August 2020 Archives

It's the same reason the phone company doesn't want to compete, General Motors doesn't want to compete, Wal-Mart doesn't want to compete, Disney doesn't want to compete, and Microsoft will do everything in its power to appear as if it doesn't have to compete. They make less money when they have to compete, and they have to provide a better quality of product.

But people know that all of the above have competitive alternatives. If you don't like one brand of automobile, there are dozens of competing alternatives. Ditto retail outlets. "Kid safe entertainment" is a bit more of a niche market, but there are competitors if you'll look. Finally, we should all be aware that computer OS's are one of the biggest Drazi Wars there are. There is competition.

But many agents and loan officers make their living by pretending there is no competition, or by actively manipulating consumer choices to preclude the possibility of competition. This takes many forms, from requiring large deposits for loan officers through exclusive agreements with agents. There's nothing fundamentally evil about this - everyone needs to make a living. But there's nothing that says any particular consumer - by which I mean you - has to put up with it. Furthermore, the agent or loan officer who is confident enough to work without these devices is likely to be a better, stronger practitioner. Ask yourself who you'd more easily believe has more on the ball: Someone who tries to keep you from considering the competition, or someone who's happy to compete? If you were interviewing two applicants who want to work for you, who'd be more likely to get the job: The person who walks out as soon as they find out you're considering someone else as well, or the person who gets their act together and out-competes the other applicant? If you were interviewing with two companies who wanted to hire you, which offer would you be inclined towards: The one where you have to hide the other interview, or the one who's willing to compete head-on for your services?

Nobody's going facilitate competition for the job they want. Nonetheless, it is to your advantage to force them to compete. If you don't understand why, consider that for all the griping about various phone companies, the situation is far superior to what it was when there was only one. Here's a particularly poignant reminder of that era.

Here's the facts of the situation: If you're only going to talk to one provider, they can quote you anything they want. There is no check upon the situation. If I were the only loan provider in California, I could charge anything I wanted. I'd auction my services to the highest bidder, work a couple hours, one day a week, make as much money as I wanted and go on to spend the rest of the time having fun with my family. If anybody didn't like the level of service, that would be their problem. But that's not the case. In fact, the further it is from being the case, the harder I have to work, the less money I make per transaction, and the better the service I need to provide. It's also the case on the voluntary level, which is to say if you voluntarily restrict yourself to one potential provider, as well as the involuntary. If you only talk to one, there might as well be only one. It doesn't matter how many loan providers and real estate agents there are, what matters is how many you talk to.

People in the real estate business get told all the time that the way to success is to avoid competing, especially to avoid competing based upon price. If ever a week has gone by without some clown wanting to charge me a thousand dollars to learn how to avoid competing on price, or avoid competing, period, I certainly can't remember it. They work, by and large, on two levels - pretending you're the prospect's friend while engendering fear of the competition. "You know I'm your friend, George. You know there are sharks and cutthroats out there who will take your money and leave you high and dry, but you know I won't do that, George." And there are sharks and cutthroats out there. The guy talking to his pretend friend George here is one of them. This is the way he talks George out of checking up on him, comparing his services and prices to either objective standards or to any other provider's. Nor are women any superior - in fact, I've had a report of one of the worst sharks I'm aware of preaching a "female solidarity" line of attack to cut out her competition. Other sharks attack via ethnic or religious solidarity, or even political similarities. What these have in common is that none of them have anything to do with competence at real estate, and they may not have anything to do with conscience. I've seen people preaching the gospel about taking care of your fellow man while extorting thousands of dollars from their client's pockets. Newsflash: The sale of Indulgences went out with the Reformation, and for good reason, too. I'm certain it happens with other religions, as well, it's just that there's fewer members of those religions around here.

One of the ways I constantly see this abused is even people who should know better advising their readers to "ask someone you trust for a referral." Well, referrals are great - if the person making the referral knows what they're talking about. If they don't, it's just another goat lined up for sacrifice, willingly led in by the previous victim, If not worse. Here's an article from illustrating someone who used this process to gain victims (HT: FraudBlogger.com, who always has a relevant example of bad behavior handy). No matter how trusted the source, it still needs to be fully vetted - you need to do your own due diligence, and part of that is comparing them to some other potential service providers.

There just isn't any valid advantage from the consumer's point of view to forking over a large deposit or the originals of any documents to a loan provider. They don't need originals, and the only thing that large deposit does is give them some money to hang onto if you find a better loan. All of the better loan providers I'm aware of work on the basis of "fees at point of service," not requiring a deposit in advance. In fact, a cash deposit can induce people to accept loans that are many times the amount of the cash deposit worse than other, available loans. People understand that check they wrote out of their account is real money, where most of them are a little bit hazy about loan costs paid by rolling them into the loan balance. I saw someone pass by a loan I had that was four thousand dollars cheaper up-front and would have saved them $1000 per year they kept it because another lender already had a $1500 deposit from them. Here are a few more pointers on shopping for a real estate loan.

Admittedly, I have come to the reluctant conclusion that it is in the consumer's interest to list their property for sale via an Exclusive Right to Sell. However, this doesn't mean you shouldn't shop agents extensively before you make that commitment. This only means that you're going to make that commitment to one agent once you have done that research. Failing to do so risks locking your property up with an incompetent agent. When you ask "what's so bad about that?" ask yourself if you'd be happy taking ten to twenty percent less for the property (or worse!), after you keep paying the mortgage six more months? Around my area, with the median sale being $423,000 last month, and assuming a loan at six percent on eighty percent of value, not only does signing up with someone who can't get the job done cost you $42,000 on the sale, it'll cost you about $2200 cash for every month that property doesn't sell! Realize it or not, you're risking a lot of money on an agent, and just because you're not writing a check to them directly at sign up in no way changes this. However, I don't advise going with the agent who asks for a short term listing, either. That's an appeal to cowardice - decide by theoretically not deciding, and make no mistake, you are deciding when you sign a listing agreement for any period of time. This isn't to say you can't bargain the time for commitment down if you're willing to take a chance on a less experienced agent - it's just saying don't decide by pretending not to make a decision. That way lies disaster. Here are a few more tips about Shopping for a listing agent.

For buyer's agents, there really isn't a reason for an Exclusive Agency Agreement, except to allow an agent to wrap up your business for whatever period of time. There isn't hardly an excuse. The only place I can see it being an effective alternative for the consumer is if they're working the foreclosure market, and that agent is spending the money for all of the "quick notification" services so that the client doesn't need to. But the vast majority of the time, agents are locking in people who simply don't know any better with an exclusive agency agreement. I've seen listing agents who wouldn't show a property without an exclusive buyer's agency agreement - a clear violation of fiduciary duty to the seller, not to mention a huge Conflict of Interest if they actually want to put an offer in on that property. Non-Exclusive Agency Agreements protect the buyer's agent just fine, but they also give you the right to fire non-performers by just not wasting any more of your time. You can also use them to separate the wheat from the chaff among buyer's agents. Sign any number of Non-Exclusive agreements you want. The good agent will still do their work; while the lesser agents will select themselves out. While we're at it, here's a few more tricks to finding a good buyer's agent.

Agents and Loan Officers don't like this. It means they might not get the business when they're exposed for the buffoons that some of them are, and it means they might not make as much money for the time they put in. Nor is exercising your choices as an informed consumer simple - far from it. You also need to consider what agent services are worth how much to you. But considering the average price of real estate around here, and the cost of the loans that most people need in order to buy, doing proper diligence beforehand will save most people more money than they make in a month - perhaps more than they make in a year, possibly more. When you consider the differences in that light, the hourly pay for doing your due diligence about agents and loan officers and forcing them to compete is absurdly high.

Caveat Emptor

Original article here


Hi--I just found your site today. The best I've ever seen/read, etc. Thank You!! I do have a question I didn't see addressed regarding our current situation/dilemma:

Our present home, which we've lived in for 8 years, is worth around $180,000 (yes, it's a small town...), and we owe $105,000. My husband has been working for about 5 years now, & has a pretty good salary (around $100K) but we have a LOT of debt --mainly a result of having had 2 babies while in school. We have about $40 K in credit card debt, a $775/mo. student loan payment, & a $500/mo car loan which will be paid off in 18 months.

We've been planning on moving across town for a few years (MUCH better schools there), but had been holding out as long as we could with the idea that the longer we waited, the better house we'd be able to afford. And besides, the kids are still young, & their elementary school isn't intolerable, etc.

The problem is that the school situation DID become intolerable about 3 weeks ago, at which time I began to homeschool them, which is also intolerable! So we need to get this moving across town show on the road!

My question is this: I know we need to at least take out a home equity loan so that we can pay off the credit cards. Some of the rates are outrageous, and I'm sick of fighting with them. That would put our equity at $35,000. But since we want to move ASAP now, I assume we could just use the sale proceeds of the house to pay off the cards, & use the remainder as a down payment. Or, am I wrong? Our current debt to income ratio is so poor--will the lenders even consider our current plan to pay off that debt using sale proceeds, or will we have to refinance now & wait a period of time before pursuing a new house to show them that we're not just going to rack the debt up again? Oh, but we haven't incurred any new debt or put any new charges on the credit cards in about 3 years--does that make any difference?

Also, the houses in the neighborhoods we are looking at are around $300,000. I'd sure appreciate your advice on this. We really want to move immediately, but not if waiting until later, like this summer, would be be better...

Your situation is a classic example of the urge to hurry a situation, and how to come out better if you don't.

You don't mention how the market is in your area, or what your credit score is like, and yes, it does take a while for bills to show as paid off. It can take over sixty days. I see some options for you, all of which have drawbacks. This is a complex situation, and I don't have nearly all of the information it takes to recommend a particular solution.

You can refinance, sell, or do nothing with your current residence, and you'll want to rent it out if you don't sell. You can rent or buy a new property, although you do want to buy before long. There's some issues that need to be dealt with, and they take a little time to deal with them properly. You can rush the situation, but doing so will cost you some big bucks.

You don't mention what rents are in your current area. By the time you pay for the refinance, my guess is your balance would be $150,000, maybe a bit higher. I'm as certain as I can be without full workup information that you're in a sub-prime situation, which means you can choose a very high rate or a prepayment penalty that'll run you about another $5000 if you sell while it's in force. The high rate is the better choice, because it's only for a few months, but it also has implications for your debt to income ratio. The reason I ask about rents is that I'm wondering if they'll cover your mortgage on the place. The rate you'll get might be higher or lower, but let's assume seven percent. That's principal and interest of about $1000 per month, plus taxes and insurance. Now your husband makes plenty to afford some negative cash flow on the property if you folks have to and the rest of your debts are gone, but not a huge amount of it. You'll only get credit for seventy-five percent of the rent, as opposed to all of the expenses, but better to have it rented for a little bit of a theoretical loss than not to have it rented.

Whether you refinance or sell, it's going to take a grand total of about four months to get your bills showing as paid - about two months to get the refinance done, and two more months for your current finance companies to get off the dime and report the accounts as paid. It might be longer if you sell, depending upon how long it takes to get a good offer made and the sale consummated, then add two months. On the other hand, if your property is in good shape, vacant properties in good condition show very well. Understand that nothing happens immediately in real estate, and new regulations supposedly aimed at protecting consumers (while in reality protecting big banks from competition) have added at least a month to the time it takes to get a loan done.

With your new property, your debt to income ratio is going to sink your loan if your current bills aren't paid off. Unfortunately, A paper has an issue with paying off bills after your initial credit is run. If it's a credit card or other revolving debt, guidelines have issues with paying them off in order to qualify. If you pay off a credit card, the wisdom goes, you could turn it right around and charge it up again. Even if you pay it off and close it, the reality is that you could get another. So they qualify you based upon your current situation. Even paying off installment debt to qualify is at the discretion of the underwriter, and I have seen them turn it down. So you want to have the debt paid off, and showing as paid off, before you make the offer for a new place. That can take up to two months after they actually are paid off.

So you're going to want to wait at least two months after you pay the debt off before you make your offer on the house you want to purchase. This means either staying where you are for now, which I can see is unacceptable, or interim renting something in the area you want to live, which is likely to be better, and you might get a line on an extra-good deal if you are living in the area. Yes, you want to buy, but you don't have to do it all in one step.

So I'd most likely go rent a place - which gets you into the new school district now - while I tried to sell or refinance the current place. If you're not living there, be advised that a refinance is a cash out investment property loan, which carries higher rates and more difficulty. I'd probably try to sell instead, but that does place you at the mercy of the market, and not only do I not know your market, but (when this was originally written) we're still in the worst time of year for sellers. Which means settling for a lower price than you might otherwise get, but you will be rid of the debt without the headaches of being a landlord at a stressful time in your life. You can learn that situation later.

Now, if you sell, you get a down payment for the new place. If you refinance, you probably don't. Your credit score may dictate the sale option; I don't know. It should improve after everything is paid, but I can't guarantee that, and I definitely can't say by how much with the information I have. Better to plan on the status quo than to bet on it improving.

Now, a couple of months after the debts are paid, you'll be a a position to make an offer on a home you want to raise your family in. When I originally wrote this, If you had a semi-decent credit score (620 or above), 100 percent financing was no big deal deal, provided you stuck with a property and a loan you can document the ability to afford. If you've got serious credit issues, you're going to need a down payment. For the school year, you may want to delay until late spring or summer to give the kids some stability for the rest of the year. Worst time to buy, but you're looking at moving again in February if you get on the stick right now.

It's a real pain to move a household once, and here I am telling you to plan on moving twice. Let's look at what happens if you risk the solution that cuts the Gordian Knot.

Your husband is an attorney. I don't know what attorneys make around your area, but around here they can make several times $100,000. So somebody advises you to do stated income, state that you make several times what you do, and just make a bid right now on the home you want to raise your family in, while putting your current home up for sale. And if your credit score is decent, I could get such a loan done pretty easy at the time I originally wrote this. At this update. stated income has gone the way of the dodo and the only 100% financing generally available is the VA loan. However, let's consider what happens next in the original context.

Now you not only have your current debt load, but you also have the payments for a brand new $300,000 loan on a $300,000 house. In California, with good credit, that would have been 6.125% when this was originally written on the first, maybe a little under 10 percent on the second (Now it would be a little lower, but since second mortgages aren't going 100% loan to value, you'd have to have a down payment and accept PMI). $1460 on the first, $530 on the second, plus property taxes (California would be about $315 per month) and insurance of about $100, more or less. Total obligations added: about $2400 per month, on top of what you're paying now.

You don't say, but if you weren't struggling at least a little bit, you would have paid those debts off by now. So you are fairly close to the edge. My best guess as to your reserves: Non-existent. Now you have to come up with another $2400 per month. Where can it come from? Borrowing is the only thing that comes to mind. Charge up the credit cards, personal loans, payments start getting behind, your credit score drops - and it won't come back quickly if you start making those payments on time. Especially if mortgage payments on either place end up being late. Meanwhile everything is compounding, eating up your equity, even if the house sells fairly quickly. As I've said, we're still in the worst time of year for sellers. Its entirely possible you won't sell until Spring, no matter how good a job your listing agent does. In short, things get desperate quick. Not only is your cash flow unsustainable, you get motivated to sell for a lot loss money than you might have otherwise. With everything compounding, it's very possible that you end up selling to a shark for less than you need to get out from under your debts. This perpetuates the situation you're trying to get away from, and makes it worse because your credit is likely to take major hits.

So tempting as it is to take the situation at one go, you eliminate a lot of risk and stress by taking it in stages, and you render yourself a lot less of a target for the sharks of the real estate world. Yes, it adds something to your cash flow to go rent for a while, but not nearly so much as if you just bought straight away, and you give yourself a line of retreat if you have to take it.

There are a lot of things that could change this. As I've said, there's a lot of stuff I'd need to know before making a final recommendation for a client, but I've sketched out the biggest stuff that needs to be considered.

Caveat Emptor

Original here

In an attempt to debunk some of the slanders that are floating around out there, this article is an itemization of how lenders and brokers make money on loans.

The first method is obvious: Origination or discount points charged to the consumer. This is money that the person getting the loan is paying, or someone else is paying on their behalf. One point is one percent of the final loan amount, two points is two percent, and so on and so forth. There is an actual difference between origination and discount points, but they have become almost interchangeable in their usage by many lenders and loan officers who often claim origination is discount. Origination has to do with a fee charged for getting the loan done. It's not a trivial amount of work to get the loan done, and unless you're a close relative or have repeatedly saved their life, the person doing the loan is going to get paid somehow (and often, the family member or close friend gets rooked the most). If you're uncertain just how they are making money, you should ask. Discount points are theoretically a cost that the actual lender is charging in order to give you a rate better than you would otherwise get, but many brokers camouflage origination points as discount points and many banks also camouflage origination points as discount points. The former makes you think the bank is making the money when it's the broker, while the latter makes the consumer feel like the lender isn't charging them origination, but that you are actually getting something most consumers quantify as real for their money (This also makes you feel like you're getting something for nothing, always a good selling point to anything - suckers eat it up).

Related to this are junk fees or markups of legitimate fees that are required to get the loan done. I do not believe I've seen a fee that some lender or another hasn't tried to mark up. If in doubt as to whether there's a markup, insist upon paying it directly. If they can't explain exactly what it was for in easy to understand words, it's probably a junk fee. Again, real fees usually run to about $3400 on a loan, although many lenders and loan officers are adept at hiding this at loan sign up.

The second way that lenders and loan officers make money is in rebates, also known as yield spread. This is pretty much limited to brokers, as neither traditional lenders nor packaging houses get direct rebates from lenders. Once again, rebates can be thought of as negative discount points and discount points can be thought of as a negative rebate. There should never be both discount points and a yield spread on the same loan. It is fundamentally dishonest. If there is a yield spread, you are being charged origination, not discount. Period.

The third way that lenders make money is in the sale of the loan. This is usually far and away the largest amount of money made on a loan. It is only applicable to actual lenders, whether traditional or packaging house or correspondent. Brokers never "own" the loan, so they can't sell it. Mortgage loans, particularly grouped in vaguely compatible bunches varying from $50 million on up, are (usually) among the most secure of all investments (indeed, in terms of historical risk, only US Treasury bonds have been superior - but treasuries will have a rude awakening). Because they are very low risk, the lender makes a nice premium on them. As I originally wrote this, CMO bonds trading at 5% even were basically at par, while 6% bonds were earning about a 3 percent premium. At par means the bank gets the face value of what they're selling, whereas a 3% premium means they get a bonus - an extra $30 for every $1000 of bond value. For a $50 Million CMO offering, this is $1.5 Million. (There are other factors such as underlying quality, whether there is a pre-payment penalty, what tranches they may be assigned, and so on, but this is a basic article on the phenomenon.) By comparison, on a random fairly good "A Paper" lender's pricing sheet at the same time, 5% was not available and 5.25% carried a discount point and a half while carrying a premium on the secondary market of half a percent or so, so the lender was making two full percent on that loan at a minimum, and unlike a broker's yield spread, this is never disclosed to a borrower. Nor is there any limit as to how much this can be, but with even decent to good A paper lenders getting 2% or more, it shouldn't stretch your mind too much to find out that this number can go to 6 or 8 percent in the subprime and negative amortization markets. 6 percent on $50 million is $3 Million dollars the lender gets for selling $50 million worth of loans - this translates to about 100 regular 3 bedroom homes here in California. $30,000 each, over and above any points and fees these people may or may not have paid, and for holding onto the loan for maybe one month. Lenders are not hurting - and many even have the guts to badmouth brokers who may make $5000 while cutting the consumer's actual cost by $7500 to $10,000 and the bank still makes $15,000 per loan. (Note: these spreads and premiums used to be much larger years ago when people didn't reliably refinance or move about every two years).

What brokers do is essentially play these lenders off, one against another on a professional basis, to see which one will cut the best deal on your behalf, because brokers are never captive audiences while the lenders regard you as theirs from the time you walk in the door.

Also, the point needs to be again that cost of a rate is always inverse to the rate for precisely the reasons of yield spread and bond premium. The lower the rate, the higher the cost. The higher the rate, the lower the cost. Some lenders and brokers may have better cost/rate tradeoffs than others, but there is always a trade-off.

The last method of receiving traditional income is to actually hold the note and receive the interest. This is actually rare these days on the part of lenders. More often, what the lender will do is sell the loan itself while retaining servicing rights (for which they are paid, of course). Most often, the lender can make more money by selling the note to Wall Street - whether or not they retain servicing - than they can by holding the actual note themselves. Keep in mind that the premium they get from sale of the note is immediate, and they can "sell the same money" several times per year, as opposed to just holding on and collecting the interest as it accrues.

How can (and should) you compare a broker's offer, where compensation is disclosed, with a bank's offer where it is not? First off, make sure that they are on the same type of loan at the same rate. My questionnaire here is a good start.

(At this update, lenders have changed the market so that locking upon loan sign-up like I used to do will cost me and all my future clients large amounts of money, but I will go back to doing that immediately if the lenders change back). None of the standard federal or state forms are binding in this sense; not the Good Faith Estimate, not the Mortgage Loan Disclosure Statement, not the Truth-In Lending form, and not the application form itself. Furthermore, keep in mind that for all third party items, such as title, escrow, attorney fees, appraisal, etcetera, they are able to exclude them from the precomputed costs of doing the loan, so most lenders and loan providers do. Not coincidentally, these are the biggest items in the closing costs section of your loan. Insist upon full disclosure of each item, and ask them to guarantee the total.

And once you are certain that the loans you are being told about are actually the same loan or the same type of loan, then you can make the decision as to which is better by choosing the one that actually gives you, the prospective client, the better loan.

One more thing, the most important: Choose loans based upon the bottom line to you, not based upon how much the loan provider makes, or whether they even have to disclose it at all. If you were shopping for a refrigerator and got a price of $500 at store A versus $520 at store B for the same model, would you care that store B paid $40 more for the refrigerator wholesale, so their margin is lower? No, you'd buy the $500 refrigerator at store A. The same principle applies here. Choose the loan that delivers the best terms for you. Type of loan, interest rate, cost to get it, you need to consider all three, because there are always tradeoffs. Failure to consider any of them is a good way to end up with a rotten loan.

Caveat Emptor

Original here

It may not come as a shock to you, but loan officers, along with many other salesfolk, speak a different language than the rest of the population. What will probably annoy you, however, is the number of times they'll say something that sounds like a phrase out of English, but really is from Salesgoodspeakian, a bizarre tongue in which the true meanings must be learned by osmosis from the particular subculture's dialect, while intending to communicate something entirely different to the poor schmuck who, after all, doesn't understand salesgoodspeakian.

This post is intended partially as humor, partially as education. I'm going to start it with a few of the most common ones, and update it by adding more and reposting from time to time. If you've got a good one, either with or without translation (and whether from one of my fields or not), please send it to me along with the context, if appropriate. Even if you don't have a translation, I'm pretty good at major dialects of salesgoodspeakian. It is to be noted that these phrases are not red flags, but more in the nature of yellow flags. If they just occur on a stand-alone basis, it's something that's likely to proceed from yellow to a red flag, particularly with repeated yellows. On the other hand, if the person uttering them proceeds to issue a clarification in plain English, issues an amplification rendering the translation void, or translates and explains the salesgoodspeakian, it's possible you've just been given a real world green flag that this is an ethical person. For instance, my absolute favorite loan to do is a true zero cost to the consumer A paper loan (and no prepayment penalty!), which I usually explain as "Nothing added to your mortgage. You've just got to do the paperwork with me, and come up with the money for the appraisal, which will be returned to you when the loan funds". And it's also possible you've been given a reinforced red because they lied.

And yes, I've had clients who came to me report every one of these. Some of the translations are a little exaggerated to make the point, but the spirit remains the same.

Any resemblance or Orwellian language out of 1984 is strictly intentional.

The salesgoodspeakian to English phrasebook:

Mortgage dialect:

"Stress free loans" two percent higher than you'd qualify for with better documentation and a little more work and less greed on the loan officer's behalf.

"Won't cost you anything out of your pocket" - Six points and $5000 in well-padded closing costs added to your mortgage loan balance, though.

"Thirty Year Loan" fixed for the first two, if they're feeling generous that day, but it does have a thirty year amortization. With five year prepayment penalty of course!

"How does a 1% rate sound?" Like you're a misleading weasel trying to get me to do a loan that digs me in deeper every month with a three year prepayment penalty that keeps me trapped even after I figure it out (See Negative Amortization Loan)

"Industry standard" - Everybody else at this company does it that way, too, because the boss says to, and I don't know any better. (This is very much the "G" rated translation. Please note that there are industry standards - things that pretty much every company in the industry does. Some of these standards need to change, some just are, and some are actually beneficial).

"Everybody knows there's 2% origination fee." Actually, everybody knows no such thing. But if I told you about it in the first place, you might have gone with somebody honest.

"Brokers can charge you anything they want" - so can bankers and other direct lenders, but brokers have to disclose their compensation and bankers don't.


Found on the same billboard:

"Rates as low as 4%!" on an "adjusts every month" loan that's going to 6% next month and who knows what thereafter. With five points. While I have you on the phone, let's sign you up for it.
"No Points!" we've got no points loans. Not on the loan we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, what's your name?
"Low Fees!" compared to the multi-billion dollar graft of the stimulus or Obamacare, $23,000 is low. Now about that 4% loan, what's your social?
"Easy paperwork" but the start rate goes to 6% for the first month, adjusting to 8% next month. Still five points. Not for the rate we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, when can you come in to sign?

Real Estate Dialect:

"Sure houses are expensive, but the loan is cheap" No, this property isn't worth what they're asking for it. But since you don't know any better than to buy based upon payment, it lets us get you into a loan that you're going to think you can afford, until long after we have our commission!

Caveat Emptor

Original herezz

I've seen many new home developments with vaulted ceilings, mini-vineyards, huge houses on little tiny lots...Why can't some developer built some homes for us regular people? A normal sized home with plenty of closet space and a decent (not designer) kitchen that is set more than 3 feet from the neighbors house. I realize that they need to make money, but more people could afford homes in this state if the builders weren't catering to people who already own 2 and 3 houses.

The developer has a certain amount of LAND for a development. That's all they have, and they are not getting any more. For this, they paid a set amount of money. Furthermore, once they have it, it's likely to be years going through the permit process before the can even build. That money they invested in the project, both upfront and as the project goes along? If they wanted to invest it in say the stock market, it'd be earning income - for years - before the first spade of earth gets dug. If it's three years from purchase to completion, that's a 33.1 percent necessary return just to break even from the opportunity cost (at ten percent per year - very doable). If it's five years, as is more likely, they need 61 percent. If it's seven, 94.9 percent. To this, add property taxes as they go, the costs of environmental studies and obtaining the permits and paying for inspections and certifying everything. If there's a loan going on, they have the cost of interest going on as well. Now there are ameliorating factors as well, but given the sheer amount of work that has to be done before they nail the first two boards together, a rational person could maybe be forgiven for thinking that society wants housing to be prohibitively expensive, because that's what the evidence says.

Furthermore, it's silly, but people buy a property based upon the structure and the amenities. Well, it's not silly to make that one of the factors, but people go overboard. They will buy a 5 bedroom 2800 square foot house on a 3000 square foot lot before they'll buy a 3 bedroom 1800 square foot house on a 20,000 square foot lot. The same structure is really worth a lot more when it's on a bigger lot, and even a lesser structure may really be worth more if it's on a bigger lot, as is likely to be the case here, but for most folks, we're talking emotional appeal, not rational thought process. In other words, like many people looking for a mate, they see the gorgeous sculpted toned and tanned member of the opposite sex, and ignore the abusive personality behind the beautiful exterior. I'm not certain I've ever met someone who wanted to live in such a development, but they sure sell like hotcakes! Add travertine floors and granite countertops and the fact that it's new to the 2800 square footer, and you've got people willing to pay $800k for the first property as opposed to maybe $550k for the second. In their mind, the first property might be a "flipper's investment" while the second is "the keeper" that they are going to make improvements on for the rest of their lives, but economically, we vote with our dollars and it's looking like a landslide for the status quo. If you opened your wallet for the house where you don't have any land, guess what? You're voting for developers to keep building them. You know something else? That brand new cheek-by-jowl development isn't going to be new forever. Considering market returns, that older $550,000 3 bedroom on half an acre is a better investment, even if it needs updating. Curb appeal and house bling and "ooh, it's new!" are the best ways I know of to sucker buyers into paying too much money.

The developer knows this at least as well as your average real estate agent. The developer has all of this researched down the the last centimeter of the lot lines. They are not in business to build wonderful homes that people are going to be happy in forever; they are in business to make money, and the blinged-out houses on the smallest possible lots bring in the most money for that developer. The fact that you're the very first person to live in the house is a further attraction to the kind of person who buys new cars, which is to say, most of the population, and it's worth serious money to that developer's bottom line, although it will cost you money in the long term.

Nor is the developer alone in this endeavor. They wouldn't make the most money from homes like that if people didn't pay the most money for homes like that. You want the real culprits in this scenario, look around you in any large crowd. It's all to easy to blame the developer, but the desires of the average home buyer and the regulatory environment both played huge factors in getting the state of new housing to where it is now.

There are ways to potentially fix the problem. They start at real consumer education, easing environmental restrictions and the permit process, particularly for high density housing, which may not be desirable, but when your front yard is the size of a postage stamp and most people wouldn't use it anyway, doesn't it make more sense to put all the community lawns together in one park that someone can actually get some use out of? Say, a place for kids and dogs to play? People say they hate condos, but condos, townhomes and row homes are all that's available to the average buyer if the price of land and developing it stays where it is. Environmental regulation and slow growth policies are fundamentally at odds with affordable housing in high demand areas. I'm not saying throw them out entirely in the name of putting up cardboard shacks, but I am saying that we can certainly choose a point friendlier to low cost housing than we have chosen. I can only conclude that society must value the environmental status quo more than it values lowering the cost of housing, in which case the status quo is the correct choice.

None of this has any measurable political support. Everybody is for lowering the cost of housing, at least for the poor, but put it on the ballot against loosening environmental protections and it loses. There are a certain number of additional reasons why this happens, of course. Multimillionaire developers are not politically popular, but Least Tern environment is. Rarely do people stop to consider that by constricting the supply of housing, you unavoidably increase the price. Nor can you do anything by governmental fiat to fix the problem that doesn't price even more people out of the market. Demand is a given - it not directly controllable. There are 325 million Americans and they all want housing they can afford. Even kicking out the estimated 11 million or more who are in the country illegally wouldn't do a whole lot to really solve this problem. The only way to treat the issue is by increasing the supply, which does seem to include being nicer to those multimillionaire developers, but in this case the issue is more affordable housing for everyone, and being nicer to the developers means that you get more housing units, which drops the price of housing from whatever it would have been without being nice to the developers. Because any time someone else enters the United States, whether legally, illegally, or simply by being born, you create a housing need. Every time there is a new American without another place for that American to live, we create somebody without a home. We price somebody out of the market. We now have an American who cannot afford to buy a home.

Now how to handle this issue until such time, as any, as society changes its mind and decides to make housing more affordable? Your best bet is to find a good buyer's agent to defeat the problem on a retail level, that is, for yourself, because wholesale solutions are not likely until people get rational about solving society's problems. You can't make people build the kind of housing you say you want. But you can make informed choices between what's out there now, and a good buyer's agent will look as far out as you tell them to.

Caveat Emptor

Original here

One of the most common things I'm seeing as I roam about the East County looking for bargains: Agents not doing their jobs.

Even when there were 40-plus sellers per buyer, single family detached homes that are priced appropriately were selling, and for appropriate prices. Condominiums weren't moving unless they were brand new with lots of glitter, but appropriately priced detached homes were selling. I can find all of the evidence of this you would care to see, because I've already seen it. Willing buyers and willing sellers. It's just that what an appropriate price is has shifted.

Let's change mental gears here for a moment. Here's the real differences between sellers markets and buyers market: Competition. Specifically, which side of the sale has to compete the hardest. In seller's markets, which is the mindset most sellers and most listing agents are still in, buyers are competing to buy the properties that are for sale. Because of this it is the buyers who have to compete to look attractive - highest offer, quickest offer, fewest contingencies. They have to offer more money or a bigger deposit or something else that the seller wants and nobody else wants to do. With the buyers market, it's the sellers who have to compete, and most of them were not doing it very well.

I want to make very clear that sellers are always competing against other sellers, even in the strongest seller's market possible. It's not enough to have your property "out there." In a strong enough seller's market, the prices might catch up to unrealistic asking prices, given time. In a buyer's market, prices are not increasing, and in a strong buyer's market, they are going down. In other words, the longer it takes, the worse your property looks. You have to have some stand out aspect to your property. It can be physical attractiveness, or it can be low price. Price will get buyers in the door, but it takes a strong agent to sell a fixer to the average buyer, no matter how attractively priced. For several years, the scumbag down the street would show the buyers something more attractive they couldn't really afford, relying upon with a negative amortization loan, done stated income to make it look like they could afford the payments. Buyers who haven't had this explained to them ahead of time will think they've just gotten the Taj Mahal for the price of a dirt floor shack, except of course, they haven't (Fortunately, this particular tactic has gone the way of the dodo because those loans are no longer available, but there are other ways to be able to quote low payments that aren't in the client's best interest).

The other way to stand out is to be priced the same, but have a more attractive property. Don't tell buyers you'll give them a carpet allowance, replace the carpet. Don't tell buyers that all they have to do is spend two months and $20,000 fixing it and they'll have a property worth $20,000 more. That won't wash in a buyer's market, if it ever does. The party who does the work, even of engaging a contractor, gets the payoff. Why should your buyers take the risk and do all that work and spend $20,000 cash that most buyers don't have (and cannot be part of the purchase money loan) when they can go down the street and find all of that work already done for maybe $10,000 more - or even the same price? Some other seller just out-competed you for that buyer's business. The only good news for sellers is that most of your competition isn't trying very hard, so small bits of competition can look very attractive.

Even lenders are still in denial for their lender-owned properties, and they are the ones with the hardest issues of all. They must get rid of the property. They don't have any choice. Even if it was in the same shape as surrounding properties - which it rarely is - they have a deadline to get rid of that property, and everyone knows it. Furthermore, the property is tying up many times its value in working capital because of regulations. They also have other constraints that other sellers do not. These make the property worth less, as they rule out certain buyers and make others less willing. In a buyer's market, every buyer counts. I had two clients putting in offers on different lender owned fixers in the last two weeks. One might comp out at the asking price of $450,000 if it wasn't lender owned - which automatically makes it worth about ten percent less than the comps. Add the fact that it's an ugly fixer that would be worth maybe $400,000 at most if it wasn't lender owned, and they will be extremely lucky to see $360,000 out of it. Not supposition, not guesswork, fact. The fact is that there's a beautiful owner occupied comparable on the same block asking $459,000. It's even a bit larger. There is no doubt in my mind whatsoever that the beautiful comparable would take $450,000. Actually, when I checked again the beautiful comparable was in escrow. One owner that competed well, one that is not competing well. I told the agent for the lender's fixer this, and she said, "I've been in this business forty years and I know what I can get for that property!" I offered to bet her $10 she couldn't close escrow on it within ninety days for over $390,000 net - essentially a zero risk bet from my point of view. From hers also, if she thought the property was really worth more. She wouldn't take me up on it - declining to risk even $10 of her own money upon getting a price within 15% of what she told her client whom she has a fiduciary duty to was an appropriate asking price. Furthermore, she's violating her fiduciary duty by not explaining this to her client. Doesn't matter how long she's been in the business. What matters is whether she reacts well to this market.

About five miles away, another lender owned fixer asking $480,000 because that's what the lender is on the hook for. And you know, it is a better neighborhood. Unfortunately for them, just because you were silly enough to lend them that much when the market was peaking doesn't mean someone else will pay you that much for it when the market is in the tank. What matters is the comparable properties, and there's one just around the corner that anyone would rather have listing for $470,000. Above par house for a below par price. Hasn't gone into escrow yet, but it will go fairly soon, unless someone else lists a better property cheaper. Even in the buyer's environment we had, they got a little bit of a bidding feud on it. Fast forward a couple of years and the market has turned. Properties priced correctly are seeing bidding wars, while properties priced incorrectly are still sitting without offers. This lender owned fixer is in rotten shape and has several issues that turn the average buyer off. I initially thought my client's offer was lower than it should have been, but the more I thought about, the more I think my client came closer to the mark than I did initially. Horrible floor plan, necessitating major work to make it attractive. Yard not suitable for children, despite the fact that there's a school on the same block that the agent is using as a "come-on". These people will be lucky to get anything over $350,000 for it, but the agent sent me a blanket, "Anything less than $400,000 will be rejected without counter," despite the fact that I explained how much work it will be to bring it up to the neighborhood standard. I left her some messages, and she didn't respond. The implication to me was clear: She is in denial, and doesn't want to hear plain facts explained. She's got dozens of REO listings. Maybe she schmoozes well, but she's not dealing well with the market. I don't know if she doesn't know market conditions or just acts like she doesn't. If nobody is willing to pay enough to get past the blanket rejection, it doesn't make much difference, does it?

Buyer's markets are the times when good listing agents really earn their money, as the gentleman listing the $470,000 comparable did. It may not be the great publicity of getting the highest price ever in the neighborhood, but getting it sold quickly and for something like asking price in a buyer's market is a real achievement. Especially with as many distress situations as are out there - people that have to sell, for one reason or another. (I did very well for my buyer clients, but it's depth-charging fish in a barrel. You really find out how good someone is when the market favors the other side of the transaction.) You find out how good someone is as a lister when there are dozens of FSBO and discounter listed properties in the neighborhood, sitting on the market for months. The last six months of Canceled, Withdrawn, and especially the Expired sections of MLS have all that and more, but that one property sold quickly, and sold for a good price. That agent earned every penny he got paid before the property was in escrow or even had offers.

The person who "buys" listings, telling the people that they can get them more money than anyone else, more money than the market will support, had a nice long run. When prices are moving up strongly and there aren't many houses to be had and everyone wants one, well a monkey could sell that house at that price given enough time, because given a few months the market will catch up to all but the most egregious of overpricing.

That is not the way things are in a buyer's market. Buyers have all the power, and they know it, because buyer's agents like me have told them if nothing else. When I originally wrote this, inventory was over nine months worth of sales, more properties were coming on the market and it was the worst time of year for sales. Given these facts, What do you think is going to happen? Where do you think the market is headed, at least in the short term?

(and incidentally, what kind of bargains do you think those few buyers willing to get off the sidelines can drive?)

The longer listing agents wait to talk some sense into their sellers, the worse it's going to be. The more days on market, the further the market falls, the more the sellers will have to move to meet it - and the more unhappy they will be with their listing agents. Actually this always applies, but it applies much more strongly when the buyers are in control. The agents I respect will refuse a listing rather than ask for a price they aren't going to get except by freak coincidence. They get the same no transaction either way, but if they refuse the listing, they haven't created unreasonable expectations, they haven't failed to live up to those expectations, and neither party has wasted months finding out what that agent should have known in the first place.

I saw agents telling people that because interest rates have stabilized or even moved down, that will revive the market. This is complete and utter nonsense in buyer's markets. I initially wrote something stronger, but my internal censor really wants to keep this family friendly. Yes, payments drive the market - when it's a seller's market. Buyer's markets are driven by the bottom line, because there are lots of sellers and only a few buyers and if this seller won't cut them a deal, the one down the block who is a little more motivated will. When every listing gets three offers within a week and buyers are getting desperate, they'll bite off on another $1000, $5000, or $10000 because "It's only $10 (or $50 or $100) more on the payment. They shouldn't, but they will. When buyers have the power and they know it, they'll tell the sellers to pay that $10 per month, because they're not paying the extra in the first place. It is the sign of someone who does not understand supply and demand to think otherwise, and I certainly wouldn't want that sort of numbwit as my agent. Your agent is your expert. If they are not an expert, why are you hiring them?

When I originally wrote this, I told people that the only way to change market momentum was to clear some inventory. Inventory can clear in one of three ways: the owner finds an acceptable alternative (such as loan modification), the owner decides to get serious about competing for a buyer's business, or the lender takes it over and eventually cuts the price enough to sell it. I've mentioned that the lenders are evidently still in denial, but they have legal requirements to dispose of those properties within a certain amount of time. The closer they get to that time expiring, the more desperate they'll get. Once the regulators climb onto that lender's back, they don't climb off cheaply, nor easily. But my real point is this: Sellers can compete on the individual level any time they want to, and the sooner they want to, the better off that individual is likely to be. Eventually, the seller's aggregate is going to have to compete much harder for the business of the buyers that are out there, and for the buyers they want to lure off the sidelines. It took a long time to sink in, but the fact did sink in to prospective buyers that the market got overextended. If you're selling, you can ameliorate your expectations and come out as well as possible, you can hope for the bigger fool of a bygone day, or you can take it off the market.

Caveat Emptor

Original here


At any given time, I will usually have at least one set of clients who really need to consider a condo or townhome who nonetheless have their hearts set on a single family residence. I agree to include single family residences in their search knowing full well I am going to get phone calls like this:

"Dan, a property just popped up on our search! It's right where we want to live and it's within our budget and we like the neighborhood and we want to buy it!"

And then I'm going to look at MLS and 999 times out of 1000 there is going to be a note in there that tells me there is no way lenders will touch the property (in 99 out of 100 such properties that don't have it, it should have been there). Net result: the vast majority of all buyers can't touch it, and I have to tell Ms. Client exactly what's going on:

"I'm sorry, Ms. Client, but that property has a broken foundation which no traditional lender will loan money on. So if you can come up with about half the purchase price in cash, we have a possibility, but otherwise that property might as well be the most expensive property in the city, because while you could afford it if you could get a traditional loan, the reason it has such a low price on it is that you can't."

Put yourself in the seller's shoes: They want to get as much as possible for the property. There just aren't a whole lot of people who go looking for ways to give money away that they could have gotten. Even if they are a philanthropist, they give the money to charities, not to anonymous buyers they don't know. Therefore, there is a reason for a low asking price relative to everything comparable around them, and the reason for a major price differential is almost always some defect that prevents a normal residential real estate loan from being obtained.

Agents don't put this information in the public area of MLS or any other advertisements they do for one reason and one reason only: doing so would restrict their ability to attract buyer clients who don't understand either this or the fact that calling the listing agent is about the stupidest thing a buyer can do. I don't recall ever having a listing in this category, but I would make it absolutely the first thing I mentioned. There is no point getting my sellers worked up with showings to buyers who cannot buy the property, and my responsibility is to my clients, not to luring prospective buyers in my own front door. That is a major priority of mine, but helping me find clients is not why people sign my listing agreements.

Here is what is going on. The sellers have a property with a defect that makes most lenders unwilling or unable to risk money on a loan against the property. A slab crack is the classic example, but there are many others. Unpermitted additions are another potential deal killer. Properties that don't have a working bathroom or kitchen. Properties without hot and cold running water, or without heat. I can go on and on, but these are the ones agents see time and time again.

Because traditional real estate loans with traditional real estate lenders are out of the question, the only lenders who can touch the property are the so-called "hard money" or "private money" lenders. Traditional lenders are publicly held companies loaning Other People's Money and they have to conform to what the SEC and Federal Reserve tell them to do. Hard Money loans are individuals and groups that have gotten together specifically for the purpose of loaning money to this market. They can do pretty much what they want, but the lowest rate on a "hard money" loan that I can remember seeing is about 12%, and right now hard money lenders want to see a 35 to 50% down payment minimum.

I keep saying this but it cannot be repeated too often: The Mortgage Loan Market Controls the Real Estate Market. The vast majority of everyone needs a loan in order to buy, and if they can't get a loan on a given property, it might as well be a storage area for what comes out of a sewage filtration plant. Such a property is worth much less than surrounding properties of otherwise equivalent features simply because of this defect. In fact, most such properties are still priced too high - the asking price reduction should be larger than it is - which is yet another piece of evidence on violations of fiduciary duty most agents will commit in order to get a listing agreement.

In point of fact, probably the majority of these properties go to "all cash" buyers who fix the disqualifying problem as well as making it pretty for Mr. and Ms. Upper Middle Class at a substantial markup from what they bought, making enough money to pay their expenses plus a substantial profit as well. That is the target market the agent has to hit. The fact that a given property cannot currently qualify for a traditional loan, but can be repaired so that it does is a business opportunity. Nobody risks pumping that kind of cash into a property without the lure of a potential profit that makes it all worthwhile, and there is nobody else involved in such transactions who is not made better off by the existence of this class of short term investor.

I shouldn't have to say that if you own such a property, fixing the problem yourself if you can will usually more than pay for itself. But there are many reasons people can't do this, most common of which is "we don't have the cash and can't get it", and without the people in the previous paragraph, what we all get is an abandoned condemned property of no use to anyone. The people who owned it get nothing. The people who would have eventually bought it (and been ecstatically happy to do so) would not even have considered it. The people who fix these properties are not only making money, they are performing a public service. I get angry when people think that the money these property fixers make is somehow morally wrong. It not only is morally right, it is economically beneficial to the community as a whole and everyone else involved in that transaction.

Nonetheless, if you are a buyer without the requisite cash, the purchase is not going to happen for you. The property might as well cost ten quadrillion dollars, because it is every bit as much out of your reach as a property costing that much. People who don't understand this are taking lenders and loans for granted, and as anyone who's been involved in the real estate market will tell you, you should never do that. Yes, they make good money also. But they also take substantial risks, as any real estate market lender of the last few years can attest.

Without lenders, we'd be stuck in the era before loans. Without the standardized lenders and programs and methods of freeing up money for the real estate loan market that we have built up over the past seventy-odd years, real estate prices would be a lot lower and we'd still be stuck with mostly cash sales with the practical result that the vast majority of real estate value would go "poof" just like a cartoon illusion. It's real wealth, but it rests upon a foundation of our current system of loans being available.

When such a loan is not available for a given property however, that property goes outside the system that we have built up to make home ownership available. Until somebody fixes the property to bring it back inside that system, it really is only worth only a fraction of the value of surrounding, otherwise equivalent properties. And if you as a buyer are relying upon that system of loans to enable yourself to to become a homeowner, such a property is as unavailable to you as if it were somewhere in the Andromeda Galaxy. On the other hand, if you are someone with the cash to buy and fix the property in order to bring it within the system there is serious money to be made - but people who fit in that category already know that.

The usual comment I get from buyers when I explain the above is "Oh, that's a shame," or words to that effect. It isn't a shame and it isn't an unrelated factor - it's the entire reason for the low asking price. If the property didn't have that defect, it would never have come up in your search because the asking price would have been priced completely out of your reach.

Caveat Emptor

Original article here

Expertise and attitude, not control of an informational chokepoint, is the way that things are going.

Let's analyze this from both sides of the problem. The current owner looking to sell really needs a marketer. For better or worse, most of their choices have been made; their main dilemma reducing to how to get rid of the result of those choices in the most effective manner. If I were Ambrose Bierce, I'd say their problem was how to convert their mistakes into cash, because they have that property, and they want is the person willing to pay largest amount of cash possible as quickly as possible. It's worth what it's worth; mistakes and omissions can cost them a huge percentage of what the property might have sold for but it's unlikely that even the best marketing program is going to sell the property for more than it's worth.

It's the buyer that has more need of an all-around expert on housing. They have cash or the ability to get it via a loan, and the want the property that best meets their needs for the lowest possible price. Note that nobody has an unlimited budget; despite all the attempts to pretend otherwise in the era of Make Believe Loans. Even if you're wealthier than Midas (Which many of the wealthy are, if you really think about it. Gold just sits there - it doesn't produce more wealth), you have to accept some constraints upon the property you decide to purchase, and knowledge of how those constraints compare to each other and how they work out down the road can keep you from being in the situation I joked about above, of needing to convert your mistakes to cash, later on.

But the current business models are all built around listing agency. Especially, the large nationwide chains and huge brokerages. Ridiculous as it may seem upon sober reflection, people do approach listing agents about buying property, especially the ones they have listed. I've written more than one article covering how Dual Agency is an invitation for disaster, especially for buyers, as have others, but still it happens. It's not like it's risk free for sellers, either. Some agents do get listings primarily for "buyer bait" and lose their best bait when the listing actually sells, and that's fairly benign compared to some other things that really do happen and aren't as uncommon as most people think. The entire current model of agency is built around listing, with only minor exceptions around the edges, and it's mostly oriented on the big name national chains with ongoing advertising campaigns. Those chains control pretty much everybody from the NAR on down, and through the NAR's lobbying arm mold the environment to their advantage. Due to the way the business is structured, It's very hard to succeed in real estate without listings, and it's much harder for independents to get listings than it is for the major chains. This is going to change no matter how many "campaign contributions" NAR makes, at least to a degree and possibly completely.

This whole set-up is a holdover from days when agents and brokerages could control access to market information. I shouldn't need to say this era is over, and the agent (or brokerage) that pretends they are entitled to three (or six) percent commission for access to the market is doomed, but the NAR seems to be leading the charge off the cliff, most recently with the move towards requiring agents to have hardware "dongles" in addition to a user ID and password to access the various local MLS services. They justify it as security, but what they're really trying to do is "protect agents from themselves" by making it difficult to share their MLS access with outsiders - attempting to control information. Where 99% of the information needs no access to MLS in order to obtain, this is ridiculous. Note to NAR: Most real estate information is public record, and can be obtained these days by visiting the appropriate county website. A lot of it can be retrieved automatically, via what we called "batch file" thirty years ago. There are dozens if not hundreds of places to obtain information on properties for sale, and a goodly percentage of them do not have their sources in MLS. Therefore, trying to justify what you make by creating an artificial information chokepoint is not going to succeed - all you're going to do is succeed in encouraging alternate pathways to the information.

There is no reason why any given local MLS can't have competition. The NAR doesn't own the concept - only the name. There's no reason why some smart techies can't set up their own service in competition, national or local, supported by whatever mechanism they can get to pay their bills. Furthermore, agents (Realtor or not) will line up to submit their properties to any competing service - it's fiduciary duty, after all. It's only the non-existent policing efforts of most such sites that have prevented them from taking more market share from official MLS affiliates. When this changes, so that a member of the general public can read a listing advertisement on an MLS competitor and have some confidence that it represents a real listing, these competitors will lose most of their handicap. If I had a dollar for every time a client called me asking why I hadn't shown them this wonderful bargain they found on a non-policed site, I could pay my office rent for a couple of months at least out of it (Buyer's agent recording 2201: "Because it's not a real listing - it's someone chumming for leads, and to avoid wasting your time with salespeople advertising things they haven't got is a small part of why you hired me"). It is only this lack of policing that is holding the competition back now. But sooner or later, those that are trying to be destination sites will figure it out. When they do, you can kiss MLS' dominance goodbye, and with it any illusions as to holding an information chokepoint.

Eventually, people will be able to put their properties on the market by going to a website and entering the information, or calling a toll free number if they're luddites. They'll need to show they are authorized to do so, but that will be the essential nature of the process. Buyers will be able to access the information for some very nominal price, like putting up with advertising or paying some nominal fee. That's where we're heading; the only items in doubt are how long to get there and what the exact pathway will be. Agents are in no way mandatory to this process of putting a property for sale on the internet or finding out which properties are for sale on the internet. The only way to survive and prosper as a profession will be to provide expertise that the average person has little to no opportunity to acquire. In other words, really learn things such that buyers and sellers of real estate can make a profit (or avoid a loss) by paying you, and make a living selling that expertise, not access to the system. Question 1: In the general economy, are there fewer expert consultants today than thirty years ago, or more? Question 2: Do the good ones among them command lower fees (even adjusting for inflation) or higher?

The issue lies in convincing people your advice really is that good. Holding an information choke-point won't do it, and the choke-point is going away within the next few years. But knowing what to make of that information is an expertise for which well-informed clients will pay and pay well, knowing that the system will be passing along those costs (along with a hefty markup) to those too stupid to pay. In other words, we've got to demonstrate and emphasize the fact that our compensation is an investment that returns more than it costs.

I'm not going to be saying listing is easy - it isn't. I learn more about the listing game, and how much more there is to learn, with every one I list, and not infrequently, I learn something important about listing from working the buyer's side (and vice versa, as well). As I have said in the past, I figure I'll have it completely down sometime in the next century or so. That said, the future of the listing game is easy enough to predict: How to make this property stand out amongst all the others, and how to attract the attention of the buyer who is suited to the property. Every property is unique; but for the vast majority of all buyers, there is a substantial list of properties that will serve their needs about as well. If you're any kind of a decent listing agent, you're going to be able to answer the questions of why this property is worth more to that buyer than the alternatives that are cheaper, and why the alternatives that are more expensive aren't worth the extra, secure in the knowledge that if they don't agree, they aren't the right buyers for this property and another set will be along shortly who are. If you're a top-of-the-line listing agent, you can do this without ever meeting prospective buyers. The seller's problem reduces to how to attract those suitable buyers, and the value of the listing agent to sellers lies in getting them a better offer sooner (Hint for those consumers reading this: It's not agreeing to list the property for a higher price! That's actually counter-productive on both counts).

That said, everything the listing agent needs to know pales beside what a good buyer's agent needs to take into account. I doubt I or anyone else will ever have the buyer's game completely down. It isn't that I know everything or will ever be some sort of shining exemplar of buyer's agents; I'm simply one of the best that happens to be available. I look at between 20 and 30 properties most weeks, every week of the year - 1000 to 1500 properties per year - and I learn new things pretty much every time I go looking. I learn things about the clients needs and desires by listening, and keep on listening. The future of the buyer's agent side is making sense of the information overload, debunking bogus information which lazy sellers and listing agents insist upon proliferating, and sorting better alternatives from those not so good, including knowing how to spot a Vampire Property. This starts at learning what a given buyer's priorities and needs are, and figuring out what areas they may be happy in and can best afford, and going from there to making comparisons between available alternatives.

In neither of these alternatives is simply having your real estate license and NAR membership certificate up on the wall going to help you extract an agent commission, particularly a larger one as opposed to a smaller. That license may get you in the door at the dance, but it's not going to fill your dance card. For that, you've got to bring something real to the situation, and the one thing clients are after, and always are going to be after, is expertise. Access, they're going to be able to get anywhere, but someone who really understands what's going on in this hugely complex transaction involving debt that most people are going to be paying for the rest of their life, and distills the specifics into something these clients can understand. Furthermore, agents relying upon chain affiliations to bring walk-ins to their door? The days of that happening are numbered, and the number is no more than the number of days until someone puts their ducks in the row to really compete with the MLS.

You're also going to need the right attitude. People are getting better and better at identifying shills. Even if you've got an exclusive contract, which are going to become more scarce, even those aren't forever and the chances of an agent being able to enforce it in spite of whether they helped an actual transaction or not are shrinking faster than Lily Tomlin ever did. Whether agents like it or not, it's becoming easier all the time for consumers to walk out on contracts with losers who conned them into exclusive contracts. If you want people to keep working with you, you need to demonstrate that this client's good is the most important thing in your world, and that's not something anybody can fake for very long. If they understand this and the expertise you're bringing to the table, they'll stick with you by choice unless they're con artists or agents themselves. I had one client not too long ago who admitted they'd been planning to ditch me for a part-time relative and decided not to because I was providing things they knew the relative wouldn't and couldn't. The non-exclusive contract which is all I ask for is plenty to discourage that, while leaving them feeling free to ditch me if I don't get the job done - so I'm motivated to get the job done, and they can know they're getting my best efforts risk free for them, not to mention that it would be entirely pointless for me to try and hold them to an exclusive contract they wanted out of. It's both pointless legally and bad business - so why ask for an exclusive in the first place?

However, the real estate profession has made a horrible botch out of stressing expertise and education thus far, which is one reason why discounters have thrived by offering nothing for less. The reason for this is that it would interfere with the profits of those national chains that control NAR. They can't hire newly licensed agents that used to work fast food fresh out of the local shake and half-bake real estate school, dress them up in a suit, and expect them to bring commissions into the brokerages if it's easy for consumers to sort out who has real expertise and who doesn't. The licensing exams themselves are pathetic, and intentionally so, in order for the brokerages to have a steady supply of inexperienced shake and half-bake licensees. No math more complex than a four function calculator, and you can use a four function calculator on the test in California (which is supposedly one of the harder exams). How can it be acceptable for someone who hasn't even been tested on the ability to set up a mortgage calculation on a calculator or spreadsheet to have a real estate license? It'd be bad enough if that license didn't include the ability to originate loans, but it does. There are a couple of questions on "what is this type of structure called?" but none on usages, advantages, disadvantages or weaknesses! I understand there's only so much that can be covered in 150 questions, but the NASD has 250 questions on their series 7 exam covering a far more limited expanse of material. There is no good reason why the real estate exam should not be a minimum of three full days, and requiring all previously licensed agents to take the new exam as well. No reason except that would constrict the supply of naive freshly licensed shake and bake licensees (For that matter, the most important knowledge for agents can't be tested, because it's both local and changes too quickly with time. It makes no sense to ask me about the neighborhoods and market in at the other end of the state - I not only don't know, I can't take the time to learn without forfeiting the time to create and maintain the requisite market knowledge for the area I do work). Alternatively, the state can do away with licensing altogether in favor of simple registration, and let the market develop informational resources as to the competence of a given agent. Consumers would demand it, and they'd be willing to pay for it whether directly or indirectly. Finally, don't get me started about all the "designations" NAR has cooked up that amount to a way to impress the ignorant and gullible ("Sell the agents the right to put some meaningless initials after their name to impress the marks!")

Above all, however, the future of real estate agency is going to be about accountability. If the industry won't develop real and reasonable performance metrics for individual agents, somebody else will. That's living in the age of transparency for you. Furthermore, you can't stand up and say you're the expert in their corner unless you're willing to defend your performance later in a court of law. Brokerages have a proliferation of forms that add nothing to the process except to make it more difficult for them to be successfully sued and distract clients from what is really important. But you can't tell the client you're an expert worthy of hiring, that's going to get paid however many thousands of dollars from their point of view, if you're going to ask them to sign fifty forms that say you're not responsible for the results of your work. Well, I guess some slick salespeople could and do, but it's hardly the sort of thing to inspire confidence in any rational client. We're neither inspectors nor appraisers, and especially not lawyers, but that doesn't absolve us of trying to solve those issues before members of those professions get involved, and do our best to help the clients understand and interpret when and if those professions do get involved. In my experience, ninety percent of inspector and appraisal issues should be solved by the agent before there's an offer, and about the same percentage of legal problems can be prevented by agent diligence beforehand. Especially the major ones. But if you make clients sign forms that say you're not responsible for this, what are they really getting in the way of an expert they can hold accountable? And if you can't be held accountable, what are you really selling besides your winning personality? They can get a better stand up set for forty bucks down at the local comedy outlet. Why should agents make a hundred times that if they can't be held accountable for performance later? The short answer is that we've got to make this confusing process that kills a dozen mature redwoods for pulp understandable and transparent, we've got to perform by making certain our clients can show a profit on the money spent hiring us (at least in the aggregate), and if we're not to be held accountable, what real assurance does the client have that what we have represented is true? Everything we add to the process that doesn't further one of these client goals is either obstructionism or distraction from what's really important, and a counter-balancing reason not to do business with us.

Caveat Emptor

Original article here

I have said repeatedly that buyer's markets are not the time to be selling a property if you have any choice.

There is one exception: People looking to turn around and buy a more expensive property.

If you're looking to move down market, do it when things are hot. But moving up works best when the market is cold. This is because the price of the more expensive property is what influences these moves the most.

It's still better if their budget will stretch to hanging onto the current property while buying the new one, because when the market turns they'll still be able to sell the first property for more than they can now. Nonetheless, it's still a good idea to move up in a buyer's market - even if you need to sell your current property - provided you can afford to do so.

Let's do some math! I'm going to use a real example. Let's say you bought a condominium ten years ago for $150,000. At peak of the seller's market, it was probably worth about $330,000 or more. Now it might be worth $260,000. Even if you bought with 100% financing, as long as you haven't taken cash out, you only owe roughly $130,000. Less 8% cost of selling, you're netting about $110,000 from the sale. Less roughly $10,000 for closing costs, and you're looking at having a 20% down payment for a $500,000 property, and you're still a conforming loan. In my favorite zip code at this update, that buts a really nice 4 bedroom 2000 square foot detached home with a panoramic view of the city and no Homeowner's Association! Not to mention the commute is pretty darned friendly for most folks and the public schools are top notch. Total monthly outlay, for loan, taxes, and insurance: just over $2500 per month ($2507. at more typical loan rates we're likely to see soon, more like $3000). Income to qualify: Just under $5600 per month, and that's with a thirty year fixed rate loan that I could lock right now without any points to the borrower, so the closing costs for the loan and property would be well under $10,000. About half that, in point of fact.

Now, let's say you wait for the market to recover. Let's say everything is a straight linear computation, even though it won't be - I'll bet you money that the more expensive home goes up further, faster, not to mention relative bargaining positions of a condominium owner versus a detached property owner. Let's say the loan rates stay exactly the same as today, which they won't, because in a period of high demand and increasing prices, there's more competition for money and therefore, higher rates. If you waited for that condo to be worth $330,000 again, that property you can get for $500,000 today becomes a $635,000 property. Straight line proportionality. You net roughly $173,000, again less $10,000 for closing costs on the new property. Now you do have slightly better than 20% down payment, to be sure, but you've still got to borrow $471,000. You can either do so with a Jumbo loan, or via a conforming first with a Home Equity Loan on top of that. Even using the full $10,000 for closing costs, your rate ends up higher. Equivalent cost per month that way: $3760. Income to qualify: a little over $8350. For making the exact same exchange, under conditions that I'll bet money are going to be less favorable than this. At this update, the market for desirable single family residences has definitely come back strongly; the market for condos is still languishing.

If you decide to go the route of the conforming first with an equity loan on top, it's a little more favorable: Assuming a 720 credit score, you can have a rate of 8.25% on a fixed rate 30 due in 15, giving you a total of just over $3650, saving you about $100 per month and cutting your income to qualify to about $8120, as opposed to the $6650 you'll need to document to make this exact exchange right now. Some people can work a little harder or longer hours, charge more for their services, etcetera, but most people make what they make. The one is less than a standard deviation over area median income; the other is almost two and a half. That's an awfully large number of people priced out. Assuming a normal distribution of incomes and given San Diego's median and standard deviations, (via Hyperstat) we're talking about the difference between 20.46 percent of the population and 1.30 percent of the population, a factor or 15 decrease. The difference between more than one family in five and less than one in 75 being able to afford said property, holding assumptions constant.

It is to be admitted that market constraints in the latter case might keep the prices down somewhat, but that's only as a counter-weight to all of the other forces, and it is quite easy for a mathematician or economist to prove that the actual equilibrium point will still be significantly less affordable than the current state of affairs. Don't worry, I'm not going to drag you through that. Nor are we talking properties that the average family can afford with this particular example, but the principle applies to every affordability range, from a bottom of the market condo to the top of the line. Nor does it take any great mathematical skill to tell you that the affordability of a good that everybody is trying to buy right now is less than that of the same good when large numbers of people are trying to sell and very few people want to buy. Think any number of hot tech gadgets or "must have" Christmas toys. Real estate isn't that much different, economically, but people can have perfectly great financial futures without the latest tech gadget. It's unlikely they will have an equally bright future without owning at least the property they live in. In a buyer's market, property is affordable because lots of people want to sell and very few want to buy, leading to a huge disparity between the number of people who could afford a given property if they wanted, and the number of people actually willing to buy, and thence to greater affordability. When a larger number of people are ready and willing to buy, the affordability will decrease. It's all a matter of simple supply and demand.


Caveat Emptor

Original article here

(This was originally written February 16, 2006, but it's relevant still)

One of the occasional questions I get from people has to do with why the housing bubble got so big (or if you're one of those still in denial about it, how prices jumped so far so fast).

This has to do with several factors. Legislation made real estate investments more attractive. Interest rates got low, and nontraditional loans proliferated. People took their money out of the stock market because of the tech bubble popping, and wanted to invest it somewhere. The feeling that the housing market could never go anywhere but up. And I will address all of these issues in the coming paragraphs, but the largest factor is and was psychological. People were simultaneously scared that if they didn't buy now, they would be locked out of the American dream, and avaricious in anticipation of buying and flipping properties for multiple tens of thousands of dollars profit.

The first enabling factor happened in 1996. President Clinton sponsored legislation giving huge tax exemptions to grains from the sale of personal residences. There were and are good arguments for doing so, nonetheless it had the effect of making real estate a more attractive investment. When a married couple can make up to $500,000 tax free over their basis every two years, that's a major incentive to start moving into a new house every two years in order to fix it up, or at least hope for a gain in fast growing areas. By itself, this was a minor factor initially, but by making real estate such an attractive investment (literally the best there is, considered in a vacuum), it started the bubble off. Since it hasn't been repealed yet and may never be, the value increase from this aren't really a bubble component, but the value increase for what was a one time systemic shift whetted appetites, even while the dot com bubble (itself a fear and greed phenomenon) was going on.

The second enabling factor was that interest rates got low. This meant prices had the leeway to rise, as most people buy homes (and other property) based mostly upon the payment. When 30 year fixed rate loans go to 5 percent, the same payments buys a lot more house than it does at 7.5 percent. If you could have afforded a loan for $100,000 at 7.5 percent, you can afford a $130,000 loan at 5 percent. Instead of a $300,000 loan, you can afford $390,000 for the same payment. $500,000 becomes $650,000. Even though rates went up after early 2004, this helped start the phenomenon.

The third enabling factor was that people had gotten burned in the stock market as the dot com boom deflated, and the real estate market was doing well. With both sides of "fear and greed" working the equation, this amounted to quite a bit of incentive to chase returns in the real estate market. "I just took a bath in tech stocks, but look at how the real estate market is going!" This is known as chasing last year's returns, but large numbers of people do it. Consequently, quite a bit of personal wealth was dumped into the real estate market. This had negative consequences on the stock market, exacerbating that decline, and for the real estate market, dumping a couple trillion dollars into the demand side of the equation didn't exactly hurt real estate prices. Supply and demand are always working. The important trick is to separate fear and greed, which are real but have mostly short term effects, from real long term changes to the market.

The thing that really drove the whole thing from behind the scenes was that the federal government "encouraged" lenders to expand their creditworthiness criteria. Thirty agencies of the federal government got together and used the Community Reinvestment Act (as renewed in 1995) as a bludgeon to force lenders to lend to minorities at the same rates (and rates of approval) as non-minorities. Since certain minority groups are statistically less scrupulous about doing things that maintain creditworthiness and financial stability (just as other minority groups are statistically more scrupulous), that meant relaxing standards. The loan market controls the real estate market. When practically anyone could get a no income documentation loan they couldn't afford for 100% of value, macroeconomic constraints upon price vanished.

Members of my professions, meanwhile, did absolutely nothing to slow the madness. Indeed, they added as much fuel to the fire as they could. As I have said elsewhere, buying a home really is a fantastic investment, all things being equal. It literally clobbers renting and investing over the long term, with those last four words being the critical part. There are limits, and many agents and loan officers went over them and three states beyond. Anybody who takes any real estate agent's unsupported word for investments and sustainability probably needs a guardian. Reality check: Here's a person who makes thousands of dollars if they tell you you can do something, and nothing if they tell you you can't, and has very little responsibility in the law for telling you lies. They're not financial advisers, after all. What do you think the average person will tell you in this position? (And before anybody sends me email or comments about the "superior ethics of Realtors®" they were just as bad statistically and worse morally, because they were holding themselves out as ethically superior, thus using the propaganda to allay legitimate concerns. I'll believe Realtors® offer some ethical advantage when I start seeing the Boards of Realtors® imposing some real disciplinary measures upon significant numbers of scumbags that the state regulators don't. Aside from advertising to build brand awareness, I haven't seen anything that the Boards of Realtors® contribute to real estate practice, and they actively work against consumer interests in significant ways.)

So there we are, with these factors doing everything they can to drive values up. This goes on for a little while, and now psychology starts becoming a real factor. "They're not making any more land!" making a scarcity argument. "Real Estate always goes up over the long term!", making a safety argument, and ignoring any number of past bubbles and downturns. Heck, I remember four previous ones in southern California! "You can always sell for a profit!", ignoring transaction costs, which are significant, and flat out misrepresenting liquidity. Real Estate can beat anything else, investment-wise, but it is certainly the least liquid class of investment that comes to my mind, as well as being sensitive to many factors beyond your control.

Couple this with a couple of years worth of twenty percent returns, and the feeding frenzy really kicks in. There starts being a real fear factor - people get afraid that if they do not buy now, they are never going to be able to afford a home. When prices rise by 50 percent in two years and wages rise by six, who can really blame them? Most people do not have the economic background to sit back and consider who buys houses, and what controls housing prices. So the mentality of "buy now or rent forever!" took hold, further exacerbating the rise. People were willing to do literally anything they could to qualify for a home, lest they be unable to qualify forever. And with the thinking detailed in previous paragraphs, they were told that "Even if you have to sell in a year, you'll still come away with a huge profit!" Yes, that's greed again, rearing its ugly head.

Up until this point, things were within reason. But into this situation stepped the lending community, particularly the sub-prime lending community, driven by the federal government breathing down their necks. More and more lenders started being willing to loan 100 percent of the value of the home. "Hey, why risk your own money when the bank will lend theirs?" This drove market leverage to never before seen heights. Furthermore, in an effort to sustain volume, lenders started a trend of competing ever harder for the most marginal case. Stated Income, Interest Only, and short term hybrid ARMs proliferated (The most common sub-prime loan is only fixed for two years). Finally, lenders started pushing the Negative Amortization loans, for those borrowers who couldn't really make even the payments required on the short term interest only alternatives.

Lest anyone think otherwise, the community of real estate agents was fully on board with this. Always higher, and fast increasing, prices meant they made more money in commissions from selling the same number of homes, and the apparent virtues of real estate as an investment of the moment kept seducing those who did not know any better. Those few voices of sanity were drowned out, and many left the business. There just aren't that many people who really qualify to buy homes at the peak prices we had based upon the traditional metrics, even relaxed as they have become, and if you won't put them into something they can't afford, somebody else will. Furthermore, during this period, more and more real estate agents were starting to do their own loans, further isolating any voices of sanity in the loan community. Speak the truth that a client probably cannot afford a loan once, and the real estate agent will never bring you another client again, and will try everything they can to pry any clients that they can away from you. After all, you 'cost' them a commission once. Interest only, and negative amortization loans further proliferate, as agents try to persuade prospective clients that they "really can afford those payments." Forty year loans start making a comeback, where they were all but extinct, and fifty year loans are introduced. Sub-prime underwriting standards are loosened until they ignore what happens when these hybrids adjust (or Option ARMs recast) and concern themselves only with the minimum starting payment. A larger and larger portion of purchasers is forced into the sub-prime market if they want to qualify. And still property values rose.

Or, more correctly, prices rose. The actual property value certainly wasn't growing that fast, only the common perception of value, aka price. People were getting away with these terrible loans, complete with prepayment penalties, because even though they weren't able to make their payments in many cases, prices were still increasing fast enough such that even if they sold relatively cheap, in order to unload the property in a hurry, and paid a prepayment penalty, they were still coming away with money, further aiding the illusion that there was no way not to make money. When workers are making more money buying a house and holding it for two years then selling than they are at their jobs, that's an incentive to keep doing it. That's an incentive for more and more people to get in on the act. And the feeding frenzy builds. Fear and Greed. When someone holds a house for two years and sells for a huge profit despite the fact that they did nothing to enhance the home's value, that has the appearance of easy money. When people start buying with the intention of short term flipping without doing any work (We call this "Hoping for a bigger fool"), and when they'd call to see if I knew of any such properties and hang up when I'd start telling them about properties that really were good investments but needed work, I knew the end was coming very soon.

The first group to holler "enough!" was not the lower income folks who were getting priced out of stuff even at the lowest end of the market. It might be what you'd expect, but it wasn't the case. My theory is that those people simply don't know any better, and didn't think they could afford to wait. It was the better paid, more economically savvy buyer at the higher end who first called "Bull****!" At least here locally, higher end McMansions and such were the first to start sitting on the market. These prospective buyers made plenty of money, and knew they weren't on the verge of being priced out completely. If they were right, they'd buy a better property when things fell apart. If they were wrong, such is life, and they could still afford something. Meantime, they were going to rent.

Lessons here: Always separate psychological factors from real market shifts. The general rule is that once they find an investment that appears to be working right now, the crowd always overreacts. Many times you will make more money in the long term by bucking the obvious trend, particularly if that trend is Fear and Greed driven.

When I first wrote this piece in early 2006, the advice I gave was these two paragraphs:

"If you are in an untenable position with your loan right now, whether because it's negative Amortization or interest only or just about to start adjusting: Either sell now for what you can get, refinance into something fixed for at least five years right now, or be resign yourself to disaster. With the yield curve inverted right now, there is practically no spread between the five year ARM and the thirty year fixed rate loan. Even someone who is as huge a fan of the 5/1 ARM as I am has to admit that, at the moment, the thirty year fixed rate loan is looking very attractive by comparison. When you get a much better guarantee of the rate not changing, for the same price, and the the loans are otherwise identical, what's not to like? As I've said before, you can survive and prosper when you're upside down on your home, as long as you have the right loan for it.

If you can make the real payments on such a loan, I would do it now while appraisers still have the ability to appraise your property for near peak values. If you lose the ability to appraise for near peak values, then you may well be a member of that rather large group in many parts of the country where the market will no longer bear a price greater than the loans on your property. When you owe more on the property than the market appraisal, then for all practical purposes you are stuck in your current loan. If it adjusts, amortizes, or recasts, you're suddenly going to be making much larger payments. If you qualified under one of the less sustainable programs I noted earlier, when this happens you are going to be in a world of hurt, and probably unable to refinance. Most common result: Losing the home, credit ruined for years, and a 1099 from the lender that says "we lost money on you!", for which the IRS will demand taxes. If your loan is going to start asking for higher payments soon, and you can not refinance, or cannot afford to refinance, it's time to sell, right now."

Very few people took this advice then. Lots of people wish they had now. Now, my advice is significantly different, because the local market (at least) is recovering, has recovered some and would have recovered more if not for some legally required extortion and insane economic policy. I'm still not recommending Unsustainable Loans, but the time to be timid about purchases has passed. If you can afford it, now is a good time to be buying.

Caveat Emptor (and Vendor)

Original here

When and Why does a Mortgage Company Sell your Current Loan to another Mortgage Company?

Lenders sell their loans because the lender can make an immediate premium of anywhere from 1.5 percent to four percent by selling your loan to Wall Street. Yes, this is less than the six to eight percent per year interest that most primary homeowner loans get, let alone second loans, commercial loans, etcetera. Nonetheless, they can turn the money several times per year, earning far in excess of what they could earn from the interest on your loan itself, and that's why they do it.

Selling your loan doesn't just get them four percent once. It lets that lender turn around and do another loan and make more money without getting more money in deposits. Many lenders can turn the money three to six times per year or more, getting them a twelve to eighteen percent bonus in addition to anything they make those few months that they hold the loan.

There are several philosophies on when to sell the loan. The one that seems to have the most adherents currently is the pure packaging house philosophy, where they sell it off immediately upon closing, or within a few days. Given this, they can turn the money a dozen times per year if they work at it, selling the loan for a smaller premium, but getting twelve markups per year, amounting to somewhere between twenty-four and thirty percent on the money.

The second philosophy is one that is practiced by a smaller, but still significant number of lenders, who fall more into the traditional lender's model of doing things, and that is to wait until one payment has been received. Since this eliminates a noteworthy fraction of the fraud that's out there, they get a better markup for their loans. The downside is because they have to hold it an average of two months before the first payment is received, that means they can only turn the money six times per year at most, as opposed to the twelve for the previous model of lender. So they get six markups of three percent or so, maybe close to 20 percent over a year. To this, they add maybe three percent, to cover the interest they actually received from borrowers directly. Net: maybe 22 percent. Furthermore, this leaves them stuck with those loans where the first payment is late, because nobody wants to buy those. Better from their mortgage bond buyer's point of view, not so hot for their bottom line because there is a high percentage chance of those loans becoming what is known as "non-performing." In other words, default. The bond buyers got stuck with the results of default in the first scenario, which the lender views as a much better thing than dealing with it themselves. In other words, this scenario forces the lender to actually live with the results of their riskier underwriting scenarios. They actually can sell those loans, but anybody who's paying to assume that kind of risk is going to demand a commensurately lower price for it, which is reflected in a lower bottom line. So the lenders who hold a loan until after the first payment usually have tougher underwriting than those with pure packaging house mentality.

Finally, there are still a few lenders who wait until they have three payments, giving them the best prices of all when they sell. Unfortunately, it takes about four months for them to be able to do this, so they get four percent for the loan, but can only turn the money three times per year. This actually gives them a chance to fix bill paying problems that might have afflicted the second group, but on the other hand, more people have a late payment somewhere in the first three. Nobody wants to pay a good price for loans that are not current, and a little less if it has been delinquent but is no longer, as that's a flag for possible future problems. These lenders get maybe 12 percent per year in funding markup, plus four percent or so for interest actually received from borrowers, netting maybe sixteen to seventeen percent. Needless to say, this model has largely fallen out of favor by most lenders because it doesn't put as much money into the firm's bottom line, but they still get over twice what the lender who actually holds the loan makes per year.

Selling loans has been part of what has driven rates down from their rates of years previous, as lenders face increased competition from other lenders who "want in" on that twenty-four to thirty percent per year from turning the loans, and are pressured to deliver lower rates by the fact that most of their money actually comes from selling the loan, as opposed to servicing loans they do make. Many lenders actually retain servicing rights when they sell the loan, as this gives them continuing income. Indeed, may people out there whose loans have been sold multiple times are blissfully unaware of the fact, as they are still sending the check to the original servicing company.

Another thing that this has driven is the increased use of pre-payment penalties, as the entities buying the loans, which are mostly large Wall Street entities, are very attracted by the consequences of buying loans with prepayment penalties, and thus, pay more for them. If you know that you're going to get that 7% for at least three years, or get a one time stroke of three percent if you don't, you are willing to pay more for those bonds than if the people involved could just hand you your money at any time. Many times the sub-prime market will offer the same people a better rate with a prepayment penalty than the A paper market will without a pre-payment penalty. It's all well and good to save half a percent on a half million dollar mortgage, which is $2500 per year, but if you don't last the three years you are out $15,000, twice the maximum you possibly could save! Pre-payment penalties are mostly to make the aggregated mortgages more attractive to Wall Street.

Finally, I should mention that if you're totally committed to writing the check to the same lender and sending it to the same address so you're willing to pay a price for it, there is such a thing. It's called a portfolio loan, and you can figure that the interest rate will be about one full percent higher, or maybe a little more. Even there, it's not that they legally cannot be sold, it's that they are priced higher to make up for the fact that certain loans don't meet the standardized criteria for sales in packages of fifty million dollars or so, but may still be perfectly good loans. The higher interest rate - price of money to the consumer - is there to counter the lowered rate of return for the lender.

Caveat Emptor

Original here

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