April 2008 Archives

I try not to do a lot of "business of real estate" posts. That's not what I'm about. But I figure that we (as agents) have got about a year to save the profession from the traditional brokerages that control the National Association of Realtors.

Last night I attended a session of the San Diego Weblogging group. Being the only non-techie present, when real estate came up they were willing to be quite upfront about their reactions to real estate. When I said "everything is a matter of public record," in a different context, the entire group went off on me about NAR's policy of attempting to control information chokepoints via MLS and limiting what information IDX is allowed to display.

(For those who were present last night, I want to emphasize in no uncertain terms that the your reaction was a good thing from my point of view. I knew intellectually what the public thought about this policy, while not having precisely this sort of eye opening experience about how strong those feelings were. But having the cover of the group and a lone agent to target, you folks felt comfortable displaying exactly what you thought of this policy to that agent: me. The shortsighted reaction would be to get angry and offended and leave. The intelligent reaction is to thank you for providing concrete perspective on something I already knew intellectually, because I am grateful for you all completely clearing the air, and I'm glad it happened.)

For those who weren't present, this is a group of very bright, very intelligent people. It's only small fraction of the number of such people here locally. All over the country are similar groups of very bright, very intelligent people. They've got brains, they've got know-how, they've got marketing expertise and access to venture capital. It is only a matter of time before some group of them figures out how to defeat any MLS monopoly of listing information. Not that there's much of one right now, where MLS information goes out complete to IDX providers and parts are only censored to the general public because it's in the license. But eventually, what shreds of information monopoly are left will be gone. The only thing that needs to remain restricted is, as we all agreed, the showing instructions. Things like lockbox combos and when people are not going to be home so the criminal element can't cart their stuff off. CBB? It's valid information on the state of their agent's mind for buyers. Show it. Contact phone for showing? Show it. Days on market? Definitely show it.

One of the people that was present works for a large IDX provider. We had a good conversation about how even the traditional brokerages are loosening information flow in the name of selling real estate right now. We agreed that it was likely that there will be attempts to re-tighten this control in the future, but that those attempts are going to flat-out fail.

Now, let me tell you something else: While these folks were vehemently hostile to the notion peddled by the traditional minded brokerage controlling market access, they were quite open and responsive to the notion of the expert consultant.

Unfortunately, these folks were all previously unacquainted with that business model. There's a lot of misinformation and disinformation out there about the business of real estate agency. A lot of it's written by people outside the business who want a piece of the action, to encourage an agenda that gives them a piece of the action. The experiences of these folks leads them to be deeply suspicious of large corporations and large organizations with a profit motive.

NAR, for their part, is playing straight into the hands of these people outside the business who want a piece of the action. The entire "controlling market access and information chokepoints" message is anathema to these folks. It tells them that agents and their organizations aren't to be trusted, it tells them that our entire business model is based upon making money by constraining people to come to us. What happens when that constraint vanishes? I guarantee that it will vanish. If not this year, than next year or the year after. Precisely when isn't important. It's coming, and probably sooner than you - or I - think. Agents can decide to anticipate this event as a group, and prosper, or lose almost the entire market when it does happen.

Let's look at the basic inalienable facts of the situation. You have John and Jane Smith. They're looking to buy a house. This is the biggest financial transaction of their lives, and purchasing real estate is an enormously complex transaction they have no real understanding of. They're coming into the market innocent of any real knowledge of trends, or where the market is. They have seen none of the recent sales in the neighborhood. They have no idea how to evaluate a property for future suitability, investment potential, or any number of other things. Do you think people might be willing to pay for all that knowledge and judgment, and know-how? Now consider: If we market ourselves by telling them they have to come to us because we have a monopoly on information of what houses are for sale, what happens when we don't? Crickets chirp, tumbleweeds roll, and 99.9999 percent of all agents go out of business. Market yourself by sending the message that your value is in control of market access, and what happens when your control of market access goes away?

Let's look on the other side of the equation as well, at sellers. You have John and Jane Smith, a few years later. They've decided to sell for some reason or another - there are at least eight categories of reasons. Now they've got a long grocery list of factors that they've never before considered to deal with in selling that property. Time constraints, property constraints, competition constraints, staging, location, construction, layout, the loan, the lender, the market they're in. Do you think people might similarly be willing to pay for expertise in dealing with all of that? But most ways of marketing that agents do boil down to "Our MLS is where all the buyers are." What happens when it isn't? RIAA is learning this lesson right now, and they have a lot more law on their side than agents do.

Or maybe we're all going down the "constrained to deal with an agent by force of law" argument? All it takes is one licensed agent to put themselves into the deal, and the traditional brokerages have made it trivial to get that license as the way to keep themselves in clueless newbies. Not to mention that most states, including all of the big ones, don't have such laws, and passing them in current environment falls under the heading of "Not Gonna Happen." The few states that have such laws are going to wake up and repeal them eventually.

The "sign in the yard, entry in MLS" listing agent is going to go away no matter what we do. So is the "here is the living room" buyer's agent. Where there is no real value provided, people will go with the cheapest alternative, and you can't stay in such a business competing with "essentially free"

But good agents do provide value, and even more so when there's no agent on the other side. My average for the buyers that are the majority of my business in the last two years is almost twenty percent of the value. Let the people be free not to use any agent if they don't want to. It just makes my clients happier. Let your happy clients tell their friends, and there won't be any shortage of business.

For those agents who can compete with all possible alternatives, it would be a lot easier to attract business if we didn't have to compete by first defusing official NAR pronouncements that are nonsense, and sabotage our efforts by telling the public that the value of an agent is in places where it clearly no longer is. We are entering a new world of information transparency whether we like it or not. I've decided that I like it very much - basic information may be free, but context, analysis, and evaluation are more valuable than ever because of it. But try and charge toll for that basic information, and people will figure out how to route around you.

"Figures Don't Lie, But Liars Do Figure" Department

I'm not going to name names, but most people can probably figure out which company I'm talking about. A few days ago, a well known commission rebate buyer's brokerage started bragging about a its clients procuring a 1% advantage over general market in the amount they negotiate off asking price.

Boys and girls, I'd say they were palming a card, but it's really more like an entire hand. Roughly 1/3 of buyers are either completely unrepresented, or allow the listing agent to represent them. At least another quarter work with rebater brokerages where the only service really provided is opening a door and the use of a fax machine. Another very large percentage are victims of exclusive buyer's agency contracts put in front of them by friends, family members, and random agents they met at open houses, who didn't know any better than to sign it?

And you're bragging about a 1% mean advantage in negotiations over that? In the best negotiating environment for buyers since the early nineties at least?

That doesn't rise to the level of pathetic. Ladies and gentlemen, that's like cheering and making a press release bragging that you make $1 per hour, when minimum wage is considerably higher.

In this environment, I believe that a good buyer's agent should make at least 10% of a difference to the value of the property the client buys. I just closed one where the lowest appraisal I could get said I made a 35% difference, CMA of recent sales yielded a similar number, and that didn't consider the intangibles of the property and what it meant for the clients in terms of not having a reason to they're going to need to move five or ten years down the line. Considerably above average even for me, but over the last two years, my average has been right around twenty percent, and these clowns are bragging about one? Even when things were going gangbusters and all the power was in the hands of the sellers, I was averaging five to ten percent, and they're bragging about one lousy percent in an environment where buyers have all the power? That they "earn" by shoving all the work off to the listing agent?

I feel like I'm stuck in 1984, when Winston Smith reads the article thanking Big Brother for raising the chocolate ration to 15 grams, when it fact it had been cut from 20. Things like this completely disgust me. The company concerned is basically counting on information overload to keep people from evaluating the facts rationally and in context, especially when that analysis shows them to be pathetic losers whose clients are barely better off than people who actively sabotage themselves?

Shame is officially dead.


Researching Raoul Wallenberg and his fate

Whatever any of this reveals, a 1979 State Department memo put the questions into perspective: "Whether or not Wallenberg was involved in espionage during World War II is a moot point at this stage in history. His obvious humanitarian acts certainly outweigh any conceivable 'spy' mission he may have been on."


Too little, too late: Obama says he's outraged by former pastor's comments

"I am outraged by the comments that were made and saddened by the spectacle that we saw yesterday," Obama told reporters at a news conference.

Wright didn't say anything in any of his recent appearances that he hadn't been saying for a long time. Yet last month, Obama defended the same thing.

The only difference I can tell - the critical difference for politicians - is the size of the audiences that heard Wright's most recent appearances, and the widespread reactions to those appearances.

In short, Obama can't sweep Rev. Wright's behavior under the carpet any more, and having to make a choice between his traditional base and the broader base he's going to need to win the remaining primaries as well as the general election in November, he's having to choose the one with more votes. Nothing unusual for a politician. But Hope and Change Man is selling himself as something a cut above other politicians.

Obama spent twenty years in this guy's church. He was the officiating pastor at Obama's wedding. Obama took his kids to this guy's church, to listen to him spread his hate. Twenty years of action are telling me precisely where Barack Obama really stands on what Rev. Wright is saying.

Q and O has much more detail.


Yes, Wright's views certainly contradict Obama's stated beliefs, policies, and values. Andrew adds: "Obama needs not just to distance himself from Wright's views; he needs to disown him at this point. Wright himself, it seems to me, has become part of what Obama is fighting against." Become? I don't see that Wright has changed. People have just noticed. And if this is what Obama is fighting against, then . . . where's the fighting against part?

Bush says no magic wand to lower fuel prices

Trying to calm anxious Americans facing $3.60 a gallon gasoline and soaring grocery bills, Bush again prodded Congress to open an Alaska wildlife refuge to oil drilling and allow construction of more nuclear and coal plants.

"I firmly believe that, you know, if there was a magic wand to wave, I'd be waving it, of course," he said during a news conference. "I've repeatedly submitted proposals to help address these problems, yet time after time Congress chose to block them."

I just last week closed a transaction where my clients did not make the high bid (or even close), but did get the fully negotiated purchase contract and the property. By building an airtight case that this client was capable of promptly consummating the transaction, I persuaded a rational seller to accept less money than they might theoretically have gotten from another interested party.

Let me make it very clear that this does not work every time. It takes a seller with a certain amount of knowledge of the market to make it work, and their agent cannot be clueless either. Your first time home seller with no knowledge of the reasons why transactions fail, or how frequently, is not likely to realize where the probability of money is. So after that seller eats carrying costs for the property for two to three months at several thousand dollars per month before they discover that the buyer cannot consummate the transaction, they might start to get rational about what's important - providing they haven't lost the property to foreclosure in the meantime.

The better the agent is, the more likely they are to be on the side of the more certain transaction. Over forty percent of all escrows started in the last year locally did not result in consummated transactions. Why did all those transactions fall apart? The loan couldn't be done. No other reason but "the loan couldn't be done." Transactions that fall apart for other reasons - newly discovered major repairs, and all of the little problems with interpersonal relationships that strike between contract and recording - are mostly unknowable in advance. We can all spot the purchase offer (or seller's counter) that says "Danger, Will Robinson!" but most of them aren't that bad. And the fact is, no matter how unwilling sellers may be to deal with newly discovered issues, they're stuck with them and the buyer isn't. Nobody's going to buy a house where you can't flush the toilets, as I had to explain at length to a listing agent about a year ago (Indeed, both law and lenders will make it very difficult). The most important question in the mind of any rational seller or listing agent has got to be, "What assurance do I have that this buyer can consummate this transaction in a timely fashion?"

As a buyer's agent, that's what you want to sell in a competitive bid situation: increased certainty of the transaction happening.. Confidence that you and your client can make it happen, given the opportunity. Show the sellers why these buyers are qualified. Telling nothing but the truth, paint a coherent picture of an easy transaction. This is one of the big reasons why real estate agents need to understand loans, whether they're on the listing or buying side. Walk the walk, don't just talk the talk. If your clients are all cash buyers, pound the point home - and get rid of that financing contingency! What's the credit score? What's the income, how stable is it, what's the debt to income ratio? The loan to value ratio? With client approval, you can even remove the account numbers from statements, and show them where the funds for the down payment are coming from!

Pre-Approval or Pre-Qualification letters will not get this job done. Neither one of them means anything real. I'll write them, but the only one I trust is one that I wrote. Why should I expect any other agent to give them any more weight?

The more qualified the buyers, the bigger the down payment and deposit they're bringing in, the better this works. A good sized deposit says you and your buyers are confident you can get it done, particularly if you'll waive one or more of the usual contingencies.

You do need both a good agent and a good loan officer to make it work. If the loan officer and agent are both the same person, that's even better, but this isn't happening with a discounter if the listing agent has more than an hour in the business, even if they're a discounter themselves (although I've never had a competitive bid situation happening with a discounter's listing. I don't wonder why, and you shouldn't either).

This pretty much can't work if you're in a Dual Agency situation. That agent counsels the owner to take the offer made where they get both halves of the listing commission, but the owner gets less money? Ten minutes in court or a regulatory hearing and that agent is toast. Yes, some agents are that stupid - but this is a mistake nobody makes twice, because once puts them out of the business. Not to mention that that owner is going to figure that the agent is out to line their own pocket at their client's expense.

For my buyer clients, I'm always looking for something valuable to the seller that isn't cash, or isn't purchase price cash. This is one of the best, because it doesn't cost my clients a darned thing, and yet it really is valuable to sellers.

Caveat Emptor

Article UPDATED here

I don't know how many people have told me the story of the Purchase Offer That Was Accepted But Couldn't Be Done. They come to me because they lost their deposit or are about to and they want some way to make it not happen.

But it's never happened to offers I write for my buyer clients. I doubt it ever will. There are many reasons why real estate agents need to know and understand loans. First off, to save their backside. Somebody defaults on a purchase money loan, the agent is an obvious target to drag in. E&O insurance plus fiduciary responsibility equals rewarding target for lawsuit. The second reason is even more important than that: Saving the client relationship. What could possibly be more damaging for a buyer's agent than losing a client's deposit? There really isn't much. When I write a purchase offer, the built in structure is always of a loan I know that I can do.

This is particularly important where there's less than 20% down payment being contemplated. For the last ten years, there's pretty much always been a loan that could be done, no matter how poorly qualified someone was. That has now gone by the wayside. Stated Income and NINA loans are now much more difficult to find, and with declining market designators, I'm not certain I can do 90% Loan to Value loans stated income at all right now, even for a primary residence.

All government programs - VA loans, FHA Loans, FHA Secure (not a purchase money program), Mortgage Credit Certificate, and locally based first time buyer assistance - all require qualifying based upon full documentation of income.

Given this, you have to know if you can afford it before you make an offer. You're going to spend roughly $1000 to pay for an inspection and an appraisal as soon as you have an accepted offer, not to mention you're tying up a deposit of several thousand dollars in escrow - a deposit that's potentially "at risk" if you are unable to qualify for the loan that will allow you to purchase the property.

I know that I'm not very respectful of pre-approval, let alone pre-qualification. This is because there are no real standards for either one, and I've seen enough pieces of paper swearing a loan could be done when it in fact could not to make a fair sized bonfire. There are several reasons for this. There just isn't anything to gain personally, and everything to lose, for a loan officer to tell someone "Sorry, but you do not appear to qualify." So they issue the pre-qualification or pre-approval on hope and a prayer, because they might be able to get a loan done.

So you want to make the loan officer go over the numbers with you" Debt to Income ratio, Loan to Value ratio. Add up all of your other debt, add up the full payments for principal and interest, property taxes, and homeowner's insurance. What percentage of your verifiable monthly income (monthly average over the past two years) is that? How much do you have available to use in your bank and investment accounts? Does that cover the projected down payment and sufficient money for the closing costs you'll need to pay? If you need to buy the loan down with three points in order to qualify on debt to income ratio, is there still enough available to make the required down payment?

In some cases, writing the purchase offer correctly - structuring the transaction with the loan in mind - can make a difference between a loan and a purchase that can be done, and one that cannot. This is definitely the case if you are looking for anything over ninety percent financing, and especially if you want 100% financing. The only 100% financing available right now that doesn't require being extremely careful about how you write the purchase contract is VA. It can be done, even in declining markets, but you have to be extremely careful to write that purchase offer in consideration of loan requirements.

Now if your real estate agent is a highly qualified loan officer, it's no sweat. I write every purchase offer with prospective loans in mind. If I don't know I can do the loan, I find another way to write the purchase contract so that it can be done.

The time of writing a purchase contract and worrying about the loan after acceptance is gone, and it may not return. Even for well qualified borrowers with plenty of income and down payment, it can't hurt to get a loan officer involved when making an offer. For those with marginal income and not much down payment, getting a loan officer involved before you write an offer (or accept a counter) can make the difference between a viable transaction, and one where everyone's wasting their time and money. Yes, you can potentially renegotiate a purchase contract later. Is there anyone who wants to tell me that's as good as getting it right in the first place? Do you think you might be opening the door to issues of trust between buyer and seller getting in the way on those renegotiations? Do you think that the seller might demand fresh concessions, where if it had been negotiated correctly in the first place, you would have something that's essentially the same terms as the initial contract? Not to mention time lost, delays in closing, opportunities for the entire transaction to go south? Write your offers with loans that can and cannot be done firmly in mind, and you won't need to renegotiate for the sake of the loan.

Caveat Emptor

Article UPDATED here

Carnival of Personal Finance

Carnival of Real Estate Investing


Hurray! Indiana's Voter ID law upheld!

Every time someone votes who is not entitled to, it effectively disenfranchises someone who is entitled to. Even if you don't drive, a state ID is cheap (some states will even give them free if your income is below a certain level), and you have all the time you could possibly need to get one.


Grasping at Straws: The NY Times on McCain

[R]egarding the non-violation of FEC rules: the article itself states that the FEC didn't even begin not-adopting this new non-rule until December - and the travel in question took place from August through February. Not in any conceivable universe would McCain ever to have been held to have violated in August a rule that didn't exist before December. And presumably if the FEC had had enough members to pass this rule in December, the McCain campaign would have then stopped doing whatever it is that the Times is so indignant about.

And WHY does the commission not have enough members to conduct business as usual? The Times is unusually reticent on that point. That's because the reason the FEC doesn't have enough members is that Barack Obama has blocked President Bush's nominee from being confirmed.


Instapundit on criminalizing policy differences.


Maybe this is what Obama means by "change"

Obama seems pretty much "brought to you by the Ministry of Truth", aka the mass media.

Convenient Memory Holes upon Demand! Whiffleball Questions! Pretending Major Inconsistencies Don't Exist! Ignoring Inconvenient Associates! How far can the media go into the tank for Hope and Change Man!


"Deadbeat Dads" Who Are Actually Moms

Despite all the hype, rates (or, actually, the tradeoff between rate and cost) are pretty darned good right now. I'm at home right now, but yesterday, for someone with average credit (national median) and 20% down payment or equity, I could have locked a thirty year fixed rate loan at 5.875% with one total point, and delivered same in thirty days. Lest you not understand, that's very good by historical standards. Last summer the same loan was in the 6.5 range, and I remember not too long ago when rates in the sevens were considered good. Nice, sustainable fully amortized 5/1 hybrid ARMs that most people will never keep five years anyway are in the low 5s for the same cost (starting to look like a worthwhile alternative again).

But you'd never know it to look at the headlines. "Lender meltdown!" and "You can't get loans!" are things you see in the mass media every day. "Hard to get mortgage" returns 435,000 hits.

The truth is, there is a meltdown. Lenders have suddenly figured out that risky loans are risky loans, and since they have their sense of humor surgically removed upon hiring, now they're mentally trapped in a humorless game of Paranoia. People with marginal credit or little in the way of down payment are finding it difficult to buy, and since their former ability to qualify was priced into the market, this limits the demand for real estate, shifting the supply and demand equilibrium (aka price) down. The loan market controls the sales market, and when the loan market makes it harder to qualify than it has been, times get bad for sellers. People looking to buy for the first time have to save more, and the people who would have sold to them aren't going to be able to move up either.

So all of the marginal cases that subprime lenders were lining up to serve until about a year ago can't get loans, and even people that have A paper credit may be forced to consider subprime loans, if they can get anything at all, due to high Loan to Value Ratio. This has become very much a positive feedback situation. Falling demand triggers tightening of lending standards, causing values to fall, further exposing lenders to loss, causing them to tighten their standards further.

When a lot of people have fallen below lender thresholds for acceptable risk, they can demand loans all that they want, but the lenders isn't going to supply those loans. But the lenders still have that money. If they don't loan it out, they're still paying interest on it to their depositors, and the investors are going to be angry that their stock isn't paying any dividends. So they've got to find somewhere to lend it out that does meet their standards.

So if you are one of those people who do meet lender standards, they want to lend to you, and there aren't as many people eligible to compete for that lender cash, which means the money is cheap in terms of what it really costs. The margin over inflation is lower than it was in Summer of 2003, when the rate/cost tradeoffs were lower than they had been in fifty years. Lenders want to lend money. For those who qualify, money is cheaper now than it was then, because the 5.875% loan you get today is less expensive, when considered in the form of "rate minus inflation," than 5% was then.

Having observed a few market cycles before this in cyclical San Diego, let me ask what happens as soon as things stop getting worse? Lenders figure out that they've been overly paranoid, they loosen the standards just a little bit, and because the loan market controls the real estate market, real estate prices starts rebounding as the new people who can now qualify in the loan market enter the real estate market. That same market that the loan climate has been hampering, gets helped when the loan climate loosens just a little bit. San Diego has been on the bleeding edge of this whole phenomenon. I see a lot of evidence, and hear of a lot more (thus far, still anecdotal because official records take a while to catch up) that says we're ready for a turn

Indeed, that lending wedge is already present, in the form of new FHA limits of $697,500 locally, when their former limit of $362,000 locally had meant FHA loans couldn't finance anything above a two bedroom condo. The FHA program in its base form gives a government guarantee of the loan for loans up to 97% of the purchase price, and there are ways to make an FHA purchase with zero down. Lenders like government guarantees - it means that even if the property does get foreclosed upon, they'll probably get their every penny of their money back. (I should also mention that the VA loan limits have also been raised, and VA loans are a better deal if you're eligible. Never go FHA if you can go VA, and I'm getting wholesalers telling me they'll do VA loans up to 1.5 million dollars) The control upon this whole thing is, of course, the fact that all government programs require borrowers to qualify "full documentation". Stated income and NINA loans are not allowed by any government program. However, San Diego's local economy will more than support current pricing levels. More than enough people make more than enough money to qualify for home loans at current prices "full documentation", and when people figure out that the mass media's Fear and Greed campaign is misplaced, what do you think is going to happen?

Caveat Emptor

Embryonic stem cells coaxed into key heart cells


Professor Bainbridge on our severely brain damaged ethanol subsidy.


Quick Humor: The Secret Diaries of Cat and Dog.


I wrote a quick article over at Mortgage Cicerone (a site intended for loan folks) following up on Zillow Mortgage, but those outside California who may be considering it probably want to read it also. I like Drew over at Zillow, and would really have liked to be able to say some more positive things. I am also open to changing my opinion should they improve their product.


Not that there was much doubt. I could have written this article right after their election: Zimbabwe police raid opposition, election offices

Riot police and intelligence officers ransacked opposition party headquarters and the offices of independent election monitors Friday, hauling away material documenting President Robert Mugabe's apparent electoral defeat.

Just because it's never happened here doesn't mean it can't: Local triathlete killed in shark attack

Right here in San Diego County.

Predators in the water haven't been conditioned to be afraid of humans.

Here was an idea I had: Pack a list of the most important things consumers need to know about buying real estate, as packed into the words I can say in sixty seconds without sounding like an over-clocked squirrel.

Here goes:

Spend some time making your property shine before you put it on the market. Doing it yourself is better than giving an allowance. Spend the effort to find a good listing agent, and sign a listing agreement at least a week before you want people to know your property is for sale. Consult the agent as to what can be done to make the property more attractive before anyone sees it. Agree to pay your listing agent for the good they do, and offer buyer's agents at least an average commission - you don't want them trying to sell someone else's property to the people who like yours.

The property is only worth what someone will pay. Price it correctly from day one. You'll end up with more money, faster, than if you start too high and reduce the price. Not all goods are in the form of cash - decide what's important to you, what's not, and how much money it's worth, before you have an offer.

Once the property hits the market, make the property as available for showing as you possibly can. If you don't show it when people want to see it, they might not come back. If you possibly can, don't be there when your prospective buyers are.

Negotiations are give and take. You shouldn't expect to get unless you're willing to give, and a stubborn attitude can sabotage your sale. Remember, you have a property and you want cash. There are lots of other properties out there

How's that?

PS: You might want to give this guy a chance to earn your business!

Article UPDATED here

I've been saying this for a long time: Short sales are poison for buyers. I don't know why people encourage buyers to look at short sales, because there is no advantage for buyers that I am aware of. In fact, there are several decided disadvantages. I'd much rather make offers on lender owned property, or anything else for that matter.

For those sellers who desperately need to sell, which is pretty much every short sale, I really am sorry. But I have a fiduciary responsibility to my buyer clients, who come to me wanting a better property for less money, and less hassle. The facts of life in short sales work against getting a bargain, while sabotaging our (mine and my clients) ability to control the transaction. Therefore, I advise against. Much better for buyers to look for lender-owned or other property.

The issues lie with the lenders, who are in denial of the situation. I've never come across anyone in any lender's short sale department who didn't have their head stuck in cloud-cuckoo land. Instead of making a prompt approval or disapproval of an offer, they sit and delay and hope for a better one. Most often, I've got the purchase financing ready to go in about two and a half weeks from the date of the purchase contract. For any other property, it's pretty trivial for the listing agent to be ready to close by then. We're done, and my client is happy.

For short sales, we usually won't get word as to what the lender is going to do for at least a month after that. I've literally never had an approval from a short sale lender within a normal escrow period of thirty days. This has implications for the buyer's loan. Mortgage Loan Rate Locks are more expensive for longer periods. Pulling a rate sheet at random, a 45 day rate lock adds a sixth of a point to the costs for a thirty day lock, while a sixty day lock adds four tenths of a point. On a $400,000 loan, this works out to roughly $667 and $1600, respectively. If you need an extension, a tenth of a point (roughly $400) buys five calendar days. Some lenders aren't extending locks at all for loans above the conforming limits. Or buyers can float the rate, leaving themselves at the mercy of the financial markets as to the loan they might eventually get. None of these is an optimal situation from a buyer's point of view.

When they do respond, the short sale lender will always try to squeeze more money out of the transaction. They're in denial about their loss, with the practical effect of making that loss worse. The property is only worth what it's worth. The first few days on the market are the best time to get the highest offer. If you didn't get an offer then, you're not likely to get more money later, as I said in How to Sell Your Home Quickly and For The Best Possible Price. But loss mitigation departments are congenitally clueless about this - and they will forget whatever you manage to teach them within 4.3 nanoseconds. They are structured towards shaking the most possible money out of the transaction, and seem completely unable to learn that all this does is result in a failed transaction, no matter how many times it happens. What's that definition of insanity again?

So what usually happens (after 45 to 60 days - weeks after my buyer clients could be living in any other property) is that the lender wants two things: A higher price out of my buyers, and a commission reduction on my part. I'm not going to say that I'm in love with commission reductions, but I'll agree in order to make clients happy. But the deal-killer is that they want the buyer to make a higher offer. Ladies and gentlemen, I went out and negotiated a good deal that my client is willing to accept with the seller, despite all of the delays and problems in short sales, and here's this third party essentially vetoing the purchase contract. If I did get a heck of a deal, it's now gone. In any case, my clients are going to be unhappy, being presented with what amounts to an ultimatum: Pay more money or lose the property. Show of hands, please: Is there anybody reading this that would be happy to get such an ultimatum? Unilaterally attempting to alter the purchase contract is forbidden with any other transaction. Why in the world would a rational buyer want to subject themselves to that? Why would any but the most clueless of agents not discourage them from doing so? I'm not going to say it's impossible to get a great bargain on a short sale, but it is highly unlikely.

I do consider my clients being willing to deal with a short sale to be worth some serious concessions in the purchase contract, as does every other agent with any experience in dealing with them. So it's not difficult to negotiate a pretty good bargain initially - but it's extremely difficult to keep that contract intact when the short sale lender gets involved, because their priority, the only thing that's on their radar screen, is shaking as much money as possible out of all the participants.

Nor is there anything I can do as a buyer's agent that's going to make the transaction fly faster, or prevent the short sale lender from sabotaging it. I can argue until I'm blue in the face. They're not going to listen to me. They might listen to the listing agent, but not the buyer's agent. I can help them with what to say, but I'm still relying upon someone else to convince that short sale lender. Whatever they do, they're going to take their own sweet time responding, hoping for a better offer.

The cold hard statistics is over eighty percent of all short sales fall apart, and most often it doesn't even get as far as whether the buyer is qualified. The short sale lender wants more out of the buyer, wants the seller to come up with more money than they've got, the buyer gets tired of waiting and moves on - something. No matter what is is, my buyer isn't going to be happy. Quite often, I get the blame, at least in my client's mind, for the transaction failing - even if I warned them as to why this was a bad idea in the first place.

If you do get an approval from a short sale lender, quite often they're written on a ridiculously short deadline. Given all of the facts above, I'm not going to advise my buyer clients to spend their money on appraisal, inspector, etcetera until we do have an approval. That's just money thrown away if the short sale lender doesn't approve it. But waiting on them means it's likely to take more than a week to get the loan done once we do have an approval - and dealing with a one week deadline was an actual experience I had once. Not to mention the effects of waiting for such an approval on the buyer's due diligence period, and possible exposure to loss of my client's deposit (at the very least, it's sitting there tied up in escrow while everything gets sorted out).

Seller paid closing costs, integral to most transactions currently, and Down Payment Assistance are also extremely difficult to get approved. These are money out of the lender's pocket, and they're going to require a higher than what they consider "market" price in order to compensate them. This is intelligent and reasonable, but if you're looking for a bargain due to them not understanding their bottom line, it's not going to happen, and in fact, when one or both of these things are part of most transactions, the "market" is priced to include them. Result: The buyer who needs one or both of these is likely to have to pay more for a short sale than any other property they might fix their eye upon. And those buyers are wanting me to find them a better property, cheaper. Are you still in doubt as to why I advise buyers against short sales?

It is far more fruitful for most buyers to focus on properties in other categories. For this particular property, better to wait until is is lender owned, at which point the bank is on the hook, paying money out of their pocket, and usually the money tied up in this non-performing asset costs that lender heavily in leverage on their working capital. Lender owned properties get turned over to different employees, with different performance incentives, with the instruction of getting that property off the lender's books! The money this costs the lender is their own management's fault.

For any lenders reading this and not liking it: The responsible party is you. If you don't want them to become lender owned and cost you much more money, get real about your short sales! Publicize your criteria so buyers and their agents will know they're not getting into a "black hole" situation, and respond in a timely and reasonable fashion without trying to leave people who weren't involved (the prospective buyer and both agents) holding the bag for your mistake. It will save you money by dealing with the situation before it goes to Trustee's Sale.

As far as writing this article goes, the only one I have any sympathy for is the current owner, who really does need to sell. No matter what past sins they may or may not have committed, that owner is currently trying to face reality and deal with it. As the buyer, however, unless you believe that seller's plight is worth wasting several tens of thousands of your dollars, there's nothing you can do. Buyers should avoid short sales. They're not likely to end up happy.

Caveat Emptor

Article UPDATED here

April 23, 2008

I'm happy this time. The submissions I get were mostly pretty good, and I only had to make fun of one submission down in the Spam section. Short carnival, but I've said I'd rather have a short one that people will think is worth reading so they come back.

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.


We even have a Host's Choice Award this time! Selling Your Home - Single Most Import Fact You Must Know talks about the a cold hard fact in any real estate market: The property is only worth what someone will pay you for it.

Your host presents Pretending the Service Equation is Simpler Than It Is, a cautionary tale about money and oversimplification.



House Stealing: Identity Theft + Mortgage Fraud = Big Problems This is why notaries are requiring thumbprints in California now, among other things.

Preserve Your Credit discourages people from acting irresponsibly and torpedoing their own future.



How I Saved Over 3,000$ In One Hour talks about taking action in a timely fashion while the rates to help him were available.



A site named Life Money Development is evidently stuck in some pre-adult developmental cul-de-sac, as their post "The 7 Attributes of Leadership" did not so much as mention real estate. Did they violate their own guidelines as well as the carnival's? Survey says Yes! Is "Herrera" going to fire himself and go away? Somehow I doubt it.

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 (May 7th, 2008), here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be May 5th.

Most of the articles and things I read about the price of gas seems to be based upon an implicit assumption that the price of gas is only as high as it is temporarily. This is not the case. Gas isn't going to get significantly cheaper than today. As a matter of fact, the way to bet is that the price ten years from no will be much higher. It's a matter of supply and demand. Two billion people in China and India are joining the consumer society, and they want our standard of living. Today, there was an article in AP headlined Gas guzzlers a hit in China, where car sales are booming.

But while sport utility vehicle sales in the U.S. are tumbling, automakers are finding that for China's newly prosperous car buyers, bigger is still better.

So General Motors Corp. has made the Escalade a star of its auto-show display and is eager to get it on the market here.

"If you look at the fastest-growing market segments in China, there are two - SUVs and luxury cars," said Joseph Y.H. Liu, GM China's vice president for sales and marketing.

It isn't a matter of price gouging by the oil companies, or even by OPEC. The real bottleneck is in refining capacity. Oh, there's only a finite supply of oil and eventually it will all be gone. But right now, the things limiting supply are how fast we can get it out of the ground, and how fast it can be refined to a usable form. Doesn't matter how much water is in the lake if you need more supply faster than the pipes can carry it.

Suburban and exurban real estate grew on cheap gas. Five years ago, gas was $1.40 per gallon. A car that gets 20 mph can go 70 miles on $5 worth of $1.40 gas. With gas around here up over $3.80 per gallon, things aren't nearly so rosy. Instead of 70 miles, that $5 will only barely take you marathon distance (26.3 miles), and it's going to get worse. At $5 per gallon, the consumer with a job in downtown San Diego who lives in Temecula (60 miles) has gone from spending roughly $2100 per year on gas for their commute to $7500 per year. That difference of $5400 is $450 per month right out of the family budget. In most cases, two spouses are driving separately, which means that difference goes to $900 per month, or almost $11,000 per year right out of their after tax income.

Temecula isn't the furthest of San Diego's bedroom communities by any means. I know people who commute from Lake Elsinore, Hemet, and El Centro. Many commutes are over 100 miles, plus all the people from even further afield (for instance, Yuma, Arizona) who may not commute every day, but have doctors or other activities here. Despite greatly augmented gas mileage, hybrids aren't going to offset this increase and even if they were, people would be adding the cost of at least one new car in order to do so. I don't know if you've looked recently, but hybrids aren't economy car priced.

With this effectively raising the cost of property further from the job, one of two things will need to happen: Either the places where the jobs are will have to relocate to the exurbs where their workers can afford to live, or people will have to start finding places to live closer to their jobs. The person in the next cubicle over who lives in Clairemont will have the same gas bill that someone from Temecula had five years ago. The older communities closer in have long been less attractive than new developments further out, but raise the price of making that trip enough, and the macroeconomic reality will force people to start thinking more in terms of shortening the commute, even if it means they have to settle for a 1200 square foot house built in 1950 instead of a new 2600 square foot one way out in the exurbs. People are willing to make sacrifices when it's mostly time out of their day, but when it's a continuing drain on the wallet that means little Billy can have an 8x8 bedroom and food, clothes, and a college fund, or a 15x12 bedroom and none of the others, you can expect more people to start choosing the former.

What this means is that exurban bedroom communities become less valuable, while older communities closer in to the job centers become more valuable. For those who may not realize what I'm saying, the closer it is to places where people work, the more valuable it will become. This factor has always been present, and the cost to commute has always been part of the cost of the property, no matter how many people pretended it wasn't. It will become a more important component as time goes by and gas prices rise further. And the further people have to drive to work every day, the less a given area will be worth. The people who work there won't have these costs, of course, but most of the skilled trades that get substantial paychecks have to work in the main job centers, and there aren't as many of those in Hemet or Westmoreland as there are in the central areas of San Diego. Corporate facilities are where they are, and if you can't afford to commute, you're either not going to work there or not going to live there. This has implications not only for where corporations decide to do business, but for zoning regulations as well.

Caveat Emptor

Carnival of Personal Finance


I am adamantly against a draft. But if we have to have one, according to certain people on the left who claim the underprivileged are paying an inordinately large share of the burdens of Iraq and Afghanistan, then Jules Crittendon has the form it should take correct. (He's incorrect about Heinlein, by the way)

I agree with him that the fight from the left in favor of the draft is a fight to get middle America to join the war protests. Glory days of Vietnam protests and all that, as opposed to the few score who turn out for their protests currently.

But a draft is wrong. Dictatorships need conscript armies - free countries where the citizens have a reason to defend them will attract volunteers. The best measure of a state's worth is how many people volunteer to defend it when that defense is necessary. At this point in time, the United States appears to have plenty of those volunteers, bless them. Yes, we've had a draft in the past. But right now, more than enough people are volunteering, so that our military can afford to be quite picky. Don't believe me? Ask recruiters. Ask people who were rejected by the military. The mass media loves to make a big story about the military accepting more people who failed to complete high school. But the percentage of people in the military who have completed high school is higher than the general population. The percentage of people with college degrees is also higher, and advanced degrees as well. And I happen to believe that the average moral IQ inside the military is enormously higher than such places as Berkeley


Mashaal offers truce if Israel withdraws from 1967 lands

The leader of Hamas says his Palestinian militant group is offering Israel a 10-year truce if it withdraws from all lands it seized in the 1967 war.

Khaled Mashaal says he made the offer to former President Carter in talks on Saturday.

And this is supposed to be some kind of breakthrough? Some sort of willingness to coexist with Israel? Notice the wording: not peace, but truce. In other words, a break in the fighting with full intention of resuming later.

See Hudna:

A particularly famous early hudna was the Treaty of Hudaybiyyah between Muhammad and the Quraysh tribe, ending with Muhammad marching on Mecca along with 10000 men, two years after the hudna was signed, and taking over the Quraysh.

According to Umdat as-Salik, a medieval summary of Shafi'i jurisprudence, hudnas with a non-Muslim enemy should be limited to 10 years: "if Muslims are weak, a truce may be made for ten years if necessary, for the Prophet made a truce with the Quraysh for that long, as is related by Abu Dawud"

But because Muhammad got strong in two years, he broke the truce. This is precisely what Hamas is asking for: space and time to get strong enough to fight on more even terms.

This isn't any kind of a breakthrough. It's grandstanding while trying to lure your enemies to sleep while you arm.

an alternate source

HUDNA - Arabic word often translated as "cease-fire.- Historically used as a tactic aimed at allowing the party declaring the hudna to regroup while tricking an enemy into lowering its guard. When the hudna expires, the party that declared it is stronger and the enemy weaker. The term comes from the story of the Muslim conquest of Mecca. Instead of a rapid victory, Muhammad made a ten-year treaty with the Kuraysh tribe. In 628 AD, after only two years of the ten-year treaty, Muhammad and his forces concluded that the Kuraysh were too weak to resist. The Muslims broke the treaty and took over all of Mecca without opposition.

If Mr. Carter's supposed christian beliefs are correct, I imagine some part of the management heirarchy will want to take this up with him upon arrival in the afterlife.

Hot Air says it's even worse than I have outlined.


Call that precipated polygamist raid may have been a hoax

Don't get me wrong. That cult needs to get investigated and shut down if they were doing what they were accused of, and law enforcement is claiming they have plenty of evidence.

But it's just as easy to "drop a dime" on some innocent party. Say one of your neighbors calls in something false about you? You're going to have your life ruined, and face many thousands of dollars in legal expenses.

Say some well meaning law enforcement officer who happens to be mistaken asks some associate to phone in an anonymous tip?

Transparency is a good thing. But you have to know who the accuser is, as well as the accused.

From an e-mail

I've been talking to agents lately and I ask them about the things I've learned about from your site. I thought I would say things like "I want to apply for a backup loan" and they would say "Good idea!" instead of "Why would you do that?" I try to answer the why and next thing you know none of my why's make sense anymore. Here is a summary of that conversation:

Me: Okay, so I need to get a "pre-approval" or "pre-whatever" from a lender so I can put an offer on this house . . . that sounds fair . . . but I want to shop my loan around and in fact, I want to get a backup loan.

Agent: Backup loan? What for?

Me: Because from what I understand what you are told at first isn't what gets delivered and you are at the mercy of the loan officer if you don't have a backup plan

Agent: They have to fill out the form and give you what they promise so you are protected.

Me: So it's the law that they deliver what they fill out on this form?

Agent: No, it's not the law but they wouldn't dare change the terms or I wouldn't recommend them.

Me: Well, most people don't know they're getting screwed until later and most of the ones that notice don't do anything about it.

Agent: Well, if you hire me to be your agent then you should trust my advice . . . otherwise why would you hire me?

A similar conversation ensued when I talked about a "exclusive" vs "non-exclusive" buyer's agent agreement. "There is no such thing as "non-exclusive"". What is the benefit to you? If I have multiple agents then they all work to find me the perfect house and the one that finds me the one I like is the one that get's rewarded. Nope! If you tell an agent you have other agents he won't work with you. Okay, well, I wouldn't tell the other agents. But any good agent is going to make you sign an exclusive agreement.

Anyway, the sales techniques here are right up there with car salesman.

Let me ask you about your experience with monopolies? Your electric provider, mass transit provider, cable provider - do they furnish top notch customer service? Do you think someone might be able to do better, cheaper? Quite likely, because monopoly situations encourage rent seeking behavior. Monopolies are the classic example of rent seeking - do business with them, or not at all, meaning you're stuck with whatever service they choose to give you at whatever price. Why in the world would you do that to yourself?

Only two possible reasons: You don't have a choice or you don't know any better. You do have a choice, no matter how much various people may choose to pretend you don't. I certainly haven't noticed any shortage of real estate agents or loan officers. There's something like 7500 licensees in San Diego County alone. That leaves you don't know any better. It doesn't matter whether it's through ignorance or not following through on the knowledge.

In fact, if you think about it, someone who insists upon exclusive rights to your business is telling you they're worried about comparisons to other professionals. They're telling you they're afraid they can't compete and they're not willing to try. Does this sound like someone who's likely to give you the best service? Someone who's not willing to compete?

Just because an exclusive agreement isn't in the consumer's interest doesn't mean that it isn't very desirable for agents. In fact, most agents take a lot of classes in learning how to lock your business up and cut out the competition before anyone else gets to the starting line - several times more training than the average agent ever takes in learning how to actually give good service and good value to their clients. Look at the average agent symposium sometime. There will be easily ten times more offerings in how to cut out the competition than there will be in how to get your clients the best value. If the average agent doesn't offer a non-exclusve buyer's agency contract, they can pretend such a thing doesn't exist. It does exist; it's available in every state. In California, it's form BBNE in WinForms, the standard computerized package. But if they can persuade you to sign an exclusive contract, they're guaranteed to get whatever buyer's agency commission is due - before they've done any real work, before they've demonstrated that they are really going to guard your interests at all. I've written about the drawbacks of an exclusive agreement before, and even given examples in shopping for an agent, and the games that get played with consumers by agents. If you've signed an exclusive agreement, you're stuck. If you don't, you're not - indeed you keep far more control in your own hands.

Some agents will try to sidetrack you with an exclusive agreement "but you can fire me any time you want!" The first question is where is that written into the agreement? Show me please. In fact, the standard exclusive contract is written to be very difficult to break for any reason. The second question is that even if it is written in, how is that not functionally equivalent to a non-exclusive contract? The answer to that is they've still got your business locked up until and unless they make an obvious blunder. As long as they don't make that obvious blunder, they're still in the driver's seat. But this doesn't mean that they're a good agent - you have no standards for comparison. Indeed, you are agreeing not to acquire any standards for comparison. Matter of fact, they can be the worst excuse for an agent ever and still not make any mistakes that most people are going to fire them for. Plead for one more chance, and most people will give it - dozens of times. The bottom line is that they still avoid any chance at having to compete.

Now just because your agreement is non-exclusive doesn't mean you have to go find other agents. At least half of my clients never talk to another agent. But they have the option of doing so, and that knowledge is one of the things that motivates me to do the best job I can for my clients, and why I keep the list of clients I'm working with at any time short enough so that I'm certain I can handle them all with no deterioration of service. If I don't, they can fire me and find another agent as easy as crossing the street. That motivation just isn't there if you give someone an exclusive agreement. Do you want the agent whose motivation is to concentrate on giving a few clients the best job they can possibly give, or do you want the agent who's a half-notch above getting fired, whose motivations are to lock up as many clients as possible, secure in the knowledge that none of those clients are likely to actually fire them? And if they're confident they can give you such a terrific job, why are they requiring an exclusive agreement? If they're really that good, they should be eager to compete. That;s the best confirmation of their abilities possible - the fact that someone else tried and couldn't do it! As I've said, most of my clients see the job I do and never talk to another agent, and most of those who do end up telling me how much I shine by comparison. But it takes confidence in my own ability to offer that non-exclusive agreement. The ones who won't are telling you that they don't have that confidence. Do you think there might possibly be a reason for that lack of confidence?

Probably the largest number of agents and loan officers compete by being what I call "Social predators" Involved in Boy Scouts, Soccer, Little League, the church, PTA, whatever. They try to make those they come into contact feel obligated to do business with them, because they are after all, a good guy (or girl), they help the cause, etcetera. Surely such a person is worthy of trust? Surely they will treat you right? They lock up the business with an exclusive agreement or a large deposit, raising the barrier to competition as high as they can. This effectively sets you up for the kill. My personal experience leads me to believe that such agents and loan officers are responsible for a truly outsized proportion of the people who are losing their property to foreclosure in the current crisis. It seems like everyone I come across who's in the process of foreclosure has a "social predator" story to tell. Most of them have no clue what happened until I dissect the entire process and show them that their "little boy's wonderful scoutmaster" bent them over and took advantage. The thought process is natural, but the conclusion does not follow from the premise - a thing most people don't understand until how it bit them (past tense) is plainer than the nose on their face.

Ronald Reagan loved a very applicable phrase: Trust but Verify. It's not accident that this principle, which he applied as President, served him and the country very well. On a more personal level, you are willing to trust agents with your business (otherwise you wouldn't be talking to them), but you want to verify that they're earning it. You're not willing to take trust to the level of the spouse who's clueless about their spouse telling them they worked late when they come home at 3AM six nights in a row smelling like someone else's perfume or cologne. This is the best function of a non-exclusive buyer's agency agreement. This means you still have the right to go out and get the only valid standard of comparison: Another agent who has the same opportunity to do the same job as them.

In your situation, I'd be very blunt: "What you're telling me about requiring an exclusive contract makes me believe that you know very well you don't measure up to a good standard. In fact, the harder you argue for an exclusive agreement, the less willing I am to believe you are worthy of one. I'll willingly give you a chance to earn my business with a non-exclusive agreement, but I'm not going to sign any exclusive agreements with anyone. Since you're not willing to sign a non-exclusive agreement, I am wasting my time. Good-bye." They have as long as it takes you to get to the door to change their mind. Walk out and never look back - find someone else who will offer non-exclusive agreement.. In fact, taking this stand in your self defense is the first and most critical point of Shopping for a good buyer's agent. The standard non-exclusive contract is truly a bet you cannot lose as a consumer. There literally is no risk. Doesn't matter if they're a freshly minted licensee who's never done a transaction in their life (How often do you hear that from someone who actually has significant experience?). Go ahead and sign a non-exclusive agreement, and the worst that can happen is they don't get the job done. You're still free to use anyone else who does. You have lost exactly nothing - as a matter of fact, both you and that agent are mathematically, provably ahead for having signed that non-exclusive contract! Hiring them thus can only increase the probability function in your favor! This improvement may be marginal or even zero, but so long as you do your due diligence it cannot be negative.

The same thing applies to the loan officer an agent recommends. The reason they're choosing that loan officer has nothing to do with the best choice for you and everything to do with the best choice for them. That's a loan officer they trust not to screw up the transaction by telling you, "You know, I'm not certain you can really afford this property." That's the loan officer they trust, by hook or by crook, to have a loan ready at the close of escrow, no matter what it takes, so that that agent can get paid. Has nothing to do with how good their loans are, how competitive they are, or any other advantage to you - only that they trust that loan officer to insure their paycheck. That's what the agent is really telling you. The loan officer may be really good, and very competitive on price. Then again, they may not, and the one thing I'd bet significant money on, sight unseen, is that they will never tell you that maybe you're stretching beyond your means - that agent will never send them another client if they do! The only agents I'm certain could tell the difference between good loans and loan officers and bad ones if it bit them are the ones who are also loan officers themselves.

If an agent is recommending a loan officer on the basis of "This person wouldn't dare cheat my clients!", ask them for a copy of the initial MLDS (California) or Good Faith Estimate (the other 49 states) and a copy of the final HUD 1 for that loan officer's last five transactions with their client. (sarcasm on) What, they don't have them? What a surprise (end sarcasm). But if they don't, how can they possibly know whether that loan officer does or does not quote accurately? You've just asked for the only possible evidence, and they don't have it! Nor does this cover how well they compete on price, and as long as the terms are the same and the rate/cost tradeoff is better, a loan is a loan is a loan. There is no reason not to apply for multiple loans and see which loan officer actually has the best loan ready to go at signing time. In fact, to do anything else is trusting someone without verifying - you have no effective control upon their behavior at the end of the transaction. Maybe they'll treat you right, even without such. But loan officers can make more money very easily by adding a few hundred dollars here, a half a point there, and if you're the only loan you signed up for, your choice is sign their paperwork and take what they offer you or don't. As I said in Getting a Loan Provider to Agree to be a Backup Loan, if you apply for two or more loans, you can explain to both providers how they shouldn't be worried about the other one if they're telling the truth, so the only reason for them not to cooperate is if they're not telling the truth. "Trust but verify". It really is a simple, powerful formula, but to use it effectively you've got to understand that it's not words that are important, but actions.

You're right that these sales techniques have a lot in common with used-car sales. Everybody in any sales business wants to avoid competing if they can - it means they don't have to work as hard, and get higher profit margins. Consumers, for their part, need to learn to understand what actions mean, and that actions are important, not words. That's part of the reason why I'm writing this article.

Sales persons, properly handled, are your best friends in the whole world. Nobody solves your problems as well as an expert with the motivation of getting paid for their trouble, and there always seem to be problems that lay people don't realize exist until they're bitten, which is almost always far too late to avoid all the damage that's coming down the pike. Kind of like having a Terminator after you. If you don't have your own very special protector, they're going to get you. I don't like having my clients bitten - not tomorrow, not next year, not ever. One bad transaction can ruin you as an agent or a loan officer, and I intend to be doing this for the rest of my life. So I'll do everything I can to keep it from happening before it happens, and you want someone just as dedicated working for you. The only way to be certain is to watch them in action over time. But if they're asking you to sign that Exclusive Agreement beforehand, how in the heck can you possibly have the knowledge of their business practices to give it to them?

Caveat Emptor

Article UPDATED here

UPDATE: This article is still good for a basic understanding. However, for an article written specifically for the new form that becomes mandatory January 1, 2010, please go to the 2010 Good Faith Estimate

(Continued from Part I)

Below the "Estimated Closing Costs" line, there are three more sections. The first is "Items required by lender to be paid in advance." These are not negotiable - they are what they are, and except for mortgage insurance or PMI, correct accounting should be the same no matter who the loan provider is. Of course that doesn't stop many providers from playing games to make it look like their loan is cheaper. Sometimes the items in this segment or the one below it may not be exactly knowable in advance.

"901 Interest for (blank) days at $(blank) per day." This is a good example of a fee that isn't exactly knowable in advance. On a refinance, until the current lender comes back with a payoff demand (which are usually in the form of $X, plus $ABC.DE interest per day after Date 1, invalid after Date 2), all I can do is estimate. It should be a pretty accurate estimate if I have last month's statement. On either a purchase or refinance, when the lender's loan funder sends to the funds for the new loan, they will tell how much prepaid interest the escrow company needs to collect, which is also in a comparable form. The same thing applies to that figure as well. Until the actual quote is in our hands, all we can do is estimate closely.

The reason for line item 901 is simple. Unlike rent, mortgage interest and payments are made in arrears. They can't charge you interest until they earn it. You could win the lottery, get an inheritance, or receive some other large windfall, and decide to pay your loan off (or down). You could also sell your house or refinance it. This would affect the amount of interest the current lender is owed. So you borrow the money at the beginning of the month, it accrues interest all month long, and you make a payment at the end of the month. So when you buy a house on March 15th, the lender is going to require you to pay interest on the loan from March 15th through the 31st in advance. This gives them a chance for their servicing department to set everything up. On April first, the loan will start accruing interest normally, and your first regular payment will be due after the end of April - May first to be precise.

When you refinance on March 15, you must pay the old lender for interest due between March 1st and March 15th, which has accrued since the last time you paid them on March 1st. You must also pay the new lender for the interest due from March 16th through March 31st. Between the old lender and the new lender, this figure can never be anything but the whole entire month worth of interest, and there will always be one or two days of overlap between the time they get the funds from the new lender and the time they are disbursed to the old lender. Around the beginning of the month, it can be two months interest if the old lender hasn't received your payment yet or hasn't credited it yet. You borrowed the money from them for the time in question. They are entitled to be paid. They're not going to let you keep it out of the goodness of their hearts, especially not when you're leaving them.

As you can see from the above, you never actually skip a month (or two) in your payments when you buy or refinance your home. It is not going to happen. What is happening is that your new lender is paying for this interest out of their pocket and adding it to the loan balance where you will be paying interest on it for a very long time. Pretty sneaky, huh? Well, you do have the option of making a payment to cover this line, or any other line on this whole form. Many providers will not tell you this because they can't run up the loan amount (and their compensation) if you make these payments. Also, trying to skip payments can cause major problems if the new loan takes longer than expected to finish, so always keep making your payments on time. If you decide to make the payment to cover this line, it will be the interest portion of your normal monthly payment, prorated between the two loans in the case of a refinance, or prorated on that portion of the month you have a loan in the case of a purchase. In most cases, I tell people to think of it as their normal monthly payment paid early, because that is what is going on, and a reasonable approximation of the dollar amount.

The most common game played with this line is to decrease the number of days of interest you'll actually be paying. Let's say you're planning this on June 1st, and your loan provider tells you "don't worry about it. We're going to close on July 1st". First off, the chances of this actually happening as planned on any particular day are slim. Second, it's pointless to try. If you do close on July 1st, the lender is going to ask for all the interest for the month of July up front, and your loan starts working normally August first with your first payment being due September first. Third, I've learned the easy way (from watching other people make this mistake, not wanting to lose clients of my own) never delay closing - it always gives something else a chance to pop up, and it's amazing how often something does. It's amazing how often something new pops up at the last minute without this gratuitous opportunity. If you can close it now, do so. Once those loan documents are recorded, the bank can't call the money back unless you violate the contract.

As I have said, on a refinance the number of days prepaid interest can never be anything less than the entire month. Period. Somebody writes anything less than 30 days on this line, they're trying to pull the wool over your eyes. On a purchase, look thirty days out or to the last day for close of escrow according to the purchase contract, and estimate the number of days left in that calendar month. There's the number that should be written. If a loan officer can't do it in thirty days, chances are they can't do it at all on the quoted terms or anything similar, and chances are they were playing games with you from the first. The only general exceptions to this are when refinance is booming. For instance, during the summer of 2003 the delay between complete loan package being submitted to the bank and the underwriter actually looking at it for the first time got to be more than thirty days right there, never mind the time it took for everything else. And even then I could usually run purchases through another department in close to a normal time frame. If you're not writing a check to cover prepaid interest, and you have a $270,000 loan at six percent, that's $1350 getting added to your loan when you may not want it to be.

"902 Mortgage Insurance Premium" This is another one of those lines that needs discussion. First off, the odds of it really needing to happen, or being in your best interest if it does, are vanishingly small. In the hundreds of loans I've pushed through I've never actually had a loan that included mortgage insurance. It was never the best thing to do for the client.

Let's take a step back and ask, "What is mortgage insurance?" It's an insurance policy that the lender makes you, their client, buy for their benefit so that if you default they get the full amount of their loan. The usual threshold for this is 80 percent of the appraised value of the house. Mortgage insurance is never tax deductible when it's a separate charge (The law has now been changed, but this change will expire in about three years), and is always charged based upon the full amount of the loan, and the amount of the loan expressed as a percentage of the value of the home. The larger the loan, the more you pay, the higher your loan value as a percentage of your home's value, the more you pay. It is commonly assessed as a separate charge, but can also be paid in the form of LPMI, or lender paid mortgage insurance, by accepting a higher rate (in other words, say a 6.625% rate on your loan instead of 6%).

"What good does mortgage insurance do me, the consumer?" you may ask. The short answer is it gets you the loan. It gets you the loan when you would be turned down without it. After that, it's just money out of your pocket every month. Mortgage Insurance, also called Private Mortgage Insurance or PMI, is primarily a thing that happens in the A paper world (sub prime loans are usually incrementally priced to cover the higher risk, as the lenders there are in the business of taking those risks for appropriate compensation, so you still end up with lender paid mortgage insurance, but you're never told what the explicit charge is for it), and more importantly, it's usually avoidable.

PMI is only charged if the first mortgage exceeds 80% of the value of the home. But if I split even a 100% loan into two pieces with the first mortgage 80 percent or below, it goes away. Yes, the second mortgage will be at a higher interest rate, and yes, the closer to 100 percent of the home value it gets the higher that rate gets. But this tends to be on significantly smaller amounts of money, and this is an interest expense - deductible in most cases. The difference in total interest expense and total monthly payment tends to be in favor of doing this even without mortgage insurance or tax treatment factored in. So when I'm shopping a given loan around, sometimes I don't always even ask about doing the loan as one loan.

"With all this against mortgage insurance, why does it still happen?" you ask. At last the critical question. Lenders usually pay yield spread to brokers or commission to their own loan officers based upon the amount of the first loan. Pay for a second is typically (not always) a flat amount or zero. Your loan provider makes more money by doing it all as one loan. The loan provider wants to make more money and sticks you with the bill.

With all that said, with the fallout from years of excess hitting hard, second mortgage lenders are getting hit hard. The first mortgage holder is getting all or practically all of their money, but the holders of second mortgages are absorbing most of the losses - in many cases, their entire loan amount. So you may have a choice of one loan with PMI or not doing the loan at all until prices start appreciating again.

"903 Hazard Insurance Premium" This is mostly for purchases, the yearly hazard insurance or homeowner's insurance premium. Any sane lender is going to require you to pay your insurance premium through escrow or before closing. They do not want there to be even a fractional second when their investment in the property is not insured. Of course, you don't want this either. I can't imagine paying the current cost of housing around here and not insuring the investment. So they're not asking for anything outrageous on this line. Unless you are one of those people who won't insure their properties, the net cost to you is zero.

"905 VA Funding Fee" I haven't done a VA loan in three years. All I remember is that it's charged by the VA on VA loans, not by the lender. If it's applicable, it's going to be the same no matter what lender is doing it.

The final section is reserves of money held by the lender to be used to pay your expenses. This is your money; they're just holding it for you in order to make sure these items get paid on time. If you sell the property or refinance you should get this money back.

These are once again, not truly costs of the loan, unless you roll them into your mortgage where you're going to pay interest on them basically forever. The lender may (and most do) require that you hold up to two months reserves in this account. Ironically, this section of comparatively small amounts is one of the most tightly regulated aspects of the Good Faith Estimate, and the whole escrow or reserves account thing is optional - although most lenders require a small fee for no reserve account. In my experience, Escrow or Reserve accounts are usually more trouble than they are worth. I'm just going to explain quickly, and not with any dollar figures because 1) they vary too much, and for good reason 2) they are not, properly speaking, costs of the loan. As I said, when you sell the home, refinance it, or pay off the loan, you get the remaining contents of these accounts back.

"1001 Hazard Insurance Premium" in most cases, count the number of payments from the time the refinance is effective to the time that the yearly premium is due (usually on the anniversary of the date you bought the property), subtract it from 14. Multiply this number by your monthly premium. Even for purchases, the lenders will generally want a month or two of reserves.

"1002 Mortgage Insurance Premium Reserves" See my comments for line 902. If an early premium on this is due, compute it the same way as your prorated hazard insurance.

"1003 School Tax" California doesn't have it as a separate line item, or at least I can't recall seeing it broken out. Matter of fact, neither of the other states I've done loans in does either.

"1004 Taxes and Assessment reserves" This is the part to make certain your property taxes are paid on time. Same method of computation as line 1001. The lenders really don't want the city, county, or state repossessing the property out from under them.

"1005 Flood Insurance Reserves" Some homes require flood insurance in order to get a loan. Same method for computing as line 1001. If you live in or near an old riverbed, especially with dams and such on the river, research "riparian rights" sometime when you want another real world horror story.

Then there is a line about Compensation to Broker, aka Yield Spread, which may be disclosed here or above. Some will try not to disclose it at all. Once again, you're looking for honest disclosure here, not the lowest number. This line makes no difference to you unless you're the one paying it. This didn't used to be required, but lenders and packaging houses got it put through in order to make the deal a broker offers you look worse in your eyes, thus handicapping brokers in their ability to compete. The thing that's important to you is what happens to you - the loan you are getting. When comparing offers, scrutinize the terms of your loan carefully, not what the broker is making on the deal. It's not like the packaging houses and many lenders aren't turning around and making even more money off the secondary market, just that that particular amount isn't disclosed anywhere.

The final section runs through three columns really fast. These are just bookkeeping, really, except sometimes you can spot your loan provider playing games if you pay attention. Remember, if this is a purchase I really hope for your sake you know your purchase price. If it is a refinance, I hope you know what your statement says your balance is. From this you can get to an approximate payoff by prorating your monthly interest. Once you have this figure, look up above on this form for the total of closing costs and prepaid items. Sometimes in a purchase your seller will give you a certain amount of credit for closing costs, so if this is applicable you can subtract those. This is the Amount You Have to Come Up With. Now subtract off new first mortgage amount, and second mortgage amount (if any), but add any closing costs for the second mortgage. The figure that is left is the Check You Need To Have. This is cold hard cash you have to come up with in order to make this all happen as described.

One of the most common tricks I've seen is for loan officers to tell clients and prospective clients they can roll the costs into the loan so they don't have to come up with cash. Despite being told this is what the client intends to do, they then give you, the client a payment quote in the third column here based upon you paying all of these costs out of your pocket - with the Check You Need To Have. In short, they're acting like all those closing costs have mysteriously vanished somewhere, like they're lurking in the Bermuda Triangle waiting to ambush some poor unsuspecting sap who will never be seen again. This poor sap is you. You're going to pay them somehow. They generally can be rolled into the loan, but make sure the loan provider gives you a payment based upon real numbers. Most people shop for a loan based upon payment because they don't know any better. This gives loan providers incentive to play games here, and the vast majority do.

Loan officers know that most clients shop for loans based upon payment quoted. This is the not the best or smartest thing for you to be doing, but it is nonetheless what most people shop based upon. So many loan providers will play a lot of games to be able to quote you a low payment. And this is one of the games they play, quoting you a payment based upon the loan without the closing costs of the loan added in. If you have a financial calculator, use it. If you can do the math yourself, better. Otherwise, go out and do a web search for financial calculators or mortgage calculators. Automobile loan sites will probably be programmed incorrectly (different assumptions), but pick a couple of others and punch the numbers in. Make certain that the real loan amount you're going to need jibes with the payment they quote at the rate they quoted. Of course, this all assumes that they're being upfront and otherwise honest and are not going to hit you with three points out of the blue, but you do the best you can with what you have. Oh, and now that you're done applying for your loan I strongly suggest you find someone willing to act as a back-up loan provider so that you can offer the person who just gave you this form a concrete reason not to hit you with those three extra points.

Caveat Emptor

Original here

(also at Dan Melson's San Diego Real Estate and Mortgage Website, targeted at California's MLDS)

UPDATE: This article is still good for a basic understanding. However, for an article written specifically for the new form that becomes mandatory January 1, 2010, please go to the 2010 Good Faith Estimate

I had a great rant about the limitations of the Good Faith Estimate all planned out in my head when I when I was in the very first stages of planning this blog in my head. It was the first idea I had for an essay, as it is the most commonly abused item in the whole mortgage system of ours, and abuse of the GFE (as the industry calls it) sets the stage for a significant amount of everything else that goes on.

Then California pulled the rug out from under the rant. They replaced it with a new form called the California Mortgage Loan Disclosure Statement, which we are all required to use in lieu of the Federal GFE

I've actually had some looks at abuses of the Mortgage Loan Disclosure Statement now, and they are very similar to abuses of the Good Faith Estimate. The abuses of the Federal Good Faith Estimate and the fact that pretty much all of them were actually legal had been something that took time to soak in back when I first got into the business, although a short stint with a Company Which Shall Remain Nameless was a real education. It appears that the regulations for the Good Faith Estimate part are unchanged, which translates into English as "Excrement." Furthermore, I'm certain that somewhere in Sacramento lobbyists are paying bribes campaign donations so that just this or that little detail can be changed "just a little in a way that doesn't really make a difference," and eventually the cockroaches will have even more ways to game the system.

On the other hand, the federal Good Faith Estimate is still the form in use in the other forty-nine states. On that note:

On the line above where all of this starts, there should be written a total loan amount, an interest rate, and a term (360 months for all 30 year loans, whether it is fixed for the full term or not - numbers less than 360 mean that the loan is due in full in less than 360 months. This can be one clue that they're trying to hit you with a balloon payment loan). As I have said elsewhere on this site and will continue to stress, just because a mortgage provider puts these numbers on a Good Faith Estimate does not mean that they have any intention of actually delivering them. I think bait and switch is the official company game of many providers. The Good Faith Estimate is THE most abused loan document, bar none. It's supposed to be a real estimate of what the loan is going to be like, based upon the loan officers best estimate. In practice, it's become nothing more serious than the loan provider wants it to be. In many cases with many providers, it's almost like a joke: "(giggle) and this is what we had to tell him in order to get him to sign up! (loud guffaws)" and this carries through the rest of the document as well. The relationship of the loan described on the Good Faith Estimate to the loan that is actually available and that said provider will actually deliver is completely arbitrary and up to the provider within very broad limits. Because at the end of the process, the client has very little leverage to get the provider to deliver the loan they talked about to get you to sign up. Unless, of course, you signed up for a backup loan like I keep telling you to do. Even a Loan Quote Guarantee, which most providers won't give either, isn't as good for getting what you actually want when you need it.

Now, it is also important to note that with two exceptions, all of the fees below are commonly held in abeyance until the end of the loan process, and you don't owe them if you don't end up refinancing or purchasing with that company. They can be added to your loan balance instead of being paid out of pocket. It is the biggest red flag I know of for a loan provider to ask you for money up front beyond the credit report.

The first actual line item on the Good Faith Estimate is "801 Loan Origination fee." This is an explicit fee charged by the loan provider who signs you up. It can be expressed in dollars, but it is more commonly expressed in terms of "points". One point is one percent of the final loan amount. Put another way, if you have a loan for $198,000 plus one point, the way to do the computation is $198,000 times 100, divide by 99 (100 minus the total number of points), which equals $200,000. It's probably not unethical if the loan officer uses $199,980 ($198,000 plus 1%, or $1980) on a quick calculation, just a desire to get an approximate answer quickly. It's still not mathematically correct. Now, if as is common, the loan provider only writes down 1% here rather than converting it to dollars as well, it can appear as if that loan is much cheaper at first glance or to the uninitiated than it actually is. If you've got a loan that's $200,000, leaving the estimate as one point without an explicit dollar figure is a way of making it look like the loan actually costs you about $2000 less than it will. Two points without an explicit dollar figure is twice as much (Consumers who don't understand: "The other guy wanted $5000 to do my $300,000 loan, but this guy only wants $3000 and two of these point thingies. What a great deal!" You would be amazed and dismayed how often I have to explain even to people who know what points are that $3000 plus two points on a $300,000 loan is about $9000). Nor is this figure, whether expressed as points, dollars, or both, carved into anything more than silly putty. I worked for a short time at a Company Which Shall Remain Nameless, and one of the things that got me yelled at several times, and one of the many reasons I left, was that I violated company quoting policy by actually adding in all of the little miscellaneous adds for half a point here and a quarter point there that the customer was going to get hit with at the end of the process anyway, and telling the customer about them up front. Finally, there is no reason why this line has to be nonzero in all cases, and indeed I've done more loans without than with.

The next line is "802 Loan Discount". In theory, this is supposed to be used only for actual discount points charged by the lender. In practice, it is used almost interchangeably with "Loan Origination Fee" on the line above (not without some justification in fact, which is beside the point of this essay). Once again, watch out for whether the figure in points is converted into an actual dollar value. Again, there is no reason why this line has to be nonzero, and I've done more loans without than with.

"803 Appraisal Fee" in California is $350 to $450 for the average home, depending upon what that particular appraiser charges for that particular job. It is legitimate and correct to mark this as PFC (prepaid finance charge) so long as the loan officer gives you an approximate figure. Unless they have a contract with a particular appraiser, it's not under the loan officer's control. This is another place where many providers play "hide the closing costs." Quoting from one less than ethical example "Hey, I'm not the one charging it and if it makes my loan look better than the guy stupid enough to tell the client, that's not my problem." I tell people with average homes that it's likely to be about $400. The abuse that happens here is that this is one of those things that's called a "third party charge" - paid to a third party service provider. As such it is not included in total fees when calculating APR on the "Truth In Lending Statement", and will almost certainly not be included in any computation of total fees by your loan provider (Other than me, I know exactly one company that includes it). The vast majority of those billboards advertising "Total fees $X" really mean "Total fees $X plus third party fees," not to mention the fact that they're going to give you a rate which gives them either an Earth-Shatteringly Large Yield Spread or premium on the secondary market. It is not unethical for the loan provider to ask you to pay the appraiser at the time the appraisal is performed, provided the person being paid is an external appraiser .
"804 Credit Report" is usually somewhere around $20. Single Individuals buying a house on their own are cheaper than two married people, but unmarried individuals must each be run separately, and so it may be a little more than $20 if you're buying a house with your brother, parents, or whatever. It is neither unusual nor unethical for the loan provider to ask you to pay for this up front. So long as the check is written to the credit reporting service, there's nothing wrong. And there is a rule now in effect that we must have explicit written consent to run credit from every person, so don't get angry with your loan provider for following it.

"805 Lender's Inspection Fee" is charged by the lender to have one of their inspectors go out and take a look and make certain the house isn't falling down. It is common for the lender's fees to be ignored by a broker, and then you'll get another Good Faith Estimate from the lender that discloses this. On the other hand, this is not necessarily charged on every loan. Many lenders will rely upon the appraiser's work in this, and not do one of their own, particularly on refinances. Since (assuming you're sane) you're going to want a building inspection yourself in the case of a purchase, the lender may make it a condition that they get a copy. And, I will admit as a broker that although I do disclose a total of all lender's fees I know about, I don't always break them out into categories and may amalgamate them all under one category. (I can ask a lender what their fees are, and one will tell me A, B, and C adding to $750. The next one will tell me A, D, and E adding to $780. The third might tell me B, E, and F adding to $995. And so on. The brokerage I work for is approved with well over fifty lenders. I maintain that as long as I disclose the total amount, most clients don't care whether it's going to underwriting or document preparation or spa visits for the CEO. It's just not important to them where it goes. It's a fee they've got to pay to do business with that lender and get that loan. Whereas I will help them consider the total cost in comparison to the cost of other options, this total is not subject to negotiation).

"808 Mortgage Broker Fee" (there is no line 806 or 807 on the form). This is another fee potentially charged by a brokerage. Just because it's not, or listed as zero, here doesn't necessarily mean you're not going to end up paying it. One trick I've seen is leaving it blank at the beginning, then at the end it's "We charged that based on how difficult your loan was. You don't expect us to work for free, do you?" Trust me, they're not working for free, although I don't think you need an astronomical level of trust for you to believe this. Nobody ever plans to do a mortgage for free.

"809 Tax Related Service Fee" I've never had to include it as a separate line item even if present. It's usually amalgamated and lumped in with something else, if it's applicable.

"810 Processing Fee" This is what they pay to the nice person who processes your loan and coordinates your transaction while the loan officer is off doing loan officer things. This varies, but I'd be very suspicious of anything less than $300. I know brokers that say to charge $600 when they pay the processor $300. My attitude towards that is that at least they're telling you, the consumer, about it up front. Better that than being told $300 and hit for $600 at the end. The processor knows what they make. The broker knows what he pays the processor. Don't worry if the processor gets the whole thing. It's not your concern, and it's not really negotiable, and whereas you have the option of going elsewhere, the elsewhere you go has the option of lying to get you to sign up.

"811 Underwriting fee" is charged by the bank to pay their underwriters. It's also a good category for brokers who hate pointless detail to lump all of a lender's fees together in. If it is broken out, as a direct lender should do, be suspicious of anything less than three to four hundred dollars - typical actual underwriter's fees. But just because he's showing $995 here where everyone else is showing $400 doesn't mean he's overpriced. Just to mention it, if you are doing a first and second mortgage simultaneously with the same lender, the lender's fees will go up by about $500 to cover the second. If the second is being done with a different company, they're probably going to charge a whole other set of lenders fees.

"812 Wire transfer fee" is charged by the escrow/title company to wire the money into your account for immediate availability. Otherwise, it's going to be a few days before the check clears. If it isn't something advantageous to you, don't get it. Most of the time it probably isn't necessary, but considering daily interest on typical amounts of real estate transactions, it may be a good investment. Last time I had this done for a client it was a little under $25. The lenders fees I've talked about elsewhere usually include a charge for wire transfer between them and escrow or title, but this doesn't cover sending it on to you.

Below this are several blank lines. An ethical loan provider will use them to disclose that he's getting a rebate from the bank (assuming he's getting such a rebate) or tell you that the price quoted includes a rebate to you from them reducing the price, if such is the case. (Most of the loans I have done tend to have this feature. You'll find out why in a different essay). Just because provider A is getting a bigger rebate does not mean provider B has a better loan. It happens quite often that one broker shops a better lender or works a little harder. A 5.5 % loan with $3500 in total closing costs is a better loan than the same loan type with the same terms at 6% with $5000 in total closing costs, even if the broker in the first case is getting paid $10,000 more by the lender, to pick an extreme figure. Now it's unlikely that there's that much of a difference in broker compensation when the one is delivering a better loan, and if there is that much of a difference I'd bet millions to milliamps that the loan terms are different. But the point is for you, the consumer, to look hard at the actual terms of the loan involved - that's what's important to you. There was just a study upon the effects of disclosed compensation released a few months ago about how most people would just choose the loan where the broker made less money, or where a loan provider's compensation wasn't disclosed, rather than the loan that's actually better for them. If we weren't all adults here, I might need to make the point that if the loans are otherwise the same, the broker in the first case earned every penny of his extra pay by finding you a better loan on the same terms and qualifying you for it. But we are all adults here, so you know that.

There also may be other fees listed here. I've only done significant business in three states, but there really is no need for anything else that I've seen. Additional fees in this area usually amount to a "Loan Officer's Latte Fee", or a "This is going to make me miss my surfing!" fee. If they actually list them (most won't), at least they're telling you up front instead of keeping it a deep dark secret that the consumer has no way of knowing about. Every once in a while, I'll see somebody write something like "Amalgamation of lenders fees" rather than using line 805, 811, or 1105 to cover it.

Finally, some states require a survey if none has been done for a certain period of time, usually ten years. This will cost $300 to $400 if required, possibly more. These requirements are the same in each given state no matter who the lender is. It's rarely the case that one lender will require it where the state will not. As a disclaimer, I haven't worked much in any of these states.

So when we look at this section, we are left with midpoint fees of $400 for the appraisal, $20 for the credit report, about $800 between line 805 and 811 and miscellaneous other lender imposed fees, and $500 for processing. Believable total, thus far, $1720, plus the amount for any points you pay, less any rebate to you. $2220 or so if you're doing a simultaneous first and second, $2500 or more if you are getting a first and second from different lenders.

The next section is title fees. These are the fees you are charged by the title company for doing the work necessary and writing appropriate policies of title insurance upon the transaction. Title insurance is a part of every real estate transaction in California, although I am given to understand there are still states where it isn't necessarily so. And even in California, if you're silly enough to buy the property for cash and insist that you don't want any kind of coverage in case it turns out later that the seller didn't really own it, or in case what you think you see is not necessarily what you got, it is possible to do a transaction without title insurance. Otherwise, when you buy the property, the seller should, as a condition of the sale, buy you an owner's policy of title insurance. When you get a loan on the property or refinance that loan, the lender will require you to buy them a lender's policy of title insurance. In California, average transactions may be a little larger than many other states, so I'm going to use a property with a purchase price of $300,000 and a loan of $270,000 for examples. It's large for many other states, but smallish for California, and here in San Diego right now it's a decent to middling two bedroom condo of about 900 square feet where the prospective buyer actually has a 10% down payment, which is unusual. Good agents and loan officers do these in their sleep. (And I'm well aware that in the vast majority of cases, I can save my clients a lot of money by splitting these into a first and a second. Work with me here for the sake of simplification. And I'm also aware that the same thing can be over $1,000,000 in certain areas of Manhattan).

"1101 Closing or Escrow Fee" depends upon the company and type of escrow. Many loan officers will write PFC, but ethical ones should tell you what it costs. Middle of the road is $450 for a refinance, the same plus $1 per thousand dollars of purchase price, divided by two for a purchase, because it is split two ways between buyer and seller. Like the appraiser's fee, attorneys fees, and title insurance, this is a third party fee that is excluded from the calculation of APR, and it's not under the lender's control unless there's a contract. Still they should let you know how much it's going to be, as it's not like there's any possibility of you not having to pay either an attorney or an escrow company, and many will pretend it doesn't exist or try not to give you a dollar value, as $X plus unknown escrow charges sounds cheaper than $X plus 450 for refinances or $X plus $375 for a purchase

"1105 Document Preparation Fee" somewhere between $100 and $200 in most cases, this covers the cost of generating the mortgage documents. Will be covered in total lender's fees if that's accounted for elsewhere. Grant Deeds, etcetera usually prepared by the title company for the process will be extra, usually about $50 per document.

"1106 Notary Fees" $100 to $150 is reasonable, and about the range of what the various mobile notary services charge. Even if your loan officer agrees to act as notary, this is likely to be charged. You may or may not be able to save yourself money by taking it somewhere yourself as state laws are different, but if you do, you're going to have to cover it out of pocket, and you're going to have to deal with the issue of the notary's business hours, taking time off work, everybody who's party to the loan being there to sign, etcetera.

"1107 Attorney Fees" Some states require the use of actual attorneys to do the escrow function. Lenders should not charge you both this and escrow. On the other hand, attorneys are more expensive. I haven't done any actual work in these states but from what I can tell $800 is about average. Disclaimer: the company I was working for at the time may have had a contract for reduced rates to which I wasn't privy. Like appraiser fees, escrow fees and title fees, this is a third party fee excluded from APR calculation, and can be marked PFC, but the loan officer should give an known dollar value, as the company should have a contract with the attorney's office. Once again, unethical providers will try to keep a dollar value from finding its way onto the paper because it looks cheaper that way.

"1108 Title Insurance: Like Appraisal, Escrow, and Attorney's Fees, this is a third party charge, and as such is excludable from the calculation of APR. A dishonest loan officer will mark it PFC without telling you how much, as once again, $X plus unknown title fees sounds cheaper than actually adding the title charges from the rate book to the paper. In the case of a purchase, the seller should purchase an owner's policy for the buyer, and the buyer's lender will require the buyer to purchase a lender's policy of title insurance, which should be heavily discounted because it's the same title search under slightly different rules of relevance. In the case of a refinance, the lender will require the borrower to purchase this. I took an average of the costs to the nearest dollar between several rate books, but they companies are really pretty comparable in most cases. If the property had a policy of title insurance issued on it within five years (the vast majority of properties qualify, as only about three percent of all mortgages are older than that), the owner's policy will cost the seller about $1004 base rate, and the concurrent lender's policy will cost the purchaser $453 (remember, this is a $270,000 loan on a $300,000 property). In the case of a refinance, the lender's policy would cost $823.

So adding this section up at the mid points, in the case of a refinance you have $450 or $800 (depending upon your state), plus $150 plus $125 plus $823, totaling $1548 or $1898, depending upon your state. In the case of a purchase, you're talking about $375 or $800 (again depending upon your state) plus $200 (somebody is going to have to do a Grant Deed) plus $125 plus $453 (remember, the seller usually pays for owner's policy of title insurance, and we're talking about a Good Faith Estimate for a loan, which the seller doesn't need unless he's buying another property) totaling $1153 or $1578, depending upon your state.

I'm going to lump two sections into one here.

"1200 Recording Fees" charged by the county recorder. Should be the same for every lender. In San Diego County it's currently $75.

"1202 City /County Tax Stamps" Some city and county governments have an intangibles tax on mortgages.

"1203 State Tax/Stamps" Some states have an intangibles tax on mortgages, computed based upon the dollar amount of the loan. Usually it's the states without state income tax. If your state charges this (California doesn't), it will be the same no matter your lender. If one company gives you an estimate that's different from everybody else, that's a matter for investigation.

"1302 Pest Inspection" On refinances, if something raises a red flag with the lender, they will require a pest inspection. There may also be areas of the country where it is required of every loan, but I've never heard of one. On a purchase, you're going to want a pest inspection anyway, and around here it's usually paid for by the seller. There is potential for abuse (somebody charges you $200 and orders a $100 inspection), but it's relatively small potatoes, and most just won't bother when it's so much easier to hide big ticket scams elsewhere. Order it yourself from an approved vendor if you're concerned.

So the section total is $75.

Below these sections is a line "Estimated Closing Costs". This really is the total of all the closing costs associated with the loan. I keep telling you that the numbers which go onto this sheet may be fictional or incomplete, but if they are actually complete and correct then the number here on this line is the most important one on the whole sheet. This is the total of the costs you're really paying to get your loan. Some call it the "total of non-recurring closing costs." If you pay attention to nothing else on this sheet, (begin Groucho Marx accent) chances are that you're being taken for a ride (end Groucho accent). But this is the most important single number. Adding the midpoint estimates from the sections we come up with $1720 if you're getting one loan on a refinance so $1548 or $1898 (depending upon your state) plus $63 plus any charges for points. Using consistent assumptions, this makes for a total for a refinance $3331 if you live in an escrow state, $3681 if you live in a state where they require lawyers to get involved. The totals for a purchase under these assumptions is $2936 or $3361. None of these numbers account for points you're paying or rebate you're getting, of course.

Just to make an important point again, this sounds like a lot more than $1658 plus third party fees, doesn't it? If offered the choice between buying one item for $3331 and buying the same item for $1658 plus third party fees, most people think the second choice sounds cheaper. However, as I've just demonstrated these are exactly the same given comparable assumptions. And there's a lot of leeway in those third party fees for junk fees if your loan provider wants to make use of them to pad their own pocket, not to mention they could trivially be much higher if your loan provider doesn't choose third party providers wisely. Insist upon actual numbers.

(continued in Part II)

Original here


(Also edited for California at Dan Melson's San Diego Real Estate and Mortgage Website

End of an era:Ollie Johnson, last of Walt Disney's "nine old men," who helped make all of the old Disney animation the thing of beauty it was and still is, has died.


Supreme Court rejects lethal injection challenge

Here's the line that really chaps my hide

forty-two people were executed last year out of more than 3,300 people on death rows across the country.

About 1 of 78 people on death row was executed last year.

In other words, they're much more likely to die of natural causes while on death row than to be executed.

Is there anybody who thinks that the death penalty is useful under such circumstances? Let's either make the process a lot quicker, to the point of making it more likely that those on death row will be executed rather than dying of natural causes, or stop sentencing people to death. The current situation isn't good for anything except billable hours for lawyers at taxpayer expense.

I'm not saying make it unconstitutional. It's not. Nor do I favor abolishing it. There will always be a few criminals where the crime is so heinous, it's worth fighting the people who make executing murderers so difficult. If I had my druthers, I'd give the criminals three to six months to raise all relevant legal points, and the execution proceeds upon the final resolution of that one appeal. But let's just stop sentencing garden variety murderers to death, and instead simply put them away forever with no possibility of getting out. It has just gotten too expensive to get those inmates off the state dole by executing them. For what we pay for the lawyers and court costs of each death row case, we could house several inmates for life.

Orin Kerr and Paul Cassell over at the Volokh Conspiracy have some good information on the decisions themselves.


Michael Barone reviews a book by a man who helped plan the invasion of Iraq. If what Mr. Feith says is true, it's pretty damning to the State Department and CIA.


There is something profoundly gratifying in watching the left suddenly figure out the media is biased. Stephanopoulos, a Clintonite, was perfectly fine as long as he was sticking it to Republicans, but now that he's asked Saint Obama a few actual questions, he's persona non-grata.

Ace of Spades has more:

But when an actual debate breaks out at a presidential debate -- one that is somewhat effective in exposing Obama's character flaws and also hints at his real political agenda (not-moderate-at-all left-liberalism), he shrieks it's all so "Rovian" and that we should talk about the "real issues."

Right. A debate on the "real issues" where both candidates say they agree with each other for two hours, except on the point of who can better execute the exact same program.

Still more from national Review Online

Hey, welcome to the big leagues, rookie. You're gonna get some questions you're not going to like. Not everybody gets to have their main opponent's bid implode when their divorce records are unsealed and compete against Alan Keyes in a general election.

Seriously, if Barack Obama can't handle questions like this from Charlie Gibson and George Stephanopolous, maybe the portrait of the cracking-under-pressure whiner depicted in the Saturday Night Live sketch isn't as wild an exaggeration as we thought.

George Stephanopolous weighs in


via Instapundit, Wikipedia's zealots. One more reason never to trust Wikipedia if someone's agenda is a stake.

Way back when I was just out of high school, I was doing a lot of things with my time. Working, dating, competing on the fencing team, gaming of various sorts. But every once in a while, I dropped in on one of those math courses I was registered for at UCSD. One of those courses was Math 110, "Introduction to Partial Differential Equations and Boundary Value Problems" Bozemoi. That was the course that convinced me that I was not, after all, cut out for a career as a mathematician. All the other undergraduate courses, I got a handle on fairly quickly, but the way my mind works made that one course something like having those alleged brains pounded out between two large gold bricks wrapped in lemon.

I eventually got through it. But one thing I took out of that class in no uncertain terms is the form a real solution to those equations took, and the fact that if you were missing terms ("parts of the answer" for those less mathematically inclined), your answer was wrong. Not incomplete. wrong.

One of the standard ideas of internet commerce is "cut out the middleman and their fees." You can find this in lots of fields. Some of them begin far earlier than the world wide web. "Discount" brokers have been going for decades, for both stocks and real estate. The internet certainly helped them, however. Loan quote services were probably one of the first ten business ideas on the world wide web. On-line this, on-line that. Do business with the faceless on-line corporation with cheaper fees (or none!) and you can't help but be better off, right? It's easy to illustrate that difference to just about anyone. There's money they're not spending, that anybody can point to as a savings earned by doing business in that fashion. But is that the whole story?

Indeed the whole discount proposition cannot succeed without an implicit or explicit assumption that the value you receive from having paid that fee is zero. But if that were the case, these professions would never have gotten going in the first place. Who wants to pay money you don't need to? Anybody want to raise your hand? I certainly don't. The world, humankind, and even our financial markets survived for millennia without stockbrokers, real estate agents, travel agents, or any other sort of business that is now being subjected to disintermediation. Why did these professions come about? It wasn't because our great grandparents were stupid, uninformed of the alternatives, or had no choice. They could and did buy and sell stock and real estate directly. The reason these professions, and others (such as journalism) arose is because they added value to the entire process. The people who made use of these professions profited by their choice. Not necessarily directly in dollars with every transaction, but statistically, the people who spent that money emerged notably better off in one or more important respects, and therefore, our predecessors made a choice to do so until essentially everyone did so.

There you have it: An explicit refutation of the assumption underlying the entire discounter promise. It neglects an essential term in the answer as to whether you end up better off. Was the money you didn't spend really the whole answer? What if by spending that money, you end up better off?

Suppose you save three percent by not having a real estate agent sell your property. Seems like a great idea on the surface, doesn't it? On a half million dollar property, $15,000 in your pocket for what you think is a few hours of work. I'll even start by granting you the same ability to market that an agent has, which isn't the case for the vast majority. But what happens if the price you pick isn't right for your market? I've gone over that. What happens if you don't disclose everything you need to? Then let's consider negotiations. Trying to match wits against a buyer's agent whose been in everything that sold in your neighborhood in the last six months is a guaranteed lose. Do you know what's appropriate for contingent sales? What about negotiating repairs disclosed by inspection? These and many other things need to be negotiated, and just telling the other side to do it your way will result in a failed transaction. Do you know how to find out if a buyer is qualified? The two months you spend waiting to find out that your prospective buyer can't qualify costs you roughly six thousand dollars all by itself. I could go on and on.

The same applies on the buyer's side. In the current environment, any decent buyer's agent who tries can make at least a ten percent difference by suggesting the correct property, negotiating to their strengths, and using the seller's weaknesses against them. Usually it's more than that. My average is running about twenty percent. Sound like a good bargain to you? Spend ten to twenty percent to save three? If so, come on into my office, and I'll give you $30 for $100 until you're broke.

The intelligent question is: Does spending that money save you more than it costs? Most people will spend $10 to save $100. That's rational. Most people will spend $90 to save $100. That's still rational. Some people will spend more than a hundred dollars to save $100, though, and that's not rational. Nor are all of the costs in money, either. How do you quantify not making a mistake that most people don't know is there until and unless it bites them?

That's really the whole question, isn't it? Furthermore, it has to be answered individually, because few situations Admittedly, with the internet, it's gotten easier for consumers and more difficult for members of those professions. But the internet can only help you with questions you actually think to ask, and then do the work to make certain you debunk wrong answers to find out where the truth really lies. It's not going to tell you any of dozens of reasons why this freshly remodeled home of your dreams is going to turn into a nightmare.

I'm getting ready to close on a property right now where the folks contacted me with information from a popular discount model brokerage in their hand, and those were the first properties they wanted me to look at (which I did). The difference in value they are receiving for their money is such that they never went back to that discounter, because I went out and looked at properties, I gave them reasons why this property was or was not one that they were going to be happy in, I gave them reasons why this property was a Vampire while that property was not. I explained to them how the surrounding environment was going to impact them in the property. I showed them what needed to be fixed, and gave them an idea what was involved. When I found an especially good value for their money, I got them out there and told them to act fast if they wanted it - if I hadn't, it would have been gone by the weekend. I can't talk about some other stuff until the transaction is done, but I can truthfully say that I wrote an offer that the seller chose to accept even though it wasn't the highest offer they had, and the difference was a lot more than my company's three percent commission. If those kinds of services aren't worth money to you, then you're not a good candidate for my services anyway. But all that discounter had to offer was how cheap they were, while I gave my clients more value than they would have saved before they put the offer that was accepted in, and they knew it. Once the clients started thinking in terms of what they were receiving by giving up that discounter's commission rebate, the discounter never had a chance. By CMA of all comparable properties in the area, my buyers are saving at least (temporarily censored but over ten) percent, and that's just by square footage - not including all of the amenities the property has that the competing ones don't.

I'm not going to pretend this one isn't an above average bargain, even for me. I'm not going to pretend that every full service agent can make that kind of difference on every transaction, because I know it isn't true. But making more of a difference to the client than the three percent a full service agent makes is an awfully easy mark to beat for the agent who tries.

Caveat Emptor

Article UPDATED here

Here was an idea I had: Pack a list of the most important things consumers need to know about buying real estate, as packed into the words I can say in sixty seconds without sounding like an over-clocked squirrel. Here goes:

Figure out what you can really afford before you do anything else. Shop by purchase price, not payment, and refuse to look at properties which cannot believably be obtained within your budget.

Listing agents are contractually and legally obligated to sell the property as quickly as possible for the highest possible price. They represent sellers, not buyers. If the listing agent can sell you the property for $100,000 above comparable market price, they have done nothing except their job. Never allow the listing agent to represent you as a buyer.

Buyer's Agents represent buyers, not sellers, and having a good buyer's agent will make more difference than anything else to get you a better property value for less money. Get at least one buyer's agent before you start looking. Sign only non-exclusive buyer's agency contracts, insist they cover bad points as well as good on every property, and fire any agent that won't, or any agent that shows you a property that cannot be obtained within your budget.

There is no such thing as a perfect property, or the perfect time to buy real estate. Properties in immaculate condition command premium prices because the owners can get more money. If you want a bargain, be prepared to do some cosmetic work. A good buyer's agent will help you know what's cheap and easy to fix, versus what's difficult and expensive.

How was that?

Caveat Emptor

P.S.: This guy is one of the best buyer's agents there is

Article UPDATED here

We had a revolution over taxation without representation. The question I want to have answered is "how much representation do taxpayers have now?"

And I'm not talking about getting a lawyer for tax court.

We are a long way down the road. We are now at the point where democracy is eleven people voting to make ten people pay for something they want. Whatever happened to "If you don't play the game, you don't make the rules"?

I know I'm not the only person who favors making April 15th national elections day. Let's make it happen!


America's Riskiest Real Estate Markets

In cities like San Diego, one of five major metros where transactions rose, that's good news, assuming it's sustained. What makes transaction volume a good indicator is that it shows how easy it is for people to get loans and how much confidence there is in the market. If mortgages are available and buyers have some faith in the value of the home, they're more likely to buy.

San Diego's present conditions suggest that over the next half-year, prices may start to rise. That's because "there's usually a three- to six-month lag between when transactions go up and prices go up," says Jonathan Miller, president of Miller Samuel, a Manhattan real estate appraisal firm.

Another good sign for the coming year? Increased credit availability.

We took into account increased Fannie Mae and Freddie Mac (GSE) loan limits. The new legislation will open up credit in markets such as Sacramento and San Diego by boosting the GSE loan limit by 125% of the median price. That's a huge deal for San Diego, where 18% of the market will see improved lending conditions, based on projections by Radar Logic, a New York-based real estate research firm.


John McCain gets it, at least partially:

McCain proposes consumer tax cuts to boost economy

Republican presidential hopeful John McCain proposed a summer gas tax reduction and other tax cuts on Tuesday in a bid to reassure voters he would help them navigate an ailing economy.

It may be just to get a some votes, but it's the right thing to do whatever his reason for doing it. These would reduce the cost of consumer items, making the consumer's money go further. This effects literally everyone

Obama and Hillary are proud of their willful ignorance:

The Democratic candidates quickly denounced the Arizona senator's ideas as a continuation of the economic policies of unpopular Republican President George W. Bush.

"I don't think America can afford four more years of the failed Bush policies, and that's what he's offering," Illinois Sen. Barack Obama told a gathering of construction labor unions in Washington.

Obama and his rival for the Democratic nomination, New York Sen. Hillary Clinton, have accused McCain of being economically illiterate and out of touch with ordinary Americans' pocketbook concerns.

Where do the Democrats get these people that evidently managed to get through advanced degrees in law without understanding economics? Either that or they understand just fine, but are willing to lie and say they're clueless just to get a few more votes. There are precisely three possible cases: Ignorance, Denial, and Pretending Denial.

Whichever it is, nobody rational wants someone in that condition leading the country.


Ted Kennedy wants everyone else to pay their share of estate taxes

The methods the Kennedys use are available to anyone. But they're not exactly chomping at the bit to pay anything more than the absolute minimum they can get away with. All that stuff they want the taxpayers to pay for? They want to pay for it with other people's money.

Ladies and Gentlemen: Estate tax is essentially voluntary, and it's an issue we're all going to have to deal with sooner or later. By refusing to deal with it, you are volunteering to have up to 55% of your estate go to the federal government alone, instead of your heirs.


It's not news, it's Scrappleface! Dems Slam Bush for Latest Unilateral Move:

I know 401k contributions impact a persons Adjusted Gross Income, thus would it also affect the amount a person could qualify for? If so, I will delay enrollment for a few months...

This depends upon what documentation you use to qualify. For most of those who are salaried or hourly W-2 employees, debt to income ratio is calculated using gross pay from w-2s and pay stubs. This is more more than half of the people out there. For these people, it doesn't matter, because the computation is based upon gross pay before any deductions - even withholding. The thinking goes that you can always stop retirement contributions if you need the money now to afford your mortgage .

For those who have to use the full federal tax forms to qualify however, the computation is based upon Adjusted Gross Income. This is basically three groups: The self-employed, commissioned sales people, and construction trades, the last being notorious for periods of unemployment between the end of one project and finding another project that's hiring. Adjusted Gross Income, or AGI, is after retirement contributions from taxable income, as well as business expenses and several other things are deducted. The reason for this is those people have more expenses that statutory employees, whether those employees are cube farm dwellers, have a corner office, or whatever. Lenders are well aware of this. The only reason why they're willing to accept taxes as proof of income is very few people will tell the IRS they make more money than they do when it means paying so many cents of every dollar they didn't make in taxes.

This can make it very difficult for people in these three groups to qualify via documentable income. This is the reason why stated income loans were created. I don't like them, but there is a reason why they exist. The rates are higher and the underwriting requirements are tougher, but without that, some people would never be able to qualify for a home loan, no matter how credit-worthy. As I've said before, stated income is subject to abuse, and you'd really rather qualify "full documentation" if there's any way you can, especially now when lenders are suffering stated-income-phobia and it can mean having to come up with tens of thousands of extra dollars down payment and pay an interest rate that might be two full percent higher than people who can qualify full documentation will pay, and might not be able to find a lender who will lend them all of the money they need for the purchase.

So it will make a difference if you're one of those who needs to use tax forms, but if you're someone who can use w-2s to qualify, it shouldn't.

Caveat Emptor

Article UPDATED here

Notice that it doesn't claim that you can do so legally.

I saw another of these signs on the way to the office this morning.

When things are going sour, there are any number of scam artists who will promise the moon. We had them in the early nineties, and we have a lot more of them now.

Perhaps the largest number of these are flat out liars. They have no ability and no intention of actually delivering whatever they're dangling out there as bait. They're just putting something out there to get you to call, so they can get you into their office and try to do whatever it is that they do. Most of these are probably fishing for victims of a "subject to" scam. Notice that they didn't say they could do it for everyone? "Subject to" deals are illegal, but quite often the lender will let you get away with it. Of course, if they don't, they go after the person who signed the Trust Deed, not the scamster who talked you into it. Note that if they're reasonably careful, the people who are dangling "subject to" deals are legally in the clear. Nor is it illegal (as far as I know) for them to use an advertising hook they have no intention of delivering. Even if it is illegal, it's not like anybody gets charged for the initial handmade sign by the side of the road that's long gone before there's any investigation into what happened.

Even if these people are telling the truth as far as they go, there is something wrong with this scenario.

Either 1) you weren't in a negative equity situation in the first place - you really could sell for at least what you owe on the property, or 2) You are going to commit fraud, and the lender is not going to be happy when they find out. Expect a very unpleasant visit from the FBI, large legal defense fees, and an extended vacation courtesy of Club Fed.

There is no lender in the world that is going to accept a short payoff where the borrower walks away with cash. End of discussion. That's the entire bargain you make with a lender when you borrow money. They get paid every penny they are due first - and you get only the excess, however much - or little - that may be. If their payoff is short, they will not accept you walking away with a single penny from the sale of that property. To do anything else is a violation of securities and banking regulations. The Wicked Witch of Wall Street may be politically dead, but this is one issue that the financial world has developed extreme sensitivity to.

If the lender did not know about this cash that you are supposedly getting, you are going to be committing fraud. The person who sold you this scam is very probably committing fraud as well, but you definitely are committing fraud if you do this. That lender is going to require you, the owner of the property, to sign a statement to the effect that you are not receiving any money that the lender does not know about. So let's add perjury to the list of charges against you, and quite likely conspiracy. Your defense lawyer is going to cost more than any cash you're going to get out of it.

I had someone ask me whether an agent can volunteer to just give you some money from their commission. I'm not a lawyer, but as far as I am aware, it is legal. However, if they're bringing you into their office and getting you to sign up with them to sell their house based upon such a promise while the lender ends up with a short payoff, you are still committing fraud, perjury, and conspiracy when you sign that document that says you're not getting any money from the sale from any source, and that agent is committing at least fraud and conspiracy as well. The whole set-up is pre-arranged, and that give-back is a condition of the transaction that you and the agent are both aware of, but the lender is not. This makes you guilty of those three crimes. My understanding is that In order for the "gift" to pass legal muster, it has to be a pure gift, conceived by the agent with no pre-arrangement, executed for no consideration and no exchange of value on your part. Since that is not the case - they're luring you in with the promise of cash from before they even saw you - it's not going to get past the courts. Furthermore, even if such a gift was a pure gift on the part of the agent, it's not likely that the courts or a jury is going to believe you when there are well-known scams like this going on.

People put these scams out there because they figure they've got an angle whereby they can still make money. I can think of several ways to do so off the top of my head, from using the property as bait to meet buyers (see Tina Teaser) to having you sign an agreement for a very large listing commission, and several ways in-between. All of them involve a violation of that agent's fiduciary duty to you. Show of hands: How many people would sign up with an agent who straightforwardly told you he intended to scam you, and that as a consequence of this transaction, you would be likely to spend several years in prison? Anyone?

It is kind of elegant in a way: The victim of the scam (that would be you) can't complain without putting themselves in line for several years as an involuntary guest of the taxpayers. But it's amazing how often some outside causes the whole thing to unravel. Actually, cancel that. It isn't amazing at all. Real estate and mortgage operations are all a matter of public record, and audits and record keeping are a part of life for anyone in either field. Failure to keep complete records is in itself an offense that practitioners can and do lose their licenses over, and the escrow and title companies have their own record-keeping requirements, and the lender will most certainly keep records. Matter of fact, if they can show you've committed fraud - and you have, make no mistake - then any legal shelter you may have had from their ability to collect the money they lost simply vanishes.

You don't want any of that to happen, and once you do it, you have no defense except to hope that you get unreasonably lucky, and nobody notices until the statute of limitations runs out. The only justification for doing a stupid stunt like this is if it gets you out of a worse predicament. It doesn't. If anything, it makes any existing predicament worse.

Caveat Emptor

Article UPDATED here

This is a dachshund's dachshund. Not only does he love to play fetch, he's got his pet human sufficiently conditioned to - well, watch the video. Look at that tail and those ears - That is one happy dog!

I do think it's a poor second choice to human interaction. But it gives the dog something to do when the family is out.


Arab Liberals Discuss Fifth Anniversary of Operation Iraqi Freedom

HT: Don Surber


Kumbayah, my lord, Kumbayah: Private Papers on the supposed damage George W. Bush has done to our reputation overseas and how the opposition expects to restore it.


Ed Morrissey of Hot Air dissects Obama's "bitter" gaffe. Don't believe him? H Ross Perot "You people". Jesse Jackson "Hymietown".

Obama regularly lets his true self show when he doesn't have a script. This is only the most damaging of many such problem pronouncements.


After 26 Years, 2 Lawyers Reveal Killer's Secret - and an Inmate Hopes to Go Free

Let me get this straight. Two public employees knew for a fact that someone else was guilty of the crime for which this man was convicted, and he sat in prison for 26 years so that a convicted murderer's confidentiality could be respected? In fact that he's still there and may be there for the rest of his life? That only the real murderer's death "enabled" those with the evidence to come forward?

If that's not proof our legal system needs an overhaul, nothing is. The state of Illinois owes this man his life back. Since that doesn't appear to be on the list of possibilities, though, let's start with his immediate freedom and more money than he can ever spend in his remaining years.

This is precisely the sort of legal hair splitting in favor of obvious injustice that causes the legal profession to be viewed with such disdain. This is more a thousand times more of a gross miscarriage of justice than anything that could possibly have happened to the guilty party. How often is a second person ever tried for a crime and convicted?


Scapegoat 1 or scapegoat 2? In this case it's scapegoat 2: Democrat blames weak economy on Iraq war

Particularly when the real culprit was excesses, negligence and deception in the financial markets? You know, Obama and Hillary's super donors and contribution bundlers? You don't have to wonder what they're getting for their campaign contributions.

Or: Please don't believe everything you read on the internet!

Rarely a week passes by that I don't get a request from someone to link to their website or article. I'm happy to link to good sites and good articles with real consumer information. Unfortunately, this is not the majority of what's out there.

I got three requests in the last day. Two were obvious spam sites, one didn't even address me by name. The third was a little harder, an article that claimed to be written for consumer benefit. Unfortunately, its five main paragraphs were wrong on every point of substance, and so vague as to be useless on everything else. But when I sent them an e-mail suggesting they improve it, I got a three letter response: LOL.

For those of you who may not understand geek speak, this stands for "Laugh Out Loud." In other words, my request was laughable to them. They wanted free links to the site, and were willing to research email addresses and such, but weren't willing to produce actually informative correct content. My primary hypothesis, which I'm not going to bother to test as it involves motivations I don't care about, is what they did write fit their own agenda better than something closer to verifiably correct. I see people writing - or who have written and are flogging - articles with similar points to that one every day.

Unfortunately, this attitude is far too common. People build these websites to optimize their chances of getting a relevant search term hit. None of the search engines tests any site for reliability of the information it contains. A search engine referral is not a guarantee or even indicator of reliability - it means they found the relevant search terms there. Testing the veracity, correctness, completeness, and usefulness of the information contained is left as an exercise for the potential reader.

I also get e-mail from consumers. One recently thanked me, saying it's easy to find real estate information, but it's difficult to find good loan information. Actually, it's just as difficult to find correct real estate information. More of what's out there is somewhere in the general vicinity, but just because it's apparently closer to the truth does not mean it doesn't contain deadly traps, made all the more plausible by association. When you're talking about real estate and mortgage loans, there's a lot of money at stake. This is all the reason necessary for some people to say whatever it takes. Remember, none of the search engines tests for reliability of the information, and failure to examine everything you read - particularly in an area where few people have competence but many people think they do - can often lead to a situation which appears to be successful until years later. Real Estate is one of those fields. I'm going through a transaction right now where it's becoming more and more challenging not to speak ill of the listing brokerage as a whole. I've got the buyer's end done and there's no termite clearance, no zone disclosure report, none of the other required disclosures, they took the lockbox off without informing me or my clients (itself a violation of MLS rules) so we couldn't do our walk-through yesterday, and that's not all by any means. That seller is sitting fat dumb and happy - and liable for basically everything in the known universe. Yes, it's a discounter. Why do you ask? Oh, right. Because I've got to do their work so that my client is aware of what they need to know before we actually consummate the transaction. But I don't have any legal liability to do so as the buyer's agent. It's simply my desire to prevent my client from unknowingly walking into a bad situation, and if I didn't, it could be ten years from now when my client discovers something, and goes to court for a fat settlement from sellers and listing agency, or even forcing them to buy the property back. Apparently successful for years, but in the end a disaster. Not to mention a couple of things that I can't talk about until the transaction records.

People have various reasons for building websites. In some cases, they're trying to sell advertisements. In fact, there's a lot of those sites, where the entire purpose of the website is to collect money from people clicking off of the site to one of their paid advertising links. I've got some of those; One direct, a couple more through AdSense and BlogAds. It pays my bandwidth charges, and usually some of my domain renewal. I'm far pickier than most about my ads, and I'd like to get to the point where I can tell AdSense to take a hike, because they don't allow me any ability to reject individual ads that may be objectionable.

Other people build their website with the explicit intent of selling something specific. I'd like to sell something specific: My services as a real estate agent and loan officer. However, I'm nonetheless doing my best not to write anything that I could not defend in an academic thesis if I were a professor and tenure was at stake. I don't get offended when people question what I write unless it's in an obvious shill way. Furthermore, I'd like to think I'm as evenhanded and complete as possible in dealing with the pluses and minuses of everything. Everything I write is designed to be tested for its veracity. In other words, if you check out what I say, whether in an actual transaction or by checking with knowledgeable neutral parties, I would be very surprised if there were substantial points of disagreement. This isn't to say I can't make mistakes (Brian, you were right about 45 day locks in January. I blew a thirty day lock for the first time since 2003, and had to pay the 5 day extension out of my own pocket). But that I try very hard to make everything I say verifiable by independent test makes me highly unusual on the internet. Some people are every bit as careful as I try to be. Others are somewhat less careful. Probably the majority do not care so long as it enables them to sell more of whatever they're selling.

What I'm trying to say is that you should make every attempt to test everything you see on the internet, including my stuff, before you bet large amounts of money on whether we're right by conducting a real estate transaction in accordance with what we say (Although if I'm your agent or loan officer I become responsible for what I say financially and professionally). That's one of the reasons why I'm not hesitant to drag out a calculator or spreadsheet and show you the numbers. If it cannot be expressed in mathematics, it's not fact - it's opinion (Thank You Mr. Heinlein for teaching me that while I was still young enough to absorb it. This isn't to say that if it can be or is expressed in mathematical terms that it is true. You've got to crank the problem and see if everything matches). Try to debunk it if you can. Does the evidence - independently gathered - confirm directly, confirm circumstantially or tangentially, confirm with exceptions, partially confirm, fail to confirm, contradict tangentially, contradict circumstantially, or contradict directly what is said? In the absence of substantial contradiction, is what we say at least internally consistent? If there is contradiction, how far does said contradiction unravel the claims? It's very different if it contradicts the central point or points and causes everything to fall apart, versus if it only contradicts some tossed off side track. Logic and the scientific method are always your friends.

Another trick is to observe whether the source admits things that bolster an opposing case, or something against the point they're trying to make. The more opposing viewpoints or evidence against their point they entertain, the more likely they're honest. Especially if they're scrupulous in the way they handle to evidence against them. None of this helps if the central tenet of what they're telling you is flatly contradicted by a known and verified fact, but in the absence of such, honest treatment of the merits of alternate explanations is a very good sign.

The quality of the confirmation or contradiction - how credible and detailed the piece of information you use to check it - is also important. You could find yourself having to check out many different interpretations before you're certain where the truth really lies.

Absolute truth can be a difficult thing to attain, there is often room for differences of opinion, and there are many logical fallacies to which even people of good intent can fall prey. The difference between a valid and invalid argument or statement can be very fine. Please, do not take anything you read on the internet as gospel truth without thoroughly vetting it for incorrect information, false premises, and false inferences. I don't believe I'm infallible. I do see stuff on the internet every day which is thorough nonsense even though it may appear credible on the surface. Sometimes it's with malice aforethought, sometimes it's an honest mistake, sometimes it's a simple misunderstanding of source material, and sometimes it's even just viewing source material from a viewpoint that distorts the answer. For my part, I try very hard to get it right and to cover information that might disagree with what I'm saying, but there's a reason why I end every single article here with

Caveat Emptor

Article UPDATED here

Absolutely sick: Teens beat girl brutally and film it -- to post on YouTube

Gang of eight brutalizes one girl who dared post criticism on her MySpace page?

Try them as adults. Put them away. They're not fit for civilized society. Sue the parents, collectively.


Economy: 1996 vs 2008

Compare and contrast media treatment, also.

Compare and Contrast with classic "Big Lie" technique. Hint: There's not much contrast.


Q and O hauls out the big guns to deal with global warming: A scientist, using actual numbers. (video) to illustrate the disconnect between warming politics and the actual science.

Today's Turkey

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It's been quite a while since I did one of these. I should probably do them more often, just to make my point.

This Eyesore Is Falling Apart But Was It Designed by a Famous Architect!

General: La Mesa, 3 Bedroom, 1.75 Bathroom


What's Wrong With It: Quicker and easier to ask what isn't. Sits on a secondary street that's the main route through the neighborhood. Cars fly up and down that street at freeway speeds at all hours of day and night. No grass and nowhere for kids to play. Several nice mature trees, but their root systems are spreading, the front yard is covered in ankle deep plants to no good purpose, the back yard is split up into half a dozen areas too small to get any use out of, and has a small cracked and leaking swimming pool that's currently the color of ichor and a breeding ground for mosquitos.

The building itself may have been designed by some famous architect, but it reminds me of the pre-WWII navy housing over in Linda Vista and Serra Mesa. It's basically a long rectangle the width of the lot and maybe twenty feet wide. The window frames are falling apart, I don't think anything has been painted for at least thirty years, the carpet reminds me of my elementary school library (it's about that old, too).

There are at least three major cracks in the concrete slab floor. The wall paneling looks like it's probably original 1949, and was sitting in someone's mountain cabin before that. I counted seven major structural cracks in the wall before I got tired of the game, and any number of smaller ones. Nor is the ceiling exempt. I was kind of nervous it might fall in on me.

Why It Hasn't Sold: New on the market, and I wouldn't expect it to last. Structurally, that is.

Who it's Not Appropriate For: Anybody who can't afford to tear it down and start over - and that includes the landscaping. It may have been designed by some famous architect, but it's been maintained by Larry, Moe, and Curley, with assistance from the Addams Family.


Selling Points: It does have a reasonably large lot. Unfortunately, zoning in the area is solidly R1. I'd peg the likelihood of getting an up-zone at "none"

Who Should be Interested: Nobody. Danger, Will Robinson!

Why it's a Bargain: It's not. The only way to salvage this property is to "accidentally" run a bulldozer through it. Forty-seven times.


What I think I can get it for: Why would you want it? The owners aren't ready to be rational about this property. Let me go find you something else better. That's easy. The hard thing would be finding something worse!

Monthly Payment examples: I think if they paid me $1000 per month, I'd consider taking it off their hands.

With no down payment: They don't pay me, I don't take it.

With 20% down: 80% of nothing is still nothing.

Investment potential: If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of 0, the property would still be a Money Pit. If you held it those ten years before selling, you would net whatever the negative of ten years of property taxes and insurance is. Not to mention what you'd have to pay to get rid of it.

To learn more: Why would you want to? I felt like I had wandered into a story by HP Lovecraft. I would be happier if I'd never seen it! But I escaped with my life and some small shreds of sanity!

Contact Information:

Dan Melson, Buyer's Agent
Action Realty Inc
9143 Mission Gorge Road, Suite A
Santee, CA 92071
619-449-0723 X 116

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.


The Host's Choice Award: Texas: The Next Real Estate Boom? takes a look at the market in parts of the Lone Star State from the point of view of where it's going, not where it's been. PS Fort Worth was just rated one of the top five places to get a job in the country by Forbes, and it was joined by another couple Texas cities. What do you think happens next in an economy like that?

Gosh it's nice to have someone submit an article like that! Makes a great change from all the spam and shill stuff! Thank You!

Your host submits The Difference Between Note Rate (APY) and APR



Why Buying a Home is More Important than You Think is a basic post that cannot be repeated too often, and it makes some very valid points. The answer to his ending question is, in general, "no."



Mortgage Brokers Not Happy With U.K. Interest Rates Decision is really nothing worth reading, but it did meet guidelines, talking about how it effects consumers.

How And Why To Consider A Purchase Money Mortgage fails to note the drawbacks, but does meet guidelines.

How to dodge stamp duty talks about some peculiarities of Australian tax code. I have no idea how correct they are, so I'm just going to pass it along without a recommendation. Nothing like reading something brain damaged to let you know how good we have it in the US!

To float or not to float, that is the question! considers the situation in India. What I said about the previous article goes here as well. Nothing like seeing something this brain damaged to let you know how good we have it here in the US



A site named Pasadena Financial Planner submitted a shill post called "Your family financial planning process" All kinds of credentials and buzzwords to make himself appear knowledgeable, but not one word about real estate. If he can't be bothered to read the guidelines, how professionally is he likely to behave towards you? How much due diligence do you think he might leave undone? In my opinion, prudence calls for giving this alleged professional's advice a pass.

A site named Best No Load Mutual Funds (with a very similar design to the previous) submitted a post entitled "The Best Mutual Funds Have NO Sales Loads and NO 12b-1 Fees" He's not only wrong, he's willfully ignorant if not actively lying, as those who have read the seminal DALBAR reports can attest. Somebody revoke his internet access, please ("Box it up and ship the whole thing back. You're too stupid to own a computer" to quote a popular joke). He's actively dangerous to innocent bystanders, not to mention clueless of the fact that submissions to this carnival should write about real estate.

Skilled Investor's skills do not extend to due diligence, failing to read either the guidelines or to consider the title of the carnival, which is really quite instructive. His submission fails to mention real estate at all, contains lots of meaningless buzzwords, and the fact is that financial planning has a certain amount of Art to it as well as hard numbers. Not to mention that this was a duplicate submission from the same author as the first post in the category. Mr. Larry Russell, you're negative 2 for two this time. (Actually, he's negative three for three, because he just submitted another irrelevant buzzword laden article, and guidelines say one post per author per carnival, so he should really be negative three for one - like he went up to the free throw line, and somehow managed to dock his team three points. How bad do you have to be to do that?)

KC Lau's Money Tips is evidently unable to afford a clue. Post fails to mention real estate at all. His comprehension is so endemically bad that he wins the race to be the first person whose e-mail is banned from submission to this carnival, and whose URL will no longer be considered.

Money Blue Book's Post did not so much as mention Real Estate, and he had some significant inaccuracies about credit scores, as well as trying to sell or recommend credit check services. Kind of like using a shotgun to shoot that apple off your kid's head - William Tell he's not, and his advice could well do significant damage.

American Consumer News not only resubmitted an article I made fun of last time ("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.") but they submitted a blatantly wrong post called, "Five Ways to Increase the Value of Your Home - For Under $100" and only one of them can plausibly be done for under $100, and that one ends up costing way more once you've actually done what was recommended. Do yourself a favor and just stay away from this website. Consider them second place in the race to get banned and blacklisted - which makes them double losers.

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 23rd, 2008), here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be April 21st.

I usually write long articles, Part of that is because I've done all of the easy subjects, part because sound bites facilitate sloganeering, not serious thought that's likely to result in a better answer - or the realization that you've been wrong in the past.

But long articles take a lot of time (not that short ones are easy, as Mark Twain knew well). So I've been trying to come up with ideas for short articles, and one of the things I came up with was: Pack a list of the most important things consumers need to know about mortgage loans, as packed into the words I can say in thirty seconds without sounding like an over-clocked squirrel.

UPDATE: The market and lending environment have significantly changed since this was originally written. This article has now been modified to take those changes into effect here

Here goes:


There is always a tradeoff between rate and cost. Never choose a loan based upon payment or APR. Shop by the cost of money and what you get - not by how much somebody is making. People refinance about every three years, so the higher rate may be better.

Ask the right questions of every lender. Lenders can legally lowball you on the initial paperwork, so ask for a Loan Quote Guarantee when you sign up. But since enforcing guarantees is difficult when you need the loan now, sign up with more than one loan provider, and check the final documents carefully before you sign.


How'd I do?

I recommend this guy for loans ;-)

Caveat Emptor

UPDATED article here

Carnival of Personal Finance

Carnival of Real Estate


Fare thee well, Charlton Heston. You will be missed.

You've got to admire a man who would picket a movie theater showing his own movie because that theater discriminated against blacks. That's speaking truth to power. Great Actor, yes. But Great Man, as well. Never hesitated to do what he saw as right because it was controversial or unpopular. It cost him personally, more than once. He never regretted it.

Here's a video of him giving the Keynote speech at the NRA in 1988.

We shall not see his like again.

March traffic count was significantly up on the visits, but way down on the page views. 80,961 human visits, 306,910 human page views, plus a little over 150,000 due to bots and spiders. Nonetheless, the visits is the highest I've had since the hosting change. Thank you all for stopping by.


An April Fools Day column with a double edged bite from Jonah Goldberg of NRO and Frank J of IMAO: Oh, the poor politicians!


Private Papers on how anti-nuclear laws are preventing people from getting cancer diagnoses and treatment.

My take on Zillow's new mortgage match service: I am going to try it.

I have, on more than one occasion, made plain the problems with online quote services.

Here is the first question Drew asked me for their article. Neither it, nor the answer, found its way into the finished product, for tolerably obvious reasons:

What are some online resources consumers should be using to find loan rate information?

None that are any good, as in the sense of providing good relevant information that's applicable to specific cases. There are many loan quote forums that will quote you a rate. They quote you a low rate or a low payment to get you to contact them - and that's all that it is, a teaser. I have literally gone right down the line in two different comparative quote forums, contacting every company and asking for quotes that comply with the standards they are supposed to quote to. Not one company was even prepared to quote me what they were advertising. Nor did the forums themselves do anything when I complained - they are not interested in policing the quotes, as to do so risks losing some hefty income when the companies quit subscribing to their service. The few companies that advertise honest rates that are really available have given up on those forums in disgust - they attract clients in other ways.

Nonetheless, I'm willing to give Zillow the benefit of the doubt. Why? Precisely because of the way they have handled their "zestimate" service. It may be useless for the purposes of buying and selling, but they have done their dead level best to make it suck less. They may be trying something for which the medium is not suited, but they've spent a lot of money and programmer time trying their best to make it work. Internet mortgage quote services are nowhere near as intractable of solution. It's just that nobody has wanted to do it correctly yet.

I'll give Zillow credit for wanting to do it correctly. Whether or not they carry it through is something else again. But they've earned a certain amount of respect for their willingness to try to correct perceived problems. I'm reasonably confident they will want to make efforts to improve

The internet being what it is, I understand about their "one way transparency" policy. I, among others, have been unstinting in my criticism of the way on-line quote requests are handled (even if they weren't actually a quest for quotes, as in the linked article). Furthermore, the vast majority of internet users are very guarded about their privacy, and if lenders could contact them directly, they would be unlikely to use the service. I believe that Zillow evaluated the trade-off between more people being willing to try the service, and more transparency on the part of consumers, and made the choice that results in more people - potential customers - willing to try the service. If the loan originators who are complaining about this stopped and thought a moment, they'd realize they're complaining about increasing the size of the potential market. Bullet. Foot. Not much assembly required.

This isn't to say I think the service is perfect: It most decidedly is not. One thing I think Zillow needs to add is a space for each and every lender to detail their quote policy, so that consumers know what is and isn't included (I like to quote all inclusive costs, others do not), as well as limitations on the value of their quotes. My margins are such that if wholesale rates rise, there is no way I am going to be able to honor any quote I make four days later. Zillow also needs to make something very plain that they have not - that all rate quotes are subject to change until locking. That needs to be graven in size forty bold font on the top of every page in the category. Trying to ignore this is a guaranteed failure for both consumers and originators.

Zillow is also going to need an arbitration department, or at least committee. Many consumers will complain about things they themselves with the cause of. "Sure, I said I make $8000 per month and it's really $2000, I said I have a FICO of 804 and it's really 408, but they didn't honor their quote!." I don't believe Zillow is ready for either that, or the lender who says, "but everyone knows there's two points of origination, and the title company and escrow fees are not my fault!" In the former case, that person should have no credibility to make a rating, and in the second, that originator should be unceremoniously branded as unworthy of professional status. Time will tell if Zillow has the guts to undertake those actions, or if they're going to take the low road of passing all allegations, no matter how thoroughly it's been debunked. If it's the latter, they shouldn't be surprised if the professionals that gravitate to them tend towards the low end of the reputability spectrum. My reputation is valuable to me, and to others. I will not have it libeled, and if Zillow does anything less than ruthless purging of incorrect information, I won't hang out waiting to become a victim.

Several people have already made the point that Zillow is going to begin charging at some point. Well, duh. At that point, I'll make a decision as to whether or not to continue participating. I'm hoping they use this initial period as a way to work the bugs out. I can stand to risk $25 and some of the time I'd otherwise spend surfing the internet to no particularly good purpose to see if I can pick up a few loans I wouldn't otherwise get.

A couple suggestions: Give the consumers more information on the prospective lenders. And since it's consumers contacting lenders, there's absolutely no reason why lenders shouldn't be able to participate immediately upon sign up, albeit marked "provisional". If the consumer can verify enough information to feel comfortable contacting a provisional lender, they should be able to. This also would have made it easier for would-be reviewers to work. I was invited to their pre-launch briefing, but they dropped the ball despite my best efforts to be included. Not precisely a great omen, but mistakes happen. It's how we with problems that defines us.

This could be a really wonderful thing, for both consumers and originators. On the other hand, it could be the worst disaster since this one. How Zillow behaves in handling the issues will determine which. I can lurk and participate a little around the edges, and see how things shake out. I don't need to know right now. I can gather evidence before making up my mind.

If it's not for you as an originator, don't feel threatened. There's plenty of market to be picked up elsewhere.

Caveat Emptor

Here's the real issue about commissions: They need to be structured to incentivize good results - rewarding those agents who do good work, penalizing those who don't. The current structure, where the brokerage gets a flat percentage of official sales price - doesn't really motivate agents to perform. It really doesn't make a huge difference to the brokerage whether a property sells for $500,000 or $400,000. Assuming a 3% commission, they get $15,000 in the first case, while getting $12,000 in the second, despite that any monkey should be able to sell a $500k property for $400k. Basically, they get 80% of the reward for doing nothing, but that failure makes a huge difference for the property owners. If they owe $400,000, that's the difference between going on to their next property with about $60,000 in their pocket or coming up short about $30,000 and having to do a Short Payoff, with all of the resultant consequences to that family's future. Nonetheless, at 3% commission, all this means is the difference between $12,000 to the brokerage and $15,000. There is a dissonance betwen the interests of the owner, who this makes a $90,000 plus difference to, versus the agent who will still get 80% of the same paycheck if they do nothing but persuade the owner to accept the first lowball offer that comes along.

This dichotomy of interests encourages all sorts of games, from "buying a listing" (leading a homeowner to believe the property will sell for more than it will in order to secure the listing) to failing to negotiate hard to accepting too many listings to be properly serviced. If I can really service six listings, and I take ten, the individual selling prices will suffer while I make more money - ten times $12,000 is more than six times $15,000. Most agents - just like most people - will do what aligns with their interests.

The major alternatives - "net listing", where the consumer "nets" a certain amount and money over that goes to the brokerage, and "Flat fee listing" don't really float my boat either. The first has the advantage of pay for performance and severely discourages agents from over-promising on price; nonetheless the homeowner isn't motivated to maintain the property, and the agent is a little too motivated to wait for a better offer that isn't likely to come. As for the "flat fee listing", all that motivates the listing agent to do is get it sold - never mind the price. Whether the owner makes $60,000 by selling for a great price, or loses $30,000 by not getting so great of a price, that's all the same to the agent. But the owner wants it to make a difference to the agent, because they want that agent to get the best possible price, not just the first offer. As for the "flat fee in advance" listing, why should that brokerage want the property to sell at all? They've made their money already! If the property sells, now they have to do all that work and assume all that additional liability!

What we really want is a fee structure where the agent is motivated to get the highest possible price as soon as possible, the latter being more important than is generally recognized, as carrying costs eat profits very quickly, especially if the family vacates so as to show the property to best advantage and get the best price, or if they've already moved to their new home for whatever reason.

There should be several terms in this equation. It should take the form a+b+c+... For every factor the owner and the agent can agree upon having an effect upon consumer benefit, there should be a term in the compensation equation. Note that if the agent doesn't measure up in some way, any of these terms (except the one for doing the base paperwork) should be able to go negative. It's likely that good agents should be making more for listings than they are, while ineffective bozos quickly go bankrupt.

I'm not concerned with getting paid for a listing that fails to sell. In fact, I consider the concept anathema to a good agent - or any other business. If I do not get the job done, I do not deserve to be paid. Nor does any other agent or any other business. The world doesn't pay off on a good try, and my experience is that listings that don't sell aren't likely to have been a good try. I just visited a listing yesterday, a preview for a prospective client. Showing instructions said "vacant -go" Got there, it's a combo lockbox, but no combo anywhere. Spend half an hour in the front yard on the cellphone trying to get a combo from agent, listing office, number listing office referred me to, the number I was referred to from that, and so on. Finally gave up. How many others like me have there done that? Sounds like an agent who wants both halves of the commission to me, discouraging prospective buyers represented by other agents. Sound like someone you want to work with? Sound like someone you want to reward if you do inadvertently sign up with them?

This doesn't change the fact that if it does sell, there's a given amount of work no matter what the price is, and a given amount of liability. That's just part of being in this business. No matter how careful you are, no matter how good you are, eventually something is going to bite you. It's just a fact of life, and is the reason for E&O insurance. The commission structure needs to recognize this fact of life, or it will fail. But this is not how agents should earn most of their money, and most agents don't do this paperwork themselves, but have assistants paid as little as they can get away with to do it. A flat fee of $1000 is probably about right in California. Enough to pay the rent, the utilities, and the receptionist who actually generates the paperwork off WinForms.

Performance pay is a separate issue, and should be a separate term in the equation. I'll happily pay $20 to make $100 ("here's another $20 if you bring me another $100!"). The most central idea of engaging an agent is to get a better price for the property. My client shouldn't be expected to pay me if I'm not performing services of value - enabling them to get higher price for a quicker sale and less. Any twit should be able to get $300,000 for a property that's worth $400,000. That's not a valuable service, and that's not something an agent should get paid for. If the agent can't get a good enough sale price to meet even a minimum test of benefit for the client, they should lose money. If the sale price is low enough, it should eat up even the base transaction fee, or even send the commission negative - the agent pays the consumer for so badly bungling the transaction. This is nothing unusual in other businesses. Even doing mortgages, I'm perfectly prepared to pay money out of my own pocket if I can't deliver a loan on the terms I quote (for reasons other than client not telling me the whole truth, that is!). The goal is complete consumer satisfaction, and taking money when my client doesn't benefit doesn't help my business in the long term either.

This performance pay should be steeper than current standards. Between ten and twenty percent is about what I think will do the most good. Give the agent a good solid incentive to want a higher price if they think its coming, while still reserving the lion's share of the benefit to the client. If I get Joe a price $20,000 higher than he would have gotten without me, Joe should be quite happy paying me a portion of that money by prior negotiated agreement. I would be ecstatically happy to do so in the reverse situation. And if you wouldn't happily pay it, I suggest you need to be confined because you're not sane. You want the agent to have a personal incentive to make that money for you. But it should be 10-20% of the excess or shortage relative to a base amount - whatever the seller and their listing agent think it could be sold without the agent benefit. It should also be based upon the sale price net of all negotiated "seller givebacks" not related to specific later discoveries (i.e. inspections and requests for repairs based upon them). It an inspection shows unsuspected repairs costing $20,000 are needed, the seller would have to pay that anyway, and it's not the agent's fault that need exists. But the idea is that client benefit should translate into agent commission, and client detriment should translate into money out of that agent's pocket.

There should also be a healthy term built into the equation to reward or penalize the agent for a quicker sale or a slower one. This can be based upon a flat duration, or upon average days on market for properties in the same class. More expensive properties take longer to move - that's just a fact. But this component term should be based upon date of sale, and should be based upon a very high percentage of carrying costs for the property - about thirty to fifty percent, maybe even sixty. I'll happily pay fifty bucks if it means I don't have to pay a hundred! Say average days on market in a given market are roughly 120 from listing to close of escrow, and it costs $4000 per month to carry the property. So for every month above or below four months, at fifty percent carrying costs, the agent gets $2000 more or pays $2000. If it's a six month listing with no offers, the agent pays $4000 at the conclusion. This would force agents to learn what are and are not qualified offers, and force agents to live with the same kinds of tradeoffs that our clients do. No more, "Sorry that escrow didn't close. It happens," when it should be part of our business to know that that offer was pie in the sky in the first place. When it's their own pay being docked, agents will do real investigation.

So far, the structure the ideal listing commission formula looks like this. $X basic commission, plus or minus $Y price performance (based upon 10-20% commission for over- or under-performing a certain price mark, plus or minus $Z time performance. Note that all of these are based upon demonstrable good for the client, and the client ends up with more money in their pocket as a result of every penny that agent is paid in incentive.

There should be one more flat component built in, contingent upon events. You don't want agents discouraging other offers, but you don't want them turning away foolish buyers who don't want a buyer's agent either. If someone is foolish enough to come in unrepresented by an agent, you don't want to shoo them away. So a fee for handling the buyer's end of the transaction is in order if there's no buyer's agent is a good idea - roughly half a percent of the sales price seems about right. Not enough that your agent is turning away offers made through other agents or pretending they don't exist, but enough so that they won't shoo any unrepresented buyers away, either.

None of this has any bearing upon the buyer's agency commission. That's a completely separate issue, and a separate article. But there are two issues you don't want happening to you. You don't want the listing agent discouraging buyer's agents so they can get both halves of the commission, and you don't want them shooing away an unrepresented sucker because it's extra work and liability that they won't get paid for.

Here's the really fun part: all of these terms need to get negotiated with every listing. Furthermore, it would tell a consumer quite a bit about whether they can really expect to get that listing price. I certainly wouldn't take a listing on terms which I wouldn't expect to get paid for, and neither would most agents (unless it's a "Hail Mary" to save their business).

As I've said, good agents would probably make more on this scheme, while poor ones will make considerably less, if they don't end up actually paying the client. You'd have agents advertising their average commission - paying a higher commission would do clients demonstrable good, rather than the standard "statistical studies show" argument NAR wants us to make. "Yes, I happily paid Joe $16,000 because because we agreed anyone could sell it for $250,000 in six months, and he closed a sale for $300,000 in thirty-two days." That's an five percent plus listing commission if the agent can pull it off - far more than any percentage I've ever heard of - that the seller was happy to pay because they demonstrably made more money and spent about $10,000 less in carrying costs! If an agent is that good, they can make that kind of money on every listing, and the clients won't be asking "What do you do to earn that money?" They'll be lining up to pay it! But to earn it, the has to deliver something good for the client, and if he can't help the client, he's going to end up owing the client money. Performance becomes the reason why agents are paid, individual performance for individual clients. It completely kills "buying listings", it completely kills "do nothing" agents as well as clueless ones, it discourages accepting more listings than you can service, it discourages working with more clients than you can handle, and it rewards agents who can actually get the job done better by the only universal measures - more money actually in the client's pockets sooner, with fewer carrying costs. The client benefit always leads to the agent reward - and client detriment always leads to agent penalty.

I have no idea whether this is even legal at this point - but I do intend to investigate. If it is legal, I'm going to start offering it for my listings. It wouldn't require any systemic changes - it all can be written into the listing contract, and it has no effect upon anyone other than seller and listing agent, meaning that if it's legal, there are no other interested parties, and a rational consumer would be as happy as a good agent to sign that listing contract, and happy to pay that commission, because it means they made even more money!

Isn't that what clients want? Isn't that what we should get paid for?

Caveat Emptor.

Article UPDATED here

FAA inspectors say concerns ignored

The meat of the article

Both FAA whistleblowers -- Charalambe Boutris and Peters -- said the agency views the airlines as its 'customers' instead of companies to be regulated. They said the FAA's chief maintenance inspector at Southwest, Douglas T. Gawadzinski, knowingly allowed Southwest to keep planes flying that put passengers at risk, and that another inspector knew of the problem and did nothing.

And people are surprised by this?

Here's the nuts and bolts. The aviation lobbies are very powerful, and the general public never gets concerned until there are bodies on the ground. When the FAA starts to do something that airlines or ALPA or AOPA doesn't like, it's pretty trivial to get someone in Congress applying heat, jeopardizing bureaucratic careers. This in turn rolls downhill all the way to the bottom - whether that bottom is inspectors or controllers. This is very typical:

Federal Aviation Administration inspector Douglas Peters choked up Thursday at a House hearing and needed a few sips of water to tell lawmakers about how a former manager came into his office, commented on pictures of Peters' family being most important, and then said his job could be jeopardized by his actions.

If Congress wants to see who is really, bottom line responsible, they need only look in a mirror. Nor are any of the last five presidential administrations immune from blame. Carter, Reagan, Bush Sr, Clinton, and Bush Jr. all share the blame for this. It's just as easy to lobby political appointees in the executive branch, or high ranking careerists who would like the opportunity for what the Japanese call Amakudari (The word means literally "descent from heaven"). Carter deregulated the airlines without putting into place mechanisms to ensure that the FAA would keep pace and remain in its proper role. To date, none of his successors in either the executive or legislative branch has remedied that error. The FAA has imposed labor contracts upon the controllers union in large part because the controllers union wanted to negotiate keeping traffic levels at a level that can be humanly handled without probabilities of error increasing, where if a system component fails -and they fail more often than the FAA admits - the resulting workload can still be handled.

I'm not really interested in blame. Since I don't fly much anymore, what I'm really interested in is effectively using the tax money they get so we don't get what controllers call "Aluminum showers" from falling airplane wreckage. But whatever public good there may be at stake, it's long past time to look at the FAA and what it regulates, and align the incentives for the FAA more closely along what we can all agree is the public good. I wouldn't be surprised if you needed to fire every single FAA employee above the bottom level to make this happen.

I am continually horrified how many people shop their loans by APR, just as I am by people shopping their loan based upon payment. Why? Because in either case, you're setting yourself up to spend a lot of money in closing costs that most people will never recover. But you shouldn't choose a loan based upon APR, just like you should never choose a loan based upon payment.

There is always a tradeoff between rate and cost in real estate loans. If you want a lower rate, you're going to spend more in up-front costs to get it. This is a law of finance on the same order as the law of gravity, or Newton's laws of movement. Some lenders and originators have different tradeoffs, for better or worse, but they are always present. The question of rate should never be asked or answered on its own, but always in conjunction with the costs it takes to get that rate. If you keep a loan long enough, yes, you will eventually get back your upfront investment, but most people don't keep their loans nearly long enough.

Let's illustrate by example. Picking a random rate sheet from one lender as I type this, I've got one thirty year fixed rate loan with a rate of 5.00 percent, and assuming an existing loan payoff of $350,000, and rolling costs only into the balance, an APR of 5.484, and payment of $1993. Looks better at first glance than a loan at 5.625%, with a payment of $2056 and an APR of 5.764. As other alternatives, 6.00 percent is available with a payment of $2119 and an APR of 6.048, or 6.375% with a payment of $2184 and APR of 6.375.

But here's what may not be apparent. As a matter of fact, it isn't apparent to most consumers. That 5.00 percent loan cost 4.8 points to get, and involved paying over $21,300 in total costs to buy the rate down that far. You're almost up against California rules limiting the total costs of a loan to 6% of total loan amount. The loan at 5.625% is done with a single point, and costs a grand total of $7070 to get done. The loan at 6.00% requires no points, and costs a grand total of $3500. Finally, the loan at 6.375% is a true zero cost loan.

What this means is that that getting that 5.00 percent rate is a $21,300 bet that you will keep that property and that loan long enough that the money you save in interest every month will be more than that upfront cost. It takes 141 months for that loan to do that as opposed to the 5.625% loan - almost twelve years - when you consider time value of money. It takes 108 months - nine years - before it pulls even with the no points loan at 6.00, and 92 months - over seven and a half years - before it pulls even with the zero cost loan at 6.375%. The 5.625% loan (a $7000 bet) doesn't start in first place either, but it does get there a lot more quickly. It takes 55 months - four and a half years to pull in front of the 6.00% loan, and 53 months to pull in front of the zero cost 6.375% loan. That poor 6.00 percent loan for no points is the only one that's never the absolute best choice - it takes the exact same 55 months to pull in front of the zero cost loan as the 5.625 takes to catch it, but since you're only betting $3500, at least you've lost less if you refinance or sell before break even, which most people do. Last time I checked (a few months ago), the median age of mortgages in the United States was 28 months - just about half the time that any of the other loans takes to pull even with the 6.375% loan that doesn't cost a penny, either out of pocket or rolled into the balance.

Let's consider how much money you'll be out if you refinance after 28 months with that 5.00 percent loan (or sell the property), like approximately half the population will. Your balance is $18,860 higher than the zero cost 6.375% loan, while on the plus side you have saved $1288 in payments. On the minus side, however, if you get another loan, you still have to pay interest on that $18,860. Whether it's because you sold that property and bought another, or a refinance loan comes along that you like better, it means a loan balance $18,860 higher even if you don't pay points on the new loan. You're still paying for your old loan, while all of your benefits stopped on the day you let your old lender off the hook by selling or refinancing. Admittedly, the chance of this happening is lower as you get to lower and lower rates, but it's still a bad bet, in my estimation. People not only sell, they want cash out, they want debt consolidation, the list goes on and on. If you get another 5% loan, you're paying $943 extra per year because of that higher balance. Alternatively, if you kept the extra in your pocket and invested it elsewhere, a 9% rate of return would mean it would cost you $1697 that first additional year. So far, I haven't worried about tax deductibility, but it works against the higher cost loan, making the picture even less favorable.

I need to note that these were honest calculations. The ones you encounter won't always be. Sometimes, they're based upon the payoff balance - in other words, calculate the payment for that 5% loan as if you were going to pay all of the costs in cash, even though the loan officer probably knows that's not going to happen. This would allow them to quote a payment of $1879. It also assumes they're giving you an honest quote on your MLDS (California) or GFE (the other 49 states) is accurate, as the APR is calculated given that information. If the underlying document is inaccurate, and I've covered how badly lenders can legally lowball, then the resulting payment and APR calculations will therefore be too low.

Now the difference between the two numbers, APR and APY, can give you a certain amount of information if you know how to use it, assuming that the loan officer tells you the truth, unlikely though that may be in some cases. I'm going to assume you've got a financial calculator or can do the calculations yourself, because none of the ones I've seen on the web are up to this task. Furthermore, this is only an approximation of the actual computation method, so there will be a small amount of slop in the calculations, but much smaller than the eighth of a percent fixed rate loans quotes are permitted to be erroneous. Using the term of the loan, the payment, and the contractual note rate (APY), tell your calculator to compute principal value of the loan - in other words, the new balance. This may not be accurate in and of itself, and that will tell you there's something funny going on with the numbers. Then repeat the calculation with APR substituted, which should give you the balance less the cost of loan, albeit with third party fees (appraisal, escrow, title) still in the amount as those are excludable from APR calculations under Federal Reserve Regulation Z. The difference in the two numbers tells you the fees the lender is charging - or the ones they're willing to tell you about, anyway. Without a Loan Quote Guarantee, these numbers have no more meaning than the lender wants them to have.

Note that the "spread" or difference between APY and APR gets larger as costs get higher or the term of the loan being contemplated gets shorter. The reason is that these costs have to be paid off over a shorter period of time. It also increases for smaller loans and decreases for larger ones. If you have to pay them off over fifteen years instead of thirty, the difference gets much larger. That 5.00 percent loan that had an APR of 5.484 with a thirty year loan term goes to 5.834 with a fifteen year loan term - not quite twice the difference, but nasty enough!

Despite the fact that the person refinances about every three years, APR is always calculated upon the consumer keeping the loan for the full term, which isn't likely. Ninety-five percent of everyone has sold or refinanced within about seven years, and this number climbs towards an effective 100% for loans that begin adjusting before that. Sure, you could theoretically keep a hybrid ARM (although not a Balloon) after the adjustment, but nobody does.

With that in mind, let's calculate APRs of each of these loans assuming you'll refinance after 36 months - significantly longer than the fifty percent mark where half of the country has refinanced or sold the property. The 6.375% zero cost loan still has an APR of 6.375 - because it has no costs to recover. The The APR on the 6.00 percent "no points" loan, which only has $1800 of non-excludable costs (see Regulation Z), doesn't go up much - to 6.391. The 5.625% loan you can have for one point jumps up to 6.643 APR, and the APR on that loan that the people shopping by APR or payment will choose - the one with a 5.00 percent contractual interest rate - skyrockets to 8.663%! If you only end up keeping it three years - beating out median age of loans in the country by better than 25% - this loan is the worst of the choices I have presented, not just by calculation of money spent, but even by calculating APR honestly.

If I had to pick a few things I could pack into a sixty second public service announcement to tell all 300 million people in this country about real estate loans, the fact that they're severely unlikely to keep the loan for anything like the full term would be one of those things. People just assume that they're going to keep a loan for the full term, but then they don't actually do it. Meanwhile, all of the calculations that are made presume that they will, even though that presumption is nonsense, and making those calculations on that basis will actually cause many consumers to make erroneous decisions, because they paint the facts as something other than what they are. If gravity was a tenth of what it is, we could all fly in the manner of Icarus as described by myth. But those pesky facts keep getting in the way, and over half the people who take out thirty year financing don't keep it for even one tenth of the full term. If you're wasting nearly nineteen thousand dollars of your money every three years, as the people here did once, those facts will have an ugly tendency to bite you just as hard as they will any modern day imitator of Icarus.

Caveat Emptor

Article UPDATED here

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