October 2008 Archives

Sitting here waiting for trick or treaters while the wife takes our own out:

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News so twisted it takes Scrappleface to make sense of it: McCain Thanks L.A. Times for Hiding Obama Video

Q and O has the non-humorous version.

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Q and O on The two faces of Obama on defense

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Leading the disabled to vote for Obama

Isn't there something in the law about being declared legally incompetent removes your ability to vote? If not, shouldn't there be?

Can you imagine the uproar if this had been a John McCain supporter?

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Obama doesn't need credit card security! Now read why this is a bad thing

Even the Washington Post is coming out of the tank enough to question this lack of validating security measures

Sen. Barack Obama's presidential campaign is allowing donors to use largely untraceable prepaid credit cards that could potentially be used to evade limits on how much an individual is legally allowed to give or to mask a contributor's identity, campaign officials confirmed.

Faced with a huge influx of donations over the Internet, the campaign has also chosen not to use basic security measures to prevent potentially illegal or anonymous contributions from flowing into its accounts, aides acknowledged. Instead, the campaign is scrutinizing its books for improper donations after the money has been deposited.

Ed Morrissey:

There is only one reason to deliberately choose to bypass those security processes, and that's to facilitate fraud. Team Obama claims that they vet the donations after the fact, but that's hogwash. It costs far more to do that than to screen for security codes and address verification up front, and everyone knows it. Obama counts on the fact that most of the fraud will fly under the radar of its victims, and the only cost they'll incur is when they have to process refunds after getting a specific complaint.

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Blaming the reporters for reporting Obama's own words: Priceless

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A beautiful explanation of why our tax policy is sending corporations and their jobs overseas, via Wizbang

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Live from the Ministry of Truth:

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Best tag line of the day: Atlas may not be shrugging, but Obama is.

Intelligent commentary on the subject from Q and O

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I'm wondering: Is the first amendment really safe?

PURGE: SKEPTICAL REPORTERS TOSSED OFF OBAMA PLANE

Despite pleas from top editors of the three newspapers that have covered the campaign for months at extraordinary cost, the Obama campaign says their reporters -- and possibly others -- will have to vacate their coveted seats so more power players can document the final days of Sen. Barack Obama's historic campaign to become the first black American president.

And all three "just happen" to be from newspapers that endorsed John McCain? In an industry that favors Obama by at least two to one?

Especially when the people they're being thrown off in favor of "just happen" to be fervent Obama supporters?

Let me make one thing crystal clear: The campaign plane is essentially Obama property. Legally, it's entirely distinct from the White House Briefing Room. He has the legal right to include and exclude whomever he wishes.

However, it's not the sort of behavior one I would expect from a person campaigning for the office of President of The United States, who really needs to learn to tolerate criticism and dissent, as every president in my lifetime has done. They really should be demonstrating this capability before they are elected, particularly if they're already in federal office, as Obama is. Obama is asking us to trust him on this.

Furthermore, given many other antics of Barack Obama and his campaign to punish reporters and media figures who were doing their job by asking the same tough questions asked of John McCain, I have to ask, "What evidence do we have that this behavior will stop assuming he does get to the White House Briefing Room?"

If he didn't do it, hadn't done it, wasn't continuing to do it in the final stages of a campaign that has him acting more like the heir apparent than a candidate, there would be no reason to question him on this subject at all. This subject isn't even on the table for John McCain and Sarah Palin, who have continued access to reporters equally no matter who that reporter worked for, and in several noteworthy cases, no matter how in viciously partisan a manner that reporter or their employer had attacked them.

But when it does get to be the White House Briefing Room, continuing the behavior that Barack Obama and his campaign have been manifesting goes by a very ugly name when applied to government action: Political favoritism. This is the same principle that would allow the government to award money or take it on the basis of political professions. Basically requiring a loyalty oath, not to the United States or it's Constitution or people, but to an individual officeholder.

That would be vile.

If you are confident that this behavior will stop, assuming Barack Obama is elected, I'd like to see some supporting evidence, please. There's a lot of circumstantial evidence it would continue, but no direct evidence either way that I'm aware of.

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Orson Scott Card on the presidential election.

Full disclosure: Mr. Card is a religious Mormon, and can be expected to hew to the beliefs of that faith. However, reading the article, I do not believe that it is influenced by his religion in more than a background sense, and his listing of the facts is impressive.

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More Obama Voter Supression, including a letter from Hillary Clinton's campaign.

Yeah, it's Free Republic. Even a stopped watch is right twice a day.


October 30th, 2008

The guidelines for this carnival.

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

STRONGLY RECOMMENDED

There were no strongly recommended articles this time.

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RECOMMENDED

I disagree with some of what Brian Brady writes in San Diego Real Estate and Housing Outlook for 2009, but it is well reasoned and he makes a good case. Were it of broader area applicability, I would have put it in the "strongly recommended" section.

Fed Policy, Economics 101 & the Housing Market talks about some of what causes housing prices to rise or fall.

Dave McCormick On Restoring Global Stability has some good macro-economic information.

$7500 First Time Homebuyer Tax Credit is a good basic overview. It is called a tax credit, but it really is a tax loan, not a tax credit.

Your host presents Will I Qualify for the Loan to Buy Real Estate During The Market Meltdown?

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MET GUIDELINES

How to Sell Your Home Fast in a Slow Housing Market gives several pieces of advice that I disagree with, some provably and objectively, but there's some good information there also.

10 Amazing, Beautiful Houses Built from Trash

Real Estate Investing Pros and Cons

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SPAM AND OTHER RIDICULOUS SUBMISSIONS

A site named Free Debt Consolidation: Qualified Financial Management submitted an article called "What Exactly Is Personal Debt Consolidation?" which failed to so much as mention real estate. Furthermore, the article was wrong about the process in several particulars, despite being vague to the point of uselessless. If that's the best thing they're written in the past month, that's really pathetic

In another violation of guidelines, they then followed up with another useless and incorrect article that doesn't so much as mention real estate called "How Can I Recover from Bankruptcy?" Two outs in one at bat. It takes talent to mess up that pathetically, and I don't mean "talent" in a good way.

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 one month on November 30, 2008, here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be Midnight November 28th.


I informed Zillow and their Mortgages Unzipped site that I was withdrawing as a contributor more than 24 hours ago, and that they no longer have my permission or endorsement to use my image, my name, or anything about me upon their site. I gave them a more than reasonable amount of time to remove my name from their site.

In my opinion, their content and lack of control of content and lack of policing the accuracy of content reflects unfavorably upon me in a professional capacity, and I no longer desire anything to do with them.

As of this moment, they still have not complied with removing my name as a contributor, thus invoking appearance of authority to use my name and image, an authority they no longer have. I have saved the emails and screen capture image (among many other things) from several points this week.

If there are any attorneys reading this willing to take the case on a contingency basis, I am interested in pursuing legal remedies.


The election is in a few days. While it has become plain to me that the reporting of the polls has been manipulated (along with everything else) by a media actively campaigning for Obama, the math apparently says that the amount of manipulation is not enough to flip the basic result: an Obama victory.

I would be very happy to be wrong about this, and enough people to make a difference could still change their mind, but I'm pretty much resigned to an Obama victory.

I'm still going to vote for McCain, and urge everyone I know to do the same no matter how hopeless it may seem to you.

I have seen too much evidence that Obama intends to lead this country into an economic, foreign relations, and Constitutional disaster of epic proportions.

I love this country.

Therefore, I am going to fight until the bitter end to save it.

I am going to the polls on Tuesday. I am going to vote for John McCain. I'm going to continue to urge all like minded voters to do so, no matter how hopeless the election may seem. That's the easy part. Who knows, we may still bring it off. In any case, by making the win as narrow as possible, it will reduce Obama's political mandate - and power to bring about dangerous change. If enough other people follow this path, we may even put enough spine into the Republican congressional leadership to stand up and make the best fight of it they can.

But if Obama wins, I am not threatening to leave the country. I am going to stay and hold that lying two-faced populist, totalitarian incompetent's feet to the fire to the limit of my ability to do so.

I am going to be scrupulously fair and give him credit for anything good he does.

I am not going to make up stuff about him. If what he has said he wants to do is what he does in fact do, the truth will be bad enough to convince anyone even vaguely rational. I won't need to make up chants like the deranged left has done for George Bush.

If the Big Lie works for the left, imagine what pure facts are going to do for the right and center.

I was too young to vote in 1976. But I remember that President Ford's leadership and plans were working, until he lost the election.

I remember all of what Jimmy Carter did. I lived through his hand-wringing about a "national malaise". The national malaise was of his causing.

Jimmy never tried to repeal half of the bill of rights, as Barack Obama has said (and voted!) to do. Specifically, the first, second, fifth, sixth, eighth, ninth, and tenth amendments are in danger of becoming dead letters if Barack Obama wins, and any pretense of the judiciary being neutral arbiters of the law. For that matter, the thirteenth amendment is in danger (the conscript national service corps he wants to establish). If Whoopi Goldberg is worried about being a slave, she should maybe vote against the man who has said he wants to do something that violates the thirteenth amendment, instead of for him because he indirectly shares some genetic heritage with the group who were slaves If you're worried about a draft, maybe you should vote for the man who believes in the all-volunteer military (John McCain), instead of the man who has said he wants to draft people - just not for the military.

Most importantly, Barack Obama has convinced me that he wants to give our most productive citizens and corporations as much reason to leave take their dollars, their jobs, their investments, and most importantly, their innovative energies out of our country and into others as he can. I want to keep these folks around, in this country, so I will raise the biggest voice I can in their defense.

I remember how Ronald Reagan turned us around. I'm looking around, and I just don't see such a figure in national politics today, and what Barack Obama wants to do will bar most of the avenues he had to make his case, get elected, and enact his agenda. So I'm going to stay, and I'm going to make as much of a fight of it as I can, no matter what anyone else does.

Barack Obama is no man on a white horse. He is a trojan horse. I'm fully aware of what happened to Laocoon, but I must stand up and speak the truth as I see it. I love this country too much to stand by, no matter the cost.


Carnival of Real Estate

Carnival of Personal Finance


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Charles Krauthammer: McCain for President

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Newsflash: John McCain's campaign is accepting money without adequate screening for violations of election laws! Clearly he needs to be disqualified from the presidency. Dirty fighter, dirty politics!

Oh, wait. The campaign guilty of that is Barack Obama's. So I guess it's all no big deal? Well, at least according to the mass media and other Obama supporters.

Intimidation of opponents and their supporters, suppressing freedom of speech when it opposes him, and now the dirtiest campaign financing operation in the history of the US. And this guy is supposed to be a "lightworker"?

Investigations afterwards could get to the truth of the matter. But since history is written by the winners, only if John McCain wins the election.

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Video: Oil billionaire claims we're entitled to oil

First off, I disagree with him. If we're not intending to conquer Iraq and treat them as a satrapy, they need to be able to control their own oil. If we behave ourselves, they may choose to sell it to us (and I think they largely do), but there should be no compulsion. That's not what the US is about. That would make it a war for oil.

Furthermore, he forever drives a stake through the ideas that Iraq was a war for oil, or that big oil somehow controls the Bush Administration. If either was the case, we would have done precisely what he is suggesting in the first place, if not something even worse (e.g. giving the oil to Exxon-Mobil) .

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Boy is this getting the approved left-wing spin:

Assassination plot targeting Obama disrupted

Read carefully:

In court records unsealed Monday in U.S. District Court in Jackson, Tenn., federal agents said they disrupted plans to rob a gun store and target a predominantly African-American high school in a murder spree that was to begin in Tennessee

and

Jim Cavanaugh, special agent in charge of ATF's Nashville field office, said the two men planned to kill 88 people, including 14 African-Americans by beheading. The numbers 88 and 14 are symbolic in the white supremacist community.

The men also sought to go on a national killing spree after the Tennessee murders, with Obama as its final target

First off, I want these idiots out of the gene pool, sterilized or placed somewhere that they never have a chance to reproduce. The only reason I'm being that merciful is that law enforcement - and it was BATF that took the lead and held the press conference, not the Secret Service as would be the case for a planned presidential assassination - is that they never committed any actual killings. If they had, I'd be willing to flip the switch on them myself.

But if you read the article, Obama was an afterthought in the nature of "If they haven't caught us by then," not the primary target. If that were the case, he would have been first, and it would have been the Secret Service taking the lead, not BATF

"They said that would be their last, final act - that they would attempt to kill Sen. Obama," Cavanaugh said. "They didn't believe they would be able to do it, but that they would get killed trying."
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Sen. Ted Stevens found guilty in corruption case

I think I may fall asleep, that's such a surprise.

Q: What's the difference between Chris Dodd and Ted Stevens?

A1: The prosecutor in his state is from the same party as Chris Dodd
A2: His party has disavowed the doings of Ted Stevens
A3: His party isn't trying to make excuses for Ted Stevens
A4: (make up your own)

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Oddly enough: The Stink in Farts Controls Blood Pressure

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If this does not kill Barack Obama as a presidential candidate, I weep for our country. This is himself, talking on the radio.

Here he is, speaking in his own voice, talking about the Constitution as an impediment to what he wants. Right out of his own mouth, he convicts himself of worse that our current President has even been accused of.

Bill Whittle, which is where I found it, has much more.

I can't be the only one thinking John Marshall has made his decision; now let him enforce it!, can I?

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Things aren't looking so good for ACORN: Indiana SecState: "Multiple criminal violations" involving ACORN


With a lot of people running around like Chicken Little screaming about the sky falling, a lot of folks who would like to buy property due to the much-lowered prices are wondering if there is any way they can qualify for the loan. There are lots of people out there over-exaggerating the difficulty of getting a loan. Well, we do have some events in the market that make it harder, but despite the Chicken Littles, the answer to the question is "probably yes." There are some exceptions, and some caveats for those who do, but most people actually can qualify for loans to buy property.

The big caveat is that it may not be a huge beautiful home straight out of the showplace magazine in the best area of town. With the imminent death of stated income and no ratio loans, you have to limit yourself to what you can document the ability to make the payments for. The ultimate sin of stated income was that it allowed unscrupulous real estate agents and lenders to sell people properties which there was no way they were going to be able to afford in the long term. There will be legitimate borrowers hurt, and hurt badly, by its demise, but the aggregate damage done by recurring abuse of stated income was far greater the damage that will be done by its demise. I would like to be able to do stated income, but I can't think of any way to prevent its abuse, and so far, neither has anyone else. Yeah, I may think I'm a good guy, but everyone thinks they're the Good Guys, including those who most emphatically are not. Stated income has been so abused in the last few years that I cannot bring myself to excessively mourn its passing despite the damage said passing will do.

The worst fall out of stated income abuse is all of the foreclosures, but right behind that is the death of the idea in the minds of most of the public that maybe someone who makes minimum wage thirty hours a week might have to settle for a property that might not be as big, as beautiful, and as desirable as the person who makes ten times the national median. If you want to make these folks able to afford the same property, there are only two ways to do it: make all properties equally unattractive, or give the government the power to decide who gets the good stuff, which merely substitutes one privileged group (those with special influence over the government - i.e. the point of a gun) for the current privileged group, who at least earned their money via transactions freely entered into where the other person must have seen some benefit. The guy making minimum wage realistically has two choices: Figure out a way to start earning the same money as the guy making ten times national median, or learn to accept that he can't afford quite as expensive a property, and instead of making with the Green Eyed Monster, be happy with what he can afford. There are ways to improve your property, and improve what you can afford, and I love helping those who will put forth the effort, but it's considerably more involved than waving some metaphorical magic wand. For those who think the prices are going to come down further, they are already headed back up in some ZIP codes. You can sit in denial while they do so, or you can take advantage before it gets worse. I've written before about the best and quickest way to get into something you can't afford right now

Okay, enough with the economics lesson. You're here because you want to know if you'll qualify for a loan now, and probably how much you can qualify for. There are basically three loan programs in the first tier for consideration for most borrowers: conventional A paper, FHA, and VA. I'm going to cover each major criterion: loan to value ratio, credit score, debt to income ratio, in order for each in successive paragraphs, followed by an affordability table.

Conventional

Conventional A paper is the most tightened of the programs, and even here more people can qualify than not, even with the tightened qualification standards. Here's the skinny in the current market: Most conventional loan programs want no more than a 90% loan to value ratio. Turning that around, that means you need a 10% down payment for conventional conforming loans (loan amounts up to $417,000 on single family housing). Temporary conforming ($417,001 to your area's limit) and nonconforming (above your area's limit) have larger down payment requirements. There are ways to get down payments in most circumstances if you want to, but the era of being able to in any wise pretend that real estate is somehow immune from real world consequences - like agents and loan officers who told people "Nothing down! Just sign on the dotted line and walk away if it doesn't work out!" are over - and this is one casualty of the current meltdown that nobody with any sanity will mourn. Real estate is a wonderful investment, properly done, but those jokers weren't doing it right. In order to be doing it correctly, you have to plan ahead for what happens next, and have a plan to deal with it.

Now where A paper lenders were accepting credit scores as low as 620, now they are pretty much wanting to see credit scores of 700 or at least 680, at least for loan to value ratios above 80%. It's not difficult to improve credit score into that range if you will try, but it can take a few months. Your choice: You can make the effort and get it done, or you can miss the best buying opportunity we are likely to see in at least the next ten to fifteen years. Or, you can somehow come up with a higher down payment. Your choice. Lenders have the money; they are entitled to set terms for lending it out. You don't want to meet those terms, you can wait until you have enough to pay cash - and paying all cash for real estate isn't nearly such a good investment.

Conventional loans still want to see the exact same 45% debt to income ratio they always have. There is room for some slop at high credit scores or with certain kinds of income, but if you plan for 45% in the first place, you're still within the loan guidelines they will accept. The way to figure this is easy: take 45 percent of your gross pay. Not what actually hits your account - but what your employer actually pays out. From this number, Subtract your ongoing debt service. That's the maximum you can qualify for. If you want to keep it to less, that's actually a good thing in my opinion, but the general issue is that most folks want to buy a more expensive property than they can really afford. Hence, the stated income debacle. The number of people who can stay strong and within a budget when they're being shown much more beautiful properties "for not very much more on the payment" is relatively small. One reason I keep telling people to shop by purchase price, not payment. If it's outside of your budget, it might as well be on the moon for all of the good it will do you.

This 45% of gross income minus ongoing debt service has to cover all of the ongoing expenses of owning a property. Principal and Interest on the loan, monthly pro-rated property taxes, and homeowner's insurance. If they are present, it also has to pay homeowner's association, temporary assessments such as Mello-Roos, and any other regular recurring expense of owning that property. For instance, assuming a 10% down payment, 6% principal and interest fully amortized loan, California default property taxes, and $100 per month for homeowner's insurance, plus 1% PMI for 90% financing (If they promise there won't be PMI for single loan at 90%, they are lying unless it's VA), here's a table of how much you need to make to afford it (assuming $200/month of other debt):



Amount
$200,000
$225,000
$250,000
$275,000
$300,000
$325,000
$350,000
$375,000
$400,000
$425,000
$450,000
Housing costs
$1,537.52
$1,717.21
$1,896.91
$2,076.60
$2,256.29
$2,435.98
$2,615.67
$2,795.36
$2,975.05
$3,154.74
$3,334.43
Income (monthly)
$3,861.17
$4,260.48
$4,659.79
$5,059.10
$5,458.41
$5,857.73
$6,257.04
$6,656.35
$7,055.66
$7,454.98
$7,854.29

FHA

FHA loans are a federally insured loan program that anyone can theoretically get. FHA loans allow an initial loan to value ratio of 96.5%, so you only need 3.5% for a down payment. On the minus side, they charge a 1.75% funding fee, and PMI-equivalent of either half a percent annualized for loan to value ratios below 95%, or 0.55% annualized for loan to value ratios of 95% or greater. The upshot is that they are not free, but you can borrow up to 98.25% of the purchase price of the property (providing the appraisal supports that value). This is the lowest down payment of any generally available loan currently available.

The enabling regulations for FHA loans still do not require any minimum credit scores, which is all well and good, but the lenders have instituted a requirement for credit scores that vary from 580 to 640 in order for them to be willing to participate. They who have the gold make the rules, and they've had what are euphemistically called "adverse results" with lower scores. You may have read about that. The good news is that it's even easier to improve your credit score to this level than it is to improve to the scores conventional loans require.

Maximum allowable debt to income ratio for FHA loans starts lower, at 43%, but the FHA is willing to issue a waiver up to about 49% pretty easily if you will still have some significant money you can access after the down payment (6 months PITI reserves), or in other words, if the down payment does not represent every penny you have in the world. Nonetheless, if you start and plan for 43% and limit yourself to that, you are better off than if you try to go over. According to what people are most often trying to do with FHA, here is a table of what you can afford with 3.5% down payment, assuming 1.25% (California) property taxes, and the same $100 per month insurance as the previous example, and a base loan rate of 6.25%, as FHA rates are usually but not always slightly higher than conventional. Note that the slightly higher monthly costs are a result of the higher amount borrowed - the cost of money is actually slightly lower under the assumptions given. Once again, I'm assuming $200 per month of other debt; FHA is a lot less forgiving about front end ratio than conventional.



Amount
$200,000
$225,000
$250,000
$275,000
$300,000
$325,000
$350,000
$375,000
$400,000
$425,000
$450,000
Down Payment
$7000
$7875
$8750
$9625
$10,500
$11,375
$12,250
$13,125
$14,000
$14,875
$15,750
Housing costs
$1,608.28
$1,796.82
$1,985.35
$2,173.89
$2,362.42
$2,550.96
$2,739.49
$2,928.03
$3,116.56
$3,305.10
$3,693.63
Income (monthly)
$4,205.30
$4,643.76
$5,082.21
$5,520.66
$5,959.12
$6,397.57
$6,836.02
$7,274.48
$7,712.93
$8,151.38
$8,589.84

VA

The VA loan is a benefit earned by those those who have served in the armed forces. I don't know what the minimum service requirement is, but I do know that they allow a maximum loan to value ratio of 103%. A veteran literally does not have to come up with a down payment. Not only that, but they can include up to 3% of the purchase price into the loan on top of the purchase price. Not one other (non-scam) program I am aware of has ever loaned over 100% of value of the property, and this one is still doing it. Unlike the FHA, the VA only charges a funding fee of half of one percent, and no financing insurance. Furthermore, the funding fee is waived for those with 10% or more service disability. I certainly wouldn't serve in the armed forces just to be eligible for a VA loan, but it is a nice thing that veterans earn for all that they have gone through.

Credit score is as the FHA: none required in the regulations, but the lenders want to see the same basic minimums (580 to 640), and for the same reasons. Once again, credit scores are not fixed and immutable and they can be improved as well as hurt by events. Just because you suffer a blow to your credit does not mean you cannot counter-act it with by making an effort to improve it.

Debt to income ratio is the same as the FHA at 43%, with the same waivers possible for higher. Given the way most folks use VA loans, I am going to use an example of loans for 103% of purchase price, at 6.25% (for the same reasons as FHA), with, once again $200 per month of other debt service assumed. Once again, the reason it is as close as it is to the others here is due to higher loan balances under these assumptions. If you compute the same situation for all three loans, the person with VA eligibility will pay less than either of the others until the loan to value ratio is below 80%, when the conventional loan will be best. Keep in mind that in this case, the VA loan balance is about 14% higher than the conventional, yet the cost of housing is very comparable, and the VA has by far the lowest down payment requirement ($0).



Amount
$200,000
$225,000
$250,000
$275,000
$300,000
$325,000
$350,000
$375,000
$400,000
$425,000
$450,000
Housing costs
$1,576.71
$1,761.30
$1,945.89
$2,130.48
$2,315.07
$2,499.65
$2,684.24
$2,868.83
$3,053.42
$3,238.01
$3,422.60
Income (monthly)
$4,131.89
$4,561.16
$4,990.44
$5,419.71
$5,848.99
$6,278.27
$6,707.54
$7,136.82
$7,566.10
$7,995.37
$8,424.65

Now there are other programs that make it easier to afford real estate, or to come up with the down payment. The Mortgage Credit Certificate and your locally based first time buyer program are a way to increase affordability and possibly come up with a down payment without saving it yourself. The drawbacks to these programs is that their budgets tend to be very limited, and what there is evaporates quickly when they do get an allocation of funds. The three basic loan types are there 365 days per year, and I've never heard of them being unwilling or unable to lend to a buyer who met their qualifications. Providing you meet them, you can get a loan, and therefore, you can buy real estate if this market strikes you, as it does me, as significantly underpriced, given the scarcity and ability of people to pay. Or as Warren Buffet says, "The time to buy is when there is blood in the streets." This principle is no different for real estate than it is for stocks or whole companies. If you can afford to buy with a good sustainable loan, you will be very happy that you did in a very few years.

Caveat Emptor

Article UPDATED here

Appraisal Fraud

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This article is a reprint.

I enjoyed finding your blog today. It was enlightening, particularly in the area of real estate appraisals. Mortgage fraud is something I've been reading about lately. Since the FBI says 80% of it involves collusion and usually with the appraiser, it made me wonder why underwriters don't just ask for second appraisals when a loan looks like it could be part of a flipping scheme (e.g., the owner hasn't had it for long and the new appraisal has it coming in much higher than the last one). Have you looked at this area at all? I'd be interested in your point of view.

Appraisal Fraud is more of a problem than it was. A couple of years ago, the appraisal was treated and regarded differently than it is now. On the one hand, appraisers were regarded as gods sitting in judgment of a property, which never was true. They're human, subject to human foibles and tendencies. On the other hand, it has perhaps swung a too far in the opposite direction, with many appraisers doing whatever the loan provider wants in order to continue to attract business.

A good balance is somewhere in between. Appraisers don't want to work any harder than necessary, of course, but they've got to remember that they are, first and foremost, businessfolk selling a service. I agree with the law that says minimum appraisals are prohibited, as it protects everyone. On the other hand, when I ask an appraiser to reconfirm if comparables don't support a value of $X, what I'm trying to do is protect my client. This gives me a chance to re-work the loan, or re-open negotiations with the seller, before my client has wasted hundreds of dollars for an appraisal that doesn't help. Eighty to ninety percent of the time, the appraiser who tells me the value isn't there gets paid anyway, because I can re-work the loan or renegotiate the deal to the point where everybody's happy and the transaction proceeds. If the appraiser just goes out, takes the check, and drops an appraisal that's $20,000 low on my client, I have a screaming mad client on my hands who is poison to my business because in their eyes I was the one who "tricked" this money out of them, and perhaps a seller and seller's agent who are angry as well because I hired an "incompetent" appraiser, with repercussions next time I write an offer for one of my clients, and nobody is happy, least of all me.

On the other hand, an appraiser who is willing to manipulate the data to come up with value no matter what is one I want to stay away from, and it's because of fraud. If there's no default and the loan gets paid back in full, appraiser fraud doesn't matter. But that's not the usual thing that happens with appraiser fraud.

I keep writing that a certain percentage of all attempted real estate transactions are fraudulent, and a good agent and especially a good loan officer keeps their eyes peeled for evidence. Real Estate transactions are very large dollar amounts. A one bedroom condo around here goes for over $200,000. This is more than most families make in a couple of years. An average single family residence might be $500,000 or more. This makes the temptation level considerable, and there are always folks around who have an eye for the quick easy dollar and never mind the effects on others or the prospects of prison if caught. Sometimes the lender is the intended mark, sometimes the other party to the transaction. I could tell you about all varieties of scams, but appraisal fraud is one of the most common.

Before we go any further, let's examine what an appraisal is. Accountants value goods using a method called "Lesser of Cost or Market," or LCM for short. This means a given property is valued for accounting purposes at either the purchase price (cost) or appraised value (market), whichever is lower. But this has been modified from its original form for real estate lending purposes, because in the real world real estate appreciates in value. At purchase, the cost or value argument still applies. No matter what, the lender will not lend based upon a value greater than the purchase price. Later on, however, they will, because land does not depreciate, it does not in general vanish or get used up, and it does increase in value (Pretty much universally over time frames of a decade or more).

This gives scam artists all the leeway they need. Some of them are relatively harmless, in that all they're looking for is a better rate on a loan that they do intend to repay. This doesn't mean it's smart to cooperate with them, as many agents and loan officers who did are likely to discover quite soon, as the loans default and the lender investigates why. The balance sheet reads a little differently when you discover that cooperating with the guy who just wanted to cut a few corners is going to cost you your license.

Appraisal fraud, however, is usually aimed at a large quick score. I'm going to keep my examples basic, lest I inadvertently release a couple more ideas into the wild. Let's say you own a property that's worth (pinky finger extended) one million dollars. You owe $900,000. If you sell, you're going to net about $30,000. But if you can persuade a buyer that property values are increasing much faster than they are, many will bite off on an increased sales price. You tell the appraiser "Appraise it for $1,250,000 and it's worth $25,000 to you!" He does so. You pay him his $25,000 and your net is still around $235,000 to $240,000. It's fraud, but fraud that many folks have gotten away with because the buyer doesn't realize he's been had and keeps paying the bank. Or you can't keep up the payments but want to walk away with as much cash as possible. Instead of a distress sale, where you'd be very lucky to break even with a sharp buyer's agent, you pay the appraiser $25,000 to appraise it at $1.25 million, refinance for cash out to maybe 90 percent of that value, pay the appraiser and walk away with a cool $200k, never making a single payment on the new loan.

Appraisal fraud can also be intentionally low. A buyer wants to buy the property, pays the appraiser to appraise it low, and renegotiates the price. I had this tried on me about two years ago. It didn't work.

Now once upon a time, there were real constraints to keep an appraiser from pulling this, on residential properties at least. To a certain extent, there still are but those guidelines have been relaxed due to the hypercompetitive market we've had the last few years. For instance, it used to be that the lenders would accept a value for a property on a refinance no higher than an annualized increase of 10 percent for the first couple years. That's gone by the wayside, as lenders get used to the fact that values are increasing faster than that. With many lenders, it's whatever the appraiser says the day after the sale. This is an invitation to fraud. Invitations to fraud do not excuse fraud, but they certainly make it easier. It used to be that no matter what, you couldn't pull cash for six months after a sale. That's now changed.

Underwriting in many lenders no longer has to pass a "smell test," where the lender pulls up the local market and sees what similar properties have really sold for recently. They're competing for loans! First time they tell the folks "no" that loan officer may not give them any more chances to do loans, choosing instead other lenders with more accommodating employees and policies. They have to do loans to stay in business, and avoid layoffs, but those lenders with more accommodating employees and policies are going to be in a world of hurt if the local market cools much further.

Now appraisers that do this are subject to discipline and legal penalties, starting with the fact that the lender has the option of never accepting one of their appraisals again and going up through loss of license and jail time. I'm not up on the penalty structure, but fraud that costs in excess of $100,000 is a serious felony. They've got the appraiser's name, license number, and other identifying information. In my opinion, aiding and abetting fraud is stupid and if you can't get them to fly straight, walking away as quickly as possible is your best option, but real estate compensations (and the amounts at stake) are large enough that many will do it. If you're not a pro yourself, your best protection is a good agent that's working for you, not splitting loyalty between both sides of the transaction, and making sure somebody working for you is there at the property to meet the appraiser.

Caveat Emptor

Original here


(expletive) unbelievable. Or rather, should I say, all too believable: House Democrats Contemplate Abolishing 401(k) Tax Breaks

Words fail, but I'm going to try anyway: Do you have any idea how much of a difference for the worse it will make for the economy? Do you have any idea how much it will hurt the retirements of the "working class" folks they say they are trying to help? For the economy, about the size of the mortgage meltdown bailout every year, while restricting our economic growth rate by at least a third. For the 401k, do the math with a 28% yearly drain on contributions and income within the account, and over a 40 year working lifetime, it cuts the size of the nest egg by a much larger factor than the tax rate.

It is the fact that this money currently accumulates tax deferred which is the biggest reason why it is a good investment. The company match is actually number two. Let's say you contribute $1000 per year. If you contribute multiple thousands, just multiply the results by however many times you contribute $1000. If you get an 8% compounded rate of return, this will cut the size of the nest egg from $281,000 per thousand per year, to $112,000 - sixty percent of the money just gone, and seventy percent of the actual increase in value (you would have $40,000 even if you put it in a mattress). And here's the sick part: For costing you $169,000, the government only collects $43,000 in taxes! If they just waited until you start withdrawing, at the end of your career, they'd get close to $79,000 at the same tax rate! Is this brain damaged or what?

Don't believe me? It's pretty trivial to program in the spreadsheet of your choice.

Change the assumption to a 10% rate of return (very achievable), and instead of $488,000 times however many thousands of dollars you contribute, you only have $163,000 as the multiplier, and the government only collected $63,000 in taxes, as opposed to over $136,000 if they just waited.

Admittedly, there's also Time Value of Money calculations to make, but this is just so unbelievably stupid that I had to check my calendar and the date stamp to make certain it wasn't an April Fools Day joke taken out of context. This is lose-lose-lose by any measure - unless your only criteria for "benefit" is "the government gets your money now"


Having had two separate very qualified buyers ask me if they could get a loan in the last two days was kind of an eye opener to all of the hype out there about how difficult it is to get a loan currently.

Things have swung just as far the opposite direction to how they were at the top of the market. Instead of far too easy, lenders are making it significantly harder to qualify for a loan than they really should. This won't be permanent, but right now with mortgage investors in "panic meltdown" mode, the lenders have to show them that every loan they give out really is a good loan. Therefore, the underwriting standards have been tightened - I believe over-tightened. But there are still loans available.

The first thing we need to go over is that stated income is essentially dead - if it were in a hospital, there would be no nervous activity, and the body would be relying upon artificial life support to keep the heart and lungs going. Freddie Mac is still theoretically willing to buy them for self-employed borrowers, but it's very hard finding a lender willing to fund it in the first place, and both them and NINA (aka "no ratio" loans) are going to be regulated completely out of business very soon. For those who are not self-employed, they are already gone. If you want to talk about there being lots of folks who will be unable to get real estate loans, despite having good credit, a good income, and a substantial down payment, I would have to agree with you that the situation is bad. Unfortunately, we have seen proof that there is just too much abuse.

Now my clients have always been 95% full documentation. But if you're someone who relied upon "liar's loans" to make the whole real estate process seem painless and easy in order to enable people to stretch for properties that they cannot really afford, or any of a number of other problems, this is the apocalypse. I think that it's a good thing these folks are complaining so much - it's a red flag about the way they do business, telling you to stay away. If you want to know why it's a red flag, ask them for a list of their clients during the period the market was hot, and see how many of them have had a Notice of Default (or worse) recorded against the property. As of right now, my total is zero.

There is one thing you can say about full documentation loans: They prevent people from stretching to buy properties that they cannot really afford. Before I move on, I should say that there are non-residential alternatives - but the down payment and interest rates will be much higher.

To counter-balance the demise of stated income, the allowable debt to income ratio has not moved at all. A paper is still looking at 45% back end debt to income ratio, FHA will accept 43%, with waivers for higher if there are decent reserves pretty easy up to 49%. So you can still afford a loan that is just as many dollars as ever, but you'll have to have a bit more in other departments.

Credit Score has tightened up considerably, particularly in conjunction with Loan to Value Ratio. When three years ago, a 620 credit score was good enough to get you 100% financing on a stated income loan (subprime), these days the lenders want to see decently high credit scores. A paper lenders are wanting to see 680 or 700 credit scores from anything over 80% financing. The few subprime lenders left are trying to reinvent themselves for the A paper and government market. Those folks with lower credit scores are being asked for higher down payments. Two years ago A paper full documentation loans at 100% of value (albeit with PMI) was very doable. Not so today. The PMI insurers don't want to touch anything over 90% loan to value no matter what the credit score, and neither do the second mortgage holders. I think I may have the ability to get 95% financing for non-government loans, but I won't be certain until someone asks for it and it actually funds.

Lenders are very skittish about low down payments. The only ways that I'm certain I can get a less than ten percent down payment through is with a government guarantee on it - either VA or FHA. On the plus side, the government has finally acted to increase the FHA loan limits, and lenders are deciding to accept the VA guarantee for larger loans as well, the limits that made these programs useless in higher cost areas have now been amended to the point that they are useful. Now, once upon a time, VA and FHA loans did not require a credit score, but lenders have now instituted minimum credit scores, even with the government guarantees these loans carry. They want to see anywhere between a 580 and 640 minimum credit score, depending upon the lender, in order to fund these loans. Note that even a 640 credit score is still eighty points below the national median credit score of 720. They're not trying to cut folks off from home loans. They are trying to cut off the worst credit risks, as just because there's a government guarantee does not absolve them of their responsibility to deny credit for applicants that have a history of bad credit and are therefore a good bet to repeat the performance. In financial circles, this is called "due diligence."

A 640 to 680 credit score is very attainable quickly (and usually cheaply) if only you will work at it - pay your bills on time, use credit responsibly, and maybe clean up some past problems. I have seen a guy less than three weeks out of Chapter 7 bankruptcy with a 686 credit score. I keep telling people this, but it doesn't seem to be getting through: Your credit score is worth obsessing over, and any instances where you may think you got away without paying for something are likely to cost you far more than you think you got away with. These days, it may be the difference between getting a home loan during what is almost certainly the best buying opportunity there will ever be again (at least here in San Diego, and probably in most other high cost areas), and not being able to get a home loan at all.

So what is available? I'm holding these rates overnight so that they're no longer current quotes, but without any points, I had a 30 year fixed rate loan at 5.90 percent while I was writing this. Keeping in mind that there is always a tradeoff between rate and costs of a mortgage loan, the best thirty year fixed rate loan that I could do for one point or less was at 5.75 percent (0.8 points), and if you were crazy enough to want to pay four points, you could have gotten a rate as low as 5.25%. I'm going to publish these without looking at the rates in the morning beforehand - they won't be identical, but should be within the same ballpark. This was for an 80% loan to value ratio, loan amount between $110,000 and $417,000, credit score of 720: right on the national median credit score, in the range of loan amounts that are what most folks want, and right on the traditional loan to value ratio. There are adjustments and such if you want a higher loan to value ratio, as well as PMI, but loans are very obtainable so long as you limit yourself to buying property you can prove you can afford, as is required by full documentation. FHA loans have a different structure and go to 96.5% loan to value ratio, and VA loans go to 103% loan to value ratio (a well earned benefit for those who serve honorably in our military).

My point is this: There's a lot of Chicken Littles out there right now, running around squawking about the sky falling, and the economy does have problems (the magnitude of which was largely caused by those Chicken Littles running around telling people how awful things were - I'm looking at you, Charles Schumer, among others). But on the level of one buyer of real estate who needs a loan, loans are very obtainable. Indeed, if lenders weren't willing to write new loans, they might as well close their doors and dissolve their loan programs. They wouldn't have to keep paying their loan folks in that case. However, lenders want very much to make good loans that have a good chance of being repaid.

Caveat Emptor


Carnival of Personal Finance

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Bill Whittle illuminates some real problems in our system of income taxation.

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Wizbang: Gallup and New Coke

Yet another iteration of the Rule of 48. For several years, it was believed that humans had 48 chromosomes. There were multiple studies that announced this result.

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The (reasonably) comprehensive argument against Barack Obama

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Would the Last Honest Reporter Please Turn On the Lights?


I keep reading stuff on the internet advising people who are upside down to just walk away if they are a upside down on their mortgage. This has got to be right up there with the worst financial advice I have ever heard.

Here's the thinking: You owe more than the property is worth, and the loan is non-recourse. So the thinking goes that if you just stop making payments and walk away from the property, you're essentially paying yourself the difference.

Not so.

First off, debt forgiveness is taxable income. You borrow $500,000 for a home, that's exactly the same as the lender handing you $500,000. If they only get $400,000 back when the home sells, that's $100,000 of taxable income to you. While it is true that there is currently a temporary amendment to the tax code still on the books at this point in time, it is set to expire at the end of 2008. It is possible that Congress will act to extend or reinstate it, but my guess is that they will not, and if they do, there will be enough exceptions to make it useless for 95% of the people. The lenders really don't like this as it encourages people to lose them money, and contrary to campaign propaganda, it isn't the Republicans who have been dancing to the tune of the lender's lobby. Furthermore, it's already too late to start this process going, as it is the effective date of the final dispository sale which controls the rules in effect. You start right this instant as I'm writing this, and you're looking at something in late February of 2009 if you're exceedingly lucky. Even if you had given the lender a deed in lieu of foreclosure back in June, it still would have been iffy, and most folks force the lender to go through the whole foreclosure process.

Second, your credit is going to take a hit that is going to last up to ten years. Not seven, not two. From Form 1003, the federally required loan application. Every single real estate loan through a regulated lender must use this form. Some of the "Thirteen Deadly Questions" on page four of the form:

a. Are there any outstanding judgments against you?

b. Have you been declared bankrupt within the past 7 years?

c. Have you had property foreclosed upon, or given title or given deed in lieu thereof within the last seven years?

...

e. Have you been obligated on any loan resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment?
f. Are you presently delinquent or in default on any federal debt or any other loan, mortgage, financial obligation bond or loan guarantee?

Look at question e again. There is no time limit. You will be answering that question "Yes" for the rest of your life. If you want your loan approved, even forty years from now, I strongly suggest you have done everything you possibly could to make good on the debt. Judgments typically last ten years, as does the notation, "Settled account." You are going to have a period of two years where lenders can't touch you, even if they want to, it can be ten years before they're willing to take a chance, and you're going to be sweating the fall-out to question e for the rest of your life, because that is cause for extra underwriter scrutiny, and a lender being unwilling to approve even minor variations forever.

Now here's something lots of folks aren't considering: It's true that purchase money loans are non-recourse in California and many other states. That's a good thing, as far as it goes. But there are limitations upon that. One of the limitations is fraud. here's the legal definition of fraud:

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Did you "shade the truth" on your loan application? Lots of folks did. Right now, this is a big problem, and one reason why I have always hated stated income loans. Just because the lender doesn't hit it today when the property sells, doesn't mean it goes away. The lender has a minimum of three years to file a suit. They may file a suit even on comparatively small amounts of several tens of thousands of dollars, hoping that you don't show up in court. If you don't show up, the default judgment is entered against you, and that is very hard to overturn. If you lied on your loan application, that turns even a non-recourse loan into a recourse loan. They can go after savings, retirement assets, pension plans, attach your paycheck, you name it. Even if they don't want the rigamarole themselves, they can sell the rights to collect, or even put them out to law firms looking for a bounty on whatever they can get out of you.

Furthermore, if there's some reason to do so, they can pass the paperwork on for criminal investigation. Fraud carries criminal penalties, and it's the government footing all the bills of pressing the case.

Now here is another reason why you shouldn't walk away: If you do so, you are taking all of these consequences and bringing them into the here and now of concrete consequence of actions that have already been taken. But the real estate market is cyclical. Just keep making your payments, and it will come back (it's already starting to rise again here in San Diego, and we're still hip deep in short sales and foreclosures). Maybe there are some exceptions to this, but I'm not aware of any.

Let's look at a personal experience I had with my first property. Bought for $90,000 in 1990, value peaked at $106,000 the next year, then crashed to $63,000. I didn't buy "zero down" like probably the majority in the recent price runup, but the principle is the same. Some people thought they should walk away. Having lived through four previous cycles locally, I just kept on keeping on with the payments. By 1996, the property was worth more than I paid again, and not too long after, people who had just kept on keeping on with their payments were in a position to sell for a huge profit.

Had I sold while the property market was down in the nineties, I would have suffered most if not all of these consequences. By just making the payments, I effectively let time fix the market for me.

By making those payments, all you're doing is sitting on a temporary loss on paper, as opposed to turning it into a hard loss with real world consequences. The paper loss has precisely zero importance - unless you sell while the market is down. The only times the value of the property is important is when you refinance, and when you sell. It doesn't matter what the value is at other times - unless you make it matter by choosing to sell. If you've got a sustainable loan, keep making the payments, and in two years or five, you'll be in a position for make money again when you sell. What's hurting the real estate markets badly is excess supply and low demand, caused by people who have no choice but to sell, and fewer buyers than usual. What happens when these conditions go back to a more normal market? That's right, the prices go back right where they were - if not higher.

Furthermore, if you get out by selling short or through foreclosure, it's not like you're going to be able to jump back into something else any time soon. Absolute minimum two years, as above, and perhaps much longer than that. You jump out of an upside-down mortgage, and you're going to be sitting out the absolute sweetest time to be in the market - right when it starts to recover. You sell or allow foreclosure, and you turn that theoretical paper loss of $100,000 into a real concrete loss of $100,000. That's permanent, and you're out of the market until lenders are willing to take another chance on you, which could be never. But, if you stay in the property, when it starts gaining value again, you're still in the market. I know lots of people that turned $30,000, $50,000, $100,000 or more of temporary paper losses into profits several times the size, simply by holding on and allowing the market time to recover. Profit or loss on an investment is measured solely by price at acquisition versus price at disposition. If you buy for $500,000 and sell for $300,000, it makes precisely zero difference that it was worth $700,000 at some point in the middle. Similarly, if you buy for $300,000 and sell for $500,000, the fact that the property was worthless at some point between is irrelevant to the fact that you still made a $200,000 profit.

If you have an unsustainable loan, there are options to deal with the problem. Refinance if you can. If you can't, call your lender and see what you can work out, or try a loan modification. For their part, lenders are trying to keep the problem from getting worse than it has to be, and every time someone takes a loss because they couldn't hang on, the lenders take the exact same loss if not worse. There are limits to what they are willing to do, but I am amazed at some of the deals they really have accepted because they believe it is better than what will happen if they don't. Which situation would you rather be in: able to hold on and eagerly awaiting the market comeback that's going to happen, and will benefit those than hang on, or stuck with a bad situation permanently because you couldn't stand the thought of being upside-down on paper?

Caveat Emptor

Article UPDATED here


In talking about loan modification, I have said it is not a panacea. Let's look at why not, and situations where it just flat out is not going to work.

Loan modification is a strategy for the lender to mitigate their loss, not a "be kind to borrowers" holiday. The lender has to make out better by agreeing to the loan modification than anything else they could do. This means if they can get all of their money by foreclosing, but won't get all of their money via a loan modification, then they will foreclose. The first rule of getting a loan to pay for a property is that the lender always gets every penny of their money first. If they hadn't loaned it to you, you wouldn't have the property in the first place!

The obvious situation where a loan modification is not appropriate is where you have the ability to refinance. If you have the ability to refinance into something more sustainable, I'd suggest doing so without delay. The fact that you don't want to or may be hoping for something better is unimportant. What you're trying to do is keep your property, and not kill your credit-worthiness. If you are able to refinance, get it done.

The second situation is if you have 20% or more equity. In such cases, the lender is going to tell you to sell or refinance the property if you can't make the payments. Never mind that the market is down and it's a rotten time to sell, if the sale of the property will clearly net the lender their money, they are probably not going to agree to a loan modification. Plus, if you do sell, you come away with some cash. If you decide not to sell despite the lender's advice, they will foreclose. They're still going to get their money - which is what you agreed to when you took out the loan - before you get a penny, and you're still not going to have the house. I've written before about what happens to equity under foreclosureThe fact that you don't want to is basically irrelevant. Here's the situation: You owe them their money. You agreed to pay it back in order to get custody of their money and buy the house. They want it: They have shareholders to whom they have a fiduciary duty to get the best return on their money.

The third situation is if you have no income, or a clearly insufficient income to ever pay the loan back. If you're unemployed, there's not an income there to make the payments with. If you were a million dollar per year stockbroker, but now you're a minimum wage employee, you're not going to keep your million dollar property. You are asking them to modify the loan to help both you and the lender. But if the debt to income ratio is not going to work at any reasonable rate of interest, why should they modify your loan if there is no ability to make the modified payments? If all you can afford is 0% interest for the forseeable future, it's only going to get worse from here on out. They might as well bite the bullet and foreclose, because modifying the loan isn't going to do them any good. You''re still going to need to be foreclosed upon.

The fourth situation is new debts - particularly voluntary ones. Some folks see themselves headed off the edge and charge up a storm on all their credit cards, and take out loans for cars, furniture, etcetera. They figure that bankrupt for an additional $100,000 isn't any worse. They're wrong, by the way. If you only have one debt you can't pay, but four credit cards all with zero balances and you go to bankruptcy, you only included 20 percent of your lines of credit in the bankruptcy, and that hurts your credit a lot less than including those four cards and five more tradelines. The person who goes bankrupt with only one bad line of credit while keeping several good ones will probably still have open lines of credit, to boot, and therefore the means of re-establishing payment history. The zero balance credit cards will likely move you to a higher interest rate and more unfavorable terms if you declare bankruptcy, but they will quite likely want you to remain their customer. After all, they got every penny they were due from you!

But if you just took out another $20,000 in debt, that is, in the lender's eyes, evidence of irresponsibility. You already can't make your debt payments, and you go out and get some more? In cases like this, they're not very forgiving of the behavior. Why should they modify their loan when to their eyes you are simply likely to go out and get yourself further into debt?

Loan modification is a possible way out when you cannot refinance, there is no equity, and you have an income and have been behaving responsibly. You just got caught by circumstances beyond your control. If any of these do not apply, you shouldn't expect your lender to agree to bail you out by modifying the loan, when there is clearly no incentive from their point of view in doing so, and they're just going to lose more money if they do.

Caveat Emptor

Article UPDATED here

Okay, I'm excited about this subject, which is why two articles back to back on Mortgage Loan Modification. There's a reason. For the first time ever, I am getting access to a tool that will enable me to keep sixty to ninety percent of the people in trouble from losing their houses. This article will talk about what effect it will have on the overall market, even those who aren't in danger of losing their property.

First off, there's the individual angle. If these folks are forced out of their property while the market is down, it turns a paper loss that doesn't really mean anything into a hard loss which has real financial consequences. If they bought for $500,000 and sell for $300,000, or are foreclosed upon, that's $200,000 in real wealth that has disappeared. Split it between the lender and the borrower however you like; it still doesn't do either one of them any good. If they are able to keep making their payments until the market comes back, they will have an opportunity to at least break even. Lots of folks were upside down on our mortgages in the early nineties. We didn't have idiots on the world wide web telling us to "just walk away" as if there were no consequences to doing so. There are very real, very long term consequences. For one thing, the tax forgiveness for short sales sunsets at the end of 2008, and it's the date of the final dispository sale that controls everything. In other words, with about 75 days left in the year, you're probably not going to make it under the deadline if you start right now. How would you like to get a bill for taxes on $200,000? Congress may still take action before the end of the year, but I wouldn't bet on it with the election coming.

Because they are still in the house, they have not converted an unimportant paper loss which doesn't really mean anything to a hard loss that has long term financial and credit effects. Furthermore, they're not homeless, or further straining an already impacted rental market. Finally, by keeping the folks in ownership of the homes, it is giving them a chance to participate in the recovery of the market. We've seen a tiny bit already in some ZIP codes in San Diego county. Furthermore, inventory is dropping in many areas of the county as well. Back in August, there were 107 homes for sale in La Mesa below $500,000. This morning there were 80. San Carlos, El Cajon, and Santee are all showing similar inventory numbers to August, but those numbers are themselves down from earlier in the year. Furthermore, the number of sales in September were up 56% over a year previously locally. Higher demand, lower supply means higher prices coming. If these folks hold on long enough - and you might be surprised at how short a time that will be - they won't be trying to sell while upside down. They'll be a normal, everyday sale, and they'll walk away from closing with money - maybe enough for the down payment on another property. Possibly even enough for the down payment on a better property. Isn't either one of these better than the consequences of a
short sale or foreclosure, to say nothing of the fact that they don't have the humiliation of having to talk about a negative event for the next seven to ten years, especially with their own kids.

By modifying the interest rate, term, or amortization characteristics of the loan, it keeps folks in their houses when the market is glutted with inventory, and buyers are still below expected averages in number. Supply and demand. High supply, low demand. But if we don't add to the problems, the market will work itself out and prices will recover.

Now let's look at the aggregate effect: every time we add a new seller unmatched by a buyer to the marketplace, the price falls. When you're not doing that anymore, the prices stop falling. Maybe they even start recovering. There's only going to be so many buyers over the next year. Every time we avoid adding excess inventory to the market because they absolutely have to sell, we end up ahead of the game. If we can avoid adding more sellers until the excess inventory is gone, prices will start to rise. Supply and demand.

Now let me ask you what happens when prices start recovering? First, a bunch of new buyers that have been holding off for three years now decide it's not going to get any better, and off the sidelines they come. The very fact that these people come off the sidelines, thereby boosting demand, means prices will rise more. And here's the kicker: Once the lenders see prices rising again, they will relax lending conditions a little bit, meaning more people now qualify for a property, and they come off the sidelines also, because the mortgage market controls the real estate market. This is a positive feedback effect - our old friends fear and greed take over as even more people come off the sidelines so they can participate in the resulting orgy of buying. A million people selling for $300,000 when they owe $500,000 is a personal and national tragedy. A million people who used to be upside-down selling for $600,000 when they owe $500,000 is business as usual, and making a profit after the lender and everybody else gets all of the money they are entitled to.

Now to be fair, it also slows the recovery after a certain point, as people who were upside-down can now sell for a profit, and individually, some of them will decide to do just that as soon as it happens. Having been upside-down, particularly upside-down and helpless, is a life changing experience. This will have the effect of a light tap on the brakes upon values just when, if people had not been able to stay in the homes, prices would really be taking off. I think that's all to the good. Anything that helps avoid a repeat a mess like we're working our way out of right now. There is always a substantial portion of the populace driving with their eyes closed, assuming that because a type of investment gained 20% last year, it will do the same thing this year (or because it lost 20% this year, it will do the same thing next year. As anyone over the age of eight should know by now, that conclusion does not follow from the premises.

Caveat Emptor


A very good article: What's good about McCain-Obama mudslinging

I'll push my own Straight Talk Express even further: Any democracy demands negativity. Our nation rests on the idea that ordinary citizens can replace one set of leaders with another. But to make that change, we need those out of power to explain what's wrong with those in charge. The beauty of our system is the peaceful transfer of power, and that absolutely requires negativity.

Criticism that is truthful and to the point serves a vital function. So does criticism that is not - it tells you quite a bit about the people making or sponsoring it. And who does the vetting? The individuals who see it. Criticism is a two-edged sword. It has the potential to hurt the one making it as badly as the one who is the target of it. This makes it valuable to those making the decision.

The problem is neither advocacy nor negative ads. The problem is that the guardians of public discourse (major media) are pretending to be neutral when they are not. In actual point of fact, Fox, reviled on the left for its supposed right wing bias, has repeatedly been measured to be the only major network within the margin of error of being neutral.
(as determined by ratios of percentages of positive and negative mention of partisans on each side of the aisle). The others are all Democratic partisans to the tune of multiple sigmas. This would be tolerable if they held themselves up as Democratic partisans - but then they'd lose audience share even faster than they are. So they cling to labeling themselves neutral, even though they are not.

Don't believe me? Here's a side by side comparison between the Obama campaign's official talking points, and the New York Times.

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A reporter hallucinating that the crowd at a Palin rally was saying "kill him!" (Obama). The Secret Service never heard it. Neither did any of the other witnesses interviewed.

now a second allegation has the Secret Service investigating, but again finding no evidence.

by comparison, a search on Google yields almost 800,000 results for "kill bush", and while I was typing it, Google was trying to suggest "kill bush games" and "kill bush online games" among others.

Two allegations by single individuals in crowds of thousands where no other witness has come forward, and it's a problem for Obama and his supporters. Nearly 800,000 instances from an on-line search anyone can do and verify for the incumbent president, and it's somehow not a problem for Obama's supporters? Including at least three commercial enterprises (on the first page of results) and some unknown number of their subscribers, large enough to make offering such things profitable?

1) Is the entire game simply to slander Obama's way into office?

2) Are they really that stupid that they cannot see the contradiction?

3) Do they think it is somehow okay because "We're the Good Guys&trade"? Last I checked, they were slandering the American military, who really are the Good Guys, for holding enemies captured in battle as prisoners of war and not doing enough to not kill people they don't absolutely have to, even when those involved are enemy combatants and our own troops take casualties because of it. The point is this: The Good Guys are the Good Guys because they don't think like that, and they don't act like they think like that. People who think and act like this aren't the Good Guys.

Let us suppose that Obama is inaugurated President, and some sick Republicans decide to copy the "kill bush" games straight across to "kill Obama", changing nothing but the name (and target silhoutte, if appropriate - I certainly wasn't going to sign up for something that sick). Is there anyone reading this that would think that would somehow be okay? How could one possibly be acceptable - to the Secret Service or anyone else - while the other one is not?

For that matter, I must be some kind of old dinosaur for believing the whole idea is unacceptable. And let me ask: What next if the unthinkable does happen and we lose either Bush or the new president to an assassin's bullet? How funny is it going to be then? Do you think there might be a little bit of societal backlash? For illustration purposes, suppose there had been an ongoing "Kill Kennedy" game going on in 1962 and 1963? Do you think maybe there would have been some blowback when Lee Harvey Oswald did his deed? And here's a really chilling thought: Suppose Lee Harvey Oswald had participated in such a game? What do you think might happen to the other participants and those who ran such games? Obviously, in that case, it wasn't all harmless fun. There would be a dead president to prove it. Prosecution of such individuals and corporations would not be likely to be dismissed under the heading of "protected speech," because there is a clear exception in the law for threatening speech or expression of any sort, under which heading this sort of nonsense would obviously fall in such circumstances.

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I was unable to watch the debate last night, as I was with clients and forgot to record it.

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Disco tune "Stayin' Alive" could save your life

That's enough for me to forgive the Bee-Gees for having recorded it. I was a senior in high school when it came out, and I will never like the tune, which was played ad nauseum (and almost ad infinitum) everywhere that year. I was driving to work one day, and it was synchronized to the word on three different radio stations. Bad enough that they all - even FM stations - played it every hour. It was alright the first few times, but after several months of you can't listen to music for five minutes without hearing it, I was ready to do violence.

Mortgage Loan Modification

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It is a great feeling to suddenly have a tool that I can use to keep people in their homes, rather than going through foreclosure or short sales, and killing your credit and ability to qualify for a home loan for a minimum of two years. That is the Loan Modification Program. It's very little comfort when turning someone away because there is nothing I can do to tell myself, "I didn't do it to them. I was trying to talk people out of it before it became a problem." Loan Modification gives me a tool with a pretty decent success rate (sixty to ninety percent, depending upon the lender). It's not a panacea, it doesn't work miracles, and it doesn't work for everyone. It also costs money. With that said, it's a much lower cost than a short sale or foreclosure, and it will work for more people than probably any other measure to prevent those results in people on a course for them.

A Loan Modification program is a modification to an existing loan. Because the lender is already on the hook for major losses, it's a lot easier to get pushed through than a new loan. If you are upside-down on your mortgage, it is a way to get your loan changed into something you can make the payments on without the lenders agreeing to write down the value of the principal, which just isn't happening for the most part. Loan to Value Ratio just isn't an issue. The idea is to reach a Debt to Income Ratio that enables you to make and stay current on your payments in the future. Most lenders are modifying loans for a debt to income ("front end") ratio in the low thirties - while some are modifying for a "back end" ratio in the high thirties. The idea is that this enables you to be current on the loan and stay in the property, while it turns the loan into a performing asset for the lender, preventing them from losing more money than they have to.

Lots of folks want the principal of the loan written down. The problems with this are two-fold. First, it becomes an immediate loss for that lender - a hard loss. They were owed $400,000, and now they are only owed $300,000. That's $100,000 in company equity gone. Second, it provides an opportunity for current owners to make a profit on money that was previously owed to that lender. If the person is able to sell for $350,000 (whether immediately or years later), they still make $50,000 less the expense of selling the property, while the lender is just out in the cold for that extra money. You get them to give you money so you make a profit? Lenders don't like that math. The chances of them agreeing to do a principal reduction are very slim. The figure quoted was 1.6% of mortgage modifications that actually happen include some sort of principal reduction - one in sixty - and those typically include issues like death or disability of the main breadwinner. Do you want to spend the $3000 to $7000 modification costs for a one in sixty chance, or do you want to do it correctly with an approach that is about 60% or higher (depending upon your lender) likely to work?

What lenders are often willing to do is modify the loan in such a way as to reduce the interest rate, or payments owed, in some fashion. This doesn't magically give you money, but it does make the dire consequences of owing too much money bearable. It is far better in most cases for your long term financial health than walking away or going through foreclosure. If you owe $400,000 at 8%, reducing that interest rate to 6% will make as much difference to affordability as reducing your principal by $75,000 and starting the loan over combined. Not to mention that every successful loan modification is a relief from delinquency. You start over on the newly modified loan completely up to date on your payments.

Here is the lender's situation: They are on the hook for the value of the loan. If you go through a short sale, they lose money - about a fifth of the value of the loan on average. This is an immediate charge against the company's book value. For properties that go through foreclosure, the percentage loss is about doubled, in aggregate. Nationally, foreclosures cost lenders $47,000 to $61,000 per property, in addition to the lowered value from being a foreclosure. If they agree to modify your loan, it's a hit against future income, but it is not a direct hit on the book value of the company, and it turns a non-performing asset into a performing asset as soon as you've made a payment or two - much quicker than foreclosure. Finally, it gives them at least a glimmer of hope down the road of recovering all of their money - a very good hope, in my opinion, as the market will recover in time - and keeps them from losing more money than they have to now. It also, not coincidentally, locks you into keeping the loan with them for the forseeable future, because nobody else is going to refinance an upside-down loan.

This is nothing short of a financial lifesaver: Let us compare the situation now with the situation in the early nineties. I bought my first property for $90,000 in 1990. It peaked in value at about $110,000, then slid straight down to $63,000 in 1994. I was upside down for a little while. But I didn't sell, and I didn't walk away. Had I done so, I would have lost $27,000 plus the costs of selling - turned a theoretical loss on paper into a concrete loss with major real world consequences. Instead, having a sustainable loan with payments I could make, I kept making those payments. By 1996, I was in the black again. Had I short sold, I would have locked in that loss, and my name would have been mud with lenders and I would not have gotten another loan after the short sale. Basically, by just keeping on making the payments, I kept from locking in a 30% or more loss, and turned it into over a 100% gain when the market recovered. Which situation would you rather be in: Ruin your financial future when you don't have to, or keep making the payments even though you may temporarily be upside down so you can eventually make a big profit? The property I had was the one I was tied to. I could have walked away, locked in that 30% plus loss, and been unable to get another loan for a minimum of two years, and have my credit cause me to be stuck with horrible loans for ten years (which would have cost me more than $27,000, if I could have gotten loans), or I could stick with the obligations I agreed to when I signed on the dotted line for that loan, have patience, and be rewarded when the market turned back up to the tune of better than 100% profit.

Now add being unable to make the payments to the situation I was in fifteen years ago. That is the situation that lots of folks are in today. They not only cannot refinance, they can't make their current payments, either. Without something like loan modification, their situation is like Comet Schumaker-Levy 9, locked into a collision course with Jupiter, and nothing short of a miracle will break them off that course for disaster. You can use search engines to pull up some pretty spectacular images of what happened there.

Which of those situations would you rather be in? This market we are in now is a market in which the people who do the right thing will be rewarded when the market has worked through the immediate problems.

Funny how karma works sometimes.

Caveat Emptor

Article UPDATED here

Every once in a while, a listing agent will get an offer in where the Buyer's Agent did their research, got lucky, or both, and the offer indicates that the buyer is aware of one or more problems that really do exist in a property.

Contrary to most people's immediate reaction, this is a good thing, as I am very happy to explain to my listing clients. It means they know about it and are want to buy the property anyway. Not only can you build a serious case that this means there is no contingency period applying to that particular defect, it means that these buyers are willing to deal with the defect. As opposed to the buyers who discover the problem during escrow, there's a much higher chance of that transaction going through.

Matter of fact, a good listing agent will disclose that problem in the listing itself.

Why in the world would you do something so stupid, you scream? It's really very simple. Pretty much every problem is going to be discovered even if you don't disclose it, and selling a property has a major component of managing buyer expectations. They come to the property expecting a beautiful turn-key property, and when they actually lay eyes upon the thing, it's got this problem. Kind of like picking up what you think is a gold nugget, and finding out it's really donkey droppings. The predictable reaction is revulsion. This is one reason why there may be a lot of showings, but no offers.

You're going to have to price the property for the fault, of course. But if you don't do that, it's not going to sell. Prospective buyers are looking for reasons not to buy your property. Whether they look at it as overpriced or priced correctly but with a fault they don't want, they're not going to put an offer in. No offer, no purchase contract, no sale. It's that simple.

Suppose, as with a property I looked at yesterday, it's not an obvious problem. This thing had been made seductively attractive on the surface, but it was really a cash-sucking vampire property ready to pounce upon an unsuspecting buyer. If you do get an offer where they don't understand and you do get an offer and negotiate a contract, what happens? I'll tell you what happens. Their inspector tells them about the problem. Okay, so they've committed $400 for the inspection, so there's some buy-in, but now they find out about this problem that you should have told them about that's going to cost something in the five figures (possibly six) to deal with. You've just been caught leading them down the primrose path. What's your level of credibility? I think the average buyer is just going to bail out at that point. If they are willing to re-open negotiations, the prognosis is not good for a new agreement. Net result? You've taken the property off the market for a couple days to a couple weeks, and anybody else who may have been interested has crossed it off their list. Furthermore, when it returns to the market, it shows as having been listed that much longer ago, making it less attractive to new buyers coming into the market.

What if it actually gets through escrow and the purchase is consummated without the buyer finding out? That's the worst situation of all, because now the courts are going to get involved when the buyer does find out. Bismarck said that people who like treaties and sausage shouldn't see them made, but if he had ever been involved in a twenty-first century US lawsuit, that would have been first on his list. You're probably going to pay your lawyer more than whatever extra profit you made, and you're going to end up paying their lawyer plus damages as well. Plus, you might very well be ordered to buy the property back. No. Thank. You.

Now, suppose you disclose the problem, and price the property accordingly. You might not get Mr. and Ms. Yuppie looking for the perfect little place for them - but you can quite likely get Mr. and Ms. Yuppie looking for an investment opportunity. You've obviously decided that fixing the problem is not something you're willing to deal with, for whatever reason, but perhaps they are. You have decided you want it sold, and here's the opportunity for that. They know about the problem, and they're interested anyway. It's a matter of managing expectations. Remember up above, where I talked about revulsion? But if your prospective buyer is expecting the problem and prepared to deal with it, they're much more likely to make an offer when they visit. No, you're not going to sell for the same price as the showplace up the block. But you wouldn't sell to that buyer anyway, and trying to do so is one of the biggest wastes of time and money that would-be sellers of real estate talk themselves into.

So an offer where the prospective buyers indicate that they are already aware of an existing problem is not an offer to be blown off. It's a serious offer from interested parties. It is a lot more likely to get the property sold, and it pretty well vaccinates you against later lawsuits on the issue. You can waste your time trying to find and sell to the Suckers of the Century, or you can decide to accept that the property is what it is, and sell to someone who understands the situation from the outset. You're a lot more likely to end up better off in the end result from the latter - because even the Suckers of the Century can get themselves a good lawyer and sue you when they do discover the problem. They are on the hook for several hundred thousand dollars. They're not just going to blow it off and say, "Oh, well," and when they do get that lawyer, they're going to get a lot more out of you than the difference between what you got, and what you could have had without the lawsuit.

Caveat Emptor

Article UPDATED here

One of those moments you can't stage: Ramona was taking her bath last night when Julia (our dachshund) evidently decided that she was dirty. Either that, or she just wanted into the bubble bath to play with Ramona!

Julia Jumps In 1

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About time: Boehner declares war on ACORN

The pattern seems very clear. Wherever ACORN works, they file hundreds and thousands of bogus registrations. These aren't isolated incidents, but strongly suggest a systemic effort to undermine democracy. Not only should taxpayers not fund such an organization, but the Department of Justice should treat it the same way they treat organized-crime syndicates.
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Video: The implications of adding government-sponsored "rights"

When the government pays for something that everybody has to have, the government has the right to set terms of service, which means the government gets to control behavior. When government is the sole provider and sole controller, you can't opt out. In many cases, the difficulty of opting out is extreme (i.e. "free" mandatory school), which means the government controls those subject to it.

It seems to me that we as a society are trying to nibble the 13th Amendment to death. You know, the one that says "Neither slavery nor involuntary servitude, except as a punishment for crime where of the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction."

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Political Theater: The report that claims Sarah Palin abused her authority

The Branchflower Report is a series of guess and insupportable conclusions drawn by exactly one guy, and it hasn't been approved or adopted or endorsed by so much as a single sub-committee of the Alaska Legislature, much less any kind of commission, court, jury, or other proper adjudicatory body. It contains no new bombshells in terms of factual revelations. Rather, it's just Steve Branchflower's opinion -- after being hired and directed by one of Gov. Palin's most vocal opponents and one of Alaska's staunchest Obama supporters -- that he thinks Gov. Palin had, at worst, mixed motives for an action that even Branchflower admits she unquestionably had both (a) the complete right to perform and (b) other very good reasons to perform.

and even so:

Finding Number Two

I find that, although Walt Monegan's refusal to fire Trooper Michael Wooten was not the sole reason he was fired by Governor Sarah Palin, it was likely a contributing factor to his termination as Commissioner of Public Safety. In spite of that, Governor Palin's firing of Commissioner Monegan was a proper and lawful exercise of her constitutional and statutory authority to hire and fire executive branch department heads.

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Hot Air has a video of a press conference of the early days of seeding the financial meltdown.

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Right Wing Nut House on the disparate expectations of partisans on the right versus the left.

I think it has to do with desensitization. For the last eight years, the unhinged left has been saying anything it could think of, no matter how hate filled, to get at George Bush, who took it like the believer in the First Amendment that he is. It's both a matter of having taken eight years to build up to this level, as well as the fact that the first time someone says "Destroy America!" it's treason, the fifty-thousandth, it's passe. Now that there is a Democrat of comparable stature, the left doesn't like what happens when a pale reflection of their own behavior gets reflected back at their own candidate, and because for the first time, they are coming it for a pale shadow of their own treatment of the opposition.

Here's a prediction: Unless Mr. Obama declares martial law (something I'm not nearly as skeptical about as I would like to be, especially given his electoral tactics, and his supporters Manichean world view and religious mentality, anointing themselves "The Good Guys&trade" while the opposition is "obviously" more foul than Morgoth or Sauron), the criticism Obama hears now is nothing compared to what he's going to hear after he's elected when it becomes undeniable exactly what he wants to do, what he stands for, and who his friends are. Considering Mr. Obama's history, comparing what George Bush has been accused of to what Barack Obama has publicly said he wants to do to the Constitution is like passing gas in a hurricane.

You want insane hate? Michelle Malkin documents some real insane hate and range.

Instapundit:

NO JUSTICE, NO PEACE? So we've had nearly 8 years of lefty assassination fantasies about George W. Bush, and Bill Ayers' bombing campaign is explained away as a consequence of him having just felt so strongly about social justice, but a few people yell things at McCain rallies and suddenly it's a sign that anger is out of control in American politics? It's nice of McCain to try to tamp that down, and James Taranto sounds a proper cautionary note -- but, please, can we also note the staggering level of hypocrisy here? (And that's before we get to the Obama campaign's thuggish tactics aimed at silencing critics.)

The Angry Left has gotten away with all sorts of beyond-the-pale behavior throughout the Bush Administration. The double standards involved -- particularly on the part of the press -- are what are feeding this anger. (Indeed, as Ann Althouse and John Leo have noted, the reporting on this very issue is dubious). So while asking for McCain supporters to chill a bit, can we also ask the press to start doing its job rather than openly shilling for a Democratic victory? Self-control is for everybody, if it's for anybody. . . .

He has some links for documentation if you visit his site.

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I couldn't make this up, but Howard Stern found it was real. Wizbang has the recording. Nasty language warning applies - it is Howard Stern. Nonetheless, the ignorance is mind-boggling. Nor do I believe they were just pretending to go along. What they might have been is a select, non-representative sample. But the observation remains, and these people are intending to vote. If that doesn't scare you, Steven King doesn't stand a chance.

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Can't Keep A Bad Idea Down Department Obama calls for 90-day moratorium on foreclosures

Democratic Barack Obama on Monday called for more immediate steps to heal the nation's ailing economy, proposing a 90-day moratorium on home foreclosures at some banks and a two-year tax break for businesses that create new jobs.

I hammered San Diego's City Attorney for this several months ago. (sixth entry here)

Question: Will this 90 day moratorium somehow mean the people owe less money? That they will somehow miraculously be able to afford their mortgages. Keep in mind, it's not an end to the interest, the payments, or anything else. All it means is another 90 days for the bills to pile up, another 90 days that lenders have to sit on non-performing assets, another 90 days of denial.

Will this mean that homeowners will suddenly have the equity to refinance to something they can support? No. Will it mean they suddenly have the income? No. Will it mean the rates drop to enable those around the margins to refinance into something better? No, quite the opposite - it will cause rates to rise. Not only will it cause rates to rise, it will cause the underlying indices to rise, as lenders will want more money in return for lending theirs. This will mean that it will knock those on the margins away from being able to afford properties they might otherwise have been able to hand onto, dumping more properties onto the market, adjusting price equilibrium down, setting us up for another entire round of this nonsense.

This is an idea tailored to populist, class warfare appeal. But like so many ideas of that bent, it's severely stupid in that it will make the situation much worse, as in "we might as well have set that $700 billion for the bailout on fire."

Investors with large amounts of money are not our enemies. They are what provides the seed money for factories, builders, consumer goods of all kind, increase our standard of living, etcetera. I'm not rich myself, but it is past time for adults to start calling the willfully ignorant children who propose this crap to task.

It's also another piece of evidence: A vote for Obama is a vote for economic disaster. If any of his vaunted and ballyhooed advisors sat him down and explained this to him, he chose to disregard the facts. I'm a pretty easygoing sort, by and large, but one of the few things I find it difficult to have patience with is willfully blind ignorance. Just because you want it to be true doesn't mean it is.


I have in the past told people to ignore APR. APR should not be used to compare between loans. Not only is it a one dimensional number used to measure what is fundamentally a two-dimensional trade-off between rate and costs, but it is computed based upon you keeping the loan for the period - no refinancing, no selling the property, not even paying off the loan earlier. Basically, nobody does this. Why pay attention to a number that doesn't tell the entire picture, and wouldn't apply to you even if it did?

But there is something that the difference between the putative APR and note rate can tell you: How big the costs of the loan are. Don't read too much into this. As I may have mentioned a time or two (in my articles on Good Faith Estimate, how much low-balling is legal, and Loan Quote Guarantees off the top of my head), at loan sign up, these are only the rate and fees that they are admitting to. Unless they're giving you one of those Loan Quote Guarantees, the APR is subject to every bit of low-balling that the Good Faith Estimate (Mortgage Loan Disclosure Statement in California) is. Furthermore, be advised that prosective loan providers are permitted a lie, I mean an error, of a full eighth of a percent for fixed rate loans, twice that for ARMs. So be aware that unless you are careful to nail prospective loan providers by asking all the right questions and requiring a quote guarantee, what you get won't be any more accurate than political spin.

Where this is primarily useful is in reading advertisements. Not that mortgage rate advertisements are a good place to be looking for loans, but people will persist no matter how much I warn them against it.

APR does not include all costs. Federal Reserve Regulation Z allows mortgage providers to exclude third party costs from the calculation. This includes escrow, title, and appraisal costs at a minimum, as well as notary and processing costs, if they are performed by outside providers. I'm going to assume a 6% thirty year fixed rate loan. For such a loan processed "in house" for $400 would have an APR of 6.056, while the same loan where the $600 processing was "contracted out" instead would have an APR of 6.044. Note that you pay $200 more for the loan with the lower APR! You therefore need to know what's included and excluded when comparing APRs. For the same reason, a loan where there's a difference of $1000 in fees due to one loans title company, escrow company, or appraiser padding their pockets while those associated with the other loan don't, will not show up under APR calculations. If other factors are the same, the expensive loan will have precisely the same APR as the cheap one.

With all that said, let's look at a thirty year fixed rate loan, starting from a $300,000 balance, with $1500 of closing costs included per regulation Z, first, with all closing costs included, then paying all costs but no points (par), then with one point, then two points. These are rates that were really available a few days ago, but will be different by the time you read this



Loan
Zero Cost
Par
1 point
2 points
Note Rate
6.75
6.375
6.125
5.875
Total Cost
0
$3200
$6263
$9388
APR
6.750
6.420
6.264
6.106
Note Rate-APR
0
0.045
0.139
0.231

Note that a loan with two full points is pretty expensive. It costs almost $9400 in actual costs, never mind impounds or prepaid interest that you may also be adding to your balance and paying interest on. Nonetheless, it boosts APR over note rate by less than 1/4 of a percent, and that the actual APR keeps going down even though the costs are skyrocketing. This means that for people who shop by APR, loan providers will advertise a loan with even more points. Even though you'll never recover the costs of those points, if all you look at is APR, the lower rate looks better.

Now let's hold everything else constant, but pretend that you have a choice between refinancing a $300,000 balance on a 6% thirty year fixed rate loan with all costs paid, where you pay the costs but no points (par), with one point, and with two points. This is never going to actually happen - the cost differentials you will shop between will not be that broad. If there's that much difference between the loans you're being offered, something is wrong. It could any of a number of things - I can't tell exactly what without a lot more information. This much variance should never happen - I'm doing this solely for illustrative purposes, so you can see how costs influence APR. There is always that tradeoff between rate and costs, and they are more likely to discover physics that repeals gravity than economics that repeals this relationship.

With that said, here's the comparison.



Loan
Zero Cost
Par
1 point
2 points
Note Rate
6.00
6.00
6.00
6.00
Total Cost
0
$3200
$6263
$9388
APR
6.000
6.043
6.138
6.233
Note Rate-APR
0
0.043
0.138
0.233

Now keep in mind, that every number here in this article is as correct as I can make it. This is, once again, to illustrate how various factors influence APR, not to illustrate the games that can be played with APR.

What other factors influence APR?

The size of the loan makes a difference. A $100,000 loan with $1500 of included costs (per Reg Z) at a note rate of 6% has an APR of 6.142, while a $400,000 loan with the same costs has an APR of 6.035. Note that this is a pretty low-cost loan, but it makes a real difference to comparatively small loan amounts. The difference ordinary costs make for smaller loans is one reason why folks with smaller loan balances should focus far more on cost than rate. Given that most people don't keep their loans longer than about three years, it can be very difficult to recover increased initial costs of doing the loan via lowered interest costs.

The basic note rate also influences how much the same cost influences APR. A $300,000 loan with $1500 in non-excludable costs (under reg Z) at 9% has an APR of 9.056, a difference of (actually) 556 basis points higher, while the 6% loan with the same costs has an APR of 6.046, an actual difference of only 463 basis points. Lower note rate means that the same costs influence APR less.

The term of the loan makes a huge difference. If that same thirty year fixed rate loan at 6% in the previous paragraph was a 15 year loan, it would have an APR 6.078. Not only can this mean that at shorter loan terms, a lower cost loan with a higher note rate can actually have a higher APR, if further illustrates how counter-productive paying attention to APR is. When the APR is computed as if you allocated those costs over the term of the loan, and most people sell the property or refinance in three years or less, the proper term to compute spreading those costs over is two or three years, not thirty. If cutting that period in half, from 30 years to 15, almost doubles the APR spread, what do you think cutting the period still further does? I'll tell you: If you only keep that same loan three years, the effective APR is 6.333 - and this is a very inexpensive loan. That two point loan from the first example at 5.875 that gets you the low payment has an effective APR of 7.549 if you refinance it after three years! Not only that, but you're going to be paying for it in the form of higher interest costs on a higher balance for as long as you have a home loan, and probably quite a while thereafter. By comparison, let me call your attention to that true zero cost loan at 6.75% from the same example, which has an APR of 6.750, no matter what period it is computed over. If you're going to refinance or sell in three years, which of these loans do you think it makes more sense to choose?

Caveat Emptor

Article UPDATED here


Neighborhoods of La Mesa: Lake Murray

I've also added links to a couple of my social media pages in the sidebars.

**********

Oh, my: Is this the smoking gun that costs Obama the election?

On a Martin Luther King zero to ten scale for judging people by the content of their character rather than the color of their skin, this is pretty much a zero.

Sauce for the Goose Department: Can you imagine what the outcry would be if John McCain were on the record as saying something like this about black people?

**********

This disgusts me. Serving their country, found a dog they want to adopt, and stupid military brass decides to make jerks out of themselves.

Stuff like this does not just hurt one soldier. It hurts the whole unit, at a minimum. Were I that officer's superior, they would be relieved for unfitness for command. The more attention the situation generates, the more likely a favorable resolution.

**********

An ad that has been purchased for during the debate tonight (October 7th)

Which candidate supports EFCA? Barack Obama
Which candidate is against it? John McCain.

When George McGovern speaks out against a union sponsored bill, in agreement with John McCain, you know something is rotten on the other side.

**********

Nothing to see here. Move along. Democrats refuse to talk about Fannie, Freddie in Oversight hearing

Christopher Shays ripped the Oversight Committee for its refusal to investigate Congress itself:

"The reason we haven't scheduled hearings on these two institutions and haven't requested documents from either is because their demise isn't someone else's fault -- it's ours, and we don't want to own up to it."

**********

Here's the thing about debates: You have to pay attention. It only seemed like a snoozefest on the surface.

For example: There was one question asked tonight about the use of force in the future. Obama gave some standardized platitudes that didn't really mean anything, although he still managed to contradict his earlier position. McCain started talking about Iraq. Even I, a McCain supporter, was thinking, "Get out of the tunnel, John!" However, he used that point about Iraq as a starting point to tie into the future use of force and how if you don't stay and finish the job you start, you end up having to go back under worse conditions, which impacts your ability to respond to the other situations that are certain to pop up. Planning and execution of this brilliant improvisation: two minutes, on the fly, just McCain himself - no staff, no focus groups, no nothing. Nothing too emotional, just a compelling story told in an intelligent way from a current starting point that illustrated he was right, rather than just claiming to be right. But the intellectual beauty of doing so on the fly like that was inspiring. It left me in no doubt which of these men has the intellectual resources to better lead the nation.

I did think Obama made some good points, but he also outright lied half a dozen times, most egregiously about Fannie and Freddie and the causes of the current meltdown. No, McCain didn't knock him out. But if Obama had been a boxer, he would have been bloody, bruised, and just barely aware of where he was. If the vast majority of the media were not Obama partisans, Obama wouldn't be even close to John McCain in the election.

Was his performance good enough to turn this thing around for McCain? Not by itself. But he did set himself up well. Now he has to go out and solidify what he started with the American people, and he's going to have to dish out a lot more red meat than he has of late. Playing it safe when you're behind towards the end of the game isn't going to cut it.

**********

On that same question Obama's 180 on genocide

In such cases, answered Obama, "we have moral issues at stake." Of course the United States must act to stop genocide, he said. "When genocide is happening, when ethnic cleansing is happening . . . and we stand idly by, that diminishes us."

But that wasn't how Obama sounded last year, when he was competing for the Democratic nomination and was unbending in his demand for an American retreat from Iraq. Back then, he dismissed fears that a US withdrawal would unleash a massive Iraqi bloodbath. "Democratic presidential hopeful Barack Obama said Thursday the United States cannot use its military to solve humanitarian problems and that preventing a potential genocide in Iraq isn't a good enough reason to keep US forces there," the AP reported on July 20, 2007 (my italics).

Which is it? Do you think we might have a moral obligation to stay in Iraq, having broken their previous state? Or should we have abandoned the Iraqi's to genocidal civil war, having no moral reason whatsoever to stay?

My vote is that it's just Barack Obama telling a given audience what he thinks they want to hear.


**********

Michael Barone: Three reasons William Ayers is relevant to the election


These are set up to allow Presidential Candidates to appeal directly to large amounts of people. So how did they do?

The Second Debate: How did it influence your vote?
Was McCain, still McCain
Leaning more McCain
Was Neutral; still am
Leaning More Obama
Was Obama, still Obama
  
pollcode.com free polls

I'm going to hold my tongue until later.


Carnival of Real Estate

**********

Joe Biden:10 factually incorrect claims in the debate

Ace says 14. Here's his list

I stopped counting after six egregious, known and verified.

Palin may have shaded the truth and had some instances of tunnel vision, but nothing where the numbers and facts were flat out incorrect. For instance: Pre-surge troop strength we were at 138,000 troops in Iraq. The surge boosted that to about 160,000. We're now at 142,000 and falling. The claim is closer to true than not. On a grayscale from 0 (black) to 10 (white) give it an 8 for simple mathematical proportionality. But on the same scale, Biden's factual errors were dead wrong zeroes. I do not know if he was intentionally misstating ("lying") or simply mistaken. Neither one is precisely laudable, and they both have their plusses and minuses relative to each other, but neither is as good as having the facts correct. For that matter, neither one is good, period.

Palin solidly outpointed Biden. She told the truth, or close enough to be within the bounds of legitimate differences of opinon. Biden did not. She didn't school Biden like John McCain did to Barack Obama, but if this was a boxing match, there's no doubt which candidate would win the decision from honest judges.

Michael Totten weighs in

Sarah Palin was closer than Joe Biden to the Vice-President's constitutional role.

(The president has the ability to delegate executive powers to other people. I don't read anywhere in the Constitution a prohibition on him delegating such power to the Vice-President, especially as the Vice-President is the only other official with a claim to national direct election. It's just that with a party (the Democrats) who have first filibustered opponents and then denied them point blank when they got voting control of the Senate for no other reason than George Bush wanted them, denoting the Vice-President as being the president's delegate removes the ability to obstruct the confirmation process.)

**********

Was Obama telling the truth about al Qaeda? Not when you look at actual evidence.

The pressure is on al Qaeda every which way it turns and it is losing, not winning.
**********

Using the slack monitoring of smaller contributions to break campaign finance rules: Obama's 'Good Will' Hunting

Consider the cases of Obama donors "Doodad Pro" of Nunda, N.Y., who gave $17,130, and "Good Will" of Austin, Texas, who gave more than $11,000--both in excess of the $2,300-per-person federal limit. In two recent letters to the Obama campaign, Federal Election Commission auditors flagged those (and other) donors and informed the campaign that the sums had to be returned.
**********

Tackling the fibs on McCain's proposed health-care plan

The figure Obama provided, $12,680, comes from a study published last month in the journal Health Affairs. That study found that "average annual premiums in 2008 are $4,704 for single coverage and $12,680 for family coverage." But that same study reported the average cost people pay for employer-provided health care coverage is $721 for singles and $3,354 for family coverage. The rest is covered by the employer.

Those figures back up a conclusion from the nonpartisan Tax Policy Center: that McCain's health plan, offering a tax credit of $2,500 per individual and $5,000 per family, would be a net tax cut initially for many. As the CNN Truth Squad has previously reported, the center calls McCain's health care plan a tax cut for virtually all Americans through 2013 and for the middle-class through 2018, which is as far as the center has projected. But the center says long-term, some of those benefits might erode if the tax credit did not keep up with costs of health care.

We have got to get away from the idea that employers are responsible for our health care, and linking health care inextricably to employers. It has all sorts of implications that vary from undesirable to outright bad. The only "advantage" is that many people who are employees start thinking of health care as essentially free, which it is not.

**********

Three and a half minutes. Worth every second, no matter who you support.

**********

Thomas Sowell: Do Facts Matter?

Three Poll Questions and lest it be unclear, one person, one vote (in each), i.e. enlightened democracy rules.

How did Sarah Palin do?

Did Your Opinion of Sarah Palin as Vice Presidential Candidate Improve or Deteriorate with her performance at the debate
Significantly Improve
Slightly Improve
No or not much change
Slightly Deteriorate
Greatly Deteriorate
  
pollcode.com free polls

How Did Joe Biden Do?

Did your opinion of Joe Biden as Vice Presidential Candidate Improve or Deteriorate as a result of the Debate?
Greatly Improve
Slightly Improve
No significant change
Slightly Deteriorate
Greatly Deteriorate
  
pollcode.com free polls

How did it influence your likely vote?


UPDATE: For some reason, pollcode is cutting out two answers I asked for "About equal - but I'm now more likely to vote Obama/Biden" and "About equal - but I'm now more likely to vote McCain/Palin" I've tried fixing this three times with no success. If one of these applies to you, since this is a voting question, please answer as if your respective choice did better and you're now more likely to vote for them

PS: If you voted while I was trying to fix it, those were lost. Please do make a vote that will be counted

Which Vice Presidential Candidate was more Impressive, and how will it effect your vote?
About equal - no change
Biden - But I was already Obamacan
Biden - I'm now more likely to vote Obama-Biden
Biden - but I'm still uncommitted
Palin - But I was already a McCainiac
Palin - I'm now more likely to vote McCain Palin
Palin - but I'm still undecided
I thought one was more impressive but I'm still voting the top half of the other ticket
  
pollcode.com free polls


As last time, I'm holding my impressions until later.

Just looked at my site traffic for the past month, and I have a new one day record - at least since the hosting changeover - of 4759 from September 12th.

Thank you all for stopping by.

**********

Journalism is dead. Proof.

Speaking of which, with tonight being the VP debate, what happens if Sarah Palin handles Joe Biden?

She's been nothing but slandered in the media (except for Fox) for the last month. Probably a lot of McCain's recent slide has to do with the fact that the media has portrayed her so negatively, casting dubious aspersions on his judgment.

So what happens if she hits a home run? Or even just a good stand up double?

The debate is the one chance where even if the moderator is a declared Obama partisan, Sarah Palin has a chance to shine with very little ability to frame and edit on the part of the media. What happens if she demonstrates a grasp as good or superior to Joe Biden, one of the more gaffe-tastic of our Senators? Had the media been doing as much hard reporting on Joe Biden as it has been slandering of Sarah Palin, we would be looking at a very different race right now. So what happens if Sarah demonstrates she's at least as sharp as Senator Foot, Ankle, and Knee in Mouth? Could this turn into a different race?

What if all of Joe Biden's gaffes came out of Sarah Palin's mouth?

I'd say there's at least a fifty percent chance of her handing Gormless Joe his head. But we'll see.

relevant humor here

**********

Private Papers: Time Is Running Out (for McCain)

**********

People unclear on the concept Department: tax loopholes

**********

The Integrity Gap

Who's Really Beholden to Special Interests

Note that John McCain only leads Barack Obama among three of the twenty industry groups, and one of those "industries" is "retired"

**********


Anti-theft lunch bags? I'm pretty sure it'll work

This really ticks me off.

I just got done going around about this with a clueless Realtor. According to them, it's not available. It's simply pending contract signatures. But it's showing as "Active" in MLS.

This is not a minor issue. Let me illustrate why. I had my friend call and inquire about the property. He was told it was "available." They wanted to set up a time to get together and show it to him, and were there any other properties he wanted to see?

Now I'm fully aware that this may be an instance where that agent wants both halves of the commission, in which case they are violating their fiduciary duty to their listing client by telling me "We accepted another offer." But I'm going to presume that everything is exactly as they told me, in which case they are still violating both MLS and ethics rules, as well as trade law.

If everything they told me is absolutely true, they are still using the property as bait for a "bait and switch" game. If what they told me was true, they do not in fact have the property available for sale. My client and I did come in and make an offer, but they're telling me that the property is not available. But for those people without an agent who call, they're using it - dishonestly - as a means to gain an audience. This is not a small issue. The hardest issue in obtaining clients is getting that first initial face to face meeting. If someone gets a first meeting with you because they claim to be listing a property that is not, in fact, available, exactly how is that morally different from just making it up ex nihilo?

In fact, they claimed that their listing client didn't want it marked as pending yet. I understand the position they're in, but what the client wants is not on the list of available options. if the property is not available, it cannot be in the Active register. That's what we all have to agree to in order to get access to MLS. That's what the ethics we agree to as Realtors says. If you're not going to play by the rules, you shouldn't have access to MLS, and you shouldn't be able to call yourself a Realtor. There's also a section of commercial law that deals with false advertising. Somebody advertises something people want, the FTC and various state regulatory agencies have grounds to get very interested if you do not in fact have it. You might ask Big Bear supermarkets about that. Such an action is what put them out of business around here. I guarantee that six figure real estate is lot more important than 5 cans of peas for $1 in the estimation of the regulators.

The upshot? I told them to get it off the active list by 9:00 tomorrow morning, or face a formal complaint to MLS and the Association of Realtors. I have a client that wants that property. If it's in MLS, they understandably want to know why their offer is not being considered. If I don't take action, my client will be justifiably curious as to whether I am somehow complicit in whatever is going on. This problem could be more severe than the listing agent is representing it. It could be a fiduciary and agency failure on their part, trying to get both halves of that commission, requiring a client to employ Dual Agency in order to get the property, in violation of fiduciary duty, agency law, and RESPA. It could even be an Equal Housing Opportunity issue. But one thing is for certain: as long as it stays active on MLS, there is something major significantly wrong. This isn't a minor bookkeeping issue. This is the bedrock of what we agree to in order to participate in the system, and someone who cannot adhere to this should not be in the business at all.

Caveat Emptor

Article UPDATED here

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