October 2021 Archives

"what can a consumer recover from title company for undisclosed easement"

Basically, the cost of the immediate remedy, at least here in California.

Here's a standard example. Mr. and Ms. Smith buy a property and they wish to put a pool in. The purchase process reveals no easements and they take possession of the property and start digging. Three hours later, the contractor hits a four foot water pipe buried six feet deep and cutting right across exactly where the pool needs to be.

With a standard owner's policy of title insurance, the title company will pay for the contractor's bill, including the cost of filling in that hole they dug. There may also be a small settlement made for the decreased utility of the property. After all, you can't really do anything about that easement, now can you? Nor can you build anything that conflicts with the easement holder's right of access. No pool, no granny flat, no game room or detached office, at least on that segment of the property, which, given the size of most recent lots, means not at all.

The title company will not, under the basic policy, purchase the property or make a large settlement. The reason for this is that if the standard policy made them liable for things like frustrated purpose of purchase, the standard policy would be far more expensive. People wouldn't want to purchase policies of title insurance, because they insure against risks which are relatively rare. However, those risks are extremely expensive when they do occur. Who pays for that? The other policyholders, of course. For a lot of people, they think of title insurance as junk when it will save your bacon if there's a real problem with title, and increasing the base price would mean that a lot of people would want to pass. The idea is to keep a policy of title insurance affordable, and still cover what it really has to cover, which is losing a property you thought you owned through action of law.

You can purchase a rider or endorsement for extended title coverage. Furthermore, if certain purposes are critical to your reasons for acquiring the property, you can do additional research, or pay to have it done. It can be expensive, but if you don't want this $500,000 property unless you can build a pool, an office, or a granny flat on it, spending the money is an excellent insurance policy. After all, even if you finance the vast majority of your purchase, you're on the hook for every dollar you spend buying the property. Spending a little extra to insure you're not wasting every dollar of the purchase cost makes sense in such circumstances.

Caveat Emptor

Original here

And I don't know why people expect it to be.

Cancel that. I do know why. Popular media. It's not all that common in popular media, but on those occasions I see someone buying a house in the movies or on TV, it's glossed over in terms that amount to the Fairy Godmother waving her magic wand. Partly, this is because the writers don't understand it, but mostly, it's because that if it's not your house, there isn't the necessary degree of emotional involvement to make it interesting. In short, it's boring, something studio and programming executives understand very well. Even on the real estate channels and shows, it's glossed over in ways as to render it basically into a simple magic spell (to the detriment of those agents who pay attention to those shows, and their clients). To an audience, all this stuff is boring, the cardinal sin in the entertainment industry. They can handle repetitive, they can handle stupid, they can handle insanely dangerous - they can handle pretty much anything except boring. To expect an accurate depiction of something so fundamentally boring to an audience is asking the impossible. When you add in how long it really takes (weeks if you're paying cash, months if you need a loan), how are they going to possibly depict that in a 30 or 60 minute TV program or 90 minute movie? Not to mention the fact they have no desire to because it's boring, and boring programs don't keep the audiences the advertisers pay for. There's no money in showing it accurately - the money for the media is in somehow being able to make it interesting. Even if they have to make up stuff that isn't there - and leave out 99.99% of what is there - to do it. Of course, by then what they show bears no relationship to the actual process.

There is nothing simple about an intelligent, informed decision as to which piece of real estate to buy, or securing any necessary financing. You can choose to do it the easy way, hoping that in your "ignorance is bliss" state of mind nobody takes excessive advantage of you. How many millions of people who had that attitude went through foreclosure a few years ago? I have documented pretty extensively on this site exactly how easy the basic research that allows you to avoid the traps these people fell into is. Unsustainable loans aren't the only problem, though, only the biggest problem we're dealing with en masse right now. All of the individual con games that get played with real estate itself are still there, and nobody's proposing to pass any laws that will have any kind of real effect upon the problem.

Here is the situation: Here is a major asset, worth several years of your family's total income. Comparatively minor differences in perceived value make a major real world difference to how much money the seller walks away with. If that seller can net $10,000 more, that's roughly two months of free income from any regular employment they may have, and around here, a $10,000 difference is pretty trivial - the usual bar for quick turn fixing is at least $50,000, more like $80,000 to $100,000. Just because it's money borrowed from the lender doesn't make it any less real - in fact, it's all the more dangerous for that.

Given the high payoff for extremely minor games, people will play those games. People will lick the bugs off a car for $20. People will cheat on their taxes and risk nasty fines, penalties, and jail time for small amounts of money. 419 scams continue to make millions of dollars off their victims daily. People will bear professional false witness for dirt cheap amounts. 7% of the people surveyed said they'd murder a stranger for $10,000. On that scale, how likely do you think it is that they'll make things appear a little better than they are to net $50,000 extra out of a real estate transaction? With several times the amount at stake that takes 7% of the population to murder you, do you really want to take that risk?

There are friendly, amicable real estate transactions where everything goes easy, everything required is disclosed, the people concerned negotiate like reasonable adults, everybody keeps what is reasonable foremost in their minds and deals with the other people involved on that basis. I wouldn't bet on it happening in any particular transaction. Nor are many transactions something like the picture painted by Churchill's most famous speech, "I have nothing to offer but blood, toil, tears, and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many months of struggle and suffering." But if you're mentally prepared for trouble and it doesn't happen, you're going to be pleasantly surprised. All too often, people think they're in for the media "magic wand" version, and freak out when they're confronted with reality. I'd like it to be easy, but frankly, if it were I'd be out of the most interesting part of what I do. Nobody would need an agent if it were easy. Those people who do business with me and through me know how often I use the phrase, "If it were easy, anybody could do it." The context is almost always something has come up, and I have to do some work to make it right, but I'm also making the point that that's exactly what I'm paid for. It's an inalienable part of the job. If it were all peaches and cream, the vast majority of all new agents wouldn't quit (or essentially quit), would they? One of the nice staff people down at my local Board of Realtors tells me that significantly more than half the registered agents do zero or one transaction per year. You can't survive on one transaction per year unless it's maybe a ten million dollar property. You can't even keep up with changes on one transaction per year (but nobody can really do fifty or more transactions per year, either - not and guard their clients interests as you're supposed to)

Buying real estate is a fantastically good idea and great investment, as this and this and this being just the major articles directly on point that I can think of off the top of my head. There are also obstacles, I will admit. Hell, I pretty much proclaim it in big bold type and explain many of those issues in detail. Credit issues, debt issues, how difficult it is to save for a down payment. Unless you're eligible for a VA loan, there are no more "zero down" or "no cash required" loans at this time. I do believe they're come back within a few years years, but it's better to act before the boost in price that their return is going to give the market. The point is this: Nobody can make up your mind to do what is necessary but you. I can and will gladly help with preparation and planning and budget and evaluating property and everything else, but you've got to first be the one to make up your mind that you want the benefits of real estate ownership, and will pay the costs required to get those benefits. Nobody can do it for you. Nor is pretending it's free or easy in your best interest. The buyers who tried to pretend it was all free and easy are pretty much getting smashed between a rock and a hard place right now.

My point is this: You shouldn't expect to buy or sell a half million dollar or more unique asset like real estate in the same fashion you would a loaf of bread or a box of paper clips. Especially not when there are major rewards for making it appear just a little bit better for the other side than it really is. Expecting to do so is an artifact of Hollywood, and it's worse than all of the horrible cliches in all the bad movies and TV shows that have ever been made about most other situations, because the people who get involved in those other situations know (or learn in short order) what a horrible crock of fertilizer it is, while people who get ready to buy real estate generally don't, and have only the one experience to learn. But that one experience often controls their life from that point on - even when they don't understand how, why, or the fact that it is controlling their lives. I don't think I've ever seen anything like an accurate media description of being an Air Traffic Controller or any of the other jobs I've done. I've been witness to or involved with several major news stories in my lifetime. Aside from sports, I don't think I've ever seen any events with which I was familiar accurately reported. The reason for the ability to accurately report sports is shared experience and widespread audience understanding of the key elements through repeated personal involvement, or at least personal observation. Not to mention that people are interested in sports or they just tune out. If you care about Antarctic Rules Underwater Basketweaving, you tune in to the station that reports it, while if it comes on and you're not interested, you pay attention to something else. If you're interested, you understand all the major points of Antarctic Rules Underwater Basketweaving - you've done it or watched it enough that you're familiar with what's important, as should any reporters. But with every real estate transaction, things are different from other real estate transactions. Not only that, if it's not your money, it's boring as hell unless you're at least a pretty decent agent who understands everything going on. But pretty much everyone who hopes for a secure financial future is going to have to buy real estate at least once in their lives. It's going to be a unique experience, and it's not all going to be pleasant. Quite often, it's frustrating as hell, even when it doesn't need to be - but you can't force the other side to be reasonable. Don't expect it to be like Hollywood depictions, and you won't be shocked. Whatever your job is (except show business itself, of course) I'll bet you serious money that Hollywood doesn't portray it correctly either. Why should real estate be any different? But here's one prediction I'll stake serious money on: The more time and effort and often disappointment and frustration you spend going through the buying process, particularly if you've got a good agent working in your best interests, the happier the eventual result will be.

My most spectacular, satisfying results have all come from clients who were difficult, or had difficulties, and kept going to the very happy conclusion. I don't have any objective measurements, but it sure seems like to me those were the ones who ended up happiest with their purchases in the end. The stuff you go through to buy a property is temporary. The benefits you get from having done so are permanent, and usually quite large, as discussed above. Even after you sell such a property, you've got more money than you would have had otherwise, money you can use for whatever is important to you. Real estate doesn't have to be your life to benefit from it - or be ruined by it. Keeping this in mind, doesn't it seem like a good idea not to expect it to be accomplished by a Fairy Godmother waving her magic wand?

Caveat Emptor

Original article here

I have to admit I'm uncomfortable with it and don't like it. As a buyer's agent, here I am getting paid by someone who not only is not my client, but whose interests are aligned, in most issues, opposite to my clients. They want the highest possible price, my client wants the lowest. They want out of the property without spending money on repairs if possible, my client wants the necessary repairs made. The list goes on and on. About the only issue on which the two sides are in agreement is that they want the transaction to happen. Yet it has become essentially universal for the seller to pay the buyer's agent. Indeed, this is basically the only fig leaf protecting Dual Agency. If the money to pay the listing agent came from the buyers, they'd have to ask themselves "whose interest is this agent looking out for?" with the result being that dual agency would die overnight, and if staking dual agency through the heart doesn't appeal to you, you're unlikely to be on the consumer's side. Not to mention the myth of "Discount price, full service" would die just as quickly, on both buyer's and seller's sides of the transaction. There are protections in place to make it both legal and ethical, but getting paid by the seller when I'm acting on behalf of the buyers still makes me profoundly uncomfortable, and that's aside from facilitating these urban legends.

(The buyers are paying the listing agent, but not directly)

That said, let's consider why it happened, what it would take to make it change, and what the cost of that change would be.

The first paragraph makes obvious the benefits if no sellers were to pay buyer's agents - if what the seller paid out in agency fees was reserved solely to the listing agent, usually contingent upon a successful sale. No "Co-operating Broker" percentage. Not to mention the fact that the seller would come away with a larger percentage of the value of their property. Instead of seven to eight percent, the cost of selling the property would fall to between four and five percent. Not paying the buyer's agent sure looks like a win for the sellers, and one would think explaining that it would be part of an agent's fiduciary responsibility to explain, right?

But the reason that it is in any given seller's best interest is almost as obvious. Ask any agent and any loan officer what the number one obstacle to buyers being able to buy a given property is buyer cash. Okay, there are those unethical persons who will tell you that the problem is qualifying people for property beyond their means, but I'm talking about people who want to buy properties they can otherwise afford. Once they get the loan and the property, they will be able to afford the payments - the real payments on a sustainable loan - and keep up the property and all of the other stuff that essentially goes with "happily ever after". The number one constraint upon people wanting to purchase property they really can afford is cash in their pockets (or equivalently, bank account). The cash for the down payment, the closing costs of the loan, and everything else involved. It takes a long time to save that money, over and above the daily expenses of living. Some people find it difficult; others, impossible. Add the buyer's agent commission to that, and that sets the bar of cash they need to save that much higher.

The seller has the built up equity in their property, from the loan they've been paying on and usually, the increase in property value, and if that property commands a higher sales price, this equity is greater, and getting more money is the reason for them being willing to pay the buyer's agent. This willingness means that the pool of potential buyers doesn't need even more cash, which means that more potential buyers are able to afford this property. The more potential buyers able to potentially afford the property, the higher the likely sales price. The greater the economic demand, the higher the price, holding the supply constant, and there is only one such property. In fact, this increase in the sales price is typically much larger than the cash they pay, thus furnishing incentive for the sellers to be willing to pay the buyer's agent as part of paying their own. By shrinking the necessary pool of cash the buyer needs to a smaller percentage of the purchase price, they increase the potential selling price by more than they cash they put out. Furthermore, if everyone else is willing to pay this money and this particular seller isn't, then by making it harder to purchase their property than the competing ones, they shrink their pool of potential buyers, thus costing them more in eventual sales price than they are likely to recover. If my clients have just enough cash for closing costs plus down payment, they're not prospects for that property, because if they had to write the check for the buyer's agent, they fall short. One alternative is to lump the buyer's agent commission into a seller paid allowance for closing costs, but the six percent aggregate limit that most lenders draw in the sand for that can make it a real constraint. Considered on an individual basis, it's better for sellers to simply agree it's their responsibility in the listing agreement, thus removing the money from that allowance.

Indeed, an argument can be made that offering an average or higher incentive (locally, 3% or more) to a buyer's agent is one of the better ways to get the property sold. Not only do many buyer's agents shop that way explicitly, but if they have an exclusive contract that says 3% (as many do, because their clients aren't educated enough to know what a crock exclusive buyer's agency agreements are in the first place, but they'll also willingly trust the chain agent as to what is "standard"). If the Cooperating Broker's percentage is lower than what it shows on the buyer's agency agreement, that buyer will need to come up with more cash to pay their agent, from out of their limited pool of available cash. When that buyer's agent is in a position to demand 3% whatever property their victim buys, even if they didn't find it and weren't involved, that means properties paying less than that aren't contenders for this buyer's business, unless they've got so much available cash that it just isn't a constraint, and that is rare. A better buyer's agent puts a lower number on a nonexclusive contract, and if they get more, that's certainly fine with them, but because they have a non-exclusive contract, they don't get anything if the buyers become disenchanted with them and stop working with them. This gives a buyer's agent with a non-exclusive contract the incentive to find the property that's a real value to the clients as quickly as possible. I care far less about whether I'm getting two or three percent or something in between on a particular property, than I do about finding the property my clients want that's within their budget. My incentive is to make the clients as happy as possible so that I do get paid, because if I don't, I won't. But the buyer's agent with an exclusive contract that pays three percent has a different set of incentives, which is another reason I advise strongly against signing exclusive buyer's agency agreements, and the existence of such creatures is the reason why it may be a good idea for sellers to offer a higher percentage to a buyer's agent. (There is no consumer oriented reason to keep the amount of the Cooperating Broker's compensation secret, and I strongly support making it part of the general public's available information, which it currently is not on my local MLS.)

So sellers offer a commission because it shrinks the percentage of purchase price that buyers need to have, competing for buyer business as well as expanding the pool of possible buyers theoretically able to consider this property, both of which increase the purchase price more than enough to balance the money they spend. If by paying someone three percent, I increase my take by five percent or more, that's money any rational person will spend. The preliminary numbers I've seen indicate that the seller's increased take is about ten percent of gross price, which translates to almost seven percent more money in their pocket if the property is free and clear, and an even larger percentage if it isn't. On a $100,000 property, you spend $3000, get that money back and another $7000 besides - wouldn't you do that? Doesn't happen on every transaction, but those are the statistical averages. It might not be that much in your particular case - but it could as easily be more as less. If the dice were loaded on your behalf like this in Las Vegas, and that the expected value of a $3000 bet was $10,000, most of those reading this would quit their jobs and move there (at least until the casinos went bankrupt). In reality, it's pretty much the reverse: It'll cost you 10% not to put that 3% on the table.

We've seen what a winner this bet is, in the aggregate, and therefore why rational sellers who are allowed the option will opt to do offer a cooperating broker's percentage, which essentially goes to pay the buyer's agent. The economic incentives under the market therefore reduce it to something like one more tragedy of the commons, although unlike the classic example, it doesn't really hurt anyone directly, it just shifts the market price upwards. The only way to change it is therefore to pass a law prohibiting it. Leaving aside the mechanics of such a law and considerations of whether people could find loopholes in such a law (they would), and consider such a law as being proposed. Consider such a theoretical law as perfectly written and trivial to enforce, such that nobody could successfully get around it. I know that this is ridiculous (as should any adult), but let's pretend to believe this fairy tale for just long enough to tear it apart even under ideal circumstances. What happens? Well the market is priced to include the shift upwards in prices that sellers paying buyer's agents causes. It's just a one time shift, but we've already had the up, so now we'd get the down. Obviously, it would further damage current owners who would like to sell, and make prices more affordable to those who want to buy. Okay, so far we have a 1:1 correspondence between who gets helped and who gets hurt, and even, arguably, a $1:$1 ratio in hurt versus help. For every potential buyer who qualifies on the basis of income but no longer has the necessary cash in hand for a down payment, closing costs and a buyer's agent, to boot, we now have someone new qualify who has the money for the down payment, etcetera, and can now qualify on the basis of income. Like I said, direct effects help someone for every person they hurt. Before we leave direct effects, we might ask about how likely people are to vote to harm people who bought into the current system of homeownership based upon the status quo, in order to benefit an equal number of people who aren't - or aren't yet - part of that system at all. That equation doesn't play well very often in the United States.

Now let's consider the indirect effects. You see, people who want to sell and people who want to buy aren't the only ones affected. People who own, but want to hang on to their current properties will also be hurt. When prices fall 10%, everyone with less than 10% equity is suddenly upside-down, with all of the problems that brings. In the current market, the chances of them being able to obtain refinancing are essentially nonexistent. Maybe you're been paying attention to the news recently, maybe you haven't. There's an awful lot of people who want to hang on to their properties right now, and are having a very hard time. Just because I don't think the one proposal that's been made to bail them out directly is a good idea, doesn't mean I want to actively sabotage their efforts. This would flush all but a vanishingly small percentage of them out of their homes and back into rentals - after completely ruining their credit and making it difficult (costly) for them to persuade a landlord to rent to them.

Furthermore, there's a ripple effect across the rest of the loan to value spectrum. People who now have significantly less equity find it harder to refinance, and end up with higher rates, higher cost of money, etcetera. When prices shift downwards by ten percent, someone who had ten percent equity suddenly has none, making their loan much more difficult and costly. Someone who had eighty percent loan to value is now essentially at ninety. Someone who was at seventy is now almost to eighty, and indeed, a a 77 percent loan to value ratio is an eighty percent loan according to all lender guidelines. It's not until you get below sixty-three percent of current value (which becomes seventy once values have shifted downwards), that the differences become small enough to ignore. In a significant number of those cases, this is going to make enough of a difference such that these owners will not be able to refinance even though they need to, or they'll have to accept loans they can't really make the payments on. Whichever is the case, they lose the property. How many people who bought in the last few years have a loan to value ratio below 63%? Not a whole lot, it turns out. Even when value increases would have more than caused that level of equity, they've taken out equity lines to pay for improvements, cashed out for toys, or even in order to put the down payment on more real estate. Maybe they shouldn't have done that. It's not my place to make that kind of judgment. I'm only going to say that they did so having no reason to believe the status quo would change, and intentionally shifting it even further on them is moving the goalposts, and to the extent it causes current homeowners to fall short of their goals of meeting their financial obligations and lose their homes, is vile.

All this leads up to the killer reason: When I first wrote this, according to Statistical Abstract of the United States, residential real estate in the United States was valued at about 25.3 trillion dollars. Let it be devalued by ten percent, and that's 2 trillion, 530 billion dollars in real wealth, just gone. I could freak out enough people just by talking about the thirty billion, or roughly $100 for every man, woman, and child in the United States, but that's only the third decimal place of the loss, in this particular case. Accounting phantom consisting of numbers on paper or not, this is real money, every bit as real as that $100 in your checking account. Every penny that vanishes means that someone doesn't have it to invest in the economy. Whether it's an individual, a corporation, a lender, or what have you, it means that suddenly the last year or so of economic expansion goes poof!. This two and a half trillion dollars vanishing has second and third order consequences, each dislocation causing more troubles further down the line. The global depression of the 1930s had much milder causes, even considered proportionately. You want to know who gets hurt? The little guy and the emerging entrepreneur, who would have been responsible for most of tomorrow's growth. Old Money comes out fine, by and large. The depression was an inconvenience to the Astors and the DuPonts, to be sure, but that inconvenience didn't much effect their personal lifestyle. It economically killed a generation of innovators in addition to causing well documented economic misery among those who were less well off. Rereading this later, let me ask if there is anybody that seriously wants to argue for more of what we've been going through because real estate prices fell?

So now you know why the sellers pay the buyer's agents, you know why it is in the individual seller's best interest that it be so, what it would take to change this, and what the results of such a change would be. I still don't like it, but changing it would cause more damage, and more immediate damage, than allowing the status quo to continue.

Finally, consider this: The only person bringing any money to the table in a real estate transaction is the buyer. Every penny that seller puts out in order to make the transaction happen comes from cash they get from that buyer in one form or another. Either that buyer paid cash, or that buyer took out a loan that compensates that seller with cash. There is no way to alter the fact that the buyer is effectively paying everyone who gets so much as a penny out of the transaction. If the money they pay their own advocate has to go through a third party in order to pass muster with lenders, accountants, lawyers and regulators (and it does, for many excellent reasons rooted in both very basic principles of accounting as well as legal reasons relating to an "arm's length transaction"), then all the ethical issues it causes are something we need to put up with, because putting up with them is better than any possible alternative.

Caveat Emptor

Original article here

This is a warning to those who purchase restricted sale property. I've gotten a couple of calls for refinancing these in the past couple months, and I've never covered this subject.

A restricted sale property is one where the identity of who can buy it and/or at what price they can buy it is restricted. Many local first time buyer programs restrict the conditions under which the property can be sold. The purchaser must be someone who has themselves qualified for their first time buyer program, the purchase price cannot be above the original purchase price plus a certain margin (usually reflecting a given percentage of Average Median Income for a given Metropolitan Statistical Area), or both.

These are by no means the only restricted sale programs. Many academic institutions have such property upon the grounds of their original endowment. There is a covenant which runs with the land that only faculty members or employees of the college or academy are allowed to purchase the property. I'm sure there are business employee restrictions and others.

This is a classic "good news - bad news" situation. At purchase, it's good news (mostly) because you typically get a far lower price than other, equivalent property, meaning you can afford it when you couldn't otherwise. At sale, however, it means you can't sell for a true market price because either the general public is prohibited from buying or the sales price is restricted by the bargain you made in order to purchase.

What this means is that if lenders have to foreclose upon such a property, they are pretty much up the creek. Such a property is unlikely to sell at auction, they can't just hire an agent and put it on MLS. If the property got beat up before the foreclosure (as happens quite often), it may not be something any of those eligible to purchase it are interested in.

Since it's not generally marketable, most lenders don't want to touch restricted sale properties. This means your loan choices are going to be restricted from the day you sign the purchase contract on. You will probably not be able to get a purchase money loan with most financial institutions. You almost certainly won't be able to refinance on favorable terms, even if everyone who bought without such a restriction can.

Typically, there are only one or two financial institutions willing to touch such a property, if any, and only through their own internal loan officers rather than through any brokers they may do business with. What's going on is that the restricted sale entity (usually a municipality or educational institution) has contracted with them to somehow take care of the problem if there is a foreclosure. This usually takes the form of taking over the property themselves and buying out the lender's Note.

For refinances, all of the above applies, even more strongly because one lender already has the indemnity contract; any others that you might have been able to choose between do not. This means your choices are limited to "refinance with that lender or not at all". Not a good situation to be in as regards to getting a good rate for a reasonable cost. Whatever they feel like offering you is what you get. Nor do you get the standard rates everyone else gets from that lender. You're not in the same situation as everyone else. You're in a special program where nobody else can lend to you because your property cannot be sold to the general public. You're almost certainly stuck with that one lender. It's not like you can go somewhere else.

Due to this lack of competition, expect the rates on loans for such properties to be above market average. Some are fairly close, but it seems an average of half to three quarters of a percent higher on the rate is what you're going to pay when you finance such a property. Furthermore, the only ones able to refinance may be the current lender, as nobody else has that indemnity contract from the restricted sale entity. Lender's don't want to take over your property - they want the loan to be repaid. But they must be able to take over your property and sell it on the market for a market price in order to accept your loan. Anything else is a violation of their duty to their stockholders and bondholders, as well as a violation of federal banking regulations. Since they can't do this, it shouldn't surprise anyone that most lenders can't touch a restricted sale property.

Caveat Emptor

Original article here

A lot of advice gets given to choose a "top producing" agent. These highly corporate offices may have the name of an individual agent attached to them, but they are in fact transaction mills. They have done pretty well for themselves through the downturn by securing a lot of listings and waiting for something to happen. All they have to do is wait long enough, cut the price enough, and they will eventually get an offer on a property. If yours takes six months to sell, in the meantime they have sold 18 others that finally decided to cut the price enough to move. It's not that they did any work besides "sign in the yard, entry in MLS" to move the property, but their production makes it look like they're good to the consumer who asks the easy question, "How much real estate did you sell?" rather than the more important "How well did you do for your individual clients?"

These agencies did well through the downturn by marketing themselves to lenders for selling property or advertising themselves as "short sale specialists." It's not like they did anything hard. Lender gets tired enough of carrying the property or close to the regulatory triggers for selling a property, they'll start taking ridiculously low offers. And their "short sale specialist" is more in the nature of "throw 100 transactions at the lenders. We'll close some of them." In case you didn't understand me, this is the old "Throw enough mud, and some will stick." Statistics on failed listings are not generally kept, and where they are, they usually excuse the agent for "lender wouldn't approve short sale". Sometimes the lender isn't realistic when they refuse the short sale - but more often it's that these nitwits wouldn't do the real work involved. Nor are there any readily available statistics on how well they did for individuals, rather than how many sales they produced or what dollar volume. The corporate transaction mills want that information buried as deep as possible because they're horrid at achieving what should be their most important goal: serving the customer.

I have had more experience than I would like in dealing with these offices. Let me tell some experiences I've had very recently. I represent far more buyers than sellers, so they're going to be from a buyer's agent prospective:

I got to one property to show it, and the lockbox was open and the key was gone. I called the listing agent's number - just a courtesy call of the sort I'd like to have if this happened to one of my listings. I got their office phone tree instead - and no ability to get a live person on the line. Yes, it was still available, but all I could do was leave a message and hope. Actually, something similar has happened at least six times in the last couple of months: A problem making it difficult to show the property, or something that was a real issue with the property that had happened, and no way to get in touch with a live person to fix it. Once, I got there and the door was standing open and there was no way to lock it without the key that wasn't there, and neither the agent nor their office answered (I called the police switchboard after them). Okay, no problem seeing the property, but the ability to secure it afterwards was completely missing. You want this to happen to your property?

Upon several occasions in the last couple of months, I and my clients have made very good, strong offers - and the response we got was like dropping them into a black hole. In other words, none. I tried calling - phone tree of doom again. Leave messages every day for a week - no callback. I tried emailing several times - no response. I tried another fax asking if they'd gotten the offer - nothing there either. At least two of these properties have since had a closed sale for less than the amount my clients offered, both of them curiously enough with the listing agency representing the buyer as well, resulting in them getting both halves of the commission. Great for those buyers and especially for the agency; not so great for the sellers whose fiduciary duty that agency failed in. I strongly advise against allowing your listing agent to represent the buyer as well, or at least not paying them both halves of the commission when they do. It's a fundamental conflict of interest to have a dual agency situation, disclosed or not. Nonetheless, the real point of this is that all of these agencies were too busy to respond to good, strong offers.

On several occasions, I've been told it was a multiple offer situation. That's fine. But rather than individual negotiation and counter-offers, I and my clients are given the incredibly weak line to "Send your best and highest offer" That is to save the agent and their assistant working time, not to get their client the best deal. To get the best results, you negotiate individually with at least the strongest three to five offers. For the others, who are way below market, the minimum response is a generic counter that tells them where the market for this property really is. Sure, some of them are likely to be low-balling with every intention of walking away if they can't get the property for that offer. But there's always the possibility that they will return a competitive offer if they're given more guidance. An agent who won't or can't spend fifteen minutes generating such a counter is not doing the whole job, let alone the agent who doesn't do individual negotiations. Yeah, the property will likely sell. But not for the best possible price. And it's amazing how many of these lazy agent "best and highest offer" deals fall through, putting the owner right back to square one with sixty days on market - and that sixty days on the time counter means that property will sell for less than it could have.

Short sales are even worse than that. You make an offer for a short sale to corporate agents, and they usually intentionally don't respond. The last four I've made were all intentionally not responded to. Instead they just forward all of the offers to the lender. The black hole situation again, even worse because there's not going to be a response for six to twelve weeks. By that time, those buyers are going to have something else and the offers will be useless. Particularly the good offers. They want a property. You can negotiate with these potential buyers, choose one and give them a reason to stay with your property, or you can throw mud at the wall. Actually, it's more like throwing "no stick" mud at a Teflon wall - because it's not going to stick. Furthermore, the back and forth of negotiations with multiple prospective buyers is highly useful and likely to help result in an acceptance. This makes both the seller and the buyer happy. Yes, the chosen buyer can still walk away in the meantime - but you've still got the contact information on all the others. In other words, you're no worse off by picking one particular offer, and you're likely to be better because there's a much higher probability of that best offer sticking around. Of course, not accepting any particular offer means that the property isn't marked "pending" and it isn't marked "offer accepted pending lender approval of short sale" which means the listing brokerage can still use it to troll for buyer clients and a way to make themselves more money by selling those clients something else. Amazing how and why that that works, isn't it? But the listing agent has the responsibility to do what is best for the clients, not themselves. I think this trick violates the fair and honest dealing duty to those buyers as well, but there isn't any real way to argue it doesn't violate fiduciary responsibility to the listing client.

The point I'm making is that while these corporate agents do sell a lot of real estate, and they certainly make an awful lot of money, they're pathetically bad choices for getting the best possible price, let alone quickest sale, and you can kiss actual good service right off your list. There are equivalent issues on the buyer's agency side as well - agents too busy to show property, poor negotiators, high pressure tactics where they are never appropriate. How can you know the agent isn't too busy to give you enough attention?

Personally, I use a points system. A loan is four points from application to funding, a buyer client is fifteen from when they start looking to close of escrow, a listing is twenty points in preparation for market, ten once the initial work is done and the property actually hits MLS through close of escrow. Negotiating multiple offers is two points per offer while negotiations are in process, and is the only thing that can possibly send me "over the limit" involuntarily. I'm only allowed 100 total points; I don't accept business that would drive me over that total (Yes, I've done 100 loans in one month. But loans have become progressively more complicated since then, especially in the last few months, and it's not fair to prospective clients to pretend otherwise). I'm not claiming there's anything perfect or sacred about my system, and agents with more people working in their unit can certainly handle more business than I can with just a contract loan processor and a shared transaction coordinator, neither of which are allowed to talk to my clients. The point is that I have such a limiting system in place; I can and have told people "I cannot work with you right now because it would mean I cannot devote enough attention to everyone else I'm already working with." I also offer them a choice of referrals or waiting.

Talk to most agents and brokerages about such a system or threshold, and they look at you like you're from another planet. Asking prospective agents and loan officers about whether they have such a system and how it works is a good test. Not that the existence of such a system means they're a great agent, but the absence is a real red flag. They can keep hiring office people all they want, but the office is not where the real work takes place. The real work all involves the agent themselves, and there are only so many hours in the day. And if they try and fob you off on some "associate agent" of theirs (in other words, they take a big cut of what that agent makes in return for feeding them business) consider that "associate agent" as if they were who is going to be responsible for your transaction - because they are. That "big name agent" has already done everything they're likely to when they introduce you to their associate.

What else can consumers do? Call their prospective listing agent and deal with their phone tree as if you were an agent with an offer, or even just an agent calling with a concern about the property. If you can't get through to a live person, that's a problem. If you leave a message and nobody calls you back within one business day at the most; that's grounds enough to remove them consideration totally. Pretend you're an agent, at least until you get someone on the phone. For buyer's agents, it's hard to see evidence of their responsiveness ahead of time, but so long as you limit yourself to non-exclusive buyer's agency contracts, you can fire agents who don't measure up at any time - making it a situation where you literally can't lose. Listing contracts, however, by their nature, need to be exclusive right to sell to get the best results. This means you can give any buyer's agent a chance and lose nothing except a little time; for a listing agent you need to be careful about due diligence ahead of time.

As this article should make very clear, there is a major difference between asking the question "Who sells the most real estate?" and "Who sells real estate for the best possible price, in the quickest time, and deals with issues promptly so I get the best results?" You want to make certain you're asking the right question, because if you ask the wrong question, you get the wrong answer and choose the wrong agent.

Caveat Emptor

Original article here

Hi, Dan!
I just came across your website and you strike me as the type of guy who has answers for our situation:

My husband and I built our home 2.5 years ago. We took out a second mortgage last year which brought us up to financing basically 100% of the value of our home. We owe a total of about $305,000 on the home, and even though it was appraised for around $305-310K. if we sell, we have been told we won't get a price anywhere near that, because it is not in a development.

Do you have any suggestions, comments, opinions...which could help us out. We would really like to relocate closer to my brother out in the DELETED area-but we seem to be stuck right where we are given the circumstances-are we?

Gee, around here custom homes usually command a premium over cookie cutters, other things being equal. Not necessarily a huge premium, but a premium. Especially since they typically don't have homeowner's association, which most people do not want.

Nonetheless, I'm hesitant to second guess the agents on the scene when I have zero personal knowledge of your local market. You basically have four options: Stay where you are, rent it out, default, or sell.

You don't state whether you are having difficulty affording the payments, or whether you've got one sort or another of unsustainable mortgage. If you're not having difficulty affording the payments and you're in a sustainable loan, there's no need to do anything. If you're at or close to 100% financing, and you need to refinance, when I originally wrote this you were looking at right around 6.25%, plus PMI of about 1% until your equity improves. It would have been better if lenders were giving second mortgages above 90% financing, but that's not happening right now. I'm going to presume that all refinanced, you'd be looking at a balance of $310,000, which may be a little low. Payment worked out to $1909 on a thirty year fixed rate loan, fully amortized, plus PMI of $258 on the traditional program when I originally wrote this. Rates are much lower at this update, but the principle remains the same. Lenders are not loaning above 90% on a property refinance unless they're already on the hook for the loan and it improves your likelihood of being able to repay the loan.

If your income situation is cramped, you may be able to get "interest only" for five years (or longer!) at a slightly higher rate. If you do an interest only loan, that would be a payment of about $1680. although you need to be aware before you do it that it is a calculated risk. I don't know your market, but mine is preparing to recover and I don't see anywhere not recovering within five years. Nonetheless, getting an interest only loan sets up a deadline for doing something again, and your market isn't under your control or anyone else's. Furthermore, I don't think we'll see rates like today's again, so we're really talking "mandatory sale within five years" unless you start making a whole lot more money. I think it's a reasonable bet given that you already own the property, but it remains a gamble.

Another word on the viability of refinancing: It hinges upon your ability to either get an appraisal that covers the amount of the new loan balance, or to come up with the difference in cash. It is possible to refinance more than the value of the property through the temporary Fannie and Freddie programs, but there are several sticking points that could prevent it if someone decides to be uncooperative. If you're looking to refinance because you can't afford your mortgage, refinancing more than the value of the property is unlikely to make it more affordable. It's probably better to consider another option.

You could rent the property out. I don't know what rentals are like in your area, but if you can get enough rent to cover the monthly expenses (mortgage, taxes, insurance, and an allowance for upkeep and management), that becomes a possibility. If you can cover the difference, that's fine, also. Remember, I think the markets are going to do well once they've digested the hairball caused by the speculative practices of buying with unsustainable mortgages and the loan investors get over their institutional paranoia. If you're short $200 per month and in five years you can sell for $50,000 more, that's an investment I'd make. The question, unanswerable by anyone at this point in time, is where your local market will be in five years. $50,000 is about 16% of $310,000. Here in San Diego, I'd have leaped at that - and been wrong, thanks to our marvelous economic overlords in government ruining the economy. In your area, I don't know. In either case, it's a risk, and you need someone who knows more about your market than I do to advise you on the probabilities.

You could just default. I'm not recommending it. It's a bad option, but it is there. If you want to buy, or even rent, after your relocation, your credit will be hosed. I don't know your state law on deficiency judgments, but that's a concern. Under this same heading is deed in lieu of foreclosure, with most of the same problems. The reason people are willing to grant credit is that we're legal adults, and supposedly responsible. If you give them evidence that you're not, you may not pay for it in dollars directly, but you will pay for it, and typically the interest rate is usurious.

Or you could sell, most likely a short payoff assuming what you've been told is correct. It costs money to sell a property, more so in a buyer's market. Figure it'll cost you about 8 percent of whatever the gross sale price is to get the property sold. Using this as the basis for an estimate, even if you sold for $310,000, that'd only net you about $285,000, so you'd be short roughly $25,000. If the lender forgives the difference, you'll likely get a 1099 love note adding it to your taxable income. If they don't, you could be sitting on a deficiency judgment for the difference. I don't know your state's law, but around here, if someone was liable for the difference, I'd suggest saving the legal fees by agreeing to sign a promissory note. If you fight, you're likely to be wasting the money as well as digging yourself in deeper. They're going to win, and they'll almost certainly get to add their legal fees to what you owe. So unless you really like subsidizing the legal profession, if you're in the situation, I'd suggest considering agreeing to pay without a judgment. Talk to a lawyer in your state about what the law says about your situation, of course, as spending the money for a half hour of a lawyer's time is likely to be considerably less than $25,000 plus interest.

If you accept such a promissory note, I actually have no idea what the rate will be, but even if it's 18 percent, you're still talking about owing only about a twelfth of what you do now. I'm not saying it'll be easy, but you can pay it off in a few years, and it's probably cheaper than the costs of defaulting, even though it does hit your debt to income ratio. People choose defaulting and bankruptcy because it's easier now, but when you go through the total costs rather than just the immediate cash, you're likely to come to a different answer.

Caveat Emptor

Original article here

pfadvice talks about debunking a money myth and perpetuates one of his own. He took issue with someone refinancing to lower their monthly payment, insisting instead that the term of the loan was all important.

His point is understandable in that because folks tend to buy more house than they can really afford, they also tend to obsess about that monthly payment. The solution to this is simple to describe but it takes someone with more savvy and willpower than most to bring it off: don't buy more house than you can afford.

Actually, there is nothing that is all important, but if I had to pick thing as most important, it would be the tradeoff between interest rate and cost and type of loan. This is always a tradeoff. They're not going to give you a thirty year fixed rate loan a full percent below par for the same price as loan that's adjustable on monthly basis right from the get-go.

This tradeoff varies from lender to lender and also varies over time. Nor is it the same for borrowers with different credit, equity, or income situations, but it is always there. For a given borrower at a given time, any program which you can qualify for will have the rate/cost tradeoff built in. If you want them to pay your closing costs, you're going to have to accept a higher rate than if you're willing to pay two points. It is the relationship between whatever loan you have now, and the loans that are available to you, that determines whether it's a good idea to refinance. Focus on the real cost of the money: The interest rate, which determines what the cost of borrowing the money will really be, and the total upfront cost to get that loan, which breaks down into points and closing costs.

If you have a long history of keeping every mortgage loan you take out five years, ten years, or longer, then perhaps it might make sense for you to take out a thirty year fixed rate loan and pay some points. To illustrate, I'm going to pull a table out of an old article of mine because I'm too lazy to do a new one.

I'm intentionally using an old table, and rates are different now. The point is to examine your current loan in light of what's available to you now, and determine whether there's a loan that's worth the cost of doing. Maybe your equity situation has improved. Maybe your creditworthiness has improved. It's possible that something has deteriorated, and the loans that are available also vary over time with the state of the economy. If you've got a prepayment penalty that hasn't expired, remember to add the cost of getting out of that loan to the cost of your refinance, because it certainly changes the computations by adding a large previously sunk cost to the cost of your new loan. Whatever it is, the loans available to you now will be the total result of all of how all of the factors in the situation have changed.

I'm going to keep the example simple, assuming no prepayment penalties, and the third column is cost of discount points (if positive) or how much money you would have gotten in rebate (if negative), assuming the $270,000 loan I usually use. Add this to normal closing costs of about $3400 to arrive at the cost of your loan, thus:

(I had to break this table into two parts to get it to display correctly)

In the next tables, I've modified the results based upon some real world considerations. Point of fact, it's rare to actually get the rebate (typically, the loan provider will pocket anything above what pays your costs), and so I've zeroed out those costs. You take a higher rate, you're just out the extra monthly interest. The fourth column is your new balance, the fifth is your monthly payment. For the second table, I've duplicated rate and new balance for the first two columns, the third is your first month's interest charge (note that this will decrease in subsequent months), the fourth is how much you save per month by having this rate, and the fifth and final column is how long in months it will take you to recover your closing cost via your interest savings as opposed to the cost of the 6.375% loan, which cost a grand total of $25 (actually, this number will be slightly high, as interest savings will increase slowly, as lower rate loans pay more principal in early years).

However, let's look at it as if your current interest rate is 7 percent. Your monthly cost of interest is $1575, there, so let's see how long it takes to actually come out ahead with these various loans.

In short, since you're recovering costs quickly, it would make sense for folks with a rate of 7 percent to refinance in this situation, no matter how long they have left on their loan. For $25 total one time cost, they can move their interest rate down to 6.375, saving them $140 plus change per month. It's very hard to make an argument that that's not worthwhile. On the other hand, I would have been somewhat leery of choosing the 5.625% loan, as more than fifty percent of everyone has refinanced or sold within two years. However, if I have a solid history of going five years between refinancing, it makes a certain amount of sense, at least considered in a vacuum. Considered in light of the real world, rates fluctuate up and down. So I tend to believe that if I don't pay very much for my rate, I'm likely to encounter a situation within a few years where I can move to a lower rate for zero, or almost zero, whereas if I paid the $8125 for the 5.625%, rates would really have to fall a lot before I can improve my situation.

Do not make the mistake of thinking that the remaining term of the loan is more important than it is. You now have (assuming you took the 6.375% loan) $140 more per month in your pocket. Your payment will go down by more than that, but you're actually saving $140 per month in interest. It's up to you how you want to spend it. If you want to spend it paying down your loan more quickly, you can do that (providing you don't trigger a prepayment penalty, of course - but the loans I quoted didn't have one). Let's say you were two years into your previous loan. Your monthly payment was $1835.00. If you keep making that payment, you'll be done in 288 months; 48 months or 4 full years earlier than you would have been done under the original loan. So long as you don't trigger a prepayment penalty, you can always pay your loan down faster. Just write the check for the extra dollars and tell the lender that it's extra principal you're paying. I haven't made just the minimum payment since the first time I refinanced.

Many folks focus in on the minimum payment. By doing this, you make the lenders very happy, and likely your credit card companies as well. Not to mention that you are meat on the table for every unethical loan provider out there. It is critical to have a payment that you can afford to make every month, and make on time. But once you have that detail taken care of, look at your interest charges and how long you're likely to keep the loan, not the minimum payment or the term of the loan.

Caveat Emptor

Original here

One of the things I'm seeing more of in MLS listings and developer advertising, among other places, is the phrase "$X in closing cost credit (or "$X in free builder upgrades") given for using preferred lender"

Sounds like a bargain, right? Just use their lender and you get this multi-thousand dollar credit. After all, "All Mortgage Money Comes From The Same Place!" Free money, right?

Well possibly, but not very likely. What most companies are looking to do with this advertising is give people a reason not to shop around. They hope that because most people think that "All Mortgage Money Comes From The Same Place", the average customer will just stay there to apply for a loan. Many builders and conversion companies will throw roadblocks in your way if you try to use another lender. They cannot legally require you to use their loan company (at least not in California), but they can make it exceedingly difficult to go elsewhere. I've been told by builder's representatives on two occasions that I was wasting my time with a loan, because "If they don't use our lender, they won't get the property!" despite already having a signed purchase agreement. Roadblocks take all sorts of turns. They won't let the appraiser in. They won't cooperate with requests for information, without which the other loan is going nowhere. And so on and so forth. By the way, this behavior is illegal under RESPA. They're just betting you won't do what it takes to complain, not to mention that even if you do complain you're still not likely to get the house you wanted - the genesis for all of this.

I should mention that the concept of giving you incentives (metaphorical carrots) instead of metaphorical sticks is legal, ethical, and highly desirable as opposed to the behavior in the previous paragraph. Just remember they've got to pay for those incentives somehow. Builders are not charities. You still want to shop your loan around based upon the bottom line to you.

The builders wouldn't give those incentives to use their lender, or throw roadblocks in your way when they're trying to sell you a property, if they weren't making more money with the loan. Quite often, they're making more money on the loan than they are from the sale. Put you into a loan half a percent or more above market, stick a three year prepayment penalty on it, and voila, anywhere from a 6 percent premium to perhaps 10 percent. To give you a comparison, around here an agent makes 2.5 to 3 percent from a transaction, and I do my loans on a margin that varies from under half a point to a point and a half, depending upon difficulty and size, and discounted from that if I'm also getting an agency commission on a purchase. But the average consumer is distracted by these "free" upgrades or closing costs that they don't realize how badly they've been raked over the coals. If I can get you that $400,000 loan half a percent cheaper and with no prepayment penalty, I'm saving you $2000 per year for certain, and very likely about $12,000 on the prepayment penalty.

Furthermore, on some of the builder's loans I've analyzed, they're getting you a rate that would carry a point and a half retail rebate or more, even without the prepayment penalty. This means on a $400,000 loan at that rate, the lender would be paying you a $6000 incentive to do that loan, more than covering normal closing costs. But this is comparatively rare. Usually, they're earning some or all of the secondary market premium directly. Have no fear, that builder is doing quite well for having loaned you that money.

What can an average person do about this sort of thing? As I've said before, builders often throw roadblocks in the way of outside lenders, and there's not a lot that you or anyone else can do about this fact.

There is a bill in the California legislature that wants to ban developers from being the lender also. This is a "quick fix" that won't fix anything; in fact, it will hurt. They can bring in outside lenders who agree to pay them under the table, or even on out in the open for certain services. Net benefit: Zero. However, this bill would also make it more difficult for buyers to order custom upgrades and finance them into the cost of the purchase, as often happens now and can be highly beneficial to the consumer who goes in with their eyes open. I wouldn't be surprised if it was the developers themselves pushing the ban.

Many people want brand new homes if they can get them. Given the realities about Mello-Roos and how prevalent homeowner's associations are in more recent developments, I'm not certain I understand this. It's one thing to deal with Mrs. Grundy when you're all cheek by jowl in a condominium high rise. It quite another thing to deal with her complaints because you left your garage door open ten minutes longer than the rules say, you want to paint your detached home a couple shades darker or lighter than everyone else, or whatever's got her dander up today.

I do have a trick or two up my sleeve for when I'm a buyer's agent in new developments. It's my job to outmaneuver the selling agents the builder has on staff (who tend to be heavy hitting salesfolk, which is not the same thing as the stronger agent). But they are dependent on some things that change from transaction to transaction, so I can't really describe them in any kind of universal terms. Writing an offer contingent upon an outside loan has its limits. Builders who throw roadblocks have that one wired; they wait for the contingency to expire at which point they've either got your deposit or your loan business as you are so desperate not to lose your deposit you'll do almost anything, particularly since most folks don't understand how much that loan is really likely to cost them.

Caveat Emptor

Original here

I just got a google search where the question asked was "What if the mortgage is recorded in the wrong county?"

I've never actually seen this (and San Diego County, once upon a time, included what is now Riverside, Imperial and San Bernardino counties), but if it's the mortgage on your loan, no big deal. You should get a copy of the recorded trust deed, and the county recorder's stamp should tell you the county it was recorded in. You probably want to record it in your own county, as when the document is scanned in both recorder's stamps will appear, thus making it obvious that these two documents are one and the same. There may be better ways to deal with it. Since the error was (everywhere I've ever worked) your title company's, they should be willing to repair it to eliminate the cloud on your title. If and when you refinance this loan or sell the property, make sure that the Reconveyance is recorded in both counties, and references both recordings.

More dangerous is the issue of what if it's the previous owner's loan that was wrongly recorded. The previous owner is obviously no longer making payments on the property. The lender may or may not have been paid off properly; if they were there may not be any difficulties. It could just disappear into some metaphorical black hole of things that weren't done right and were never corrected, but just don't matter because everybody's happy and nobody does anything to rock the boat. However, unlike black holes in astronomy, things do come back out of these sorts of black holes.

If the previous lender was not paid off correctly, or if they were paid but something causes it to not process correctly, they've got a claim on your property, and because the usual title search that is done is county-based, it won't show up in a regular title search. Let's face it, property in County A usually stays right where it's always been, in County A. There is no reason except error for it to be recorded in County B. Therefore, the title company almost certainly would not catch it when they did a search for documents affecting the property in County A; it would be a rare and lucky title examiner who caught it.

In some states, they still don't use title insurance, merely attorneys examining the state of title. When the previous owner's lender sues you, you're going to have to turn around and sue that attorney who did your title examination for negligence, who is then going to have to turn around and sue whoever recorded the documents wrong. If it's a small attorney's office and they've since gone out of business, best of luck and let me know how it all turns out, but the sharks are going to be circling for years on this one, and the only sure winners are the lawyers.

In most states, however, the concept of title insurance has become de rigeur. Here in California, lenders don't lend the money without a valid policy of title insurance involved.

Let's stop here for a moment and clarify a few things. When we're talking about title insurance, there are, in general, two separate title insurance policies in effect. When you bought the property, you required the previous owner to buy you a policy of title insurance as an assurance that they were the actual owners. By and large, it can only be purchased at the same time you purchase your property. This policy remains in effect as long as you or your heirs own the property. The first Title Company, which became Commonwealth Land Title, was started in 1853, and there are likely insured properties from the 19th century still covered. If you don't know who your title insurance company is, you should. Most places, the company and the order of title insurance are on the grant deed.

The other policy of title insurance is a lender's policy of title insurance. This insures your lender against loss on that particular loan due to title defects, and when the loan is paid off (either because the property is sold, refinanced, or that rare property where the people now own it free and clear), it's over and done with. Let's face it, most people are not going to continue to make payments if they lose the property. If you take out a new loan, your new lender will require a new policy of title insurance. You pay but they are the ones insured by the policy. Their money; they set the terms for lending it out.

To get back to the situation, what happens when you order title insurance is that a searcher and/or an examiner go out and find all of the documents they can find that are relevant to the title of the property. These days, they typically perform an automated search, and sometimes documents are indexed and cross referenced incorrectly and therefore they do not show up when they should. Nonetheless, the title company takes this list of documents and tells you about known issues with the title, and then basically says "We will sell you a policy of title insurance that covers everything else." This document is variously known as a Preliminary Report, PR, or Commitment.

It shouldn't take a genius to figure out why you want a policy of title insurance. Around here, the average single family residence goes for somewhere on the high side of $500,000. You're committing a half million dollars of your money on the representation that Joe Blow owns the property and that if you give him that half a million, he'll give you valid title. I would never consider buying property without an owner's policy of title insurance. Even with the best will in the world and my best friend whose family has owned it since the stone age, all kinds of issues really do crop up (Another agent in the office had a client who bought a property via an uninsured transfer - and there was an unrecorded tax lien. Ouch. Say bye-bye to your investment). The lenders are the same way. No lender's policy, no loan.

So what happens when this old mortgage document is uncovered? Well, that's one of the hundreds of thousands of reasons why you have that policy of title insurance. You go to your title company and say, "I have a claim." Since they missed that document in their search, they usually pay off the loan (there are other possibilities). After all, if they hadn't missed it, it would have been taken care of before Joe Blow got paid for the property and split to the Bahamas.

None of this considers the possibility of fraud, among many other possibilities, but those are all beyond the scope of this article.

So when buying, insist that your seller provide you with a policy of title insurance. When selling, it really isn't out of line for your buyer to require it - it shows that you have a serious buyer. Some places may have the buyer purchasing his own policy, but most places that use title insurance, the seller pays for the owner's policy out of the proceeds. Of course, anytime there is a loan done on the property, the lender is going to require you pay for a lender's policy. If the quotes you are given do not include this, be certain to ask why. There really isn't a good reason for not including that quote - they are going to require it, you are going to pay it. Better to know about it ahead of time, don't you think? That way you can make a fair, accurate comparison between the loans you are shopping.

Caveat Emptor

originally here

How do I keep my home after filing bankruptcy. The Mortgage company wants to foreclose?

I want to know if there is anyway to keep the home even after filing chapter 7 bankruptcy. I want to know if there is any program that can assist me.

Bankruptcy does not effect your current mortgage. The only thing that will cause you to go into foreclosure is not keeping up your mortgage payments, period.

You don't have to include your mortgage in chapter 7, and it's not usually a good idea to do so if you have significant equity. Leave it out, and you even have a mechanism to restore your credit already in place, while limiting the damage the bankruptcy does. The larger the percentage of your lines of credit you include, the worse the hit is. Furthermore, if you have an open mortgage when your bankruptcy concludes, you're establishing post bankruptcy credit history, the best way to rebuild your credit. The poor folks who have to go get a new credit card get dinged even harder post bankruptcy for each turndown, so that each successive application lowers the probability their next one will be accepted. Positive feedback to a negative end. Vicious cycle.

Talk with a real lawyer in your state to be certain. I'm not a lawyer, and I don't even play one on TV. However, my understanding is that Mortgages are debt secured by a specific asset - the property. Keep up the payments on that (or bring it current if you haven't) and general creditors with unsecured debt cannot touch that asset in most states and most situations. There are exceptions, but owner occupied residential real estate is one of the most protected assets there is. The fact that it is a loan secured by a specific asset can also be used to avoid compromising the mortgage holder's interest.

The upshot is that if you make your payments on the property, and keep them current, quite often it can sail through a bankruptcy untouched. People will often let everything else go to keep making the payments on their mortgage - one of the reasons why mortgage rates are so favorable, compared to unsecured credit. Another issue I should mention is that while A paper does care about non-mortgage late payments, subprime generally doesn't. As long as you keep your mortgage payments current, you can often secure a loan on surprisingly good terms, even though it'll likely have a prepayment penalty. So keep your mortgage current if you can.

None of this is intended to encourage bankruptcy. But if you're heading for bankruptcy anyway, you want to limit the damage. The more lines of credit you can keep intact through the process, the better off you are in general. If you have six open lines of credit and only need to discharge one, that's much better for you than if you have to discharge all six. Your mortgage is the most important of these for restoring future credit and your own personal residence is protected from creditors more strongly than any other asset you may have. If you can keep that one debt current, it's usually making the best of a bad situation to do so, even if you have to let everything else go.

Caveat Emptor

Original article here

The answer is yes.

This situation is called a short sale. As with everything else pertaining to real estate, there are potential upsides and downsides. First of all, lenders in short sale situations often demand agents reduce their commission, so the agents are not likely to start from a discounted or low end commission. If it takes $12,000 to break even on a full service transaction, and you have to reduce your pay to make the sale happen, you're going to want more than $12,000 before the reduction. Discounters usually demand their money up front, but discounters aren't selling many properties in this sort of market. Along these same lines, it's a good idea to offer a larger than average commission to the buyer's agent. The average buyer's agent sees a short sale, and they say a transaction that takes twice as long as average, and that they have to accept reduced commission for while handling a whole lot of additional concerns. It makes the loan officer juggle rate locks and possibly submit multiple sets of paperwork. It makes the escrow officer juggle the entire transaction schedule, usually several times. Sometimes, the transaction approval with the seller's lender takes so long that an inspection or appraisal has to be re-done in order to satisfy the buyer's lender. It's tempting to just avoid your property entirely. With short sales, everybody marches to the beat of the seller's lender, which means I (as the buyer's agent or loan officer) have a whole slew of things that can go wrong beyond my ability to control, any of which results in my client ending up unhappy by costing them more money. Unhappy clients are poison to my business, no matter how great the deal they actually got was. Furthermore, I'm a lot more willing to not worry about my own pocketbook than many other agents.

The person who drives this whole process, and makes it happen or fails to make it happen, is the listing agent. So if I see anything that tells me that listing agent is a bozo, or doesn't have their act together, I'm going to recommend that my buyer clients pass on the property, and I'm going to tell them precisely why. Pricing, staging, marketing, it's all got to have the fingerprints of a professional. If that listing agent has overpriced the property, if they have allowed the owner to leave excessive clutter, if they're saying things about the property that are not borne out when I go to view the property, I'm going to spell it out to my buyer clients why it's a bad idea to make an offer. I won't even look at "For Sale By Owner" properties trying to execute a short sale. I know, from experience, that I'm wasting my time, and my buyer client's as well. Lender approval of the short sale is not going to happen without an expert who is motivated to get the best possible price. You, as the owner, don't want to turn off either the buyers or their agents. So you want a listing agent that's demonstrably up to the task.

Now just because the lender accepts a short payoff in satisfaction of the debt, doesn't mean that all is forgiven. In some circumstances, they may go so far as to eat the loss entirely. I'm not certain I've ever seen such a case. They may report the loan as being paid satisfactorily to the credit bureaus, avoiding further hits to your credit, but they've just taken a loss. They want to deduct that loss from the earnings, as tax law permits them to do. But in order to do this with the IRS, they pretty much need to send the borrower they forgave a form 1099, reporting income from forgiveness of debt. Since this is taxable income under current law, expect to pay income taxes on the shortfall. The temporary moratorium on that ended at the beginning of 2017.

For those agents who promise that the lender will forgive your debt completely, it really isn't under their control. You're trying to get the lender to forgive many thousands of dollars in money you owe them, plus you want them not to hit you with a debt forgiveness 1099, so they end up paying the taxes as well? Remember that not going through the entire foreclosure process is a benefit to the current owner as well as the lender, and there may be the possibility of a deficiency judgment as well. I'd be extremely skeptical of any promise to get you out of two or all three. If someone comes to me for a short sale, I can promise to try and I might even be able to do it sometimes, but I can't promise to deliver. Nor can anyone else - it's not under our control. That's a cold hard fact.

So even though you're not really paying the listing or buyer's agent directly, as you would be in most normal transactions, you can expect to end up paying the tax upon whatever it is they end up making. After all, $10,000 paid to the listing agent and $10,000 paid the the buyer's agent means $20,000 that didn't go to your lender. As I've said before, that lender is going to want to see real evidence of poverty before they accept the short payoff. Getting short payoffs approved is not about "it's difficult!" or "I don't wanna!", it's about showing that there isn't any way that nets the lender more money. If it looks like they'll lose less if they foreclose, expect the lender to go the foreclosure route. They're not going to accept a short sale just because getting them their money would be uncomfortable for you, financially. You are (or actually, your listing agent is) going to have to persuade them that all of the other alternatives result in them losing more money than approving the short sale.

Agent commissions mean you'll owe more money in taxes, or deficiency judgment (if applicable) than without an agent, but that's only considered in isolation. If they convince a buyer's agent to show it to their client, if that results in a client being willing to make a larger offer, or an earlier one, if they negotiate the offering price upwards, and most especially if they get the lender to quickly approve a short payoff rather than dragging it out, or going through that whole dismal foreclosure process, all of these mean you ended up owing less money than you would have without that agent - precisely analogous to any number of research studies and studies that show that people who pay full service agents end up with more money in their pocket, even after paying the agent. It's very easy to look at the HUD-1 and ask yourself what an agent could possibly have done that's worth 3 percent of the sales price. There's no way to show or track, on an individual sale basis, the added value that the agent brought to the transaction. Those numbers just don't show up on the individual HUD-1, because there's nothing that documents them. On the other hand, they've been documented any number of times in the aggregate. The bottom line is that if the lender ends up losing less money, you end up with less in the way of potential tax liabilities, less in the way of judgments against you, and less damage to your long term financial picture, not to mention that the lender comes away better and the agent gets paid. If that's not the perfect picture of win-win-win, what is?

One last thing before I close: this presumes you have some reason why you need to sell the property. The loan market being what it is and my local market being what it is, I am straightforwardly advising people not to list their property for sale if they have a viable alternative. It may be a great time to buy, but it is a rotten time to sell. If you can afford the payments, if you don't need out from under the mortgage as quickly as possible - in short, if your situation is sustainable - there's no need to do anything, and you'll be able to sell on better terms when there aren't forty sellers per qualified buyer in the market. But sellers will still come out better if they can wait a while before selling. For buyers, property prices are not going to get any cheaper.

Caveat Emptor

Original article here

Every so often, I write about professional responsibility.

Every month I get a couple of magazines because I'm a Realtor. There was a letter from someone who was proud of the fact that he had never asked someone if they could afford the property, despite having been in the business for decades. Essentially, this reduces to, "I'm in this for the commission check, and what happens after that is none of my business."

Contrast this with investing in the stock and bond markets, where the SEC and NASD have mandated an entire slew of regulations and practices. Before any financial licensee accepts your money for investment, he or she is obligated to ask enough questions about your situation to have a reasonable basis to believe the investment they recommend is appropriate. A large proportion of financial licensees breach this, but the requirements are there, and upon those occasions where the investment turns out not to have been so well advised, they are both civilly and criminally liable. They are supposed to question you about reserves, and a will, and life insurance. Occupation, income, necessary expenses. They're supposed to encourage disability insurance and long term care insurance, where appropriate. The list of questions goes on and on, and if the questions don't get asked, those advisers who fail to ask are going to hear about it. The penalties start with fines that are larger than whatever loss the client may have taken, and include permanent loss of license, jail time, and being a convicted felon for the rest of your life. Among the regulations is a very stiff requirement that the money being invested cannot be borrowed except under strictly circumscribed situations (Margin accounts being the only example I'm aware of).

The idea that you can encourage someone to make a half million dollar investment with borrowed money, get paid thousands to tens of thousands of dollars for it, and have less responsibility than the guy who makes $1.25 signing someone up for mutual funds with $100 they saved out of their pay this month, is preposterous. It's wishful thinking, and lying to the The Guy In The Glass. It is completely unacceptable if those in my profession want to be treated as anything other than snake oil salespersons. Every time someone makes an easy property sale, or an easy loan sale, without ascertaining that they are, in fact, putting the person into a better situation, the fall-out down the line hurts every single one of us in the profession. In fact, the prevalence of discount 'solutions' in real estate can largely be attributed to those unethical members of the profession who have failed to take the real interests of the consumer into account. When someone figures that they likely won't get the sort of real advantages that accrue from using someone knowledgeable and ethical anyway, they don't see themselves as having given up anything when they go the cheaper route.

The absolute worst case from someone investing $1000 in mutual funds is they lose that $1000, which hurts their ego and their pocketbook, but if they had to have that money to live on, they shouldn't have invested it, and the person who solicited that investment will need to answer to the SEC, the NASD, and the criminal prosecutors for their area. As many people found out the hard way in the last ten years, that isn't close to the worst case for someone put into a property they couldn't afford. Those people are finding themselves with their credit ruined, owing thousands of dollars in taxes, and in some cases homeless without anyone willing to rent to them. Life savings may have been completely depleted in a vain attempt to keep the property, and in many cases, there are deficiency judgments against them. In some cases, where a Realtor or loan officer had to exaggerate income in order to qualify them for the loan, they may even face criminal prosecution for fraud. It's like the difference between having your TV stolen, and having your life ruined.

Thirty years or so in the past, the listing services were reserved to Realtors, and so if you wanted access to MLS, you had to hire a Realtor. These days, due to restraint of trade suits, that's not the case. Not only are those days gone, they're not coming back (and that's a good thing, in my opinion). If all you are is MLS access and transaction facilitator, prospects are correct to pass you by in favor of the discount options that accomplish those same services far more cheaply. Every time some Realtor pleads that they're only a transaction coordinator, everyone who hears about that is driven straight into the office of the discount service providers. It's only by being more than that, and being willing to stand up in court and say that you're responsible for more than that, that you earn the full service commission. Most lawyers and all of the big chains tell their member agents not to be present for the inspection. My question is, "If you're claiming to provide knowledge or experience that the average person does not have, how can that possibly be anything other than gross and intentional negligence?" I'm there with a notepad, every time - lawyers be damned. As I have said, I'm perfectly willing to do discounter work for discounter pay - I make more money, more quickly, by limiting my responsibility and involvement to running the paperwork, even if I only make half or less of a full service commission. I never try to "upsell" those people who want discounter service on the full service package. Truth be told, it's easy for someone is used to providing full service to provide better discount service than the discounters. But if you want a client to happily pay a full service commission, you've got to convince them you've earned that money, by providing something real that they would not otherwise have.

One of the most basic of those services is as a check of their ability to afford the property. This is a major psychological stumbling block for a lot of property purchasers. Many very qualified buyers don't understand that they are qualified. Part of this is simple anxiety, part of it is so many loan officers telling people what difficult loans they are to discourage them shopping around to different providers. If you're willing to go over the numbers and tell them what kind of property they can and cannot afford, many people may buy who otherwise would not trust their ability to afford the property. If they tell me to butt out when I ask, that's their prerogative - I tried to do my duty and they absolved me of that portion of it. It's not acceptable if they want me to do the loan (a loan officer has to have the information to do the loan), but I can't force anyone to do their loan with me. Nonetheless, even the most jealous guardian of personal information will concede it was a professional necessity for me to ask. What actually reassures a lot of people, particularly in this market environment, about what they can afford is being told what they cannot afford - information I cover with everyone who'll let me. This information has lost me more than one prospect, but it reassures and solidifies the commitments of most.

If you cannot agree to find them something they want within a certain budget - purchase price budget, not monthly payment - you need to sit down and have a frank discussion about where the market is, and what their budget will actually buy. If their budget won't stretch to what they want, where they want to live, it's part of earning that full service commission to inform them of that fact. If they're going to have to settle for a fixer, a lesser property, or whatever in order to live within that budget, well, managing client expectations is part of every job that has clients. Unless you're personally going to extend them a loan they can really afford in order to buy the property, this means working within what they can afford with sustainable loans at current market rates that they can actually qualify for, and explaining what they can afford if their eyes are bigger than their wallet. If I ask and they tell me that they don't want to share the information with me, it's a free country and that is their right. It may be hurting themselves by dismantling one of the checkpoints which is there to keep them out of trouble, but it remains their right. I'm fine with them refusing because it means I don't have to do some of the work I have to do for other clients, and have less legal responsibility, to boot. It still doesn't completely absolve me - I've still got to pay attention to any other clues that may be present - but it greatly lessens what I'm responsible for. Failure to ask about their budget and financial situation is prima facie evidence of gross negligence.

Putting clients into property you know they cannot afford, or can afford only with the aid of temporary and unsustainable financing arrangements, is a violation of fiduciary duty, and willful ignorance is not an excuse. If you don't want to be responsible to a client's best interest, find another line of work, like cell phone sales, where you'll fit in just fine.

As far as being a loan officer goes, when I originally wrote this, the question was rarely "Can I get this loan through?" Much more often, it was "Should I? Am I really helping these people if I do this?" Not to mention whether or not I'm likely to end up buying the loan back from the lender. It doesn't benefit me to get a $1500 check if I were to end up paying out potentially $400,000 for a loan that went bad, any more than it benefits the client to be put into a loan where they can afford the payments now, but sure as gravity they won't be able to two or three years down the line. That has, obviously, changed somewhat, but less than you'd think.

You cannot provide service or expertise, and be compensated for it, without the associated liability. I'm not a lawyer, but that's my understanding of the law in a nutshell. Morally and ethically, there is no doubt whatsoever. Your choice as a realtor or loan officer is clear: You can try and duck out, sabotaging your business, your career, and your profession as a whole, or you can stand up and say in a loud clear voice that you are worthy of every penny of what you make, because you accept the challenge of that responsibility. Our profession is better off without the former sort, and they are unworthy of our protection. We should gladly cooperate in hounding those sorts out of the business. Not only is the profession better off without them, we'll be better off without them. On the other hand, there's room for as many of the latter sort as want to practice real estate.

Caveat Emptor

Original article here

My answer is yes.

National Association of Realtors is very proud of their sponsorship of legislation to keep lenders out of the business of real estate. They quote the legislation keeping banks out of the real estate business as being one of the reasons they're worthy of our dues money. They quote all kinds of justification, centering on the fact that they fear that the banks would "drive all the independents" out of business.

Folks, the vast majority of market share goes to a few big chains. You've heard the names. You know who they are. One belongs to one of the world's biggest financial corporations. Four of them, that most people think of as being competitors, are nothing more than different brands owned by the same company. On that scale, independents like the one I work for - thousands of brokerages nationwide, some of them in multiple locations - account for a grand total of about fifteen percent of market share, last I checked. The big national chains get the rest. They're just as corporate as the lenders, and they're anxious to protect their turf from the one group of potential competitors who have some kind of understanding of the business and otherwise low barriers to entry.

In fact, the lenders would compete primarily with the chains. Corporate marketing channels all look remarkably similar, and reach pretty much the same audience. Sure, lenders would probably take some transactions I'd otherwise get, but most of what they'd be getting would be feeding off fellow corporations. If you're the sort of idiot who believes that Major Chain Real Estate is better because you've had their television commercials tell you so, you're also part of the lender's target market.

Now, let me ask about the interests of the consumer, which are supposedly paramount. Our current system amounts to an oligopoly, controlled in fact by fewer than ten chains who can easily control the market (even if you buy the hokum that different brands owned by the same people make their own decisions, which I don't), and practices of everyone, based upon what is in the best interest of those chains. How many lenders are there? I know I've done business with dozens, and even if the current meltdown ends up shaking them out to the point that there are only a couple dozen holding corporations, that's still expanding the choices of this sort of consumer by a factor of three or more. Furthermore, because there are more corporations in the power circle, it becomes easier to get one (or a few) to break ranks, and harder to get all of them to agree to protect each other.

Let us ask about real estate which has become owned by the lender. Why should lenders lack an ability shared by every other citizen, resident, illegal alien, and even people who have never set foot in the country - the ability to sell their own property? There's no requirement for anyone else to use an agent. It may be smart to use an agent, but everyone else has the legal right to go it on their own. Why not lenders?

I'll tell you why. Because not only would lenders being able to get into the business threaten the interests of the major chains that control most real estate, but this requires lenders to pay those same firms money if they want to get the property from their bad loans sold - and they need to get the property sold.

I have to admit, I'm not exactly eager to compete with even more big corporations with huge advertising budgets. It remains the right thing to do. Right for the industry, and right for the consumers. As I've said many times before, rent-seeking is repugnant, and that's what NAR is doing - seeking rent from lenders who are not permitted to be in the business themselves.

Mortgage brokers have been competing successfully with lenders for decades, to the benefit of consumers. There's no reason real estate brokerages can't.

Caveat Emptor

Original article here

"overpriced house offer rejected what next"

(Before I get started, I want to make it clear that I am using the same definition of worth found in this article)

The first thing to consider is the seller obviously didn't feel that it was overpriced. But, just as many sellers will try to put a property on the market overpriced "just to see if we can get it", many buyers will low-ball a purchase price for the mirror image reason: "Just to see if we can get it for that." Nothing wrong with that, but it's a low percentage endeavor. Given that the sellers were unwilling to sell for that, consider the possibility that you didn't offer enough.

It's human nature to always want to blame the other side. Given the state of real estate prices here in San Diego when I originally wrote this, I have considerable sympathy for buyers. It seemed like ninety percent of those listing their property were in denial about where the market really was; that they hadn't checked out the actual sales being made. On the other hand, if you looked at the sales log, sales were still being made. This means willing buyers and willing sellers were coming to an agreement that both felt left them better off, and they were doing it (by definition!) at market prices.

The fact is, there are always at least two possibilities when an offer is rejected, and the truth may be a mixture of the two.

First, that the seller is being unreasonable. This happens a lot. Probably sixty percent of all properties initially enter the market overpriced. Somebody thinks their property is worth more than it's worth. When people can buy better properties for less, they're not going to be interested in yours. In this situation, you're not likely to get any good offers. You'll get people doing desperation checks - coming in with lowball offers to see how desperate you really are. A very large proportion of these are people in my profession looking for a quick flip and the profit that comes with it, or other investors. Anybody looking at properties priced where this one should be priced is likely not even going to come look. This activity is 100 percent predictable when you overprice property. Nobody will be interested at the list price, and when it's been on the market long enough, the sharks will start to swarm. Putting the property on the market overpriced will result in the seller making less money than they could have.

Second possibility, the buyer is the one being unreasonable. Properties like that one really are selling for the asking price, or at least substantially more than you offered, and you offered tens of thousands less. Some buyers do this because it's all they can afford. Some buyers do this because they want to get a "score". And some are just the standard "looking to flip for a profit" that I talked about in the previous paragraph. There is a point at which I tell all but the most desperate sellers that they're better off rejecting the offer completely than counter-offering. It saves time and effort, and the prospective buyer either comes back with a better offer, or they go away completely. Someone offering $250,000 for a $350,000 property is not likely to be the person you want to sell to. Even if you talk them up into a reasonable offer by lengthy negotiations, they're far more likely than not to try all sorts of games to get it back down as soon as you're in escrow. Better to serve notice right away that you won't play.

Now some bozo agents think that starting from an extreme position, whether high list price or lowball offer to purchase, gives them more leverage, or that somehow you're eventually likely to end up in the middle. This is bullsh*t. Concentrated, distilled bullsh*t. The whole concept of negotiating room is nonsense promulgated by weak negotiators. A transaction requires a willing buyer and a willing seller. Price the property to market if you want it to sell. Offer a market price if you want the property.

When I originally wrote this, the Quickflippers™ had a distorting effect on this, and disconcertingly many of the properties being offered for sale are owned by people who bought with the intention of the quick flip for profit, rather than buy and hold. Many of those looking to buy still fall into this same category, and I suspect this is much the same in other formerly hot housing markets as well. They had become addicted accustomed to the market of the previous few years, when a monkey could make a profit on a property six months after they paid too much money to purchase it. That is not the market we face today. This market favors the buy and hold investor. Actually, if you remember the spreadsheet I programmed a while back, I've pretty much confirmed that the market always favors the buy and hold investor, it's just been masked by the feeding frenzy of the few years, where John and Jane Hubris could come off looking like geniuses when it was just a quickly rising market and the effects of leverage making them look good. It's just that the support for the illusions of Mr. and Mrs. Hubris has now been removed.

Now, what to do when your offer has been rejected. There are two possibilities. The first is to walk away. If the home really is overpriced, and there are better properties to be had for less money, you made a reasonable offer and were rejected, you're better off walking away. I don't want to pay more for a property than it's comparable properties are selling for, and I especially don't want my clients to do so either. The sort of people who go around making desperation check offers walk away without a second thought with considerably less justification.

The second is to consider that the property might really be worth more than you offered. Okay, a 3 bedroom 1 bath home did sell for that price in that neighborhood, but when you check out the details, that was a 900 square foot home on a 5000 square foot lot and the one you made an offer on is a 1600 square foot home on a 9000 square foot lot, and in better condition with more amenities. It's a more valuable property, and you can refuse to see that from now until the end of the world and you're only fooling yourself. The reason you thought the property was attractive enough to make an offer was that it had something the others you looked at didn't, and most of these attractors add a certain amount of value to the property. The more value there is, the more folks are willing to pay for it. This is why one of the classical tricks of unethical agents is to show you a property that's out of your price range, then figure out a way to get a loan where you qualify for the payment. This property is priced higher because it has features that add more value and a reasonable person would therefore conclude that other reasonable persons would be willing to pay more for that property than others. Landscaping, location, condition, more room, amenities. There's something that the seller thinks reasonable people would be willing to pay more for. It's kind of like taking someone who can afford a $10,000 car and showing them a $25,000 one, then telling them they can get interest only or negative amortization payments to get them into it. You only thought you could afford the $400,000 home, but they've got a way that you can get into the $600,000 home, which obviously is going to have many things that the $400,000 home lacks. Consumer lust does the rest. Cha-ching! Easy sale, and the fact that they've hosed the client doesn't come out until long after those clients made a video for the agent on move-in day when they're so happy they've got this beautiful house that they didn't think they could afford (and really can't), and they gush gush gush about Mr. Unscrupulous Agent, who then uses this video to hook more unsuspecting clients - never mind that the original victims in the scam lost the house, declared bankruptcy, and got a divorce because of the position Mr. Unscrupulous Agent put them into. You want to impress me with an agent, don't show me happy clients on move-in day. Emotional high of being brand-new homeowners aside, there was a period of several years when any monkey of a loan officer could get anybody with quasi-reasonable credit into the property. What happens when they have to make the payments? More importantly, what happens when they have to make the real payments? Given the current environment, the question, as I keep saying here, is not "can I get this loan through?" but "Is it in the best interests of the client to put this loan through?" You want to impress me with an agent, show me a happy customer five years out "My agent found this property that fit within my budget, told me all about the potential problems he saw, got the inspections and loan done, and it's been five years now with no surprises, and the only problem I've had was one he told me about before I even made the offer."

Of course, the real value of the property may be beyond your range or reach. If your agent showed you something you could not reasonably acquire within your budget, you should fire them. I accept clients with a known budget, I'm saying I can find something they want within that range. If it becomes evident I was wrong (eyes bigger than wallet syndrome) the proper thing to do is inform the client that their budget will not stretch to the kind of property they want, and suggest some solutions, starting with "look at less expensive properties" and moving from there to "find a way to increase the budget" and finally to "creative financing options." That's a real agent, not "Start with creative financing options but somehow 'forget' to mention the issues down the road."

There is no universal "always works" strategy for rejected purchase offers. It's okay to do desperation checks, but be aware that most sellers aren't desperate and that it's likely to poison the environment if the seller isn't that desperate. Poisoning the environment is okay if you're a "check for desperation and then move on" Quickflipper™, but if you're looking for a property you want and have found something attractive, it's likely to be counterproductive so that you may end up paying thousands more that you maybe could have gotten the property for if you'd just offered something marginally reasonable in the first place. Make a reasonable offer in the first place, and you're likely to at least get a dialog. And if the seller rejected what really was a reasonable offer for an overpriced property, the only one to lose is them. If their property isn't worth what they want, nobody will pay it. Move on. Their loss is someone else's gain.

The only way to tell how much of the "blame" for a failed offer attaches to each property is to examine the market - what is selling for what price in that immediate neighborhood. Properties in the same condition, of about the same size, built at about the same time. Not across the highway in the brand new development with an extra bedroom and bathroom when this one is thirty years old. Not across the other highway in the eighty year old slums and half the size. You can't make the other side see reason. All you can do is examine whether you were reasonable or not.

Caveat Emptor (and Vendor)

Original here

Got this search:
"should I get a buyer's agent if I've already found a house"

The answer is almost certainly yes, but I am going to examine both the pros and cons. Full disclosure: This is what I do for a living.

The con is fairly simple. If the seller isn't paying a buyer's agent, they may be willing to sell more cheaply. Then again, they may not. One of the reasons people sell For Sale By Owner is that they're a little too greedy. Even if they have a seller's agent, their listing contract may call for them to keep the buyer's agent's commission if the selling agent sells the property without a buyer's agent involved, and this may cause them to be willing to sell more cheaply. They are under no obligation to do so, however.

Many think the buyer's agent's job is to say, "Here is the living room." That's like saying the president's job is to look impressive. Sure, most presidents do look impressive and I do say "here is the living room," where it's applicable and my buyer may not have figured it out for themselves. Nor is it about looking in the MLS and my connections to find my buyer a property they like. It's not even about making showing appointments with listing agents and occupants.

My real job as a buyer's agent is to find you the best property for your needs under your constraints and get you the best possible bargain on it while making certain that the seller and their agent aren't hiding anything.

Many folks call the seller's agents and use them as their agent. This is what is known as a mistake. That seller's agent has a listing agreement telling them and the seller what the responsibilities of the agent are to the seller. They may or may not sign a representation agreement with the buyer. If they don't sign one, all of their explicit legal responsibilities are to the seller. They are working for the seller, not for you, and they have a contractual obligation to sell that property at the highest possible price. The buyer's interests do not enter into it. Perhaps they do an excellent job of representing your interests anyway, but the odds are against it. Their legal responsibilities are essentially limited to "don't tell any lies and don't practice law without a license." While I was working for the FAA, we found out about an agent who had made a real good living for a while as a seller's agent and how he had done it: By telling everybody he showed a house in the area to that the airport was going to close. Ladies and Gentlemen of the jury, that airport land was dedicated solely to aviation usages by an Act of Congress, and if the county had wanted to close the airport (they didn't; they were making enough money to pay for every airport in the county there, and socking up a huge fund if they ever figured out something else aviation related to spend it on), they would have had to have paid back tens of billions of dollars to the federal government. We got a call from one of his victims one busy Saturday, who asked, "When is this airport scheduled to close?" We advised him that any proposed closure was news to us, and explained the preceding to the gentleman.

Even if the seller's agent does sign a representation agreement with you, in approximately thirty percent of transactions (from my experience) a situation other than price arises where the best interests of the buyer and the best interests of the seller collide. When this happens, no matter what they do, an agent representing both sides is stuck on the horns of a dilemma. If they do A for the seller, they are violating the best interests of the buyer. If they do B for the buyer, they are violating the best interests of the seller. Here's a hint as to which way they are going to jump in the event of conflicting interests: If they violate the seller's interests, they don't have a transaction at all. If you don't buy, they can always sell it to someone else, but if they lose the listing agreement, they are completely out in the cold.

Price conflicts of interest happen on every single transaction. The buyer's interests are to get the property as cheaply as possible. The seller's are to get as much money as practical. This is a fundamental conflict of interest, and the entire business model of real estate is set up to camouflage this conflict, especially from the buyer. It is quite likely not in the best interests of buyers to buy a particular property at all, but if you're contacting a listing agent to make an offer, you are asking the professional opinion of someone who has a legal and ethical obligation to not only sell it to you, but to get you to pay as much money as you possibly can.

Before I even point a property out to you, or if you find it surf the internet and ask, "What do you think?" I am evaluating the property for fitness, suitability, affordability, how it stacks up to other properties on offer, how many other properties are on offer, and what the details of the property likely mean in the way of potential problem issues. Just a for minor example, a property built in 1975 has to be concerned about both lead-based paint and asbestos; a property built in 1990 still has those worries but to a far lesser extent, as most building stocks with those concerns were long gone, and a property built in 2005 is more likely built over Jimmy Hoffa's final resting place than a repository for asbestos and lead based paint (it could happen, but the odds are long against it). I am not an inspector or a tester, but I can and do alert my clients to safety and environmental issues, potential repair bills, and all sorts of other items before we've made an initial offer. "Best thing you could do with this building is 'accidentally' run a bulldozer through it," is something I told a client in a few weeks ago, in the context of telling him the value, if any, was the land less the cost of demolition and haul-away. Initially built almost 100 years ago and haphazardly added to as well as obviously not in compliance with code, my client would have been facing the possibility of the county condemning the building as unsafe, and quite frankly, I didn't think anyone would insure it outside FAIR requirements. You're not likely to get that kind of talk from a seller's agent. If you do, they're working against the best interests of their clients. Do you really want an agent who will do that? Instead you get words like "charming," "funky!" and the ever popular phrase "needs a little TLC!"

When it comes to the offer, a seller's agent is looking to get the highest possible price. Period. They don't care if you could buy a better property for less elsewhere, their responsibility to the seller and desire for a larger paycheck are in perfect alignment. A buyer's agent is responsible to you, and whereas buyer's agents get paid based upon the sales price, same as the seller's agents, they at least have a legal responsibility to do their best for you. If there are any complaints, a seller's agent can take refuge in the fact that it is their primary duty to get the best possible terms (i.e. highest possible price) for the property. The buyer's agent has no such shelter. Which would you rather have as your representative?

Buyer's Agents do not usually cost you, the buyer, any extra money. Maybe there are exceptions, but I've never run into one. Both the Exclusive and Nonexclusive Buyer's Agent Agreements used by California Association of Realtors state (You want the non-exclusive agreement for a lot of reasons,), in the absence of additional agreement, that any commissions paid out of the "cooperating brokers" amount on the MLS count against the buyer's obligation to the representing agent. This is typically agreed to be two percent in California, and I don't know the last time I saw a residential MLS listing offering less than that to the buyer's agent. The way the transaction is structured is that the selling agent gets the entire commission, but agrees via the listing contract and MLS to share a certain portion with the buyer's agent, if the buyer has one. Good buyer's agents typically beat the price down significantly more than two percent, especially in the current market. I am equipped to do value battle with that seller's agent in ways that members of the general public are not, and whereas it's true they don't have to negotiate with my clients, they've got to sell the property to someone. It's not like the real estate fairy is magically going to convert this property to cash.

Alternatively, if they keep you out of an unproductive bidding war, isn't that also saving you money?

Finally, if there's something you should know about a property, the buyer's agent makes certain the question gets asked and the answer disclosed to you. This eliminates a lot of potential surprises down the road, and gives you the opportunity to have a reason to exercise your contingencies.

In short, buyer's agents are the professional on your side, they typically do not cost you any additional money, they can save you a significant chunk on negotiations, and you're more likely to find out about potential problems with the property if you engage a buyer's agent.

Caveat Emptor

Original here

Once upon a time, this was a good way to get more money for your listing. This led to a classic tragedy of the commons. Because it didn't take hardly any extra time, and there was no reason not to do so, listing agents will claim there are multiple offers with practically every property. It's not like they are expected to furnish any evidence.

Because of this, in the last few months, I've had listing agents try to tell me that there were suddenly multiple offers on property that has sat on the market for months. If I don't see any evidence that there's a reason for it to suddenly have multiple offers, such as a recent massive drop in the asking price, I find these claims dubious at best. It might be believable if the property has been on the market for three days, and has not recently been listed before that. If it's been on the market more than three weeks, such a claim is likely to be making things up. I recently talked a pair of clients into making an offer on a property that had expired twice and been re-listed for a third time. A week prior to that, a special incentive to buyer's agents had expired. In short, there was every reason to believe that that we had a clear field, with nobody else making offers. As I always do, I included information on comparable properties that had recently sold in the neighborhood, of which I had inspected two, and the issues that this property had. The listing agent claimed there were multiple offers and gave the kind of counter I hadn't seen since the height of the seller's market years ago, demanding a "best and highest" counter. I and my clients jointly countered back that we'd agree to their conditions if they'd agree to our price, and gave them 24 hours to take it or leave it.

Before you claim that there are multiple offers, you do need to have multiple counters in point of fact. Because the flinty-eyed buyer's specialists know better. Even if they do, in fact, believe that you've got multiple offers, we're going to tell our clients that it's best to counter back as if the seller is lying. Essentially, we call their bluff. If they do have multiple offers and someone is stupid enough to play ball with them, that's no skin off my client's nose. It's not that much of a seller's market, and it won't be again anytime soon. If this seller doesn't want to be realistic, we can keep looking until we find a seller that is realistic. This is why property sellers need to protect themselves from lazy agents.

For an intelligent buyer in this market, even if there are multiple offers upon a property, it doesn't make us willing to offer more for the property. It means we want to expedite our deadlines for the sellers to respond, and it means we're likely to make subsequent counters with a multiple offer contingency (in other words, we're making offers on multiple properties now. If another offer gets accepted before you accept ours, we're going with that one). Mostly though, it means that this seller, and their listing agent, have their heads stuck in the land of wishful thinking, and it's time to consider another property because we can't force the sellers to be reasonable. Nobody can make them sell against their will, but we can find another property where they seller isn't so far gone in denial, and where the agent has done a better job of explaining the realities of the current market. It's not like there's any shortage of choices.

Let's face it: Unless you fax over the competing offer, complete with all terms and the competing agent's name and their contact information so I can verify it, there is no reason for me to believe that you have a competing offer. If you do this, the offer is either better than my clients', or not as good. If it's not as good, the leverage is provides is minimal in any market. If it's better than my clients' offer, it's either something my clients are willing to beat or it isn't. If it isn't, your leverage is still negligible. It's only if the other offer is better, but my clients are willing to beat it, that this trick offers you any leverage whatsoever. In this market, it's more likely to make us act like I discussed in the last paragraph - because no property is worth getting attached to before you own it. Let me baldly state that I also understand the potential benefits of collusion with your friend the agent from another office. She colludes with you on your client's property, and you collude with her on hers, each stating that they do, in fact, have clients making thus and such offers on that property. Since once again, it's trivial to convince yourself that it's in your client's best interest, even verified offers aren't going to mean a whole lot to a smart buyer's agent. It may no longer be a buyer's market, but there are still no properties worth a buyer getting attached to them before closing. And for all the properties I've made offers on where the listing agent claimed there were multiple offers, I've never had one of them offer any real evidence.

People willing to price their properties to the market, and negotiate realistically, can sell properties very quickly due to the fact that comparatively few sellers are competing well for the buyers that are out there. In the last couple months, I've been involved in the sale of two beautiful properties - and two others that were plug-ugly, but sold quickly because the sellers and their agents had their heads in the right place. In one instance, I even had someone bidding against my clients, but we nonetheless consummated the sale quickly.

If you're trying to sell and you negotiate unrealistically, you are only hurting yourself. That buyer's agent can find them something better, cheaper, making the agent's client much happier. Even if you do have multiple offers, it might be a good idea not to particularly act like it. You can check the multiple offers box without being aggressive about it.

The property I mentioned earlier? Where the agent and seller acted like it was god's gift to prospective buyers? It's still for sale, and my clients have moved into another property. The relocation company that owns it is out roughly $6000 per month. Had they priced it to market, and negotiated reasonably, they likely would have sold. If they simply negotiated reasonably, they would have sold it to my clients. My clients have their new home - they're happy. The sellers? Not so much. They're paying about $6000 per month for an empty property. It's been on the market for a year now, and it's not like they have any real alternative to selling. That's $70,000 they've flushed down the drain to no good purpose, and it's not like there's any chance of them getting more than the property is really worth.

For listing agents who refuse to act like their clients are competing for buyer business, they are violating client interests no less than if they counseled the client to accept an offer from someone acting as a straw buyer for the agent, personally. In fact, I rather suspect this particular agent of being Sherrie Shark, but there's nothing I can do for the owners as a buyer's agent. It's not legal for me to so much as contact them without going through "Sherrie". Nor would it benefit my clients in any demonstrable way. It just gets me and potentially my clients caught up in a legal morass to no beneficial purpose. So the owners are high and dry on their own. It's our profession's problem, but there's nothing I can do about it as an individual. The only person who can do anything about it is the property owner; this is one of many reasons why it's important to be careful in your choice of listing agent. Unlike a buyer's agent, you need to commit to a listing agent for a given period of time, and if you commit to the wrong agent, you have wasted your time of highest interest, when you will get the best price for the property.

Caveat Emptor (and Vendor!)

Original article here

One of the casualties of the lending meltdown is the high loan to value second mortgage. With many properties locally having lost twenty percent or more of their value, a second mortgage on a property that ends up in default may well lose every single dollar the lender put into the loan. It shouldn't surprise anyone that lenders don't want to get into that kind of situation. Even though I (and most other credible analysts) are convinced that real estate is now undervalued, the money markets are still in fear mode over the money they have lost or are on track to lose.

The result is that lenders of junior financing aren't nearly so willing to go close to 100% financing any longer. Even when the same lender is lending the money for both loans, the people who underwrite the second mortgages are (usually) a different division. So when the property goes to foreclosure, the division who underwrote the first mortgage may end up with every dollar or nearly every dollar of their invested money, and they come up smelling like a rose. The division that underwrote the second mortgage that got wiped out and came out with 10 cents on the dollar loses their shirts, and everybody gets fired. I don't have one single subordinate loan program offering over 90% financing - doesn't matter the credit score or how much we can prove the clients make. The lenders have all decided they are not willing to accept the risks of a high loan to value second mortgage. That's their prerogative - they who have the gold make the rules for lending it. With the situation as I've have discussed, and second mortgage lenders in the process of losing every penny they put into loans, they understandably don't want to do it.

There was an alternative for quite a while. There were, for quite a while, still any number of lenders who would accept 100% financing on one loan with Private Mortgage Insurance (aka PMI). That has been gone for a couple years now. In fact, for a couple months it was really difficult to get financing over 85%, but then they started removing the declining market indicator in July 2008, and now it's pretty easy to get 90% conventional financing, and I have a couple of ways to get to 95%. Considering that FHA financing only goes to 96.5% and is far more difficult to get, this means that the difference between conventional financing and FHA is small in terms of down payment, and considering the premium FHA-eligible properties command, being able to go conventional may save you money despite a PMI rate that's higher than for government loans (VA loans have become the only widely available 100% financing)

Private Mortgage Insurance is an insurance policy that the borrower pays for but which insures the lender against loss. It does get the borrower the loan, but that is the only good the borrower can expect to get out of PMI. It does not prevent your credit rating from being ruined, it does not prevent any deficiency judgments that you may be liable for, and it definitely won't prevent the 1099 love note that tells the IRS you owe taxes on debt forgiveness. All it does is shift the entity that loses the money from the lender to their insurer, so that if you default, you'll be dealing with the insurer instead of the lender via subrogation.

What is going on here is that lenders are shifting the risks to insurers, who are in the business of taking risks via the Law of Large Numbers. Yes, the insurers know they will lose a certain number of these bets, but they are comfortable that overall they will make money at it. It is to be noted that lenders can improve their profit margins by self insuring, but they're not in the business of insurance. I'm certain some of them insure themselves in one way or another, but they isolate the risks away from their lending divisions, which are in the business of making money by loaning it out and having those loans repaid in full. When a lender loses a dollar because the loan wasn't repaid in full, that hits them where it really counts - bond rating, stock price, value of their mortgage bundles on the secondary market. When an insurer loses a dollar due to paying a claim, that's part of their daily business. They're in the business of paying claims, fully expecting premiums to more than pay for those claims.

As I said in One Loan Versus Two Loans, PMI is more expensive than splitting your mortgage into two loans, but when nobody wants to do second mortgages with less than ten percent down payment, the choices may narrow down to accepting PMI or not buying the property. The only other alternative that comes to mind is a private party loan, either in the form of a Seller Carryback (which comparatively few people are willing and able to offer) or the "good in-law" loans that were popular before lenders started liberalizing their standards in the 1970s.

(I haven't been in the business that long. I've never heard the phrase actually used by another professional, although I actually did a transaction that involved one not too long ago. I learned it from textbooks, as even in the early nineties when I both bought my first property and went back to college for my accounting degree they were a fading memory)

Paying PMI does have the net effect of decreasing the loan that potential buyers will qualify for, so this development should cause some small amount of additional downwards pressure in prices. For those interested in irony, the lenders are contributing to their own immediate losses by bailing out of the low equity financing market. People who have to pay a higher effective rate for the money can't afford to spend as much for a property, which means that current owners, whether they're borrowers or lenders, won't be able to get as much money for them.

One last thing before I finish. Don't get too hung up on the fact that you may end up paying PMI when experts (myself included) advise you not to. It's one of those voodoo words and concepts like "points", that people freak out about because they've been warned about them but they don't really understand. Just like points, many experts, myself included, often advise you not to pay PMI. But if you have one loan that is over 80% loan to value ratio, you are going to be paying PMI in one form or another. As I said in How Do I Get Rid of Private Mortgage Insurance (PMI)?, it can be a separate charge or camouflaged by being built into the rate, but you're still paying it. There are advantages and disadvantages to each choice, as I explained in that article. Choose your alternative with your eyes wide open and an understanding of the consequences, not because someone scares with with the voodoo phrase, "PMI."

Caveat Emptor

Original article here

HI, My name is DELETED and my husband and I are searching for a way to get out of our Negative ARM loan before we get upside down.

Our problem right now is our loan to value. Our loan right now is at $547,367.80 and is only getting higher. Our house just appraised at $620,000.00. We have a prepayment penalty of $20,000.00 and would just like to get that covered. We feel we need a Jumbo loan if possible.

Our wish is to get into a 40 or 50 year fixed. My husband makes good money and I will be working in a couple of months making a decent income. Right now I am doing temp work. We can afford payments for our mortgage if we were to refinance but we are having a hard time finding someone who will take the risk with us. If there is a risk. We are just trying to get out of this loan that is going to end up taking our house from underneath us. Our credit is good and I feel there is a way something can be worked out

Can you help us?

I will try, if you're in California. First, let's stop and think a minute about your situation and what will benefit your pocketbook, rather than mine.

If you pay the penalty, your new loan is going to be approximately $570,000, even without points. The issue is that neither I nor any other loan provider can get you a loan that isn't available. $580,000 is more likely, considering prepaid interest, etcetera, unless you have some cash to pay it down. $570k and $580k are both within the band of 90 to 95%, so I have to price it as a 95% loan to value ratio. 95% loans are problematic for jumbo loan amounts. I don't have any such programs over 90% - but it turns out that I do actually have a refinance that can be done on a "jumbo conforming" up to 90%, albeit with PMI.

So suppose you don't have to pay the penalty? Now staying at or below 90% loan to value is a real possibility, and the loan can be priced as a 90% loan, giving better trade-offs. The way we might be able to do this is to check if we can get your current lender to refinance you. It'll likely mean renewing your prepayment penalty, but better that than paying $20,000 in penalty. Even if you end up with a higher rate than you might otherwise get because your lender doesn't have the lowest rates, $20,000 is almost four percent of your loan amount. Over the course of the 3 years of the new prepayment penalty (since that's standard for negative amortization loans), you'd have to save over a percent per year to break even with another lender. As I said in "Getting Out of Paying Pre-Payment Penalties", sometimes lenders will not require you to pay a penalty if you refinance with them and accept a new penalty.

In short, if we check with your current lender first, we might save you $20,000 cash plus the interest on it. So let's figure out who your lender is and ask.

The second alternative is to find out how long until the penalty expires. Make at least the full interest payments every month until your payment expires. How long do you have left on the penalty? If you've only got six months or a year left, rates just weren't low enough when I originally wrote this to make it worth your while refinancing, especially Jumbo loans, which even if your loan to value ratio was below 80% would have still cost you nearly two points for a 7% loan. If you pay at least your current "interest only" payment, you're not getting in any deeper. When the penalty expires, maybe rates and the market will be in better shape and you'll get a better loan. Matter of fact, waiting was a moderately good bet that would have paid off back when I originally wrote this, especially as opposed to just flushing $20,000 paying that penalty. If people had less than a year left on the penalty, I was urging them to make the interest only payments (or more), and come back to me about three weeks before it expired. Conditions have changed now. In fact, at this update, rates are much better than when I originally wrote this article. For "Jumbo conforming", rates below 5% are very possible, but I don't know how much longer that will be the case

Even if you're only six months into your loan, we'd have to save you about about 1.5% on the rate for you to come out ahead by paying that penalty. $20,000 times 12/6 divided by $547,000 gives a current rate of 7.3%. As you'll see, a blended rate of 6.67 is about as low as I could have gotten for this situation when I originally wrote this. Your rate would have to had to have been at least 8.2% when I originally wrote this for paying that penalty to have been in your best interest.

The loan market today is a very different creature than it was a couple years ago. Let's look at the alternatives, assuming your lender will waive prepayment with a new loan. Even so, let's look at a loan amount of $558,000, which is about where you're going to be with closing costs and one point.

Before I close, it occurs to me to mention that before refinancing, you have to be certain you are actually able to make the new payments. Because the fact is that you owe $547,000 right now, and that's a cold hard fact that nobody is going to change. Quite often, people get put into negative amortization loans because that was the only way they're going to make the payment on that much debt even for a little while. If you cannot realistically make these payments, delaying the inevitable will only cost you more. As things sit, if you sell you might come away with a few thousand dollars if you sold now, and then you can buy something you can really afford. If you wait, things are going to get worse, and you're going to end up with a short payoff and a 1099 love note that says you owe taxes, plus maybe a deficiency judgment, having your credit ruined, and still not having the home of your dreams. This doesn't make me popular right now, but what people like you are going through now is the result of people in my professions who wanted to be rich and popular, rather than actually doing what was best for the clients. Were I in your shoes, I'd likely be asking a lawyer if there's some liability on the part of your lender and real estate agent.

Caveat Emptor

Original article here

One of the things I hear a lot is that people are getting cash in their pocket from a refinance rate where there is no rebate. "I'm not paying any closing costs!" they proudly tell me, "The bank is putting money in my pocket."

Chances are that's not what's going on. In fact, when the client gives me the chance to investigate, I find out that they are paying huge fees, which are all being added to the balance of the mortgage. But what they remembered was that the lender was also going to give them $1200 or $1500 in cash and add that to the balance on top of everything else.

For "A Paper" loans, Fannie Mae and Freddic Mac define the difference between a cash out and rate/term refinance. On a rate/term refinance, a client can have all costs of the loan covered, both points if any and closing costs. A client can have an impound account set up to pay property taxes and homeowner's insurance out of the proceeds. They can have all due property taxes and insurance paid. The client can have all interest paid for 30 to 60 days. And the client can get up to one percent of the loan amount or $2000, whichever is less, in their pocket. In addition to this, if the old lender had an impound account, the client will receive the contents in about 30 days.

Let's say you have a $270,000 loan on a $300,000 property - small for most parts of California and some other places, but large for most places in the country.

Here in California, yearly property taxes would be about $3600 on that. Insurance is about $1000 per year, monthly interest is $1237.50. I originally wrote this in September, so if you finished your refinance on that day, your first payment would be November 1. You'll make five payments before both halves of your property tax are due, and they want a two month reserve, so 12 months plus 2 months is fourteen months minus five months is nine months reserves they will want in property taxes (Actually, three months reserve plus the first half-year paid through escrow despite the fact you would normally have until December 10th). $3600 divided by twelve times nine months is $2700. Let's say Insurance is due in April, so they'll want eight months of that. $1000 divided by twelve times eight months is $666.67. Plus two points and $4500 in closing costs the lender charges, and they actually may have told you about it, but they emphasized the cash you are getting in your pocket so that is what a lot of people remember.

Even without the cash out, this works out to a new loan amount of $270,000 plus $2700 plus $666.67 plus $1237.50 plus $4500 plus two points which works out to $284,800 as your new balance without a penny in your pocket. If they gave you $1500, your new balance becomes $286,330 (remember the two points apply to the $1500 also!) which will probably be rounded to $286,350. Subtract $270,000, and they have added $16,350 to your mortgage balance but hey, you got to skip a month's payment and got $1500 in your pocket!

As I have said many times, however, money added to your balance tends to stick around a long time, and you are paying interest on it the whole time. Furthermore, lenders and loan originators love this because their compensation is based upon the loan amount. All because you allowed yourself to get distracted by the cash in your pocket. This is fine if it is what you want to do and you go in with your eyes open, but chances are if someone were to tell you "I'm going to add $16350 to your mortgage balance to put $1500 in your pocket and allow you to skip writing a check for one month!" you wouldn't agree to do it. Even if the rate is getting cut so your payment is $75 per month less.

For loans lower down the food chain (A minus, Alt A, subprime and hard money) the lenders set their own guidelines on what is and is not cash out, but Fannie and Freddie's definition is more strict than the vast majority.

So when somebody tells you they are going to put money in your pocket as part of the closing cost, ask them precisely how much is going to be added to your mortgage balance. Print out the list of Questions You Should Ask Prospective Loan Providers, and ask every single one. Because chances are, they are trying to pull a fast one, and once you are signed up, they figure they have you.

Caveat Emptor

Original here

Got a search engine hit for

do I make a big down payment on a home or should make a lump sum payment after the mortgage

Here's the basic rule: You're allowed tax deductibility of the acquisition indebtedness, amortized, plus up to a $100,000 Home Equity Loan. For many years, the universal practice has been to deduct all of the interest on a "cash out" loan even though it's not permitted by a strict reading of the rules. That is now changing, and the IRS has served notice that they are going to be scrutinizing mortgage indebtedness to compare it to acquisition indebtedness, and disallowing anything over what they figure is the amortized amount of purchase indebtedness. For example, if you originally bought your property for $120,000 in 1996, and your original loans totaled $108,000, sixteen years later you might persuade the IRS that your deductible balance is about $85,000, as ten percent loans were common then. But if your property is now worth $500,000 and you've "cashed out" to $400,000, the IRS is likely to prove, well, skeptical of that deduction.

The other reason not to use your down payment money for a down payment is to save it for repairs and upgrades. There's only so many places that the money might possibly come from, and your own pocket heads the list. Cash back from the seller not disclosed to the lender is fraud, and if you do disclose cash back to the lender, you've defeated the only rational purpose for it, because they will treat the purchase price as being the official price less the cash back. You're not legally getting any extra net cash from the seller. Period. If you put the money down and then try to refinance it out, the refinance becomes a "cash out" refinance - the least favorable of the three types of real estate loan. Unless the rates have gone down or your equity situation has improved, you'll get better rates on a purchase money loan, not to mention not spending the second set of closing costs for the refinance because you only did the purchase money loan. Furthermore, at this update, lenders really don't like "cash out" loans - they are coming up with all kinds of obstacles to throw in the way. So if you need the money for repairs or to make the property livable, you're probably going to want to keep it in your checking account rather than using it as a down payment.

On the other hand, the search question postulates that you'll use the money to pay down what you owe, whether immediately at purchase or later on. After you put the money down, you'll have an improved equity situation, which means that you are likely to get a better price on the loan - a better rate-cost trade-off if you put the money down. Not guaranteed, but it is highly likely. A few years ago, 100% financing was generally available. It's not, any more unless you're eligible for a VA Loan, and FHA loans loans go up to 96.5%. For conventional lenders, I've got a couple that will go 95% if the PMI underwriter will accept you. If it's the difference between 95% financing and 94% financing, every lenders I know of treats 94% financing the same as 95%. But if it's the difference between 95% financing and 90% financing (or 95% and 80%, especially), you're likely to get a better loan. Which means you either spent less in costs, got a better rate, or some trade-off of the two. Less money spent equals more money in your pocket, or more money for the down payment, which translates as more equity. Better rate means lowered cost of interest. The fact that it's on less money also means lowered minimum payments, although you shouldn't be shopping loans based upon payment. More importantly, you don't pay interest on money you don't owe. If your balance is $10,000 lower on a 6% loan, that's $600 less interest per year - $50 real savings per month.

If for some reason you want to pay extra, and you're holding on to the money so your minimum payment will be higher, don't. Most loans allow you to pay at least a certain amount extra, and if you're one of those unfortunates with a "first dollar" prepayment penalty, I have to ask, "Why?" There are occasionally reasons to accept a so called "80 percent" pre-payment penalty. There's never a reason to accept a "first dollar" penalty. Not to mention that your lump sum will get hit with the penalty anyway, where if you used it as a down payment, it wouldn't.

If you think rates will go down, that's fine, but I've got to ask "What if they don't?" If they do go down enough to make it worthwhile to refinance, you can always do so. But you should want something you'll be happy with even if they don't.

Finally, I should note that there are arguments against paying off your mortgage faster. Paying extra on your mortgage does sabotage the gain you get from leverage. You could typically take the money and invest elsewhere at a higher rate of return. Psychologically, however, there's a peace of mind to be had from not owing money, or not owing so much money. The only sane way to define wealth is by how long you could live a lifestyle comfortable to you if you stopped working right now, and if you don't owe as much money, that time frame that determines your real wealth is obviously longer. In short, you're better off by the only sane way to measure.

The point is this: There are arguments to be made on both sides, and the circumstances can be altered by the specifics of your situation. My default conclusion remains that if your mind is made up that you're using a certain amount of money to reduce debt on the property, either from necessity or because you want to, then you might as well use it in the form of purchase money down payment.

Caveat Emptor

Original article here

A few days ago, I had an agent get angry at me about an offer below a range asking price. I had submitted the offer with extensive justification as to why it was an appropriate offer. Basically, this clown had overpriced the property, and thought that because he had put a range on it, people were somehow not supposed to make offers outside the range.

Just because you put range pricing on a property, does not, by itself, mean anything. As I've said before, you can ask for any price you want for your property. It doesn't mean the asking price is realistic. It means that you own the property and have the ability to put a price on the property that you want. This doesn't do you any good if the price is above what similar properties are selling for. Having been told it's for sale, buyers have the same options the seller does - they can offer any price they would be happy paying. The seller doesn't have to accept. In fact, the seller probably won't accept. If the buyer offers less than the property is really worth, than the seller is correct to reject the offer. On the other hand, if the buyer is offering what the property is really worth and the seller doesn't accept the offer, they are hurting only themselves.

Many sellers and their agents are shooting themselves in both feet by overpricing the property. When I originally wrote this, there were some special circumstances in effect - the lending panic, to be precise. It's mostly psychological, as there are any number of very solvent lenders willing and able to fund loans, but hysterical reporting grabs attention (which is why reporters do it). The net effect is that many buyers who would otherwise be in the market were still sitting on the sidelines, and so the ratio of sellers to buyers locally had ballooned to 47 to 1. Imagine yourself in a situation where the ratio of men to women is 47 to 1. The social dynamics are going to favor the women. Even if she's a fat slovenly harridan at the tail end of middle age, she's going to have her pick of men. The men, for their part, are going to have be both good looking and well off to attract even the woman in the previous sentence, and keep working hard to keep the woman around. If you're not willing to do what it takes, and keep doing what it takes, you might as well not bother. Now imagine that people who want to sell are the men, and people who are willing to buy are the women. If you're not willing to out-compete the other 46 sellers, why is your property on the market? If you need to sell, then you need to do what is necessary to out-compete those other sellers. Make it pretty. Make it cheap. And you still better be willing to work when an offer comes calling. If you're not, get the property off the market until the climate changes. I told you when I originally wrote this that I didn't think it was going to be long.

It was longer than I thought, but my market at least has changed. We now have people looking for relatively safe places to stash their cash, places that look likely to return an eventual profit, and real estate heads the list.

Range pricing a property at a value you're not willing to accept is a waste of everybody's time. There was a property on the market variable priced over $125,000 range, and my client made a very strong offer about $15,000 over the minimum. Lots of cash, good deposit, short escrow, no contingencies, etcetera. Under the circumstances, a very good offer considering what the property was really worth. Yet despite all the information we put in front of them, this seller kept countering at the same number, which was more than my client was willing to pay for that property. Net result: the whole process was a waste from the time we started driving to the property. Yes, they got a lot of activity, but since they weren't willing to sell for the price that generated the activity - or anything like that price - the property didn't sell. Since if the property doesn't sell, every penny you put into trying to sell is wasted, as is every second of your time, plus all of the carrying costs that you may incur. So the listing agent told me they'd had a dozen showings in a week - but if they're looking at the property because it's variable priced $75,000 below any offer the seller is willing to consider, well, self-stimulation may feel good but it doesn't produce anything. This entire situation is a failing on behalf of the listing agent, who is theoretically earning money because of their knowledge of the market and should know precisely how likely it is that buyers will agree to pay more than the comparable properties are selling for, which is to say, Not. In a 47 to 1 buyer's market, if you need to sell, you're almost certainly going to have to settle for less than comparable properties are asking. If you don't need to sell, get your property off the market until it changes. The sooner excess inventory clears, the sooner the turn towards sellers is going to happen. Not to mention your days on market keep climbing, and there's nothing beneficial about having a failed listing in a property's immediate past. The longer it sits unsold now, the harder it's going to be to sell for a good price later. But in a seller's market, things are different. For one thing, buyer's don't have all that power - sellers do. That's why they call them "buyer's market" and "seller's market": Who has the power.

Properly used, variable or range pricing can increase the sales price of a property. But the catch is that it must still be priced correctly. Range pricing is not an excuse for a lazy or incompetent listing agent to build owner expectations above market level. The rule of thumb is that the bottom of the range should never be lower than a good "all cash, no contingencies" offer, and the top of the range should never be more than market plus a reasonable premium for dealing with the uncertainties of financing and contingencies. Both figures should be modified downwards if the seller is asking for something extra in the way of consideration from the buyer - for example, leasebacks of more than a week or two, seller contingencies, etcetera.

When I originally wrote this, the way the market was in most of the country, I was inclining against range pricing. If it's priced correctly, that range is information I can use as a buyer's agent. Why would I want to hand the other side information I could put to use were I on the other side, especially when they already have the whip hand in negotiations? Range pricing is something that's primarily useful for sellers when the sellers have the power, and back then, it was the buyers that have the power. If it's not useful for the seller, why in the world would you want to put range pricing on a property? With blortloads of highly upgraded properties for sale then, I had absolutely no hesitation in telling my buyer clients to offer what we think the property is worth to them under the circumstances, and let the sellers decide if they want to do what's necessary to get the property sold. If they don't want to play, somebody else will. Either way, the buyers are happy. This seller can either decide they'll be happy with an appropriate amount of money, or the property can sit unsold. Which is pretty much the situation as it always is. Since then, my local market has changed - particularly with regard to what Mr. and Mrs. Average First Time Homebuyer see as an attractive property.

Range pricing is not a panacea. Range pricing is not something lazy or fearful agents can use to "buy" a listing with impunity, confident it'll work out in the end (it won't). Range pricing is not an excuse not to price your property to market, or not to negotiate hard with all of the facts at your disposal (if you don't have enough favorable facts at your disposal as to what comparable properties are selling for, your negotiating position is not strong). Range pricing is a way to offer clues to buyers and get them to the table with an appropriate offer when sellers have significantly more negotiating power than buyers. Range pricing is something to use sparingly when sellers have no power. There's nothing that says buyers have to offer you what you want. Not now, not ever. The only leverage sellers have over buyers is the fact that if this buyer won't offer something that is appropriate, somebody else will. That's very weak leverage when there's 47 properties on the market for every buyer, but it's much stronger when properties are flying off the market as soon as they're listed.

Caveat Emptor

Original article here

About half the listings around here do not have a single number asking price, but rather a range in which "offers will be considered". Even many agents have trouble understanding range pricing. I've seen and heard more than one agent rail against it, saying that it is essentially "repricing the home".

Range pricing began in Australia and was brought to the United States by a certain major real estate chain. That chain is not one I particularly like doing business with, but that doesn't mean range pricing is a bad idea.

Range pricing is a way of starting people talking, and to begin the negotiating process; nothing more. If there's no offer made in the first place, I can guarantee there will be no transaction. The idea of range pricing is to jump start the negotiations.

Range pricing is not appropriate for all properties, nor in all markets. In a buyer's market such as we had when I originally wrote this, I'm certainly more hesitant to use it, as it offers more information as to the owner's state of mind. In a seller's market where prices are rising rapidly and sellers have all the power, it gives an indication as to what a serious offer is and what it is not. In a buyer's market it tells some buyers exactly how much leverage they may have. I'm also more leery of using it on commercial properties.

One thing many agents (and others) misinterpret range pricing to mean is that any old offer inside the range should be accepted. This is the mark of an inexperienced negotiator. If they say offers will be considered between $400,000 and $425,000, that is not the same thing as saying "I want $425,000, but I'll take $400,000." There are many other terms and conditions on a purchase contract besides just the price, and there is no mandate to agree with even a full asking price offer if those other terms are prohibitive. Indeed, an agent who knows how to figure out other terms to offer in place of higher price is likely to save you far more than any commission they earn. Even price is rarely just price. For instance, if I write an offer for $410,000 cash, no contingencies, with a $10,000 deposit, most sellers should rightly treat that as superior to an offer of $425,000 with the seller paying $10,000 of closing costs and only a $2000 deposit, contingent upon financing for sixty days. Note that the seller nets over $4000 more if the latter offer actually closes, but the former is a much stronger offer and if two such offers were to come in and other things were equal, I'd strongly counsel taking the cash offer, especially as the latter offer is indicative of a not very well qualified buyer without much commitment to the idea of purchasing the property, and there would be a high probability that the transaction will not actually close. There are all kinds of terms on purchase contracts, and having a discussion as to what's important to the other side can be a way of making your offer much more attractive without necessarily raising your price. For instance, owner occupants are often understandably nervous about whether the transaction is going to close, and committing large sums to alternative housing before it actually does close. If you can think of a way to address that concern, you're miles ahead of the negotiator who can't. Every situation is different, and what works one time may not be appropriate to even offer the next.

So if I see a property with range pricing of $400,000 to $425,000, I want to educate my buyer clients that an offer of $400,000 exactly with the seller paying up to $20,000 of closing costs is not within the range indicated. Indeed, as I've said elsewhere for such offers, a $380,000 sales price with the buyer paying their own way is a superior offer from the seller's point of view. If they insist, I must and will submit it, but even in a strong buyer's market I wouldn't be surprised to see it rejected outright with no counteroffer.

In a strong buyer's market, those few buyers willing to purchase properties have an enormous amount of power, and this will always continue when the seller to buyer ratio gets out of whack. So in a buyer's market, I might actually offer significantly less than the asking price range, secure in the knowledge that if this seller rejects it, I'll find something just as good tomorrow where the seller will accept. Some will. So if some won't, so what? You learn to spot the sellers that have the power to refuse, and the ones who have to take anything vaguely reasonable.

Admittedly, I don't do a lot of listings, as most sellers don't like to listen when I tell them to price their property to the current market if they want to sell. (But if they don't want to sell, why are they talking to me?) But when I'm showing them what the market is like, and what reasonable prices for properties like theirs are right now, I'll ask a couple of questions once I'm convinced they understand. Everyone knows what they want to get for the property, and by the time I'm done, they better understand what a reasonable asking price is and why it's stupid to list for more. But after that, once I've explained that there are offers and then there are offers, and the price isn't the only thing worth paying attention to, I'll then ask them, "Now that you know what a realistic asking price is, what would be the lowest price you would consider selling for, if someone offered everything else you wanted? Great deposit, all cash, no contingencies for financing, etcetera?" Next I'll ask, "How far over the realistic asking price we've agreed on would you require going if the buyer came up with some odious terms: takes possession early, no deposit or not much of one, wants a long escrow, etcetera?" Rebates or seller paid closing costs always raise the necessary price at least dollar for dollar, by the way. A $380,000 offer with no rebate is superior to $400,000 with $20,000 rebate from both buyer's and seller's perspectives. Then, depending upon how much the seller needs to sell, I'll use that information to help me figure the endpoints of the asking range (assuming I'm not just going to use a single asking price). I won't just use either number, of course. But that, together with the state of the market and how much power buyers think they have in the market at the time, will give me a good feel for what the lower number of the range should be.

There is another, entirely different benefit to range pricing is that when the search is done on MLS or its substitutes, the lower number in the range is going to trigger your property coming up on more searches. If you're a listing agent, you know that MLS and MLS substitute buyers are more likely to be aggressive, and often unrealistic, bargain hunters, as opposed to people who really want to live in the neighborhood around this property. MLS inhabitants are not my favorite buyers when I'm listing a property, for that and other reasons. But if this property comes up on their search, they might look, and if they look, they might make an offer my client is happy to accept. If they don't even see it as they're searching, I guarantee no offer will come in from them. So range pricing helps me capture these people's attention. Whether interest, desire, and action follow is anybody's guess. But they might, where without range pricing they definitely wouldn't.

This doesn't mean I should put a lower end price on it that is lower than what the seller is likely to accept. That is just a waste of everyone's time. A buyer sees a property listed for $400,000, goes to look based upon that representation, and decides to make an offer - then it comes back that the seller isn't willing to really consider anything less than $430,000. Furthermore, the seller's time has also been wasted by encouraging that buyer to view the property. If the seller is not willing to consider an offer at that amount, it shouldn't be listed for that amount. If I get offers above minimum asking price that I'm reasonably certain can consummate, I'll even suggest raising the asking price while we consider them or negotiate. If I have an offer on the table for $450,000, it's not likely to be available to someone only willing to offer $420,000, and it is not reasonable or intelligent to have it listed for $420,000.

In short, range pricing, properly done, is not repricing the home, and it is a good way to get the buyer and seller to the negotiating table. It is not appropriate for every property in every market, but for those it is appropriate for, it's a useful tool. Properly used in a seller's market, it can even help your seller get a higher price for the property than any single number asking price you'd dare use.

Caveat Emptor

Original here

It shouldn't be any surprise to anyone with the headlines of the last few years that shopping for a mortgage loan has radically changed. Indeed, a lot of the regulatory changes seem directly aimed at what were the best lending practices - ways to force loan providers to change away from those best business practices.

I'm going to say this more than once in this essay: There are now significant costs for failed loans, costs that brokers and correspondents are now going to be forced to pay. This means that one way or another, consumers are going to be forced to pay them. There are two groups that can be required to pay them: People whose loan succeeds and is funded, or people whose loan fails and is not funded. Individual broker policy is going to determine which group of that broker's loan applicants pays for the costs of failed loans: The ones whose loan succeeds, or the ones whose loan fails. To determine which sort of broker you'd rather apply with, ask yourself "Do I want my loan to succeed?" If so, apply with a broker whose policy requires the failed loans applications to pay for the failed loans. If you don't want your loan to succeed I must ask, "Why are you applying?"

I need to do some political background and warmup in order to make sense later on. I need to tell you what has changed in the background, why it has changed, and what this means for the consumer. I did warn NAMB (the mortgage brokers association) that brokers were going to be used as the scapegoat for everything. It was the only way the bankers could avoid criminal indictment, public outrage, and the mob and pitchfork crowd known as Congress. President Obama, who is on one hand inciting the mob with pitchforks while on the other hand pretending to be the banker's friend, was one of those Senators at the heart of the reasons for the meltdown. You have only to examine the public record of the period from 2003 to the time everything started unraveling to find out who tried to reform the system in time to avert catastrophe and who stood in the way of reform. Old principle: The best way to avoid being the target of political lynchings for a disaster is to lead them yourself.

Not that lenders need a political reason to come after brokers and correspondents. It's a classic love-hate relationship. Lenders hate brokers in general, without whom their margins and profits on mortgage loans would be much higher, but they love the profits from the individual loans brought to them specifically by those same brokers. To give you an analogy from a time before the internet, once upon a time airlines used to regularly get together every year to try and set the prices for summer vacation fares higher than market, so they all would make a lot more money per ticket if they hung together as an industry. However, every year, the airlines as individuals would decide they wanted all the money in profits they would get from lowering their individual airlines ticket prices to attract people away from the competition. It was comical in a way, watching the same show year after year, with the same outcome. The airlines tried for years to get the federal government involved so that they could give their price-fixing the authority of law, but even Jimmy Carter was too smart for that - in fact it was he who deregulated the airlines rate and fare structure completely, resulting in an explosion of air travel as air travel suddenly became a lot more affordable. Lenders relationship to brokers is a lot like that. Sure, brokers bring them a lot of money and profit - but if there was some way to completely eliminate brokers, they would make a lot more money for every loan they did.

The difference between that situation and this is that the lenders and those who want to help them do away with brokers have gotten a lot more intelligent in the last thirty years. Instead of trying to accomplish their goals directly, they are raising the costs of doing business as a broker to make it harder for brokers to compete, and they have enlisted to aid of the government to that end. The government, in return for bribes known as "campaign contributions" has been only too happy to help, under the guise of "protecting consumers" which in fact, has been the exact opposite of protecting the consumers. It's as if they were designing changes to harm lenders and brokers who work in a way most aligned with consumer interests.

Let me go back to the dim and far off times of an just a few years ago. Effectively Shopping for A Real Estate Mortgage Loan was trivial: Get quotes, sign up with the one who was willing to guarantee their quote in writing for the best tradeoff between rate and cost. I could lock a loan based upon a verbal representation that you wanted it, and do the application and everything else afterwards. If you were concerned about whether the originator you signed up with intended to honor their guarantee, you could get a backup provider. This was pretty darned easy for a loan officer to set themselves up in compliance with. There was a good alignment between the way that the market worked and the needs and desires of the average consumer. No need for a deposit, no need to commit yourself to a single lender who could well be lying and it was extremely easy to provide good transparent loans and actually deliver the exact loan - rate and cost - of what got the consumer to sign up because I could lock that loan when right when that consumer said they wanted it.

Let me go over what has changed, which is two big things, each with multiple consequences for the loan originator who acts in accordance with consumer interests. The first is that lenders have acquired permission from regulators to discriminate against brokers with respect to loan fall out. Oh, they don't call it that - but that doesn't alter the fact that it is discrimination. The fig leaf being used to conceal - not very effectively - this discrimination is the secondary loan market. The lenders themselves don't hold the loan, but rather sell them to Fannie Mae, Freddie Mac, and Wall Street investment firms - whether directly or not. So when you lock a loan with a given lender, that lender is ordering the money from the secondary market so that they will have it when it's time to loan it to you. What happens when you don't actually get the loan? Well, the bank still ordered it, and Wall Street still supplied it and expects to get paid.

However, there has always been and still is a certain "slop" built into those contracts, with costs paid only when the "slop allowance" was exceeded. The lenders and Wall Street both know damned well that not every dollar ordered is going to be used in a funded loan, which is one thing they pay actuaries a lot of money for, and the actuarial estimates are usually almost frighteningly close on their "money ordering" contracts. The banks, however, are turning around and charging the brokers and correspondents for basically the full marginal cost for every single loan that doesn't fund, while allowing their "in house" loan officers to free ride, making uncharged use of the "slop allowance" built into the contract. This discrimination essentially transfers all of the costs for locked but undelivered loans onto brokers and their clients. It is costing consumers large amounts of money, but the regulators are permitting them to do it. Nor do the lenders penalize in any way their own loan officers who fail to achieve the same level of response they require out of brokers and correspondents. I've said for a long time that the best and the worst loan officers all work for brokers. That has changed - the only way for a bad loan officer to survive is to become a direct lender employee, working in a bank branch.

This means that if you lock a loan with a broker or correspondent, they're going to be forced to pay the lender they locked that with a fee if you don't carry through. So in order to protect our real customers - the ones that end up with a funded loan that actually gets the brokerage paid - brokers and correspondent lenders are having to be very careful with which loans they actually lock. Let me be very plain about how far reaching this is: What matters is that there is a lock without a funded loan. It does not matter why. It doesn't matter that the consumer decided they just didn't want it, that someone else had a better rate (or said they did), that the consumer could not in fact qualify for the loan at all, that the appraisal came in too low to fund the loan, that the lender rejected the consumer's application for an unforeseeable reason, or any other excuse. What matters is that there was a lock but not a funded loan. This has the effects of raising a broker's costs - which means they have to raise prices to compensate, or make certain it isn't our actual clients who end up with a funded loan who pay those costs. This, in turn means that the way to success for a broker or correspondent is going to be putting the costs for failed loans upon the people whose loans fail. Failure to do that means that the people whose loans succeed are going to be pay for the people whose loans fail. Not to mention that the loan officer who has more than a low percentage of loans fail is going to be facing higher costs for all of their new loans, because the lenders are going to be requiring a higher premium to do business with them.

In short, you can pick a low-cost loan provider, OR you can pick a loan provider where there's no risk and no cost if your loan falls apart. There will be no loan providers where both options exist - those places in denial of these changes are out of business now. The costs for failed loans exist, and someone has to pay them. It can either be the people whose loans fail, or it can be the ones whose loans succeed. Ask yourself if you want your loan to succeed or if you want your loan to fail to tell you which sort of broker you should be looking to apply with.

The second major change impacting lending practices is the Home Valuation Code of Conduct (hence HVCC), and the genesis of this is even more shadowy than that of the changes due to fall-out. I don't like it, but neither I nor anyone else in the lending business has the option of ignoring it. It is the new law of the land, having to do with the way that appraisals are handled. First, there isn't going to be any more developing a relationship between a good loan officer and appraiser with the idea of protecting the clients. It's not going to stop the bad loan officers or appraisers from doing everything they have done in the past, but it will stop the good stuff. Instead of ordering an appraisal through a specific appraiser, loan officers now have to order through appraisal management companies. This means I no longer have the ability to stop using bad appraisers - the ones who waste client money, the ones who produce substandard appraisals the underwriters reject, the ones who take so long to produce the report that I have to extend the rate lock because of their delay.

Second, the loan officer who orders the appraisal is now obligated to pay for it, which means that loan officer has a choice of either getting money in advance, or of charging successfully funded loan clients enough to pay for all of the appraisals of unsuccessful loan applicants as well as their own appraisals. The loan officer is prohibited from having the client write the check directly to the appraiser. Finally, most lenders as well as Fannie Mae and Freddie Mac are now requiring that the appraisal be written in the name of the actual lender instead of the broker. This means that despite the fact that I must pay the appraiser for the appraisal, the actual lender owns that appraisal, and if I want to change the lender for some reason, I have to get that lender to release it. Not likely. Even if the lender rejected the loan, getting them to release the appraisal is just about impossible. This means I have to pay for another appraisal if I want to try again with another lender, which really means the consumer has to pay for another appraisal as well, and there's no guarantee the second appraisal is going to be good even if the first one was. The appraisers are happy about this feature, as are the lenders. Consumers, not so much. It's not good business, and it's not good government. It is, however, what we're now stuck with.

So what does this all mean to consumers?

First, it means that those loan providers who really do provide low cost loans are going to have to get enough money from consumers to cover the cost of the appraisal before they order it. We should all be adults here, which means we should understand that if the loan provider doesn't do this, when your loan funds you are going to be paying not only the costs for your own appraisal, but a higher margin to cover those appraisals that did not result in funded loans. Make your choices of loan provider accordingly.

Second, it means that low cost loan providers can no longer guarantee to lock their best rate/cost tradeoffs immediately. I'm sorry, but if I lock every loan on a verbal indication that you want it, too many of them are going to fall out, which means I'm going to be liable for not only the appraisal costs of those loans that fail, but all of the costs that the lenders I lock with will charge me for failing to deliver that loan. Furthermore, if I have a high fall out ratio, the lenders will charge me extra to lock the loan and possibly even refuse to do business with me at all. This means I wouldn't be able to offer low cost loans - in fact, I'd be lucky to do much better than the lenders themselves. All of this is real money, and neither I nor anyone else can stay in business without paying those costs somehow. Since your loan officer has stayed in business thus far, you can safely assume they've got a plan in place for paying those costs. If you don't understand what it is (in other words, through being asked to pay some money up front for the appraisal, and waiting to lock until there is a reasonable assurance that loan is actually going to fund), then if your loan funds, you are going to be paying an extra margin for all of that loan provider's loans that don't fund, in addition to the specific costs of your own loan. In other words, by insisting upon no risk to yourself - no risk of losing the appraisal money, no risk of not getting the rate you're quoted - you will waste an awful lot of money if your loan actually funds. And lenders are permitted to lie to get you to sign up, same as always. Even with the new rules for the Good Faith Estimate, it's not that much harder to lie to consumers at loan sign up, and the loan officers who want to have the loopholes completely figured out.

Third, it means you're going to have to be very careful about Questions you ask your loan provider. Be very through, and insist upon specific answers. Beware of misdirections like "we honor our commitments" because nothing you get at loan sign up is in any way, shape, or form a commitment. What I'm having to talk about now is "What I could guarantee to deliver if I could lock your loan right now", because unfortunately, neither I nor any other loan officer can any longer lock loans until reasonably assured they will fund. Those loan officers who do lock everything early are going to be providing much higher cost loans, and that is for the very short period of time until lenders refuse to do business with them due to unpaid fall-out fees.

It's a situation of the sort made famous by Catch 22. Loan officers can protect the interests of the loans that fund, or the loans that don't fund - but protecting the interests of the loans that fund means you get a lot fewer loan applications, and scare off a lot of uninformed borrowers who haven't considered the consequences of their choices.

This is precisely the situation that lenders want to foster with regards to brokers and correspondents - because the average loan consumer isn't informed, hasn't considered the consequences of their choices, and is very hesitant to write a check for that appraisal upfront when they're not certain they're going to get a funded loan. It is nonetheless the intelligent thing to do, and failing to do so is going to cost you a lot of extra money.

"Might as well go back to the lender's themselves!" you say. Let's do something I don't usually do: Mention names and specific examples. Let's consider a $400,000 purchase money loan on a $500,000 property for someone with a absolute dead average median FICO score of 720, primary single family detached residence in San Diego California with a 60 day lock. All loan quotes were current as of when I wrote the original article for this:

Citi: 5.125 with one eighth of a point discount plus their normal origination which they won't detail online.

Ditech was quoting 4.625% for 2.1 points - but they're not telling you how long the lock is for. I'm not seeing if that includes origination, so even though I believe that the answer to whether it includes origination is really "No", I'll act as if it's "yes"

Chase was 5.375 for one point discount, 4.875% for two.

Union quoted me a lot of different loans, none of which are competitive (6% with one point on a fifteen year fixed rate loan - and fifteen year rates are lower than a thirty year loan everywhere else right now)

I couldn't get Bank of America to quote online.

GMAC wouldn't actually quote either - referring me to a phone number.

Same story with Flagstar

Wells Fargo wants me to sign up for rate alerts, but they won't give me an actual quote either

By comparison, at the exact same time I was able to get my clients the same 30 year fixed rate loan at 5.125% with no origination and no discount - no points at all. I made my normal money per loan off the secondary market premium with no borrower cost. If you're willing to pay origination but no discount, the rate was 4.75%. On a sixty day lock, which I've never needed in my life - but that's the shortest some of the lenders are willing to tell us about, so let's play fair. To nail down the difference in pricing absolutely, I've got 4.625% for 1.25 total points discount plus origination. So the closest any of the direct lenders can possibly come to what I really can offer at the same rate is at least 85 basis points more expensive, and I'm not certain a couple of them aren't quoting to a credit score twenty to forty points higher than I am. To put this into dollar terms, 85% of a point is about $3400 in this case. Nor were the credit unions any better on their rates than the major lenders. You want to just waste an absolute minimum of $3400 by applying with a direct lender because that's easy, be my guest, but that's the minimum difference it could possibly have been on this direct comparison. In reality, you're likely talking $7500 to $10,000 difference in costs for the same rate.

Why is it so much? Brokers are more efficient. Nobody expects me to have a beautifully landscaped building, plush carpet, beautiful furniture, a well-paid receptionist, etcetera. I make money when I fund loans. Bank employees make money whether they're funding loans or not. Get the idea?

No matter how much more efficient brokers are though, things have gotten a lot tougher for brokers of late, and consumers are now have to take a lot of the risks that lenders and brokers and correspondents (oh my!) were formerly assuming on their behalf. But the best and cheapest place to get a loan delivered to quoted specifications is still find a good broker. Getting a good loan is going to become a lot more a matter of developing a good relationship with that broker. This isn't to say "Don't shop around,", this is saying, "Shop effectively" because the game with phone quotes or email quotes that most consumers are playing that they think is getting them great loans is in fact, costing them an awful lot of money as opposed to what they could be getting by slowing down and having a real conversation with prospective loan providers. I don't often make $3400 (the minimum difference from the actual example above) for a day's work, which equates to a yearly gross of $680,000 for a day spent shopping your loan effectively. Someone making $680,000 per year doesn't need a loan for a $500,000 property, so I suspect the time it takes to slow down and have the full conversation will pay for itself for those folks, too.

As I said at the beginning of this article, the changes in the market in the last year are such that they are almost calculated to drive the low cost loan provider with consumer driven practices of a year ago out of the business. I'm not happy about any of these changes, but I have two choices: Do what is necessary to change, or leave the business. It won't help me or consumers to leave the business. All it would do is leave me broke and competing for limited employment opportunities while the consumers I would otherwise serve are left at the mercy of less ethical higher cost providers.

Now more than ever before, the sign of a good low cost loan provider is one who doesn't ask their serious loan applicants who really want a loan to pay for the costs of the unserious jokers who are just shopping ad nauseum for the sort of loan officer that's going out of business as we speak. As I said, these extra costs exist. They have to get paid somehow. You can choose a loan provider who makes the failed loans pay their own costs, or you can choose a loan officer who makes the successful loans pay for the costs of the failed loans. Everybody else is going to be out of business. And all of the consumers that kid themselves otherwise are wasting thousands, if not tens of thousands of dollars.

Caveat Emptor

Original article here

Many folks have no idea how qualified they are as borrowers.

There are two ratios that, together with credit score, tell how qualified you are for a loan.

The more important of these two ratios is Debt-to-Income ratio, usually abbreviated DTI. The article on that ratio is here. The less important, but still critical, ratio is Loan to Value, abbreviated LTV. This is the ratio of the loan divided by the value of the property. For properties with multiple loans, we still have LTV, usually in the context of the loan we are dealing with right now, but there is also comprehensive loan to value, or CLTV, the ratio of the total of all loans against the property divided by the value of the property.

Common breakpoints on Loan to Value ratio are 70 percent, 80 percent, 85 percent, 90 percent, 95 percent, 96.5 percent (for FHA) and 103% (for VA). Some lenders may have others. If you're between two break points, LTV always treats you as being at the next higher break point. For instance, 82% Loan to value will require you to qualify as if your loan to value was 85%.

Note that for instances where you may be borrowing more than eighty percent of the value of the home, splitting your loan into two pieces, a first and a second, is usually going to save you money, if the loans to do so are actually available. See here for an example, but government loans ( VA and FHA) are an exception to this. At this update I am unaware of any second loan program that will loan over ninety percent of the value of the property, meaning one loan with PMI may be your only option.

The maximum loan to value ratio you're going to qualify for is largely dependent upon your credit score. The higher your credit score, the lower your minimum equity requirement, which translates to lower down payment in the case of a mortgage.

Credit score, in mortgage terms, is the middle of your credit scores from the 3 major bureaus, reported upon a scoring model proprietary to a company called Fair-Issacsson. If you have an 800, a 480, and a 500, the middle score, and thence your credit score, is 500. If the third score is 780 instead of 500, your score is 780. If you only have two scores, the lenders will use the lower of the two. If you have only one score, most lenders will not accept the loan. I've never seen scores that divergent, but that doesn't mean it couldn't happen. Usually, the three scores are within twenty to thirty points, and a 100 point divergence is fairly unusual. Despite what you may have heard or seen in advertising, according to Fair Issacsson (who set the parameters) the national median credit score is 720. See my article on credit reports for details.

In order to do business with a regulated lender, you need a minimum credit score of 500. There are tricks to the trade, but if you don't have at least one credit score of 500 or higher, you're going to a hard money lender or family member.

Exactly what the limits are for a given credit score is variable, both with time and lender, even when you get into A paper. Subprime lenders (when we had true subprime) would go higher than A paper, but the rates would have also been higher. Nonetheless, there are some broad guidelines. At 500, only subprime lenders will do business with you, and they will generally only go up to about 70 percent of the value of the home. A few will go to 80 percent, but this is not a good situation to be in. Note that at this update, true subprime is basically non-existent. It isn't the lenders; it's the investors behind those lenders not being willing to loan money. The shenanigans that were worked with bond ratings mean that nobody wants to take a chance, and there are people with legitimate needs for subprime loans that neither I nor anyone else can help right now because of it. I hope the so-called ratings agencies get sued and the investors win everything.

When I first wrote this, at about 580 credit score, you could find subprime lenders willing to lend you 100 percent of the value of the home, provided you could do a full documentation loan. These days, subprime won't go over about 80% of value, period. 580 also used to be where Alt-A and A minus and government program (VA and FHA) lenders start being willing to do business with you. These days, you're more likely looking at 620 to 660 for those.

At 620, the A paper lenders start being willing, in theory, to consider your full documentation conforming loan. They won't do cash out refinances or "jumbo" loans until a minimum of 640, but they will do both purchase money and rate term refinances at 620 or higher. Below about 660, you can expect to be limited to about an 80% loan to value in the current financial environment.

At 640 is where subprime lenders used to start considering 100 percent loans for self-employed stated income borrowers. Not any more. Stated Income is essentially dead, although I'm starting to see a few portfolio lenders that will consider stated income loans. I haven't submitted any so I don't know how hostile the underwriting process is firsthand, but I would not expect it to be friendly.

660 is now where A paper will start considering conforming loans above 80% loan to value. The PMI companies are really leery of accepting credit scores below that, and there are heavy hits on the tradeoff between rate and cost below about 740, but they are obtainable. Furthermore, expect that someone whose credit is lower than 720 will probably not be able to get PMI on loans 90% or higher of the purchase price.

It is to be noted that just because you can get a loan for only so much equity, it does not follow that you should. Whereas the way the leverage equation works does tend to favor the smaller down payment, at least when prices are increasing, it can also sink your cash flow. So if the property is a stretch for you financially, it can be a smarter move to look at less expensive properties to purchase. I have seen many people recently who stretched to buy "too much house" only to lose everything because they bought right at market peak with a loan they could not keep up. Many of these not only lost every penny they invested, but also owe thousands of dollars in taxes due to debt forgiveness when the lender wrote off their loan.

Right now, there is only one commonly available purchase loan that will support 100% financing: The VA loan, which actually goes to 103% to allow the financing of some closing costs. FHA loans require a 3.5% down payment, and I can do conventional conforming purchase money loans with a 5% down payment, albeit with a PMI and a highly restrictive choice of lenders. 90% financing is very commonly available on conforming loans ($417,000 minimum, higher in certain high cost areas such as San Diego where I work). For loans above the conforming limits, sometimes I can get financing above 80% (up to 90%) .

There are other ways to buy with a smaller down payment: Seller Carrybacks and some municipal first time buyer programs to name the two most common, but both of these start a long time before you've got a purchase contract, and your agent had better be able to write and negotiate a purchase contract the right way or you're going to find yourself dead in the water. Acting within narrow time windows is typically also necessary.

There are other factors that are "deal-breakers", but so long as your debt to income ratio is within guidelines and your loan to value is within these parameters, you stand an excellent chance of getting a loan. All too often, questionable loan officers will feed supremely qualified people a line about how they shouldn't shop around because they're a tough loan and "you don't want to drive your credit score down." First off, the National Association of Mortgage Brokers successfully lobbied congress to do consumers a major favor on that score a few years back. All mortgage inquiries within a fourteen day period count as the same one inquiry. Second, the vast majority of the time it's just a line of bull to keep people from finding out how overpriced they are or to keep you from consulting people who may be able to do it on a better basis. I've talked to people with 750 plus credit scores, twenty years in their line of work, and a twenty percent down payment who had been told that, when the truth is that a monkey could probably get them a loan! By shopping around, you will save money and get more information about the current status of the market.

Caveat Emptor

Original here

Many people have no clue how qualified they are as buyers, or borrowers.

There are two ratios that, together with the credit score, determine how qualified someone is for a loan.

The first, and by far the more important, is debt to income ratio, usually abbreviated DTI. This is a measurement of how easy it will be for you to repay the loan given your current income level. One point that needs to be made is that this ratio protects you as much as it does your lender. You've got to be able to make those payments, and if you can't, you're going to suffer far worse consequences than simply not getting the loan. Better for you as well as the lender to deny a loan with an unmanageable debt to income ratio.

The debt to income ratio is measured by dividing total monthly mandatory outlays to service debt into your gross monthly income. Yes, due to the fact that the tax code gives you a deduction for mortgage interest, you qualify based upon your gross income. This ratio is broken into two discrete measurements, called front end ratio and back end ratio, for underwriting standards. The front end ratio is the payments upon the proposed loan only (i.e. principal and interest), whereas the back end ratio adds in all debt service: credit cards, installment loans, finance obligations, student loans, alimony and child support, and property taxes and homeowner's insurance on the home as well. With the current paranoid lending environment, the front end ratio has become significant where it was formerly almost ignored. I have seen front-end ratio become a real concern in a couple of recent loans. The thing that will break most loans, however, is the back end ratio.

As to what gets counted, the answer is simple. The minimum monthly payment on any given debt is what gets counted. It doesn't matter if you're paying $500 per month, if the minimum payment is $60, that's what will be counted.

"Can I pay off debt in order to qualify?" is a question I see quite a lot and the answer depends upon your lender and the market you're in. For top of the market A paper lenders, who have to underwrite to Fannie Mae and Freddie Mac standards, the answer is largely no. If you pay off a credit card where the balance is $x, there's nothing to prevent you going out and charging it up again. Even if you close it out completely, the thinking (borne out in practice, I might add) is that you can get another one for the same amount trivially. "Won't they just trust me to be intelligent and responsible?" some people will ask. The answer is no. Actually, it's bleep no. A paper is not about trust. A paper is about you demonstrating that you're a great credit risk. Even installment debt is at the discretion of the lender's guidelines. If they believe that what you really did was borrow money from a friend or family member who expects to be repaid, expect it to be disallowed. Therefore, the time to pay off or pay down your debts is before your credit is run and before you apply for a loan.

For subprime loans (when real subprime existed), the standards were looser. As long as they could see where the money was coming from, they would usually allow the payoff in order to qualify.

Many folks thought that stated income loans didn't have a DTI requirement. They did, when they existed. As a matter of fact, stated income was even less forgiving than full documentation loans in this regard. As I keep telling folks, for full documentation, I don't have to prove every penny you make, I only have to prove enough to justify the loan. If what I proved before falls short, but the client has more income, I can always prove more. For stated income, we had to come up with a believable income for your occupation, and then the debt to income ratio is figured off of that. Even if the lender agreed not to verify income, they were still going to be skeptical if you change your story. "You told me you make $6000 per month three days ago. Now you're telling me you make $7000 per month. Which is it? Please show me your documentation!" In short, this loan had now essentially changed to a full documentation loan at stated income rates. Nor were they going to believe a fast food counter employee makes $80,000 per year. There are resources that tell how much people of a given occupation make in the area, and if you were outside the range it would be disallowed. So you had to be very careful to make certain the loan officer knew about all the monthly payments on debt you're required to make. Sometimes it doesn't show up on the credit report and the lender found out anyway.

Debt to income ratio has nothing to do with utilities (unless you're in the process of paying one of them back). Utilities are just living expenses, and you could, in theory, cancel cable TV if you needed to. Once you owe the money, you are obligated to pay it back.

As for what is allowable: A paper maximum back end debt to income ratios vary from thirty-eight to forty-five percent of gross monthly income. I'm a big fan of hybrid adjustables, but they are, perversely, harder to qualify for under A paper rules than the standard 30 year fixed rate loan despite the lower payments. This is because there will be an adjustment to your payment at a known point in time, and you're likely to need more money when it does. Note that for high credit scores, Fannie Mae and Freddie Mac have automated underwriting programs with a considerable amount of slack built in.

Some things count for more income than you actually receive. Social security is the classic example of this. The idea is that it's not subject to loss. Once you're getting it, you will be getting it forever, unlike a regular paycheck where you can lose the job and many people do.

Subprime lenders would usually, depending upon the company and their guidelines, go higher than A paper. It's a riskier loan, and you could expect to pay for that risk via a higher interest rate, but even with the higher rate, most people qualified for bigger loans subprime than they will A paper. Some subprime lenders would go as high as sixty percent of gross income on a full documentation loan.

Whatever the debt to income ratio guideline is, it's usually a razor sharp dividing line. On one side you qualify, on the other, you probably don't. If the guideline is DTI of 45 or less, and you are at 44.9, you're in, at least as far as the debt to income ratio goes. On the high side, waivers do exist but they are something to be leery of. Whereas many waivers are approved deviations from guidelines that may be mostly a technicality, debt-to-income ratio cuts to the heart of whether you can afford the loan, and if you're not within this guideline, it may be best to let the loan go. You've got to eat, you probably want to pay your utility bills, and you only make so much. Debt to Income ratio is there for your protection as much as the bank's.

Caveat Emptor

Original here

The companion article on Loan to Value Ratio is here.

Having written several articles on Negative Amortization Loans, telling of the details of what is wrong with them, and even destroying the myth of Option ARM cash flow, I sometimes get asked if I would like to see them banned completely.

Well, given the pandemically misleading marketing that surrounds these loans, and pandemically poor disclosure requirements, I am tempted. It only takes one person losing their life savings and having their financial future ruined to make a very compelling story, and I've seen a lot more than one and read about many more. Furthermore, it's almost a moot point right now. The requirements for offering them are onerous and nobody does.

However, when you ask if they should be banned outright, I have to answer no.

Part of this is my libertarian sympathies. Adults should be allowed to make their own mistakes. But there are economic and a realpolitik reasons as well.

The fact of the matter that just because Negative Amortization loans are oversold under all of the friendly-sounding marketing names such as Option ARM, Pick a Pay, and even 1 Percent Loan (which they are not), does not mean that there is no one for whom they are appropriate or beneficial. People for whom these are appropriate do exist. Consider someone with crushing consumer debt, and no significant usable equity on a home they've owned for a while. They sell the home, they end up with nothing and still have the consumer debt. They can't refinance cash out. But if you put them into an Option ARM for a while, you remove from several hundred to over a thousand dollars per month from their cash flow requirements. In three years, they will pay off or pay down those consumer debts, and then you refinance to put them back on track, and the money that has accumulated means nothing compared to what they've paid off. Yes, if the market collapses they're likely to be in trouble, but if you don't do it, they're in trouble at least that bad now. It's a narrow niche, but it does exist.

Consider also someone starting a business. Cash flow insolvency is what kills most start-up businesses. Until the customer base builds, they don't have enough money to pay the bills. Lower monthly cash flow requirements on their house can mean the difference between success and failure of their business, far outweighing the cost of the extra money in their balance that they accumulated. Furthermore, the fact is that when their cash flow gets tight, they're not making the mortgage payment anyway. They are likely to lose both business (through insolvency) and property (through foreclosure) if the business fails anyway, and the lowered cash flow requirements of the Negative Amortization loan may give the business more of a chance to succeed, and once it is profitable it will pay back the investment many times over.

There's still a need to really explain what's going on, and all of the drawbacks of the loan, but people in these two circumstances really do have a valid possibility of it being in their best interest. Banning negative amortization loans completely takes away that option, thereby hurting those people.

When I first wrote on this subject, I didn't think it was politically possible to ban these loans that have now cost millions of people their homes, their credit rating, and their life savings. So far that is holding up. They're not actually banned; it's just that no investors are willing to take a chance on loaning money for them right now. Furthermore, due to the cries of the wounded beast, the law now mandates some tough disclosure requirements for them - some few of which are for the benefit of the consumer.

Disclosure requirements are is an approach that will work. That is, at this point, what really killed the negative amortization loan sales. The scumbags who made a habit of selling these now have to tell the prospective victims in easy to understand language and easy to read print about all of the problems they are letting themselves in for with these loans, very few people are going to sign on the dotted line. I originally suggested this: "Caution: If you accept this loan, the 1% is a nominal, or in name only, rate. You are really being charged a rate of X%, and this rate will vary every single month. If you make the minimum payment, your loan balance will increase by approximately $Y per month at current rates, or Z percent within five years. You will have to pay this money back in lump sum if you sell, or with higher payments at a later date. If you cannot afford full payments now, you will unlikely be able to afford them in the future after your balance has increased. There is a three year prepayment penalty on this loan, and if you sell the property or refinance within that time, you will pay a penalty of approximately $A in addition to whatever additional balance has accrued. It is currently under consideration that the mere fact that you have one of these loans will have significant derogatory effect upon your credit rating, even if you never make a late payment, due to financial difficulties encountered by borrowers with this kind of loans in the past." I could go on in bullet points for a couple of pages, but I trust you get my point. What the government did in fact do is technical and shorter, but similar. Enough so that with some less stringent warnings in writing from the federal government, the least any marginally competent adult is going to do is find out what's really going on.

Furthermore, the only way disclosure requirements could be fought by the industry is behind closed doors. The only way it stays behind closed doors is if nobody raises a political stink, and it's easy to raise a political stink about stuff like this. Newspapers and television reporters and bloggers all converge on the issue, and the industry is left in the awkward position of crying because they have to tell the truth. That doesn't play well with the American public. The way this plays with the American public is the major reason for the successes of Porkbusters, among others. Despite some very entrenched and very powerful enemies lining up against them, they've won on a couple of big issues because of the power of the idea that the American people have that the truth should be told. Take the tack that all you want is for the industry to tell the truth, and watch the political wind die out of their sails. David beats Goliath pretty reliably in American politics when the issue is "Do I have to tell the truth?"

To summarize, it is tempting to try to ban negative amortization loans. But it is far better social and economic policy to go the disclosure route instead, and far more likely to be politically successful.

Caveat Emptor

Original here

It has become very trendy to ask for pre-approvals on loans, because so many escrows are falling through. Unfortunately, as I have explained in the past, Loan Pre-Approval Means Nothing, and prequalification means even less. Both are literally wasted paper. As far as actually meaning anything you can hold someone to, they're useless. Worse than used toilet paper, which was actually put to some useful purpose once upon a time.

I never trust either a pre-qualification or pre-approval unless I did it. As I've said before, there is no accepted standard for either. Furthermore, I doubt there ever will be. Agents aren't asking for these pieces of waste paper because they're concerned about their listing clients. They're asking for them to cover their own backside so they don't get sued when the transaction falls apart.

There's no way on this earth that you can promise that owner that the transaction isn't going to fall apart. Accepting any offer always has some attached risk. If the buyer can't actually get the loan funded, the seller is out of luck as far as getting that purchase price for the property, and you'll have to go back to square one.

This isn't to say that the seller is out the whole amount. The buyer risked whatever good faith deposit, which should be at least enough to pay the costs of carrying the property for a month or two. This isn't to say that the seller is necessarily entitled to the deposit or that escrow will automatically remit it to them. There are rules about that. But the contract is very carefully written to limit the amount of time before the seller is entitled to the buyer's deposit. If you're concerned that the buyer may flake, or not be able to qualify, the correct thing to do is negotiate more of a deposit and more favorable terms for it to come to the seller in the purchase contract. If listing agents were really trying to protect their seller clients from failed transactions, they'd be focusing in on larger deposits and trying to get them paid to the seller while the property is still in escrow. That's real protection for the seller. Of course, many buyers will walk away from such terms, meaning that it goes from a possibility of that listing agent getting paid to no possibility of that listing agent getting paid.

Buyers understand the deposit in cash terms. They scraped and saved this money in real time, dollar by dollar. It's real to them, and they don't want to risk it. You've got a better chance of getting $10,000 more on the price with most buyers than of getting a $1000 higher deposit, or more favorable terms for forfeiture. Of course, a lot of buyers choose to go unrepresented or use the listing agent to represent them. Both are silly, when you understand what's really going on. But demanding a high deposit, or harsh terms of forfeiture, is a good way of scaring off potential buyers. Savvy agents understand that an increased deposit is a way to get a better price for their buyers. If you require a high deposit and harsh terms of forfeiture, you are discouraging certain buyers, shrinking the pool of potential purchasers, thereby lowering the likely eventual price.

Of course, being able to negotiate a good contract is a major part of what an agent's getting paid for. In some circumstances, high deposit will be appropriate. For instance, if the buyers are getting a really good price. If I'm getting a property $100,000 cheaper than comparables around it, I shouldn't mind putting up a bigger deposit, or agreeing to more stringent terms for forfeiture. On the other hand, if I'm paying top dollar for the property, I'm going to be a lot more guarded. Mind you, I don't make offers without evidence that my clients can qualify for the necessary loan, but I'm going to want that seller to assume more of the risk of the transaction falling through. If they're getting a good price, they should be willing to. If they're not so willing, they're basically saying that the transaction isn't worth the increased risk. Remarks about having your cake and eating it too apply. I'm certainly willing to persuade my clients to offer a better deposit to get a lower overall price. But I'm also perfectly willing to tell an overaggressive seller to go jump in the lake if they want harsh terms for the deposit without my client getting something tangible in return. The reverse of each applies when I'm listing a property. If the buyer is offering - or willing to offer - a large deposit or terms that are generous to my client, I may counsel acceptance of such an offer where I wouldn't of an otherwise identical offer with a smaller deposit or less generous terms for its forfeiture. It tells me that the buyer is willing to risk something real if they can't qualify after tying up the property.

There is another alternative, if you are or have a loan officer that you trust. Get their credit information. After all, a buyer is in a position where the sellers are in fact considering extending credit. Income, FICO, credit score, other debts. Ask your loan person if they could do a loan for this buyer. Of course, if your loan officer is a bozo, or if the buyer's is, all bets are off under this option. Under RESPA, you can't make them so much as put in an application with any loan provider not of their choosing.

If the sellers are not concerned enough about the buyers' ability to qualify to be willing to accept a lowered sales price for better terms on the deposit, I'd say it's not very important to them. If they're not willing to keep looking for another buyer, they want to do business with this one, and they must be getting something worth their risk out of the prospective transaction.

I recently had an agent tell me that requiring a pre-approval was part of their due diligence. Nonsense. I'll go so far as to say it's preposterous. The deposit is real. Information on creditworthiness is real, if subject to more interpretation. Pre-Approvals and Pre-Qualifications are a waste of space in the file, approximately equivalent in worth to an attestation that there is indeed a screen door in this submarine. There is no rational reason to choose one buyer over another, or accept one offer and refuse another, that has its roots in the pre-qualification or pre-approval. There's nothing there that you can hold anyone responsible or accountable for if the buyer does not actually get the loan funded, and if there's nothing there you can hold anyone accountable for, it's not anything real. Which makes it purely a CYA on the part of agents. Some of them may think it means something real, but it doesn't. Those agents need to be educated.

I'll admit I hate being asked for pre-approvals, even though I should probably love it as the sign of an agent that doesn't know what they're doing. But all too many times in the current market, a listing agent that doesn't know what they're doing is a sign of not being in touch with the current market, that I'm spinning my wheels in any negotiations, because the listing agent has no idea what properties like this one are actually selling for. It feels like you're trying to get useful work done on a computer that's frozen up and gone to blue screen of death. Not useful, and not helpful to either my client or theirs. You do have the option of behaving like a recalcitrant mule. Nobody can make you stop, but it's not likely to be beneficial to your bottom line.

Caveat Emptor

Original article here

One of the standard arguments I hear about Negative Amortization and Option ARM loans is that they "give the client the option to make a smaller payment if they need to." This so-called "Pick A Pay" benefit is a real benefit, but it's an expensive benefit, one that the client will pay for many times over. They are better off just managing their money well to begin with.

Let's go into some details. Let's consider someone with a $400,000 loan on a $500,000 property, and dead average credit score, and to keep the playing field level, let's price loans with the same 3 year "hard" prepayment penalty. When I originally wrote this, I had a 30 year fixed rate loan at 6.00 percent, less than one point total net cost to the consumer. The equivalent Option ARM/"Pick A Pay"/negative amortization loan was actually a little above 7.5 percent real rate, although it carried a nominal rate of 1%. Furthermore, removing the prepayment penalty would make a difference of about an eighth of a percent to the rate on the thirty year fixed, while I have yet to see a Negative Amortization loan that even had the option of buying the penalty off completely, and this loan carries higher closing costs to boot.

Now, let's crank some numbers. That thirty year fixed rate loan has a payment of $2398.21. Nothing ever changes unless you change it by selling or refinancing. The first month, $2000.00 even is interest and $398.21 is principal. You pay for a year, $23,866.38 in interest and $4912.05 in principal is gone, and you've made payments totaling $28,778.43. You are also free to pay down up to twenty percent of the loan's principal in any year without triggering the prepayment penalty.

Plugging in 7.5% for the real rate to keep the math a little easier, the Negative Amortization Loan has four payment "options" of $1286.56, $2500.00, $2796.86 or $3708.05. These options represent "nominal" payment, "interest only" payment, "30 year amortization" payment, and "15 year amortization" payment. Actually, the last three options will vary every month, but let's hold them constant just to make my point. As a matter of fact, if you don't make a habit of paying at least the thirty year amortization payment, the options for payment will increase over time, even before reset. The chances of people making the thirty year amortized payment in the real world are minuscule, as I make clear in my first article on this subject, Option ARM and Pick a Pay - Negative Amortization Loans, but let's play the game, just to see how it turns out if you give the advocates everything they ask for and more.

Crank the numbers through for twelve months, and you've paid $29,874.96 in interest, $3687.34 in principal, and made $33,562.30 in total payments. This is the "going along, making the loan payments" that the advocates are talking about. Here's a table, comparing this to the 30 year fixed rate loan:

When you put it in those terms, I don't think there's any question which loan a rational person would rather have. But that's not the situation the advocates would have us believe is beneficial, at least not with this particular argument. Let us presume that two months out of that year - and to keep the math as simple and as favorable to their argument as possible, let's make them the last two months - that you decide you have the need to make minimum payments, and let's see what happens. you've paid $29884.40 in interest, lost all but $657.30 in principal payments, and made $30,541.70 in total payments. Now, if you're making the minimum payment more than one month out of six, most folks should agree it's not an "occasional" thing, it's more of a "regular occurrence" thing, which situation I have already done the math to refute any claims of advantage. Here is a table comparing that "2 month short pay" option to the thirty year fixed rate loan:

Look very carefully at that "total paid" row. The thirty year fixed has saved you $1763.27 in total payments. Now, this begs the question of what you're paying it out of, but if you haven't got the income to make the payments from somewhere, you shouldn't have the loan. It's not good for you. So we're assuming that money is coming from somewhere, and as I have illustrated, if you'll just not spend it as it comes in and set a little bit aside in case something happens to your cash flow, that 30 year fixed rate loan leaves you with $1763.27 of your hard-earned money in your pocket. Not to mention just an all around better situation, as evidenced by the rest of the second table.

Let's even add in another scenario: The Negative Amortization loan with the two 'short' payments versus a thirty year fixed rate loan with a five year interest only option. Those were available at 6.25% back then.

Leaving you with $5,541.70 in lowered real payment, even taking the two 'short pay' months. You could put $3000 of that towards paying the loan down without triggering the penalty, plus have $2500 plus still in you pocket, and be thousands of dollars better off in every particular - more money in your pocket, less money owed on the loan.

Now, given the fact that these loans have basically nothing to recommend them to clients, why do alleged professionals keep pushing them off on the public? Well, two reasons, both of them having to do with money. $$$. Coin of the realm. Specifically, commission checks.

First off, it should come as no surprise to anyone that lenders are willing to pay very high yield spreads for negative amortization/Option ARM/"Pick a Pay" loans. The yield spreads start at about 3 and a quarter percent of loan amount, and go up to 4 percent, with most clustering in the higher part of the range. By comparison, that thirty year fixed rate loan pays 1 percent. On a $400,000 loan, like the one in the example, that's the difference between a $4000 check and a $15,000 check. Doesn't that make you feel good that they left you twisting slowly in the wind so that they could make $11,000 extra? Didn't think so.

The second reason that people do this to you is that it makes it look like you can afford a larger, more expensive property than you really can. Most people tell professionals how much property they can afford in terms of monthly payment. Well, shopping for a property or a loan by monthly payment is a disastrous thing to do, as the first part of this article, among many others, illustrates. But let's say you tell the Realtor that you can afford $2500 per month. Most people are thinking of mortgage payments in the same terms as rent payments, when most people can afford a higher mortgage payment than rent, but let's use these numbers. Let's just use that numbers, and have insurance and property taxes call it a wash. For $2500 per month payments, you can make real payments on a $410,000 property, or you can make minimum payments on a $775,000 property. At 3% buyer's agent commission, assuming they are only representing you and didn't list the property, and assuming they do the loan as well, they can get checks totaling about $16,400 for the buyer's agent commission and loan in the first situation, or $52,300 in the second. Not to mention I don't have to tell the client to limit themselves to what their pocketbook can afford in the second situation. Even here in San Diego, that $775,000 property is a beautiful five or six bedroom 2800 square foot home with all of those nice little extras like travertine floors, three car garage, marble counter-tops, etcetera, in a highly sought after area of town with great schools, whereas the $410,000 property has linoleum floors, no garage, Formica counter-tops, and is in a neighborhood with marginal appeal and probably not so wonderful schools. Which do you think sounds like a more attractive property and an easier sale, for what the typical buyer thinks of as the same payment? Which property do you think the typical buyer is going to select, particularly if they have never had all of this explained to them?

Finally, for pure loan officers, it's a way of appearing to compete on price without really competing on price. The average person is told about this great 1% payment of $2500 when the real payment for a thirty year fixed rate loan (allowing for the fact that this has become a jumbo loan) is $4771.80, and they just aren't looking at little things like two extra points of origination or higher closing costs, as it just doesn't make that much difference to the payment. They can also slide in a higher margin over index that gets them an even higher yield spread, and it doesn't influence that minimum payment at all, which is the only thing this client has their eyes on. So what if the final payment comes in at $2600 (making the loan officer roughly $35,000 or more)? So what if their loan balance is increasing by $2000 per month? Most people just do not and will not do the work that enables them to spot this trap. Scary, isn't it? But we've now seen the evidence that people will not do their homework ahead of time, to the tune of millions of foreclosures on this runaway train wreck of a loan.

Caveat Emptor

Original here

Read your article on negative arm loans, and for the person who only owns a residence and most real estate investors it will not work. I own several properties, and the parcel to be refinanced is ocean front...so is going up in value more than the negative arm would be when refinanced after prepay penalty period. Cash out would be used to pay off other mortgages, thereby increasing my cash flow for a few years. Does your advice against negative arms apply in my situation?

I believe he's referring to this article.

This is actually an excellent question, and the answer is ... maybe. At least it is not a clear "no", unlike so much of what the Negative Amortization loan is misused for. This largely goes beyond the scope of what I'm trying to do with this site, but I'll take a swing at it.

The fact is that I can construct a scenario that goes either way, and the implicitly high appreciation rate you mention has surprisingly little to do with it.

The positive is that your other loans are paid off! To use Orwell-speak, this is maximum plusgood.

The negative is that this loan now includes every dollar you previously owed. Furthermore, there may be negative tax connotations to the fact that all of your interest expense now comes from one property, as opposed to being able to directly match it against individual properties with individual incomes. If interest against one property is greater than the income for that one property, you may not be able to take it all, as it's definitely a "cash-out" loan of the sort that the IRS has been limiting to partial deductibility. I'm not clear on all the implications of the tax code here (and I'd like to be educated), so consult with a CPA or Enrolled Agent. Plus it definitely becomes a full recourse loan, no matter the original circumstances.

Furthermore, your new loan won't magically create any "lake" of dollars. In order to pay off the other loans, it's going to have to be the size of all of them combined, plus any prepayment penalties, plus all costs of doing the loan, plus potential pre-payment penalties for the Negative Amortization loan.

Now consider: If you make payment option one (the "nominal" or "as if your rate was 1 percent" payment), you are allowing compound interest to work against you. This is the force Einstein described as "the most powerful force in the universe", and it's working on the whole dollar amount of every single one of your current loans and then some.

Ouch.

No matter which payment you're making, the rate you are being charged, (aka "what the money is costing you") is not fixed, but variable month to month. As far as most commercial property loans are concerned, this is no big deal. They're pretty much variable at "prime plus" anyway. However, I expect the MTA and COFI (upon which Negative Amortization loans are based) to continue rising as government borrowing increases, whereas I'm not so certain about prime.

Now with all this said, it's still very possible to construct winning scenarios, depending upon a variety of factors. You mention short-term cash flow, and that is certainly one possible justification. If short-term cash flow is all you're looking for, and the money it will cost you later on is no big deal because you're planning to buy down the prepayment penalty and sell in a short period of time. Yeah, you've added to your balance but you've got plenty of equity and you'd rather have a few hundred per month now than multiple thousands later. Think of it as a cash advance.

One of the things that negative amortization loans can do for you is make it easier for you to qualify for more loans on more properties. Because in loan qualification, the bank will only give you credit for 75 percent of prospective rents while dinging you for the full value of payments, taxes, fees, maintenance, etcetera, this can make it much harder to qualify than is realistic, given that in many markets the vacancy factor is less than five percent. You actually pay more, but you're not obligated to. Particularly because many people own investment properties for the capital gain rather than the income potential (i.e. price speculation, rather than monthly income). On the other hand, just because a property has been appreciating rapidly does not mean it will continue to do so, beachfront or not. The market nationwide is very different now than was previously. I can point to beachfront property here locally that's lost a lot of value since early 2005. Price speculation is great when it works (which is most of the time), but is really scary when it doesn't. It's a reward for risk-taking, so don't lose sight of the fact that it is a risk.

One other factor of doing this is that it can cause taxes on a sale to exceed net proceeds. Suppose you intend to sell the beachfront property in a couple of years, and it doesn't gain any more ground from where it is right now. Many properties were bought for less than 10% of their current value. Let's say you bought for ten percent of current value. If your loan is for eighty percent, and you pay six to seven percent in sale costs, you're getting ninety-three to ninety four percent of value, leaving a net of thirteen or fourteen. But you owe long term capital gains of eighty-three or eighty-four times twenty percent - almost seventeen percent! This can force you to take another loan out, against one of those "free and clear" properties lest you owe the IRS penalties. Yes, 1031 (or 1035) and even a potential personal residence exclusion can modify or nullify this, but so can all the depreciation you may have taken over the years, and if you intended to 1031 the property that would tend to contra-indicate any reasons you had for the negative amortization loan.

Now, to be honest, my experience with commercial loans is limited, and I've never done a negative amortization commercial loan. What few clients I've had in that market have had different goals in mind, and being as I'm a sustainability type loan officer, I tend to attract sustainability type clients, where Negative Amortization loans are more indicative of a speculative ("risk taker") type. I understand what's going on, but it isn't my primary approach to the issues. There are circumstances on investment properties where, unlike your primary residence, it can be appropriate. Unfortunately, without full specifics, including time schedules, goals, reasons for holding investments, other investments, risk tolerances, etcetera, it's difficult to tell if yours is one of them. My experience in dealing with people is telling me one thing, my sense of ledger evaluation is hinting at a different answer. But I hope I've given you a clear idea of the kinds of issues you need to look at with professional help.

Caveat Emptor

Original here