September 2023 Archives

No, I'm not turning into a country western singer. Just got a search for "no closing costs no points loan cheapest rates loan". The visit (to this article) lasted less than a full second. The obvious implication was that it wasn't what that person was looking for.

One of the reasons consumers get mercilessly taken advantage of in mortgage and real estate is because they assume they know everything they need to. Unfortunately, the vast majority don't know everything they need to. Most of the time there are gaps in their knowledge that the unscrupulous can sail the Queen Mary through - sideways. Hence the fundamental dishonesty of almost all mortgage advertising.

As I have said before on many occasions, lowest rates do not go with no points or no closing costs loans. Period. One of these things does not go with the others. Rate and total cost of the loan are always a tradeoff. Nobody is going to give you money, of all things, for less than the cost of money.

This is not to say that one loan with no closing costs may not be cheaper than another loan with no closing costs. The point is that there will be lower rates available with some closing costs, progressively more so as you get higher closing costs. Then if you start paying points, there will be still lower rates available. There is a reason why they are paying all of your closing costs - you're choosing a loan with a higher rate than you otherwise could have gotten.

No cost loans can be and often are the smart thing to do (Unfortunately, the Congress of 2009-10 effectively outlawed the loans by requiring yield spread to be treated as a cost, which it isn't (not to consumers), and said yield spread was the only funding mechanism for it) . Because they are the only loans where there are no costs to to be recovered, they are the only loan that can possibly put you ahead from day one. Consider the zero cost loan as a baseline, and compute what lower rates will cost you in closing costs. Consider: If the zero cost loan is 6.75 percent and you currently owe $270,000, your new balance should be $270,000. If you can get 6.5 at par with closing costs of $3500, your new balance is $273,500. Your monthly interest in the first instance is $1518.75 to start. Your interest charges in the second case are 1481.46. The lower rate cost you $3500, but saves you 37.29 per month. Divide the cost by the savings, and you break even in the ninety-fourth month - not quite eight years. So in this example, if you think you're likely to refinance or sell within eight years (in other words, practically everyone), you'll be ahead with the zero cost loan.

If the loan has a fixed period of less than the break even time (any loan that goes adjustable in less than 94 months in this example), you also know that the costs are not a good investment. If this loan were only fixed for five or seven years the rates go to precisely the same rate after adjustment, underlying index plus the same margin. If you haven't broken even by then, you never will, even if you decide you want to keep the loan.

So whereas a true zero cost loan is often the best and smartest way to go, it will never be the lowest rate available. You need to choose carefully where on the spectrum you choose, because there's no going back once the loan has funded. All of the up-front costs are sunk, and you don't get your money back just because you don't keep the loan long enough to break even.

Caveat Emptor

Original here

I saw your article on on Searchlight Crusade about exclusive buyers agents and I have a couple follow up questions pertaining to my own situation that I am hoping you could shed some light on.

I don't have any buyers agent (currently). However I have spotted 2 houses in an area that I think I would like to make an offer on. Both of these houses are listed by real estate agents. I am obviously eager to save as much money as I can and think it would be great to try and save on the agent undefined if at all possible (I have bought FSBO before, so I am familiar with the process and I don't see much value add with an agent since I have already found the properties).

However I just don't get it - if I make an offer on the property by working with the sellers agent then the sellers agent gets both commissions? Is there a way to just take the buyers agent commission off the sales price? If there isn't then I guess there is no reason not to go and find a buyers agent to assist me? Seems like a waste of money.

I have found an buyers agent that who said he will give me 50% of the commission if I sign an exclusive buyers agent contract with him however I am worried that my hands are tied if I don't end up purchasing one of these properties I have already identified (ie I could end up paying 1/2 his typical commission if I found a FSBO).

Any insight you could provide would be of great help - I love reading your stuff.

Thanks,

The first thing I need to clear up here is the nature of listing agreements. The standard listing contract form gives the listing agent the full commission for both buying and selling, and if someone other than them represents the buyer, then they agree to pay the buyer's agent a portion of that. If there is no buyer's agent, they keep it. Since you have to make your offer through the listing agent, the listing agent gets that commission, and that is as it should be. Note that I believe it is stupid to act as agent for both parties in the same transaction because seller's interests and buyer's interests are often at impasse, and when you're acting as agent for both sides, there are many potential issues which, if they happen, are lawsuit material one way or the other no matter what the agent does. If I find a buyer for my own listing, I'll find another agent I trust to do a good job or have them sign a non-agency agreement, and that way there is no conflict of interest. But greed is a powerful motivator, as you yourself are illustrating. The fact is that if the listing agent wants the full commission, they will probably end up with it, and justifiably so, as they found the owner a buyer, didn't they? That's what the contract says the seller's commission is for. You saw their sign, you saw the house they listed, you made an offer through them, the house got sold through their efforts. According to the terms of the listing contract, they found you, whether you realized it before now or not. The buyer's agent commission is for an agent who has a buyer who sells them that property, as opposed to the one down the street.

Many agents make side agreements to rebate part of their commission in certain circumstances. But that potential rebate contract in this case is with the seller, not you, and is none of your business. Unless the agent has a release to discuss it with you in writing, they are violating confidentiality to do so. The seller may sell to you cheaper because of such a clause, but they are under no obligation to do so.

Now before you dismiss this with, "That's Stupid!" or something worse, because it appears that things are stacked to cost you money, consider that this has evolved over many years as the best and cheapest way to preserve everybody's best interests. Without these forms, there would be a lot more lawsuits filed over commissions, with the side effect that the lawyers get rich, and the money ends up getting paid anyway on top of the lawyer's fees. The listing agent commission is partially a hold over from the old single listing days of half a century ago. Over time, the buyer's agent commission evolved as a way to open the system up, so that homes sold faster and those agents and offices without a large, pre-built client base could break into the business. But it's still intentionally structured that way as a way to motivate that listing agent to advertise the property far and wide and especially in all of the most effective venues. It costs money for that sign in the yard. It costs money for MLS access. It costs money for advertisements in the paper. It costs money for all the trappings that enabled someone to go find that agent and list the property in the first place. It costs that agent money just to stay in business whether they have any clients or not. It costs the agent money for the advertising to attract clients in the first place. And chances are, if they hadn't spent that money, you wouldn't have found that property, and the owner wouldn't have sold it. Consider also the liability issue, which is huge and real. Are you volunteering to give up any legal rights for a complaint? Didn't think so. Which means they have to go through all of the disclosures, and they're still liable if they make a mistake. How many people do you know that do major work in their occupation for free, even though they're still going to be liable for potentially hundreds of thousands of dollars if something isn't perfect?

People think agents are making money hand over fist, when the reality is that unless they're putting in the long hours and hard work to make multiple transactions happen every month, they're just barely scraping by. Most of the successful agents I know put in sixty hours or more per week, and if they are putting in less than forty, I'll bet money on no other data that they'll be out of business in a year. This is not a cheap business to be in, or an easy one. I don't blame you for wanting to economize - it is a lot of money. If you don't think about what it's getting you, and what you're getting, and what agents are giving you, and the liability they're assuming, and what they have to spend to stay in business, and you just look at the check the brokerage is getting, it seems like a lot of money.

Put yourself in the shoes of a seller. You have a property, but you want cash. Real estate is not liquid, a property interchangeable with billions of other shares in Planet Earth that you can call a broker and sell over the phone because there's a ready market for shares in Planet Earth which are all interchangeable. Instead, each and every property is unique. This means it is bought and sold on the basis of those unique individual characteristics. You want results, you want your property sold for the highest possible price, you don't want it coming back to haunt you if there was something wrong you didn't know about, and it costs money and it takes work to make buyers want to buy your property.

Sometimes the agent gets lucky of the market is hot and it sells quick. Sometimes the agent works hard - and they really do work - for months with no offers despite all of it. There are times where a monkey could have sold a residential property within a week for more than the asking price, and there are times when no matter how good the agent is, you still need luck. This requires an adjustment in thinking if you're going to do well. Average total commission paid is up locally in the last few months, from five to six percent. Particularly in a rough market, if the seller tries to sell it themselves, it will statistically take longer, and they will statistically net less money from the sale, not to mention what they spent on the property in the meantime. Some few get lucky. People win lotteries and casino jackpots, too. Betting that you'll be one of them is a sucker's game. Any number of studies and statistics show this fact, and many brokers make a good living buying FSBOs to then resell for a hefty profit. The last broker I worked for is one example. In one month, we sold four properties he bought from FSBOs, all for a substantial profit, even in a down market. Sellers tried to think like you do, and it cost them over $150,000 net of commissions, and these were all fairly quick sales. Had we tried harder to get maximum value for his money, we could likely have gotten more, but he's not complaining.

Before we go any further, let's look at what a buyer's agent really does. It isn't just pop you into the house and watch you wander around. While you're oohing and aging over the beautiful kitchen and the brand new carpet, I'm looking for foundation cracks. I'm analyzing floor plan. I'm looking at location and real condition of the structure and how good a design the property is and whether I can see issues that are going to cost you money down the road and considering eventual resale value and comparing it to other nearby properties I've seen. I have talked buyers out of superficially attractive properties on each and every one of those points in the last month or so, saving them a lot of money and headache down the road. The listing agent is working for the seller, and it would be a violation of fiduciary duty for them to say anything about any of these negatives.

Now, with that said, let's look at your current situation. I've already covered the fact that the listing agent is entitled to that commission. Now let's put you on the other side of the table from a guy whose responsibility it is to get the best possible price for the property, and his commission depends upon how good a job he does. He does this constantly, for a living. He's set up with information to ensure that he gets the highest price. It's cost effective for him, in a way that it isn't if you aren't doing it constantly. Betting that you're better at his profession than he is would be like him betting he's better at your profession than you are. My money is on "you end up paying more than you have to."

Here's a dead giveaway that an agent's job is trickier than you think it is: That you're even talking about an exclusive buyer's agent contract in this situation. So long as you already have the property in mind, there is comparatively little risk and a lesser amount of work for him in the situation. He's not going to have to drive you around to four million properties over the next twelve months to maybe find one you want. This is a buyer's agent's dream situation - cut straight to the bargaining, without any of the preliminary work that takes so long. If this one falls through, he can either look for more or blow you off, depending upon what he has time for. Offer him a general non-exclusive buyer's agent agreement with a fifty percent rebate if you find the property yourself, as you did in this situation. This motivates him to do his best bargaining and looking out for your interests without sabotaging the transaction. If this one falls apart, he's still got motivation to find you something on your terms, and you're not bound to him unless he introduces you to the property or you use him for negotiations, etcetera. You get a negotiator who knows your market and should know most of the tricks and is working on your behalf, and if this one falls through you have someone who's motivated to find your something with better tools and more relevant skills at his disposal than you have. He gets a commission which, if smaller, is also easier and walked its own self in the door rather than him having to go out and spend time and money to drag it in. Everybody wins. If he won't do it, find someone else in your area who will.

(Before anybody asks, I don't propose client contracts that I wouldn't accept)

Caveat Emptor

Original here

>broker incurred 19 inquires in 1 week dropping my score.

B.S.

I'd go the full Penn and Teller on this one if I wasn't trying to stay family friendly. The law is clear on this one, and practice is fully compliant with the law. I've seen thousands of credit reports, sometimes with dozens of recent mortgage inquiries. It could be 1, 19 or 19,000 inquiries. As long as they are all mortgage inquiries, all inquiries within thirty days count as one one inquiry. And the credit reporters and credit modelers I'm familiar with all comply.

The best and the worst loan officers are brokers, who shop your loan around to multiple lenders. But you don't have to stick with one broker, and you are silly to do so. Shop your loan with half a dozen at least. I used to tell people to apply for at least two loans, but changes in the lending industry make that a waste of time now. In all practicality, the dual application is dead due to regulatory and financial market changes meant to drive clients away from brokers and towards direct lenders and higher cost loans.

Credit Report scores falling with repeated inquiries used to be a real issue. Years ago, there would be a game as each inquiry was a hit to your credit, so prospective mortgage providers would run your credit again and again, until they drove your score under some noteworthy creditworthiness break-point. They could still use their original report, but since anybody who ran your report after that would see a 678 instead of a 686, or a 572 instead of 588, it would be unlikely that they could provide as good a loan.

However, several years ago the National Association of Mortgage Brokers sponsored legislation in Congress to change this. It was hardly altruistic of them, people not having their score hurt by multiple inquiries means that they are more willing to allow brokers a chance to compete. Nonetheless, this was a major benefit for anyone who wants to be able to shop around for a mortgage like they might want to for any major purchase, and mortgages are the second biggest purchases most people make in their lifetime (the biggest being the property the mortgage loan secures!). No matter how selfish the motive, however, they still did you a major favor, as someone who might want to have a mortgage someday even if you don't now. Tell your mortgage broker thank you for that.

There is a limitation to this, and ironically it affects credit reports run at banks and credit unions, although not brokers. Because in order to qualify for this, the inquiry has to be run under a provider code that says, "inquiry for mortgage." Mortgage broker inquiry codes all say "inquiry for mortgage," because that's the only type of credit they deal with. But banks and credit unions give loans for other purposes also, so they have a minimum of two inquiry codes, one that says "mortgage inquiry," and one that says, "general inquiry." If you are talking to a loan officer at a bank, who does car loans and credit cards also, sometimes they use the wrong inquiry code, and it counts as another inquiry. Talk to four banks, potentially four inquiries. Talk to four brokers, unless you space them out by 30 days or more, it's never more than one inquiry.

So anybody who tells you not to let other mortgage providers run your credit because they might drive your score down is either unaware of the law, or simply trying to scare you because they are frightened of having to compete. Incompetent or a liar, one or the other - maybe both. When you get right down to it, they are really telling you that their loans aren't very good. Because so long as they are done within a few days, the fact is that any number of mortgage inquiries all count as precisely one inquiry.

Caveat Emptor

Original here

Forty and Fifty Year Mortgages

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For a while there, the forty year mortgage had started to make a comeback, and a few lenders started introducing the fifty year mortgage. The reason, straight from the horse's mouth, the lender's representatives, is lowered payments. In an uncertain and unstable market, investors are nervous about interest only financing, and so the lenders are tightening up on the standards of who is able to qualify for that, while looking for another way to compete on the basis of lower payments. Any fig leaf to be getting their premium and avoid competing upon real price. One way that they do this is the Option ARM, or negative amortization loan. However, to anyone who does even a minimal amount of investigation those loans are like cutting your own throat. A lot of people will still sign up for them, but after Business Week did a feature calling them "Nightmare mortgages" more and more people finally started picking up on the tremendous downsides to those loans (and they were finally all but banned, too late to do any good), but if they still want too much house and they've got to be able to qualify for, and make, the payment, they need an alternative. That is the forty and now the fifty year loan.

Note that nobody does forty year fixed rate mortgages, let alone fifty. They do two and three year fixed rate loans, called the 2/38 and 3/37. Some lenders will also do a loan that amortizes over forty years, but the remaining balance is due in thirty years. This so-called 40/30 balloon has a lot in common with a thirty year fixed rate loan - including the fact that almost nobody goes more than five years without refinancing, so that the thirty year balloon should be no big deal. All of the preceding forty year loans are sub-prime loans, by the way, with prepayment penalties and higher rates than A paper. A Paper lenders doing the forty year loan are few and far between. People get longer durations from sub-prime lenders; A paper competes for the best borrowers - the ones who can really afford their loans - on rate/cost trade-off and underwriting standards. For those lenders doing the fifty year loan, it is pretty much the same story. The fifty year amortization due in thirty, the 2/48 and the the 3/47.

Because the lender is risking their money for a longer time, and with less amortization and therefore more risk, most of the lenders - particularly the ones looking to compete on rate that you would prefer to do business with - charge a slightly higher rate for forty year loans than thirty, and a little higher still for a fifty. The difference is not huge, but it is there. Where a 2/28 might be at 7%, the corresponding 2/38 might be at 7.125, and the 2/48 at 7.25 for the same cost. Sometimes they'll say that the difference is as small as a quarter point of cost for the forty year amortization as opposed to the thirty - but that's an eighth of a percent on the rate, at subprime's usual 1 point equals half a percent trade-off.

In my opinion, these longer amortization loans are mostly a marketing gimmick to lower the payment - slightly - for those who do not qualify for interest only under lender's guidelines. The forty year amortization started making a comeback early in 2005, most as the 2/38, and the fifty year about March of 2006.

My initial perception was that refusing interest only to these borrowers is a figleaf tossed to nervous mortgage investors, and this has been borne out by subsequent events. It's not like fifty year amortization is really going to make a difference, as opposed to interest only, from the point of view of remaining principal. If a 100% loan gets foreclosed any time in the first five years, or if property values decline further, the difference is basically insignificant. Let's do some math.

Assume a $200,000 loan on a $250,000 purchase in California, just so I can do it in one loan without worrying about PMI.



Amortization Period
30
40
50
Interest Rate
7
7.125
7.25
Loan Payment
$1330.61
$1261.07
$1241.78
Other costs
$510.42
$510.42
$510.42
Total monthly
$1841.03
$1771.49
$1752.20
Income to Qualify
$3685
$3545
$3505

Unlike everyone else who has written on longer amortizing loans, I'm not going to obsess about "interest paid over the life of the loan," although if you keep them that observation is true. But that's almost irrelevant. These borrowers are going to refinance in a few years anyway, same as everyone else. That's just the way things are. But let's do look at the difference between interest paid in the first two years, the fixed period for most of these at the end of which people will refinance.



Amortization period
30
40
50
interest rate
7.000
7.125
7.250
1 month interest
$1166.67
$1187.50
$1208.33
24 mos interest
$27,724.41
$28,374.03
$28,941.66
Remaining Balance
$195,789.89
$198,108.53
$199,138.73
Comparative Deficit
$0
$2968.26
$4566.09

So under these conditions, the 40 year loan only saves $1668.96 in payments over the first two years, and the fifty $2131.92. So if we subtract these numbers off the deficit in the above table, we are left that the forty year loan costs us $1299.30 in net deficit as opposed to the thirty, and the fifty year loan costs us $2434.17 net of all savings. This on top of the fact that it really doesn't make that much difference in the income we need to qualify for the loan (which in my example is limited to cost of housing with no other payments). Just paying off a credit card that takes $100 payments per month will do more to help you qualify.

These numbers get worse, not better, in the bigger loans that the lenders are using them to justify. Let's assume a $400,000 loan on a $500,000 property instead:



Amortization period
30
40
50
interest rate
7
7.125
7.25
Loan Payment
$2661.21
$2522.13
$2483.58
Other costs
$630.83
$630.83
$630.83
Total monthly
$3292.04
$3152.96
$3114.41
Income to Qualify
$6585
$6310
$6230


Amortization period
30
40
50
interest rate
7.000
7.125
7.250
1 month interest
$2333.33
$2375.00
$2416.67
24 mos interest
$55,448.83
$56,748.07
$57,883.32
Remaining Balance
$391,579.79
$396,217.06
$398,277.46
Comparative Deficit
$0
$5937.30
$9132.95

Considering that over two years, the forty year payment saves $3339.92 in payments, it's still down by $2599.38 as opposed to the thirty year amortization, and the fifty is down by $4869.83 in just two years - never mind what happens if you have to do it again in two years, and once again, paying off a credit card probably will do more to help someone qualify full documentation.

I don't see anything particularly wrong with forty and fifty year mortgages, although a thirty year loan is better while making very little difference on the payments, I can see some benefits for those who lie in this income range. But pardon my lack of enthusiasm for something that makes very little difference to whether someone qualifies for the loan, while costing them far more than they save in terms of payments, even over the short term and disregarding the effects if the people do not refinance. Far better to just persuade someone not to buy quite so much house in the first place, even if it means you get less of a commission. But then if most real estate agents sold property on the basis of what people could afford rather than it's beautiful and they want it and therefore it's an easy sale and now let's figure out a way to get them the property even if they can't afford it, the southern California real estate market would not have been in the state it has been in these past several years.

Caveat Emptor

Original here

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