June 2020 Archives

"What do I do when the loan falls through"
That depends upon when it falls through and what situation you're in. If you're in a refinance situation, you generally keep making payments on your old loan until and unless you can find a refinance that is better that you qualify for. There is one exception to this: balloon loans. Balloon loans must be paid off in full before a certain date. These dates are known at least five years in advance, but some people insist upon leaving it to the last possible instant. Don't do this. If you have a balloon loan, start the the refinance process at least ninety days in advance of the balloon date.

If you're unable to refinance your balloon in time, lenders whom you ask for forbearance will generally will give you at least some time in extension of the old loan, but at a much higher interest rate. This is very kind of the lenders because they don't have to give you an extra minute under any terms. The agreement ran out last week and you didn't pay them; they are entitled to foreclose if they want to. Good thing that the lender usually doesn't want to.

If you're doing a purchase, loans are taking 45 to 60 days now. Or more. That's just a fact of life. The agent who writes a purchase contract for less than 60 days in escrow is not your friend if there is a loan involved.

However, I also need to say that if purchase money loans fall apart, it's a real good idea to re-confirm that you can afford this with some independent expert. It's not a red flag, precisely, but it is definitely a yellow caution signal. Ask "Why did the loan fall through?" Make certain it isn't something to do with basic affordability or needing cash you don't have. Loans do fall through for stupid reasons (I had a loan I had to move from one lender to another not too long ago because they first lender wouldn't give them the usual credit for 3/4 of the rent because the tenant in their rental property had paid the deposit in cash despite the tenant having been there for nearly a year, showing rental checks, etc, and without that rental income, my client's other income fell short of qualification). Loans also fall through because the basic checks show you cannot afford the property. Loan qualification is there for your protection as well as the lender's

However, loan providers will generally not admit that loans fell apart before the last minute, even if they were rejected out of hand back on day three. Actually, that's a trick they pull quite often; tell you about loan A intending to deliver loan B, and then at the last minute tell you that you don't qualify for A but you can have B. This keeps you from having time to shop around after you discover what a rotten loan they really have for you. They knew about what loan you would and would not qualify for within a week unless they are hopelessly incompetent, but their advantage lies in keeping mum until you have no choice but to accept loan B. In another amazing coincidence, loan B usually has a long prepayment penalty, and buying it off - if you can - costs two percent on the rate, and they'd have to send it all the way back to underwriting to see in you qualify, and that will take weeks, so why don't you just sign for this loan right now. They may even say, "We'll fix it later." Yes, they will volunteer to get paid again after you've spent several thousand dollars on that prepayment penalty. I had a guy come to me quite recently, trying to fix one of those after the original company failed to do so. Unfortunately, the coals he'd been raked over, and with his credit score, there was nothing I could do and he lost the property.

So it's now day thirty-one of a thirty day escrow, you've got a $10,000 deposit on the line, as your loan contingency expired back on day eighteen. What now? I used to tell people to apply for a back up loan, but nobody can do them any more. Well, the situation isn't necessarily lost.

First, call your seller, or actually, have your agent call their agent, and find out if they'll extend escrow. If it's a hot seller's market and they won't, you're hosed, but in a buyer's market, they will if they're smart. Most sellers, even in a buyer's market, will want you to pay extension fees and that is to be expected. The reason escrows are usually limited days is so they don't have to keep spending money on you if you can't qualify, and they do spend money on the transaction. This may cost you an extra $100 per day for up to ten days, but when the alternative is losing $10,000, that's very worthwhile.

Loan providers who admit in the first week after you've given them standard qualifying information that you're not going to qualify for the loan they initially told you about are almost certainly honest, and likely thought you really would qualify. Because they could have put off telling you, but didn't, I would bet serious money they're honest, and it's worth giving them another shot. But the longer it goes, the less likely it is they intended to deliver the original loan. I might believe someone like that in the second week - but I wouldn't believe that story from anyone in the third week after applying, even if they were backed up by affidavits from everyone from Diogenes to George Washington.

Loans fall apart all the time. Locally, the percentage of purchase escrows that fall apart because the buyer cannot in fact qualify for the necessary financing is around forty percent. So take precautions to make certain that situation does not happen to you.

Caveat Emptor

Original here+

How do you transfer house ownership after someone dies and leaves you the house in a will?

The will must be probated. Once all debts of the estate are paid and the court agrees to a final disposition of assets, the executor will then create a deed giving whoever the heir is title to the property. It may or may not be part of the executor's job to record the deed with the county - so make certain it gets done yourself if you are the inheritor. It may cost some money, but it prevents huge problems down the road.

Note that if there's a loan or other liens in effect against the property, the mere fact that your predecessor died does not render them in any way invalid. Most specifically, Trust Deeds still have the power to foreclose if the payments are not made in a timely manner. Sometimes the estate has the money to pay them off; more often it does not and somebody better keep making those payments during probate, which lasts a legal minimum of 9 months, or the issue will be academic before probate is resolved. Nor can estates, in general, secure financing, so refinancing the loan can be difficult. Relatively few dead people earn significant amounts of money.

On the other hand, if your property is in a Trust, then there is no probate on that part of the estate. Title to the property remains in the trust, which didn't die. Control passes basically immediately to the successor trustee, who must comply with whatever instructions are made in the trust with regard to the property, but is otherwise free to do with it as they will within the limitations of the law. Among other issues encountered in probate but not here, this permits refinancing in whatever name happens to have the income to keep making the payments.

Caveat Emptor

Original here

I bought a condo in DELETED, CA. Zero down. For 7 months I paid every bill on time - mortgages, HOA and taxes until... The Homeowner's Association told us that we MUST pay a $20,500 special assessment.

My realtor had told me nothing about possible coming special assessment. I lived from paycheck to paycheck and had to leave the property.

I didn't pay ANY bills until my property was foreclosed. Today, AFTER ONE YEAR it was foreclosed, I received a letter. They say that I owe "prior the date when the property was foreclosed... delinquent in payment of the assessments, late charges..." $24.773.08

I can agree that I owe HOA monthly payments until the property was foreclosed but special assessment?

With a delay of seven months, I consider it unlikely (although possible) that the assessment was proposed prior to your purchase. It's usually no more than three months from proposal to assessment.

Usually, special assessments of that magnitude are not required to be paid immediately in one lump sum, but rather eligible for payments of so much per month over so many months. However the condo association has the right to levy assessments for repairs and required maintenance. This is part of owning communal or common interest property. Your assessment was larger than most, but the Association does have that right to make those assessments. It's in the CC&Rs, which you had to accept in buying the property - the former owner did not have the right of severing the unit from the association, and neither does the current owner. Usually assessments are recommended to the board by the management company, approved by the board (itself elected by the owners) and confirmed by vote of the owners. You most likely got a ballot in the mail. Whatever you did with yours, a majority of a quorum of owners in your complex voted in favor of the assessment. They need to keep records of all of this - board minutes, ballots mailed, ballots returned and how they voted. My guess is there were pretty good reasons the other homeowners voted for such a large assessment, and unless there's something wrong with how it was conducted, it's a valid lien on your property, and against you personally if you were owner of record on the date of assessment. If something was concealed from you regarding the assessment, it would be in the records of the association.

I doubt you were bamboozled by an already approved assessment. In California, you're required to receive what's called a "condo certification," from the HOA within seven days of the accepted offer. Among other things, that condo certification will show special assessments, whether under consideration or already approved. Furthermore, every single regulated lender in the known world is going to require that condo cert in order to fund the loan, and if there are special assessments known, they will require that you qualify at the increased rate of payment. So I'm betting you got full disclosure at the time.

This was a buried problem, and the only way to ferret it out for certain is asking members of the board point blank at purchase time about any deferred maintenance issues, but sometimes things like this can take an association by surprise. For example: fires, burst pipes, etcetera. A condo inspection only looks at your unit, not all of the others. Alternatively, you've got to walk the entire property looking for problems, and hope it's not hidden inside something where there's no way to know it's there. One final way that might spot problems is in looking at the level of association reserves in the condo cert. it takes a good buyer's agent to ferret it out before a sale, and an even better one to tell you about it. Most of this stuff isn't part of basic due diligence, and telling you about it is a noteworthy example of "no good deed goes unpunished," because it's going to mess up the transaction, and most clients will kill the messenger by not working with that agent on their next offer. If you didn't have a buyer's agent, you were all on your own, because that listing agent certainly isn't going to investigate in the first place and get their client angry. There's a reason why Dual Agency is a sucker's game from the buyer's perspective. Well, actually there are hundreds of reasons why dual agency is a sucker's game, but this is one of them.

It appears that you were the owner of record at the time the assessment was made. It may be payable in payments, but the full amount is due from the owner of record as of the day of the assessment. It's an all or nothing thing. It wouldn't matter if you were two days from buying it - the seller would have to pay it in order to deliver clear title, while you would not be obligated, although if the owner didn't pay it and clear the title, it's unlikely the transaction would proceed. If you were two days from selling it, same story. You would have to pay in order to deliver clear title, as required by the purchase contract, and the buyer would have the right to expect that you would do so, and the title company would refuse to insure the property until you did so, so the transaction would not happen without that assessment being paid. If you had bought it the day before the assessment became effective, well, you would have been informed by the condo certification, but it would be attached to you. You owe this money. The fact that you are no longer the owner as of this moment is irrelevant. Nor does default wipe it out, in general.

The homeowner's association has the right to assess the individual owners for needed repairs and maintenance. Indeed, they have a duty to do so in order to preserve the value and marketability of the property. What this person did was pretty darned silly, but done is done and there are no do-overs in real life. The board and owners don't make assessments gratuitously, because they're also assessing themselves, and every last one of them had to pay that $20,500, the same money this guy would have paid. Twice that, if they own two units. I may wonder what caused a large assessment unforseeably, and consider it likely that a good buyer's agent would have caught some deferred maintenance issues, but the cold hard fact is that he owned the property on the date of the assessment, and he therefore owes the association that money. He needs to talk to a lawyer if he wants to get out of it, but I don't know anything except bankruptcy that might do the trick, and that's only likely to reduce the damage, not wipe it out, and bankruptcy on top of a foreclosure is very bad juju for your credit rating and your financial future for several years. It could cost him five times as much as the actual money he'd save by not having to pay off the debt in full.

Caveat Emptor

Original article here

"Contractor's Specials"

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I was looking through some real estate listings and saw one property described as: "Contractor's special, first time buyers and investors. House needs TLC." Does contractor's special mean u better be a contractor if you wanna buy this place?

It means it needs some serious rehab work, but it's priced too high for you to make a profit paying to have it done, so the people they're trying to attract are people who are inexperienced home repair folk who don't realize what their time is worth, and won't realize how much time and money and dirt and sweat and just plain hassle that living with the problem and getting it fixed is going to entail.

In point of fact, it's an uncommon "contractor's special" that isn't overpriced in terms of asking price. We're not talking about just carpet and paint here. We're talking some major league repairs. Foundation breaks. Significant settling damage. Plumbing that's broken and leaking water. Mold in the framing (which will usually spread). Wiring that's a fire hazard. The list goes on, but they've all got one thing in common: You're dealing with stuff that adversely influences the habitability of the property. Without those repairs, you're not going to get reasonable enjoyment out of the property. It fails the most essential test of inhabitability for a property: The ability to live the same kind of lifestyle in that property, as the rest of the country does in theirs, and to do so for the foreseeable future.

Martha Stewart notwithstanding, you can live with stained carpet. Whatever you read in Better Homes and Gardens, you can live with spots on your walls, or even holes in the drywall. It's possible to live with both old and ugly, if you get get electricity and hot and cold running water when you need them, and the house isn't falling to pieces around you. You can't really live if every time you plug something in or turn something on, there's a significant chance your property will burn down around your family's ears. You can't live if hot water is leaking out and eroding your foundation support, as well as keeping you from taking hot showers. You're not going to live indefinitely with a foundation break - sooner or later, it'll either rip the house apart or tear it apart.

Many such properties aren't a residence at all, when you really think about it. I'd sooner put your average family of four into a one bedroom apartment than a "contractor's special." Sure you got a low price - on a property you can't use. Kind of like getting a deal on dog vomit. It begs the question not only of why you'd pay for it, but why you'd want dog vomit at all. Me, on those rare occasions when one or another of my four-legged best friends has lost their dinner, I'd willingly pay someone who offered a small amount of money to get rid of it for me.

This kind of property can be an opportunity, IF you really know what you're doing, and IF it's priced correctly so that you can do the work and make a profit, and that includes some significant cash for being the one to deal with it. But it's no coincidence that the serial decorators who line up to replace bad carpet and paint ugly walls give "contractor's specials" a wide berth. The work that needs doing is far too expensive to be "worth it" - at least at the levels "contractor's specials" are usually priced. The most recent one I was in, a four bedroom place not very far from my office, was priced about $20,000 below what would have been appropriate for a turn-key property in the area - and it needed roughly $60,000 worth of work that I saw. For a forty year old 1600 square foot house, with position issues, floor plan issues, and not a single surface in the entire property that presents well. A more appropriate price would have been land less demolition and haul away. Which is about what it's going to go for - once the owners price it somewhere in the appropriate ballpark. Oh, I can fight the battle and often even win a signed purchase contract for the correct amount - but it's a lot more effort than finding someone who at least is willing to admit the realities of the situation up front, and the owner who hasn't faced reality is very likely to find an excuse not to consummate the sale. Sometimes, I'll see if I can get a client the property is appropriate for to make a test offer, just to see if the sellers and their agents are willing to admit the obvious truth. If not, we move on.

What the owners are really hoping for, of course, is someone who only sees only the relatively cheap price, but not the cost, in all senses of the word, of the work that's necessary to have a useful property once they own it. But this kind of cheap is no bargain. I've said it in the past, but Know What Can Be Fixed and What Can't, What's Profitable and What Isn't, which is only one of hundreds of reasons why You need a buyer's agent, whose job is to bring up all of these not so minor concerns that owners and listing agents would rather buyers didn't understand, because it means they get more of that buyer's money.

Caveat Emptor

Original article here


The answer is "Yes." You don't have to lose your home in bankruptcy. I've done loans for many clients who kept their homes through bankruptcy. But they kept their mortgage payments current, or close enough to current.

The condition that causes you to lose your property is called foreclosure. The specifics vary from state to state, but here in California, the lender has the option of marking you in default when you are 120 days in arrears on your mortgage.

Default causes you to lose some rights, and the lender to gain some. Since properties can go into arrears literally for years before they go into default, this seems appropriate. You could theoretically stay at 90 days behind throughout the whole term of your mortgage (except the first 90 days), and the lender can't really do too much about it except hit your credit. Please, don't try this at home. This is for purposes of hyperbolic illustration only. It really does kill your credit rating. Refinancing (or getting another loan after you sell) will be extremely difficult, and the rates will be sky high if you can get it.

But at the point you enter into default, your lender can require that you bring the loan completely current in order to get them to rescind the default. A Notice of Default, or NOD, is a matter of public record, and if one is recorded against your property, you can count on getting hundreds of solicitations from bankruptcy attorneys, hard money lenders, real estate agents, and just plain sharks. Additionally, the lender is going to hit you with thousands of dollars in fees when they put you into default. These go into what you owe.

Here in California, if you don't bring the loan current within sixty days, the lender has the option of dropping a Notice of Trustee's Sale on you. This publicly recorded document basically says "Bring it current now, or we're going to sell it at auction." Actually, at this point they can require you to pay them off in entirety to make them go away, and I don't know anyone except hard money lenders that will refinance you out of default. They can do this because you signed a Deed of Trust when you got the loan. Things are different in states that still use the mortgage system - there, the lenders have to go through the courts, which you're also going to end up paying for if you're in one of those states. The Notice of Trustee's Sale will tell the owner to be out at least five days prior to the auction. You also lose the legal right to redeem the loan at that point, although most lenders will keep working with you until the gavel falls. There must be a minimum of 17 days between Notice of Trustee's Sale and the actual auction. This is the actual act of foreclosure.

Bankruptcy is a different process entirely, and has to do with solvency, the ability to make required contractual payments on all of your debts. Within limits, you can choose to enter or not enter bankruptcy, and which creditors are and are not included in the bankruptcy. It's usually better not to include everything in the bankruptcy, because post bankruptcy credit history is critical re-establishing your credit. No matter what else, if you can stay current on the loan against your personal residence, that has more rights of preservation against other creditors than anything else (usually). Please consult an attorney in your state - there may be differences in the rules, or you may fall into one of the exceptions, and there are all kinds of relevant details I'm not going into here.

If you can hang onto your personal residence, and keep the loan current through bankruptcy, you not only (usually) get to keep your property, but you have a ready made mechanism to rebuild your credit. Those monthly payments you keep making to your mortgage lender? They count for credit re-establishment. In fact, if you have zero balance credit cards or revolving lines of credit, you can often choose not to include them in the bankruptcy, get to keep them, and all that nice jazz having to do with duration of credit, etcetera. You might want to read my article Credit Reports: What They Are and How They Work for more.

Foreclosure and bankruptcy are two different issues that often go together - but not necessarily. The law gives consumers a lot of protections on their primary residence, even through bankruptcy, but if you go into default on your mortgage, it's very hard to keep your home if you're in bankruptcy also.

I have seen people fresh out of Chapter 7 bankruptcy qualify for an A paper loan. It's unusual, but it does happen. What usually causes it to happen is that they have one or two lines of credit, often business related, and they file bankruptcy promptly, rather than spending months getting their credit dinged because they're in denial, and they keep everything else current. It's uncommon that someone who keeps their mortgage payments current will even have the home encumbered further during bankruptcy due to the difference between secured creditors (ones with a specific asset pledged as collateral) versus unsecured creditors (ones where the loan is not secured by any specific asset). Compromising the interests of secured creditors is something the law is reluctant to do.

But if you keep your mortgage payments current, whatever else happens, frequently you will emerge from bankruptcy with your property. The issue that most people are having right now is that their home loan, which is a secured loan with the property as collateral, is what is more expensive than they can afford. That's the exact opposite of the case I'm describing here, where the home loan is affordable but there's something else that's causing the basic problem of financial insolvency.

Be advised: I'm not a lawyer in any state. Consult one for all the gory details, especially for how they apply to you.

Caveat Emptor

Original article here

I get occasional questions about the difference between these three kinds of activity. Well, there are subjective parts to the answer, but here are some general guidelines:

A true flipper is looking for a quick turn on the property, usually without much work done to really improve the property. They don't typically keep the property and rent it; they're not willing to accept the work of being a landlord. They make their money off of desperate sellers and getting a very low price for a property. Typically, their profit comes from how far down they can drive a desperate seller.

A fixer is someone who is looking to make a profit by making the property more attractive. By making it more attractive, they are able to sell for more money. There is both an art and a science to fixing, so that you don't spend more than you make. Fixers typically sell when the renovations are done, although many will wait for a full year to gain better tax treatment. They do not typically rent the property out, although they may live in it while it's being renovated.

An investor has the idea of buying and holding for a certain period of time, usually leveraging rent to make the payments, sometimes breaking even, preferably with positive cash flow, usually while eventually hoping to cash in on capital appreciation, but always holding for periods that start at two years and go up from there.

Now I've heard a lot of folks who are really fixers call themselves flippers, but I've never heard a flipper call themselves a fixer. Why? Because the general perception admires flippers more, because they theoretically make money by their wits instead of by the sweat of their brows. It's more status to call yourself a flipper, although why people think it's better to tell people they make their living by shorting people who really have no choice, instead of by actually creating value by improving the properties they purchase, is beyond me. But due to the huge long swell of the last seller's market, many people got addicted to the fact that it enabled people who didn't really know what they were doing to buy properties for too much money, and six months later sell for a profit despite not having done anything to improve the property.

Right now, the local market is able to support flipping again. However, more than one flipper lost their shirt in the downturn. Indeed, I know of a couple of properties out there on the market that went through more than one sale from desperate flipper to optimistic flipper, and then the optimistic flipper gets desperate and sells to another optimist. With those values having stabilized, fixers who know what they're doing are doing well again, although the market has changed how best to make a profit. It's no longer a gamble as to whether fixing will yield a profit after expenses in the usual fixer's time frame, but the margins are both thinner and lower. There are quite a few out there that are suitable, and many more that are not.

Investors pretty much always do well, mostly because they're not subject to time limitations. If market conditions aren't right to sell, they keep the property until market conditions are right. When there are a lot of desperate sellers out there, and so long as investors have got positive cash flow in a sustainable situation, all they've got to do is wait for the market to move in their favor. Until then, they are making money every month. Real investors never turn into desperate sellers, because they always have the option of hanging on to it. It might not be their most preferred option, but it is there.

I love working with fixers. It's a lot more work to find suitable properties right now, but that's fine. And, of course, families who buy for a personal residence in the current market (despite the very frustrating frenzy) will do very well in the longer term.

Caveat Emptor

Original here

I got an ill-mannered complaint email about how an evil loan officer from another company ordered the appraisal without waiting for the inspection to be done, and it turned out there was a minor problem that the seller likely could have had repaired, but this clown chose to walk away, and as a result is griping about having to pay for the appraisal.

First, that appraiser did the work based upon your representation you wanted the property. You signed a purchase contract saying that you were intending to purchase the property. You submitted a mortgage loan application, and as a result of that someone acting on your behalf ordered the appraisal, which has to be done if you're going to get a loan. That appraiser did the work. They are entitled to be paid.

Second, scheduling an appraisal promptly protects you. The longer the entire process takes, the worse the loan you are going to get. If they didn't order the appraisal right away, the loan officer is gambling with your money. But rate locks aren't free, and they are for definite periods of time. The longer a rate lock is, the more you will pay for it. Furthermore, if you go beyond them you're either going to pay a tenth of a point for five days, or a quarter for fifteen (both assessed in full on the first day of extension) or pay worst case rates. The person who ordered the appraisal was acting in good faith to protect your interests based upon the representation that you wanted the property. If you didn't, why did you make an offer and sign the purchase contract and submit a loan application? Speed is important in getting a loan done, and even if in some instances people like you end up paying for an appraisal when they cancel escrow, the people who actually want the property benefit by having everything done right away. Appraisals are around $350. A tenth of a point of $400,000 is $400. A quarter of a point is $1000. Or you can pay a quarter of a point more - $1000 - for a longer rate lock in the first place.

The assumption when you sign that purchase contract and loan application is that you want the property and loan, which means the appraisal has to get done, and you want the lowest rate, which means the shortest practical lock time. People get sued - successfully - for not ordering the appraisal right away. This person was doing exactly their job, and in the best possible way for a buyer who really wants the property.

I have stated before that I will bet money, based upon no additional information, that a loan done in thirty days or less will be a better loan than one that takes sixty or more. Due to all the new regulations and procedures delaying the loan, add thirty days to those numbers but the principle is still valid. Ordering all of the services: inspections, appraisal, disclosures, zone report, etcetera, right away is part of how a good loan officer - and good agents - get a transaction to close fast, on time, and to the loan quoted. For the buyers who carry through on their intention, as evidenced by that signed contract, doing this is the only correct way to do business. Delaying the appraisal until after the inspection adds to the time it takes to get the loan done. In the vast majority of cases, the inspection is going to reveal something you didn't know. Sometimes it's trivial, and sometimes it's major, and all gradations in between. Most people manage to deal with it like mature adults and negotiate something reasonable. I recently negotiated some sellers to pay $20,000 plus to hook up a sewer connection when the septic was shown to be failing, something I had no way to know when I checked out the property. The repairs were made, the deal closed, my clients are in the property and very happy. But this person who wrote me to complain canceled and walked away from something far more minor. How do you think the seller feels about everything they had to pay for, now that this person who said they wanted to buy the property flaked out?

A purchase contract should not be something you enter into lightly, thinking you can get out of it easily if the slightest thing goes wrong. This is part of the reason for buyers agents. They should explain to you that this is a binding contract, and you are agreeing to purchase that property, and in many cases the seller can sue to make you buy the property. A buyer's agent will also spot a lot of problems before you make the offer. Don't think of them as building inspectors; few agents have that license (and I'm not one of them). But there is nothing that says that I can't spot potential issues and bring them up. In the particular case of the person who emailed me this question, it was a trivial issue that I spot and tell my clients about on a regular basis before they make an offer, and as a result, we have dealt with the issue before the contract is agreed to. But even if it isn't dealt with up front, the better response is to negotiate a reasonable response from the seller, not walk away in a huff.

Caveat Emptor

Original here

The question that inspired this was

can a mortgage company use the flood insurance claim money towards homeowners mortgage loans?

This is equally applicable to every other form of insurance on your home - earthquake, regular homeowner's insurance, and any others that you may have or require.

The short answer is yes.

The reason that the lender requires being added to every policy of insurance you have on your home is so they have a claim on the policy proceeds. Let's say you buy a $500,000 home for nothing down, and the value of the structure is $150,000 while the value of the land is $350,000. Let's say the house burns down next week. If they weren't on there as beneficiary, you could theoretically take that check for $150,000 and head off to Tahiti, leaving them with a $500,000 loan that they're maybe going to net $270,000 for by selling the property that secured it - after all the time for foreclosure, et al, which means they're out all those costs plus thousands of dollars in interest. If you're a lender, you're going to suffer this loss once at most before you decide not to trust anybody.

This is also a reason to keep your insurance updated, to the full value of what it's going to take to replace your property. It's a bummer to own a $500,000 house that burns down, and you're only insured for the $150,000 you owe the lender. Insurance is not a "Get out of trouble free" card. If you're not paying the insurance company for a policy large enough to cover a loss of the item, don't be surprised or angry when what they pay you doesn't replace it. In this case, you told them it would only take $150,000 to replace the asset, and that's how much coverage they sold you. They're not to blame if that's not enough.

On the other hand, the lender doesn't want the property or a partial repayment. They want the loan repaid in full. What they're going to do is sit on any funds they get and make certain they're used to rebuild, unless they have some reason to believe that rebuilding is a bad risk. Banks don't throw good money after bad, so if this is the case, they're going to keep the money. On the other hand, if you've been keeping your payments up, they're going to want you to rebuild. Their taking custody of the money is a way to make certain that you do, too.

Caveat Emptor

Original here

Why doesn't real estate just sell for the asking price instead of having to go thru all the paper work...? Wouldn't it be easier to just put a price on it and sell it for that price? We don't go thru all of that when purchasing cars or anything else. Where did this practice start?

This practice started millennia ago. The practice of buying stuff off the shelf at the marked price is the recent practice. Only when stores started selling so much they couldn't haggle over price was that practice invented. It's easy, but it's not suitable for transactions larger than the utterly routine. If Supermarket A has better prices than Supermarket B, people will tend to drift there over time - unless B has different merchandise A doesn't carry. This is the model for a couple of major chains. But every parcel of real estate is different from every other.

Land is important, it is immovable, they are not making any more, and it is uniquely identifiable by location. It is used as a basis for taxation, and social status. Not too long ago, the vast majority of the population worked by farming land. It's big enough, and expensive enough, to be worth extended negotiations, as even small percentage differences will be a large amount of money by the standards of any other transaction.

Precisely how much land goes with a parcel, and precisely what the boundaries and limitations are, is critically important. Taking just a few square feet away can mean that it cannot be used for a given purpose. Rights of easement are important to everybody served by that easement. Wars have been fought over simply the right to pass over a piece of land. Zoning disclosures are a real issue with at least twenty percent of all properties, as well as any number of other issues about the condition, permitted uses, boundaries, and appurtenances.

Because of its importance, its permanence, and its value, there has been a lot of fraud committed over land, therefore the systems of title and escrow. Misrepresentations and just keeping silent about very salient defects can be worth tens of thousands of dollars, so people do that (or try it) regularly. Add that to the fact that land is taxed by most governments, and you have all the reason needed for public records systems.

Because of its permanent and immovable nature, lenders will loan money secured by land on better terms than anything else. But since a fair number of people over the years have gotten money for land they don't own, or gotten more money for land than it is worth, the lenders have instituted safeguards such as the appraisal, inspection, and lenders title insurance. It still happens, by the way. Just before I wrote this, I looked a a property in a fantastic location, but really old and badly run down. By the market, I'd say it was maybe worth $600,000 - but the owners convinced someone to loan them $1.8 million dollars on it.

Every part of the process has a reason it is there. There is no need for anyone who is not a professional to learn them, but the reason those professionals exist is so that you don't have to know what they know - and that runs true for everyone from the escrow officer to the title officer to the agent, and trying to shortcut the process is a recipe for disaster. Nor is it pure information, in a lot of those cases, but experience and knowledge and judgment acquired over time, and the one that most people misss: how to put it in context. Just ask the people who got burned, and whose cases are the reasons for all that paperwork and hassle you have to go through to buy or sell a property. And people still get burned today. Most often, it's the people who try to shortcut the process to save a few dollars. "You don't need that appraisal! You're paying cash!" "You don't need that inspection! Solid as a rock!" "You don't need an agent! Trust me!"

There are good solid reasons why you don't want to cut any corners, and why you want a professional working for you every step of the way. Proper disclosure will save you from lawsuits most people wouldn't believe. Proper investigation will stop you from walking in to the problem in the first place, or at least get you some serious concessions if you have a good buyer's agent on your side. And if they fail to do their job properly, it gives you the right to go after their insurance and their broker's bond. This is all critically important. Professions such as real estate and all the allied professions exist for your protection, If they fail to protect you from the things they are supposed to guard against, then it is only moral that you be indemnified for that failure.

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do mortgage companies usually seek a deficiency judgment on home foreclosures

Depends upon whether it is a recourse loan or not. A recourse loan is one where the lender can come after you for any excess amount of money you owe. Whether a loan is recourse or non-recourse varies with the state you are in, whether it was a purchase money loan or a refinance, and always, what it says in the Note.

For a non-recourse loan, that's it. If something happens and the property does not fetch enough money at sale to pay the lender off, that lender is out of luck whether they want to be or not. These are often used in reverse 1031 exchanges, where the accommodator is going to hold title to the property for a while but is usually unwilling to shoulder the risk that the lender may be able to come after them for a deficiency. Due to the fact that the lender cannot come after the borrower for the difference, these are riskier loans and therefore carry a higher rate-cost trade-off than recourse loans. This is nothing more than any rational person would expect.

The law is different everywhere, but I don't think have never seen a cash out refinance that was not a recourse loan. In short, take the money now, but if you don't pay it back, they are going to come after you in court and with a multitude of tools to get that money back.

Note that just because a loan is non-recourse does not mean that the lender will necessarily approve a short payoff. In fact, it is usually harder to get those approved because the lender knows that this is the only chance they have to get their money, whereas with a recourse loan they can attach other assets to pay for their loan. However, note that just because your loan is non-recourse doesn't mean they can't try for a deficiency judgment. If you don't show up in court, they win by default. If you did something to invalidate the non-recourse protection, such as fraud in obtaining the loan, the lender can and probably will win in court.

Finally, it is to be noted that just because a lender does have recourse and can attach other assets does not mean that they will. If you're down to $0.47 to your name, they'd have to be pretty silly to waste a lawyer's time doing so. However, just because you don't have it now doesn't mean that you will never have it. Statute of limitations also varies, but if you receive a financial windfall within the first few years, don't be surprised if the lender who you thought forgave the difference is standing right there, demanding their metaphorical pound of flesh.

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One of the things I've heard and read other agents complaining about is that they can't find qualified buyers to represent.

Welcome to Unintended Consequences 101.

The way that the market had been working is this: Young, often unmarried, buyers buy a starter place, usually a condominium of some description. A few years later, once they're married and have a couple kids, they trade up, using their equity for the down payment and (usually) increased income in order to make the payments. They may do this a second time when the kids are teenagers, or when they get another rise in income. This is all simple demographics.

However, we all know that most buyers want to stretch to their maximum, and even a bit beyond, not understanding that there is no magic wand to make borrowing money more affordable. The absolute hardest thing for a buyer's agent who's trying to do their job correctly, is persuading buyers with property lust in their hearts to limit themselves to properties they really can afford. Traditionally, the penalty for failing to do this was a failed transaction, and a ticked off client who had already spent hundreds of dollars on appraisal, inspection etcetera, and quite often, multiple trips to the decorating store planning and a month or more fantasizing about the decorating they're going to do. When that all comes crashing down, it's kind of difficult to hold onto the client.

During the Era of Make Believe Loans, however, the immediate downside disappeared, and by the time people figured out that they couldn't really afford the property, those agents and loan officers were long gone with their commissions, leaving those buyers high and dry. With easy loan qualification, and initial payments way below a sustainable level, there was no immediate need to restrict themselves to selling what a client could afford. Since given one client or set of clients, most agents would rather make more money than less, they sold higher end properties than clients could really afford. The clients, for their part, were happy that there was no apparent need to spend years living in the lesser property, building equity.

However, by skipping over those starter properties, those agents greatly exacerbated their future problems. When the condominiums and other starter properties don't sell, the owners are stuck with them, and they cannot afford a larger, more expensive property until those properties do sell. These folks are the largest single source for buyers of archetypal three and four bedroom detached housing. If you bought a condo for $90,000 and sold it for $200,000, you have roughly $100,000 down payment for a $500,000 home. This lowers the payments from about $3415 (assuming PMI) to $2398, total cost of housing from roughly $4045 per month to $3030, and the income to qualify from $9000 per month to about $6730, a full 25% less, assuming no other debts. Considering the median family income is approximately $5500 per month in San Diego, this makes a major difference to how many people can qualify - far more than a proportional difference. Assuming a standard normal distribution, you're going from about 3.5 standard deviations over area median income to about one and a quarter. This increases the number of people who qualify from 233 in a million to 110,000 in a million (via Hyperstat). Now, you have 470 times as many people in your target group! But in order for this to happen, the condominiums and other starters have to sell.

The temptation is always there for agents want to hunt the big game, but now that the make-believe loans that enabled it are gone, we've got a situation. We've conditioned the public to believe that everyone can afford the property of their dreams, right off, and that's just not the case. This makes it much harder to sell them starter properties that fit within their budget. Their friend John or Jen was able to get that dream property, why can't they? The fact that John and Jen are fighting a losing battle against foreclosure doesn't enter their thought process. The people that already own the starter properties, having bought five or ten years before and gotten to a position where they're ready to move up, can't. Not until the starter sells. This made the crimp in the market far worse.

If condos and other starter properties don't sell, you don't have the usual influx of buyers with a down payment that enables them to afford more expensive properties. When you're essentially putting contact superglue on the bottom-most rung off the property ladder, you can't be too surprised when the higher rungs are vacant. So if you want buyers for higher end properties, and you want your higher end properties to sell, we've got to start going through the demographic "property ladder" of previous years.

Caveat Emptor

Original article here

If I am buying a foreclosed home for 220k of which 200k is being financed, and the home comes back at being valued at 285k from my mortgage company, am I still required to pay PMI? If so, how in the future would I be able to eliminate it?

At purchase, the lender treats the value as being the lesser of cost (i.e. purchase price) or market (i.e. appraisal value).

So if your purchase price is $220k, that's the most the lender will consider the property to be worth at purchase. You will be required to pay PMI for any single loan amount over $176,000, or eighty percent of this valuation. The only exception to this is the VA loan. Since second mortgage lenders don't want to loan over ninety percent of the value of the property right now, you can either come up with a couple thousand dollars more, or accept PMI.

A couple years ago the wisdom was just to refinance in a few months. Lots of luck with that in the current market. In the current market, lenders are reverting to their standards of several years ago, which is that unless you spend some major sum upgrading it, the most a lender will believe within one year of purchase is 10% - and even that is subject to an appraisal done under HVCC. Were I in your shoes, I'd plan on waiting a year, then doing whatever your state law says is necessary to remove PMI. This might be pay for an appraisal, this might be get a broker's price opinion based upon recent comps, but there have just been too many people over-evaluating property in return for some special compensation (i.e. accepting bribes to return a higher number on the value). They want to see some time to season the transaction between purchase and evaluation. Scam artists don't want to hang onto the property for a year.

Private Mortgage Insurance (PMI) is not a good thing, but it may be the only way to get the loan in the current environment, as I discuss in 100% Financing or Low Down Payment or Low Equity: PMI May Be The Only Option. 100%

You do have the option with a lot of lenders of converting to LPMI, or lender paid mortgage insurance. This folds PMI right into the basic rate of your loan, so (unlike regular PMI), it usually becomes tax deductible. On the other hand, because it's written into the basic Note rate, it has a disadvantage that unlike regular PMI, you need to actually refinance to get rid of it. Since most people spend thousands of dollars to refinance, this isn't a good bargain unless you figure the rates to go down. I don't, or at least not much. Were somebody to put a gun to my head and force me to make a bet right now, I'd bet they were going up over the next twelve months. If I were to decide to accept LPMI, I'd almost certainly want a true zero cost loan now, with the loan I'm getting for the purchase. I would accept the higher rate that comes with it, and quite likely a hybrid ARM as well instead of a thirty year fixed rate loan. The reason for this is that I'm never going to recover closing costs through lowered cost of interest in only one year. In other words, accepting LPMI means I've made up my mind to refinance in a year, or sooner if I can find a lender that will do it, and that I'm not going to willingly pay any loan costs that take longer than a year to recover. Furthermore, if I can get even a slightly lower rate by accepting a shorter term hybrid ARM, that's worth a good idea under these circumstances. As I said, If I'm accepting that I'm going to refinance in a few months, I'm going to want a loan with costs as low as I can get it, and it just isn't important to me to have a thirty year fixed rate loan in such circumstances. Makes no sense to worry about having it be fixed for the entire duration if the loan you're getting will go away in a few months regardless.

(In the zeal to scapegoat brokers and make life better for their campaign contributor major banks, Congress has passed a law that Yield Spread must legally be treated as a cost to the consumer in defiance of all accounting, mathematics, and logic. Without Yield Spread, zero cost loans and minimal cost loans cannot be done, much to the detriment of the savvy consumer. If that doesn't point you to exactly what Barney Frank's and Chris Dodd's priorities really were, there isn't much hope for you)

If I was getting a loan for the purchase where I'm paying closing costs and points to buy it down, regular PMI is the way to go. That can be removed without a full refinance. If I have to refinance in a year to remove LPMI, the vast majority of those loan costs will be wasted, because I need to refinance to get rid of LPMI, and when I do, I'm letting the lender off the hook for the rest of that loan period, and if I haven't yet recovered the closing costs, I certainly won't get any additional benefit from my current rate after I refinance!

Caveat Emptor

Original article here


I recently received an email asking about a Good Faith Estimate on a $200k loan. The person asking my opinion attached the actual "estimate" to the email. In addition to a point of origination and a point of discount and $3000 in other closing costs plus $2500 in alleged government charges separate from the $3500 in FHA's initial mortgage insurance premium, it just assumed a 6% seller credit of $12,000 which made it look like the loan wasn't going to need much more than the down payment money to close the loan. They just automatically assumed that the seller would offer that much or be willing to pay that much, because the FHA says they will permit the seller to do so.

Ladies and gentlemen, the FHA allowable limit on seller-paid closing costs may be 6%, but that doesn't mean every transaction has 6% concessions - or any at all, for that matter. I don't think I've heard about any where the seller concession was maxed out - and I have heard of a couple FHA loans recently where they was no seller concession. Keep in mind that on FHA loans there is no mandatory concession, unlike VA Loans which prohibit the veteran from paying some very real and necessary transaction costs that buyers and borrowers traditionally pay. Nor does it change the fact of how expensive the loan is. If you had a less expensive loan, it would be even less net money out of the seller's pocket.

It also makes it appear as if their loan was less costly because of lowered requirements for cash to close. People are often stupid about cash, because they understand that this is real money which they accumulated in their bank account little by little. Loan amounts, not so much - at least not until they've been paying on them for a while. This has the effect of low-balling the cash necessary to close, and the buyer possibly ending up shy on cash to close.

The loan referenced was a damned expensive loan, but by playing "let's pretend someone else is going to pay this" with the consumer and pretending that consumer weren't going to have to pay these costs, they hope to assuage consumer skepticism. But you always pay these costs. If there's a $10,000 seller concession for whatever in the cost, any well-advised seller would also take $10,000 less with no concession, as they will end up with more money in their pocket. This loan officer was pretending to give with the right hand while taking with the left - the standard lender game of making it appear as if their loan is lest costly than it is so you sign up with them and not the competition. By subtracting that 6% of the sales price off the loan cost, they are making their loan look more attractive than it really is.

Except for VA loans, I would advise people to never accept estimates or figures that assume a seller concession. Even with VA loans, you're paying for it one way or another, so I would want to know the real cost of the loan without seller concessions. After all, if the seller is going to pay $5000 more of the proceeds if he accepts my offer than if he accepts someone else's offer, he's going to want at least $5000 more in sales price in order to accept my offer over the other guy's. That is, assuming his agent has anything like a clue - and I never assume the other side is stupid or clueless until they prove it. Even if there are no competing offers, they should accept an offer of $5000 less without the $5000 in costs you're asking them to pay. I get the same amount of money to start, but then I don't have to pay for higher commissions, higher title and escrow fees, or anything else. Subtracting the amount of the needed concessions from your offer and submitting it without a demand for such is always superior to an offer that may be for the higher amount, but has more givebacks to compensate. Seller concessions cost the buyer/borrower money - it just might not leap off the page in black and white.

The higher purchase price necessitated by seller concessions in this manner has a possible consequence that may completely torpedo your loan: If the property doesn't appraise for the required amount. Something between forty and fifty percent of all purchase transactions are hitting this iceberg right now. Sometimes it can be fixed by the buyer coming up with more cash, occasionally by the seller agreeing to take less money. I haven't been hitting the issue where I'm the buyer's agent for several reasons, but it still could happen. There is also the issue of the higher purchase price causing your property taxes to be higher.

Finally, unless you have a fully negotiated purchase contract, you have no idea whether a given seller will actually be willing and able to give those concessions. Many times, the lenders in short sales will disallow them even if the purchase contract price reflects those concessions. Asking for closing costs says two things to those in the know - you don't have a lot of cash and there is a high risk the transaction won't actually close. Neither one of those is a signal you want to send to sellers or listing agent if you can help it. On lender owned properties, it can cause the lender to bypass your offer in favor of a lower offer without that request, because the one thing that costs them even more money than accepting a lower offer is accepting an offer that doesn't close. Even on "regular" sales, a competently advised seller is going to know they're risking a lot of money because of the likelihood of you not having enough cash to close.

Caveat Emptor

Original article here

Scapegoating mortgage brokers or anyone else is not the answer, nor is prohibiting yield spread. We've been here before (in the early 1990s), congress did something remarkably similar except a little bit more sane. It didn't work then. Why would we expect it to work this time? Among many other problems with the bill, if prohibiting yield spread being used by brokers to pay loan costs and their own compensation is a good thing, why not get the whole of the problem and prohibit lenders from selling notes above face value at all? The differences are two: The premium that lenders make from selling loans above face value is more than yield spread (usually double yield spread or more; and present in far more loans than yield spread) and whereas yield spread is disclosed to consumers, the premium a loan will sell for on the secondary market is not. Proposals to outlaw yield spread are a payoff to lending industry campaign supporters, in order to make it more difficult for brokers to compete, not any kind of solution to the actual problem. Nor is there any legal requirement for a lender to offer yield spread. If lenders feel it is being abused, they have the ability to refuse to offer yield spread. But of course, then the lenders that continue to offer it will attract more business from brokers - an incentive for individual lenders to make more money by breaking ranks with their competitors. Lest you not understand, if individual lenders can not legally do this, the lenders as a whole will make more money, and consumers will lose. The only way to make this kind of collusion work is to get the government behind it, giving individual lenders no option but to comply.

I've also seen proposals put forth that federal licensing, a la the NASD, will solve the problem. Preposterous. There's lots of counter-evidence on this one. Black Monday 1987. The dot com bubble of 1996-2000. John Corzine, who outright stole $1.6 billion from customer accounts. Pretty much everybody in the securities business is multiply licensed, and it didn't prevent any of these. The securities business may be a little tighter than the real estate business, but that doesn't make it something to emulate, nor does it mean that licensing will solve problems, as I have illustrated with these two well-known examples, and could illustrate with many others, less well-known but no less telling. If we're going to have licensing requirements, I favor toughening those requirements, but not for this reason.

The causes of this mess are not simple, and a real solution will not fit in a sound bite.

The problem was one of responsibility. Responsibility in law and legal responsibility in fact.

Lending practices had become decoupled from responsibility. Not only had the lenders become insulated from the consequences of offering ill-considered loan programs, mortgage originators had become insulated from the consequences of making an unsustainable loan, the agent from the consequences of selling clients a more expensive property than they can afford.

The point of immediate failure was the loans associated with real estate, and so I'm going to focus there for this article. It wasn't buyer cash, or the price of housing. You can do anything you want with your cash, and the worst thing that can happen is that you don't have it for something else. If the day after you buy a million dollar property for cash, the market collapses and it's suddenly only worth fifty cents, you've still got that property, you just don't have the million dollars for other uses. Whatever the purpose it was going to be used for, it can still be used for. There are no issues with being unable to make monthly payments, no need to refinance when you're upside down because you can't make those payments, and you're not on the hook for money you probably don't have and can't get by selling the property. That's part of money management for adults. But for loans, you're making payments on existing debt with money you are theoretically going to earn in the future. The most critical factor is not the immediate payment. It's the cost of that money - the interest on the loan and the initial costs to procure that loan. Some people still don't understand that these are not the same thing. People tried to pretend that the real cost of the money didn't matter, only the monthly cash flow - until the real cost of the money rose up and bit millions of people in denial. It was the money for debt service that gave people difficulty, and the inability to pay the real cost of that money that financially crippled the vast majority of those that got hurt, and those who are going to get hurt in the coming months.

If I had to look at one place to stop future problems like this before they start, it would be in the loan. One area alone won't completely stop abuse, but the loan is by far the most important. How many people would be in difficulty today if lenders had been unwilling to make the loan? That real estate agent can preach for months about how great this house is, Mr. and Ms. Wannabe Homeowner can pine for it all they want, and Mr. and Ms. Seller can proselytize about how wonderful an investment the property is. The fact remains that if the buyers cannot qualify for a loan large enough to buy the property (in combination with their cash on hand), it's not going to happen for those buyers at that price. If they've got the price in cash, there isn't a problem. As I said, the worst that can happen is that they don't have that cash for something else.

The entire lending process was so skewed that it's difficult to communicate to someone who's not a professional in the field. Let me start by describing three of the leading poster children loans that led to the housing meltdown.

100% loan to value ratio loans done on a stated income basis. Stated income loans were an early enabler of the housing boom, and they do have legitimate uses. Their traditional niche is persons who are self employed business persons, who are allowed any number of tax deductions not allowed to the corporate employee, because congress wants to encourage the next Microsoft, the next Google, or the creation of legal, medical, and accounting firms, among others, to foster the competitive element in those professions. If there really were only four accounting firms, they could get together, section the country off, and charge anything they wanted for any quality of service they wanted to deliver - not exactly conducive to happy consumers of these services - and congress gives the owners of those businesses certain tax advantages to encourage the formation of these firms. However, since income is documented via federal tax return, this causes them to be unable to document the same income that someone working as an employee of a larger firm who really is making the same money. Hence, the stated income loan, where someone "states" their income, and in return for a higher interest rate, the bank agrees not to demand documentation of that income. The problem is that if the consumer really doesn't make that income, they're still going to have to pay that same cost of money.

The traditional control upon the stated income loan was nobody did them for 100% of purchase price. And today, we're back to that traditional state of affairs. When you have to put twenty-five percent of the gross purchase price into the transaction in the form of your hard-earned cash, not only is the lender insulated from losing money if you default, but most people are going to do some hard investigation to make certain they really can afford it and aren't putting that money at risk. Before I write a check for $100,000, I'm going to make darned certain that what comes after is going to enable me to protect that investment. Nor was stated income ever a blank check: You had to be working in a field, and with a job title, where people really do make the income you "stated". Even though the bank wasn't verifying it, it had to be believable. But for several years, these were available for people with credit scores as low as 600 who didn't put anything down. To many people's minds, these consumers weren't really risking anything. here's my rebuttal to one such alleged professional who wrote me an email asking for an endorsement of his program. To this way of thinking, this loan removed risk from the prospect of the reward. After all, the consumer wasn't putting any of their hard earned money into the deal, so if it should just not work out for any reason, the consumer could just walk away, whereas if it did, the consumer was in the money! The thinking of these people (who were looking to get paid for their alleged wisdom) was that the consumers weren't risking anything with these loans, so there was no reason not to do these loans and these transactions. As I said then, investment risk is not and never can be zero. There is no such thing as a risk-free investment. Risk can be camouflaged or hidden, but it's still there. Good investment consists of managing that risk. Furthermore, these alleged professionals sold people property and the associated loans based upon this false assessment. Whether a given individual was truly unaware of these consequences, or maliciously lying in order to get a commission, the result should be the same: I put it to you that they are unfit to practice either real estate or loan origination, and they should be permanently barred from the entire real estate industry, after making restitution and serving some appropriate period as involuntary guests of the government.

The 2/28 interest only loan is one of the more common examples of what I have been calling short term adjustable loans. Unlike the 100% stated income loan, which was offered by many A paper lenders for a while, this loan is explicitly subprime. The way this loan, and others of similar mien such as the 3/27 interest only loan, work, is thus: There is an introductory period, during which the loan rate is contractually fixed at a set rate, and the borrower pays only the interest that accrues every month on the loan. For example, if the loan is at 6% for $200,000, the monthly payment is $1000. The attraction is that the payment, and hence, the perceived cost of money, is lower than the same loan fully amortized, for which the payment is $1199. But now let's get to the reason why it was the subprime loan that was offered, instead of the A paper equivalent, various hybrid ARMs such as the 5/1 ARM or 10/1 ARM: Because qualification standards in the subprime world were written to allow borrowers to qualify on the basis of Debt to Income Ratio for the loan payments at this initial level of payment, rather than based upon the fully indexed payment after this initial period and with a lower maximum debt to income ratio to allow for the fact that that underlying index might well rise, as A paper standards require. Furthermore, thirty year fixed rate loans are available subprime, albeit at higher rates. The net effect of all this was to allow people to qualify for a larger loan than they could really afford, and made sellers, real estate agents, and lenders very happy, and buyers happy for a certain period of time. After all, here they have this house that they didn't think they could afford, much nicer than the one they thought they could afford. It must have been a great bargain, because the apparent cost, or in terms they understood, the payment, was the same!

Unfortunately, that temporary payment is not the real cost of that money. Well, actually it is to begin with in this case, but if that cost changes, and since in this instance we know it will, then good risk management means we need to plan for it. In this case, we know from the start that on day 731, that interest rate is jumping to 8.2%, the underlying index plus a margin stated in the contract, and assuming that the index stayed the same, that's what we'd be going to in two years. Bad enough in the case of an amortized 2/28, where we know the payment is going to jump to $1437, a roughly 20% increase over $1199. It's tolerable to do these loans on a refinance for people whose credit just needs a couple years breathing space, after which they'll be eligible for A paper (provided, of course, they know that's what's going on before they sign the application). But for the interest only variant, the payments jump from $1000 per month to $1521, a 52% increase, and that's assuming the underlying index (in this case, the 6 month LIBOR) stays exactly where it was back then.

The most egregious loan of all, the negative amortization loan, should never be a purchase money loan for a primary residence. If you need a negative amortization loan to qualify, you shouldn't buy that property. Period. But it was marketed under all sorts of friendly sounding alternative names, like "Option ARM", "Pick a Pay", and the ever popular "1% loan." Who wouldn't want a loan with a cost of interest of 1%? Sign me up for that!

However, the 1% was a nominal rate only. You were allowed to make payments "as if" your actual loan rate was 1% or something similar. That was not your actual cost of interest for one single solitary second. The actual cost of interest was somewhere between seven and about nine percent, depending upon the situation. This while I had thirty year fixed rate loans in the low 6% range without points, and lenders were going out advertising to convince people who had gotten 5% thirty year fixed rate loans to refinance into Negative Amortization loans. You're only writing a check based upon a 1% rate, but they're charging you 8%. That payment is $643 on $200,000, but they're actually charging you $1333 per month in interest to start with. The difference ($690 the first month!) goes into your loan balance, where they can charge more interest on it next month! Then, when you hit recast (within 5 years at the very most), which in this case we will pick to be when the loan gets to be 15% larger than at inception, which happens in month 39, and your monthly payment jumps from that $643 to $1756, a 170% increase, and you discover that you now owe $230,000, and the property was only worth $212,000 when you bought it, and you discover it's worth less than that now. You have severe difficulty refinancing to something affordable, even if you didn't trigger a pre-payment penalty. Once again, the lender made the qualification decision based upon the debt to income situation computed using the minimum initial payment! And until the customer is completely unable to pay, the lender is booking all that income from deferred interest. That's what their financial statements write up as income! That bank executive looks like a genius (temporarily!) for getting you to sign up for a loan with an interest rate 2% higher than you could have had, or 3% higher than the one you did have. I read an interview conducted with one of those executives back near the beginning of 2007, who basically said, "The people who sign up for these are all idiots, but I've made a lot of money off them," to which I thought, "No you haven't. The accounting just looks that way right now on paper." Twelve months further on, that company was in bad trouble (and now it's dead). To make matters even worse, both this loan and the 2/28 were also offered on a stated income basis!

Lest this be in any way unclear, nobody was coercing lenders into offering these products. They were completely free not to. In fact, I can name a couple of household names that hung back, and never did offer negative amortization loans. But with the huge although false incomes lenders and mortgage investors were reporting upon these three types of loan (and others), there was a mad stampede for a while to see who would offer the most over the top loan program. For that matter, mortgage brokers were free not to participate, and real estate agents were free to limit themselves to real loans their client could afford, and more than one did, no matter how they suffered professionally while their competition got rich offering make-believe head-in-the-sand math. But so long as that mortgage broker and their client was following the rules set down by the lender, the only people the lenders can blame is themselves. So long as the mortgage broker and real estate agent made certain their client could in fact afford that loan, there is absolutely nothing wrong with having your client buy a property with a stated income loan for 100% of value. If the program the lender offers falls apart in the aggregate on loans that were precisely as presented, they is no one to blame but the lender themselves. No broker ever forced a loan program or a loan onto a lender. In fact, I threw at least a dozen lenders representatives who wouldn't talk about anything but these awful loans out of my office.

The problem is that disclosure and transparency were nowhere to be found in the vast majority of these loans. I can imagine otherwise sane adults signing off on all this sort of problem loan even if they were fully informed, but not in the numbers that are causing all of the problems. There are rational reasons why someone might do every single one of those loans. These loan programs are not new - it was the way they were marketed and sold that led people to sign up without understanding the consequences. Lest anyone be unaware, bad consequences hitting large numbers of borrowers always translates to bad consequences for lenders holding those notes, something that the lenders themselves had forgotten.

Lack of real disclosure is at the heart of the problems with our entire system of real estate in general, and of loans in particular. Lack of disclosure of what is going to happen should the consumer stay in that loan. Lack of disclosure as to what is really going on. Lack of disclosure - really a lack of transparency - in the entire loan process. I know - every good loan officer knows - what loans are available and what loans are potentially deliverable to a given applicant. It really doesn't take much in most cases. Credit report, income documentation, purchase contract. Every once in a while there's something unusual going on that prevents the loan you thought you could do, but for the vast majority of loans out there, that's enough to tell a competent loan officer what you qualify for. Furthermore, if a loan officer doesn't know all the salient points of the mortgage loan they're trying to persuade someone to sign up for, I don't think anybody sane would argue that wasn't gross negligence. "I can't tell you what this loan is going to do, but I think it's a really great loan for you!"

In the overwhelming majority of cases, however, that loan officer knew exactly what loan they would be able to deliver, at exactly what real cost, before the borrower signed the loan application to begin the process. They knew exactly what the terms would be, and exactly what the cost would be, exactly what the final loan amount would be, and exactly what the payment would be, not only now, but for the rest of the loan. This is all easy math, and the only thing more difficult than what a third grader needs to know to get into fourth grade is computing the payment once you have the total. Some of it may be subject to revision if you find out the client had their current balance or whether there was a prepayment penalty wrong, but you should be able to get the math right in the first place. It is one of the lending industry's big dirty secrets that the lender who underestimates the real figures by the largest amount will win the business. The one that tells a given consumer the best fairy tale gets their signature on a loan application. Despite the fact that these fairy tales are not binding in any significant way without a Loan Quote Guarantee, rare indeed is the consumer who will penalize the lender who lies to get them to sign the application, by not signing the final loan documents thirty or sixty days later. Furthermore, the lenders don't like brokers who offer loan quote guarantees, to the point where they have made it unaffordable for mortgage brokers to offer them.

I've already discussed the major ways in which people were qualified for loans they couldn't really afford, and the ways that were available to a competent loan officer to make it appear as if a given client could afford a given loan. And people who don't understand what was wrong with these are still looking for them. I got a search hit yesterday for "1% loan 120% of value." I get comparable search hits most hours of most days. People think these loans are good for them because they enabled them to buy a more expensive property than they could really afford (or "cash out" refinance for toys when they shouldn't have). But the real cost of the money was there and lurking all along, and none of this was explained to them. Furthermore, the vast majority of people whom I explained it to proceeded to go ahead and do it anyway, because it was so attractive to them now. They didn't do it with me, despite the fact that I told them if they were certain they wanted to do it, I could get it done. They went out to someone else who pretended the downside wasn't there. The downside was there, but by pretending it wasn't, these providers persuaded millions of people to do loans where they were cutting their own throat in slow motion. But people didn't want the truth - that they were heading towards an inevitable disaster - they wanted to pretend that everything was hunky-dory, and they richly rewarded those who pretended it was so.

How do we prevent this from recurring? Three answers: mandatory and full timely disclosure, a more transparent process, and more responsibility in fact. None of these are present currently. The lending and real estate industries and their lobbyists will fight all three of these, but they are all necessary if we really want to deal with the problem.

Let's detail what I'm talking about.

Instead of the joke that is the current Good Faith Estimate (Mortgage Loan Disclosure Statement in California), let's require prospective loan providers to tell the whole truth about a loan before the client commits by signing up. Nor are the new HUD-1 and Good Faith Estimate going to help in any material way - they're only going to make the steps to lie to consumers a little more complex. It's not difficult for a loan originator to figure out what the real costs are going to be, and what the rate really is going to be. We've already established that if they don't know all of the characteristics of a loan before they try to sell it, something is wrong. So the loan originator really should know everything about a loan as soon as the prospective consumer furnishes basic information. Let's make it mandatory to tell the consumer the truth of all of those neat little details when they sign up, rather than when they sign final paperwork. Let's start with a real accounting of the new balance: "This loan will cost you 1 point of origination and 1 point of discount. Administrative costs to finish the loan will be $3022, including all third party fees. You have indicated that you will/will not be adding the cost of one month interest to the loan in order to skip one payment. There will/will not be an impound account set up to pay property taxes and homeowner's insurance, requiring an initial amount of $n/a, which will be paid by check/adding it to loan balance. Starting from your initial balance of $200,000, this leads us to a final balance on your new loan of approximately $208,186. If this balance is not correct within $100, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents." This puts an honest accounting of what the loan is really going to cost in the consumer's hands right away. It removes the incentive for low-balling, because the client is going to know about any changes ten days in advance - enough time for their competitors to get the loan done (at the update, ten days aren't enough to do any loan any more, because of regulatory changes that delay the whole process to take 45-60 days. Once more way the government pretends to help consumers while in fact tying them to unscrupulous lenders). Here's an article discussing how much it's legal to low-ball a loan quote, and the lenders keep pretending that quote is real, even though they know it isn't, right up until loan signing, where the consumers usually have no choice but to sign the documents for the loan they were lied to about all along.

Then let's have a section on characteristics of the loan: I don't like 2/28s, but let's use one for an example, just to show how well undesirable terms should stand out: "The initial interest rate will be 6%. This will be fixed for 24 months. After this initial period, your interest rate will be determined by 6 month LIBOR plus a margin of 2.8%, determined every 6 months. Should this index remain where it currently is, your interest rate will be 8.2% upon full adjustment. This loan is fully amortized/interest only for a period of n/a months/negatively amortized for up to n/a months, after which, it will fully amortize. If this loan features negative amortization, your balance will increase by $n/a if you make the minimum payments for this period. Should any of these numbers other than the value of the applicable index change, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents." This lets the consumer know exactly what they're getting into, before they have no choice but sign the documents or lose the deposit, while still have time to shop for something else.

Let's disclose the effects of any prepayment penalty, as well! "This loan does/does not include a prepayment penalty. Should you pay it off within 24 months of funding, you will be required to pay a penalty of 100% of six (6) months interest upon the loan. At current values, this is approximately $6245.58. If any of these values changes by 1% of the estimated value, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents." Let's put a dollar figure on that pre-payment penalty, so people know what they're risking. It's not like this is Monopoly money!

Now, let's disclose the payments, and the real costs of keeping the loan: "The initial monthly cost of interest on this loan will be $1040.93. Assuming the underlying index remains constant, the cost of interest will be $1422.60 per month at full adjustment. The minimum initial monthly payment will be $1248.19. Assuming the underlying index remains constant, the monthly payment will be $1543.14 at full adjustment. If any of these values changes by 1% of the estimated value, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents."

Next, a little bit of transparency: "This includes a rate lock of 30 days, and is subject to change until such time as the lender accepts the rate lock. Your loan is/is not currently locked. If it is locked, your lock expires n/a (date) and the loan must be funded by that time in order to receive this rate. Should any of these numbers other than the value of the applicable index change, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents.

Now, some real transparency! Let's tell the consumers what it will take to qualify: "This loan requires full documentation of income/stated income/no income requirement. It requires a debt to income ratio not exceeding 50%, and a loan to value ratio not exceeding 80%. This quote is based upon a FICO score of 640, with the following mortgage delinquencies in the preceding 24 months 2x30 0 x 60 0 x90, and the following non-mortgage delinquencies n/a x30 n/a x 60 n/a x90. Based upon known debts service of $1643 per month, of which $1483 will be replaced by this loan, and prorated monthly property taxes of $166 per month and prorated insurance costs of $72 per month and other monthly housing costs of $230 per month, you will need an monthly income of $3753 to qualify for this loan, and the property must appraise for a minimum of $260,250 in order for this loan to be accepted by the underwriters. If any of these values changes by 1% of the estimated value, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents. Note that misrepresentation of your financial position or of the property value is a felony punishable by up to five years in federal prison, and conspiracy is a separate felony offense also punishable for up to five years in federal prison, and you may also forfeit legal protections afforded most consumers" Most people can look at this and tell if they qualify. No more loan providers baiting someone with a loan they know they're not going to qualify for! There could even be a standard list of common "loan busters" attached. Finally, it lets people know that they need to tell the truth, the whole truth, and nothing but the truth in order to receive all of those nice protections the law has granted consumers against lenders. Furthermore, other people, such as agents and sellers, can look at this and see something that really tells them whether or not these people are going to qualify for this lean. No stringing other people along for two months before they find out the loan isn't possible!

My point is this: Both consumers and those who are honest loan providers will benefit from moving the moment of truth forward from final loan documents. The only people that will be hurt are those who make a habit of low-balling their estimates - telling people about loans that there's really no way they can deliver. The current situation, where consumers are likely to sign up with the person that tells them the best fairy tale, even if they shouldn't get a loan at all. The current situation encourages telling fairy tales in order to get people signed up. I don't think anyone will argue that's a good thing. The replacement should encourage people to understand how loans really work.

I've discussed disclosure and transparency. Now let's consider responsibility. The best laws do no good unless they're enforced, and enforcement has to start getting tough for real. Furthermore, for many years a lot of large companies have gotten away with saying they train their people to follow the law, when in fact they let it be known they'll wink at violations so long as you bring in a little more business because of it, if not actively encouraging violations when the regulators backs are turned. They'll make their people sign off on a piece of paper that says the company told them about violating the "do not call" list, or that soliciting other agent's listings is illegal, or any of dozens of other violations, while letting it be known that the company will wink at violations if not actively encourage them. And I'm just talking about things that are flatly illegal here, never mind things that may be unethical but not illegal, such as telling people they have a $400,000 loan for $1287, encouraging people who already have loans at 5% to exchange them for negative amortization loans at 8%, where the minimum payment may be less for a while, but the real cost of the money is $2700 per month, as opposed to the under $1700 of their current loan. Just forgetting to mention little things like that.

Nor can the hunt for responsibility stop at the first broker supervisor up the chain. Companies that make it clear they want you to follow the law don't have nearly as many difficulties. If more than a very small percentage of loan officers or agents working for a given chain do something they shouldn't have, it wasn't likely to have been spontaneous disregard of the rules. The big chains know that under the current set up, they'll lose the occasional low level victim to the regulators, but nobody important will ever be prosecuted. That needs to change. At one point in time, I was waiting to interview at a loan place which shall remain nameless, and heard someone described as a "national vice president" giving a class that was not only incorrect as to the facts of the matter, but intentionally misleading in such a was as to make it easier for the loan officers he was instructing to rationalize putting a client into a bad loan. But if the only penalty such companies face is a slightly higher turnover of underlings, while they're permitted to keep the increased level of business that results, that is not the way to encourage good, ethical, responsible behavior. Nor is it sufficient to train the people you're allegedly responsible for in legal CYA maneuvers and declare training complete.

Let's consider advertising for a minute. Currently, it over-promises the moon, just in order to get people to call. "$400,000 loan for $1287 per month!" to use the example of one web advertiser I've seen way too much of. The cost of that loan isn't $1287 per month. That's just the minimum payment. The real cost of that loan is $2700 per month, and increasing if the borrower makes that minimum payment. Net result: Millions of people who gave up good loans for lies, and have now lost their homes, or are in the process of losing their homes, because of it. Advertising needs to be required to focus on the real cost of the money. The interest rate, and how much in dollars it will cost to get that loan done. If they had to advertise a rate of 8.2%, they wouldn't get nearly so many gullible people signing up. If those people who make a habit of advertising a loan with a low rate instead of a low payment, then they're going to need to explain that that $400,000 loan at 5.5% will cost $24,000 to get it done. There's always a Tradeoff between rate and cost, except when they can sucker someone into applying for a loan that has a high rate and high costs.

Enforcement needs to be faster. There is no reason why every HUD 1 that gets filed cannot be checked for compliance by a computer program, and flag for human evaluation those that fall outside of set parameters. It needs to be compared to the earlier paperwork the client was given, and checked for compliance with the law, not wait until someone actually loses their property before the government starts to act. Swifter, more certain punishment will deter more of the unethical and illegal acts before they happen. Elementary psychology. Sadly, there are those that can only be deterred by confiscating their license permanently and sending them to Club Fed for several years, but the rest of us are better off without them in the business, but the sooner we confiscate that license, ban them from the industry, and put them away, the fewer people that will get hurt as the result of their actions.

Another thing: For as long as real estate agents and loan originators are the same license, it's time to stop pretending that one doesn't need to know the basic job functions of the other. Professionals who deal with real estate every day are much better equipped to recognize malfeasance, and stop if before it gets to the point where their client is getting hurt. If you don't warn your client of any issues you see, you have violated fiduciary duty, and nearly as deserving of punishment as those who commit it. No, you can't recognize everything that happens before it does. But there's no excuse not to have an affirmative requirement to investigate, not to turn someone in to state regulators, but to inform their client that all may not be as it seems. This may meet resistance from loan officers and agents who want the other to continue to share business, but who is really entitled to more protection: The person who leaves you open to charges that you failed your client, or that client, who really does directly and measurably put money in your pocket?

There can only be one answer to that question.

Caveat Emptor

Original article here

Hello, I've been reading your website for awhile now, and have found it very helpful as I'm learning to navigate this crazy loan process! I had a question I was wondering if you could write about/answer.

We currently have a mortgage and a secondary line of credit on our condo (we didn't have a down payment, so we had to do it like this). We have been here one year, and the home values in our complex have gone up about $70,000 - $100,000 in that time period. (We live in Southern California.)

Recently we got a notice in the mail telling us that they can reduce our monthly payments ("by as much as $1,500!)" if we refinance with them. Frankly, it sounds way too good to be true, and I have a feeling they're not really telling us the truth in this notice. But it did raise a question in my mind: would it be wise to attempt to refinance, in the hopes that our higher valued home would allow us to refinance with only one mortgage, instead of two? I'm not even sure if that's possible...I'm having a hard time understanding how refinancing works. I should mention that we are currently in an interest-only loan, with no prepayment penalties. Our first loan is 4.75%, and our secondary line of credit is 6.375%.

Any help would be greatly appreciated.

Your feelings that they aren't telling the whole truth are justified.

Refinancing is the process of replacing one loan for another on the same piece of property. The idea is that the terms of the new loan are more advantageous to you than the terms of the existing loan. There are three main issues that you need to be aware of, however. The first is that there are always costs associated with doing the new loan. The second is that there may be a prepayment penalty to get out of the existing loan. The third is to make certain the terms you are moving to are enough better, for your purposes, than the existing terms to justify the costs associated with the first and second issues.

You state that you're in California, which is where I work. Realistic costs of doing the loan are about $3500 with everything that is necessary. This doesn't include origination, to pay the loan provider for the work they do on the loan, or discount, to pay for a rate the lender might otherwise not offer. I explain those costs, the difference between them, and many of the games lenders play in my article on Good Faith Estimate, part I. There will also be the possibility of you having to come up with some prepaid items, explained in Good Faith Estimate Part II.

Note that not every loan has points. I actually think that, given most client's refinancing habits, it's usually better to pay for a loan's cost, and the loan provider's compensation, through Yield Spread rather than out of pocket or adding it to the mortgage balance. Yield spread can be thought of as negative discount points, and discount points can be thought of as negative yield spread. Discount points are a fee charged by the lender to give you a rate lower than you would otherwise have gotten. Yield Spread is a premium paid by the lender for accepting a rate higher that you could otherwise have gotten, and can be used to pay the loan provider and/or loan costs. Each situation must be considered upon its own merits, of course, but most people don't keep loans long enough to recover the higher costs required to buy the rate down. There is always a tradeoff between rate and cost of a real estate loan

Now, let's take a look at your specific situation. Your current first mortgage is at 4.75% interest only. You don't mention what sort of loan this is (updated via email: it's a 5/1 Interest Only ARM), but there is no such thing as a thirty year fixed rate interest only loan. At most they are interest only for a certain period, usually five years, before they begin to amortize over the remaining twenty-five. On the other hand, you said you bought one year ago, and that rate didn't exist on thirty year fixed rate loans then and it doesn't exist now. (Via later email, the first mortgage is a 5/1 Interest Only ARM). Your second loan is a line of credit at 6.375. I'm also guessing that either you, or the person who sold to you, paid a good chunk of change in discount points to buy the rate down, and I'm hoping it wasn't you.

There's no way that this is a loan that's going to serve you indefinitely at that rate. When I first wrote this, there wasn't a 30 year fixed rate loan comparable to that available, with any lender I know of, no matter how many points you paid (at this update, it's trivial). So what you have is at most a hybrid ARM (Yes, 5/1 Interest Only). No worries; I love hybrid ARMs. They are the only loans I consider for my own property in most circumstances. But they do have one weakness. There is likely to come a time when it is in your best interest to refinance, because after the fixed period the rate on them adjusts every so often, based upon a stated index plus a contractual margin, and the sum of these two is likely to be significantly higher than the rate for refinancing into another hybrid ARM.

Now what are they offering you? They're talking about cutting your payment by $1500 or more. But there just aren't any rates that much lower than yours available. Nothing even vaguely close. So how are they going to cut your payment?

The only hypothesis I can come up with that is not contradicted by available evidence is that they are offering you a loan with a negative amortization payment. I explain those in these articles:

Option ARM and Pick a Pay - Negative Amortization Loans and Negative Amortization Loans - More Unfortunate Details

There is more information on marketing games with this loan type in these articles: Games Lenders Play (Part II) and Games Lenders Play (Part IV).

Finally, there are a few more issues that may not be relevant to everyone in these articles: Regulators Toughen Negative Amortization Loans? and Negative Amortization Loan Issues on Investment Property

One thing to understand is that when lenders are sending out advertising, they are not looking for Truth, Justice, and the American Way. They're looking to get paid for doing a loan, and most lenders will do anything to get you to call, and then to get you start a loan. The creative fiction on many Good Faith Estimates and Mortgage Loan Disclosure Statements is only the start of this. If you find a loan provider who will pass up loans that they could otherwise talk you into because it doesn't put you into a better situation, keep their contact information in a very safe place, because you've found a treasure more valuable than anything Indiana Jones ever discovered. A valuable treasure that you can and should nonetheless share with friends, family, and anybody you come into contact with because you want them to stay in business for the next time you need them. Most lenders and loan providers could care less if they are killing you financially - what they care about is that they get paid. A negative amortization loan pays between three and four points of yield spread. Assuming your loan is $300,000, they would be paid between $9000 and $12000 not counting any other fees they charge you for putting you into a loan where the real rate is at least 1.5 percent higher than the rate you're paying now, and month to month variable. Warms the cockles of your heart, right? Didn't think so.

In short, they're offering you a teaser no better than a Nigerian 419 scam for most people in your situation. My advice is not to do anything unless you're coming up on the end of your fixed period, in which case you need to talk with someone else, who might have your interests somewhere closer to their heart than the Andromeda Galaxy.

Caveat Emptor

Original here

Whenever I go scouting in public forums, somebody is always asking, "What's the secret? How do you get rich in real estate?" The alternate to this question is "What do you know that I don't?"

These people are sure there's some magic formula for getting rich quick in real estate, but nobody is willing to share. They're a good person, they're a smart person, and in their mind, they deserve to make money as much as the next person. Why won't anyone tell them? No con artists need apply, of course.

The reason nobody except con artists will tell them is that there is no such secret. There are no mystical secrets of the universe that make you an overnight success in real estate or any other field. Like any other investment, it takes money to make money in real estate, and the more money you have and are willing to risk, the more money you can make. Leverage in real estate is a fantastic instrument, but in order to get the lender to loan you money, you have to be able to convince them you can repay it. This takes money, and it takes income. It can also be overdone, as many people have. Even if you win the bet about your property increasing in value, if you cannot make the payments you can bet on losing the whole thing.

Other people are skeptical of the value of real estate agents at all. "What do they know that I don't know?" is the question that I see asked the most, when they don't proceed directly to an assumption that the answer to this question is "Nothing," and from there the bashing begins.

Until somebody hits a real world snag, of course. "My house isn't selling. What do I do?" "A buyer offered me $X. Should I accept?" or "This happened. What do I do now?"

The issues are mostly preventable, and had even a brand new agent with the ink on their license still wet written the contract, chances are good that the potential problem would have been foreseen, and safeguards against it devised. This is, after all, what we're trained for and what we do. If people could learn your job by reading a couple books, nobody would need to pay you for whatever you do - real estate is no different. Well, I know enough about many subjects to know that I can't learn everything I need to know by reading books, and that any pretense otherwise on my part would be foolish pretension. It might be one thing for me to pull my little girl out of a 5 foot deep swimming pool when she gets in over her head. It would be something else again to try an open ocean rescue of a 200 pound adult.

And a financial lifeguard is an entirely apt analogy. It's not that you don't know how to swim, for crying out loud. It's that you got in to a situation beyond your capabilities, beyond your experience, and now that you're there, you can't get yourself out. Unfortunately for those who ignore "no lifeguard" signs in real estate, it's very difficult to go find that lifeguard while the trouble is going on. It's not like you can get a time out, and many times the fact that you are drowning may not be apparent until you breathe in water, months or years later. If there is a agent present the whole time, you can sue their insurance carrier for your losses, but most often, they will prevent the deadly misstep in the first place. Any agent with a lick of sense won't get involved when there's already an existing problem. That's where attorneys come in, and attorneys get much more expensive than the agent in a hurry.

It's not what good agents know, but what they know. Anybody can read the financial press, and it's not too difficult to understand what they're saying. But knowing it and understanding what it really means are two entirely different things. Being able to formulate a plan of action to come out as well as possible is a whole other level beyond that. What good agents understand down deep at a level of calm certainty that nobody with an expertise less than theirs stands a cell phone's chance in an IED of talking them out of, and that is a system of approaching the transaction that debunks the hype, the nonsense, and makes certain that the numbers all work and the traps are all evaded. If you're not willing to pay the agent what it takes, spend a couple of years of your life familiarizing yourself with all of the issues, and you'll still likely fall short, because it's not just book learning, but experience, and even a new agent has a supervisor with a wealth of experience to draw upon. Nor is it just "sticks". There are an awful lot of carrots out there that are very valuable if know when and how to use them, and will cost a lot of money if you do not know when and how not to.

Here is a fact: The vast majority of people who claim they did fine doing a transaction without an agent say things that inform me and everyone else who understands the way things really work that they got taken for tens of thousands of dollars. Most often they say them while attempting to brag about how well they did, when they're really saying something like, "I threw the seller (or buyer) thirty thousand dollars extra because I don't really understand what's going on!" The number of dollars wasted can quite easily amount to a third of the property's actual value - well in excess of $100,000 for middle class homes here in the San Diego area.

There aren't any huge and critical secrets. But there is a wealth of experience and understanding and little tricks that make big differences. People who do not deal with the real estate and mortgage markets every day are unlikely to have this knowledge. Whether you're a computer programmer or any of a thousand other occupations, ask yourself if someone fresh out of college could do your job correctly on the first attempt, even if that's what they spent four years studying it (which you almost certainly have not done for real estate). You know the answer. It doesn't change because you're the one who wants to do someone else's job.

Caveat Emptor

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I got behind 5 months, in months of 01/2010 to 05/2010. Home was paid cash for in 11/2000,took out a first mortgage in amount of 75thou.House went into default, I sent in 3 thou in 05/2010, and another 1200.00 before end of 06/2010. They sent the money back, said loan was in default, could not accept monies. In June started process to modify loan, in the Making Home Affloan. Original loan was 8.25%. During time was being reviewed for the mod. loan house went to auction 08/03/2010, was postponed. It took bank from 06/2010 to 11/23/2010 to disqualify us for loan because we owned over 200,000 in stock. A few more auction postponements, we were in review for the loan. Did not receive notice did not qualify for that loan mod. till first week of 12/2010. Contacted bank, they said had other modification loans,(in house loans) sent in more financials, this was 12/06/2010, found out new auction date was 12/07/2010, they postponed sale, was in review for loan restructure. Next thing I know called them on 12/20/2010, told me was an aution date for 12/23/2010. I was told was too close to sale date to file paperwork for a new loan mod. to keep calling back to see if got a postponement. To make a real long story short, 12/23/2010, came sold our house valued at between 500,000 to 600,000 dollars for under 97,000. Then today 12/30/2010 received 2 letters from bank telling me want to work with us, keep us in our home and referenced our phone conversation on 12/23/2010, and asked for me to send more financial info, they have many programs to restructure the loan. I just want people to know what the banks are doing. If you could get this story out there, someone need to know what happened to us, ours was a rare case, but people need to know.

The salient points that stick out were:

-They owed a base amount of $75k which became $97k

-They had $200,000 in stock so they were denied for a loan modification

Given these two facts, there is only one conclusion possible: They chose not to make those payments.

Maybe it would have been uncomfortable in some way. That's simply not relevant. They voluntarily borrowed the money. Based upon their representations, the lender agreed to loan them the money. One of the conditions was that if they did not repay the money, the lender would have the right to the security interest. These people had $200,000 available to pay the lender, chose not to pay, and the lender exercised that right.

What this really looks like to me is these people tried shaking down the lender despite having the assets to pay off the loan. They were asking for a windfall via the lender just voluntarily allowing them to skate on the obligation they freely agreed to. They had the money to pay the lender, they just chose not to pay it, hoping that the lender would just let them slide on the bargain for no good reason.

Taking the right of foreclosure away from lenders would completely gut the housing market, because nobody would willingly make a loan ever again. Keeping in mind that The Mortgage Loan Market Controls the Real Estate Market, this means that housing prices would crash, and only people with the ability to pay cash would be able to buy real estate. You want to know what that would look like, go back to the late 19th century tenements of our old industrial cities. It's not a pretty picture.

I never like to hear about someone losing their property, but someone who had the money and chose not to spend it to prevent foreclosure doesn't generate much sympathy from me. Yeah, there are people working the system who haven't made a payment for two to three years. That doesn't mean it's a good thing, and that doesn't mean it was right. That lender loaned the money in expectation of having it repaid with interest. If they could not expect repayment with interest, they'd never loan it out again. If they didn't have the right to foreclose in pursuit of recovering what they should have been paid, not very many people would make their mortgage payment (even fewer on time and in full), and once again, nobody would ever loan money for a mortgage ever again.

Caveat Emptor

Original article here

Every so often, another story of eminent domain abuse hits the headlines for a day or two. Someone whose property is desired by the government gets hit with an eminent domain suit and ends up forced to sell and getting a lot less than they believe the property is worth. One of the most common things about these in recent years is that the government agency condemning the land hands it over to some other private individual for some purpose or other that may not have any real public need.

Let's be clear and explicit about eminent domain abuse: The issue is money.

Every once in a while there's someone who really won't sell the old family homestead at any price. The media loves these stories. They're also somewhat less common than hen's teeth. Far more common, indeed typical, is the government - or rather the private individual they're fronting for - offers someone a price below what similar properties that happen to be vacant or voluntarily marketed ones are going for.

If an eminent-domain condemning agency were to offer these business owners the amount the property is really worth to those business owners, i.e. value plus cost of relocating their business, they'd sell in a heartbeat and no legal case happens, not to mention there is no legal delay. Everyone wins. With the cost of litigation, nobody wants to get the courts involved.

If a condemnation agency were to wait, the property would become available on the market in the course of time. How much privately held property has not been sold voluntarily in the last fifty or a hundred years? The proportion is vanishingly small.

But in the case of a condemnation, we're not talking about a voluntary sale. We're talking forced sale of a property. The property is not on the market. If it were, the condemning agency could negotiate the price same as anyone else. I should also mention that the condemning agency also has the choice of purchasing some other property that is on the market, and that would be a viable choice in a majority of cases. The current owners do not wish to sell. Most particularly, they do not wish to sell for the price offered.

However, the incentives for government agencies don't work the way they do for private individuals and corporations. Their legal budget is what accountants call a "sunk cost" not charged against those bureaucrats like operating budgets are. Furthermore, if a project takes longer because everything is tied up in court, that's okay because everyone still gets paid, and the person directing it all has more opportunity to build themselves a secure little bureaucratic empire. But cost of acquisition? That comes out of budgeted dollars and they're held responsible for those!

All too often these days, there's a politically connected private individual or corporation who is the true beneficiary of the condemnation standing behind the government agency doing the actual condemnation. These people are sensitive not only to cost, but to the cost of delay. They could afford to pay enough to induce the owner to move voluntarily. They choose not to because the cost of the delay is less than the windfall they get from the condemnation getting the property for less than it is worth.

Let's look at the Fifth Amendment. I'm going to emphasize the relevant text:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

What is just compensation?

Should not a case be made that just compensation includes the expense of involuntary relocation, since we are forcing the property owners to relocate, allegedly for the common good? Certainly in such cases if the owners were poor people from the inner city, it would be demanded the government pay over and above the actual assessed property value to compensate them for their hardship.

I submit that it is no different in the case of a "wealthy" individual or corporation.

This includes any permits the business may require to move to the new location. If the business spent lots of time and money obtaining permits that are specific to the site they currently occupy, and do not transfer to the new location - or have to be re-done when they move - That is a legitimate expense the condemning agency is forcing them to bear if they want to stay in business, and should be included in any settlement that has any claim to "just compensation"

Let's be clear on another point as well: The condemned property is neither vacant nor voluntarily marketed. If it were, we'd have a clear case of negotiation being necessary until both sides come up with something mutually satisfactory. If the owners have a higher offer, or even rejected a higher offer, obviously the condemning agency needs to pay more, not threaten to end the negotiation with a "nuclear option" consisting of "We'll take you to court and get it for less". Reduced to the essential components, that's governmental robbery of private citizens. If you don't agree that's a bad thing, check yourself into a mental hospital immediately.

Require just compensation for the owners of condemned land, in the same way and via the same methods that corporations are required to make restitution to the victims of corporate malpractice (or even alleged victims) and watch the practice of eminent domain abuse come to a screeching halt.

The people practicing eminent domain abuse don't want to pay lawyers any more than their victims do. They are simply more able to pay their lawyers than the victims are able to pay theirs. They do so because it is cost effective: They make more money utilizing this scheme of legal terrorism than they do negotiating a price that reflects the real value to the current owners in the first place.

Take that incentive away and the problem will vanish.

Caveat Emptor

Original article here

This just keeps popping up everywhere, so I obviously need to explain it blatantly.

In order to be a real estate loan, there must be real property involved. In other words, land or an interest in land. It doesn't have to be what lawyers call "fee simple" and the rest of the world calls complete ownership, free of anyone else's interests, but it does have to be an interest in land.

When you buy a house, townhome, condominium, or even timeshare, what you are buying is an interest in the land it occupies. The building you want to live in comes along for the ride because it is what lawyers call appurtenant: attached in such a way as to make removal non-trivial. I know that moving even mobile homes isn't what anyone who understands calls "trivial", but it's a lot easier than moving something with a permanent foundation. Talk with a lawyer if you need a finer appreciation for what your state considers appurtenant; I'm just trying to convey a general idea.

The cleanest example of an interest in real estate is "fee simple": A piece of land in which nobody else owns any interests. It's been about a century since most urban plots had this feature, since J. Paul Getty figured out that if you separate out the mineral rights you can make more money, but there is still a lot of rural back-country where fee simple is common (although not ubiquitous. Lots of farmers, ranchers, etcetera have sold mineral rights).

Much more common today is a community development, where the neighborhood has a Homeowner's Association (hence HOA) for common area maintenance, and this HOA has rights to enforce common standards of appearance. This really empowers the neighborhood busybodies, but it does safeguard you from a neighbor who lets their property become an eyesore and drags your value down or rents his property to a fraternity with loud parties 24/7. This is still an interest in land.

Then there are Condominiums and Townhomes. These are common interest developments where the entire group shares title to the land, and all you have is the exclusive use of one particular piece of the area or volume, which is described in the initial plan. This typically includes a dwelling unit, one or more parking spaces, and perhaps a storage locker. Note that these are usually described in terms of the volume they were planned to occupy, and may not be 100% compliant with the plan document. I heard about a high-rise where pretty much every unit was at least partially above the volume originally described for that unit because there was a change in building codes requiring more height per story, but everyone understood what was intended and pretended it was all copacetic. This is still real estate, because each individual owner still has an interest in land.

The principal extends even to timeshares. Title companies don't like to do them and most lenders don't like them, but they've still got an interest, although time diluted and common interest. That's still a real estate loan.

Even leaseholds can be a real estate loan with some caveats. The lease has to run at least as long as the term of the loan or the lender will decline. No lender is going to approve a real estate loan where the real estate interest might go away before the loan is paid off, but even leaseholds are still real estate and you can get real estate loans on leaseholds. Of course, this renders said property essentially useless as an investment in many cases, but it is at least theoretically possible to get loans on them. In the East County, there are quite a few residences on leaseholds (mostly Indian land) in and around eastern El Cajon, Lakeside, and other communities.

Manufactured homes can be real estate loans, albeit with restrictions. The critical question is "What is the legal interest in the land?" If the land it sits on is an ownership interest or even a leasehold interest, it's usually at least theoretically possible to get a real estate loan on it. There are restrictions on loan to value ratio that mean a higher down payment requirement and therefore worth fewer dollars, but if there is an ownership interest in land, a real estate loan is at least theoretically possible.

What is not a real estate loan is any property where the land involved is rented space. If there is monthly space rent, it's not a real estate loan to buy the dwelling unit. It's a personal loan like buying an automobile, watercraft or airplane, and that is an entirely different department at the bank. People with real estate lender's licenses can't help you - it requires a different type of lending license and loan procedure. Most such dwellings are registered with the Department of Motor Vehicles or your state equivalent rather than the county recorder or assessor (the good news is there may not be property tax!). This isn't me or anyone else in the real estate industry trying to ghetto-ize you and your dwelling. It's not discrimination, prejudice, "raaaaaacism!", or anything else. It's what the politicians and lawyers have decided in setting up the legal structure we work in, and it applies to everyone in that situation, whatever else may be going on in your lives or theirs.

Caveat Emptor

Minorities get higher rates.


They add that the fact minorities are more likely to borrow from institutions specializing in high-priced loans could mean they are being steered to such lenders or that some lenders are unwilling or unable to serve minority neighborhoods.

What they describe is called redlining. It is illegal. HUD (correctly!) really gets their panties in a bunch over it, too. Mostly what actually happens is that the lenders simply aren't chasing certain kinds of business. If any comes to them, they deal with it like anyone else. This is standard marketing procedure. Figure out who you're trying hardest to serve, and really chase that segment. If anyone else wants to come to you, that's wonderful and you serve them the same as any other customer, but they're still not someone you're going out of your way to attract.

One thing that the article explicitly said: This does not include or compensate for credit scores. Working with people in the flesh, I have experienced the fact that there is a difference between how various groups handle credit. Often, the urban poor have some difficulty in meeting the requirements for open and existing lines of credit. They are more likely to have failed to make the connection between credit reporting and future qualifications for credit, having at some point made a decision not to pay a creditor. On the flip side, often they are more poorly educated about their options or think they're a tough loan when they're not. This extends into the general population, although it's less prevalent. I have a friend I went to high school with. He and his wife make over $160,000 per year between them in very secure jobs they have held for over a decade each. Their credit score is about 760. The loan officer they were originally working with told them they were a tough loan to try and scare them into not shopping with anyone else. The reality is that the only question is what loan is best for them because they easily qualify for anything reasonable. This is far more common than most people think. When I originally wrote this, if you had two or three open lines of credit and your credit score is above 640 - sixty plus points below national average - I could have gotten 100 percent financing, and the possibility didn't disappear completely until you went below 560 (whether it's smart was a question for the individual situation, but I could have gotten a loan done if it was). 100 percent financing is now gone (unless you're a veteran!) but if you've got a five to ten percent down payment and stay within your means, a loan can be done for credit scores down to 620 for conventional A paper, and with a 3.5% down payment down to 580 and perhaps lower than that with an FHA loan. With increasing equity, I can usually get a loan done even for credit scores down to 500 (two hundred points below national average!), albeit with prepayment penalties. Now, the better your situation, the better your loan (e.g. rate, terms, closing costs, etc.) will be, but the question is not usually "Can I do a loan for these folks?" but "Can I find them better terms than anyone else?" and "Should I do this loan or is it really putting them in a worse situation than they're in?"

Quite often, the loan provider that urban poor go to is the one who advertises where they see it - basically, the lender who chases their business, usually by advertising in that area or in that language. Every other lender is still available to them, but they go to the place whose advertising they see. They think "This guy wants my business. He does business with people like me all the time. He can get me the loan." The problem is that all too often, this loan provider has chosen to chase this market precisely because the people in it, most often urban poor, do not understand they've got other choices, and do not understand effective loan shopping, and so this loan provider makes six percent (the legal limit in California) on every loan plus kickbacks and arrangements under the table. They make more on one loan than I do on half a dozen for roughly the same amount of work each, and the loan they do are not as good for their client as others that can easily be found.

Most people are better loan candidates than they think they are, and qualify for better loans than they think they do. It's more often the property they have chosen and the fact it requires a loan bigger than they can afford that creates an untouchable situation than the people themselves.

(I got a ten minute lecture a while back from a nice young couple telling me they "deserved" a rate of four to five percent on a 100% loan for a manufactured home sitting on a rented space, because it was "the same rate everyone else is getting". Well, if it had been on a regular house sitting on owned land I could have gotten them that loan on very desirable terms, but nobody ever did 100 percent loans on manufactured homes, and if there's no ownership interest in the actual land involved then it's a loan secured by personal property, not real estate, and it becomes a personal loan, for which the rates are much higher.)

So keep this in mind if and when you're in the market for a real estate loan, and shop multiple lenders, and shop hard. Remember that all of the times your credit is run in a two week period for mortgage purposes only counts as one inquiry, whether it is just once or whether it's five dozen times. A loan provider does not have to run credit themselves to get a quote, but the information must be complete, accurate, and in a form they can use.

Keep in mind that the loan market changes constantly. A quote that's good today almost certainly will not be good tomorrow. When I originally wrote this, I wrote "If it's not locked, it's not real, and a thirty day lock is not valid unless extended on the thirty-first day, for which you will pay an extension fee if necessary." That is still valid, but lenders are making it very expensive to loan officers and their future customers for locking a loan without it closing, so it has become too expensive to lock loans before there is pretty concrete assurance it will close. So shop hard, with a real sense of urgency, get it done quick, and make your loan provider get it done quick. Any additional stress will more than pay for itself (and the longer the loan takes, the greater the opportunity for stress, too). Loans are taking longer now than they used to due to new regulations that have the effect of delaying every loan for 3-4 weeks, so 45 days is about the fastest you have a prayer of actually getting a loan funded. But I will bet money that a loan done in sixty days or less from the time you say that you want it is a better loan than the loan that takes ninety days or more.

Caveat Emptor

Original here


Note: This article was originally published November 2007, when rates were higher than currently

I had been corresponding irregularly with this gentleman during his hunt. It happens he lives outside of California, and I only work inside California, so I wasn't professionally involved. However, when he sent me the email telling me how it all worked out, I thought it it would make a good case study to show how several things I write about actually happen, how to deal with them, and that even if you don't do everything I write about, you can still get quite a bit of benefit out of this. I obtained his permission to run it with identifying details removed. I'm going to break it up into more digestible blocks, and comment upon what he did right and what he could have done better, had he wanted to spend the effort.

Hello Dan,

Thought I'd drop you a note and complete the circle so to speak. We've corresponded a handful of times since about May. I'm in DELETED, sold my $200K townhouse and contracted to have a new house built. I used your site a lot to come up to speed on mortgage matters, I've only had 1 mortgage in my life which was for the townhouse 8 or 9 years ago. That one was an FHA ARM I assumed so this new one was a new deal entirely for me.

Research is always good. That puts him ahead of at least 90% of everybody, right there.

We signed the contract to build around May 1 and closed on a nice shiny new 3,100 square foot, 5 bedroom house on a .31 acre lot on October 1. It's been a wild month what with moving and all but we're now firmly in and very happy with the new digs. Mortgage wise we went with the builders affiliated lender, it's a moderately large regional builder not one of the publicly traded ones. I would have liked to have had the opportunity to shop around a lot but the way they write these contracts makes their lender pretty enticing with a $15K credit towards closing costs.


A $15k credit towards closing costs? On a $200,000 loan? Real is $3000-3500, plus whatever you decide to pay in points. That's about 6 points of buying the rate down. And 6.125, what he ended up with, is available in my neck of the woods for less than a point. Rates are down from where they were in the summer, but even then, I think 1.2 points was as high as I got for that rate. Real, effective savings for using the builder's lender: about $6000. Not exactly chicken feed, and at least it was a net savings. All too often, people let cash make them stupid about real estate, and this is one of the biggies. We didn't cover whether the builder's loan had a pre-payment penalty, but the builder's loan having a prepayment penalty would have eaten all those savings and more, besides.

A better way to handle it is as a direct credit on the sales price of the house. Of course, you need to have already negotiated your best bargain before you bite off on that, or they'll give you $15,000 with one hand, while taking $20,000 away with the other.

So here is how it all worked out. Initially we got a GFE from the lender which is of course worthless at the start since you can't lock a rate 4 months ahead of time. The initial GFE was for 5.875%, 30 year fixed with a single point origination fee. Then over the summer the whole subprime mess hit the mortgage market hard. My loan was never going to be a problem with a loan amount of $215K against a purchase price of $430K but we were sweating bullets over the rate for a while . I got my initial firm rate lock the last few days of July at 6.5% with the same 1 point and 30 year fixed term. That was just under 75 days from the initial closing date of 10/8, I believe (you'd know ;)) the 75 day locks are a little more expensive than the shorter term ones. This lender lets you lock at the first opportunity and for my loan type that was 75 days, then they'll let you re-lock once between then and closing at no extra charge. I watched the rates every day and I was subscribed to DELETED daily rate alert so I could see the daily trends as the bond market did all sorts of gyrations up and down .

The longer the lock is for, the more expensive it is, yes. That said, for A paper loans, it's not very difficult to lock for up to 270 days out. On the other hand, for longer locks, you're likely to make a non-refundable deposit. It costs money if you lock and don't fund. The only question is whether you pay for your own risk of this, or whether the originator theoretically pays, but makes up for it by charging a margin that not only pays for everyone who doesn't fund, but has a tidy sum left over.

This is also describing the "float down" option that lenders have, and which may or may not be included with a lock at a direct lender - their way of luring in customers, and that's fine. Broker clients don't get this (at least I've never heard of a broker who could offer it), but brokers can pull the loan and resubmit elsewhere, no matter how much lenders try to stop the practice (It's so rare that ways they try don't do much good). What they're doing with the float down is getting people committed without having them feel committed. You're committed. Here's the proof of that pudding: What happens if they completely hose you on the loan? Who else is going to parachute drop in with another loan ready to sign? Answer: Nobody. Therefore, you're committed to that lender.

.

My closing date got moved up to 10/1 at some point and then we got to September. On 9/7 (I think this was the week) which was a Friday bonds had had a rally that week anticipating fed action. The DELETED rate had dropped from 6.5 to 6.375 to 6.25, I checked with my Broker and he offered 6 & 1/8. I held off till Monday since the bonds had rallied even more on Friday thinking it might drop a smidge more. No dice, Monday had the same 6.125 so I re-locked at that rate, 1 origination point and 30 year fixed - or so I thought.

If he's working for the broker, he wouldn't be working for the developer. He might be a loan officer, but he's not a broker. I've never made $15k on a single loan - ever. My company has never made half that amount, even on loans several times the size and apparent difficulty. That builder is not offering you $15k of incentives to use his lender if they're only making a couple thousand that a broker would from that loan. That builder is getting the direct lender's stroke from selling that loan on the secondary market.

That said, this is pretty good work on the lock.

Now, at every turn in this process I'd see other options. Initially he asked me if I had any interest in interest only, "certainly not" was my reply. Each time I receive a GFE there were blocks for the interest only option. I know in the past they've done A LOT of interest only 5 year fixed period loans. But I wanted a 30 year fixed, the rates are hardly any different these days and I do want to actually payoff my loan eventually! :-)

Oh, you will pay off your loan eventually. That's one feature all loans have. Lenders use interest only to make the payments seem a little more affordable for a while. Of course, when the interest only period expires, your loan amortizes over a shorter period, and the payments are even less affordable than they would have been.

Unless you can afford the property with a fully amortized loan, you're well advised not to buy it with an interest only. They always bump the rate/cost tradeoff for interest only loans, and usually it's grounds for a loan originator to make a little more money, or at least try to. Even if you can afford the fully amortized payment when it does adjust, only go with an "interest only" loan if you have a plan that's going to make you more money than it costs you.

So closing day arrives. We trundle over to the brokers office and meet the person from the title company who is serving as the closer. She begins reviewing docs, might have been the first piece of paper of maybe the second - "and here is your note, 6.5% rate with interest only for 5 years" Wait, STOP - that isn't my loan, my loan is a 30 yr 6.125 rate!!! So she calls the broker and they look it over . Oh, so sorry, someone dropped the ball and drew up the papers incorrectly. It took them an hour to redraw the entire package up the way it should have been in the first place. The broker was very apologetic and did offer, without me asking, to waive their document processing fee which was a few hundred bucks. All's well that ends well but it makes you wonder. The loan they prepared in error had the slightly higher rate and no origination point so the costs were a couple thousand less for the higher rate. So I don't think they were trying to screw me totally but the fact remains it was a totally different loan from what we had discussed all along.

6.5%, even interest only, on a 5/1 would have made them something like 2.2 points of yield spread, had they been a broker, more in secondary market premium if they're direct or correspondent lending. It makes a difference of something between 3 and 4% of the loan amount on the secondary market. That's why no origination on that loan. If you had signed those papers, they would have sent out for caviar! That and of course, the fact that they were giving you a $15,000 allowance which you weren't close to using all of. That said, always judge and compare loans by what is best for you. If someone can make more money while delivering me a loan with a better bottom line, they've earned every penny of whatever they make. Lender compensation is not something for consumers to worry about except as it ends up costing them more money than another loan they could have had.

This is very good, that you caught the difference and stood your ground, however. Yes, your signing agent made it easy on you, but you still did it. People don't believe this really happens, but it happens all the time, and over fifty percent of all people it happens to do not notice, and something like 85% of those who do notice won't stand their ground.

Caveat Emptor

Original article here


The phrasing in parallel with Animal Farm is intentional. Sellers need to understand this, and so do buyers, especially in a hot real estate market. Some offers are more equal than others, and knowing how to choose between competing offers on the selling side is critical. On the buyer's side, understanding this and anticipating it so as to make your offer attractive to a seller with a good agent is critical to success in making offers.

Even if they are for the same number of dollars or even for larger amounts, some offers are much less likely to actually consummate than others. If they don't consummate, all that happens for sellers is that they wasted their time, their money, and came up with nothing. Furthermore, once you have a fully negotiated purchase contract, the chances of renegotiating it so the seller gets more money are nil. Most purchase contracts, the seller needs to make concessions due to things discovered to be suboptimal with the property. Sad to say, there are even some very shark-like real estate types that go around making offers with the intention of using every little thing to renegotiate the contract in their favor. They make their offer look superficially attractive and then once they have a purchase contract start demanding concessions right and left.

There are currently three major things likely to prevent a transaction from actually going through. The first is the Home Valuation Code of Conduct sticking the transaction with an appraisal that's lower than the purchase price. I had an appraiser choose two completely trashed lender owned beaters down the hill as comparables ("comps") for my client's beautifully maintained property in a more desirable location, and there wasn't a thing I could do about it even though there were more comparable comps. When this happens, all the issues in When The Appraisal Is Below The Purchase Price for Real Estate come into play. If the loan standards are eighty percent Loan to Value Ratio and the buyer only has 20% to put down, when the appraisal comes in low, the additional cash isn't there to make it happen and the transaction will fail. In some cases, private mortgage insurance can maybe extend it to ninety percent currently, possibly 95% in some cases, but 100% financing is out of the question for anyone but veterans, and adding private mortgage insurance often means the buyers don't qualify on the issue of debt to income ratio. Most often, if the appraisal comes in low it means that either the transaction is going to fall apart, or there is going to be a mixture of the buyer adding more cash to the deal and the seller lowering the price. If the buyer doesn't have more cash to add to the deal, it doesn't take much predictive ability to see that things are going to boil down to the seller deciding whether they'd rather find another buyer or take less money, and it doesn't take much insight to see that a very limited amount is likely to mean you're better off taking an offer where this isn't an issue.

The second thing likely to prevent a transaction going through is issues with the property. Something is discovered during the buyer's due diligence period that causes them not to want the property, or to not want to pay the originally negotiated price. It could be anything. These issues are always with us. The only way not to be surprised by them is for the seller to be honest with themselves and do their own due diligence beforehand.

The third major deal-killer is buyer inability to qualify for the loan. Either they represented themselves as having more cash than they do, they really don't qualify for this loan on this property, or some miscellaneous loanbuster issue pops up. This is why I insist that every qualification letter I write and every letter I'll counsel my clients to accept be a pre-qualification written for that specific property and that specific offer. A generic "They qualify for $300,000" letter is wasted paper. The person writing that letter must also make specific representations as to why the buyer qualifies on the basis of debt to income ratio, loan to value ratio, credit score, and Cash to Close. For my listing clients, it the offer doesn't do this, I send the buyer back to try again. I tell them what the letter must cover, and I will counsel my clients never to accept an offer that doesn't include this information.

Running an automated underwriting program is easy and popular, but never acceptable for this purpose. Automated underwriting results are only valid if they don't change anything from how it was submitted. Let me tell you something that happened to me not that long ago: I got an automated underwriting accept and priced and locked the loan and sent the file through on that basis. My processor, for reasons beknownst only to them, took it into their head to run automated underwriting through again on precisely the same file and got a lesser acceptance that raised the cost of the loan and cost me most of the money I would have made on that loan, and it could easily have changed to an outright rejection of the loan. This was for a refinance where nothing of consequence changed except for a precise appraisal amount that was still well within guidelines. What do you think is likely to happen when the purchase price changes or the the precise loan amount or any of dozens of other factors changes by a little bit? I never accept automated underwriting results for a purchase offer. Manual underwriting rules, however, are universally good, particularly in the A paper world. If something happens at one lender that causes it to have trouble, somebody else will take it if the manual underwriting standards are met.

I should also stress that sellers live in a world where net proceeds are what is important. If the transaction doesn't close at all, the net proceeds to the seller are negative regardless of what was offered. Even if the transaction closes, an offer for $200,000 requiring them to pay $5000 for seller paid closing costs is in actuality $5300-$5500 less net money to them than an offer with no such requirements. A good agent (on either side of the transaction) is going to make careful consideration of this.

So keeping these in mind, which offer is the most attractive to a seller, assuming the same number of dollars and desirability of the offer?

All cash offers are always going to top this list. If the buyers don't care what lenders think, if they don't need a loan or a loan contingency, don't have to be concerned with loan standards, that eliminates an entire layer of complexity that includes most of the likely reasons why things fall apart. An all cash offer without an appraisal contingency is the Gold Standard. They are saying "The property is worth $X to me - I don't care what an appraiser thinks" They can still be intending to over-negotiate every little thing revealed by the inspection, but there is less to go wrong from a "nothing you can do in the initial contract" standpoint.

The next category on the list is offers where there buyer has significantly more cash than lender standards require for the contemplated loan type, particularly if they're planning to use it for the down payment anyway. This means that the buyer has the option of continuing the transaction even if the appraisal comes in low. Since all the incentives right now are for appraisers to come in low on the appraisal, this is happening a lot right now and there is nothing anyone can do about it except repeal those ridiculous appraisal standards. If the buyer has more cash, when the appraisal comes in lower than the purchase price the viability of the transaction doesn't depend upon the seller deciding whether to take less money or put the property back on the market. If the buyer has more cash than absolutely necessary, the parties can meet in the middle rather than the seller being the only one with room to give. Conventional financing purchase offers of thirty percent cash or more and VA loans where the buyer is putting down cash even though they don't have to fall into this category, and even FHA loans where there is a cash cushion. I always want to address the question of "How low would the appraisal have to come in before this transaction has difficulty because of it?" Offers where the buyer has this cash cushion means that if the appraisal comes in slightly low, it isn't just the seller deciding whether to take less or put it back on the market.

I would rather have conventional financing than government. Government involvement puts a bottleneck, or single point of failure on the transaction - if the government won't put their seal of approval on it, we're done. It also takes longer. That said, I need to say that both VA and FHA are unfairly tarred in many agent minds because until a few years ago they were costly bureaucratic nightmares for the seller. The bureaucratic issue has largely changed, but it is still an issue even if it is a much smaller one, and a VA loan in particular does not permit a buyer to pay a lot of very real and necessary costs, so the VA loan needs to be for a higher number of dollars to break even on this point with conventional ones.

If a buyer wants a government loan but can go conventional, that will delay the transaction if they start out government but need to change to conventional, but it should still close. There is a fallback position. This is a critical difference and makes such an offer superior to one where they have no choice but a government loan, particularly some special or limited funding government program like the mortgage credit certificate or locally administered first time buyer programs, both of which are limited budget and usually run out almost immediately upon receiving a new funding allocation.

Both when writing an offer and evaluating one, I always want to address the question of what circumstances or combination of circumstances could cause this to fall apart. As a buyer's agent, I want to show the listing agent that my client wants the property and I have considered how to get around potential failure points. As a listing agent, I have a fiduciary responsibility to help my clients evaluate offers and make an informed choice on which offer to accept based in part upon likely failure points. Comparatively few agents meet that responsibility (one reason we've got such extreme transaction fall out now) but the good ones are all among them. A good listing agent is always looking for evidence in an offer that the buyer's agents have considered possible failure points and how to get past them.

Waiving the appraisal contingency is always an argument in favor of an offer. It can be symbolic, but it says "The property is worth $X to me, and I'm willing to pay that whether or not the appraiser agrees". Nonetheless, if there is a loan contingency attached to such an offer it's not an unlimited blank check. If the appraisal comes in lower than the difference the buyer can cover, the transaction is still going to fall apart. If the buyer has no extra cash, waiving the appraisal contingency accomplishes nothing. But a prospective buyer having $10,000 extra cash and no appraisal contingency should be something that is valuable to well informed listing agents and their clients.

What if your offer is less desirable in these terms, quite likely because you have no choice? Well then you need to offer more money to sweeten the deal and give the sellers a reason to choose your offer over any others. When I'm acting as a buyer's agent, I always discuss how much competition we're likely to see from other offers if my buyers like a property. It's not a perfect science, and I never trust a listing agent telling me how many other offers they have (Unless the answer is "none") or for what dollar amount, but it's like gravity: if you don't take it into account, you're certainly not going to get where you want to go - a successful purchase.

Caveat Emptor

Original article here

If you have three real estate companies sending you emails with multi-listings, if you want to see one of the properties, who gets the commission? There five properties that I want to see the inside of the houses. Company A, B, C, etc. One house is listed by one of the three people that have been sending me emails.Am I obligated to sign up with an agent if I want to see the inside of a house? Do I tell the other agents not to send me anymore multiple listings?

That depends upon you and upon the agent and upon what sort of agreement, if any, you have signed.

If you haven't signed any representation agreements, nobody has grounds to complain. I don't ask for any agreement just to have listings automatically e-mailed to a prospect (within limits), or even an automated site for them to manage those listings. I have to have MLS access anyway, and that comes as part of the package. I look at it as an opportunity: for a few minutes work, I'm likely to end up with a prospective buyer. If one in a hundred of these converts to a transaction, I'm ahead of the game. The ratio is much higher than that. I could use it as an opportunity to set up my toll booth, and many agents do, but although they may be "top producers" because they cut out other agents with an exclusive representation agreement for having their receptionist take five minutes out of their day once to set this up, they're not the sort of agent someone who compares agents in action will likely choose. In any walk of life, the person who has to cut the competition out is telling you they're weak.

If you've signed a non-exclusive representation agreement, the one who is the primary motivating factor behind the sale should be the one paid. This may be the agent who introduces you to the property, or it can be the agent who answers all of your questions well enough that you're willing to make an offer, or (best of all) the agent who opens your eyes to the possibilities of the property after six other agents have shown it to you. It can also be the one who fast talks or pressures you into making the offer, but that's the beauty of non-exclusive agreements. You can fire such agents by just not working with them any more, and they're out of your life and out of the transaction.

If you've signed an exclusive representation agreement, then the person you signed the exclusive agreement with is legally entitled to be paid. This is a problem if someone else really sold the property to you, or if you've signed two or more such agreements. Furthermore, you can't fire bad agents with an exclusive agreement except by waiting for it to expire. You sign a six month exclusive agreement in April, they're going to get paid for any transaction you start through October (and possibly longer) - even if you told them you never want to see their face again before April was over.

Many agents will ask you to sign an exclusive representation agreement before they do anything. You shouldn't sign one at all. Non-exclusive is plenty good to protect the agent while preserving your protections against a bad one. And there is no reason not to sign the standard non-exclusive agreement.

I have heard every rationalization under the sun as to why exclusive agreements are desirable. The only person they're desirable to is insecure or incompetent agents. There is no advantage for the consumer to sign one. Exclusivity prohibits real competition, where the consumer can observe your skills and your attitude in action. Anybody can look good in the office before you've seen a single property together. That's just sales patter. The proof is watching them in action when you're evaluating property together. That's where you can tell the best agents from the friendly idiots, the high pressure commission grabber, and all the other problem personalities around. And sometimes, that's where you find out that they're not so friendly after all. Unless it's showing one of my listings, I won't go out with someone who's signed an exclusive with someone else, and neither will any other agent I know of. I'm not going to show someone the bargain I spent twenty or thirty hours finding so that an agent who couldn't be bothered to get out of their swivel chair can get paid for the work I did, but you'd be disgusted at how often I get the request.

If all you're getting is a sit on their hands agent who never leaves their office to scout property for you, whether they're an explicit discounter or someone pretending to be full service, then the purchase contract itself has confirmation of the relationship and there is no need to sign an agreement in advance of this at all. The same is true anytime you approach an agent with a property you have already determined to make an offer on. The agency relationship is confirmed in the purchase contract, indeed, in the initial offer. There's absolutely no need to sign any kind of representation agreement with them outside of that. It's simply one more method by which rotten agents lock up business, because if you sign that exclusive agreement they ask for, they've got you for however long it lasts. I've been told - by clients - about listing agents who wouldn't communicate an offer until they had signed a buyer's representation agreement - a clear violation of fiduciary responsibility to that owner. I've heard every rationalization under the sun here, as well. "I'm putting my time into this! I deserve to get paid if it falls apart!" is the most common one. My response is to such agents is, "Not yet you don't, and if you're concerned, make sure it doesn't fall apart" The reason agents get paid as much as they do is because their pay is contingent upon a successful, fully consummated transaction. It's right there in all of the standard WinForms contracts. If an agent can't make this transaction go, if this transaction falls apart, they haven't earned any kind of right to mess up another one also. If you, the client, want to stick around once you've seen them in action, that's great! If not, that should also be within your range of choices. An exclusive agreement removes that option.

Caveat Emptor

Original article here

Most people tend to shop for a mortgage based upon the payment. They figure the lowest payment will be the cheapest loan.

This is the way most people make banks rich. Because they are looking for the loan with the lowest rate and the lowest payment, they choose the loan with two or three points that's going to take twelve years to pay for its costs, and then after they've sunk all those costs into the front end of the loan, refinance within two years and sink a whole new set of costs into the new loan. The bank gets all this lovely money, and then the consumer lets them off the hook by refinancing, and the bank doesn't have to carry through on the full amount of their end of the bargain.

In point of fact, when shopping for a mortgage loan, there are at least four factors the consumer should consider. The best loan for a given consumer in a given situation at a given time is based upon all of these factors. Each varies in importance from loan to loan.

These factors are:

The monthly payment
The monthly interest charges
The costs that are sunk into the loan in order to get it
How long you're likely to keep the loan.

This is not to say that only these factors are of importance. For example, the possibility of "back end" costs when you refinance is likely to be a critical factor when considering a loan that has a prepayment penalty. Most people that accept prepayment penalties end up actually paying them - a thing to keep in mind before accepting a prepayment penalty. If you know there's a good chance you're going to get hit with an $8000 charge for paying it off too early, that needs to be added into the likely costs of the loan.

The monthly payment is important for obvious reasons. If this is not something you're comfortable paying every month for month after month and year after year, then getting this loan is probably not something you should do. The costs of getting behind in your mortgage are significant, and the costs of going into default are enormous, and both may likely continue even after you have dealt with them. When I started this website, I was talking with people all of the time who say, "We've got to buy something now, before it gets even worse!" Furthermore, there are always people trying to stretch too far to buy that "perfect" house, and paying four points to buy the rate down to make the payment a little more affordable is one of the tricks of scoundrels. Many agents and loan officers will happily put people in either situation into a home, with a loan payment that looks affordable on the surface, but isn't. If you don't examine the situation carefully, not just for now but for the future. you're likely to be getting into something you cannot afford, and is likely to have huge costs and ramifications for years down the line. Neither of these people is your friend. They are each making thousands, often tens of thousands of dollars, by putting you into a situation that is not stable, and that you're going to have to deal with down the line, while they're long gone and putting some other trusting person who doesn't know any better into the same situation as you. If the situation is not both stable and affordable, pass it by.

Once we have noted that you need to be able to afford it, the monthly payment is actually the LEAST important of these four factors. As long as it's something you can afford, do not charge straight ahead, distracted by the Big Red Cape of "Low Payment" while you are being bled to death by other things. Many of these Matadors (which means killers in Spanish) will bleed you to death while acting like your friend by distracting you with the "affordable low payment", not unlike the matador distracts the bull with the cape so they never see the sword. Due to lack of a real financial education in the licensing process, a disturbingly large number do not realize they are bleeding people, but that doesn't help their victims. A loan payment that is higher but still affordable may be a better loan for you - and in fact this is more likely true than not.

The three other factors are each far more important than payment. Payment is important. People who are unable to make their payments are called insolvent. Many of them file bankruptcy, have liens placed upon them, wage garnishments, suffer for years because of bad credit ratings, etcetera. But just because the cash flow is better right now does not mean the situation is better - that way lies the Ponzi scheme, Enron, and many other famous wrecks in the financial graveyard. I've been telling people this for years - and now with the loan meltdown it's become undeniable. Negative amortization and other unsustainable loans will come back around to bite those who use them. Guaranteed.

There is no universal ranking of which of the remaining three factors is the most important. They must be compared as a group in the light of a given situation: YOUR situation.

The monthly interest charges are simple. Principle balance times interest rate. This starts at the amount of the new loan contract (with all the costs added in, of course) times the interest rate.

The costs sunk into the loan shouldn't be any more difficult to compute, but they are. As I have gone over elsewhere, it is an unfortunate fact that rarely does a mortgage provider tell the entire truth about the costs of the loan until it's too late to do anything about it. The rules for the 2010 good faith estimate only make it slightly more difficult to lie, while confusing the issue as to what actual costs are. If you have an ethical loan provider, the amount on the Good Faith Estimate (or Mortgage Loan Disclosure Statement here in California) should match what shows on your HUD 1 at the end of the process. Please remember to note any prepayment penalty or other back end charges as a separate dollar amount. But if these figures aren't accurate, they're completely worthless in any attempt to evaluate which loan is better for you, or indeed whether to get any loan. The number one reason why this is done is because from the point of view of crooks, the flip of a coin beats absolute knowledge that the other loan is better. Once people say they want the loan, most will stick with it even if evidence becomes available that they shouldn't.

The thing that is most difficult to determine is how long you intend to keep the loan. Most people have no reliable crystal ball to gaze into the future.

The obvious answer to this dilemma is to compute a break even point. This falls short with regards to higher costs incurred after disposing of the loan as a result of having a higher balance, but it's a start. If one loan has lower costs and a lower interest rate, there's no need to go through the computations. But if as is common (a given lender always has a tradeoff between rate and cost), one loan has a higher sunk cost and the other has a higher monthly interest charge, divide the difference in sunk costs by the difference in interest charges per month. This gives a figure in months that is a break even point. Don't forget to add in any possibility of a prepayment penalty.

With this breakeven figure in months, you can calculate which is likely to be the better loan for you, using your own situation as a guide. If the breakeven is 54 months and you're being transferred in 36, the answer is obvious. If you've refinanced at intervals of twenty-four months your whole life, a 54 month breakeven is not likely to be beneficial. If you're going to need to sell in two and a half years when mom retires, that's a clue, too. And if you're a first time home buyer starting out, remember that 50% of all homes are sold or refinanced within two years, so unless you have some reason to suspect that you are likely to be different, take that into account. Far too many people waste thousands of dollars regularly by paying the up-front costs for loans that they will not keep long enough to break even.

Caveat Emptor

Original article here

I am an adamant believer in the Non-exclusive Buyer's Agency Agreement. In practical terms, as opposed to the Exclusive Buyer's Agency Agreement, it is so much to the advantage of the consumer that it isn't funny, and it doesn't usually hurt good agents. On the other hand, the proponents have one argument going for them that I do respect, having experienced it more than once. I start a client on the searching process. I explain it's going to take looking at a minimum of 12 to 15 properties before they know what the market is really like in their area in their price range. I find a whole bunch of properties, and start taking them to a few. I offer rational, real world comparisons of their comparative virtues. Ask about what they liked versus what they didn't, what they could live with and what they couldn't. And then, in between, one or both partners gets a wild hair about going to view another property. I've explained what their price range is, but they either don't realize it's out of their range or don't care. They just want to see what it's like. And because the property is out of their price range, it's going to be a more desirable property - that's why the owners think they can get more money for it!

So they go out, and after my careful work of making sure to stay within their budget, on a sustainable loan they can afford, this other agent shows them what, by comparison, is the property of their dreams and says they can buy it!, and he knows where they can get the loan! If this sounds familiar, it happens a lot. "Dan was showing us such ratty properties by comparison! This guy is showing us beautiful stuff we love! Let's buy one!" and the first I find out about it is they tell me they're in escrow on someone else's property.

Most people buy based upon emotion. If you want to make one change in the value of your financial future, learn how to take emotion out of your decision-making process, especially on anything big enough to require payments. Once people have emotionally convinced themselves that they deserve this property, my rational analysis of the situation doesn't have a snowball's chance in July of talking them out of it. I know this very well. I could stamp out buyer's transactions at the rate of three or four per week by showing clients two or three ratty fixers within their budget and then moving in for the kill by showing one immaculate property in ready to move in condition for thirty percent more. But this is hosing people with malice aforethought, and no matter how many others do it, I'd have problems shaving without looking in the mirror, and I need to shave every day that I work. The reason that wasn't within their budget is that they cannot afford the payments, or they cannot afford the real payments. I've said this before, but there are no tricks to make the real cost of the loan cheaper. There are ways to lower the payments for a while, but they always come back to bite you in a few years, and the situation will be worse than if you had taken the sustainable loan in the first place. Buying a more expensive property than you can afford is a way to put yourself on a course for disaster. Kind of like Comet Shoemaker-Levy 9

And that's why there is money in fixers. It's all very well for people to say they are interested in the $400,000 fixer that fits within their budget and that they can fix it up and sell. Particularly first time homeowners, particularly young married couples, and especially if they have children, show them the $600,000 move-in ready property and they will bite almost every time, budget buster or not. Put all three factors together and not all of the wisest people in history together could talk them out of it.

So the smart operator offers $350,000 for the fixer that's been on the market for four months, spends $40,000 on upgrades like carpet and modernizing the kitchen or adding one more bedroom and bathroom, and turns around and sells for $620,000, of which she keeps approximately $186,000 in profit. If the buyer needs them to pay some closing cost in order to make the transaction happen, she still makes $175,000 for a few months work. Not bad, eh?

The average couple won't have $40,000 to upgrade the property immediately. I consider myself very lucky to have worked with two such couples in the last year. Most potential buyers try to minimize the down payment as much as possible. But if they buy that livable fixer, they have a lot more room on their monthly budget and as much time as they want. At 6% interest rate and California standard property tax rates, the $620,000 loan has a payment of $3717, plus $646 in property taxes. The fixer property, even if they buy for $400,000, the payment is $2398 and the taxes are $417. I know that it's smarter to split the loan into two if you can, but work with me for the sake of simplification. So the already fixed property costs $4363 per month, while the fix it themselves costs $2815. That's over $1500 per month difference they have to put towards fixing it up, or anything else they want to. In two years, they've got the $40,000 from that $1500 per month payment difference alone. This is leaving aside the issue that the rate on the bigger loan isn't going to be as low. The new owners can concentrate on the most important updates. Sure, it's a pain. That's why buyers are willing to pay $620,000 for the ready to move in property. Actually, they'll line up to pay $620,000 for the more attractive property. It's just the way things are. And the people who fixed it get done with their two year project, and now it's worth every bit as much as the property that was worth $620,000 to start with. At 5% annual for two years, that's $683,000, and it's getting to the point where I expect our local market to grow faster than that. If they sell, that's approximately $235,000 in their pockets (tax exempt in most cases) instead of in the professional fixer's. If they bought the move-in ready property and then sold, they'd net about $15,000 by the same calculations.

Now most properties, even fixers, won't generate quite this kind of quick windfall. But that is a real example I encountered not long before I originally wrote this. Moral of the story: fix it yourself if you can. By isolating off the emotional appeal, you've made yourself - or saved yourself - a lot of money. And the reason there is money in fixers is because most people won't do this, instead convincing themselves that they're good people and they deserve this beautiful property. And you know, most folks are pretty good people, and they do deserve a beautiful property. But if you deserve the property that's beautiful now, you also deserve the huge cost, and the huge loan with the huge payments to maintain it, and you definitely don't deserve all the profit that the folks who buy the first kind of property make from the sale.

Caveat Emptor

Original here

Every so often, someone who thinks they're a wit sends me a copy of The Rules For Relationships According To Women. Unlike those rules, which might have been funny around the time Nefertiti was a debutante, there are very few rules for mortgage payments, but they real and they are not based upon caprice.

Recently, I was walking through a grocery store parking lot and heard someone screaming on their cell phone, "It wasn't my fault! The broker told me not to make that payment, and then they didn't pay the loan off on time!" Which leads me to Rule Number One: It is YOUR responsibility to make all payments on time. Nobody else. Your name is on that contract, not theirs. Under text that says essentially, "I agree to repay this loan on these terms." When you are in the process of refinancing or selling, make it a point to keep paying that mortgage on time and in full. The worst thing that will happen is that you will get a check back a couple weeks later. Whereas if you blow the payment off, you are taking the risk, as happened to this person, that some incompetent person doing your new loan will not get the loan done in time to make the payment date. On the sixteenth, there's a penalty due. On the thirty-first day, it hits your credit, where it can conceivably make a difference of 150 points. And if the lender is getting ready to fund the loan the next day and runs your credit then and sees your drop, the terms of your loan just got worse, if they can fund the loan at all. It is the mark of a bad loan officer to tell you not to make your payments. A good one will specifically tell you to continue to make payments on time. I haven't blown a rate lock in a very long time, but there's always the possibility it might happen and the loan takes longer than I think it will. Don't let it happen to you. Make your payments on time, whatever you're doing.

Corollary to Rule Number One: You are responsible for getting it to them. All of this nice convenient stuff about mailing a check or sending the payment online is quite a convenience, but they do not legally have to do it. Your grandparents had to walk the check (or the cash) in every month. You can still do this if your lender has branches and you suddenly remember on the 15th that you forgot to make your mortgage payment. Many lenders are very forgiving about this. But they don't have to be,

If that payment doesn't get made on time, it is your fault. End of discussion. If you mailed it off on time and it got lost in the mail, you are the one that owes the penalty. If you transferred the money online, and it somehow doesn't get credited to the right account, it is your fault. These don't happen often, but they do happen. No matter the reason, you are responsible for getting that payment to that lender on time. If you don't understand this, or cannot live by it, don't get a mortgage. The lenders are actually very forgiving about it, provided you can convince them that the payment was made. The one time I had a check lost in the mail, they called me on the 17th, and I walked the check into the branch next day, and they waived the late fee. but all of that was because I had a solid record of paying well in advance of the deadline. If you're good enough about paying on time, sending the check on the first even though it's not officially late until the 16th, they're usually pretty forgiving about checks that get lost. On the other hand, if you are always paying on the last possible day, the lender is going to regard that late fee as the least they are due. While you are at it, always include something with your account number on it when you send the money. Write it on the check, include a coupon, put it in comments. Otherwise the lender could easily end up misapplying the funds of the check, especially if they figure to use the address on the check, and you're making a payment on another property. Most of the time they do get it right. But if they don't, it's your fault. If they get the payment with all of the necessary information and misapply it, that's their fault. If they didn't get it, on time or at all, or missing some important information, it's your fault.

There is no rule two, at least that I can think of right now. There is only one rule, but you violate it at your extreme disadvantage.

Caveat Emptor

Original here

It's not difficult to see how some of the weakest agents and loan officers I know make lots of money. They work for an office of a well advertised chain, and when they get the walk-in traffic, no matter what happens, it's "A great property," or "a great loan." Nice place, priced a hundred thousand above where it should be? "Great property!" Attractive on the surface, but has a cracked foundation that's going to cost a hundred thousand to replace? "Great Property!" A 2/28 a full percent above what you could have had with a thirty year fixed, and with a couple thousand dollars in extra closing costs? "Great Loan!"

It's like working with a cheerleader.

A lot of ex-cheerleaders make a very good living as real estate agents and loan officers. The personality types are a good fit for sales, whether it be real estate or loans. Enthusiastic about everything, no matter how messed up it is. Their answer is always, "We can do it!". The people who don't understand what's really going on, and don't compare it seriously; they hear a putative expert going on like this, and all their warning reflexes get defused. It's human psychology, that when all the barriers should be going up in such situations, they go down instead.

Here's a cold hard fact: There's no such thing as a perfect situation in real estate. No matter what you're doing, buying, selling, or getting a loan, there are always trade-offs. Sometimes the trade-offs are obvious, as with loans, where there is an explicit tradeoff between rate and cost. Sometimes, they're not so obvious or direct, as when comparing between properties for sale. You can understand those trade-offs, and choose the one most advantageous to you, or you can choose in ignorance, metaphorically stamping "sucker!" on your forehead.

A stronger agent or loan officer will explain those choices, and put the consequences of each in context. "This one is $50,000 more, but has another bedroom, another bathroom, and is 300 square feet larger. This one is $40,000 less, but it's going to cost you $80,000 to fix the foundation. This one is $30,000 less, but it's going to cost you about $10,000 for carpet and paint." On the loan side, "You can have a thirty year fixed rate loan at 6.5% for a total cost of $1500, as yield spread will pay the rest, or you can have 6% for a total cost of $8000, or you can have a 5/1 ARM at 6% for $3000, or a true zero cost 5/1 ARM at 6.375%" . An informed choice requires knowledge of both reasons for and against a given option. I don't try and tell them which property to make an offer on or which loan to like more. I can present one in a better light than another, but making the choice is not my job. My job is explaining the consequences of the choices the clients make before they're stuck with them, because in real estate, like everywhere else in real life, there are no "do overs".

People like to be told that everything is going to be easy. But that's not the way to get a good bargain in real estate. You shop for the best loan, force loan officers to compete, compare properties, force your agents to come up with bad things to say about every property, fire any listing agent who won't tell you hard truths from the first time they open their mouth. Real success in real estate is never easy.

Real estate transaction can be made easy - at the price of giving the other side what may be the best deal since the Dutch bought Manhattan. Real estate, particularly in high cost areas where the largest proportion of the population live, is valuable enough that just a few percent of the purchase price can be more than most people make in a year, and if you're not on your guard, you may never know you've been had. I talked with a guy recently who had no clue that there was an identical property four doors down being offered for $140,000 less than he paid, at the time he paid it (I didn't tell him. Not my client, and done is done. No use stirring up trouble or getting him aggravated over something that could no longer be remedied). Really pay attention to the things people will do to save much smaller amounts of money for a few weeks, and it will remove all doubt in your mind as to whether scams happen. To use another gratuitous example, the vast majority of all the negative amortization loans out there. What percentage of people do you think are going to sign off on, "pay interest two percent higher than you could get, compounding against you in the lender's favor, end up owing more than the property is worth and being unable to refinance, and won't be able to afford the payments in three to five years, thereby ruining your credit for life and losing the property as well," if everything is laid out with full disclosure? But millions of people did, and I'm still getting email most weeks from people who were lied to by their loan officers and agents and only figured it out at signing! Bobby McFerrin wrote a great song, but "Don't worry, be happy!" is not the key to a successful real estate transaction. In fact, it's the direct opposite. If you're not willing to be a diligent guardian on your own behalf, I'm willing to bet money that nobody else involved will, either.

Around here, even a "small" transaction puts $300,000 or so onto the table. Ask yourself, "What would I do with $300,000 at stake?" Then ask yourself what the worst scoundrel you know would do with $300,000 at stake. I assure you that the world of real estate has people out there worse than any fictional villain - I've dealt with some of them. The fictional villain has to be believable; the real person only has to exist. Finally, ask yourself what somebody who's almost - but not quite - a saint might be willing to do with $300,000 on the table. The variations should give you a good idea as to the gamut of possibilities, but people are ingenious when it comes to ways to squeeze extra money out of someone else.

Now ask yourself: Do you really want to hire a cheerleader as the expert on your side in light of this? Or do you want a cold-hearted analyst who really understands everything that can go wrong, and is going to tell you the downsides as well as the upsides of everything? It may not be as complex as the game of celestial billiards NASA plays with probes like Voyager, Galileo, and Cassini-Huygens, but a constant between the two is that, like celestial mechanics, real estate transactions have critical moments where if you are just a little bit wrong in what you do, you end up heading in completely the wrong direction, if not splatted into the side of the waypoint at several miles per second. Nor can you usually fix it later if you get it wrong at the critical moment. If you doubt this, spend a little time on any of dozens of real estate forums, reading the stories of the people who got it wrong, and are now trying to fix it.

Buying real estate, or financing it, is a huge decision. So big that the emotional hind brain with all the "flight or flight" stuff over-rides our rational decision-making process, which was layered on in our complex operating system we call a brain much later, and loses out any time there is a conflict between the two. Fear and suspicion are hardwired into the hind brain. If anything about the situation is uncomfortable, the primary reaction of the hind brain is to get out of that situation. In fact, in many cases, the only way some sales folk can move a lot of people off their hunkered down position in mental concrete is by pretending that there is no possible downside to the transaction. Not only is this cheerleading behavior a calculated lie (unless the sales person really is that clueless themselves), but it destroys any element there may be of the healthy response of evaluating the situation completely, from a rational viewpoint. There is no such thing as a real estate transaction without potential downsides, and the ones you don't know about or don't understand are generally much worse than the ones you do.

I don't know how many times I've heard people say things that reduced to "I can't be rational! This is far too important for that!" A good professional's most important job function boils down to keeping intellect in the process. I can't make Mrs. Lee (and women make the decisions when picking out the cave!) decide she emotionally likes the property enough to buy it (Even if I could, I wouldn't - that way lies professional disaster). That's Mrs. Lee's part of the process, and Mr. Lee will help. I can give them enough concrete reasons why or why not to get past that reptilian hind brain's emotional over-ride of the thought process.

I've got to admit that the thought of being able to buy real estate and get loans stress free appeals to me, too. Being a carefree adolescent or child is appealing on a certain emotional level. But it's also profoundly dangerous. One of the wisest and most profound things I've ever read, despite the mixed metaphors, was the following:

"'Let George do it ' is not just the lazy man's motto. It is also the credo of the slave. If you want to be taken care of and not have to worry, that's fine; you can join the rest of the cattle. Cattle are comfortable - that's how you recognize them. Just don't complain when they ship you off to the packing plant. They've bought and paid for the privilege, and YOU SOLD IT TO THEM"

So how about it? Do you want to be comfortable, or do you want to be involved and understand everything going on? Do you want to have it all easy, or would you prefer to plan it through? Do you want to work with a cheerleader, or with an analyst? Maybe you've been reading the news these past couple years. Millions of people are in the process of losing their homes, having their credit ruined for years, and having the rest of their lives ruined, financially. Millions more have already been through it. I've yet to hear of one who was the client of an analyst-type agent or loan officer who disclosed everything the client needed to know at the appropriate time.

There's always going to be a leap of faith somewhere in a transaction. Short of learning the jobs of three or four professionals on the same level of knowledge and practice as they possess, there is no way around this. But by going in with your eyes open, doing your own due diligence, and cross checking what you are told, you can make that leap into a short step, and give yourself confidence that your trust is not misplaced by verifying it isn't misplaced where you can check. Because most of the crooks out there are fundamentally lazy, and can not or will not do the work and preparation that will enable their little drama to withstand even small amounts of real scrutiny. Most of those desperate people I read or get email from, trying to recover from being royally taken advantage of, could have been saved by very small amounts of skepticism and research.

Caveat Emptor

Original article here

The Loan Shopping Koan

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It's very easy for loan providers to talk about a much better loan when you're shopping than they have any intention of delivering. Then you give them thirty to sixty days after you sign up, and you're put into a situation where the loan isn't what you were promised to get you to sign up with that loan provider, but you have a choice of signing now and getting it over with, or going all the way back to the beginning with a new loan provider. If it was intended as a purchase money loan, you may not even have the time to start all over again. This creates powerful incentives for loan officers to paint their loan as being better than it is, and there's no practical legal downside for them doing so.

It's very much like a zen koan: Consumers want the best possible loan, but the better the promised loan, the more likely it is that it won't actually be delivered. It is very difficult for consumers to tell if what's being promised will actually be delivered. This has only become more of a problem recently with HVCC on the one hand and lenders charging for failed loan locks. Both of these have bad effects which loan officers have no choice but to pass on to consumers in one way or another. I would like to go back to locking every single loan and guaranteeing total cost and rate as soon as I have an application, but doing so would inevitably mean that all of my clients would pay higher costs for the same rates in the end.

Despite Washington's high minded words, the regulatory changes in the loan industry have universally hurt both the consumer and the ethical loan officer, while helping lenders and to a lesser extent, unnecessary bureaucracies like Appraisal Management Companies. Nor do the rules for 2010 Good Faith Estimate make a real difference where they were intended to. They do a few things very right, but loan providers can still lie with malice aforethought to get you to sign up with them, and as long as they give you the notice of what they're really going to deliver seven days before the end of a thirty day (or more) process, they are still golden. If rates have gone up in the meantime, it's quite likely that the rational thing to do is stay with the liars, even though they can change their minds again as long as it's another 7 days to closing. If you think this is a recipe for jerking consumers around, you're right. Loan officers can tell you they've got 5%, then 5.125, then 5 again, then 5.375, all before finally delivering the 5.75% they intended to deliver all along, and similar games with cost apply. Remember, it's always a tradeoff between rate and cost.

What is an informed consumer to do?

Well, if you're an adult about costs, you can ask loan providers to guarantee their total compensation at loan sign up - the Upfront Mortgage Broker Guarantee. I would still prefer to do loan quote guarantees because they put the risk for misquoting squarely on the loan officer. However much I'd like to do them, though, the costs to me and all of my future customers of failing to deliver on Mortgage Loan Rate Locks is just too high to lock the loan before I have a reasonable assurance of the loan actually closing. In some cases this means once I have a full loan package, in others it means I need to wait until I have a loan commitment from the underwriter. Until then, in order to protect my ability to actually deliver low cost loans, I've got to let the rate and cost float. That's what is real, and it's easy for liars to say a loan is locked when it isn't. Loan quote guarantees would take all the uncertainty out of it for the consumer, but I can't do them at sign up any more except in a very few cases.

The "We'll do the loan for $X total compensation" removes a lot of the incentive for loan officers to actually find the best rates as opposed to the loan quote guarantee, which quotes an aggregate figure for costs and rates that includes everything, including what the loan officer makes. It focuses upon the mouse of loan officer compensation, not the elephant of what the loan is actually going to cost you, but it's better than nothing. This is an intentional choice of words - think of the standard cartoon "elephant scared of mouse" schtick and you've captured the ridiculous nature completely. You really should focus on the total bottom line to you, but since we can't lock the loan under current market conditions until we are pretty certain the loan will close, we can't guarantee those terms at sign up, no matter how much we want to. One hopes if you're looking for a mortgage loan you're enough of an adult to realize nobody does loans for free. Nor are loans what most people think of as "cheap". It can be hidden in many ways (yield spread must be disclosed, but SRP and secondary market premium do not), but nobody really does loans for free. No matter which way they hide it or don't, you're still paying for it.

Ask your loan officer the hard questions. Every single one of them. Nail them down as to exactly what they are offering, when they can lock it, what the closing costs will be, and how long it should take. The total closing costs shouldn't change even if the loan is allowed to float rather than locking. If you discover they have lied, well the best thing to do for the long term health of the loan market is to walk away, but most people won't do that.

Things have gotten a lot more difficult for loan consumers wanting to actually get the best possible deal, rather than merely signing up with the loan officer who talks the best game. I would really like to go back to the way I used to be able to do things - Quote a loan I know I can deliver, lock it immediately, get the application done and work it so as to fund within the lock period. Unfortunately, if I tried it my future clients would all be paying higher costs when my closing ratio dipped lower than the lenders require it to be, and therefore they started charging me higher costs for the same rate, costs that my future customers would end up paying because there is no other way any more than there is for any other business. That's a good way to not only hose my future clients, but be forced out of business completely. One more koan to the loan shopping experience - this one from the loan officer side.

Caveat Emptor

Original article here

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