November 2008 Archives

November 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.


There were no strongly recommended articles this time, and therefore, no Host's Choice.



Do neighbors really make good fences? talks about adverse possession, a real fact of the law that can cause you to lose title to part of your property.

Asheville, Anywhere: Costs of Heat and Utilities talks about how to take the cost of utilities into consideration when buying.

How To Calculate Blended Interest Rates. Please note that blended interest rates tend to rise slightly with time, as the lower interest loan gets paid off more quickly in most cases.

Save Money (and the Planet) While Remodeling Your Home talks about deconstruction. Keep in mind that for most people, a $4200 tax deduction does not offset $2500 in direct expenses, but it's it definitely something worth considering. Check with a tax professional, of course.



How To Stay Calm In The Real Estate Market

Investors & Landlords: What Kind of Car Should You Drive?



A Site named Home Security Guru submitted an article called "A Buyers guide to Security Camera Systems", which failed to so much as mention real estate. He may call himself a home security guru, but he's a spamming nitwit.

A Site named The Quisani League submitted a purely political post The Future of Tomorrow which makes several factual errors, has no thought process, and fails to so much as mention real estate. Spam spam spam spam...

How Credit Rating Consequences Can Affect Your Life manages to mention real estate, but that's all. Furthermore, it gives no useful details, and despite this, what little information it tries to impart is mostly wrong. We have a triple crown loser!

DIY Home Security: 100 Essential Tips, Tools, and Resources uses a bullet point format for the entire article, and every single one of those bullet points is trying to sell you something. Spam trying unsuccessfully to masquerade as something useful. The entire site looks like a spam blog to me. Time for this site to join the Blacklist!

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

Project Valour IT

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(This will remain on top through Thanksgiving. Scroll Down for newer entries.)

This cause means a lot to me. It seems the absolute minimum I can do for these wonderful people who are essential to this country.

Project Valour IT helps injured service people reconnect with the internet by furnishing voice activated laptops to wounded service folk who have lost the use of one or more limbs. This is critical because it allows them to do things everyone else has come to take for granted while they're going through treatment for their wounds, and afterwards.

These folks stepped up to the line to defend you, me, our friends, family, and even that jerk who runs this website that everyone hates, and it cost them one or more limbs. Seems an awfully small measure of appreciation to help them be able to surf the internet and send email while undergoing treatment and afterwards, because I've yet to meet any of them who really got their hands back.

Please, give what you can if you can. These men and women deserve a lot more than this, but this is what I'm asking you to help with. I know it's rough; I understand if you're not in a position to do so. But please help if you can

(PS the manufacturer sells these laptops at cost or even a bit below. They don't make a penny)

Here's the Soldier's Angels page that tracks the overall progress. (if you have a website, join there!)

Prevent this shame from happening to us. Please.

The Last of the Light Brigade

There were thirty million English who talked of England's might,
There were twenty broken troopers who lacked a bed for the night.
They had neither food nor money, they had neither service nor trade;
They were only shiftless soldiers, the last of the Light Brigade.

They felt that life was fleeting; they knew not that art was long,
That though they were dying of famine, they lived in deathless song.
They asked for a little money to keep the wolf from the door;
And the thirty million English sent twenty pounds and four!

They laid their heads together that were scarred and lined and grey;
Keen were the Russian sabres, but want was keener than they;
And an old Troop-Sergeant muttered, "Let us go to the man who writes
The things on Balaclava the kiddies at school recites."

They went without bands or colours, a regiment ten-file strong,
To look for the Master-singer who had crowned them all in his song;
And, waiting his servant's order, by the garden gate they stayed,
A desolate little cluster, the last of the Light Brigade.

They strove to stand to attention, to straighten the toil-bowed back;
They drilled on an empty stomach, the loose-knit files fell slack;
With stooping of weary shoulders, in garments tattered and frayed,
They shambled into his presence, the last of the Light Brigade.

The old Troop-Sergeant was spokesman, and "Beggin' your pardon," he said,
"You wrote o' the Light Brigade, sir. Here's all that isn't dead.
An' it's all come true what you wrote, sir, regardin' the mouth of hell;
For we're all of us nigh to the workhouse, an, we thought we'd call an' tell.

"No, thank you, we don't want food, sir; but couldn't you take an' write
A sort of 'to be continued' and 'see next page' o' the fight?
We think that someone has blundered, an' couldn't you tell 'em how?
You wrote we were heroes once, sir. Please, write we are starving now."

The poor little army departed, limping and lean and forlorn.
And the heart of the Master-singer grew hot with "the scorn of scorn."
And he wrote for them wonderful verses that swept the land like flame,
Till the fatted souls of the English were scourged with the thing called Shame.

O thirty million English that babble of England's might,
Behold there are twenty heroes who lack their food to-night;
Our children's children are lisping to "honour the charge they made-"
And we leave to the streets and the workhouse the charge of the Light Brigade!

Rudyard Kipling

Please help if you can.

Carnival of Personal Finance


This is one of those things that is so unbelievable that you wouldn't believe it if you read it in a novel: FEC declines to investigate Obama fundraising

More campaign contributions than anyone ever before. All fraud monitoring overridden and turned off. And they ask us to believe nothing illegal happened.

Maybe they'll buy my beachfront property in Florida. Actually, with an attitude like that, they should start a bidding war for my beachfront property in Florida. Against themselves.


Via Argghhh!:

American troops in Afghanistan through the eyes of a French OMLT infantryman

Touching the Face of Grace


Have We Changed Yet?


It appears that appointing Hillary Clinton Secretary of State would be unconstitutional.

This really gets me angry. I think it's past time to declare war on this subject. I hope folks will send copies of this to their legislator and congresscritter and demand immediate action in no uncertain terms. Actually, existing law should be more than adequate to cover this - so send your governor and attorney general such missives, as well.

First, let me share a piece of information that the general public may not be aware of. When there is a prospective short sale of real estate, the listing agent is allowed to continue marketing that property even though there may be an accepted offer. In plain english, it still shows "Active" or "Available" on MLS, among many other things.

I understand the reasons for this. Approximately one in five turns into a completed sale. Therefore, four out of five do not. The people who are selling their property "short" are usually in fairly dire straits, and the wasted time can often mean the difference between selling (albeit at a loss) and foreclosure.

I simply disagree with it, mostly due to abuses by listing agents.

There is an absolute requirement in my local MLS. The property must have the phrase "Offer accepted pending lender approval of short sale" as the very first words in the "Remarks" section, which people viewing MLS and the various other listing services sourced in MLS can see for themselves, without the benefit of an agent, or if they're perusing some kind of gateway that an agent has set up for them. The "Remarks" section is public information, available to the general public, and putting the magic phrase right in the beginning of "Remarks" might cause it to be noticed - if the agents actually put it there.

Instead of this, you'll find this phrase sprinkled everywhere except where it's supposed to be. "Mandatory Remarks" or "Confidential Remarks" (Both of which show to other agents, but not to prospective buyers), buried deep in the "Remarks" where it won't likely be noticed, or in the "Supplemental Information" section.

I just today had another reminder of this. Some clients from out of town came in and wanted to view properties. I called the agent on this one particular property listed for below nearby comparables, who swore there were no offers. So I took my clients to that property. They liked it. After due consideration and several days time during which we found out their first choice wasn't going to work, they decided to make an offer. Great! I start up WinForms, e-mail them the offer paperwork, start writing a pre-qualification letter, and call the agent, who swears there are still no offers. This is 4pm on a Friday. I get the email with the signed offer back, and first thing Monday morning present the offer. Except that over the weekend, there have miraculously appeared no fewer than four offers for tens of thousands of dollars more, and that they had an accepted offer that my client's offer was not competitive with, despite my client having offered full asking price - I know about short sales. Considering the fact that I had tried to call the agent over the weekend and gotten no response at all to multiple messages, I find that impossible to believe. They weren't working over the weekend. Their office wasn't working over the weekend. Exactly when did all of these offers come in? Either they were lying to me Friday, or they were lying to me Monday. Since my client isn't interested in the property at the higher price, I hope for their sake that they were lying to me Friday, but this is still a violation of the duty of fair and honest dealing. I found the magical phrase today, though - buried deep in the supplemental information, where it doesn't really mean anything, and certainly won't be any obstacle to innocent buyers who don't know any better than to use the listing agent calling them about the property.

Furthermore, there is an epidemic of mis-representing the asking price on short sales. "Low-balling," to use the common parlance, only this is coming from the listing agent. More than half of the short sales I check out are priced so low that there is no way on this planet that the lender is going to accept even a full asking price offer. Our offer was marginal - the comps showed something not too terribly much higher, so the offer was reasonable, especially considering the fact that the "No tax for income from debt forgiveness" dies in about six weeks and is not likely to be renewed.

But combine an already accepted offer with continued marketing and a low asking price, and you have nothing other than the classic trick of "bait and switch". An asking price is a representation in writing of an offer that the seller would be glad to accept. But if the seller would not be glad to accept that offer, it is false advertising plain and simple. An offer of that asking price would not have even been considered, seeing as they have an offer for tens of thousands of dollars more that they have accepted. There is no way on Planet Earth that a full price offer for $x is going to be accepted when there is a fully negotiated purchase contract for $x+40,000, or even $x+1000. You know it, I know it, even the communist die-hards still left here and there, mostly in western universities, know it. Even if the lender might have considered such an offer before the higher offer was received, they are not going to do so now.

Let us consider: Why, then, is the property marketed at a price lower than any conceivable offer which might be accepted?

Plain and simple, it is so that the listing agent can meet prospective buyers for other property. They are using this property, marked to a price well below the market which it cannot really be obtained for, as a lure to draw in prospective buyers. These agents are putting out an advertisement that essentially says, "I have a property for sale for tens of thousands of dollars less than it's really worth!" They don't have that property for sale at that price; they don't really have it for sale at any price. Until and unless that buyer with the current contract bails out, there is a cloud on that title and the seller is not free to sell it to anyone, no matter the asking price.

(I know it's "subject to lender approval of short sale," but if the lender were to refuse a given offer, than accept one for a lower price, that would certainly be fodder for all kinds of lawsuits starting at Equal Housing Opportunity and going from there - not to mention that you are kidding yourself if you really think there is a possibility of a lower offer being accepted by the lender right after a higher one is rejected. Several months on, maybe, if nothing else is submitted in the meantime. Right then? No)

So the listing agents are using a property they don't really have at a price they definitely don't have it to lure prospective buyers into contacting them, hoping to sell them something else. Have I missed anything? Oh, right, they are still hoping to persuade some folks it may be worth enough over the asking price to be worth making such an offer. But if an offer comes in for "merely" the asking price, they are going to tell the party making it that such is not good enough. I therefore submit that the property is not for sale for that asking price, which makes a representation that it is for sale thusly FRAUD.

This is illegal in California, and in most other states. Substitute "car" for "property" and you have a couple of the elements of the slimiest used car salesperson from fifty years ago, before we ever heard of consumer protections in law. Furthermore, it's entirely untruthful, and it violates several core concepts of the Realtor's Code of Ethics and Standards of Practice. The National Association of Realtors is lying to itself, its members, and the public if they think their claim of improving the industry does not directly conflict with this, and indeed, is not completely contradicted by this policy. The NAR is not after the benefit of the public - they are after the benefit of the major national brokerage chains which control it.

What would I like done about it? Ideally, I'd like all properties moved to "Pending" as soon as there is a fully negotiated contract of sale. Not optimal for the seller, but it is the only way of dealing fairly and honestly with the general public. There is a contract of sale in effect, exactly the same as any other pending property, and if nothing happens to prevent it, that property will be sold on those terms, exactly the same as any other property. Such a thing would only be done over the dead bodies of the major brokerage chains, but it's not like that's a public interest argument against such a course. That this particular contract has one additional contingency is no excuse to treat it any different than any other.

The absolute minimum compromise I am willing to settle for is that the asking price listed in all advertisements reflect the highest current offer as a minimum. If there's an accepted offer for $400,000, it might be acceptable to market it for $450,000 - you should not be able to market the it for $350,000. It isn't for sale for $350,000, and there isn't any rational disinterested judge who is going to believe that it is. You would probably be able to get the current contracted buyer to relinquish their interest for an immediate profit, and it wouldn't break the lender's heart either, to be losing less money than they thought. But there is no way on Planet Earth that the property would actually be available for purchase for $350,000, and to represent that it is is nothing short of FRAUD. Marketing such a property in thus a fraudulent manner is a legal and ethical violation of all the laws and principles of business that have evolved over the last hundred years since there have been Realtors. If the NAR wants to retain the confidence of the public, it is time that they fixed this. If the NAR does not want to act, I intend to do my best to ensure that Congress and the legislatures of all fifty states will.

Furthermore, if the lender has rejected an offer at a certain level, that should also be a "floor" for asking price. If the lender has rejected an offer for $400,000, you can be pretty darned certain they're not going to accept one for $350,000, and marketing the property thus is no less fraudulent than in the previous example. You still have to submit any offers that do come in, but you're not fraudulently marketing the property for far less than there is any chance of someone purchasing it for. If the owner in a non-short sale situation tells you they won't accept $400,000, would you think that marketing the property at $350,000 was ethical? It certainly wouldn't be legal. That lender has to sign off on releasing the trust deed. You can't deliver clear title to a buyer at $350,000, and you know it. In any other situation, with any other commodity, this would be false advertising, subject to severe penalties. Why, then, do we countenance marketing such properties thus?

What can we do as individuals until that happens? I have been putting a requirement to cease marketing the property in all short sale offers I've been making. Move it to "Pending", stop advertising it as available for sale in other venues - or my client's offer goes away, and said clients have a right to sue for damages. This is for my client's protection. Suppose the seller gets another offer for $5000 more than my client's accepted offer - which offer do you think the lender is going to accept? Not to mention that in the meantime, my clients are going to be spending money on for an inspection and appraisal and possibly other things as well. Might the seller, in such circumstances, not be tempted to find an excuse to bail out of that contract, possibly leading to lawsuits and court appearances and judgments (Oh, my!) and in any case, endangering my client's right to purchase that property, which is what they want and where their interest is. If you're putting an offer in on real estate as a purchaser where a short sale may be involved, may I suggest that you do the same?

If you are a listing agent who doesn't like this, may I suggest you get real about investigating which offers are backed by a strong ability to perform, and which are not, instead of some meaningless prequalification or even pre-approval letter that says these buyers might qualify for enough to fund the loan. There are four things I want to know: debt to income ratio, loan to value ratio, credit score, and verification of cash to close. Time in line of work might also be nice to know, but is harder to verify. You can't require anyone to get a letter from your favorite lender, an illegal practice I'm seeing more and more of ("Steering" is illegal under RESPA, and not just kind of).

May I suggest you also get serious about investigating what kinds of offers the lender actually might accept? I know they don't want to tell you what they would accept, but find out how this lender evaluates short sales for acceptance. I mean the actual decision-making, not treating it as a "black box" where you input the standard short sale package and a commission check just might pop out. You're trying to get this property sold, and once you put a low asking price on it, you're probably not getting offers at a higher level than that. In any other situation, this would be violating client interests and fiduciary duty by repricing a property thus. The fact that there is a short sale involved in no way changes this no matter how much you allow yourself to be distracted by it. When your clients start getting tax bills for debt forgiveness here when the current forgiveness expires in a few weeks, you're going to be in a world of hurt legally, as well. Here you are telling the client "Short sell by $200,000? No problem!" and then they get a tax bill for over $50,000 from the IRS, at least part of which would have been avoidable by putting the correct asking price on the property. How do you think a lawyer is going to interpret that? Don't expect any sympathy from the people who have been doing it right, either.

Short sale bait and switch is just as much a violation of good business practice and the law as telling people, "That airport is going to close!" when it isn't, or "that factory isn't an environmental hazard" when it is. Let's all put a stop to this fraudulent practice now.

Caveat Emptor

A Purchase offer is not money in your pocket. As a matter of fact, accepting the wrong purchase offer can cost you tens of thousands of dollars if the buyers can't consummate.

I recently dealt with clients making an offer on a property where the comparable sales run in the $350,000 to $370,000 range. The ask is $380,000, which isn't outrageous in and of itself, but Seller Paid Closing Costs are so endemic that they are essentially priced into the market, at least up to a price of half a million dollars or so where first time buyers peter out. My clients initially offered a price a bit above the lower end of the comparables, and paying their own closing costs. The owners rejected that but my clients really liked the property, so we sweetened it to what was essentially a full price offer, without any appraisal contingency, and the mechanics of my clients' offer (larger than necessary down payment) were such that there wouldn't be any obstacle to getting the loan and closing the transaction unless the appraisal had come in under $330,000.

But when I called the agent on the phone to make certain they got it, she was quite snippy, implying that they have offers for tens of thousands more. Well, I don't know that she had the greatest negotiation technique in the world, because it completely turned me and my clients off of the property.

What I do know is that people offering way over asking price are not, in my experience, coming in with large down payments. In fact, when I dealt with them in the past, they were mostly first time buyers who were asking for seller paid closing costs, and even sometimes Down Payment Assistance back when it was still available. Basically, the deal is "We'll give you a really great price if you pay for all the ancillary costs we don't have the cash for." And these transactions result in everybody being happy and even noticeably higher commissions for the agents, as commission is paid on the full sales price.

So far, so good. But what if the appraisal is lower than the purchase price? The comparables in this instance are all between $350,000 and $370,000, as I said. Even moving up in the square footage department and adding another bedroom won't boost that much, as the property is already above average for the neighborhood - anything much more would make for a misplaced improvement.

The upshot of all of this is that the appraised value is not likely to be sufficiently high to support the loan value, unless the competing buyer has a much larger than required down payment, which they can then use the excess of to pay the amount that the sales price is over the appraisal on a dollar for dollar basis. As I've said, this isn't likely to be the case where someone is offering significantly above the asking price. People who have somehow acquired the money for more of a down payment understand that this is real money, far more than people with a minimal down payment planning on simply having higher payments.

So unless the appraiser commits fraud, the value is going to come in between $350,000 and $370,000. Let's be generous and say $370,000. Lender's evaluate value on an "LCM" or "lesser of cost or market" basis. Since the appraisal will be beneath the purchase price (if representations are correct), the lender will treat the value as being the appraised value, which we have posited to be $370,000. Let's say the purchase price is $400,000. For a 100% Loan to Value Ratio loan, which are not available right now, the lender will only lend $370,000. For a VA loan, which will go to 103% for veterans of the armed services, the limit would be $381,100, including loan costs, and everything else including the VA funding fee - the real limit is $375,550 for the buyer's purposes. For FHA loans, the limit would be $363,525, and that includes the 1.75 points the FHA charges - the real limit is $357,050. For conventional conforming, the effective loan limit is either 90% ($333,000) or maybe 95% ($351,500).

So, assuming a $400,000 purchase price, to make a VA loan fly, the purchaser has to have a down payment of at least $24,500, and that's assuming they're not paying any loan charges, at least not themselves. For the FHA, they would need $43,000. For conventional, maybe they could get by with $49,000, but it's more likely they would need $67,000. All of these figures are exclusive of any transaction costs the buyer is paying, of course.

If that buyer doesn't have that cash, that transaction is not going to happen. You might as well reject it to begin with, because if you accept it, all that is going to happen is that you're going to waste six weeks or more waiting for Godot. It is my usual experience that buyers with down payments of the size indicated understand that dollars are dollars, no matter what form they are in, and are unlikely to offer prices much over asking. There are exceptions, but not many. The reason people end up paying more than asking price is because they need something special from the seller, and therefore the seller who is willing and able to give it to them can extort a higher price for that property in return, and the most common reason why buyers need these sort of concessions is because they haven't got the cash necessary for the down payment plus closing costs. Therefore, in order to induce the seller to give them the extra they need in some wise, they offer a higher official purchase price that nets the seller what they want after the givebacks. Unfortunately, if that higher purchase price is not supported by the appraisal, the buyer then has to come up with more cash - and we just posited that they don't have it. Prognosis for the transaction: not good. So perhaps it might be a good idea to require a buyer to come up with some evidence that they do in fact have the necessary cash to make the transaction happen. When I write a buyer qualification letter, that is one of the essential parts it must contain: Evidence of cash to close. When I have a listing, that's one of the things I want to see evidence for before I advise accepting an offer: Evidence of cash to close.

Too many agents became used to the Era of Make Believe Loans, and don't understand yet the implications of it being over. Whether you're a buyer or a seller, you want to consult a loan officer on whether or not a given purchase offer is likely to be able to be done. Of course, if your agent is a good loan officer, you're already ahead of this game.

Caveat Emptor

Article UPDATED here

I am sorry, but I cannot stay silent on this matter any longer.

Several years ago there was a a Proposition on the California ballot regarding gay marriage. I voted in favor of gay marriage then, but as I recall, my side lost by something like 8 million votes. Given that, I accepted the fact until the next time there was a ballot proposition. If the voters speak, that should be the law of the land, absent a clear and convincing Constitutional reason otherwise. At least until the voters change their mind.

Make no mistake: Supporters of gay marriage have enough support to easily put such an initiative on the ballot in any election they should care to make the attempt. It only requires a tiny percentage of the voters to sign the initiative petition. We could have had such a proposition to change the law on the ballot in every election between then and now, but that has not been done.

I am going to take a few paragraphs for an aside here. I don't actually think the government should have anything to do with marriage. Living partnerships, yes. Any two adults want to form a business partnership for household expenses, raising of any children, that's fine with me. If the state wants to privilege certain partnerships, then it should privilege those partnerships without regard to the sexes of the two partners. But that's all in the nature of a business partnership. Whether you realize it or not, that's the entire historical basis of a state or government interest in marriage: The financial partnership interests. Call if domestic partnership, call it marriage, call it gobbledegook if you want. That's a legitimate state or government interest, particularly if it is privileging certain partnerships in certain ways, and I firmly believe that when government privilege is involved, the sexes of domestic partners should not be a criterion for discrimination.

Unfortunately, when the government started getting more involved in such things, there were only partnerships between one male and one female to consider. This in turn led to some noteworthy confusion which still exists - the financial arrangements of such partnerships, which are a legitimate state interest, with the spiritual arrangements, which are not, but rather within the domain of whatever religious body the partners happen to be a member of.

In short, the word marriage is subject to a confusion between the government sense of the term - a financial and business partnership between adults - and the religious sense of the term, having to do with the spiritual aspects and whether some particular religious body has blessed the union in accordance with whatever principles they hold sacred.

I would far rather see a complete bifurcation of the word "marriage" into "civil (or domestic) partners" and "spiritual partners." The former is a legitimate government interest; the latter is not - indeed, it appears to me to be forbidden from government interest by the First Amendment. I see no reason why these two functions should not be completely independent of one another. There is no reason to require civil partners be spiritual ones, nor vice versa. I see no reason why two adults cannot be one or the other without any requirement whatsoever for the other. I suspect the word "marriage" would be preserved in function on the spiritual side, where it has a far longer history and tradition, but that is not important. The explicit bifurcation of functions is.

There seems to me to be a lot of confusion on both sides of the issue. The pro gay marriage side seems to be intentionally glossing over (or perhaps glorying in) the fact that they are attempting to force spiritual acceptance on the faithful of just about every faith in the world. They don't accept each other's spiritual marriages (or for that matter, purely civil ones) despite the fact that they might otherwise meet that sect's requirements; why should they be forced into accepting a "marriage" that violates every belief they stand for? The anti gay marriage forces, for their part, seem to be deliberately confusing the state interest business and financial partnership with the non-state interest spirtual partnership that the various faiths may not accept. I've long despised the latter; but my state of mind has recently evolved into "A Pox Upon Both Of Their Houses."

We have previously established that the pro gay marriage forces have more than sufficient influence to place gay marriage onto the ballot any time they want, and proceed to influence the minds of the citizens in their direction by campaigning and giving those citizens reasons that those citizens should vote in their favor. That would be the intelligent, rational way to go about these things. Persuade the voting citizens that they are not threatened by gay marriage. We aren't, you know.

Instead, supporters of gay marriage took to the courts, trying to win their case by appealing to a few judges. Well, they eventually did. Four judges decided to re-write the state constitution by judicial fiat, making gay marriage legal and giving the gay rights community not only that, but classifying disagreement with the concept of gay marriage as "hate speech", something which is Unconstitutional no matter how many judges say it isn't in contradiction of all reason.

To change something that the citizens of the state had voted upon in the millions, and come up with a many millions plurality one way by judicial fiat is a raw wound, and it should not have surprised anyone with the IQ of an amoeba that there would be a push back, and so Proposition 8 qualified for the ballot, defining marriage as one man, one woman, and removing the hate speech classification.

I think it quite reasonable - only fair, in fact - that the homosexual community have the same rights of civil partnership as anyone else. I did not, initially, understand that the issue was broader, and so I was planning to vote against Proposition 8 as a matter of course. Sure, we had lost previously, and it certainly rubbed me the wrong way that four judges had undone the work of a multiple millions plurality of the voters because of their private prejudices and the fact that they happened to be a majority upon one particular court. That was very bad, but not bad enough to make me vote for Proposition 8. After all, here was another election, and if the voters voted the way I (initially) wanted them to, we would have gay marriage and have arrived at the spot where we should have been in the first place legitimately. I fully intended to vote against Proposition 8 until nearly the end of October.

That was when I found out about the "hate speech" feature of what the judges had done. Hate speech is a vile, evil concept that directly violates the First Amendment to the Constitution. I want to see what I see as justice done. I want to see homosexuals have full legal parity with heterosexuals. But it is vile, evil, and a corruption of everything I hold sacred to criminalize disagreement with me on this score or any other. Let us consider that if "hate speech" had been a fixture of life thirty years ago, homosexuals would not have many of the rights they enjoy now as a matter of course. You have the right to be heard, and to make your case, and to the victory if the citizens vote your way. NOBODY has a right to stifle dissent, to make disagreement grounds for criminal punishment. That's a right that not even traditional marriage has, and earlier in this article I said things about traditional marriage which might well be "hate speech" within the meaning of the law towards traditional heterosexual marriage, if such a protection existed. I'm glad it doesn't, and you should be also. Just because the body of public opinion favors you at this moment does not in any way give you the ability to freeze the status quo into place. How are we supposed to make future improvements if the status quo is frozen? Ladies and gentlemen, our children are going to have more data about the situation after we are gone than we could hope to. What right have we to freeze any decision of ours forever immobile into law so that they cannot change it? Do we somehow believe they will be more bigoted, more narrow minded, stupider, have less in the way of scientific knowledge? That's what criminalizing opposition to anything does.

Furthermore, gay marriage proponents had filed lawsuits against several religious houses seeking damages and the revocation of their tax exempt status for the horrible crime of disagreeing with whether gay marriage should be legal. What happened to that First Amendment clause about "nor restricting the free exercise (of religion)"? Only religions that meet certain dogmatic tests are to be permitted? Well, I can see restricting ones such as the Thuggees and Islamic Fundamentalists, who want to kill anyone who isn't one of them. But absent violence towards non-believers on the part of that sect, there is precisely zero in the way of legal, ethical, or moral justification towards outlawing religious belief. If you want crazy, harmful beliefs, Communism has killed a couple hundred million in the last century and made the lives of billions into living hells that anyone who could escaped by running away, drugging themselves into oblivion, or committing suicide, yet communists are still permitted to preach their vile mental poison of envy, which has been proven false upon the lives of billions of people within the memory of myself and billions of others alive today. By comparison, the recent history of any world religion except Fundamentalist Islam is a paragon of virtue.

I wrote a few paragraphs ago that heterosexuals are not threatened by homosexual marriage. But everyone is threatened by the concept of hate speech. None of our liberties is safe when hate speech is an avenue of legally closing down any debate. Furthermore, criminalizing hate speech isn't even beneficial. If the Nazis or the KKK want to preach their particular brand of hate, well it may be offensive to the targets, but it is one heck of a useful signpost that these miserable excuses masquerading as human beings should in no way, shape or form be trusted with power, money, votes, or even dignified by taking them seriously. By allowing it into the public discourse, we have a significant restraint upon the ability of these cretins and their allies to persuade us that they might somehow be mistaken for reasonable, rational people. By accepting a certain amount of verbal abuse upon the targets of hate, we immunize ourselves against the possibility that the proponents will ever be able to actually do anything worse.

And in the last few days of the election campaign and the aftermath, the proponents of gay marriage certainly demonstrated a vile streak of their own. Intimidation worthy of the Pinkertons against Unions at the beginning of the twentieth century isn't the first example that pops into my mind, but I'll use it. Communist guerrillas throughout the twentieth century who made a habit of intimidating and assaulting the political opposition before assuming power, and just imprisoning or shooting the survivors after they assumed power. A little old lady who happened to be a Mormon intimidated and subjected to more hateful behavior than anything she was accused of doing because she donated $100 of her own money to the anti gay marriage Yes on 8 campaign. I can understand her business being boycotted by those in favor of gay marriage - that's legitimate, just as it would be equally legitimate for pro gay marriage people to make a point of patronizing her business as often as possible. What is not acceptable is the vile treatment she received when she attempted the common courtesy of hearing out those she disagreed with. Another little old lady abused and assaulted by a mob of gay marriage proponents. I could go on for quite a while, but you can run the same search engines I can for the articles.

Well, you vile fascist pigs, here I am. Here I will stay. I voted FOR Proposition 8. Boycott my business all you want. Say all the vile things about me that you care to. I will simply delete them if they happen to be on my website. If they're not here, I'll simply get a lawyer and sue if they are within the definition of defamation - towards individuals, not causes - that has been quite correctly inscribed in our legal system for centuries. Physically assault me, and I will do my dead level best to pound you into the concrete - and then I'll get my lawyer and sue for assault. Or simply disagree with me in a civil fashion, and we can talk it over in a civilized manner. You have that right, and you might even persuade me. I don't want to classify disagreement with me or the status quo as "hate speech," and will fight any attempt to make it so.

And I will still continue to vote and speak in favor of equal civil rights for homosexuals - unless you somehow manage to convince me of what you have not done thus far: that said rights would constitute a threat significant enough to be worthy of denying equality to you. You're starting late in the game, but really making up for lost time there. I'm repulsed by your tactics and behavior of late, to the point where my flesh has crawled while reading a couple of articles about them. But I still think you should be treated equally before the government, and I understand that there are still areas where your treatment has not attained that standard (hospital visitation and funeral arrangements, to name two), and I will not only vote in favor of such equality, but vote for representatives who will vote in favor of such equality. Where I draw the line is in the use of legal force to stifle dissent, or to force religious folks to accept within their religion that which their holy books decry, whether those books be Christian, Jewish, Moslem, Zoroastrian, or whatever. I believe in equal rights, but not in special privileges. We should all have the right to be equal before the law - but none of us has the right to avoid a little unpleasantness and disagreement from time to time in dealing with those of differing beliefs.

Carnival of Personal Finance


What he said: Stephen Den Beste (profanity warning applies)

There is no way in this universe that Obama can govern in accordance with how he campaigned. To the extent that he tries, his term will be a disaster.

If I were an Obama supporter, I'd be fervently hoping that everything he said was just an empty campaign promise. He's the president-elect. I am going to give him a chance. I'm not going to criticize him without reason rooted in his actions since the election.

Here is one such reason: By asking Rahm Emmanuel to be his chief of staff, he's also signaling that he's going to be the most partisan president since Nixon (at least). So much for "bi-partisan". Mr. Emmanuel has been one of the more vicious attack dogs in Congress.

On the other hand, he campaigned against Guantanamo, but now that he's actually President, Obama appears to be backtracking on that There may be hope for an Obama administration after all. Maybe the nutroots will even allow him this. Buddha knows the extent of their logical thinking is "Bush Evil! - Obama Good!"


VP-elect Biden hopes to be a hands-on No. 2

Vice President-elect Joe Biden was all smiles Thursday when he paid a courtesy call the man he will succeed, Dick Cheney. But he has insisted he wants to be nothing like him. Biden has called Cheney "the most dangerous vice president we've had probably in American history" and said he couldn't name a single good thing Cheney had done.

But even if he won't acknowledge any similarities, there's one way that Biden wants to be like Cheney - a strong partner in governing the country.

Partisan Politics 101: When we do it, it's good sense. When they do it, it's an unconstitutional abuse of power the vice president was never given.

I am not going to play that game. If I believe Cheney remained within his constitutional mandate (and I do), I must believe the same thing about Joe Biden. There is nothing forbidding the President from assigning other duties to the Vice President. The Dems just didn't like it because they couldn't force President Bush to spend political capital getting an appointment through when the Vice President is legally elected without a need for confirmation by the senate.

If Joe Biden does something in particular that is stupid or illegal (pretty much a matter of clockwork with him), you can expect me to say something. But assisting the president? That's a good idea as far as it can go, and I like the idea of the Vice-President being a power player in their own right. After all, does anyone remember voting on who would be White House Chief of Staff? I certainly don't. But the Vice President was elected with the same ballots the President was. Just because I voted otherwise in no way changes this.


Top Republican senators oppose automaker bailout

About time.

Sens. Richard Shelby of Alabama and Jon Kyl of Arizona said it would be a mistake to use any of the Wall Street rescue money to prop up the automakers. They said an auto bailout would only postpone the industry's demise.


Added Kyl, the Senate's second-ranking Republican: "Just giving them $25 billion doesn't change anything. It just puts off for six months or so the day of reckoning."

Right he is on that score. However:

"They're not building the right products," he said. "They've got good workers but I don't believe they've got good management. They don't innovate. They're a dinosaur in a sense."

Even here he has his elements. The problem isn't the workers, or even today's management. It's that when Detroit owned the worldwide automobile marketplace, their management then gave the labor unions more than they should have, and those contracts are weighing on the automakers like a millstone on the neck of a drowning man. The unions are unwilling to renegotiate, and federal labor laws make it impossible for the companies to do anything without the union being willing to renegotiate. They can't legally abrogate the contract, they can't legally refuse to deal with the union.

The original power of the union was that the companies could not afford to replace everyone, and so it was in their best interest to give them a fair share of the profits of their labor. But when laws were passed forbidding the companies from hiring an entirely new work force if that was more efficient, the power of the unions became too great. The automakers cannot hire an entirely new work force; they are legally forbidden. They can't refuse to deal with the union, they are legally forbidden. They can't force the union to renegotiate if the union is unwilling; they are legally forbidden.

Detroit has some very nice products (my wife and I just replaced a Saturn that got crunched with a Ford Minivan, and we like it a lot), but union contracts which prevent them firing anyone, force them to pay workers to sit around, and saddle them with lifetime health benefits for retired workers and their families - something not even the federal government does. The difference in competitiveness between domestic and foreign autoworkers can be directly ascribed - in the mathematical, accounting, sense - to the differences in the legacy contracts Detroit's automakers are saddled with.

I very much regret this fact, but there are only two ways out of this situation: A way can be found to break the UAW's stranglehold on the profitability of our domestic autoworkers, or Ford, Chrysler, and GM are going to be gone. If anyone thinks that would be a good thing for the United States, I would love to hear a rational reason why, because that is almost certainly what is going to happen. Oh, we might suffer a sudden attack of rationality after we lose one of them, but by then it will be too late for the other two as well.

And when they go under, what will the UAW and its members be left with?


The Same Old Change

You would think these nitwits would learn. You would think they'd all be out of the business. Sadly, that is not the case.

It started innocently enough. It always starts innocently.

This was an email I got today (specifics redacted).

Hi Dan, I came across your blog looking for information on what to do when your mortgage loan might not go through at the very last minute. I live in DELETED, and realize your in the San Diego area, but you really opened my eyes on the subject and I had to let you know. We are in escrow with a close date of DELETED, and our VA lending agent no longer works with the company after 2 months of paperwork, assurances and promises. The newly appointed agent says they don¹t know how DELETED was going to close the loan and everything is falling apart. DELETED went as far to say he could close the loan in 5 days to use as a negotiating tool to get a contract with the seller which won us the house. We never heard of getting a back up loan or a purchase money loan? It¹s not over yet, but any advice would be GREATLY appreciated as we are 1st time home buyers and really feel taken.

My response

(name deleted),
VA loans are dead simple providing you have the following qualities:

-VA eligibility

-sufficient income to cover the payments and other debt (see debt to income ratio)

-acceptable loan to value ratio. In the case of VA loans, this can be up to 103% of the purchase price or appraised value, whichever is lower. This is the only widely available "no down payment" loan right now.

-Property that meets VA and FHA standards (No holes in walls or cracks in windows, subfloors all covered, etcetera)

-enough time to get the government bureaucrats to do what they need to.

Unfortunately, there's a lot of loan officers and real estate agents out there who still don't understand how the market has changed. I have always built client affordability and a budget into my transactions, but the reason we're having problems is that a lot of my competitors didn't.

Here's what you need to do: Find out if there is a reason this transaction is not going to fly.

Obvious reasons why it definitely would not fly:

  • Can't document enough income for a long enough time
  • something wrong with the property
  • property appraises way too low
  • no VA eligibility

There are other possible reasons, but those are the main ones. If there is such a reason, bail out NOW. If there isn't such a reason, find someone who knows what they're doing IMMEDIATELY. Alas, I don't know anyone in DELETED, but I believe my company (Clarion Mortgage Capital) does business there. The good news is you still have almost
a month, which should be enough time.

If this property doesn't work out for you, may I suggest finding DELETED or DELETED and asking one of those fine gentlemen to be your agent? They're both ethical agents who won't be searching for properties you can't afford and who do know competent loan officers. I can get their contact information if needed, but they're both easy
to find online. Tell them I sent you - they both know I neither ask for nor accept referral fees, but that the occasional free client I send their way will disappear if they mistreat anyone I send.

I went out looking at property, and when I came back this email was there:

Thanks for your quick reply Dan, I know you must be busy, and I really appreciate all your information.

The only factor the new agent is citing is that we do have a high income to debt ratio. We know this. Everyone knows this, and it has not changed since we started the process 2 months ago. The first loan agent was going to get by this by paying down one of our high credit cards with seller money. We asked for 4% back from seller for this reason which they agreed to. Done. Now the new lending agent is saying that won't fly, that we can't pay down the debt we have to pay it off, and the 4% is 2000 short of our credit card debt. So she does not know how she can do it but is getting back to us today.

We have not talked to our real-estate agent yet, but we will today as well. Would you recommend we contact your mortgage company in the mean time to try to push through and cover ourselves?

Oh my.

Lions and Tigers and Bears and people trying to commit fraud. Oh, my!

My heart goes out to this person, especially as they are a veteran, but there's very little I can do beyond make them aware of some facts before things get any worse.

This is fraud. No maybe about it. I have written about this before in Cash Back From The Seller to the Buyer in Real Estate Sales. If the purchase price is $400,000 but the seller is returning cash back to the buyer under the table, then the buyer isn't really paying $400,000, are they? Nor is the seller really getting $400,000, are they?

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.

Now if they don't disclose that 4% cash back, they are misleading the lender and the government into believing that the property is worth more than it is. In other words, fraud. Furthermore, the former loan officer evidently hadn't disclosed it from the fact that the new loan officer is saying the lender isn't buying off on it now.

(I should say that the Department of Veteran's Affairs apparently allows this, but they are not lenders or loan officers, and whether the lenders would accept it is another matter. They can add other requirements if they so desire, and I would not expect this to pass muster with any lender I am aware of, as it violates generally accepted accounting principles (GAAP). Truth be told, I've never tried to get such a thing accepted, but I would try if the client really needed it and understood what needed to happen and the dangers to them. Even if the VA and the lender both permit it, it must be disclosed to them and approved by the underwriter in order for it not to be fraud. For standard conforming "A paper" loans, and for that matter even subprime ones, cash to the buyer from the seller, or cash to pay the buyer's debts, is strictly forbidden. Finally, considering such things from a dispassionate neutral point of view such as "are they a good idea?" or "Is the consumer likely to be able to repay the loan?" or "Is this a good risk for the lender?", I have to agree with GAAP - the answer is no, and the prognosis is that given the consumer's financial habits, this is setting them up for failure. But "good idea" and "legal" are two distinctly different concepts.)

Whatever the lender's fraud policy may be, the government comes down on people who participate in mortgage fraud that involves VA or FHA guarantees like a ton of bricks. Just because the VA permits it doesn't mean it isn't fraud if the lender doesn't, or didn't approve it in this particular case. They are going to throw the book at you. Have you ever seen the list of government regulations? Ouch, both literally and figuratively.

Let's suppose the buyer and seller do not commit fraud, fully disclosing the cash back to the lender and the government. If they do this, the lender and the government will both treat the purchase price as being the appropriate amount less than whatever number is on the paper. As I said in When The Appraisal Is Below The Purchase Price for Real Estate, this will mean the borrower basically has to make up the difference in cash. Net result, the buyer/borrower needed that 4% cash not to pay off their consumer debt, but for the down payment on the property. Net gain to the buyer from that money: Zero. Nada. Zip. Zilch.

Both the loan officer and real estate agent and their brokerages need to hear about this, at a minimum. The loan officer for actively planning a fraudulent transaction, the real estate agent for not speaking up and putting their foot down, because they should have known better, but were keeping their mouth shut to get a bigger commission check.

Now that stated income is, to use Miracle Max's wonderful phrase, "mostly dead", there seems to be no shortage of nitwits trying this fraudulent trick to get loans and transactions through. It is not a minor violation that nobody cares about. It goes straight to the heart of the notion of property value, and the lender's expectation that if you do default, they will be able to get their money back by selling the property. This trick fraudulently persuades a lender to accept more risk than they are aware of, or worse, tricks them into taking a risk that they would reject were they in full command of the truth. That's fraud.

It also goes right to the heart of whether the client can afford the property. In this case, they clearly can not. If they could, there would be no need to commit fraud in order to generate a false picture of them being able to afford it. Debt to income ratio is there for the borrower's protection as much as the lender's.

Here's the rest of my response to the clarification:

Your loan officer has hosed you badly. I really hope it's not going to end up losing your deposit. If so, in your place I would talk to their company about paying it in your stead. Their loan officer was trying to make a fraudulent transaction fly; that's failure to supervise. If they don't promptly agree to indemnify you in writing, talk to a lawyer. Actually, talk to a lawyer anyway. But if your loan contingency is still in effect you may be able to get out of it without losing your deposit.

I don't know your situation or your state's law or the contract you signed on this, and I definitely am not a lawyer. Talk to your real estate agent about getting out of the contract RIGHT NOW because this transaction is not going to happen.

Once you're out of the contract, I'd fire that agent if I were in your shoes. He helped negotiate the contract, he should have known it was fraudulent and the requirements for making it legal and the consequences thereof.

After sober reflection several hours later, I am, if anything, madder than I was. I would be ready to do violence to these two twits for what they did to someone who not only wants to put money in their pocket, but served our country, so it's a good thing they're not here in front of me. If it were me, or some situation I had an interest in (legal standing), I'd certainly make a written complaint to the regulatory authorities. I want these clowns gone, out of business, locked up in prison so they can't attempt to repeat this nonsense with some other innocent client who doesn't know any better, and I want their enablers and those who fail to supervise them gone, too. Helping someone with their home buying is a trust, and I have no more sympathy for those who knowingly and willfully violate that trust than I do for pedophile priests.

I'm not here to act like the Black Knight, shouting "None Shall Pass!" That didn't work out too well. But you need to consider 1) Can you really afford it? 2) Is it consistent with your financial habits?, and 3) Is it fully disclosed to everyone it needs to be? That lender is loaning out hundreds of thousands of dollars based upon their understanding of the situation. If that understanding is not in full accordance with what is actually going on, that's a problem.

Caveat Emptor

Article UPDATED here

Housing Bubble Death Trap

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(This blast from the past originally appeared June 7th 2006, and it wasn't my first such article. It's still relevant, though. Keep in mind that San Diego has been on the bleeding edge of all of this, so we're likely to start our turn around sooner as well)

The title was the wording of a search engine hit I got. It's not literally a death trap, of course, only much financial pain. But the hyperbole is forgivable in today's modern society and the state of the current market.

Other people may have other definitions of "housing bubble death trap," but when I'm talking about stuff like that, I'm talking about someone who bought too much house with an unstable (or insufficiently stable) loan.

I just picked a couple random streets in older lower middle class neighborhoods, and looked back a couple of years. I found a couple of homes that have sold twice or are on the market again.

A 3 bedroom home sold for $487,000 at the end of last year. It's back on the market now for $425,000. A condo sold for $285,000 at the end of 2004, and again just recently for $265,000.

UPDATE:And the prices on those streets are significantly lower now. The Condos I originally wrote about are now about $180,000.

Now just in case you don't understand, the owner doesn't get the full sale price, but they paid the previous sale price to buy it. Usual seller's expenses run about seven percent or so. So for the 3 bedroom home, the owner is only going to get about $395,000 to pay it off, even if they get full asking price. For the condo, the owner only got about $246,000.

Now, let's consider the sales involved. Either their down payment when they bought the home will cover it, or it won't. If it does, the homeowner is out about $92,000 in the first case, about $39,000 in the second. This doesn't include any prepayment penalties there may be or negative amortization it may have undergone, not to mention the cost of any payments they may have missed, etcetera, etcetera. There's always a reason people sell for a loss, and it's usually because they have no choice. They can't make the payments (and never could) or they have been transferred, have to get housing elsewhere, and can't make the payments. And what if the down payment won't cover the deficit? Well, at the end of the year they are likely to get a 1099 form that says they got income from forgiveness of debts. As I understand it, this is ordinary income, and it can knock you up to higher tax brackets, both federal and state, if your state has state income tax.

UPDATE: a temporary reprieve for this was passed in about September 2007 thanks to the sponsorship of President Bush, but it expires at the end of 2008 and does not appear likely that Congress will renew it.

So why didn't the folks just refinance into something stable, you ask? They couldn't afford the payments on a stable loan. Furthermore, they couldn't refinance due to their situation. If you bought with anything close to 100% financing, and you lose $55,000 of value, well, banks don't like lending money for more than the property is worth. There's no security in it. Now there are were 125% loans out there, but the rate is high and the terms are ugly. If you can't afford the rate at 100 percent, or 95 percent of value, you certainly can't afford the rate for over 100 percent. There are only two times that the value of a property means anything. One is when you buy or sell, and the value is whatever you paid for it, or your buyer pays. The other, alas, is when you refinance, and if you owe $480,000 on the property when similar properties are selling for $425,000, the odds of you getting a better loan with a lower payment are essentially non-existent.

Now if the folks are in a stable loan, and can make the real payments, it doesn't really matter what the property is worth right now. You're doing fine, whether you refinance or not. Refinancing might put you into a better situation, but if you can't refinance, you're still doing okay. Yes, the prices are down and they're likely to go down more. It just doesn't matter if you don't intend to sell and don't need to refinance. Your cash flow is what it is, and if you really were okay with that to start with and the loan is stable, you're likely okay with it now. If you got a loan that was stable for three or five years long enough ago to worry about loan adjustment now (or soon), you've likely got plenty of equity in the property now. If, on the other hand, you did a 2/28 interest only a year and a half ago, then you're potentially looking at a payment adjustment in the next few months that's suddenly two percent higher and fully amortized, which could be thirty or forty percent difference in the payments. Ouch. Out of such scenarios are losing a property to foreclosure constructed, with consequences even worse than the ones I talk about above. Just the act of lender filing a Notice of Default usually adds thousands of dollars to what you owe, never mind any payments you may have missed or been late.

This then, is what I call the Housing Bubble Death Trap. People who bought too much house with unstable loans, then had the market recede a little on them. Now they are upside down (owe more on the property than it is worth) with a loan they cannot refinance and cannot afford, and they can't sell for as much money as they paid.

What are the loans to watch out for if you're buying? Anything like stated income, where you're not documenting that you make enough to qualify for the loan. Stated Income has legitimate usages, mostly for small business folk and those paid on commission, but should not be used nearly so often as it has been, of late. For all the people who have claimed otherwise (and used them for such), I have never seen a situation where I'd recommend any kind of negative amortization loan for the purchase of a property that you intend to live in. Stated Income Negative Amortization loans should scream out to anyone "WARNING, WILL ROBINSON! DANGER! DANGER! DANGER!" Short term (2 year) interest only loans are less clear-cut, but often a bad idea. These are sub-prime loans. I did a lot of 2/28 loans at six percent a couple of years back. They were intended as short term loans until folks' credit improved, and that's the way I explained them, emphasizing that fact that they have to make certain their credit score actually improves during those two years. They're going to be around 8 percent the first six months they adjust, and a $300,000 6 percent interest only has a payment of $1500 per month. If it adjusts to 8 percent and starts amortizing with 28 years left to go, that's a payment of $2240. I have a firm rule of no prepayment penalties longer than the fixed period of the loan, but I'm definitely the exception rather than the rule there among loan officers. If you were paying principal and interest all along, like most of my clients, you've got some breathing room (equity) in your property and the "payment shock" won't be nearly so bad, not to mention that if your score actually went up, you likely qualify A paper now.

UPDATE: And stated income loans are "mostly dead" now, due to the systematic abuse by most alleged professionals. I feel bad for the self-employed and sales professionals who now have a much harder time qualifying for a loan because of it. Yet another instance of the tragedy of the commons: The market is killed by individuals who are all collectively looking for one more commission check right now.

Three year (or longer) fixed rate A paper probably gives you enough breathing room in all but the worst of all market collapses, and I prefer at least five, with thirty year fixed actually being my favorite loan right now, due to the fact that depending upon the lender and the client, I may actually be able to get them cheaper than anything else. This, however, is a short term phenomenon of the moment, due to the yield curve being inverted, and once it straightens out, I'll probably be doing more medium to long term hybrid ARMs again.

Caveat Emptor

Original here

HUD has announced a new Federal Good Faith Estimate and HUD 1 form. The regulations have been finalized, but as I write this, they have not yet been published, at least in their final form. They appear much superior to the current forms, but I have a major gripe in that the new forms will not be required until January 1, 2010. There is no reason on this planet why they can't be enacted effective at the beginning of 2009 at the latest.

I haven't exactly made a secret of my disgust for the loose loan disclosure rules we have had for these many years, and these loose requirements were a major cause of the meltdown we currently find ourselves in. I've been griping about the loopholes in the Good Faith Estimate from my very first articles on the site. I said a year ago in How to Avoid A Repeat of the Housing Market Mess, if I had to pick one place to prevent a repeat of this whole mess, it would be in the loan disclosure requirements. Without a copy of the regulations, I can't confirm how well they've done, but the new form appears to be light-years ahead of the previous version.

You can view the document here. Go ahead and click on it - it should open in a new window or tab. You're going to want to be referring to this while viewing it.

The "Summary of Your Loan" box on page 1: All of those questions are wonderful to see where they are highlighted, not hidden in the middle of other stuff or altogether missing:

Your initial loan amount is

Your loan term is

Your initial interest rate is

Your initial monthly amount owed for principal, interest, and any mortgage insurance is

Can your interest rate rise?

Even if you make payments on time, can your loan balance rise?

Even if you make payments on time, can your monthly amount owed for principal, interest, and any mortgage insurance rise?

Does your loan have a prepayment penalty?

Does your loan have a balloon payment?

On Page 2, it explicitly tells the consumer what they are paying in origination versus discount (often incorrectly used on the previous form), whether they are getting anything back, or what they are paying (discount) in order to get this loan rate.

1. Our origination charge This charge is for getting this loan for you.

2. Your credit or charge (points) for the specific interest rate chosen

The credit or charge for the interest rate of % is included in

"Our origination charge." (See item 1 above.)

You receive a credit of $ for this interest rate of %.

This credit reduces your settlement charges.

You pay a charge of $ for this interest rate of %.

This charge (points) increases your total settlement charges.

The tradeoff table on page 3 shows that you can change your total settlement charges by choosing a different interest rate for this loan.

Now here's another change I approve of: Lumping the fees into categories, rather than playing hide the salami by pretending charges do not exist, or they don't fit exactly on a given line:

3. Required services that we select

These charges are for services we require to complete your settlement.

We will choose the providers of these services.

Service Charge

4. Title services and lender's title insurance

This charge includes the services of a title or settlement agent, for example, and title insurance to protect the lender, if required.

5. Owner's title insurance

You may purchase an owner's title insurance policy to protect your interest in the property.

6. Required services that you can shop for

These charges are for other services that are required to complete your settlement. We can identify providers of these services or you can shop for them yourself. Our estimates for providing these services are below.

Service Charge

7. Government recording charges

These charges are for state and local fees to record your loan and title documents.

8. Transfer taxes

These charges are for state and local fees on mortgages and home sales.

9. Initial deposit for your escrow account

This charge is held in an escrow account to pay future recurring charges on your property and includes all property taxes, all insurance, and other .

10. Daily interest charges
This charge is for the daily interest on your loan from the day of your settlement until the first day of the next month or the first day of your normal mortgage payment cycle. This amount is $ per day
for days (if your settlement is ).

11. Homeowner's insurance
This charge is for the insurance you must buy for the property to protect from a loss, such as fire.
Policy Charge

B Your Charges for All Other Settlement Services $

Then on page three, it breaks the charges into three groups, the first group being charges that are not allowed to change

These charges cannot increase at settlement:

Our origination charge

Your credit or charge (points) for the specific interest rate chosen (after
you lock in your interest rate)

Your adjusted origination charges (after you lock in your interest rate)

Transfer taxes

The total of these charges can increase up to 10% at settlement:

Required services that we select

Title services and lender's title insurance (if we select them or you use companies we identify)

Owner's title insurance (if you use companies we identify)

Required services that you can shop for (if you use companies we identify)

Government recording charges

I'd rather title and escrow charges be in the first category (cannot increase), but I'll take what I can get. This forces actual price sensitivity upon loan officers, although there is still room to lowball. It also limits title and escrow junk fees to an amount you agreed to pay in the first place, plus 10% at most. Once again, the actual regulations, once they are available in final form may short-circuit the usefulness of all of this, but taking things on the face of it, this is a HUGE amount of improvement.

Finally, the list of things that can change prospectively without limit:

These charges can change at settlement:

Required services that you can shop for (if you do not use companies we identify)

Title services and lender's title insurance (if you do not use companies we identify)

Owner's title insurance (if you do not use companies we identify)

Initial deposit for your escrow account

Daily interest charges

Homeowner's insurance

I do not understand why daily interest charges are in this list, unless they are merely in the sense of the number of days you are being charged interest for changes. The actual per day charge should be known exactly as soon as you have a loan amount and interest rate, but the number of days prepaid interest will vary with the actual settlement date. Since the calculation is in the form of $x per day times y days = $z, no matter how many decimal places you're correct on the $x per day figure, if the number of days (y) changes as settlement gets moved forward or pushed back, it doesn't take a genius to figure out that the figure for $z is going to change.

The next item is as beautiful to my eyes as any work of art. I've been harping about the tradeoff between rate and cost since day one on this site, and quite a while before that, but it just does not enter the public consciousness. The federal government has built this tradeoff right into page 3 of the good faith estimate!

Using the tradeoff table

This GFE estimates your settlement charges. At your settlement, you will receive a HUD-1, a form that lists your actual costs. Compare the charges on the HUD-1 with the charges on this GFE. Charges can change if you select your own provider and do not use the companies we identify. (See below for details.)

Understanding which charges can change at settlement

In this GFE, we offered you this loan with a particular interest rate and estimated settlement charges. However:

If you want to choose this same loan with lower settlement charges, then you will have a higher interest rate.

If you want to choose this same loan with a lower interest rate, then you will have higher settlement charges.

If you would like to choose an available option, you must ask us for a new GFE.

Loan originators have the option to complete this table. Please ask for additional information if the table is not completed.

Your initial loan amount

Your initial interest rate1

Your initial monthly amount owed

Change in the monthly amount owed from this GFE

Change in the amount you will pay at settlement with this interest rate

How much your total estimated settlement charges will be

The loan in this GFE

You will pay $ less every month

Your settlement charges will increase by $

You will pay $ more every month

Your settlement charges will be reduced by $

For an adjustable rate loan, the comparisons above are for the initial interest rate before adjustments are made.

Cost is attached to rate and rate is attached to cost. You cannot separate one from the other, but you would not believe how many people just assume that they can have the lowest possible rate without points or fees, and have been taken for a ride because they did not understand this fundamental truth of mortgage loans.

The new HUD 1 form is a little more readable, and links back better to the Good Faith Estimate, both praiseworthy endeavors. It's essentially the same format on the first two pages, with a third page added, linking back to the settlement charge categories on the Good Faith Estimate. I've always been a big fan of the HUD 1 form, and all they appear to have done is add more information with a third page that links back to the good faith estimate in an easily understandable way.

National Association of Mortgage Brokers (NAMB) issued a press release

NAMB will be issuing a press release announcing its disappointment with the final RESPA rule once it is released. NAMB believes that the final rule will hinder competition in the market and increase costs to consumers.

In addition, NAMB will be calling upon Congress to take immediate action to review the rule.

I wasn't involved in the process, so I have no idea if NAMB wanted a better, tighter standard or a looser one. I'm willing to be charitable, but the new form is so much better for consumers than the old one that I have my doubts as to whether NAMB, as well as the Mortgage Bankers Association (their statement is here, leading me to suspect that they got a little more of what they wanted). I don't know if they were pushing for even more transparency or less, but change would have come decades ago if the industry wasn't so dead set against it.

May I observe that this is not a done deal yet. Congress, in particular the financial committee chairmen (Barney Frank in the House and Chris Dodd in the Senate), are well known to be completely in the pocket of the industry (fee simple title, at that - and owned free and clear). I have no idea of the political maneuvering that went into this - I have no idea whether the Bush Administration is intentionally going to the mat on this one, or if it's simply career bureaucrats finally beginning to do the job they should have done thirty years ago. Given the President's history on trying to prevent the meltdown (he and Congressional Republicans tried no less than three times to prevent or lessen the mortgage meltdown, and were stymied by the Democrats in every case), I'm inclined to be believe the Bush Administration is at least complicit in the changes, although I have no direct evidence. But I suspect that any changes Congress makes if it gets involved will not be for the betterment of the consumer. In fact, I suspect the industry is behind the delay in implementation (over an entire year) to give them a chance to work the changes in Congress (where bribes campaign contributions are legal) that they couldn't get from the career bureaucrats.

To summarize, all I'm working from here is the fact sheet and the new forms. The Devil is Always in the Details, and the finalized regulations are not yet available for public viewing as of this writing. They could be so loose that the improvements in the new forms lose all meaning and importance - for example, the current regulations and the current form, which if the regulations were what they needed to be, the current form would not be the joke it is. But if these changes can be taken at face value, the new forms will be the best thing for mortgage consumers ever. I'm not saying they can't be improved. I'm just saying that I would not have expected anything nearly so good for consumers as these appear to be to have come out of the government bureaucracy.

Caveat Emptor

(Thanks to Steve Kaye for bringing this to my attention!)

A while ago now, I quoted a loan to someone, and they chose a 5/1 loan at 6 percent with .05 points of discount, and they told me the closest competition was 6.375 with more discount than that. Then when I tried to lock the loan with the lender, I discovered a transient compliance problem that prevented that lender from accepting loans from us for about a week. No biggie, I thought, I'll just go with the second best. It's not as if my competition was even close. So it became a loan that would cost about one tenth of a point of discount instead of only 5%. Difference (on a $500,000 loan): About $250. However, this particular client had opted for the Upfront Mortgage Broker Guarantee, where my compensation is a fixed amount, instead of my standard Loan Quote Guarantee, where if it's not precisely the loan I quote, I have to eat the difference. So I did the ethical thing under those circumstances, and called the client right away to let them know that the pricing was a little different. They then canceled the loan, despite having been specifically counseled about the risks of the plan they chose.

Now the loan they would have gotten was still a much better loan than the competition was offering, and I would have been legally compliant had I just waited and socked them with the difference at closing. Even the Upfront Mortgage Brokers would have accepted the facts had the client complained - if, indeed, they had even noticed. I could have kept my mouth shut and gotten a loan, and at least 95% of all loan providers would say I was stupid for not doing so.

But let's look at it through a consumer's eyes: Wouldn't you rather be told, weeks in advance, so that you know what you're really getting? So that if you so desire, you can go shopping for something better? Isn't it better than having it sprung upon you at closing? Isn't this the sign of someone you want to be doing business with?

Some people may feel it's a sign of someone who's springing a little change now in preparation for springing a bigger change later. That might seem intelligent, except for the fact that I don't have to tell you about the changes now. There is absolutely no legal requirement. The fact that your loan provider does tell you right away is a sign that they are going well past the legal requirements. The vast majority of all loan providers are pretending that thousands of dollars in fees and adjustments and even barefaced low-balls don't exist - and you're getting all angry and disappointed because someone who's delivering something thousands of dollars cheaper than the competition is telling you weeks in advance about a $250 difference between the initial quote and the numbers he's going to stand behind with a Loan Quote Guarantee that's still way less than the competition - and that competition isn't willing to issue the guarantee even on the higher quotes?

The problem with the loan industry is that lenders can tell you about one set of numbers to get you to sign up - numbers that they know good and well they are not going to deliver - and then thirty days later when they actually have your loan ready, deliver something completely different, secure in the knowledge that they have this unbeatable advantage of you having actually given them this thirty days to get ready. Entire business plans are drawn up based upon the fact that they can lie, and conveniently "forget" to tell consumers about all of these additions to what the consumer is actually going to end up paying, and consumers will reward them by not only signing up, but signing on the dotted line when it's time.

Now, take a step back and ask yourself: Is someone who comes right back and tells you about the difference within a couple of hours playing that game? Not likely. If they give you a real loan quote guarantee based upon the revised numbers, any future games they are playing are pointless. In fact, if they tell you that the difference came about in the locking process, you can be more confident that they actually have locked your loan, itself a huge problem with the industry. If I haven't locked your loan, I can pretend that the difference isn't going to happen because the rates might go down, can't I?

When people come back right away and tell you about issues in your loan, you should become more comfortable with them, not less. The less ethical ones can pretend the issues don't exist for weeks, until they spring all these differences on you at closing while distracting you with a thousand other things so that you don't notice what you're signing. In fact, the sooner they tell you about an issue, the more likely it is they are doing their best to be honest.

Caveat Emptor

Original article here

California has replaced the one page federal Good Faith Estimate with a two page Mortgage Loan Disclosure Statement. When I originally wrote this, I haven't seen a lot of abuses of this yet, mostly no doubt because it is so new. I didn't even know if there were solid regulations and implementation policies and standards on it yet. I hadn't seen anything from the Department of Real Estate in the mail, and all web searches (including with the Department of Real Estate) come up with is a link to various lenders online forms, not the regulations for filling it out. So I'm presuming that said regulations are similar to the federal Good Faith Estimate, especially as the only thing a recent seminar we paid for on changes in the business had to say was, "If you give the client a Good Faith Estimate, you will be held to have complied with federal regulations but not state of California regulations." All of which combined with subsequent developments to indicate that California didn't alter the existing federal standards so much as add a few more requirements, the effects of which are to leave all of the games loan providers play with the federal Good Faith Estimate intact, as well as adding a couple more. (See my two part essay on the Good Faith Estimate for a list of the most common of those games). This essay is going to concentrate on differences between the new California form and the Federal Form.

The first page of this new form is similar to the Federal Good Faith Estimate, and indeed you should refer to that article for the limitations of this page, and how little the quotes mean. The first major difference is that there is no explicit loan or rate quoted at the top, and the broker or lender must disclose whether each given cost of the loan is paid to the broker or to someone else. There is no explicit line item (as there is on the Good Faith Estimate) for "Estimated Closing Costs" to explicitly sum all of the things that are actual fees or costs of the loan, as opposed to reserve requirements or things that are your fees paid in advance, such as property taxes. Your property taxes are the same whether you have lender A, lender B, or no loan at all. Ditto your homeowner's insurance, school taxes (if any) and flood insurance (if any). Setting a form where they are part of a total to be compared, rather than apart from that total, is just offering the loan provider one more opportunity to play games or distract you from the really important information.

There is a sum of all the things the client is paying to the broker versus paid to others. I wonder if this might not backfire on the lending and packaging houses that got this part added. They're going to show a line of fees paid almost entirely to them, whereas the only things paid to or from an actual broker are origination fees (if any), processing fee (my processor works for me or for the brokerage, not the lender), and broker's rebate to client (if any, and which if it exists is something paid by me the broker to you the client - a good thing in most clients' opinion). Psychologically a telling advantage, even if it doesn't really mean anything.

At the bottom of page one, there are subtotals for fees paid to others and fees paid to brokers, and then an overall total. Then there's a section which says "Compensation to Broker," explicitly adding "(Not Paid Out of Loan Proceeds)". In other words, this isn't coming out of your pocket, although they could certainly give you better terms by reducing their compensation in the vast majority of cases. But the fact that one broker is making more than another (or is required to state explicitly what they make, whereas a direct lender or "packaging house" originating their own loans is not) does not mean you're not getting a better loan from them. Some brokers get discounts others do not. Some brokers disclose honestly and completely, others do not. Examine the loan you are getting - all of the terms, rates and conditions, and decide based upon those which loan is better. That's what makes a difference to you. The rest is a matador's red cape - a distraction from what is important. For instance, I have both correspondent lines (where my company funds the loan and immediately sells it to the lender who underwrote it) and broker lines (where we originate, but the lender funds it themselves). The major difference between the two is that with the correspondent lines, not only do we make more, but what we make is undisclosed because it isn't yield spread, but rather income from selling that loan on the secondary market. But if the client pays attention to what is important to their own bottom line, which is to say type of loan, interest rate, and total cost, disclosure of additional compensation is just unimportant to them.

Once again, this isn't important to you, the client, but it has in passing performed a service to many workers in the loan industry. Many lenders give bigger brokers a volume rebate, over and above the basic per loan rebate, and the brokers were keeping this a secret from even their own workers lest they have to increase compensation. Now these brokers have to disclose it to the clients. This means the brokers have to tell the loan officers about it so they can disclose it. Now that all loan officers know about it instead of only a few, those who are high producers and have leverage can say, "I'm helping you make all this money. I want part of it."

Page two of this two-page form starts with section I, which is a short accounting of the money. My advice is not to trust this any more than anything on the Good Faith Estimate. In other words, whether this is accurate is likely to be a function of your particular loan officer's good will more than anything else. Once again, the only form where there are real penalties for being inaccurate is the HUD-1, which comes at the end of the loan, not the beginning. But it's a good intention, nonetheless, and perhaps one of these years it'll actually mean something even if your loan officer is Simon LeGreedy or has a nose fourteen miles long. Proposed loan amount less costs, less other stuff of yours that's getting paid off, less the purchase price of the home or payoff of existing loan. The idea is to give you an explicit "you're going to get this much cash" or "you must pay this much cash to make this balance"

Section II is something I want to draw your attention to: Proposed interest rate is a good thing to have, although there is no more guarantee that this is the rate you're going to get than a federal Good Faith Estimate. But it has a choice of two things to check off "Fixed Rate" or "Initial Variable Rate". Just because Fixed Rate is checked does not mean the loan they are discussing is fixed rate for the full duration of the loan. Let me repeat that: Just because Fixed Rate is checked does not mean the loan they are discussing is fixed rate for the full duration of the loan. It might be fixed for thirty years - or it might be fixed for three months. This is a good place for unscrupulous loan officers to offer misleading information verbally, while checking the correct box doesn't usually mean a whole lot.

Section III is proposed term of the loan. If something less than 360 months is written here (or whatever the amortization of the loan is in years), it's telling you there's a balloon at the end. Once again, there is no way to verify that if 360 months is what is written, it's real.

Section IV is proposed loan payment. Ideally it's computed based upon the amounts given in the previous three sections. Verify that it at least makes mathematical sense by running these numbers through an amortization calculator, or doing the calculation yourself. Many loan officers will play games with the payment because most people shop loans based upon payment. Never choose a loan based upon payment. It's too easy to promise an unrealistically low one, or bait a really nasty trap that doesn't spring for a couple of years with low payment.

Section V: does the loan have a prepayment penalty, and on what basis? I'm glad to see this section here. I'll be even gladder if and when I see evidence the answers mean anything in the sense of legal penalties for lying. Lying about prepayment penalties has been rampant for a long time. Lying about prepayment penalties is a good way to make an absolutely awful loan look pretty good. Lying about prepayment penalties gets someone to sign up with the loan provider who lies because of this. And when you find out at the end of the loan process, when they present the loan documents, that they were lying (if you even notice, which many are expert at making sure you don't!), you may not have any good alternatives to signing those documents anyway.

Section VI basically tells you the lender cannot require credit life insurance or disability insurance. Many lenders would if they could. Not that disability insurance is a bad idea - quite the opposite in fact (I'm of two minds on credit life insurance, and this is not the place for that essay).

Section VII requires you the client to tell them, the lender about all the other liens on the property and hints at penalties for dishonesty. Not that the lender or broker is going to take your word for it, of course. But the gall this amazes me: requiring a consumer to be accurate on this or face penalties, pay for the loan, etcetera when many brokers and lenders could submit the form to the Pulitzer committee for consideration in the category for best short fiction.

Section VIII is about Article 7, which covers loan amounts so small as to be irrelevant for all practical purposes in California. There's also a bit about whether or not a broker is lending their own money. This is potentially both confusing and interesting, but beyond the scope of this essay. It's good that they are requiring license numbers now. In California, you can easily look them up for past violations online at (many other states have similar registries). Not that someone without past violations is pure, and not that someone with them necessarily intends to do anything dirty to you. But it's good information to know. Another good place to check them out is with the Better Business Bureau, which compiles information on every business, members or not, at You'll need a business name and address, phone number, or web site. Now, if they've got one strike against them, they could easily have been caught in circumstances beyond their control. But a pattern of abuses is a clear warning. When I originally wrote this, I had just decided to risk $50 for a business card order with a company that has a truly awful rating BBB rating. The cards arrived two days later and I couldn't be happier with any aspect of the transaction. But my next order from them won't be any bigger until they have established a track record with me (and also I with them so they can see a long history of orders they want to keep coming, and which will stop if their service isn't satisfactory).

Section IX explicitly tells you, the client, that this is not a loan commitment. This is good, so far as it goes. I've spoken to many otherwise intelligent people who somehow had acquired the idea that because a loan provider filled out a Good Faith Estimate, it meant the loan was a Done Deal. It most certainly does not mean anything of the sort. No real estate loan officer EVER writes a loan commitment, and it's been that way for at least a couple of decades. Loan commitments are the exclusive province of the underwriter, who is intentionally and for anti-fraud reasons isolated from the client (i.e. the underwriter is not allowed to communicate with you directly). The most an ethical loan officer will say is "my experience does not show me anything that should cause you to have a problem"

Now, here's the rub, and an indication of what this section really should say. Does it not stand to reason that if the loan is not a Done Deal at all, it most particularly is not a done deal on the exact stated terms? This form is supposed to be an estimate. It may be a good estimate, given on a loan that has already been locked. Or it might be just a convenient fiction that gets you to sign up with that provider. There is no way to be sure it's good until you get the HUD-1 at the end.

Caveat Emptor

Original here

(Amalgamated with my article on the Good Faith Estimate at Dan Melson's San Diego Real Estate and Mortgage Website)

With housing prices having crashed in most of the higher cost areas of the country, many people who were formerly priced completely out of the market have become interested once again in purchasing property. The drawback is that because lenders are scared of zero down payment programs right now, if you haven't got a down payment you are just as solidly locked out of property as if you could not afford the payment, as formerly. So I thought I'd go over the down payment requirements for purchasing real estate. These are minimums. If you have more of a down payment, that's even better. You cut the amount you need to borrow, thereby cutting the payment and increasing affordability still more, and you also quite likely improve the loan you are eligible for.

Right now I would plan on having 10% of the purchase price for a down payment with conventional conforming loans. On a $400,000 property, that's $40,000, which is quite a chunk of change for most folks. This is the "no government involvement necessary" loan, up to $417,000 of loan amount (not purchase price, a critical distinction to make!). If you're putting 10% down on a $450,000 property, what you have is a conventional loan amount - $405,000 - not "temporary conforming" (currently $417,001 to $697,500 in San Diego), not nonconforming, but a full on conforming loan, assuming you qualify on the basis of credit score debt to income ratio and loan to value ratio. I do have a source for loans with only 5% down purchase money loans that seems increasingly solid - but it's only one. One program from one lender can vanish at any time, and there is no Plan B. If that lender pulls the program while we're in escrow, that's not Monopoly Money my clients are risking. It's to be noted that if you're putting less than 20% down, you need a credit score of at least 680 to get private mortgage insurance, without which the loan will not actually fund.

FHA loans have had a recent revision: They now require a 3.5% down payment as opposed to 3%. On a $400,000 property, that's $14,000. On the plus side, the funding fee (Currently 1.75 points) can now be added back in to the loan amount, yielding a 98.25% loan to value ratio when everything is said and done, but you need a 3.5% actual down payment or the deal is off. Furthermore, they have a financing insurance charge of 0.5 or 0.55% on top of your note rate, but better to pay the charge and get the loan you need than not pay the charge and not get the loan.

VA loans really have become the magic bullet. Not only do they not require a down payment at all, but closing costs of the loan (including the VA Funding Fee, if it applies) can be rolled into the loan on top of the purchase price. Furthermore, there's no financing insurance charge, and only very minimal loan adjustments, if any at all.

The good news, to counterbalance the increased down payment requirements, is that prices are much lower. The bad news is that if you wait for the lenders to lower down payment requirements again, prices will be much higher then. You see, it's the difficulty in finding people who can get a down payment that is partially fueling the fall in prices. They're not going to stay this low when that changes.

So how do you take advantage now? Where can you get the money for a down payment quickly?

I'll skim over the obvious and simple candidates: Savings, investment accounts, sell some of your stuff. If you have a spare Ferrari lying around you're not using, that's probably a peachy down payment for just about anything. Just because folks were all wanting to buy without a down payment, to the point where it became unusual for folks to actually have a down payment there for several years, does not mean that doing so is in any way mandatory. But if you are in one of these categories, you probably don't need to hear me tell you that money you have stashed away could be used for a down payment for the purchase of real estate. I'll bet you can figure it out on your own.

So let's look at the non-obvious ways.

Let's start at the least painful, at least personally: Retirement accounts. The tax code allows you to withdraw up to $10,000 from certain IRAs for the purpose of a down payment (talk with your accountant for details). Put two spouses together, and you've got $20,000. That may have been only 3% when properties were $600,000, but when the property is $300,000, $20,000 is almost 7 percent - more than enough for an FHA loan, which anyone who hasn't defrauded the federal government can get..

Second option: 401k and its siblings and cousins 403b, 401b, 457, etcetera. These are group retirement plans where you cannot withdraw the contributions for so long as you work for the company, government, or non-profit. But the majority of these have plan documents that allow those who have previously contributed to take out loans from their balance in the plan and repay those loans from future contributions. Let's say you've contributed $30,000 which has grown to $50,000. The mechanics do vary, but if you take a $30,000 loan and repay it $200 every two weeks from your normal 401 contribution, that's mostly a wash in most cases. Be careful for rules on interest rate charged and method of repayment, but the federal government's Thrift Savings Plan (among many other employer sponsored plans) allows loans for this purpose. Meanwhile, your original contributions may even continue growing. Once again, it depends upon your plan document and everything it lays out.

If your family (or your spouse's family) wants to give you a gift for the down payment, that works. FHA rules specifically allow up to a 6% gift from family members, VA rules are similar even though they don't require a down payment, and even conventional lenders make it easy enough to use family gifts for a down payment. This may seem like a no-brainer, but many times Junior wants so much to do it on their own without help, that they refuse to see a very obvious solution even though it is the best and most painless way under the circumstances. You can always save up the money to pay them back even though it was a gift. Just because it's a gift doesn't mean you can't give them a gift back later; it just means that it cannot be a loan masquerading as a gift.

Many locally based first time buyer programs exist. There programs lend (not grant) you the money for a down payment. In some cases, 20% or more of the purchase price. Most of these take the form of a "silent second" mortgage where there are no payments due, and it you hang onto the property for a certain amount of time, the loans can even be forgiven. The drawbacks are several, but the usual elephant in the room is that these programs run out of money at Warp Speed every time they get a new allocation. I've heard of people who had tried three, four or more times at intervals separated by six months and still couldn't get into these programs due to budget limitations. It can be very difficult to get in on these programs. I applied for one back in April for some clients. Despite the fact that we were less than two weeks out of the starting gate from when the budget allocation had been received, there was nothing left in the program. So even though your loan person may be eager to participate in such a program, the fact that your application is competing with those of many other people may preclude it actually happening.

The final possibility is a personal loan. These can be either from banks and credit unions issuing a fully underwritten loan with market rate interest, or from family members deciding to make a below-market rate loan based upon the fact that they like you. Lenders take a truly large number of precautions to prevent the down payment money from being borrowed unbeknownst to them, but a fully disclosed personal loan, not secured against the title of the property, is perfectly acceptable in most cases. If does impact debt to income ratio, because you've got to make payments on the personal loan as well as the real estate loan, so it does constrict what you could conceivably afford in the way of purchase price. On the other hand, it does put the purchase money in your bank account today, when you need it, rather than two years from now, when there is an excellent chance prices will be much higher by then.

So there you have them, half a dozen possible ways to get a down payment quickly, while it really makes a difference to the home you can afford the payments for because prices are down. Which they are, in part, because people with down payments available to them are so difficult to find. If you need a down payment to buy and neither these not any other method of acquiring one will work, you're just going to have to wait it out until the guidelines are relaxed, or until you do manage to save up the money for the required down payment.

Caveat Emptor

Article UPDATED here

Quite a while ago, when loan standards were other than they have become, I wrote an article with the title Is a VA Loan a Good Deal? Back then, if you could qualify for a loan that was both A paper and full documentation, I could get you a better loan as measured by cost of interest for the same closing cost, maybe even if you didn't have a down payment. Lenders were eager to make loans at 100% loan to value ratio, and since conventional conforming rates have always been the lowest for a given cost, they could beat VA loans despite not being designed for the same situations.

That is no longer the case.

100% financing for ordinary conventional loans has completely self-destructed, at least for now. I am firmly of the opinion that it will be back for full documentation borrowers who can prove actual income via tax returns or W-2 forms, but for right now, it is gone. FHA loans only go to 96.5% Loan to Value ratio, and the down payment assistance programs that formerly enabled people to get FHA loans without a down payment have been put out of business by legislation. This leaves the VA loan as the sole loan program available that currently allows purchase of real estate without a down payment. Not only do VA loans allow over 100% financing, they have absolutely no ongoing mortgage insurance charges. There is a half a percent funding fee charged by the VA, but this is eligible to be rolled into the loan itself, and the funding fee is waived if the veteran has 10% or greater service related disability.

Not everyone is eligible for a VA loan. You must have earned it via time in the armed services. Currently active-duty service-folks are potentially eligible, providing they have met the criteria. In some cases, a spouse of a deceased serviceperson is also eligible for a VA benefit. This still isn't as many people as was true formerly. Thirty years ago, far more people served in the military than currently do. Even though San Diego is a military town, most veterans seem to leave when their tour is over, so the population of discharged veterans is lower than might be expected. They're here, but they have mostly come back because of civilian employment or following spouses who are themselves in the military, rather than choosing to retire here.

Indeed, Active duty servicemembers have an advantage over retirees. They are able to draw a housing allowance if they do not live in military housing - a housing allowance that can pay their mortgage instead of rent, and when reassigned, they can rent the property to another military family, knowing the military family receives that same allowance. A military family that exercises due diligence can retire owning five or more properties, all with positive cash flow, and most likely with huge amounts of equity, if not owned outright. Current BAH allowances for San Diego won't purchase a mansion, but they will cash flow out for quite reasonable properties in desirable parts of town. Since VA loans are all fully amortized, this will eventually pay the mortgage off, leaving them with only property taxes and maintenance for the expense of owning the property.

For a decade or more, VA loans were pretty much useless in high cost areas because of loan limits too low to purchase desirable properties. There for a while, they were only useful for one bedroom condominiums here in San Diego because the price of housing had so far outstripped VA loan limits that that was all that could be bought with them. That has now changed, both because prices have fallen (if anything, farther than they should), and VA loan limits have risen dramatically thanks to new legislation. San Diego has a current VA loan limit of $697,500 (here are loan limits for high cost areas nationwide) and recent legislation has extended VA loan limits above "regular" conforming loan limits through at least the end of 2011.

The Department of Veterans Affairs:

The temporary increase to the maximum guaranty has been extended through December 31, 2011. When combined with new locality-based Freddie Mac conforming loan limit in January 2009, VA's maximum county "loan limit" will be $1,094,625 ($1,641,937.50 in Alaska, Guam, Hawaii, and the Virgin Islands). This results in unique county "loan limits" for VA.

The one limit to VA loans is a good one to have: They require documentation of earning enough income to be able to afford the payments, either through tax returns or w2 form. This prevents something that has happened all too often of late, real estate agents and loan officers selling someone a property that there is no way there are able to afford in the longer term. This was another reason VA loans were often bypassed in the last few years, but I actually like this protective feature. Debt to Income Ratio is more important to protect the borrower than it is to protect the lender!

So even though not everyone is eligible for a VA loan, if you are one of those who has earned eligibility through service to the country, the VA loan has become the best "magic bullet" currently available to assist you in buying real estate. By not having a mortgage insurance requirement, or boosting the basic rate through adjustments as other loans have, and by requiring full documentation of income, they not only aid the veteran in affording the property, but have a significant protective element.

Caveat Emptor

Article UPDATED here

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