudices.


TRUSTEE, estates. A trustee is one to whom an estate has been conveyed in trust. 2. The trust estate is not subject to the specialty or judgment debts of the trustee, to the dower of his wife, or the curtesy of the husband of a female trustee. 3. With respect to the duties of trustees, it is held, in conformity to the old law of uses, that pernancy of the profits, execution of estates, and defence of the land, are the three great properties of a trust, so that the courts of chancery will compel trustees, 1. To permit the cestui que trust to receive the rents and profits of the land. 2. To execute such conveyances, in accordance with the provisions of the trust, as the cestui que trust shall direct. 3. To defend the title of the land in any court of law or equity. Cruise, Dig. tit. 12, c. 4, s. 4. 4. It has been judiciously remarked by Mr. Justice Story, 2 Eq. Jur. Sec. 1267, that in a great variety of cases, it is not easy to say what the duty of a trustee is; and that therefore, it often becomes indispensable for him, before he acts, to seek, the aid and direction of a court of equity. Fonb. Eq. book 2, c. 7, Sec. 2, and note c. Vide Vin. Ab. tit. Trusts, O, P, Q, R, S, T; Bouv. Inst. Index, h.t.

How has this judge acted to the benefit of her charge? I think she has demonstrably acted in precisely the opposite fashion. If some attorney wants to help this young man sue the state of California for breach of duty when he turns 18, I think that would be justice.

Personally, I think this whole case would be worth the assignment of a military lawyer, or even hiring a paid civilian gunslinger - an excellent use of discretionary dollars for the Pentagon. It would not only demonstrate that the military is willing to look after the interests of this young man when the State of California failed, but it would prevent other judges from making the same mistake.

Never mind, the money, the marketable skills they may learn, or even just the fact that they have a secure job they can count on as long as they don't screw it up. One thing I see looking in at the military from the outside is a very real sense of family. That's something those in foster care don't get from the state, and yet it is something that is a real benefit to most individuals. And it isn't given freely - it's earned. The few orphans I've known in my life would do quite a lot to get it.

In short, I can't think of a single level this judge didn't make a mistake on - except that she was true to her personal prejudices.

If that's not grounds for removal, we've got a problem.


Department of Poetic Justice: NY Governor Linked to Prostitution Ring

This clown made his political reputation through overzealous prosecution of securities activity. Some of what he did was needed, beneficial, and locked up bad guys. Too many, however, were harassing people on a technicality that made no difference, or even may have actually helped shareholders.

his stint as governor has been marred by several problems, including an unpopular plan to grant driver's licenses to illegal immigrants and a plot by his aides to smear Spitzer's main Republican nemesis.

The Greeks called this hubris.

Michelle Malkin has more.


Glenn Reynolds writes against journalistic shield laws. He makes the point that now pretty much anyone can be acting as a journalist, and also that it creates a privileged class.

Several times a month I get calls and emails. Sometimes, it's even people stopping in. "I've heard you're good at finding bargains." Well, yes I am. "Please tell me the addresses of some bargains so I can drive by."

Well, facts are cheap in the age of transparency. I will quite joyously look at stuff on the internet, even set up an MLS Gateway or feed for someone on the speculation that they'll come back to me later for a showing or to make an offer. Setting up such a feed takes very little time, and about the expertise of an eleven year old that has learned to fill out internet forms. Oh, and MLS access. Can't forget MLS access. We've got a brand new system that lets me custom define the search area now - I can click the corners of a search area I want on a map, and it will return only the results within that area. It's a really neat feature, and using it takes about ten seconds of training, and maybe ten minutes to do the whole thing. I'll happily do it as the possible prelude to a limited service commission, and even if the prospects end up using another agent, I've risked and lost nothing significant. No agency contract required, or even asked. I've even done it for folks who didn't want to give me their phone numbers so I could follow up. If they come back to make an offer, my compensation will be set in the offer paperwork.

But good analysis, experience, and expertise are not free - or even cheap. Furthermore, my time is valuable - and you're asking for a lot of it. I might find three or even four real potential bargains when I spend a full day searching - and that's in a target rich environment. Furthermore, I've got a lot of experience and a lot of knowledge to draw upon that many agents don't, and I look at a lot of properties. I can winnow 100 listings on the internet to twenty possibles in about an hour, go through them in about five hours, of which I might show a client who has made the commitment to work with me six, with usually one or two standouts among those. The rest will have something that to experienced, knowledgeable eyes, will have reasons why it is not a viable choice for these particular clients. Maybe it's overpriced and I have reason to believe the owner won't negotiate. Maybe the location or surroundings have an unsolvable issue - one reason you can only tell a bargain by getting out of the office and looking at property. Given the area I work, most often there's something going on with the property itself that's not worth what it's going to cost to fix. I love the older East County suburbs of San Diego - they are good places to live, and when you consider what you get for what you spend, they blow the rest of the county away as far as value. Furthermore, I think the conditions are getting right for the housing buzz to rediscover them. But anytime you consider structures that mostly vary from thirty to eighty years old, you have to watch for maintenance and repair issues, and it really helps to know what you're looking for. Furthermore, it is always necessary to understand the market the property is being listed in. The only way you can do that is by having been in the properties that have sold recently, and the only way you can do that is to go out and look at them while they are still "for sale" because it's not likely the new owners will let you in after it sells.

What I'm trying to say is that the fact of the existence of a listing on MLS is cheap - basically free. You want me to send you addresses of properties for sale meeting certain criteria, that's easy and I'm happy to do it, no strings attached. Anything like that, that can be done by automated computer search, is not a part of what I'm really offering for sale, and I'll give it away on the speculation that sometimes, I'll make something when that person comes back to me to write an offer.

But the ability to recognize a bargain and equally important, what is not - that's the largest part of what I'm really selling as a buyer's agent. Winnowing those 100 listings to a few standout values is a valuable skill. If you don't agree with this, you shouldn't need or want that skill, and you shouldn't be talking to an agent about finding bargains. For people that want me to use that skill, there is a fee. This is precisely equivalent to the difference between a computer programmer giving away some old boilerplate code for free - but they want to be paid for a brand new custom program. This requires all of the same things: Expertise, analysis, experience, knowledge of the area and the current market, the time it takes me to build, run, and debug the bargain-finding program in consultation with the client, and everything else that's involved. The mental ability to do those things did not suddenly appear one morning and it does not maintain itself. Furthermore, the liability for doing this if I make a mistake is huge. Agent mistakes cannot be undone by simply re-writing a few lines of code to work correctly, and having the ability to sue me and my insurance company if I do make that mistake is a huge benefit to the client in and of itself. If they make the mistake, they're stuck - and to be blunt, the probability of a non-professional making that mistake is both much larger than most home buyers believe and many times the probability that I will make that mistake - while if I make that mistake, they can get a lawyer and sue me for everything they might have lost, plus court costs, plus other damages ad nauseum. The idea isn't to sue, but rather not to make that costly mistake in the first place. An amazingly large percentage of buyers make mistakes of a magnitude that I find incomprehensible, all in the name of saving a fraction of what the mistake costs.

The ability to recognize a bargain property is a valuable skill. If you disagree with this, what reason do you have for looking at properties before you buy them? Why don't you simply pick out the cheapest property that meets your specifications on MLS, make an offer, come to an agreement, and pay the price, all sight unseen? Remember, you're claiming that the ability to recognize a bargain does not have value. Why would you want to take the time to look if there's no value in it? When there are ten thousand identical items in a warehouse or on the grocery store shelves, you grab one and get on with your life. You might look at the label to make certain it was manufactured to fill the need you have. You don't bother opening the box - if it's defective, you can just exchange it for another. They're all interchangeable.

But that isn't the case even on everything in the grocery stone. There's a reason they wrap meat in transparent plastic - so you can see the piece of meat you're buying. To view the cut, how much fat is on it, how large a piece of meat it really is, how fresh it is - in short, the value of the meat. If you know what good meat looks like, you've seen people that have no clue as to what to look for choosing crummy meat that you've just rejected. It happens most of the times when I'm at the meat counter, as a matter of fact. It's why the grocery stores keep putting out bad cuts of bad meat. Somebody who doesn't know any better will buy it.

The same thing happens in real estate. I have dealt with people who bought into just about every bad situation imaginable - and now they're trying to unload the results of that onto someone else at a premium price. When I list a property, it's even my job to help them do so. But a significant percentage wouldn't even be selling if they had made the right choice in the first place!

The point I'm trying to make is this: Because the ability to find and recognize a bargain is a valuable skill, if you want it, you're going to pay for it. You can either pay me consultant rates by the hour, or you can pay me by doing the transaction with me. In either case, you're going to sign a contract that spells out exactly what that pay is. If you want bargains I've already found, those are valuable also. I can use the basic information as a lure to attract other people willing to work with me. If you buy it and you are not my client, the simple physical reality is that it's not available for people who are my clients. You got the benefit of my expertise without paying for it - and those who are willing to pay for it didn't. Contrary to something I read by a listing agent the other day, I have no responsibility to market the property - I haven't accepted agency, sub-agency, or anything else. When I'm acting as a buyer's agent, I have no obligation to any owner to sell their property. And until some prospective buyers sign my agency contract, I have no responsibility to them as far as locating and evaluating property. So if they're not going to sign my contract - and a non-exclusive agreement is all either one of us needs - I have no responsibility to give them the benefits of my expertise for free, any more than a lawyer or a computer programmer does. As a matter of fact, that non-exclusive contract is me betting that I will find something sufficiently above and beyond the market that they want to buy it - because if they don't buy it, the contract says I don't make anything. It's me betting that my expertise will cause them to want to stick with me - because if it doesn't or they don't want to, there's no reason they have to. If that bargain I find isn't a bargain, they can walk away with no obligations. But if it is a bargain, they use me as buyer's agent. The only reason to refuse to sign a non-exclusive agency contract is if you're not willing to work with the agent who brings you the bargain.

And that describes most of those who call or email. When asked to sign my contract, they'll say, "I'm working with someone." To which the answer is, "No, you're not. They're not doing the job. If they were, you wouldn't have come to me. What you are asking for is no different than asking one lawyer to do for free what you're paying another lawyer to do, or asking one computer programmer to do for free what you're paying someone else for. If you didn't think that what I do was somehow valuable to you, you wouldn't have contacted me and we'd both be doing something else right now. So your choice is this: Do you want to stick with someone who isn't doing the job, or do you want to work with someone who will get the job done, and will give you permission to fire him if he doesn't?"

Loyalty has a place. It's perfectly fine to give your Uncle Harry a chance to earn your business. But if Uncle Harry gives you his business card and tells you to call him when you've found the property you want to buy (or a property you may want to buy), he hasn't earned your business. In fact, he's told you he's unworthy of it. That's not an agent. That's a transaction coordinator, which most agents will charge you extra for so that they can go out prospecting and gladhanding for other business while the transaction coordinator does paperwork - the only real work their office does. But full service should be a lot more than a transaction coordinator doing paperwork in the office - and the office should pay for that coordinator out of what they make, not charge you extra for it. In this scenario, what expertise are you really getting? The ability to fill out all the paperwork on a checklist? It is important - but is it worth the thousands of dollars to you? Or is the ability to find you a bargain while discarding properties that aren't bargains what's really worth what a buyer's agent makes?

If you want a bargain on real estate, work with the buyer's agent who finds bargains you want to buy. The principle is the same one that says if you want the ditch Charlie digs, you pay Charlie to dig a ditch, not George. If you want the haircut Jane gives, you go to Jane's shop for her haircut - not down the street to Mary. And if John the mechanic isn't fixing your car correctly, you don't pay John and then ask Dave to do the work for free. You take your car away from John and take it down to Dave, and pay him for the work he does. It doesn't matter that John's mechanic shop has nifty uniforms, a funny advertising campaign, or anything else other than the mechanic who fixes your car so it runs right, which they don't. Dave fixes your car so that it runs right, you pay Dave, and you go back to Dave the next time it breaks down. If the funny advertising campaign is worth giving John some money, that's fine. But you're still going to have to pay Dave to fix your car, and he's going to want you to sign his service contract before he does any real work. The same thing applies to when you want to buy real estate. If Uncle Harry isn't doing the job you need him to do, you fire Uncle Harry and start working with someone else. Don't tell me you want me to find bargains for you but you're working with Uncle Harry. Get Uncle Harry to find you the bargains. If he's not doing that, your choice is really very simple: Suffer with Uncle Harry, or start working with someone who will do the job that he isn't.

When I'm looking to buy professional services, I don't look for the office with the lawyer with the neat ad campaign, computer programmers who act friendliest, or the doctor who talks about how to draw customers into their office. I look for the office who will demonstrate their expertise, keep me there by demonstrating their knowledge of the expertise I need, explain everything I need to know (preferably before I need to know it), advise me as to what my best choices are and the consequences of those choices. I want the office that finds other, better alternatives and offers them to me. That's sanity. That's what's valuable to me.

The same principle applies to real estate. If you want to do the searching yourself, that's fine. Here's your MLS gateway, call me when something pops up that you want me to get involved in. But if you want real expertise on the buyer's side of the transaction, that gateway is not what you want and you're going to have to agree to pay the agent who gives it to you. Because it is valuable, and if you didn't think it was valuable, you wouldn't be asking for it. I am not cheap - no good agent is. But I'm a lot less expensive than using a cheap agent.

Caveat Emptor

Article UPDATED here

NOTE: With the changes in the mortgage market, there are no backup loans any more. I won't do them and I don't know anyone else who will. The costs have ballooned too much; not only in the form of costs that don't get reimbursed if the loan doesn't fund, but in the form of higher rates the lenders charge me and all my future clients when I lock loans that don't fund

I have repeatedly advised my readers to sign up for a back-up loan if they can find somebody willing. So every once in a while, I get email like this:

Hi! Would you be willing to do my backup loan? I'm already signed up with my brother-in-law but you tell people to get a backup loan so I'm asking you.

No loan officer with any sanity is going to agree to that request. You've already made up your mind who is doing your loan. You are not honestly shopping your loan, and you're kidding yourself if you think you are. You're not likely to evaluate your brother-in-law's loan critically when it comes to final signing, you're just going to sign on the dotted line. So the back-up loan officer is going to spend hundreds of dollars and a lot of time pushing your loan through for zero prospect of getting paid. Suppose your asked you to work through the weekend, and maybe a couple extra nights, spend about a week's worth of your own pay, but that you wouldn't be paid, you wouldn't get a bonus, and it wouldn't be considered at your next review. That's essentially what you're asking them to agree to with the above scenario. There is no carrot whatsoever in the case of loan officers, because (unlike employers) you're not paying them at any other time, either. Quite frankly, I'd rather spend the time trying to find another client, or with my family, or doing anything else. I'm not interested in wasting my time on backup loans like that, and neither is any other loan officer.

The first thing you have to do if you're hoping for someone to agree to be a backup loan provider is give them an honest chance at being the primary loan. You have to shop them before you have signed up with anyone. You have to have the whole loan officer conversation with several loan officers: what you've got, where you want to get to, your situation, etcetera. Don't forget to ask the Questions You Should Ask Prospective Loan Providers. They go out and price the loan, and get back to you with what they can do. If you are actually signed up with someone else prior to this point, you have not honestly shopped your loan, and no loan officer in the world is going to agree to provide a backup, not to mention that you have placed yourself completely at the mercy of the loan officer you signed up with. There never was any real chance that other loan officers could actually earn your business. It's like going to an auto dealer and asking them to special order a car for you, despite the fact that you've already paid another dealer, are not going to put down a deposit, and indeed, really want to do business with the other dealer, but hey, you want them to do this for you on the chance that other dealer cannot deliver. If you have any doubts, why did you order with the other dealer, or more precisely, why did you sign up with your brother in law for the loan? Especially prior to checking with anyone else? And if you have any doubts about your brother in law, why are you waiting until now to shop your loan?

So after honestly shopping your loan, you obviously need to make a choice. Now the reason I advise people to get a back-up loan is because everything you are told when you make that choice could very well be a lie. With the majority of loan companies, either the federal Good Faith Estimate or the California MLDS are subject to all kinds of misrepresentation, intentional misquoting, etcetera. If this were not the case, there would be no need to sign up for a back up loan. The purpose of signing up for a back up loan is to give yourself another option if, when you go to sign final documents, the loan they actually offer you a contract for is different from the loan they dangled to get you to sign up, that they have been talking about all this time but at the moment of truth they don't really have it. Whether it's a different rate, has closing costs thousands of dollars higher, thousands of dollars added to your loan amount that they conveniently "forgot" to tell you about, has a pre-payment penalty when they told you it didn't, is a completely different kind of loan than they told you about in the first place, or even all of the above, the loan isn't what got you to sign up. In some cases, they don't have a loan at all, and are stringing you along in hopes that they will have a loan Real Soon Now. If you only have one loan ready to go, your options are limited to "sign on the dotted line or don't." If you've made a substantial deposit on a property you are buying and all of a sudden you don't have a loan, guess what? You will probably lose that deposit. So people will sign on the dotted line, even for refinances, when it's not the same loan they were led to believe they were getting in the first place. Hence, my advice to sign up for a back-up loan. That gives you the option of signing the other loan officer's loan contract, and the mere fact that someone else also has a loan ready to go is much better leverage than anything else you can do to get them to produce the loan they said they had in the first place. You can use the first loan officer's loan as a club for your back-up, too, if need be.

But if you're not going to evaluate your primary loan officer's loan critically, if you're not going to go through the paperwork and make sure that rate, terms, and costs is indeed, as described, that back-up loan officer has just wasted all of their work, and all of their money. Excuse them if they are less than enthusiastic about doing that when there is no prospect of getting paid. It's not like they are being paid an hourly wage. If that loan doesn't close, they get nothing for all that time and effort. People work to earn money, even if they really do like their job. What you need to do is give them reason to believe that you are going to end up signing for their loan. The best way to convince them of this is if the prospective backup loan officer is certain themselves that the primary loan isn't really going to be able to deliver the loan they're promising you.

So what you've got to do, preferably before you make a final choice for your primary, is ask your number two prospect about your number one prospect's loan. Does loan officer number two think offer number one is deliverable? I assure you that good loan officers know what is and isn't really deliverable. Whether the answer is "Yes" or "No", you've got some useful information. If the answer is "Yes," you know that what the low bid is talking about is possible. Whether they will actually deliver it or not is a different question. The way to bet is that they will not, unless they are willing to offer you a written Loan Quote Guarantees. If you ask for a Loan Quote Guarantee, most lenders and loan officers will not give you one. Instead, they will try to distract you with BS about how they are thus and such reputable company, and they honor their commitments. This is nonsense. Neither the Good Faith Estimate, Mortgage Loan Disclosure Statement, Truth In Lending form, or any of the other standard forms that you get at loan sign up, is in any way a commitment or a guarantee. They are only estimates, and they may be accurate estimates or they may be the biggest lie since the invention of the one night stand. Furthermore, loan officers don't write loan commitments. That is the exclusive province of underwriters, whom you will never communicate with directly. The most that loan officers can promise is that if the underwriter approves it, the loan will be on a given set of terms, and that is the sort of Loan Quote Guarantee you should look for.

Now, if the second lowest loan provider says "no," that the lowest's rate is not deliverable, that is your opening. "Well, tell you what, Mr. Loan Officer," you say, "If you're certain that loan quote is not deliverable, and that yours is, how about you agree to be my back-up loan provider? If they don't deliver on those terms, as you say they won't, and you do deliver on yours, I'll take your loan. What do you say?"

What they are most likely going to do, of course, is try and talk you into being the primary, and to forget this nonsense about back-up loans. After all, he (or she) is a sales person. If you do what they want, this puts them in the cat-bird seat thirty days down the line instead of your number one choice. And you know, if they are willing to give a Loan Quote Guarantee and the number one choice isn't, I'd probably make them my primary. Ask anyone who's dealt with construction contractors if they'd rather take a bid of $X that is just an estimate, or $X plus 5% that has good solid guarantees behind it? Same principle here. The one that's willing to guarantee their work gets the business, or at least first crack at it.

Now suppose number two won't agree to provide a back-up? Then ask number three. Suppose number one is going to try to hinder your back up loan? You need to explain that you fully intend to go with them, and that if they provide the loan on the terms they told you about, they are going to get the business, but you're providing yourself with an insurance policy, just in case they won't, and their attempts to sabotage that insurance policy are likely to force you to cancel your loan with them. Tell them that if they are really going to deliver what they said they would, their loan will be better than the competition's, so there will be no reason to choose the other loan, so their attempts to obstruct or sabotage the other loan have you thinking that maybe you should cancel their loan, because their actions are indicative of being nervous about their own loan. Be blunt, be truthful, and carry through on your threat to cancel if they keep being an obstacle to the back up. If they need to obstruct a worse loan, it's because they have no intention of delivering the better one. Carry through on your promise to cancel - and then go find yourself a new insurance policy, aka backup loan provider.

Signing up for a back up loan is the cheapest, smartest thing you can do to protect yourself in one of the largest dollar value transactions of your life. But if there isn't a real possibility of getting the business, no loan officer in the world is going to agree to be your back up. You need to demonstrate to them that there is a real possibility of their loan being the one you actually sign the loan contract for at the end of the process, or they are not going to be interested. The type of email that is referenced at the top of the article isn't to protect yourself. It's to mollify your conscience, because you know you didn't really shop your loan around, and you know you're going to pay more than you need to, unless you get struck by pure dumb luck. The point of reading the consumer education here is that you don't want to rely on pure dumb luck.

Caveat Emptor

Original here

Cool! Saturn moon Rhea may have rings

Rhea would be the first non-gas giant found to have rings if this is confirmed. The obvious source, IMHO, would be gravitational captures of some of Saturn's material. The Saturnian moon system is more than complex enough to make this happen.


A reason for men to want to do housework: Men who do housework may get more sex


Dean Urges Do-Over Voting in Fla., Mich.

By strange coincidence, right after Hillary pulls some big wins and Obama's empty suit status starts to show.


Armies of Liberation on Internet censorship in Yemen.


Volokh Conspiracy notes exactly how far overboard the harassment thing has gotten. A janitor at Notre Dame receives a letter telling him he can't read a book about how Notre Dame University defeated the KKK in the presence of black co-workers on his break. One of the early triumphs of the civil rights era, and and reading it in their presence is regarded as harassment of blacks.

Sometimes you just want to start singing McDonoughs Song.

Got an email alerting me to this fact. The e-mail was gobbledegook as far as making any sense but I went to the FHA home page and they had better information.

It appears as if the FHA, through OFHEO, has opted to maximally raise their limits, to 125% of the median sales price in their Metropolitan Statistical Area (MSA). For a very few MSAs, the limit is the legal maximum of $729,750.

For the first time, conforming loan limits are not going to be one number for the 48 contiguous states. This is a very welcome and long overdue development, even if it does make life more complicated. Go to the FHA Mortgage Limits page to find out how much the limits are going to be in your area.

I wrote an article about waiting for the limits and how Fannie and Freddie, and the FHA separately, are going to have to decide what they're actually going to fund. FHA's limits have now been announced, but we're still waiting for Fannie Mae and Freddie Mac are going to react. Keep in mind that they are 98% privately held corporations. They want to stay on Congress' good side because they do have some moral or historical claims on the taxpayer if they get in trouble doing what Congress wants them to do, but the final decision as to what they will fund belongs to them. Now that the FHA has made their announcement, I would look for Fannie and Freddie to be making their decisions as to what they will and will not fund fairly quickly, and that will set the limits as to what a conventional conforming loan is.

Caveat Emptor

UPDATE: I just went the the Credit Union, and not only they but the bank next door are doing something we used to call "Betting on the come" when I was a controller. They're advertising "Jumbo loans for Conforming Rates!" This is fundamentally dishonest. What they're doing is taking applications based upon what they think Fannie and Freddie will do. However, if they guess wrong, they're not going to actually fund the loan, especially given the two percent divergence between conforming and jumbo rates for A paper at the same price. Bottom line: They're trolling for clients with incredibly misleading advertising, and if Fannie and Freddie don't come through according to what these institutions expect, there's going to be a large number of very angry people.

People who talk about learning skills tend to discuss a model for learning called the conscious competence learning model.

It starts with unconscious incompetence. You not only don't know how to do something, you don't realize that it is a skill that requires learning. "Anyone can do that", people at this stage of learning will think, despite the fact that they never have. They have, in fact, no basis for comparison. Some things are as simple as tripping over your own feet, but most aren't.

The next stage is the conscious incompetent. You still don't know how to do whatever it is, but at least you know that you don't know how. Maybe you've tried and fallen flat upon your face, maybe it's something that you instinctively know is beyond your training or ability. Back when I worked for the FAA and people would find out what I did for a living, it's was amusing to see how many people would immediately volunteer that they couldn't have done my job. For some reason, I don't get that now, despite the fact that the skills of being a good real estate agent are at least as difficult to acquire.

The next stage up the ladder is the conscious competent. Some preparation, supervision, a few botched tries, and then you do it right without anyone having to step in. But you've got to think - really pay attention, take your time and be careful about what you're doing.

The final stage is unconscious competence, where the skill becomes second nature. You're good at whatever it is. Most people over the age of two are at this stage as far as the skill of walking is concerned. They do it without considering how to move the muscles that make the legs and hips move. They walk whatever distance they need to without even paying attention. And here's an important point: Sometimes by not paying attention, people step on something or trip over something and get seriously hurt. They walk in front of a semi, or trip over the coffee table and fall through a window or just step on an oily patch that causes their feet to go out from under them and hit the back of their skull on the pavement.

It is my contention that nobody is up to unconscious competence when it comes to real estate.

In fact, if you think you've achieved unconscious competence at most of the core skills of real estate, you're almost certainly stuck on the first level.

First off, real estate isn't one skill. It's at least half a dozen. The average client doesn't care about how good we are at attracting other clients. They care if we interact with them incorrectly, but I have yet to hear of a prospective client saying, "I want to sign up with someone who's great at prospecting for leads." They'll say highly correlated things like "I want to work with a top producer," or "I want to work with (insert heavily advertised brand here)" but they really don't care about lead prospecting competence per se. Yet this is probably the most discussed skill set on real estate websites. I don't understand why other agents think this is fascinating to clients, but by how often they talk about it, they evidently do. Maybe because it's one of the big focal points for every office - if you don't attract enough business, you're not going to be in the business. Nonetheless, clients don't really care about this one. You could be the worst prospector in the business, but somehow get enough clients to stay in business, and as long as you're good at everything else, the clients are going to be happy.

Then there are the interpersonal skills that most people have in fact developed by the time they're adults. Hello, how are you? Nice day, and so on from there until we get to the pinnacle of those skills, handling people so well that they never realize they've been handled. People care about this, and they know they care. Don't believe me? Whatever you do for a living, try calling your next prospect something nasty. You can't do real estate without these skills, but not only are they not the central job function for real estate licensees, but clients actually do not want somebody who is obviously too good at this. Why? They like the basic skills, but they don't like being played by sales persons, something that's happened to basically everyone by the time they're ready to buy real estate or get a loan. Nonetheless, many people choose agents and loan officers based upon feeling "a connection." *Buzz*. Thank you for playing. If a prospective agent isn't competent at the interpersonal dance, that's one thing. But 95% of all agents are quite good at it, and it doesn't mean a darned thing about their competence at real estate. Anybody with any competence at interpersonal skills can talk a good game in the office. They could be ready to crack that license prep course any day - not actually know a thing about real estate yet - and still manage to generate "a connection."

Then there's the paperwork and legal CYA stuff. I could name names of nationwide real estate firms that take months to cover these skills with new licensees, and brag about their training based upon that. The obvious snark that occurs to me every time I see one of their advertisements is, "How is being able to avoid legal judgments when you've hosed your client a virtue in the client's eyes?" In other words, it blows my mind that they actually brag about it to clients. To be fair, this skill set is a real part of the career, but I'd like to see more emphasis upon actually doing a good job for the client, not disclosing everything in small print, hidden among 500 other sheets of paper at final document signing. There is stuff here that you're going to see on every transaction, or almost every transaction, but pretty much every real estate transaction is going to have something going on that is different from some hypothetical "typical" transaction, and if you aren't thinking about what you're doing, it's very likely you'll miss something important. Even if you are thinking carefully, you might miss something. People successfully sue agents every day, and the defendants are not all incompetent. This isn't a skill that gets clients a better bargain very often, and perfect paperwork doesn't mean the client didn't buy a vampire property, that they got a good bargain even if they didn't buy a vampire, that they sold for a good price in a timely fashion, or anything else except that the paperwork is perfect. The paperwork will usually tell them if they are careful enough, but "careful enough" can be "reading documents for forty-six hours straight at final signing," and even then, it's pointless unless they've got the willpower to say no to the transaction at the last moment like that. Nonetheless, bad paperwork is what the attorneys of former clients find easiest to pin on real estate agents, and almost every judgment against an agent has "bad paperwork" behind it as the evidence. Paperwork is a necessary skill for agents, but it it's only evidence of a good or bad job - it isn't the good job or bad job itself.

Negotiation is a critical skill for agents, and many do actually study it. But for every agent I encounter who understands principles of negotiation, another is completely clueless and a third thinks negotiation is where you tell the other side everything about how the transaction is going to be. You should see some of the contracts my buyer clients have been told to sign - take it or leave it - in the middle of the strongest buyer's market of the last fifteen years. And these folks wonder why the property didn't sell. Actually, I'll bet that if you work with buyers, you wouldn't be surprised. I just randomly pulled up twenty listings in the zip code my office is in - and all but two had violations of RESPA right in the listing. Bare, baldfaced violations of RESPA - steering is illegal, no matter the form it takes. It's not only setting you up for a lawsuit, it's setting your client up for a lawsuit. If DRE wanted to put at least half the agents and brokerages in California out of business over this one point, I think it would be pretty trivial. But I digress - this paragraph is about negotiation. Everything about the transaction is negotiable, and refusing to negotiate anything can be grounds for losing an excellent offer. Price is not an independent variable, and it's not the most important of a series of completely independent points. It may be the central issue of a negotiation, but it influences everything else about the negotiation, and is in turn influenced by all those other factors. What does each side need, what do they want, what would they settle for, and what are they willing to give up in order to get it? If the answer to this question is "nothing," then they must not want it very badly! There are many factors other than money, but they all inter-relate, and the person who can figure out something the other side wants that isn't money can use that to make both sides happier. Negotiation isn't just faxing offers back and forth, and in the context of real estate, it's a skill that takes a significant amount of practice as well as study to maintain. Furthermore, more than any other skill involved in real estate, negotiation never gets to be so strong a skill that you can do a good job without thinking about it. For one thing, on the other side of that negotiation is another agent who does the same thing. I always presume the other side is better at it than I am to start with. Evidence quite often proves this presumption to be nonsense, but you don't hose your client in negotiations by paying attention and being careful. Nor is there any metric for negotiation skills except how good the deal you get one particular client is, and since every property is unique, often the client has no real idea whether you should be nominated for negotiator of the year or pilloried for incompetence. I haven't heard of anybody being sued for poor or non-existent negotiation skills. I have heard of buyer's agents getting beat up by their brokers for doing too good of a job - lowering the commission.

The next skill is property evaluation. This is more important to buyer's agents than listing agents, but listing agents can benefit by knowing it as well. It breaks into several skill facets, each of which is a skill that requires instruction and practice. The most important facet of this is the ability to spot defects that are going to cost the client money - actual structural problems. Ask yourself: Is the fact that the agent tells you they're not an inspector going to make you feel better about buying a property where the roof caves in three weeks later? Is that going to absolve the agent of blame in your mind? Don't expect your agent to note everything that a contractor or inspector or engineer will - but they should tell you about everything they see, and they should see most of it, and it should come as part of a full service package, so you don't have to spend $300 getting an inspector out, or $600 for an engineer, not to mention put a deposit into escrow where you may not get it back for quite some time if the seller wants to be obstinate. Furthermore, without a good agent who will tell you this stuff, you might have to do this multiple times. Instead, with a good agent you know about the problem before you consider putting an offer in - and instead of a costly drama that eats your life, you walk away unscathed and find another property that actually suits you. I just helped a client cross four properties off their list today, all of which would have sent him through that cycle. Decorator's eye is another facet of this - helping the client stage a property - or helping them see the potential of a property despite poor staging. Rehabber's eye is related, yet a distinct sub-skill - helping the client see the property with a few changes, usually not very expensive ones. Location evaluation: How does the location of the property fit with the client's agenda? Schools, traffic, shopping, environmental noise and other factors. Sometimes, the client doesn't know themselves, as I have discovered upon many occasions. All of these are part of the core job function, all are skills that must be developed and practiced if you want them. They are also critical to how happy a client is going to be with an agent's work - particularly if you're working as a buyer's agent, as I usually am. But it seems that this whole group of critical skills gets neglected in favor of "Which property has one feature that makes Mrs. Client swoon with delight?" This approach is conceptually similar to "throw enough mud at the wall and eventually some will stick." Out of sheer frustration if nothing else. But I have yet to see a single brokerage train their clients for any of this entire group of skills. Indeed, most of the major chains seem to be doing their best to pretend these are not part of an agent's function. Here's the thing: I can get people to buy and sell properties without these skills, and never get sued successfully over them. But then it's completely hit or miss as to whether the client will really be happy with the property - and who do you think is going to get the blame if they're not? I had some clients insist upon buying property on the corner of two moderately busy streets last year - and I made certain to remind them of the traffic and noise throughout the transaction - giving them encouragement to change their mind if they weren't certain they were going to be happy with it. But I'll bet you a nickel they call me when it's time to sell it because these opportunities to change their mind also generated a real buy-in to the situation for them.

Marketing skill is more critical for listing agents, but buyer's agents need to know marketing as well. How do you get the attention of someone who will want to buy this property? How do you persuade them it's worth making an offer on? What are the available venues, and what actually works? Theory says that there is one buyer out there who will pay more for the property than anyone else - how do you get their attention or that of someone close to them? Get them to come look, get them to see value, get them to make an offer you're happy to accept, get them to carry through on the purchase? On the buyer's side, you've got to be able to counter the fecal matter - and I can count on the fingers of one hand all the properties I've been in the last year where I didn't find some obvious fecal matter in the way it was represented, or the things that the listing agent said in order to get it sold. (FYI: This fecal matter has an ugly habit of biting the disseminators later on.)

Did you think I was leaving market knowledge out? Here it is. How does the property compare to everything else around it? What's the general market for real estate like in the area? What else has sold lately, for how much, and what was it really like? It's too late now to get a viewing of all the comparables that sold within the last few months - the lock box is gone, the new owners have moved in, they're done with all that transactional nonsense, and the vast majority sure as heck aren't going to let random strangers poke around their new house. How many agents get off their backside, get into their car, go out and look, take notes, and remember? Most of the agents I've done business with never leave the office except for an actual showing generated by clients driving around, or surfing the internet, or even reading the "for sale" ads. That is so backwards I have difficulty articulating precisely how messed up it is. A good agent knows the market, knows the comparables for sale, and knows how a given property compares. They might not have been in every single one, but they've been in enough for a good comparison. Patronizing an agent who hasn't done this, who doesn't make a habit of this, is like having half an agent - at most. How in the nine billion names of god are you going to help a client price a listing properly if you haven't looked at the competition? How in the name of ultimate evil are you going to know a property is or isn't worth making an offer on, and for how much? Yet people will do put up with this nonsense because they don't know any better. This is probably the agent skill that needs the most practice of all, and decays the most quickly if not practiced. There's this one neighborhood about three miles from my office that I haven't been into for almost three months, and I'm terrified I'm going to get a call for it before I can remedy the situation. There's nothing wrong with clients suggesting properties, and I firmly believe that no matter how messed up the property is, they should be given the opportunity to see any property that catches their eye - but doing that and only that takes zero advantage of the one thing good agents have that bad ones (and 99.999% of the general public) don't - precisely this expertise. It is this expertise that makes more difference than any other skill set in results for clients - whether selling or buying. You can't recognize either a bargain or the opposite without the context to put it in. You can't price a property right without knowing the competing properties and their relative strengths and weaknesses. But all too many people, both agents and general public, discount this difficult to acquire skill, thinking, "Anybody can do that!" Question: Which learning category does this place them into?

I don't know how many people I've met that seem proud to be stuck in unconscious incompetence. But just because you don't recognize the skill doesn't mean it doesn't exist, it doesn't mean that its lack won't bite you, and it most assuredly does not mean that its presence in others won't hurt you. For real estate transactions, to the tune of thousands of dollars at a minimum. Knowledge springs, not from the mental impenetrability of "Anyone can do that!", but rather from the admission that perhaps you might have something to learn.

Caveat Emptor

Article UPDATED here

I enjoy your blog very much and figured you would be a good person to ask this prepayment penalty question to.

Is there a prepayment penalty if you dont pay down the whole amount? For
instance, say I owe 620k and want to refinance this. Can I get a loan for
say 610k from another lender and leave 10k with the orignal lender?

Does that avoid the prepay penalty?


Have to admire the ingenuity, but it won't work. Here's why:

First off, the penalty is triggered by paying a certain amount extra. There are two main trigger points for a prepayment penalty, usually known as "first dollar" and "twenty percent." "First dollar" prepayment penalties are uncommon, but they do exist. What such a penalty means is that if you pay one extra dollar of principal during the time the penalty is in effect, you will get hit for the penalty - usually six months interest on the prepaid amount. Not so bad if you pay an extra dollar and get hit with a three cent penalty, but you have to pay a substantial amount to get any noticeable good out of it. You pay $1000 extra, and that's $30 they're going to hit you with on a 6% loan. Pay off a $100,000 at 6%, and they're going to have their hands out for $3000 extra.

The other trigger point, "twenty percent" lets you pay down the balance by up to twenty percent for any given year without triggering the penalty. Note that this includes not only any extra you pay, but normal amortization as well. If you have a $100,000 balance, and would normally pay $3000 down through regular amortizationduring the year, this leaves you with "only" $17,000 of extra that you can pay before the penalty starts hitting you. Most often for this type of trigger, the prepayment penalty will only be assessed on any amount over 20% of the balance, but I have seen these charge the full penalty once triggered. So paying off $20,001 of a $100,000 balance at 6% might, depending upon your loan contract, cause a $600.03 penalty to be assessed - but most often it will only be that three cents. In this case, paying off the loan in full would only cause the penalty to be assessed on $80,000 - $2400 instead of $3000. It's also something to be cognizant of that this 20% paydown applies to the balance as of the start of the loan year, which runs from contract anniversary to anniversary. Say you have such a penalty in effect for three years. The first year you only pay it down to $80,000, escaping the penalty. The second year, you can only pay it down to $64,000 - by 20% of the beginning amount for the year - before triggering the penalty. If you do so, in year three you can only pay it down as far as $51,200 without triggering that penalty. This type of trigger is used when the lender is mostly worried about a complete refinance or selling the property. (A "soft" prepay is one where the penalty is not due if you actually sell the property, but most loans with prepayment penalties have "hard" penalties that are assessed at a certain trigger level, no matter the reason.)

No matter whether your penalty trigger is "first dollar" or "twenty percent" though, you're not going to refinance without paying it off completely. Here's why: In order for the new loan to be first in line, the old loan has to be paid off completely. The rates and prices on home loans that we all see advertisements and such for are predicated upon them being first trust deeds. They can only do this by paying off the previous loan in full and having a Reconveyance of the Deed of Trust recorded. Not paying the old loan off means no Reconveyance, which in turn means no new loan because their Deed of Trust will not be first in line. You'd have to content yourself with the higher prices for a loan priced as a second trust deed.

There are only four ways to avoid a prepayment penalty that I'm aware of. 1) Don't accept one in the first place, 2) Don't sell or refinance until it expires if you do accept one, 3) Convince a court the lender has done you sufficient dirt for the court to order part of the contract voided (this takes a lot of dirt), or 4) Swap your old penalty period for a brand new one by refinancing with the same lender, if they will allow it (They don't have to).

Caveat Emptor

Article UPDATED here

Aging geeks like me have one more reminder of our mortality: E Gary Gygax has died.

It's become fashionable in gaming circles to bash his creation, but when you consider that D&D was the very first game of its type, it's amazing how good it was. His primary error (and that of the company that still publishes its successors) is sticking to the initial model despite later ideas making role-playing more enjoyable.

It's been over a decade since I last played anything D&D based. GURPS does a better job with any gaming milieu where you don't want magic. I happen to think the way Mage handles magic more than makes up for its lack of coherent indexing, when you want that play element. But the initial GURPS system didn't begin development until D&D was about 15 years old, and Mage is more recent still. Expecting the original first effort in the genre to be as good is like expecting Thomas Edison to have come up with the Blu-Ray DVD system. Later developers got to keep all the good ideas and start over with the stuff that didn't work out so well - but they all owe the EGG and his original partner Dave Arneson for coming up with the basic idea and a lot of the basic framework. So even though I stopped playing his products, he was still a contributor for a lot of fun I've had in role-playing games

(One news report headlined it as "Gary Gygax Fails Final Saving Throw", which I thought worth a chuckle, and if some people might think it was in questionable taste, I don't think he would have been one of them. Oh, and by the way, the copyright on my original three book boxed set was 1972, not 1974 like some news reports have been saying.)


Fed Chief: Mortgage Crisis to Continue

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.

Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. "They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again," Bernanke said.

I can give them a better idea: Stop the over-tightening of financing rules. I predicted back in 2005 that when the crash came, 100% financing was going to go away. Well, now that has happened, but 100% full documentation loans actually have a very good track record as far as repayment. Even stated income loans with down payments of 20% or more have a good track record - nobody is going to commit $100,000 of their own money that's going to be the first thing lost if they can't make the payments - and those are gone also. Going overboard on tightening just crashes the market because, as I wrote this morning, The Mortgage Loan Market Controls the Real Estate Market. Over-tighten mortgage rules, and you cause the bust to become worse. This whole lender cycle of over-loosening and then over-tightening mortgage rules does nothing but encourage boom and bust cycles. Because you know what happens when the market finally hits bottom? It's starts going up again, which means lenders will start loosening restrictions again which means that loosening will cause prices to spike upwards again - and we're off to the races. Again.

One of the things I keep telling folks about the real estate market, whatever area you live in, is that it is controlled by the loan market. If you want to understand where real estate in general is headed, look at the loan market and the financial markets that generate them.

Right now, the loan markets are in full panic mode. In the last week or so, all non-governmentally guaranteed loans for more than 95% of value have disappeared. This means that VA and FHA are all that is left above 95% loan to value ratio, and you've pretty much got to be A paper full documentation to get 95%. Since 100% Loan to Value ratio financing has been the universal financing vehicle for borrowers for the past several years, this constricts their choices. Comparatively few people have money they could use for a down payment if they wanted to. Not everybody qualifies VA or FHA. VA requires military service, and FHA has loan limits that aren't going away. As I'm writing this, we're still waiting for hard numbers on what increased loan limits will be, but I strongly doubt that they are going to be raised as high as most people seem to be assuming that they will.

Furthermore, all of the other loan programs to get 100% loan financing have gone away, and all of the supplemental programs to extend buyers' ability to qualify have rather sharp income limits, and those income limits are not going up at all. They actually effect San Diego less than most areas, but even here, they constrict the ability of buyers to qualify. Both the mortgage credit certificateand all of the municipal first time buyers programs have income limits that mean people can't make over a certain amount of income - and even if they have no other bills they can't qualify for the loan on property over a certain loan amount, because even if they have no other bills, their debt to income ratio will be too high. You can't cheat on this - all of these programs require full documentation of income. Above about $420,000, even if they conforming limit goes up, even if the prospective buyers make the maximum amount per year for the program and have no other bills, they won't qualify based upon debt to income ratio.

The moral of this story is simple: If you want to sell your property above a given price, you're not competing for first time buyers. You are competing for people who have sold (or are about to sell) their property for a profit and are now ready to move up. No matter what the conforming loan limit is or becomes in your area, if the prospective buyers don't qualify for the necessary loan based upon debt to income ratio, they can't buy.

Any time you raise the price you want to sell by a certain amount, there are people that no longer qualify to buy your property. You have priced them out, and no matter how much they might want to buy your property, the fact remains that they cannot.

As for buyers making the median family income in San Diego of $72,100, their limit on 100% financing is about $270,000. So unless they have a significant down payment, a family making $6000 per month is looking at a condominium. Just a cold hard fact.

There will always be buyers around the edges who are exceptions. People who have saved or inherited a substantial down payment in defiance of demographic trends. But those are the exceptions, and for every one of them, you have a dozen of more unqualified buyers engaged in wishful thinking. I just spent the most of the morning unsuccessfully looking for a stated income loan to save the home of a guy who called me out of the blue this morning. At this point, I'm 99% certain there's nothing I can do, because the loan program to help him doesn't exist today. Six months ago it would have been a slam-dunk - there's plenty of equity. Before you ask me what relevance this has to buying and selling, I'm going to answer: Every time a lending program goes away, there go some buyers who otherwise could have qualified. Right now, there is no stated income. Doesn't bother me much, as 95% or more of my clients have always been full doc, but for those who are used to the opposite ratio, it's the apocalypse. Ditto for sellers and listing agents who don't understand what it takes to qualify, and who price their properties as if the loan market for two years ago was still going gangbusters. When the property sits for months because the people who might buy can't qualify for that big of a loan, that's a problem.

With all this said, the people who do have the cash or the ability to qualify for a loan are in the driver's seat now. You may be getting tired of hearing this from me, but veterans can qualify for about 20% more loan than someone without military service for the same income. People with 5% or more down are in an even stronger situation, and people who have both things going for them have an incredible amount of negotiating leverage. When the loan market will approve anyone who can fog a mirror, your competition is everyone who can fog a mirror. When the loan market wants to see guarantees and cold hard cash going into the property in the form of a down payment, your competition is, by comparison, non-existent.

Caveat Emptor

Article UPDATED here

Carnival of Real Estate

Carnival of Personal Finance


Victor Davis Hanson

It is a cop-out to say George Bush caused all these problems. They loom large mostly for two reasons. One, the United States promotes global democratic capitalism, and our military ensures international free commerce in the air and on the seas. This bothers regional dictators and terrorists eager to carve out their own spheres of influence, regardless of who's sitting in the Oval Office.

It's nice to read analysis written by an adult.


I'm not going to embed this video, because the language and imagery are definitely not family friendly. Wizbang posted a video of a so-called "peaceful" protest in Berkeley. Be warned if you go view it that it is definitely Not Safe For Work or a family environment.

For those of you on the left: I'd be working to restrain this sort of thing if I were you. Today, Republicans are tarred by association with everything that was done to resist integration in the South - and it wasn't even Republicans, but Southern Democrats that did it. I don't believe that all of those on the left can possibly be so scared of their political opposition that they need to threaten, intimidate, and even physically abuse those who would debate them.

The civil rights marchers of the fifties and sixties won because they refused to become violent or intimidating, and appealed to that which was decent in their fellow Americans. They insisted upon being civil and nonviolent. Even a Klansman in full regalia would quite likely have been safe, even surrounded by them. That doesn't appear to be the case here. I strongly doubt that MLK would be standing with these people.

If you don't want to be tarred with the same brush, take steps now to disown these people, because it appears to be only a matter of time until they do something so barbarous that it enters the lexicon much like the murderers of Medgar Evers


I doubt this is a coincidence: At U. of California, a Systemic Governance Crisis

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