Searchlight Crusadetag:www.searchlightcrusade.net,2007-08-27://32012-02-04T18:34:27Z"What you need to know about mortgages and real estate. And more."Movable Type Publishing Platform 4.0Government Policy, Economic Consequences, and Following The Trail of Logictag:www.searchlightcrusade.net,2012://3.50652012-02-04T16:30:00Z2012-02-04T18:34:27ZSomething I feel the need to point out when people talk about current issues with the real estate market, for instance, housing prices fall yet again, mortgage rates hitting new lows yet again or the Federal Reserve indicating a need...Dan Melsonhttp://www.searchlightcrusade.net/
housing prices fall yet again, mortgage rates hitting new lows yet again or the Federal Reserve indicating a need to keep returns low
Q: What happens when you artificially restrict demand (in this case by preventing large numbers of people from qualifying for a mortgage)
A: The price falls until it's low enough that the market will absorb the supply. Profits (return for mortgage investors) becomes non-existent. Money moves elsewhere. Because the supply of people who *don't* need a loan for property is limited to the rich, few people can buy homes. Prices for real estate fall.
Q: What happens to people who move their money from becoming mortgage investors to real estate investors?
A: As prices fall, the same money buys better properties. Capital returns become minimal, but rental returns become very attractive on their own as people who are prevented from buying are forced to rent, driving up demand for, and therefore price of, rental properties.
Q: What happens if you remove those restrictions (Dodd-Frank, et al)?
A: The above trends reverse. Those already wealthy people who moved their money from mortgage investment to real estate investment see massive capital returns as those formerly shut out return to the market.
Q: What is the net effect of this?
A: Massive wealth transfer from those consumers less well off to those with larger financial reserves, including major financial corporations.
Q: Ignoring what the politicians involved say, can I find in their actions any difference between those actions and a directed "evil plan" or conspiracy comparable to those hatched by any number of bad movie villains?
A: Thus far, those involved have gotten away with it.
Otherwise, no
I also feel obliged to point out that even if Dodd-Frank is never repealed, the intended beneficiaries are reaping large gains and will continue to reap them.
UPDATE for clarity
Q: Are the actions of these politicians a credible method of attaining what they say they want - protections for consumers, punishment of those responsible, and avoidance of a repetition?
A: No.
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There Is Always A Reason For A Low Asking Pricetag:www.searchlightcrusade.net,2010://3.49882012-02-03T15:00:00Z2012-02-03T14:05:01ZOne thing prospective home buyers need to understand and don't is that there is always a reason for a low asking price. There is always a reason for a low asking price. Sometimes that reason is something you can deal...Dan Melsonhttp://www.searchlightcrusade.net/
don't is that there is always a reason for a low asking price. There is always a reason for a low asking price. Sometimes that reason is something you can deal with, sometimes it isn't, but until you know, you're risking your money on an unknown.
Look at the situation from the seller's point of view: They have this valuable property. They want to get as much money for it as they possibly can. So unless it's your mother or favorite uncle or similar family member giving you a deal on property they've owned forever, get religion about the fact that there is a reason why they're asking fifty thousand dollars less than all the comparable properties. It could be that there's a broken slab. It could be that there's a condemnation about to start. It could be the golf course is about to close, or that a chemical manufacturing plant is about to get built. It could be something you can't see that will cost loads of money down the road, such as a broken water pipe undermining the foundation. It could be any number of things. Sometimes the reason is because their agent persuaded them to put a low asking price on it as one way to get lots of suckers to come out and bid against each other and run the price up (That rarely works, though).
Usually, the asking price on properties of this sort should be even lower. It only seems low because you don't know what's wrong with it and what it's going to take to fix the problem - if it can be fixed. Lots of prospective buyers don't seem to understand this. The "get rich quick" scams never point it out - doing so would severely restrict their supply of people willing to plonk down hundreds to thousands of dollars for whatever "system" they're trying to sell. But it's true, nonetheless. There are any number of reasons for a low asking price, but there's always a reason.
Every once in a while, the reason is "because they need a quick sale." Right now this is fairly common. But just because they tell you that doesn't make it true. Even if it is true, doesn't mean it's the only reason, or that you know the reason why they need a short sale. Just because you know one reason, doesn't mean you necessarily know all the reasons for the low asking price.
If you read between the lines on MLS, you can often figure out what the reason is before you even go out to a property - or at least an agent who does this all the time can. But it takes careful reading, and thinking about what they're really saying - or what they're not saying. Keep your eyes open when you visit the property, and the reason for a low asking price usually becomes obvious - or at least one such reason does. Fairly often, there are one or more secondary issues that aren't so obvious that may well cost even more to fix than the obvious issue that leaps out and grabs you.
If you're certain you know what the issues are, and you are able to deal with them, that's what people call an opportunity. But that is a very different thing from walking in cold and taking somebody's word for the fact that the little old lady who used to live here needs to sell because the nursing home needs the next month's payment (Hint: this doesn't happen. Granny can get a Reverse Annuity Mortgage if she's that desperate, and whereas I recommend against RAMs in almost all cases, this is one exception where they are the lesser of two evils, as compared to just giving away a big chunk of equity).
When there's a low asking price, be thinking in terms of things that most buyers can't deal with. Defects that prevent some or all loans from being funded. Probate where there is no money to rectify even safety and habitability issues. Things that prevent your average buyer from actually carrying through on an intention to buy a given property.
Sometimes, as with lender owned properties, it's merely that no one knows if there are problems or not. Maybe it's just cosmetic stuff like paint and carpet, maybe it's a bad floor plan, and maybe it's something a lot more serious. Get yourself a good buyer's agent and go into the property with your eyes open. Be religious about investigating the property; you're risking the full purchase price, not just the down payment, whether you realize it or not. Plus interest due on the loan, of course. Buying a property like this is always a risk - but it's what insurance underwriters call a speculative risk. As opposed to a "pure risk" where there is only opportunity for loss, speculative risk means there is opportunity for gain, as well. Gambling is the poster child for speculative risk so you need to understand it's a gamble, but when you buy a property of this sort, there is opportunity for both gain and loss. It's never difficult to understand the opportunity for gain - people will stand in line to point those out to you. It's the opportunity for loss that you've got to watch out for. A good buyer's agent will save your backside on this score more often than most people would believe.
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Builder Upgrades: Pro and Contag:www.searchlightcrusade.net,2009://3.45002012-02-02T15:00:00Z2012-02-02T14:59:40Z What I still am unclear on is the pool and how (in my opinion) it's crazy to finance $40,000 into a mortgage when you *plan* on refinancing in a few years. By *plan* I mean you take out a...Dan Melsonhttp://www.searchlightcrusade.net/
What I still am unclear on is the pool and how (in my opinion) it's crazy to finance $40,000 into a mortgage when you *plan* on refinancing in a few years. By *plan* I mean you take out a mortgage that you know isn't what you want but you took it because the builder forced you into it with "incentives" or they just plain wouldn't build a house for you if you don't use their lender and the builders lender is looking out for the builder, not you. I guess you can't *know* that the pool won't add value . . . especially in a new area where there are no comps . . . but am I crazy here?
Another situation I don't get is with all the "upgrades" they try to get you to buy with a new house. Blinds, paint, water softener, ro water filter, counter tops, cabinet upgrades. I wonder if you would be better off just getting the cheapest options and then upgrading later when you can afford to pay cash. I can guess that's the case but people figure life is too short to live in a a despicable house that has a kitchen with laminate counter tops instead of granite!! (I have laminate and somehow my wife and I manage.)
And that leads me to the pricing on new homes and how the builder sets the price and somehow the lender will lend you money on a house that may or may not be worth what you end up paying (granite counter tops may add value to the house but probably not $10,000). The more I learn the more I realize how much I still have to learn.
Builder upgrades are an almost entirely different set of rules and calculations than after-market upgrades. There are reasons for this that mostly reduce to "The lender can do a lot of things if they really want to, but most lenders don't have a reason to want to." For all of this, keep in mind that my normal stomping grounds just don't have a whole lot of new developments any more, so I don't deal with developer issues a lot, and it's very possible for the rules to change while I'm not doing any developer deals. I'm working with one set of clients right now who might end up buying in a new development, but it's been over a year since my last set of clients who bought just one (although if there are any developers reading this, I do have one investment firm client who wants to buy out the last of any new development that isn't moving quick enough).
The normal after-market upgrade, if you want a normal mortgage loan for it, has to be justified in terms of the property's current numbers. In other words, if you want to take $50,000 cash out to put in a pool, you must already have $50,000 equity available to you. You have to qualify for that loan debt to income ratio and loan to value ratio exactly as if you were going to take that money and buy lottery tickets with it. In other words, without the value of the proposed pool or other improvement added to your property, but solely based upon the situation as it sits now.
With builder upgrades, however, there's a little more latitude built in - especially where the builder controls the lender outright. Sure, the property is really only worth maybe five thousand more with that fifty thousand dollar pool installed, but because the basic number equates to money in their pocket directly, as well as money that they're going to earn interest on, they have a motivation to be more forgiving than in the case of the lender who is not getting $50,000 placed into their left hand while they loan it out - at interest - with their right. In many cases, even if they don't control the lender directly because they're not that big yet, the developers have made an agreement to indemnify the lender for any losses they take as a result of lending that money. The builder is secure in the knowledge that they'll make a lot more from the increased number of upgrades than they'll lose from the small proportion of defaulters. However, this should explain to consumers why sometimes builder's preferred lenders can do things nobody else can - because they're getting paid to do it. Furthermore, because they can do something nobody else will, they can charge a premium, either in rate, points, or both, over general market rates. Because the consumer wants the home with these upgrades, and because this is the only way anyone will lend on it, there's money to be made! Usually, there's plenty of money to go around - the consumers are, in aggregate, paying for it. Surcharges and premiums on the secondary mortgage market can go anywhere from two and a half percent up to six percent, perhaps more. On a hundred $500,000 homes, four and a half percent is over two million dollars additional clear profit. Even if three of those homes default, losing roughly fifty thousand in each case, they've still cleared more than two million extra profit for having done this.
(This is not to say that many after-market contractors don't have their own finance department cranking out trust deed financing even if the equity may not be there to pay it right now. But this way they get the job, which means they make the money for that job, and most of these contractor loans carry rates well above regular current market, so they can make more on the job as well as on the loan. How remarkably analogous!)
As for whether it's smarter to upgrade with the builder or wait and pay cash, there's an argument for each side. On one hand, the argument for waiting is that you are a lot less likely to owe more than the property is worth if you need to sell. Furthermore, you're not paying interest on depreciating fixtures, a classic double whammy anyone who's even bought a car on credit can relate to. It also lowers the likelihood of getting into a situation where you have to sell or refinance while you're upside-down on the mortgage.
Because you're not asking for anything special or difficult in the way of financing, you can at least theoretically go anywhere for your financing. Builders in California cannot legally require you to use their lender, which is not to say it doesn't happen - sometimes very blatantly in violation of the law - but that's the theory, anyway, that you should be able to shop the market. If you want a loan any lender can and will do, you're going to get a better price on the loan - fact. The loan on a property with builder upgrades, however, is often something only the builder's chosen lender will do.
Finally, the cost of most upgrades is rarely recovered in increased sales price when the current owner sells. Spending a dollar, and paying interest on it, to make back twenty cents in eventual increased sales price strikes me as shooting yourself in the foot. It is to be admitted, however, if it was worth a dollar to you to have the upgrade, the twenty cents is icing on the cake.
Against this, however, is the cold hard reality of labor costs. If you build in granite counter-tops in the first place, the only increase in costs is the comparatively small increase for more expensive materials. If you wait until after it's done, you've got to tear all the old work you've already paid for out, then pay the labor costs to put the new counter-tops in, as well as new materials, the cost of haul away, etcetera - not to mention the restaurant meals you'll be eating while it gets done. At anywhere from $15 per hour up, plus benefits plus markup, that labor isn't cheap, and it's usually at least a couple of workers for several days.
Builders know all of this, and that it's very attractive to roll the upgrades into the cost like this. When they build a property "on spec" (meaning it hasn't sold before the framing is done at the very latest), they typically build in all of the upgrades they can, and if you went to them to take a completed property off their hands, but wanted something not upgraded, it's likely they will be unable to accommodate you (This is a negotiating opportunity on the rare occasions it happens!). They don't tend to build very many "on spec" around here, or anywhere else if they can avoid it without worse consequences, but that's what they do when they do it.
There's also one more argument in favor of builder upgrades: You won't get your extra money out of them, but in slow markets like right now, it's more likely the property will sell if you do need to sell it. There are always suckers out there who will zero in on the upgraded property because "it's soooo beautiful!" even though there are better bargains nearby. Real estate fixers and flippers worldwide make their fortunes on the backs of these people, but they're legal adults deciding this stuff is worth their hard-earned money. Who am I to say it isn't?
Builders set their prices on the same motto as Poul Anderson's Polesotechnic League: "All the traffic will bear!" (I highly recommend his Van Rijn and Falkayn stories, by the way.) Profit isn't evil, it's what motivates developers to build places for people to live. But there's nothing that says you have to cater to it by forking over excessive numbers of your hard earned dollars, either.
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Low Price: "Quantity Has A Quality All Its Own"tag:www.searchlightcrusade.net,2010://3.49872012-02-01T15:00:00Z2012-02-01T14:58:44ZThis saying comes to us courtesy of our military. They use it in the context of ten million peasants armed with stone age weapons will swarm one man, no matter how well armed or how well supported. In my work,...Dan Melsonhttp://www.searchlightcrusade.net/
ten percent nationally. What they aren't emphasizing is the margins between that and the best unemployment rate ever: something just over four percent. This means that ninety percent of the people are working in horrible times, as opposed to ninety-six percent in the best times ever. Difference: about six percent, or one person in sixteen. Bad if you're that one person in sixteen, but not too much difference if otherwise. Maybe a few more people than normal are also less secure in their jobs than at other times, but there's always quite a bit of that. The bottom line is that eighty to eighty-five percent of the people out there are secure in occupations that aren't going to vanish, working for companies that aren't in any danger. Unless that company decides it's worthwhile moving overseas to avoid excessive US regulation and costs of staying in business, their jobs are going to securely stay right where they are. These folks are actually sitting pretty right now, because their money is worth a lot more than it was not very long ago, and especially in real estate, much more than it will be worth two or three years from now (unless the so-called "progressives" manage to finally kill the economy for good and turn us into Mexico or Somalia). The difference in the economy is on the margins, and these people are not on the margins.
They're figuring it out, too. The areas where I work here in San Diego, the absolute inventory isn't down that much in the last few months, but what there is is selling much more quickly, and that's just at a first glance. In time terms, we're down from about eighteen weeks inventory to about ten weeks inventory here in East County, but there's a distortion in that due to the fact that most short sales stay in the "active" list all the way to the actual sale, as opposed to moving over into "pending". This in the period of the year that is usually the absolute worst for getting property sold. I don't have a crystal ball, but my projection for what happens this spring when people start thinking about moving once the kids are out of school is a little bit scary.
People can really afford a lot more than could when unsustainable loans were the order of the day. I'm in escrow right now for just over $400,000 on a property that last sold for over eight hundred thousand. Another property I'm in escrow on is about three and a quarter on a property that would have been worth $650,000 at market peak, and probably would have sold for seven hundred or a bit higher. These properties are closer to being the rule than the exception. Yeah, the market comps I'm getting are about ten percent higher (which means I got them one hell of a good deal), but even a $360,000 property is a lot more affordable to the median wage earner than a $650,000 one, and a lot more people can afford $400,000 than can afford $819,000. Since incomes have an approximately normal distribution, a lot more than twice as many people can afford a property that's half as expensive.
A while ago now, I did a study on what people can afford in San Diego. Those numbers were based upon 2006 wages, those being the most recent I could find a distribution for, and then-current rates. Well the rates now are a lot lower. When I did that study, I assumed an FHA type loan at 6.5%, by which I really meant a tad over 7, as the FHA charges 55 basis points per annum for financing insurance. The rates at this update are a lot lower for exactly the same loan. That person smack dab in the middle of the largest group of wage earners, who could afford the loan, taxes and insurance on a $302,000 property all by themselves at $2343 per month, is only spending $2016 per month on exactly the same thirty year fixed rate loan, taxes and insurance on exactly the same property at exactly the same price - a difference of over $325 per month. This means it's a lot easier for them to afford exactly the same property. You shouldn't make decisions on real estate based upon payment (at least not beyond a blanket rejection if you can't make the payment), but people do it. Quantity of dollars out of the monthly budget has a quality all its own, as every crook who's ever preached "Low Monthly Payments!" knows very well.
That same $2343 per month under exactly the same circumstances now stretches to a $342,000 property. The loan by itself would allow a further stretch, but those pesky property taxes keep going up by purchase price. This enables people to set their sights on more desirable areas of town, or bigger, better, more attractive properties within the same area. Instead of a 1000 square foot 3 bedroom 1.5 bath property, people can now afford a 1500 square foot 4 bedroom 2 bath property next door for exactly the same payment. Maybe it isn't quantity having a quality all it's own, but higher attractiveness and more value becoming obtainable for the same price (as these folks think about it) will also cause more folks to sign on the dotted line.
Lower rates are also allowing more people to save their property. They couldn't afford the adjusted payment at eight and half percent, but they still have equity, and their debt to income ratio supports five and a quarter percent, where it didn't support seven percent, let alone the higher adjusted rate. If they have equity, they are refinancing. If not, they are getting loan modifications - the lenders are willing to give them at lower rates when the rates are lower, and they're certainly preferable to the lender losing the money and being forced to sell the property in what has been an uncertain market. The lenders have also (finally!) figured out that if they stop flooding the market with inventory they don't have to, prices might stay a little bit higher, and recover more quickly, so they get a better price and lose less money on the properties they do have to put on the market.
The backlog of people who want to sell is dropping. The number of people who have held their property off the market was only large, not limitless. We're burning through the people who didn't or don't have any choice but to sell - the short sales with adjusted loans and lender owned properties, and back when I first wrote this, I didn't see another wave of foreclosures here in San Diego (that might happen now, thanks to the way the government is persecuting american companies and making the environment unfriendly for investment. We can't all work for the government, and even if we could it wouldn't be a good thing). People are assuming foreclosure takes three years after loan adjustment and thinking that some loans were fixed by up to five years after initial purchase before adjustment, but there just weren't many of those in San Diego - the dangerous loans were all two to three years before the payment adjusted - the exceptions are insignificant, statistically. Furthermore, people are deciding to get out now and get the pain dealt with, even though there are a lot of reasons why they shouldn't. It's been five years now since the last of the Make Believe Loans (January 2007), and more than six years since the bottom started falling out of the San Diego market (October 2005). My point is this: of those who are going to lose the property because their loans adjusted, the vast majority of those adjustments have already hit, and people are deciding - wrongly - that the smart thing to do is stop paying their mortgage now.
Of those in other situations, where they have a choice, some people have decided to stay in their current property, while others have decided to wait until prices recover and still others are waiting for conditions to be right for a move up. These last can afford a slightly more expensive property, but some of them need a little bit more equity for the down payment on the new property. They will be in a position to get it soon, and when they are, the market is going to heat up still further.
The only thing causing prices to go down - the only thing that can cause prices to go down - is excess inventory (Conversely, the only thing that can cause prices to rise is excess demand). That excess inventory is starting to clear, at least here in San Diego. I don't know how far the rest of the country is behind us, or any given area, but it will happen, sooner than most folks probably think.
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The Economics of Housing Developmenttag:gockel.hmdnsgroup.com,2007:/~searchli//3.28172012-01-31T15:00:00Z2012-01-31T14:52:44ZHat tip to Unrepentant Individual, who also has some good information on what it means. The genesis of this article is Something's Gotta Give, a report (.pdf format) from the Center For Housing Policy. Furthermore, there is an article in...Dan Melsonhttp://www.searchlightcrusade.net/
Unrepentant Individual, who also has some good information on what it means.
The genesis of this article is Something's Gotta Give, a report (.pdf format) from the Center For Housing Policy. Furthermore, there is an article in the Washington Times from UPI that connects the dots on the tactical level.
The Center for Housing Policy report details some of the costs to society. Not surprisingly, when people are forced to spend a large portion of their income on housing, they have less to spend on other things, and so they can't spend as much on other things. Lest you think I'm talking about Lexuses, Lattes and Liposuction here, I am not. I'm talking about bare minimum things like food - as in people going hungry because they don't have enough to eat. Far from talking about liposuction, I am talking about basic medical care and insurance. I am talking about clothing, which, rightly or wrongly, people use to judge the worth of other people, and people who cannot afford good clothing are not given the opportunity to advance because no one will hire them. I am talking about basic transportation needs, without which people's job-hunting prospects are limited to the places they can walk. If you cannot get from work to home and back again in reasonable amounts of time, then you're either not going to live here or not going to work there.
Nor am I talking about the needs of some nebulous underclass. As the NHC report makes clear, these are people earning up to 120 percent of national median income. Furthermore, they are among the fastest growing classes of worker.
Below the first level effects, there are others lurking, largely unmentioned in the report. But malnutrition, parental depression, and lack of good medical care are the causes of many other ills. Malnutrition allows health problems to become chronic and generates more health problems. These are people who have more difficulty getting and holding jobs. So long as we have societal programs of social insurance, these folks are going to cost us, as a society, tens to hundreds of billions of dollars annually. If they can't hold a job, they've got to get money somewhere. No job means welfare or crime, and both are bad situations not only for that person, but for everyone else as well. Poor or no medical care makes any problems they have worse than they need to be, further increasing both explicit costs, what we actually spend on them, and implicit costs, money they don't make, taxes they don't pay, and other stuff that they suck out of society. Long commutes people suffer in order to buy housing they can afford means less parental supervision of children, leading to delinquency, increased crime, and other problems a few years out. Most critically, difficulty with money is the number one cause of divorce, and when families go through a divorce, the standard of living suffers even more and more long term societal troubles ensue.
Who is causing all this bad stuff? The short answer is that we all are. The cold hard fact of the matter is that they are not making any more land. Housing needs land. Land that is in use for other uses, whether it is industrial, commercial, open space, or other housing is not available for housing. Higher population means we (as a society) need more places to live. Anytime we add a person or a family, we add the need for that person to live somewhere. We can't just push them under the workbench in the garage until the next time we need them. Well, actually, I suppose we could, but I am certainly not going to vote for policies like that, nor, I imagine, is a majority of the electorate. So that fry cook at Lenny's, the cashier at the supermarket, and the nice lady who helps you carry your purchases out to the car at Home Despot, all need places to live.
Cold hard fact number two: In the high density places where jobs are to be found, land is expensive. In fact, it is far and away the most costly thing about a place to live. I can show you places where the lot goes for $350,000, while the finished home goes for $500,000. Considering the economic realities: Developer has to buy the land, then apply for permits that take years, then put the homes up for sale. Developer has to pay for the land, the cost of the money to own it for the years that are necessary, the property taxes, the cost of the permits, the cost of the people to get the permits, the labor and materials to build, and of course, they have to pay the people that sell the finished product. Except for the comparatively minuscule costs of labor and materials to build, these are all fixed costs! They are what they are. So if the developer pays another $5000 for labor and materials, and can sell the house for $200,000 more because it's got two more bedrooms and Italian marble floors, that is obviously the way for them to make a better profit. So they build the higher end home, which cannot be afforded by the lower income buyer. If the government requires so many homes to be set aside for lower income people, that merely increases the money they have to charge for the rest. Plus the "low income" buyers are likely to sell as soon as their contract limitation on doing so runs out. Just because Mr. and Mrs. Lower Income Couple only make $40,000 per year doesn't mean they don't realize they can make enough money to pay their rent for the rest of their life by selling the home that the city forced the developer to sell them at a reduced price for a huge profit. It's not like there's any difference between their home and the house next door that the developer sold for full price. I assure you that they are keenly aware of this. This makes getting into low income housing akin to winning the lottery in expensive parts of the country, and that is not what it is intended for.
There are obvious solutions to this. More housing. High density housing. Shortening the approval process, and making it less expensive and less uncertain. But the observable trend is in the other way. Why?
This is where it comes down to you and me. We're making it tougher for the developer to get those permits. When developers offer to buy property with the intent of building, neighbors come out in force to protest. Oh, we use all of the high-sounding names like "open space" and "habitat protection" and "quality of life" and even the mostly honest "No higher taxes to pay developers costs!" They come out and throw obstacles in the way of the project and sue in court and delay as best they can - which raises developer's costs, forcing the rest of us to pay for them. Or at least the for the people who eventually buy those properties to pay them, thereby raising the cost for the end consumer.
But the real issue, the elephant in the room that everyone desperately wants to ignore, is scarcity. We all want housing to be scarce. Why? Because we're already owners, that's why. If there's not enough of something, the price goes up and people wanting to buy have to pay the people who already have more money in order to buy. Whether people who obstruct developers will admit it to themselves or not, they are trying to vote themselves a profit at other's expense. The cashiers who work at the stores in the strip mall where you buy groceries need to live somewhere, and the lower on the socioeconomic scale they are, the closer that they have to live. It has almost nothing to do with the "Eeevil!" developers or any other corporate alleged malefactor. If developers have to charge two million dollars per house to make a profit, they will build two million dollar houses. Or three. Or none at all, if they can't make enough for a profit. If they need to charge two million dollars per property to make a profit, they are not interested in building the $400,000 properties that a family with two breadwinners earning $15 an hour might be able to afford. It's the buyers that pay for it, and these buyers are real people just like you are, who need a place to live just like you do, and if they can't get one in a sustainable way, will do it in an unsustainable way, as too many people have. Sometimes it works out, more often it doesn't, with even worse effects down the road.
If you really want to watch something both amusing and eye opening some time, go to a planning commission approval hearing where you have nothing at stake. Let's say the proposal is thirty miles away on the other side of the city or county and you never go there. And watch them try to have a discussion about high density housing.
Oh!, the carrying on I've seen! The histrionics! The burying of the real issues! The hysteria! Ask for the mike and mention "property values" and the NIMBYs will go ballistic, guaranteed. "It's not about that!" some will scream. Then why, once all of the other concerns have been dealt with, do they continue to oppose the project? Or do you think it's really about a little bit more traffic on the roads, or open space that most of them can't see and never go use? "Ruining the character" of a neighborhood where they might know two or three other families at most? Why then, won't the people live near where they work? "Because it's not a nice neighborhood!" "Explain," you will say, and they will oblige with "Because it's all condos and apartments and it's a nasty neighborhood and and everything is expensive and property values don't go up!" And there the real agenda slips out. Figuring it out, and getting them to admit it, is about as challenging as dynamiting fish in a barrel.
When I originally wrote this, the City of San Diego had just made a rational attempt to plan for housing affordability, lessened commutes, etcetera. Called the "City of Villages" concept, it envisioned more decentralized and distributed services, employment, and shopping, and in particular, a lot more high density housing with neighborhood parks and social centers. It may still come about, but over the objections of suburbia which sees their future increase in property value drying up (as well as losing the ability to exclude the peasantry from their community). It would also be over the objections of members of my profession who have tried everything they can to obstruct it. Let's face it, when everybody who has a job in a county of about three million people is trying to get to one of three places, and then out of those same three zones where everyone works, all at the same time, it's a recipe for a traffic jam. Add in the fact that the median commute is something over twenty miles, and many people drive well into the next county over (80-120 miles) and it's a recipe for an extended traffic jam. We have three full-blown interstates and at least a dozen spur and connecting freeways, and they're all jammed solid at least ten miles and two hours one way every morning, and the other way at night. This doesn't make any kind of sense.
People in my profession aren't exactly blameless for the high cost of housing. Real Estate, as a profession, is responsible for a significant amount of price increases due to encouraging speculation and selling exclusive lifestyles. Actually let's stop for one quick moment and consider the idea of "exclusive lifestyle." Doesn't it have to do with excluding the masses? Making yourself one of the well off? Raising ones' self? It's not like the money to buy you out is coming from nowhere, and the poor schmuck who buys the property is going to have to deal with every penny of it.
Everytime I go into the MLS, a large percentage of the results have the statement "Quiet cul-de-sac," and these are all homes built within about the last thirty years. Cul-de-sacs were comparatively rare before then. Even in San Diego, with all of our hills and slopes and irregular terrain, neighborhoods older than that are designed for open access. The streets are laid out on a grid. Major and secondary roads cut all the way across entire developments. You can get from point A to point B without going around the whole thing. Cul-de-sacs were rare, and mostly there because the developer could get a few more homes into irregular terrain that way.
This suddenly changed sometime right around 1970. Suddenly developers realized that the "exclusive" label added to the value they could receive. Now streets were designed not to encourage access, but to discourage it. They start and stop and start again for no reason other than to discourage access. The quickest way to get from one major road to another, on the other side of the development, is to go all the way around the development. The developers lost very few homes to the redesign, if any, but now they could sell the cachet of "exclusivity," as in keeping the helots out. The start of accelerated growth in home prices traces to this period. It's also worthwhile to note that when these "keep the peasants out" neighborhoods start downhill, they tend to go a long way down, very fast.
The motivations for driving the prices up on the behalf of my profession are certainly understandable human motivations. We make more money on bigger transactions from the same amount of work and expense. That doesn't make them good for society, but higher profit for performing your professional function is at least an honest motivation. Ditto for the motivations of City, County and State. You're taking up X number of square feet of land, and they're not getting any more land in their jurisdiction. If the price goes up, they can sock you and they can sock the merchants and they can sock everyone in the area for more money. More money means more money for salaries - their salary. Their cronies. More lucrative contracts, necessitating more campaign contributions.
Fact: Given the current economic situation, the only way to get developers to build more housing that low income people can afford is to make housing for low income people more profitable than other housing.
How do you accomplish that? Allow more high density housing, but force them to plan the impact correctly. Enough parking, water capacity, sewage. Give the developers the parameters up front, so they know whether or not they can meet it, and enact a "must issue if standards met" law. Let the community get involved in setting the standards, if they want, but make them universal throughout the jurisdiction. Same standards for hoity-toity-ville as for the wrong side of the tracks. And make the citizens themselves subject to the same requirements. Make waivers as tough to get for homeowners as for developers, and come down hard on non-permitted activity. I just pulled up a couple dozen properties on MLS, and the well over half of the listings had the notation somewhere that "X may not be permitted." In my experience the owners know damned well that they didn't have the proper permits, but that it's very easy for the people who buy it from them to get a waiver as theoretically innocent, and they know that there's very little enforcement even if the new owner doesn't get it retroactively approved. So they put on an extra bedroom or bathroom without permits, knowing it made the property more valuable when they sell it, and because if they don't get a building permit, their property won't be reassessed until they sell. Incidentally, most of them don't use licensed contractors, either, but rather what our wonderful government euphemistically calls "undocumented workers" because contractors have to report where they did the work and woe be unto the contractor that does something without the proper permits. This means that the people who go through the process that society has agreed is necessary to perform competent, safe work in accordance with code, pay their people in accordance with the law, report their income so that a fair share of taxes are paid - the people who are playing by the rules - get cut out. Either do away with those rules or come down on the people who violate them, please. But I suppose that since it's "the little guy" who wants to make some money illegally, that makes it Okay? Even when in order to buy the property, this "little guy" has to have income in the top ten percent of the population? Didn't think so.
I am not trying to get all holier than thou on anyone here. I am as much of a capitalist as anyone, and more so than most. Capitalism works, but it works better when everyone has to follow the same set of rules. I'm tired and disgusted of bending the rules on behalf of one class but not another, because of lying, self-serving propaganda. My younger brother works - when he can find work - as an on the books construction worker at about $13 an hour or so. This works out to $26,000 per year if he was working full time all the time. This is well below the federal poverty line for a family. So far below that were he married and his wife working a minimum wage job, they still wouldn't beat the poverty line. Compare this to the "handymen" who work off the books, without any qualification beyond their word that they can do the job right, and who claim they make $80,000 per year when they're asked how much they make in order to get a loan. The taxes they don't pay means that you and I pay more. The property taxes their clients don't pay mean that you and I pay more. The permits that their clients didn't get means that there are more building code issues out there that someone else is going to have to deal with - after said client makes the inflated profit on the sale of the home, despite not having properly paid the increased property taxes they should have (and that they could well afford to pay, I might add).
Contrast this with the hell a developer has to go through, often for years, in order to get a project greenlighted and never knowing for certain whether some stupid technicality will put the whole thing back to square one. For smaller developments, it's hard to find a place where it they are economically feasible, even with higher sale prices.
Furthermore, no developer with a lick of sense is building condominiums here in California right now. For ten years, they have unlimited liability for anything that can be considered a "construction defect." There are several highly profitable law offices that actually make a career out of going around nine to nine and a half years after the project is sold out, and telling homeowner's boards they can get them money. Usually this is done without any prior complaints, and they don't have any knowledge of actual conditions there - they just know they can get money. There was a period not too long ago where you just couldn't find condos that weren't going through a lawsuit, which is why it was eventually dropped from many underwriter standards. I'm certain that a certain percentage of them had legitimate complaints, but there were just too many lawsuits filed with exactly the same sort of timing for anything else to be the explanation. For the record, what the developers are doing is building them as apartments, and then they are being converted after the unlimited liability period has expired. This is a severely bad thing, societally, but a full explanation would digress too far.
If a developer wants to build high density housing, there should be a fixed set of steps - parking, utility upgrades, etcetera - they have to go through, and then approval is immediate and mandatory - provided they actually sell the units for the stated price. If they renege, they are prevented from selling at all until they've gone through the whole approval process from the start, with no mandatory approval.
Put this into law, and watch the prices of available housing drop. We could even structure it into tiers, Tier A where the approval process is basic and automatic, Tier B with somewhat higher prices but more hoops and less certainty, and so on. Make sure you index these tiers to the median cost of housing in the area! I would love to be able to find young families affordable three or four bedroom condos with community parks and play areas - but three bedroom condos are scarce whether or not they are affordable, and four bedroom might as well not exist, affordable or not.
For the last decade or so, the various governmental entities even been requiring developers to set aside infrastructure projects which, under current rules, are more properly the realm of government. They have to build schools and deed them to the government. Funny, but I thought with the increased tax base they are getting, that was the government's job. It doesn't do anything beneficial for the price of the homes in the rest of the development. Ditto parks, which are an excellent and admirable idea, particularly near high density housing, but should not be part of a government shakedown to cut down on the profit margin of land the developer paid their own money for, and went through an extended approval process for. The population is already there, and whether the developer builds new housing for them or not, the government would be responsible for finding school and park space. At the very least, the government should reimburse the developer for the proportional cost of the land and utility capacity, and do the building themselves.
Many of you reading this are thinking about money - dollars and cents. And you know, that's fine. I like it when clients make money on their property. It's part of my job to help them make money on their property. But there's a difference between a reasonable profit at 5% increase per year, and extortion because you happen to own a place to live and there isn't enough housing to go around because you're doing your best to get policies enacted to make certain that there isn't enough housing to go around - Jay Gould writ in miniature, millions of times over, and without the long term benefits much of what he did had.
The gentrification has reached the point in many areas of the country where you need to be in the top ten percent of all income earners in order to afford to buy a place to live - any place to live. That's great and wonderful if you're seventy years old and you can sell your home for a three quarter of a million dollar profit to your retirement nest egg and go live somewhere cheap. It's not so hot if you're a young working class couple looking for a place to live that you can afford and here is where all the jobs are. The damage done to the latter far outweighs the benefits that accrue to society because of the former.
If this continues, what happens next? Instead of having to be in the top 10 percent, now you've got to be in the top five percent, or the top one percent. If mommy and daddy never owned a house, or were so unlucky as to sell for less than stellar profit, you won't either. If there's no place to live that you can afford, you have to stay with mom and dad - but what if they don't want you, or they're in no shape to host you, or they just don't live in the only place you can get a living wage job? Suppose now you're twenty-five or thirty, engaged or even married, and still cannot afford a place to live? This is a recipe for social disaster.
At one percent homeownership rates, we're below what the homeownership rates were when we had tenements and slum lords, even if they are single family homes in older areas of town. And many people who have been engaged in "condo flipping" are themselves priced out of the market. There are damned few folks who cannot be priced out of the market if it gets bad enough, and if policies remain unchanged, who is to say that it will stop just before you become one of the victims, the permanent underclass? Even if you're one of that fortunate class who isn't priced out, when there are ninety-nine people who want housing for every one who can actually afford it, what do you think is going to happen at the ballot box, or in the streets if necessary? I'd rather start now, while we can plan it rationally, as opposed to later when any old low quality crackerbox will be thrown up in panic mode anywhere and anyway it can be just to keep people from rioting in the streets. At this update, housing prices have fallen quite a bit from peak, but even without the unsustainable financing that drove the bubble, this is only a temporary lull that will allow politicians to ignore the problem for a few more years.
Other things that need to happen. Tax codes need to be rewritten. this article traces the most recent acceleration to 1998 - coincidentally about two years after the $250,000 profit exclusion on housing ($500,000 for married couples) was enacted. All you had to do was live in it for two years, and bang! you didn't pay taxes on the gain. I believe that instead of keeping it in the current "cliff" form (after two years you qualify for the full exclusion), I think it needs to be phased in over a longer period of occupancy. Two years gets you maybe $50,000, then another $25,000 per year until ten years are done. It's hard to argue that someone who makes more on flipping houses every two years than they do on their day job deserves to make that money tax free, when the poor shlub in the next cubicle who can't qualify to get into the first house pays taxes on every penny he earns.
I also suspect that we would benefit from more limits on Section 1031 exchanges (and reverse exchanges), which has to do with not taxing profits from real estate when it's replaced within six months with other real estate. Don't get me wrong, it's a beneficial code section overall and I'll keep helping clients with them, but I have to question whether someone who makes an exchange and then refinances to strip equity is really doing something to earn all that tax free money, or just engaging in paper transactions that make it look like they contributed something. I don't blame the participants for taking advantage of what is in the code, but some of what I have seen, and much of what I have heard about, is of questionable economic benefit to the country.
Zoning also needs to be heavily looked at, and not just for high density housing. "Granny flats" are just too useful, but prohibited by blanket R1 zonings with no exceptions allowed in too many neighborhoods. Many folks don't want and don't have room for granny to live in the same dwelling, but if they could put up a small second dwelling, whether attached or not, granny could live there rather than off somewhere else where the choices are often "completely alone" or "in a nursing home," by which I mean they are one of the best ways to keep granny out of a nursing home. Furthermore, granny flats are also good for young adults who may not be able to easily afford housing on their own. None of this was a problem before 1970, and it's not a problem now - except in so called "modern" "exclusive" neighborhoods where we've made it a problem.
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An Apparent Red Flag that Isn'ttag:gockel.hmdnsgroup.com,2007:/~searchli//3.28152012-01-30T15:00:00Z2012-01-30T15:01:28ZFor all of the rants I post about bad business practices, there are a lot of things the mortgage industry gets right. One of these looks like a red flag not to do business with them, and may seem like...Dan Melsonhttp://www.searchlightcrusade.net/
intentional mistakes on things such as the loan type, rate of the loan, or the points involved.
And every so often, I get a panicked phone call because I forgot to warn the client the package was coming.
The point of this particular package is not what it appears to be.
You see, every so often, some criminal wanders into some loan office and applies for a loan on a property they don't own. Sometimes loan brokers actually go out and meet the client in their home, but other sorts of loan providers sit in their office and business comes to them. Therefore, the bank has really no way of knowing if this is the actually the person who owns or even lives in the property. So they mail a loan package to the owner of record.
The idea is that if you haven't applied for a loan, you're going to speak up. You're going to call the bank, the broker, and everyone else asking, "What the heck is going on? Is somebody else trying to get a loan on my property?"
This is the point of the particular package. It's an anti-fraud measure meant to catch criminal activity before the lender is out hundreds of thousands of dollars. And it has just worked.
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Asset and Income Rentals - Borrowing Trouble at Usurous Ratestag:gockel.hmdnsgroup.com,2007:/~searchli//3.28142012-01-29T17:00:00Z2012-01-29T16:55:33ZThis was originally published in 2005, but is one facet of the meltdown that is still going on, unfortunately. I found this article by Ken Harney in the paper. WASHINGTON - Call it funny money for the housing boom: Now...Dan Melsonhttp://www.searchlightcrusade.net/
Ken Harney in the paper.
WASHINGTON - Call it funny money for the housing boom: Now you don't need actual cash in the bank to buy a house. All you need is somebody who says you've got money in the bank.
Need a hundred grand on deposit to convince a lender that you deserve a million-dollar mortgage? You've got it . . . even though you haven't really got it because you "rented" it from a company in Nevada for an upfront fee of 5 percent - $5,000.
Sound bizarre? Welcome to the wonder world of "asset rentals" now being investigated by bank and mortgage industry fraud experts. It works like this: Say your loan officer discovers that you lack the financial wherewithal needed to qualify for the mortgage you want. Rather than lose your business, however, the loan officer turns to a service that offers "asset rentals." For a flat fee of 5 percent of the amount you need, the service will verify to anyone who asks that the $100,000, $500,000 or $1 million in bank deposits you've claimed on your loan application documents are yours indeed.
I am sorry to say that this is not the first time I've encountered said phenomenon. Nor lenders. This is why assets require seasoning or sourcing. In other words, the lender requires you to show that you've had it and built it up over a period of time, or they want to know where and how you got it.
Most loans should not require a large amount of assets - A paper loans, the best loans of all, want one to two months Principal, Interest, Taxes, and Insurance (PITI) for full documentation (and I can usually get it reduced), three to four months if there is a "payment shock" issue. "Stated income" loans are no longer available, but when we had them, six months PITI was the standard requirement. Neither of these is a large number if you're really making the money, and they can be in a variety of places.
Some sub-prime lenders, however, will take large amounts of money in an account somewhere as evidence that you can afford the loan. These loans usually end up looking more like a propagandized No Income, No Asset loan than anything else. They don't get the best rates and terms, even for sub-prime, and there's likely to be a nastily long pre-payment penalty on them as a GOTCHA! The loan provider, be it broker or lender, is likely to make a lot of money on them - In California there is a thing called section 32 limiting total loan compensation to six points, which on a $400,000 loan is $24,000, and many so-called "discount" real estate agents turn around and require their clients to do the loan with them. It doesn't do you a bit of good to save a couple thousand on the sale or purchase in order to get ripped for twenty on the loan, where it's easier to conceal it. I can point you to many of these so-called "discount" houses who do these loans all day, but they are not loans you should want. If a friend came to me and asked for one, I'd try my best to talk them out of it.
But wait! It gets better!
This and other e-mail pitches, copies of which were provided to me by mortgage industry recipients, carried the sender name of Loren Gastwirth, identified on the e-mail as vice president-marketing for Morgan Sheridan Inc. of Mesquite, Nev. The asset rental attachment carried the name Independent Global Financial Services Ltd., with an address in Las Vegas.
... to a Zexxis Co., with the same Mesquite, Nev., address on Loren Gastwirth's Morgan Sheridan card. When I called the number listed for Gastwirth, I received no reply, but instead heard back from a person identifying himself as Allen Paule. Paule is listed in corporate filings with the Nevada secretary of state as the "registered agent" for Morgan Sheridan, Independent Global Financial Services, and Zexxis Corp.
Paule said the asset rental and employment pitches - including downloadable attachments and forms carried on Morgan Sheridan's Web site - were not connected to his firms. He said, "somebody hijacked our Web site." He confirmed that a Loren Gastwirth works for Morgan Sheridan. And he also confirmed that Independent Global Financial Services, Morgan Sheridan and Zexxis Corp. have overlapping ownership and management. According to Nevada corporate records, a Paul Gastwirth is listed as president and director of Morgan Sheridan.
The Web site of Vault Financial Services Inc. of Las Vegas lists Paul Gastwirth as CEO of that firm, and president of Independent Global Financial Services, "a company specializing in asset rentals and enhanced credit facilities for individuals and companies worldwide."
In other words, they are playing a Nevada Corporation shell game (There is a reason Nevada Corporations are a red flag for underwriters). A long head swallowing tail chain of corporations, each of which is likely to be a shell set up to insulate criminals from the consequences of their actions. The stuff about "somebody hijacked our web site" is almost certainly bogus.
but it gets better yet!
That's where the asset rental service's "VOE" (verification of employment) program comes in. Essentially you indicate on a faxed form what annual or monthly income you or a home buyer client needs to qualify for a mortgage, and the asset rental company will verify to anyone who asks that you have been paid those amounts.
The cost: just 1 percent of the claimed annual income. "For example," says the pitch, "$100,000 of annual income - cost of $1,000. Minimum is $50,000." The e-mail came with attachments that directed payments for asset rentals and employment verifications to an account number at Wachovia Bank in Roanoke, Va
In other words, they're also volunteering to help you circumvent one of the most basic protections to the whole process, making sure for both the lender and the borrower that the borrower can afford the loan. If you cannot afford the loan, you are probably better off without it, although many people don't realize that this requirement is partially for their own protection. If you can't make the payments, you're going to get foreclosed on. If you get foreclosed on, you're likely to lose everything you put into the house and get socked with a 1099 form which the IRS will use to go after you for taxes as well.
Lest you not have realized this by now, all of this is FRAUD. Serious, felony level FRAUD. Lose your home and go to jail FRAUD.
I'm going to share a little secret with you, widely known within the industry but not in the general public. That real estate agent or loan officer getting you your house or your loan may not be the brightest financial light bulb in the world. Many loan companies and real estate offices select for this, usually by only hiring people who have never been in the industry before. Some of them are even among the biggest names in the business. They select for sales ability and "make sales" attitude, not the knowledge (and more importantly, willingness) to say, "Wait a minute! Something is not right here!" Especially when it may cost them a commission. And hey, if the companies involved lose a few low-level sacrificial victims to lawsuits and the regulators, that's no skin off the owners' noses and they still get commissions out of it. These schemes are pitched to the agents and loan officers as a way to "save" a client. Sounds like it's in your best interest when you put it that way, right? It is not. The bank discovers this (and Nevada Corporations, among others, are a red flag that loan underwriters look very hard at) Most of these deceptions are discovered before the loan gets funded - meaning that the client they were helping to commit FRAUD wasted their money, and they have a case against the agent and employing broker, whose insurance will probably not cover the issue.
The ones that do get funded are even worse. When the bank discovers the FRAUD, they have a right to call the loan. This means you have a few days to repay the loan, or they take the house. All of those wonderful consumer protections the federal and state governments have enacted become mostly null and void, because you committed FRAUD. You can count upon losing all of your equity in the home, and getting thrown out with nothing. Furthermore, depending upon company policy of the lender, you may find yourself sued in court, and possibly even under criminal indictment. Judgments for FRAUD are nasty, and they don't go away. Convictions for FRAUD can really mess up your life completely and forever, not just in applying for credit, but in employment and other ways as well. If your loan is sold to another lender before the discovery happens, the probability rises even further, because the new lender is going to sue the old lender, who is going to take action against you as part of a defense that says they were acting in good faith. The shell corporations that pretended you worked for them or had deposits with them will be long gone (or untouchable) of course. You may have a claim against the agent, loan officer, broker or possibly even original lender, but if someone else beat you to it or they are out of business for some other reason, good luck in actually collecting.
In short, relying upon an agent or loan officer as an expert without doing your own due diligence is likely to get you in hot water. As good rules of thumb: Never lie. Never allow someone to lie on your behalf. No matter how desperate you are, it's likely to buy a lot more trouble than it's worth.
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The Best Way To Create Problems For Yourself In Real Estatetag:www.searchlightcrusade.net,2009://3.44952012-01-28T15:00:00Z2012-01-28T15:17:08ZHave a "looking for cheap" attitude, especially on services meant to protect you. It's great to have a "looking for value" attitude. If I cost more than someone else, it is in your best interest to ask why, and ask...Dan Melsonhttp://www.searchlightcrusade.net/
how much lenders can legally low-ball quotes in the past. If they can't deliver their quote, they can't deliver it, and it gets you no benefit. I get many people hitting the site every day asking questions that indicate to me that their lender presented them with an entirely different loan than they initially told them about to get them to sign up. Consequences to the lender: Zero. Consequence to the borrower: Now you have a choice between signing the documents for this loan, or doing without. Chances are that you're going to sign their papers anyway, which means that lender will be rewarded for lying to get you signed up, and the attitude of "looking for cheap" is what did it to you. I dealt with any number of people who metaphorically plugged their ears and refused to listen to the downsides of the negative amortization loan. It doesn't change the fact that there are enormous downsides, or how bad they are. It just means you don't know about them. But they sure do have that low payment (for a little while).
In real estate, breaking the law is only the second best way to create problems for yourself. Since in the current environment, you can count on law breaking being discovered, that should tell you how bad looking for cheap is.
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Refinancing Your Property with Less Income Than You Had When You Boughttag:www.searchlightcrusade.net,2009://3.44942012-01-27T15:00:00Z2012-01-27T14:59:00Z Hello, When my husband and I bought our home 2.5 years ago (two bedroom condo) we qualified for the loan ($250,000) based on both our incomes. Then I had a baby and stopped working. We've never missed a payment...Dan Melsonhttp://www.searchlightcrusade.net/
Hello,
When my husband and I bought our home 2.5 years ago (two bedroom condo) we qualified for the loan ($250,000) based on both our incomes. Then I had a baby and stopped working. We've never missed a payment or even been late, and we're getting by just fine by being frugal. However, our loan is a 5/1 ARM, and I'm skeptical of our ability to pay the adjustable rates once our fixed years are over. Our original plan (when we got the loan) was to see about refinancing at the end of those five years. (Five years worked well for us because my husband was still in school and we knew we'd be here about that long, if not longer.) However, now that we no longer have my income, all the mortgage calculators online are telling us that we can afford a loan of just about half the value of our home. What do we do in a situation like this? Is it possible to do anything other than sell our home once our five years are up?
A few other (maybe) pertinent details: currently we're paying interest only on our first mortgage (4.75%) and a principal and interest payment on our second mortgage (8.75%) Our home has gone up in value since we bought it, and we've made some improvements as well. Likely selling price right now (based on comparable properties that just sold in our area) is $325,000 to $340,000.
What do you think?
The first thing I want to ask someone in this situation is "How long do you have until reset?" The second would be, "Are you going to be able to afford the payments when it hits reset?" These two answers I'm fairly certain of, looking at the information provided. The third would be "Do you intend to change something about the situation before that time?" and "What's your market trends?" would be the fourth. In San Diego, I know the answer to four, but question three would be a guess, and you're not in San Diego or close to it, so my answer to question four doesn't apply to you.
You have the loan. It is already funded. You have lived up to all the qualifications you agreed to in order to get it funded. You don't have to do anything other than make the payments in order to keep this loan. If this were a 30 year fixed fully amortizing loan that you were already making the payments on, there would be no reason for you to do anything, because that rate is very hard to beat by enough to make it worth refinancing. If you have already got the loan and you can afford it indefinitely, you don't have a problem.
Unfortunately, that's not the case here. You're fine for now, but not forever. You have a known time approaching at which point you will be unable to make your payments. To make matters worse, even with rates the lowest they have been in fifty years right now you're not going to qualify to refinance. That's the worst news. If you were in a situation where your current income was enough to qualify for a new loan, this would be fixable at your convenience. Unfortunately, again that is not the case.
The mildly bad news is that you're not paying your balance down much. Assuming you're not paying anything extra, you're not going to pay that $200,000 interest only first down by anything, and you've only paid the $50,000 second down by about $1000 now, and you'll only pay it down to about $47,800 by the end of the fifth year.
The mildly good news is that you've got 2.5 years left to do something with. You could go back to work, and if you do so now, you'll have two years continuous same line of work before the 5 years are up. Your husband could also start making more money, as is common the first few years out of school. Or some combination of the two. Assuming you make as much as you used to, you should be able to afford the property. Doesn't really apply to these folks, but if rates are lower than the last time you got a loan it can really help. On the flip side, if they're higher, that's can be a real problem.
This 2 1/2 years is time on your side. I keep telling folks time makes a great ally or a horrible enemy, but it's never neutral. Right now, it's on your side - giving you time to do something to change the situation. Once the adjustment hits, or even gets close, time will become your enemy. Don't waste time, but right now it is on your side.
The really good news is that your market has gone up, and you have a good amount of equity. This is about as surprising as gravity, but it is still good news. You're under 80% loan to value ratio if the numbers you gave me are valid. I wouldn't touch your loan right now, if I were you, but if you were in a sub-prime situation to start with, chances are good that you'd be A paper by now. You've got a 5/1 A paper loan with plenty of the initial fixed period left - but there's a lot of folks out there with 2/28 C paper. Especially if your adjustment had already hit, moving from 8% adjustable to a 5% or less thirty year fixed A paper without points (as of this update) makes a lot of sense. Even if you don't want to sell or refinance now, know that that kind of equity means you've got some breathing room if you've got to have it.
The bad news is that if you sell, you're going to sacrifice some of that equity. It costs money to sell property. Assuming yours sells for $325,000, you'd probably only net roughly $299,000, of which your loans would eat $249,000, leaving you with $50,000 in your pocket. Right now, a lot of places are in a world of hurt for trying to sell, so your could be out more than that and still have to take a lower price in order to get it sold. If your condo was in San Diego, for instance, you'd be doing extremely well to net $35,000 from an actual sale right now, even if your condo really was worth $340,000. The condo market is just saturated with sales that people couldn't really afford. I think this will change soon enough to surprise a lot of people, but I don't know for sure.
Let's assume that you don't intend to return to work. If your loan was adjusting any time in the next year, it would be time to sell. However, you've got some time. If your market doesn't look like it's in danger of collapse, I'd probably wait. If your market is on the road to recovery, selling later would be better. Most likely, more than enough better to justify waiting. If your market is just peaking, however, you've got a real issue, and you might want to get out now before you've lost all of your lovely equity.
One former possibility was planning to wait and refinance, doing the loan "stated income", telling the lender that you make more money than you do. This was always dangerous. Quite aside from the fact that you are intentionally defeating one of the most important safeguards for your protection as well as the bank's, this is not what stated income was intended for, and you need to be careful that you're actually going to be able to make the payments without going backwards (in other words, no negative amortization). Furthermore, stated income is gone and with the way the government is pretending it was always evil, may not come back for a long time. Better would be a fully amortized loan, but since you're already in the property, interest only is acceptable. If the situation is at least stable, why incur the costs of selling while the property meets your needs? However, at this point we do not know what the rates will be two and a half years from now. I don't know what the maximum rate you could afford is. Can you afford even an "interest only" payment on a 6% loan ($1250/month on $250,000), which is roughly 1/3 more than you're paying now? 6.5%? 7%? Finally, no interest only loan is interest only forever. Getting another interest only loan is recycling the problem you find yourself facing now.
This isn't a situation that can be tackled using only numbers, but the situation is not likely to be sustainable as it sits. You do have some choices on the table. The three most obvious are that you can go back to work, your husband can start making more money, or you can start making plans to sell the property. Any of them beat the default option, which is "do nothing and let the situation ambush us when time is up." And if you decide it's likely you'll be able to afford to refinance, keep an eye on rates. A point at which it makes sense to refinance could come at any time. I think the rates today are a freak low caused by a perfect storm economically, but there's nothing that says they cannot go even lower. Unfortunately, since you're not able to refinance right now due to low income, even the best rates ever aren't going to be any help to you, as your debt to income ratio is going to prevent a new loan from being approved. You somehow need to start making more money, enough more in time enough to be able to afford your property, or your best option is going to be to sell before you lose the property after the loan adjusts.
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Weighted Average Cost of Capital Doesn't Include Everythingtag:www.searchlightcrusade.net,2009://3.44922012-01-26T15:00:00Z2012-01-26T14:55:07Z Or: Figures don't lie, but Liars Sure do Figure! NOTE: At this update, rates on first trust deed loans are about as low as they have ever been while rates on second mortgages aren't particularly low. However, that won't...Dan Melsonhttp://www.searchlightcrusade.net/
Stranger in a Strange Land, calling it "straining at flies and swallowing camels," which is an apt description of what's going on. Theater.
What's really making the calculation work in favor of refinancing is that $50,000 at 12% without deductibility, and assuming a tax bracket higher than most people are in. Even the top federal bracket is 39.6%, so if you live in a state without income tax (quite a few), the article was overstating any possible current benefit. Furthermore, those states without income taxes tax mortgage loans on the basis of size, some of them pretty steeply. I just got an email from someone in one of those states back east, and for a mortgage under $250,000, the state was charging about $7000 in taxes. That's almost a 3% surcharge on the base mortgage, and if you're going to roll it into the balance, you're likely to be paying points up front. You're also paying interest on it basically forever.
Doing the calculation on the basis of pure interest rate calculation, like the manuals teach (I've got an accounting degree) ignores the costs of consumer loans. For corporate transactions, the costs are built into the the interest rate of the obligations. For consumers, this is not the case. You're going to be paying thousands of dollars for the privilege of refinancing - points and fees, and in many states, taxes. As I've made clear in the past, there is ALWAYS a Tradeoff between Rate and Cost in Real Estate Loans, and the standard WACC computations do not include cost of doing the loan in whether it's worthwhile, only the rate. This makes it seem like the rate with three or four points is necessarily better than the rate with none, when in reality it's likely to take eight to ten years before the lower rate pays for its cost in terms of interest savings. Most people will never keep a given real estate loan that long in their lives.
Now just for a moment, let's give the author of that article everything they're asking for. In order to be able to absorb this debt without PMI, the property has to be worth $625,000 minimum, plus 125% of whatever fees and prepaids get rolled into the balance.
What this means is that I could, without touching that 5.25% first, refinance that second into a 30/15 at around 7.25% (lower today), and still get paid half a point yield spread to do a very easy loan that costs the consumer less than $1000 all told. You see, not only do we get a price break for the bigger equity loan, but because it's only 80% Loan to Value Ratio (actually CLTV), and so we get a price break of
$350,000 at 5.25%, 40% aggregate tax bracket, 70% of the loan, =2.205% contribution from this
$150,000 at 7.25%, 40% aggregate tax bracket (on 2/3) 20% of loan = 0.870% contribution
$150,000 at 7.25% non deductible on 1/3 10% of amount =0.725%
2.205%+0.870%+0.725%=3.8% weighted average cost of capital, which essentially ties the projected 3.75% on 6.25% which is 40% deductible, but the lowered cost more than covers the difference in interest - $250 per year - for ten full years, just based upon the difference in closing costs, never mind points or cost of interest on the increased balance.
So why do loan officers push a full refinance when there are better options? Quite simply, they make a lot more on first mortgages than second, so it's in their best interest to make it seem like refinancing a first is in your best interest, even when it clearly is not. Second mortgages are something I'll do for existing clients, but it's not business I chase because I just can't make enough to make it worthwhile, and chances are that a credit union is going to do about as well as I can. First mortgages, however, are a different matter - and not just for me. The projected first mortgage would make me roughly 7 times what that second does, and my margins are low by comparison with the rest of the industry.
Because of facts like this, you need to know enough to think about alternatives like refinancing a second and leaving a low interest rate first untouched. This is also why you need to talk to more than one potential provider, to increase your chance of getting one of them to give you a better way of doing things.
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Prorated Property Taxestag:gockel.hmdnsgroup.com,2007:/~searchli//3.28072012-01-25T15:00:00Z2012-01-25T14:52:58ZJanuary first and July first mark turning points in the year for California real estate, as property taxes are collected for a period running from July 1 through June 30. They are paid in two installments, the first due due...Dan Melsonhttp://www.searchlightcrusade.net/
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Some Free Advice About Real Estate Transactions: If You're Spending Money, Make Sure You Get Something Valuable For Ittag:gockel.hmdnsgroup.com,2007:/~searchli//3.28062012-01-24T15:00:00Z2012-01-24T14:42:08ZMost days I get loan wholesalers coming into my office. I'm always happy to talk with them, providing they want to talk about what I want to talk about. They usually want to talk about this gimmick and that gimmick...Dan Melsonhttp://www.searchlightcrusade.net/
always happy to talk with them, providing they want to talk about what I want to talk about. They usually want to talk about this gimmick and that gimmick and the other gimmick. They feed me lines about service and fast turn around and quick approvals and loan commitments. Ladies and gentlemen, these are all things that every lender should be capable of, and if someone hoses one of my clients, I'm no longer interested in doing business with them. Everybody makes mistakes, it's how they deal with mistakes that I am interested in. I'm very forgiving if they make their mistake good, completely unforgiving if they do not.
What I want to talk about is two things. The first is loan programs nobody else has, or that nobody else has in that category. Suppose a lender has a program to deal with people in default just like everyone else with only a small penalty. If they have something special, I'm all ears, and I make certain that goes into my database. I expect the rates for the underlying program to be higher, but that's cool. I'll price loans with them anyway, and if they're the best I can do for the client, I'll use them. Next time I have somebody in default, though, they get my first call, because they've got something nobody else does, or very few do. At this update, however, with the federal government controlling and tightening all the major loan markets and regulating all the competing private products out of business, it's rare that a wholesaler has such a program.
The second thing I want to talk about is price. A loan with given terms is the same loan no matter who is carrying it. So long as they are both legal, my client sees no difference between National Well-Known Megabank and Unknown Lender from Nowhere. The loan is the same. If the rate is the same, what's important to my client is how much they have to pay in order to get it. This comes back to The Trade-off Between Rate and Cost. If one lender's par pricing is a little bit lower, I can either get the client the same rate cheaper, or I can get the client a lower rate for the same price. There is otherwise no difference between standard loan terms for the standard loan types. I can always get the client a lower rate for the same price if they'll accept a prepayment penalty. If they want a true zero cost loan, the rate will be higher. How much higher or lower? That varies with time and the lender involved. But except for the rate printed on the contract and the cost to get that rate, these loans are the same.
Wholesalers don't want to talk about price, and they don't want to compete on price. If they're competing on price, they're making less money in the secondary market. Less money for the same work. I can't blame them. Suppose I walked into your office and proposed cutting your pay by somewhere between twenty and fifty percent? Somehow, I don't think most of you would appreciate it. But turn that around, because you're in my office now, as consumers, shopping for a loan, and you want the loan with the terms you want at the best price possible. If I get a lower price from the lender, I can pass it on to you. I can maybe even make a little more money while still saving you some money. Aren't you entitled to a bonus when you make money for your company or their clients? Ask yourself this: If I saved you $1000 and $20 per month over the next best quote, would it break your heart if I made an extra couple hundred? It shouldn't. When I'm out shopping, it doesn't bother me at all. By delivering the item on better terms to me, that company has earned whatever money they make.
This doesn't mean I necessarily look for the lowest price. When I'm shopping for myself, many times I'll buy something that is close to the top of the line? Why? Because it has something worth more than the extra money to me. What is worth extra money in real estate? Getting you a better bargain. You spend three percent instead of one, but your $500,000 home sells for $25,000 more, or it sells when it perhaps would not sell under a less aggressive marketing plan. $25,000 minus the 2% difference in commission ($10,000) is $15,000 in your pocket because your agent can afford to market and negotiate more aggressively on your behalf, never mind the difference between selling and not selling. Can a full service agent guarantee a better result? No. But I can tell you through personal experience that I find it much easier to get a better bargain for my clients who are buyers from someone who listed with a discount brokerage or flat fee place, and my clients are probably going to think I'm superman by comparison before the deal is done. But note that the difference in price does have to be justified. A loan is a loan is a loan, as long as it's on the same terms, but buying and selling real estate is an entirely different ball game.
A couple days before I originally wrote this, I got an email calling my attention to someone calling me an "alarmist", and furthering that with an accusation that I was trying to paint everyone else as a crook. Nope. There are a large number of basically honest practitioners out there, and a significant number of scrupulously honest ones. But there are also a fair number of people out there who, like my loan wholesalers, don't want to compete on price, don't want to compete on service, basically just expect to make money by virtue of the fact that they've got a license. Do I blame them? In most cases, no. As I said the day I launched this site, this is the way they were trained and they don't know a better way is possible. Plus they want a larger amount of money for the same work rather than a smaller. Many of them resist changes for the better for the consumer because it means they will make less money for the same work. Seems like every day there's a seminar advertising that they'll teach agents and loan officers how to attract clients without competing on price. This is what is behind the rise of the corporate agent. You see their billboards everywhere, saying how great they are, but that doesn't make it true, any more than agents working at Biggest National Chain With Large Advertising Budget are better than the agent who doesn't. It's all a matter of individual performance. Find an agent who will spend the time to get you the best service themselves - and this is not the corporate agent who spends all their time running their office and whom you will never actually talk to once you have signed the dotted line on the listing.
Well, suppose someone makes enough money per transaction to be happy, even though they are competing on price? Then what they want to do is attract more business, which is a part of what I'm trying to do here. More importantly, I'm trying to give you, my readers, the tools necessary to get yourself the best possible bargain. Nor am I trying to tell you that I'm purer than the driven snow, and I don't think I ever have. That is for you to judge with the tools I put out, and there's no way to know for sure unless and until I do a transaction for you.
How far you want to go with these tools is up to you. Real Estate transactions are the biggest transactions most folks undertake in their lives, and as a consequence, small percentages tend to be a lot of money by the standards of lesser transactions. If you only want to do a few easy things, they should save you some money or net you a better result. If you want to do the work for the whole nine yards, they should save you a lot more. But when you have the tools, you are better armed consumers, more likely to get bargains that are better for you, given your situation. Like all tools, they are to be evaluated on the basis of how well they do the job. If they are used properly and nonetheless fail you, you are right to fault them. If there are tools that do a better job, you are right to use those instead. But to say, essentially, "Pay no attention to that man behind the curtain!" is not the optimal response to the issue. Through issues clients and potential clients have brought me, I have encountered every single issue I raise here. There not only is a man behind the curtain, you need to keep your eyes on him and you need to learn how best to deal with him. That is what this site is about.
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Refinancing When You Owe More Than The Home Is Worthtag:www.searchlightcrusade.net,2009://3.44902012-01-23T15:00:00Z2012-01-23T14:55:28Z I've been looking around for an answer to this but my searches haven't returned anything useful. Say you buy a house and with that house you finance in a pool. House was $210,000 and pool is $40k. $250k mortgage....Dan Melsonhttp://www.searchlightcrusade.net/
I've been looking around for an answer to this but my searches haven't returned anything useful.
Say you buy a house and with that house you finance in a pool. House was $210,000 and pool is $40k. $250k mortgage. Okay, so two years later (the average!) you decided to refinance. Especially since you didn't get a good deal in the first place because you wanted a new house and to get the incentive you decided it was okay to finance with the company the builder tells you to finance with. Anyway, in those two years the housing market slumps a bit but for the most part after that time your house doesn't loose value. At the same time, the pool does not add value to your house. Comps in the area put your house at $220,000 but you still owe $245k. Is it possible to refinance? Was all the refinance hype only because the markets kept going up? Is this the reason why people who got an bad loan, maybe thinking they could refinance, are going to loose their house because no one will refi a house that isn't worth more than it was when you bought it?
(sic)
No, the refinancing craze was only partially because values kept going up. Rates kept going down as well. What this combination meant was that not only were better rates coming along all of the time, but that people who were stretching to the utter limit for 100% financing could refinance into more favorable loans as their equity picture improved. If you bought for $180,000, and comparable properties are selling for $360,000 now, that's 50% equity even if you didn't have a down payment. So people who bought for $180,000 were refinancing into single loans without PMI once values hit $225,000. Let's use the rates when I originally wrote this as a comparison. Instead of a first for $144,000 at 6.25% and a second for $36,000 at 9%, with payments of $886.64 and $289.67, even if the rates are absolutely the same and you refinance after 18 months for the $177,000 you owe (paying closing costs out of pocket), when your appraisal says $225,000, that's one loan at 6.25%, with a payment of $1089.82. This cuts $86.49 off the monthly payment, which is how most people think, and cuts your monthly cost of interest by $81, which is how smarter people think. It probably isn't worth refinancing at anything like par for such relatively small savings, but rates were dropping at the same time. This led a lot of unethical agents and loan officers to lead a lot of clients down the primrose path by saying things like "real estate always increases in value," and "You can hold on for a year, right? You'll have equity and we'll be able to refinance you." Lots of folks have a tendency to assume trends of the moment are going to continue, and it's amazing how consistently they get burned by this assumption.
A lot of what I wrote for the original article is no longer true, but there are two new twists: a cluster of special programs from Fannie Mae and Freddie Mac allowing refinancing up to 125% of value for loans originally done "A paper" and Mortgage Loan Modification for loans that were originally sub-prime or variable rate, basically renegotiating your existing loan. As a note, the so-called "minor" modifications of forbearance and displacing any missed payments to the end of the loan have over a forty percent recurrence of default within about a year. In plain english, unless your situation has changed permanently for the better (e.g. found a better job, or recovered your previous one) or you have fully worked through the one time problem that got you into trouble (e.g. temporary disability that is now in the past), all you're likely to be doing is delaying the inevitable. Most people need at least an interest rate modification that puts them at a bearable debt to income ratio. Better the bank do this than lose money through a default. On the other hand, many people want their principal modified, which is not likely to happen - one case in sixty are the statistics I'm hearing, all of them having to do with the "killer Ds" of death, disability and divorce. The bank might as well lose the money they'll lose by foreclosing. At least that way, they know their losses are at an end.
Rates as I write the update are the lowest they have ever been, but prior to that tumble due to the financial meltdown, had been broadly rising for a while. People don't like refinancing when it will raise their rates, and quite often, they can't afford to refinance, even if they have to, if the payment is going to go up. This has caused many lenders to get desperate, and is certainly one of the reasons for the way the negative amortization loan had been pushed. Loan Officers don't get paid unless they are originating new loans this month, and negative amortization loans look wonderful on the surface, when all you know about is the minimum payment. (I've also published an article debunking the Weighted Average Cost of Capital scam some lenders are also using to persuade people to refinance out of low rates into high ones).
If your equity situation has deteriorated due to decline in property value, however, it can be a real problem. Outside of the two alternatives I talk about above, both of which are temporary, lenders don't want to risk money in situations where Loan to Value ratio doesn't support them getting all of their money back if you default. The problems created by declining value are far deeper than the benefits that arise when prices are rising rapidly. When the loans total $500,000 and the property is only worth $420,000, that's a problem. That's a real problem. Lenders do not want to lend more than a property is worth. The highest financing regularly available is 100% of value, even when the market was going gonzo with Make Believe Loans and 80% is the highest refinance I'm seeing now. The situation I have just illustrated is a 120% financing situation. On a straight refinance, that's not going to happen. Period.
Now before anyone goes too far off the deep end, being upside down is no problem at all if you don't need to sell or refinance. You just keep making the payments and everything is fine. It may be possible that real estate won't eventually return to the pattern of appreciation we've come to expect these last hundred odd years, but that's not the way the smart money is betting. You will have equity again. I was upside down myself for a little while after I bought in 1991. It was no big deal. I just kept making those payments, and the prices came back. By the time I had a reason to refinance, I was back at 80% loan to value. For those people who have sustainable loans, being upside-down is a non-event.
Where it becomes a serious problem is when you've got an unsustainable loan. Whether it's negative amortization, or something somewhat less hazardous to your financial future such as a 2/28 or something short term interest only, you're looking at a time when refinancing is going to be pretty much mandatory. If you could have afforded the payment it's going to adjust to, you could have had a sustainable loan. But people have a tendency to stretch too far and buy more of a property than they can really afford.
There used to be more options and potential options if you needed to refinance while you're upside down. The one involving the least amount of mental effort was and is to come up with the difference in cash. Most people don't want to do this even if they have it, but it's an option. Actually, it's a pretty good option if you have that cash.
There second option for refinancing was a 125% equity loan piggybacked onto an 80% first loan. The first problem was that the terms on these were ugly. It's not likely to cut your interest rate or your payment, and they are all full recourse loans, where purchase money loans are mostly non-recourse. This doesn't work for a lot of people, not the least of the reasons for which is that the lenders that were offering these when prices were increasing rapidly have largely withdrawn them from the market now that prices have been decreasing. 125% loans were a function of a rapidly increasing market. I can't remember the last time I had a wholesaler offer me one. Still, if you're in trouble it can be on option worth asking your current lender about - the worst that can happen is they tell you those are no longer available. The situation is this: If you can't make your payment now and go into default, they lose money. If you can afford the payments on the 80/125 combo loan, and don't go into default, they won't lose money, not to mention they potentially move you from a non-recourse purchase money loan to a full recourse refinance, a very good thing from the lender's viewpoint. Easier to do a loan modification, but this option might be available.
In some circumstances, it is conceivable if highly unlikely that the holder of a second trust deed may agree to subordinate their loan to a new first. They're not going to agree if your payment or the loan amount on the new first increases, so you're going to have to pay all closing costs out of pocket. The amount on the new first is also obviously going to be above 80% of value, so you're likely to have PMI on it, but if it gets you from a 2/28 that's adjusted to 9% to a 30 year fixed at 7, it's probably worth doing. If the second goes from sitting behind a $410,000 first at 9% to sitting behind a $410,000 thirty year fixed at 7%, it has become more likely that second loan is going to be repaid in full, where if you default on the first trust deed that second is likely to be completely wiped out. Obviously, the holder of the second would rather not do this - they'd rather be refinanced out of their losing position. But nobody is going to come along and rescue them from their bad decision making if the property is only worth $420,000 and you owe $495,000. If you need to refinance your first in order not to lose the property, the holder of the second can either agree to subordinate, step up to the line themselves and be on the hook for the full amount, or be wiped out completely when the first forecloses. The options for them might all be bad, but subordination is the least bad.
The next option is the worst of all possible worlds: default and foreclosure. This is something you want to avoid if there's any way around it. Slightly better is a Deed in Lieu of Foreclosure, where you sign the title of the property over to the lender. Lenders may or may not allow this if you're upside down, though. Typically, they want to have at least a little bit of theoretical equity in order to agree to a Deed in Lieu. On the other hand, if they avoid the money that the whole default and foreclosure process costs, they may agree. A Deed in Lieu does hit your ability to get a future real estate loan, although it's not nearly so bad of a hit to that or your general credit as a foreclosure, particularly if you can see it coming and take action before you have a spate of late payments. Most folks won't.
Finally, if you need to refinance and can't, you can get yourself a good listing agent and execute a sale subject to a short payoff. This has potential consequences for your financial situation that start at 1099 love notes and might include a deficiency judgment. This is definitely not something to try "For Sale By Owner" or even with a discount listing agent. You're going to need an on the ball full service agent in order to make it happen, because the lender isn't going to listen to you as the owner, and a discounter is unlikely to be willing and able to devote the time necessary to get the lender to approve it. The big advantage to this is that it doesn't hit your credit nearly so badly as a foreclosure, perhaps less even than Deed in Lieu, and if you want another real estate loan sometime in the next decade, you would probably rather do a short sale than go through foreclosure.
None of these situations where you need to refinance a mortgage you can no longer afford, but owe more than the property is worth, is a good situation to be in. But if you take action before you've got late payments or a notice of default, let alone a notice of trustee's sale, you can get away surprisingly little damaged. The worst thing that can happen, will happen if you don't do something to fix an untenable situation before it gets that far.
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Be Careful Not To Commit Fraud With Rebatestag:www.searchlightcrusade.net,2009://3.44892012-01-22T16:00:00Z2012-01-22T16:15:18ZWith many people pushing various "cash back to the buyer" schemes in real estate, a note of caution is needed. Actually, it's more like an entire symphony of caution. Because if there is a loan involved, you run the risk...Dan Melsonhttp://www.searchlightcrusade.net/
worth the resources to investigate all of that brokerage's transactions.
Here's what happens. A wants some cash to fix the property up, and so arranges with B to jack the price enough higher so that B can rebate the difference to A. A then procures 100 percent financing on the increased price, B gets the increased price, and rebates it to A.
Alternatively, A writes an offer with a real estate licensee who rebates part of their commission, while providing lesser "services". Usually, the question I want to ask those rebaters I encounter is "Why do you make more than minimum wage?" The answer is because suckers who think in terms of cash in their pocket don't understand what they're getting into.
In either case, this cash back somehow doesn't get disclosed to the lender, and it needs to be. Because if the official purchase price is $X, but B is giving A back $Y under the table, the real purchase price is $X-Y. If the lender knows about the cash back, they will treat the purchase price as being $X-Y. At the very most, for 100% financing, they will only lend $X-Y. Since this defeats the purpose of the cash back, the sorts of people who do this predictably will not disclose it to their lenders.
This is fraud. Even so-called "harmless" fraud where the people fully intend to repay the entire loan (and eventually do) is still fraud. The lender doesn't have to lose a single penny in order for you to have committed fraud. The definition of fraud is "An act of deception carried out for the purpose of unfair, undeserved, and/or unlawful gain, esp. financial gain." The legal definition is a little more complex, "All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated," but essentially similar. Had you told that lender about the cash back, they would have treated the purchase price as being less than the official price. Hence, fraud.
Now there are all manner of crooks out there encouraging people to do this (and other things). I've seen numerous advertisements for various "real estate investment systems", and people who represent themselves as real estate professionals and real estate investors and real estate authorities and even real estate licensees who urge people to commit federal felonies for various reasons on the surface that always reduce to "So the crook can make money." Whether it's through a commission they wouldn't have because the client can't be persuaded to do it the legal way, or money they intend to make selling their "Foolproof System!" to thousands of pure deluded fools, they do a lot of damage. Nor does it get you off the hook if you were following the advice of alleged professionals, as lots of people in federal prison can testify. Even if you didn't know it was illegal, even if people you had reason to trust told you it was legal, you are still responsible.
The rebate itself is not illegal, according to my best understanding. Once again, I'm not a lawyer and I don't even play one on TV, so check that out thoroughly, but it is my best understanding. The illegality happens when you deceive the lender, either by omitting information a reasonable person would agree is relevant, or by actively saying something that isn't true.
It's more than possible to get cash back and be compliant with the law - it just defeats the purposes most people have in mind with cash back, which is to make the lender think they paid more for the property than they really did, and so lend a greater amount of money or on more favorable terms, or both, than the lender otherwise would have, had they known about the cash back. In other words, FRAUD
If you inform the lender, they will treat the purchase price as being the official price less the rebate. So if the official price is $400,000, but you're getting $20,000 back, the price the lender will lend based upon will be $380,000, and it doesn't matter if the appraiser says it's worth $400,000, or $400 million. $380,000 will be 100% financing, not $400,000, $360,000 will be 95% financing not 90%, and I'm certain you can figure the rest. Lenders evaluate property based upon the LCM principle, which is Lesser of cost or market. You only paid $380,000 in real terms, which makes it a $380,000 property at most. It doesn't matter whether this rebate is direct from the seller, or some third party. They look at it in terms of "How much of your hard earned money are you actually going to part with?" If some cash is coming back to you, you aren't really parting with whatever number is on the purchase contract, are you?
Where most lenders will cut a certain amount of slack is in closing costs. If the money is not actually coming back into the buyer's pocket, but instead being used to pay for costs of the purchase transaction or costs of the loan, most lenders will give that their reluctant blessing. Because all parts of the transaction are subject to negotiation as to who gets what and who pays what, the lender will usually understand that in order to get that price, the seller agreed to pay this cost or that cost. I don't expect this to last forever because I can point to a lot of abuses that are happening, but it happens to be the case right now. I believe that sooner or later, lenders will clamp down on this practice and refuse to allow it, but for right now, most of them are still willing to do so.
Even the most forgiving of lenders, however, draws a bright and hard line if any of that cash finds its way back into the buyer's pocket. So make certain it doesn't. And make certain that the lender has been notified in writing of every penny that's paid on the buyer's behalf by anyone else for closing costs. Because you don't have to be directly involved in a conspiracy to get drawn into a fraud investigation, and once it gets started, you can never be certain you won't be sitting in a courtroom somewhere, charged with fraud and conspiracy and anything else they can think of to throw at you. Even assuming you win, it's going to be a big hit to your wallet and a bigger one to your reputation. Not to mention the little detail of some time of your life spent wearing prison clothing as a "guest" at Club Fed.
Caveat Emptor
Original article here
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Deciding You Don't Want A Particular Mortgage Loantag:www.searchlightcrusade.net,2009://3.44862012-01-21T16:30:00Z2012-01-21T16:21:30Z I have questions to ask you about the loan for house. I have been work with one broker since DELETED and I just tell her on the phone that I chose her and that she can start to do...Dan Melsonhttp://www.searchlightcrusade.net/
I have questions to ask you about the loan for house. I have been work with one broker since DELETED and I just tell her on the phone that I chose her and that she can start to do the escrow but I didn't sign any application and papers for her. Two weeks later, the appraisal had been done. Can I stop to work with her because she promised me to look for lower rate later, but she didn't do anything about it. If I stop to work with her, do I have to pay any fees for the appraisal and bank approval for the loan and how much it may costs? (she had only done the bank approval and ordered the appraisal). Thank you very much for helping me.
This is pretty open and shut. Usually it's less clear. You haven't signed anything committing you to the loan. She probably has civil recourse on the appraisal - if she wants to spend thousands in lawyer fees to recover a few hundred. Since that's silly, I don't think it's likely she'll pursue it. Her case hinges on her having ordered it because of your verbal representation you wanted the loan. One more thing in your favor is that the date on the Good Faith Estimate and California MLDS needs to be within three days of the date she ran your credit report, not to mention the Truth In Lending Advisory and everything else. Not likely, if you haven't signed anything.
Most loan providers, ethical or otherwise, won't start work without a loan application package. Ethical ones because they've got legal obligations to meet, less ethical ones because there will be an origination agreement in there obligating you to pay their expenses if you don't go through with it.
If you have signed such an agreement, there's probably something in there obligating the loser to pay the prevailing party's legal fees. Since you're likely to lose if they push their case, this shifts the presumption as to what you want to do, which is pay the appraiser. You can fight it in court if you want to, but you're likely to end up paying for both sides legal expenses in addition to the appraisal bill. Since the chances of you winning in court are pretty minuscule, you would be well advised to just pay the appraiser.
I've said it before, but it's likely that lenders who promise to pay for an appraisal are going to more than recover those costs elsewhere in the loan. Suppose you've got a $300,000 loan. If all you see is the fact that you're not writing a check for $400, that loan provider can, by being willing to loan you the $400, trivially make two extra points on the loan, or $6000. Just because you're not writing that check directly doesn't mean you're not paying every penny of it via higher rates, or higher origination. Furthermore, they're not likely to pay for the appraisal without an origination agreement that obligates you to make good their expenses.
The true low cost mortgage providers won't pay for the appraisal. If you've got a low cost provider, they're either going to have to absorb the costs of the appraisals that don't pan out, or they're going to have to charge their clients whose loans fund for the ones who don't. In either case, this means a higher loan margin. Usually, there's a good margin there on top of the appraisal. I can point to providers who use the fact that they pay for the appraisal as a wedge to extract thousands of dollars in junk fees as well. Most of the people for whom that is a selling point only understand money when they write a check or fork over cash. They don't understand about how money they roll into their loan balance is every bit as real.
If you do decide you don't want a loan, the appraisal is the vast majority of the money you should be out, because that and the credit report (somewhere between $13 for a single person and about $40 for a married couple) are the only third party expenses. This doesn't mean that the less ethical won't try and soak you for other fees, because they will, and junk on top of those fees. Depending upon the origination agreement you sign, you could be on the hook for thousands of dollars - more than a low cost provider would make if they actually fund the loan.
I need to say this again, also: Just because you paid for the appraisal, and are therefore entitled to a copy, does not mean you are entitled to take it to another loan provider. The appraisal must be in the name of the correct loan provider, and if the prior loan provider does not release it, the appraiser will not re-type it. Even before new appraisal rules rendered it pointless, the games that were played by loan providers who refuse to release appraisals are legion. Most will want money to release it, money such that you may be better off getting another appraisal. Even the most ethical will not likely release the appraisal just because you find a better deal - or think that you have. They've spent anywhere from hours to days of time - time they have to pay for, even if they can't show a receipt - on your loan. Expecting a loan provider to release the appraisal without money is like expecting your mechanic to release your car without being paid. Therefore, you want to be the one that controls the appraisal, if you possibly can (Thanks to the new appraisal rules, this is forbidden). Some appraisers don't like this, because it's in their interests for you to pay for more appraisals, but the law in most states isn't nearly so hard nosed as most appraisers would like you to believe.
One final thing: When I originally wrote this, rates had risen quite a bit in the last few weeks. I had a purchase client whose transaction hit a snag in a property defect that had to be corrected before any loan could be funded, and it was much more cost effective for them to pay for rate lock extensions than it was to re-float the rate. A tenth of a point per five calendar days is a lot less than the almost half of a percent re-submitting the loan to a new lender would make in the rate. In such circumstances, any reasonable loan that's been locked for a couple weeks is likely to be better than anything available today. I can look for a lower rate all I want. It's not likely to be found, unless their current provider is pretty high margin.
Caveat Emptor
Original article here]]>