tag:www.searchlightcrusade.net,2007-08-27://3 2012-05-16T13:48:43Z "What you need to know about mortgages and real estate. And more." Movable Type Publishing Platform 4.0 tag:www.searchlightcrusade.net,2010://3.5021 2012-05-16T14:00:00Z 2012-05-16T13:48:43Z

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

Dan Melson http://www.searchlightcrusade.net/ local first time buyer programs restrict the conditions under which the property can be sold. The purchaser must be someone who has themselves qualified for their first time buyer program, the purchase price cannot be above the original purchase price plus a certain margin (usually reflecting a given percentage of Average Median Income for a given Metropolitan Statistical Area), or both. These are by no means the only restricted sale programs. Many academic institutions have such property upon the grounds of their original endowment. There is a covenant which runs with the land that only faculty members or employees of the college or academy are allowed to purchase the property. I'm sure there are business employee restrictions and others. This is a classic "good news - bad news" situation. At purchase, it's good news (mostly) because you typically get a far lower price than other, equivalent property, meaning you can afford it when you couldn't otherwise. At sale, however, it means you can't sell for a true market price because either the general public is prohibited from buying or the sales price is restricted by the bargain you made in order to purchase. What this means is that if lenders have to foreclose upon such a property, they are pretty much up the creek. Such a property is unlikely to sell at auction, they can't just hire an agent and put it on MLS. If the property got beat up before the foreclosure (as happens quite often), it may not be something any of those eligible to purchase it are interested in. Since it's not generally marketable, most lenders don't want to touch restricted sale properties. This means your loan choices are going to be restricted from the day you sign the purchase contract on. You will probably not be able to get a purchase money loan with most financial institutions. You almost certainly won't be able to refinance on favorable terms, even if everyone who bought without such a restriction can. Typically, there are only one or two financial institutions willing to touch such a property, and only through their own internal loan officers rather than through any brokers they may do business with. What's going on is that the restricted sale entity (usually a municipality or educational institution) has contracted with them to somehow take care of the problem if there is a foreclosure. This usually takes the form of taking over the property themselves and buying out the lender's Note. For refinances, all of the above applies, even more strongly because one lender already has the indemnity contract; any others that you might have been able to choose between do not. This means your choices are limited to "refinance with that lender or not at all". Not a good situation to be in as regards to getting a good rate for a reasonable cost. Whatever they feel like offering you is what you get. Nor do you get the standard rates everyone else gets from that lender. You're not in the same situation as everyone else. You're in a special program where nobody else can lend to you because your property cannot be sold to the general public. You're almost certainly stuck with that one lender. It's not like you can go somewhere else. Due to this lack of competition, expect the rates on loans for such properties to be above market average. Some are fairly close, but it seems an average of half to three quarters of a percent higher on the rate is what you're going to pay when you finance such a property. Furthermore, the only ones able to refinance may be the current lender, as nobody else has that indemnity contract from the restricted sale entity. Lender's don't want to take over your property - they want the loan to be repaid. But they must be able to take over your property and sell it on the market for a market price in order to accept your loan. Anything else is a violation of their duty to their stockholders and bondholders, as well as a violation of federal banking regulations. Since they can't do this, it shouldn't surprise anyone that most lenders can't touch a restricted sale property. Caveat Emptor Original article here]]> tag:www.searchlightcrusade.net,2010://3.5020 2012-05-15T14:00:00Z 2012-05-15T13:14:54Z

A lot of advice gets given to choose a "top producing" agent. These highly corporate offices may have the name of an individual agent attached to them, but they are in fact transaction mills. They have done pretty well for...

Dan Melson http://www.searchlightcrusade.net/ how well they did for individuals, rather than how many sales they produced or what dollar volume. I have had more experience than I would like in dealing with these offices. Let me tell some experiences I've had very recently. I represent far more buyers than sellers, so they're going to be from a buyer's agent prospective: I got to one property to show it, and the lockbox was open and the key was gone. I called the listing agent's number - just a courtesy call of the sort I'd like to have if this happened to one of my listings. I got their office phone tree instead - and no ability to get a live person on the line. Yes, it was still available, but all I could do was leave a message and hope. Actually, something similar has happened at least six times in the last couple of months: A problem making it difficult to show the property, or something that was a real issue with the property that had happened, and no way to get in touch with a live person to fix it. Once, I got there and the door was standing open and there was no way to lock it without the key that wasn't there, and neither the agent nor their office answered (I called the police switchboard after them). Okay, no problem seeing the property, but the ability to secure it afterwards was completely missing. You want this to happen to your property? Upon several occasions in the last couple of months, I and my clients have made very good, strong offers - and the response we got was like dropping them into a black hole. In other words, none. I tried calling - phone tree of doom again. Leave messages every day for a week - no callback. I tried emailing several times - no response. I tried another fax asking if they'd gotten the offer - nothing there either. At least two of these properties have since had a closed sale for less than the amount my clients offered, both of them curiously enough with the listing agency representing the buyer as well, resulting in them getting both halves of the commission. Great for those buyers and especially for the agency; not so great for the sellers whose fiduciary duty that agency failed in. I strongly advise against allowing your listing agent to represent the buyer as well, or at least no paying them both halves of the commission when they do. It's a fundamental conflict of interest to have a dual agency situation, disclosed or not. Nonetheless, the real point of this is that all of these agencies were too busy to respond to good, strong offers. On several occasions, I've been told it was a multiple offer situation. That's fine. But rather than individual negotiation and counter-offers, I and my clients are given the incredibly weak line to "Send your best and highest offer" That is to save the agent and their assistant working time, not to get their client the best deal. To get the best results, you negotiate individually with at least the strongest three to five offers. For the others, who are way below market, the minimum response is a generic counter that tells them where the market for this property really is. Sure, some of them are likely to be low-balling with every intention of walking away if they can't get the property for that offer. But there's always the possibility that they will return a competitive offer if they're given more guidance. An agent who won't or can't spend fifteen minutes generating such a counter is not doing the whole job, let alone the agent who doesn't do individual negotiations. Yeah, the property will likely sell. But not for the best possible price. And it's amazing how many of these lazy agent "best and highest offer" deals fall through, putting the owner right back to square one with sixty days on market - which sixty days means that property will fetch less. Short sales are even worse than that. You make an offer for a short sale to corporate agents, and they usually intentionally don't respond. The last four I've made were all intentionally not responded to. Instead they just forward all of the offers to the lender. The black hole situation again, even worse because there's not going to be a response for six to twelve weeks. By that time, those buyers are going to have something else and the offers will be useless. Particularly the good offers. They want a property. You can negotiate with these potential buyers, choose one and give them a reason to stay with your property, or you can throw mud at the wall. Actually, it's more like throwing "no stick" mud at a Teflon wall - because it's not going to stick. Furthermore, the back and forth of negotiations with multiple prospective buyers is highly useful and likely to help result in an acceptance. This makes both the seller and the buyer happy. Yes, the chosen buyer can still walk away in the meantime - but you've still got the contact information on all the others. In other words, you're no worse off by picking one particular offer, and you're likely to be better because there's a much higher probability of that best offer sticking around. Of course, not accepting any particular offer means that the property isn't marked "pending" and it isn't marked "offer accepted pending lender approval of short sale" which means the listing brokerage can still use it to troll for buyer clients and a way to make themselves more money by selling those clients something else. Amazing how and why that that works, isn't it? But the listing agent has the responsibility to do what is best for the clients, not themselves. I think this trick violates the fair and honest dealing duty to those buyers as well, but there isn't any real way to argue it doesn't violate fiduciary responsibility to the listing client. The point I'm making is that while these corporate agents do sell a lot of real estate, and they certainly make an awful lot of money, they're pathetically bad choices for getting the best possible price, let alone quickest sale, and you can kiss actual good service right off your list. There are equivalent issues on the buyer's agency side as well - agents too busy to show property, poor negotiators, high pressure tactics where they are never appropriate. How can you know the agent isn't too busy to give you enough attention. Personally, I use a points system. A loan is four points from application to funding, a buyer client is fifteen from when they start looking to close of escrow, a listing is twenty points in preparation for market, ten once the initial work is done and the property actually hits MLS through close of escrow. Negotiating multiple offers is two points per offer while negotiations are in process, and is the only thing that can possibly send me "over the limit" involuntarily. I'm only allowed 100 total points; I don't accept business that would drive me over that total (Yes, I've done 100 loans in one month. But loans have become progressively more complicated since then, especially in the last few months, and it's not fair to prospective clients to pretend otherwise). I'm not claiming there's anything perfect or sacred about my system, and agents with more people working in their unit can certainly handle more business than I can with just a contract loan processor and transaction coordinator, neither of which are allowed to talk to my clients. The point is that I have such a limiting system in place; I can and have told people "I cannot work with you right now because it would mean I cannot devote enough attention to everyone else I'm already working with." I also offer them a choice of referrals or waiting. Talk to most agents and brokerages about such a system or threshold, and they look at you like you're from another planet. Asking prospective agents and loan officers about whether they have such a system and how it works is a good test. Not that the existence of such a system means they're a great agent, but the absence is a real red flag. They can keep hiring office people all they want, but the office is not where the real work takes place. The real work all involves the agent themselves, and there are only so many hours in the day. And if they try and fob you off on some "associate agent" of theirs (in other words, they take a big cut of what that agent makes in return for feeding them business) consider that "associate agent" as if they were who is going to be responsible for your transaction - because they are. That "big name agent" has already done everything they're likely to when they introduce you to their associate. What else can consumers do? Call their prospective listing agent and deal with their phone tree as if you were an agent with an offer, or even just an agent calling with a concern about the property. If you can't get through to a live person, that's a problem. If you leave a message and nobody calls you back within one business day at the most; that's grounds enough to remove them consideration totally. Pretend you're an agent, at least until you get someone on the phone. For buyer's agents, it's hard to see evidence of their responsiveness ahead of time, but so long as you limit yourself to non-exclusive buyer's agency contracts, you can fire agents who don't measure up at any time - making it a situation where you literally can't lose. Listing contracts, however, by their nature, need to be exclusive right to sell to get the best results. This means you can give any buyer's agent a chance and lose nothing except a little time; for a listing agent you need to be careful about due diligence ahead of time. As this article should make very clear, there is a major difference between asking the question "Who sells the most real estate?" and "Who sells real estate for the best possible price, in the quickest time, and deals with issues promptly so I get the best results?" You want to make certain you're asking the right question, because if you ask the wrong question, you get the wrong answer. Caveat Emptor Original article here ]]> tag:www.searchlightcrusade.net,2009://3.4693 2012-05-14T15:00:00Z 2012-05-14T13:46:12Z

Hi, Dan! I just came across your website and you strike me as the type of guy who has answers for our situation: My husband and I built our home 2.5 years ago. We took out a second mortgage...

Dan Melson http://www.searchlightcrusade.net/ Hi, Dan! I just came across your website and you strike me as the type of guy who has answers for our situation: My husband and I built our home 2.5 years ago. We took out a second mortgage last year which brought us up to financing basically 100% of the value of our home. We owe a total of about $305,000 on the home, and even though it was appraised for around $305-310K. if we sell, we have been told we won't get a price anywhere near that, because it is not in a development. Do you have any suggestions, comments, opinions...which could help us out. We would really like to relocate closer to my brother out in the DELETED area-but we seem to be stuck right where we are given the circumstances-are we? Gee, around here custom homes usually command a premium over cookie cutters, other things being equal. Not necessarily a huge premium, but a premium. Especially since they typically don't have homeowner's association, which most people do not want. Nonetheless, I'm hesitant to second guess the agents on the scene when I have zero personal knowledge of your local market. You basically have four options: Stay where you are, rent it out, default, or sell. You don't state whether you are having difficulty affording the payments, or whether you've got one sort or another of unsustainable mortgage. If you're not having difficulty affording the payments and you're in a sustainable loan, there's no need to do anything. If you're at or close to 100% financing, and you need to refinance, when I originally wrote this you were looking at right around 6.25%, plus PMI of about 1% until your equity improves. It would have been better if lenders were giving second mortgages above 90% financing, but that's not happening right now. At this update, if your loan is with Fannie Mae or Freddie Mac 125% financing is likely available, but those are limited time situations. I'm going to presume that all refinanced, you'd be looking at a balance of $310,000, which may be a little low. Payment worked out to $1909 on a thirty year fixed rate loan, fully amortized, plus PMI of $258 on the traditional program when I originally wrote this. Rates are much lower at this update, but the principle remains the same. Lenders are not loaning above 90% on a property refinance unless they're already on the hook for the loan and it improves your likelihood of being able to repay the loan. If your income situation is cramped, you may be able to get "interest only" for five years (or longer!) at a slightly higher rate. If you do an interest only loan, that would be a payment of about $1680. although you need to be aware before you do it that it is a calculated risk. I don't know your market, but mine is preparing to recover and I don't see anywhere not recovering within five years. Nonetheless, getting an interest only loan sets up a deadline for doing something again, and your market isn't under your control or anyone else's. Furthermore, I don't think we'll see rates like today's again, so we're really talking "mandatory sale within five years" unless you start making a whole lot more money. I think it's a reasonable bet given that you already own the property, but it remains a gamble. Another word on the viability of refinancing: It hinges upon your ability to either get an appraisal that covers the amount of the new loan balance, or to come up with the difference in cash. It is possible to refinance more than the value of the property through the temporary Fannie and Freddie programs, but there are several sticking points that could prevent it if someone decides to be uncooperative. If you're looking to refinance because you can't afford your mortgage, refinancing more than the value of the property is unlikely to make it more affordable. It's probably better to consider another option. You could rent the property out. I don't know what rentals are like in your area, but if you can get enough rent to cover the monthly expenses (mortgage, taxes, insurance, and an allowance for upkeep and management), that becomes a possibility. If you can cover the difference, that's fine, also. Remember, I think the markets are going to do well once they've digested the hairball caused by the speculative practices of buying with unsustainable mortgages and the loan investors get over their institutional paranoia. If you're short $200 per month and in five years you can sell for $50,000 more, that's an investment I'd make. The question, unanswerable by anyone at this point in time, is where your local market will be in five years. $50,000 is about 16% of $310,000. Here in San Diego, I'd have leaped at that - and been wrong, thanks to our marvelous economic overlords in government ruining the economy. In your area, I don't know. In either case, it's a risk, and you need someone who knows more about your market than I do to advise you on the probabilities. You could just default. I'm not recommending it. It's a bad option, but it is there. If you want to buy, or even rent, after your relocation, your credit will be hosed. I don't know your state law on deficiency judgments, but that's a concern. Under this same heading is deed in lieu of foreclosure, with most of the same problems. The reason people are willing to grant credit is that we're legal adults, and supposedly responsible. If you give them evidence that you're not, you may not pay for it in dollars directly, but you will pay for it, and typically the interest rate is usurious. Or you could sell, most likely a short payoff assuming what you've been told is correct. It costs money to sell a property, more so in a buyer's market. Figure it'll cost you about 8 percent of whatever the gross sale price is to get the property sold. Using this as the basis for an estimate, even if you sold for $310,000, that'd only net you about $285,000, so you'd be short roughly $25,000. If the lender forgives the difference, you'll likely get a 1099 love note adding it to your taxable income (In normal circumstances - at this update there is temporary legislation in place making loan forgiveness non-taxable). If they don't, you could be sitting on a deficiency judgment for the difference. I don't know your state's law, but around here, if someone was liable for the difference, I'd suggest saving the legal fees by agreeing to sign a promissory note. If you fight, you're likely to be wasting the money as well as digging yourself in deeper. They're going to win, and they'll almost certainly get to add their legal fees to what you owe. So unless you really like subsidizing the legal profession, if you're in the situation, I'd suggest considering agreeing to pay without a judgment. Talk to a lawyer in your state about what the law says about your situation, of course, as spending the money for a half hour of a lawyer's time is likely to be considerably less than $25,000 plus interest. Now if you accept such a promissory note, I actually have no idea what the rate will be, but even if it's 18 percent, you're still talking about owing only about a twelfth of what you do now. I'm not saying it'll be easy, but you can pay it off in a few years, and it's probably cheaper than the costs of defaulting, even though it does hit your debt to income ratio. People choose defaulting and bankruptcy because it's easier now, but when you go through the total costs rather than just the immediate cash, you're likely to come to a different answer. Caveat Emptor Original article here]]> tag:www.searchlightcrusade.net,2007://3.3517 2012-05-13T16:00:00Z 2012-05-13T15:43:21Z

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

Dan Melson http://www.searchlightcrusade.net/ pfadvice talks about debunking a money myth and perpetuates one of his own. He took issue with someone refinancing to lower their monthly payment, insisting instead that the term of the loan was all important. His point is understandable in that because folks tend to buy more house than they can really afford, they also tend to obsess about that monthly payment. The solution to this is simple to describe but it takes someone with more savvy and willpower than most to bring it off: don't buy more house than you can afford. Actually, there is nothing that is all important, but if I had to pick thing as most important, it would be the tradeoff between interest rate and cost and type of loan. This is always a tradeoff. They're not going to give you a thirty year fixed rate loan a full percent below par for the same price as loan that's adjustable on monthly basis right from the get-go. This tradeoff varies from lender to lender and also varies over time. Nor is it the same for borrowers with different credit, equity, or income situations, but it is always there. For a given borrower at a given time, any program which you can qualify for will have the rate/cost tradeoff built in. If you want them to pay your closing costs, you're going to have to accept a higher rate than if you're willing to pay two points. It is the relationship between whatever loan you have now, and the loans that are available to you, that determines whether it's a good idea to refinance. Focus on the real cost of the money: The interest rate, which determines what the cost of borrowing the money will really be, and the total upfront cost to get that loan, which breaks down into points and closing costs. If you have a long history of keeping every mortgage loan you take out five years, ten years, or longer, then perhaps it might make sense for you to take out a thirty year fixed rate loan and pay some points. To illustrate, I'm going to pull a table out of an old article of mine because I'm too lazy to do a new one.

rate 5.625 5.750 5.875 6.000 6.125 6.250 6.375 6.500 6.625 6.750 6.875 7.000

discount/rebate 1.750 1.250 0.625 0.250 -0.250 -0.750 -1.250 -1.500 -2.000 -2.250 -2.500 -3.250

cost $4725.00 $3375.00 $1687.50 $675.00 -$675.00 -$2025.00 -$3375.00 -$4050.00 -$5400.00 -$6075.00 -$6750.00 -$8775.00

I'm intentionally using an old table, and rates are different now. The point is to examine your current loan in light of what's available to you now, and determine whether there's a loan that's worth the cost of doing. Maybe your equity situation has improved. Maybe your creditworthiness has improved. It's possible that something has deteriorated, and the loans that are available also vary over time with the state of the economy. If you've got a prepayment penalty that hasn't expired, remember to add the cost of getting out of that loan to the cost of your refinance, because it certainly changes the computations by adding a large previously sunk cost to the cost of your new loan. Whatever it is, the loans available to you now will be the total result of all of how all of the factors in the situation have changed. I'm going to keep the example simple, assuming no prepayment penalties, and the third column is cost of discount points (if positive) or how much money you would have gotten in rebate (if negative), assuming the $270,000 loan I usually use. Add this to normal closing costs of about $3400 to arrive at the cost of your loan, thus: (I had to break this table into two parts to get it to display correctly)

Rate 5.625 5.75 5.875 6 6.125 6.25 6.375 6.5 6.625 6.75 6.875 7

Points/Rebate $4,725.00 $3,375.00 $1,687.50 $675.00 ($675.00) ($2,025.00) ($3,375.00) ($4,050.00) ($5,400.00) ($6,075.00) ($6,750.00) ($8,775.00)

Total cost $8,125.00 $6,775.00 $5,087.50 $4,075.00 $2,725.00 $1,375.00 $25.00 ($650.00) ($2,000.00) ($2,675.00) ($3,350.00) ($5,375.00)

New Balance $278,125.00 $276,775.00 $275,087.50 $274,075.00 $272,725.00 $271,375.00 $270,025.00 $270,000.00 $270,000.00 $270,000.00 $270,000.00 $270,000.00

Payment $1,601.04 $1,615.18 $1,627.25 $1,643.22 $1,657.11 $1,670.90 $1,684.60 $1,706.58 $1,728.84 $1,751.21 $1,773.71 $1,796.32

rate 5.625 5.750 5.875 6.000 6.125 6.250 6.375 6.500 6.625 6.750 6.875 7.000

New Balance $278,125.00 $276,775.00 $275,087.50 $274,075.00 $272,725.00 $271,375.00 $270,025.00 $270,000.00 $270,000.00 $270,000.00 $270,000.00 $270,000.00

Interest* $1,303.71 $1,326.21 $1,346.78 $1,370.38 $1,392.03 $1,413.41 $1,434.51 $1,462.50 $1,490.63 $1,518.75 $1,546.88 $1,575.00

$saved/month $130.80 $108.29 $87.73 $64.13 $42.47 $21.10 $0.00 ($27.99) ($56.12) ($84.24) ($112.37) ($140.49)

break even 62.11922112 62.5610196 57.99355825 63.54001705 64.15695892 65.17713862 0 0 0 0 0 0

In the next tables, I've modified the results based upon some real world considerations. Point of fact, it's rare to actually get the rebate (typically, the loan provider will pocket anything above what pays your costs), and so I've zeroed out those costs. You take a higher rate, you're just out the extra monthly interest. The fourth column is your new balance, the fifth is your monthly payment. For the second table, I've duplicated rate and new balance for the first two columns, the third is your first month's interest charge (note that this will decrease in subsequent months), the fourth is how much you save per month by having this rate, and the fifth and final column is how long in months it will take you to recover your closing cost via your interest savings as opposed to the cost of the 6.375% loan, which cost a grand total of $25 (actually, this number will be slightly high, as interest savings will increase slowly, as lower rate loans pay more principal in early years). However, let's look at it as if your current interest rate is 7 percent. Your monthly cost of interest is $1575, there, so let's see how long it takes to actually come out ahead with these various loans.

Rate 5.625 5.75 5.875 6 6.125 6.25 6.375 6.5 6.625 6.75 6.875 7

Loan Cost $8,125.00 $6,775.00 $5,087.50 $4,075.00 $2,725.00 $1,375.00 $25.00 $0.00 $0.00 $0.00 $0.00 $0.00

New Loan $278,125.00 $276,775.00 $275,087.50 $274,075.00 $272,725.00 $271,375.00 $270,025.00 $270,000.00 $270,000.00 $270,000.00 $270,000.00 $270,000.00

Saved/month $271.29 $248.79 $228.22 $204.63 $182.97 $161.59 $140.49 $112.50 $84.38 $56.25 $28.13 $0.00

Breakeven 29.94960403 27.23218959 22.29233587 19.9144777 14.89346561 8.50926672 0.177945838 0 0 0 0 0

In short, since you're recovering costs quickly, it would make sense for folks with a rate of 7 percent to refinance in this situation, no matter how long they have left on their loan. For $25, they can move their interest rate down to 6.375, saving them $140 plus change per month. It's very hard to make an argument that that's not worthwhile. On the other hand, I would have been somewhat leery of choosing the 5.625% loan, as more than fifty percent of everyone has refinanced or sold within two years. However, if I have a solid history of going five years between refinancing, it makes a certain amount of sense, at least considered in a vacuum. Considered in light of the real world, rates fluctuate up and down. So I tend to believe that if I don't pay very much for my rate, I'm likely to encounter a situation within a few years where I can move to a lower rate for zero, or almost zero, whereas if I paid the $8125 for the 5.625%, rates would really have to fall a lot before I can improve my situation. Do not make the mistake of thinking that the remaining term of the loan is more important than it is. You now have (assuming you took the 6.375% loan) $140 more per month in your pocket. Your payment will go down by more than that, but you're actually saving $140 per month in interest. It's up to you how you want to spend it. If you want to spend it paying down your loan more quickly, you can do that (providing you don't trigger a prepayment penalty, of course - but the loans I quoted didn't have one). Let's say you were two years into your previous loan. Your monthly payment was $1835.00. If you keep making that payment, you'll be done in 288 months; 48 months or 4 full years earlier than you would have been done under the original loan. So long as you don't trigger a prepayment penalty, you can always pay your loan down faster. Just write the check for the extra dollars and tell the lender that it's extra principal you're paying. I haven't made just the minimum payment since the first time I refinanced. Many folks focus in on the minimum payment. By doing this, you make the lenders very happy, and likely your credit card companies as well. Not to mention that you are meat on the table for every unethical loan provider out there. It is critical to have a payment that you can afford to make every month, and make on time. But once you have that detail taken care of, look at your interest charges and how long you're likely to keep the loan, not the minimum payment or the term of the loan. Caveat Emptor Original here]]> tag:www.searchlightcrusade.net,2007://3.3516 2012-05-12T14:00:00Z 2012-05-12T14:29:25Z

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

Dan Melson http://www.searchlightcrusade.net/ All Mortgage Money Comes From The Same Place!" Free money, right? Well possibly, but not very likely. What most companies are looking to do with this advertising is give people a reason not to shop around. They hope that because most people think that "All Mortgage Money Comes From The Same Place", the average customer will just stay there to apply for a loan. Many builders and conversion companies will throw roadblocks in your way if you try to use another lender. They cannot legally require you to use their loan company (at least not in California), but they can make it exceedingly difficult to go elsewhere. I've been told by builder's representatives on two occasions that I was wasting my time with a loan, because "If they don't use our lender, they won't get the property!" despite already having a signed purchase agreement. Roadblocks take all sorts of turns. They won't let the appraiser in. They won't cooperate with requests for information, without which the other loan is going nowhere. And so on and so forth. By the way, this behavior is illegal under RESPA. They're just betting you won't do what it takes to complain, not to mention that even if you do complain you're still not likely to get the house you wanted - the genesis for all of this. I should mention that the concept of giving you incentives (metaphorical carrots) instead of metaphorical sticks is legal, ethical, and highly desirable as opposed to the behavior in the previous paragraph. Just remember they've got to pay for those incentives somehow. Builders are not charities. You still want to shop your loan around based upon the bottom line to you. The builders wouldn't give those incentives to use their lender, or throw roadblocks in your way when they're trying to sell you a property, if they weren't making more money with the loan. Quite often, they're making more money on the loan than they are from the sale. Put you into a loan half a percent or more above market, stick a three year prepayment penalty on it, and voila, anywhere from a 6 percent premium to perhaps 10 percent. To give you a comparison, around here an agent makes 2.5 to 3 percent from a transaction, and I do my loans on a margin that varies from under half a point to a point and a half, depending upon difficulty and size, and discounted from that if I'm also getting an agency commission on a purchase. But the average consumer is distracted by these "free" upgrades or closing costs that they don't realize how badly they've been raked over the coals. If I can get you that $400,000 loan half a percent cheaper and with no prepayment penalty, I'm saving you $2000 per year for certain, and very likely about $12,000 on the prepayment penalty. Furthermore, on some of the builder's loans I've analyzed, they're getting you a rate that would carry a point and a half retail rebate or more, even without the prepayment penalty. This means on a $400,000 loan at that rate, the lender would be paying you a $6000 incentive to do that loan, more than covering normal closing costs. But this is comparatively rare. Usually, they're earning some or all of the secondary market premium directly. Have no fear, that builder is doing quite well for having loaned you that money. What can an average person do about this sort of thing? As I've said before, builders often throw roadblocks in the way of outside lenders, and there's not a lot that you or anyone else can do about this fact. There is a bill in the California legislature that wants to ban developers from being the lender also. This is a "quick fix" that won't fix anything; in fact, it will hurt. They can bring in outside lenders who agree to pay them under the table, or even on out in the open for certain services. Net benefit: Zero. However, this bill would also make it more difficult for buyers to order custom upgrades and finance them into the cost of the purchase, as often happens now and can be highly beneficial to the consumer who goes in with their eyes open. I wouldn't be surprised if it was the developers themselves pushing the ban. Many people want brand new homes if they can get them. Given the realities about Mello-Roos and how prevalent homeowner's associations are in more recent developments, I'm not certain I understand this. It's one thing to deal with Mrs. Grundy when you're all cheek by jowl in a condominium high rise. It quite another thing to deal with her complaints because you left your garage door open ten minutes longer than the rules say, you want to paint your detached home a couple shades darker or lighter than everyone else, or whatever's got her dander up today. I do have a trick or two up my sleeve for when I'm a buyer's agent in new developments. It's my job to outmaneuver the selling agents the builder has on staff (who tend to be heavy hitting salesfolk, which is not the same thing as the stronger agent). But they are dependent on some things that change from transaction to transaction, so I can't really describe them in any kind of universal terms. Writing an offer contingent upon an outside loan has its limits. Builders who throw roadblocks have that one wired; they wait for the contingency to expire at which point they've either got your deposit or your loan business as you are so desperate not to lose your deposit you'll do almost anything, particularly since most folks don't understand how much that loan is really likely to cost them. Caveat Emptor Original here ]]> tag:gockel.hmdnsgroup.com,2006:/~searchli//3.2238 2012-05-11T14:00:00Z 2012-05-11T13:58:55Z

I just got a google search where the question asked was "What if the mortgage is recorded in the wrong county?" I've never actually seen this (and San Diego County, once upon a time, included what is now Riverside, Imperial...

Dan Melson http://www.searchlightcrusade.net/ Commonwealth Land Title, was started in 1876, and there are likely insured properties from the 19th century still covered. If you don't know who your title insurance company is, you should. Most places, the company and the order of title insurance are on the grant deed. The other policy of title insurance is a lender's policy of title insurance. This insures your lender against loss on that particular loan due to title defects, and when the loan is paid off (either because the property is sold, refinanced, or that rare property where the people now own it free and clear), it's over and done with. Let's face it, most people are not going to continue to make payments if they lose the property. If you take out a new loan, your new lender will require a new policy of title insurance. You pay but they are the ones insured by the policy. Their money; they set the terms for lending it out. To get back to the situation, what happens when you order title insurance is that a searcher and/or an examiner go out and find all of the documents they can find that are relevant to the title of the property. These days, they typically perform an automated search, and sometimes documents are indexed and cross referenced incorrectly and therefore they do not show up when they should. Nonetheless, the title company takes this list of documents and tells you about known issues with the title, and then basically says "We will sell you a policy of title insurance that covers everything else." This document is variously known as a Preliminary Report, PR, or Commitment. Now it shouldn't take a genius to figure out why you want a policy of title insurance. Around here, the average single family residence goes for somewhere on the high side of $500,000. You're committing a half million dollars of your money on the representation that Joe Blow owns the property and that if you give him that half a million, he'll give you valid title. I would never consider buying property without an owner's policy of title insurance. Even with the best will in the world and my best friend whose family has owned it since the stone age, all kinds of issues really do crop up (Another agent in the office had a client who bought a property via an uninsured transfer - and there was an unrecorded tax lien. Ouch. Say bye-bye to your investment). The lenders are the same way. No lender's policy, no loan. So what happens when this old mortgage document is uncovered? Well, that's one of the hundreds of thousands of reasons why you have that policy of title insurance. You go to your title company and say, "I have a claim." Since they missed that document in their search, they usually pay off the loan (there are other possibilities). After all, if they hadn't missed it, it would have been taken care of before Joe Blow got paid for the property and split to the Bahamas. None of this considers the possibility of fraud, among many other possibilities, but those are all beyond the scope of this article. So when buying, insist that your seller provide you with a policy of title insurance. When selling, it really isn't out of line for your buyer to require it - it shows that you have a serious buyer. Some places may have the buyer purchasing his own policy, but most places that use title insurance, the seller pays for the owner's policy out of the proceeds. Of course, anytime there is a loan done on the property, the lender is going to require you pay for a lender's policy. If the quotes you are given do not include this, be certain to ask why. There really isn't a good reason for not including that quote - they are going to require it, you are going to pay it. Better to know about it ahead of time, don't you think? That way you can make a fair, accurate comparison between the loans you are shopping. Caveat Emptor
originally here]]> tag:www.searchlightcrusade.net,2009://3.4691 2012-05-10T14:00:00Z 2012-05-10T13:55:39Z

The answer is yes. This situation is called a short sale. As with everything else pertaining to real estate, there are potential upsides and downsides. First of all, lenders in short sale situations often demand agents reduce their commission, so...

Dan Melson http://www.searchlightcrusade.net/ short sale. As with everything else pertaining to real estate, there are potential upsides and downsides. First of all, lenders in short sale situations often demand agents reduce their commission, so the agents are not likely to start from a discounted or low end commission. If it takes $12,000 to break even on a full service transaction, and you have to reduce your pay to make the sale happen, you're going to want more than $12,000 before the reduction. Discounters usually demand their money up front, but discounters aren't selling many properties in this sort of market. Along these same lines, it's a good idea to offer a larger than average commission to the buyer's agent. The average buyer's agent sees a short sale, and they say a transaction that takes twice as long as average, and that they have to accept reduced commission for while handling a whole lot of additional concerns. It makes the loan officer juggle rate locks and possibly submit multiple sets of paperwork. It makes the escrow officer juggle the entire transaction schedule, usually several times. Sometimes, the transaction approval with the seller's lender takes so long that an inspection or appraisal has to be re-done in order to satisfy the buyer's lender. It's tempting to just avoid your property entirely. With short sales, everybody marches to the beat of the seller's lender, which means I (as the buyer's agent or loan officer) have a whole slew of things that can go wrong beyond my ability to control, any of which results in my client ending up unhappy by costing them more money. Unhappy clients are poison to my business, no matter how great the deal they actually got was. Furthermore, I'm a lot more willing to not worry about my pocketbook than many other agents. The person who drives this whole process, and makes it happen or fails to make it happen, is the listing agent. So if I see anything that tells me that listing agent is a bozo, or doesn't have their act together, I'm going to recommend that my buyer clients pass on the property, and I'm going to tell them precisely why. Pricing, staging, marketing, it's all got to have the fingerprints of a professional. If that listing agent has overpriced the property, if they have allowed the owner to leave excessive clutter, if they're saying things about the property that are not borne out when I go to view the property, I'm going to spell it out to my buyer clients why it's a bad idea to make an offer. I won't even look at "For Sale By Owner" properties trying to execute a short sale. I know, from experience, that I'm wasting my time, and my buyer client's as well. Lender approval of the short sale is not going to happen without an expert who is motivated to get the best possible price. You, as the owner, don't want to turn off either the buyers or their agents. So you want a listing agent that's demonstrably up to the task. Now just because the lender accepts a short payoff in satisfaction of the debt, doesn't mean that all is forgiven. In some circumstances, they may go so far as to eat the loss entirely. I'm not certain I've ever seen such a case. They may report the loan as being paid satisfactorily to the credit bureaus, avoiding further hits to your credit, but they've just taken a loss. They want to deduct that loss from the earnings, as tax law permits them to do. But in order to do this with the IRS, they pretty much need to send the borrower they forgave a form 1099, reporting income from forgiveness of debt. Since this is taxable income under current law, expect to pay income taxes on the shortfall. There's still a temporary moratorium on that, but it is going to end eventually. For those agents who promise that the lender will forgive your debt completely, it really isn't under their control. You're trying to get the lender to forgive many thousands of dollars in money you owe them, plus you want them not to hit you with a debt forgiveness 1099, so they end up paying the taxes as well? Remember that not going through the entire foreclosure process is a benefit to the current owner as well as the lender, and there may be the possibility of a deficiency judgment as well. I'd be extremely skeptical of any promise to get you out of two or all three. If someone comes to me for a short sale, I can promise to try and I might even be able to do it sometimes, but I can't promise to deliver. Nor can anyone else - it's not under our control. That's a cold hard fact. So even though you're not really paying the listing or buyer's agent directly, as you would be in most normal transactions, you can expect to end up paying the tax upon whatever it is they end up making. After all, $10,000 paid to the listing agent and $10,000 paid the the buyer's agent means $20,000 that didn't go to your lender. As I've said before, that lender is going to want to see real evidence of poverty before they accept the short payoff. Getting short payoffs approved is not about "it's difficult!" or "I don't wanna!", it's about showing that there isn't any way that nets the lender more money. If it looks like they'll lose less if they foreclose, expect the lender to go the foreclosure route. They're not going to accept a short sale just because getting them their money would be uncomfortable for you, financially. You are (or actually, your listing agent is) going to have to persuade them that all of the other alternatives result in them losing more money than approving the short sale. Agent commissions mean you'll owe more money in taxes, or deficiency judgment (if applicable) than without an agent, but that's only considered in isolation. If they convince a buyer's agent to show it to their client, if that results in a client being willing to make a larger offer, or an earlier one, if they negotiate the offering price upwards, and most especially if they get the lender to quickly approve a short payoff rather than dragging it out, or going through that whole dismal foreclosure process, all of these mean you ended up owing less money than you would have without that agent - precisely analogous to any number of research studies and studies that show that people who pay full service agents end up with more money in their pocket, even after paying the agent. It's very easy to look at the HUD-1 and ask yourself what an agent could possibly have done that's worth 3 percent of the sales price. There's no way to show or track, on an individual sale basis, the added value that the agent brought to the transaction. Those numbers just don't show up on the individual HUD-1, because there's nothing that documents them. On the other hand, they've been documented any number of times in the aggregate. The bottom line is that if the lender ends up losing less money, you end up with less in the way of potential tax liabilities, less in the way of judgments against you, and less damage to your long term financial picture, not to mention that the lender comes away better and the agent gets paid. If that's not the perfect picture of win-win-win, what is? One last thing before I close: this presumes you have some reason why you need to sell the property. The loan market being what it is and my local market being what it is, I am straightforwardly advising people not to list their property for sale if they have an alternative. It may be a great time to buy, but it is a rotten time to sell. If you can afford the payments, if you don't need out from under the mortgage as quickly as possible - in short, if your situation is sustainable - there's no need to do anything, and you'll be able to sell on better terms when there aren't forty sellers per qualified buyer in the market. But sellers will still come out better if they can wait a while before selling. For buyers, property prices are not going to get any cheaper. Caveat Emptor Original article here ]]> tag:www.searchlightcrusade.net,2009://3.4686 2012-05-09T14:00:00Z 2012-05-09T14:05:01Z

Every so often, I write about professional responsibility. Every month I get a couple of magazines because I'm a Realtor. There was a letter from someone who was proud of the fact that he had never asked someone if they...

Dan Melson http://www.searchlightcrusade.net/ proud of the fact that he had never asked someone if they could afford the property, despite having been in the business for decades. Essentially, this reduces to, "I'm in this for the commission check, and what happens after that is none of my business." Contrast this with investing in the stock and bond markets, where the SEC and NASD have mandated an entire slew of regulations and practices. Before any financial licensee accepts your money for investment, he or she is obligated to ask enough questions about your situation to have a reasonable basis to believe the investment they recommend is appropriate. A large proportion of financial licensees breach this, but the requirements are there, and upon those occasions where the investment turns out not to have been so well advised, they are both civilly and criminally liable. They are supposed to question you about reserves, and a will, and life insurance. Occupation, income, necessary expenses. They're supposed to encourage disability insurance and long term care insurance, where appropriate. The list of questions goes on and on, and if the questions don't get asked, those advisers who fail to ask are going to hear about it. The penalties start with fines that are larger than whatever loss the client may have taken, and include permanent loss of license, jail time, and being a convicted felon for the rest of your life. Among the regulations is a very stiff requirement that the money being invested cannot be borrowed except under strictly circumscribed situations (Margin accounts being the only example I'm aware of). The idea that you can encourage someone to make a half million dollar investment with borrowed money, get paid thousands to tens of thousands of dollars for it, and have less responsibility than the guy who makes $1.25 signing someone up for mutual funds with $100 they saved out of their pay this month, is preposterous. It's wishful thinking, and lying to the The Guy In The Glass. It is completely unacceptable if those in my profession want to be treated as anything other than snake oil salespersons. Every time someone makes an easy property sale, or an easy loan sale, without ascertaining that they are, in fact, putting the person into a better situation, the fall-out down the line hurts every single one of us in the profession. In fact, the prevalence of discount solutions in real estate can largely be attributed to those unethical members of the profession who have failed to take the real interests of the consumer into account. When someone figures that they likely won't get the sort of real advantages that accrue from using someone knowledgeable and ethical anyway, they don't see themselves as having given up anything when they go the cheaper route. The absolute worst case from someone investing $1000 in mutual funds is they lose that $1000, which hurts their ego and their pocketbook, but if they had to have that money to live on, they shouldn't have invested it, and the person who solicited that investment will need to answer to the SEC, the NASD, and the criminal prosecutors for their area. As many people are finding out first hand now, that isn't close to the worst case for someone put into a property they couldn't afford. Those people are finding themselves with their credit ruined, owing thousands of dollars in taxes, and in some cases homeless without anyone willing to rent to them. Life savings may have been completely depleted in a vain attempt to keep the property, and in many cases, there are deficiency judgments against them. In some cases, where a Realtor or loan officer had to exaggerate income in order to qualify them for the loan, they may even face criminal prosecution for fraud. It's like the difference between having your TV stolen, and having your life ruined. Thirty years or so in the past, the listing services were reserved to Realtors, and so if you wanted access to MLS, you had to hire a Realtor. These days, due to restraint of trade suits, that's not the case. Not only are those days gone, they're not coming back (and that's a good thing, in my opinion). If all you are is MLS access and transaction facilitator, prospects are correct to pass you by in favor of the discount options that accomplish those same services far more cheaply. Every time some Realtor pleads that they're only a transaction coordinator, everyone who hears about that is driven straight into the office of the discount service providers. It's only by being more than that, and being willing to stand up in court and say that you're responsible for more than that, that you earn the full service commission. Most lawyers and all of the big chains tell their member agents not to be present for the inspection. My question is, "If you're claiming to provide knowledge or experience that the average person does not have, how can that possibly be anything other than gross and intentional negligence?" I'm there with a notepad, every time - lawyers be damned. As I have said, I'm perfectly willing to do discounter work for discounter pay - I make more money, more quickly, by limiting my responsibility and involvement to running the paperwork, even if I only make half or less of a full service commission. I never try to "upsell" those people who want discounter service on the full service package. Truth be told, it's easy for someone is used to providing full service to provide better discount service than the discounters. But if you want a client to happily pay a full service commission, you've got to convince them you've earned that money, by providing something real that they would not otherwise have. One of the most basic of those services is as a check of their ability to afford the property. This is a major psychological stumbling block for a lot of property purchasers. Many very qualified buyers don't understand that they are qualified. Part of this is simple anxiety, part of it is so many loan officers telling people what difficult loans they are to discourage them shopping around to different providers. If you're willing to go over the numbers and tell them what kind of property they can and cannot afford, many people may buy who otherwise would not trust their ability to afford the property. If they tell me to butt out when I ask, that's their prerogative - I tried to do my duty and they absolved me of that portion of it. It's not acceptable if they want me to do the loan (a loan officer has to have the information to do the loan), but I can't force anyone to do their loan with me. Nonetheless, even the most jealous guardian of personal information will concede it was a professional necessity for me to ask. What actually reassures a lot of people, particularly in this market environment, about what they can afford is being told what they cannot afford - information I cover with everyone who'll let me. This information has lost me more than one prospect, but it reassures and solidifies the commitments of most. If you cannot agree to find them something they want within a certain budget - purchase price budget, not monthly payment - you need to sit down and have a frank discussion about where the market is, and what their budget will actually buy. If their budget won't stretch to what they want, where they want to live, it's part of earning that full service commission to inform them of that fact. If they're going to have to settle for a fixer, a lesser property, or whatever in order to live within that budget, well, managing client expectations is part of every job that has clients. Unless you're personally going to extend them a loan they can really afford in order to buy the property, this means working within what they can afford with a sustainable loans at current market rates that they can actually qualify for, and explaining what they can afford if their eyes are bigger than their wallet. If I ask and they tell me that they don't want to share the information with me, it's a free country and that is their right. It may be hurting themselves by dismantling one of the checkpoints which is there to keep them out of trouble, but it remains their right. I'm fine with them refusing because it means I don't have to do some of the work I have to do for other clients, and have less legal responsibility, to boot. It still doesn't completely absolve me - I've still got to pay attention to any other clues that may be present - but it greatly lessens what I'm responsible for. Failure to ask about their budget and financial situation is prima facie evidence of gross negligence. Putting clients into property you know they cannot afford, or can afford only with the aid of temporary and unsustainable financing arrangements, is a violation of fiduciary duty, and willful ignorance is not an excuse. If you don't want to be responsible to a client's best interest, find another line of work, like cell phone sales, where you'll fit in just fine. As far as being a loan officer goes, when I originally wrote this, the question was rarely "Can I get this loan through?" Much more often, it was "Should I? Am I really helping these people if I do this?" Not to mention whether or not I'm likely to end up buying the loan back from the lender. It doesn't benefit me to get a $1500 check if I were to end up paying out potentially $400,000 for a loan that went bad, any more than it benefits the client to be put into a loan where they can afford the payments now, but sure as gravity they won't be able to two or three years down the line. That has, obviously, changed somewhat, but less than you'd think. You cannot provide service or expertise, and be compensated for it, without the associated liability. I'm not a lawyer, but that's my understanding of the law in a nutshell. Morally and ethically, there is no doubt whatsoever. Your choice as a realtor or loan officer is clear: You can try and duck out, sabotaging your business, your career, and your profession as a whole, or you can stand up and say in a loud clear voice that you are worthy of every penny of what you make, because you accept the challenge of that responsibility. Our profession is better off without the former sort, and they are unworthy of our protection. We should gladly cooperate in hounding those sorts out of the business. Not only is the profession better off without them, we'll be better off without them. On the other hand, there's room for as many of the latter sort as want to practice real estate. Caveat Emptor Original article here]]> tag:www.searchlightcrusade.net,2009://3.4685 2012-05-08T14:00:00Z 2012-05-08T13:07:44Z

My answer is yes. National Association of Realtors is very proud of their sponsorship of legislation to keep lenders out of the business of real estate. They quote the legislation keeping banks out of the real estate business as being...

Dan Melson http://www.searchlightcrusade.net/ eager to compete with even more big corporations with huge advertising budgets. It remains the right thing to do. Right for the industry, and right for the consumers. As I've said many times before, rent-seeking is repugnant, and that's what NAR is doing - seeking rent from lenders who are not permitted to be in the business themselves. Mortgage brokers have been competing successfully with lenders for decades, to the benefit of consumers. There's no reason real estate brokerages can't. Caveat Emptor Original article here ]]> tag:www.searchlightcrusade.net,2007://3.3499 2012-05-07T14:00:00Z 2012-05-07T14:06:38Z

"overpriced house offer rejected what next" (Before I get started, I want to make it clear that I am using the same definition of worth found in this article) The first thing to consider is the seller obviously didn't feel...

Dan Melson http://www.searchlightcrusade.net/ this article) The first thing to consider is the seller obviously didn't feel that it was overpriced. But, just as many sellers will try to put a property on the market overpriced "just to see if we can get it", many buyers will low-ball a purchase price for the mirror image reason: "Just to see if we can get it for that." Nothing wrong with that, but it's a low percentage endeavor. Given that the sellers were unwilling to sell for that, consider the possibility that you didn't offer enough. It's human nature to always want to blame the other side. Given the state of real estate prices here in San Diego when I originally wrote this, I have considerable sympathy for buyers. It seems like ninety percent of those listing their property are in denial about where the market really is; that they haven't checked out the actual sales being made. On the other hand, if you look at the sales log, sales are still being made. This means willing buyers and willing sellers are coming to an agreement that both feel leaves them better off, and they are doing it at market prices. The fact is, there are always at least two possibilities when an offer is rejected, and the truth may be a mixture of the two. First, that the seller is being unreasonable. This happens a lot. Probably sixty percent of all properties initially enter the market overpriced. Somebody thinks their property is worth more than it's worth. When people can buy better properties for less, they're not going to be interested in yours. In this situation, you're not likely to get any good offers. You'll get people doing desperation checks - coming in with lowball offers to see how desperate you really are. A very large proportion of these are people in my profession looking for a quick flip and the profit that comes with it, or other investors. Anybody looking at properties priced where this one should be priced is likely not even going to come look. This activity is 100 percent predictable when you overprice property. Nobody will be interested at the list price, and when it's been on the market long enough, the sharks will start to swarm. Putting the property on the market overpriced will result in the seller making less money than they could have. Second possibility, the buyer is the one being unreasonable. Properties like that one really are selling for the asking price, or at least substantially more than you offered, and you offered tens of thousands less. Some buyers do this because it's all they can afford. Some buyers do this because they want to get a "score". And some are just the standard "looking to flip for a profit" that I talked about in the previous paragraph. There is a point at which I tell all but the most desperate sellers that they're better off rejecting the offer completely than counter-offering. It saves time and effort, and the prospective buyer either comes back with a better offer, or they go away completely. Someone offering $250,000 for a $350,000 property is not likely to be the person you want to sell to. Even if you talk them up into a reasonable offer by lengthy negotiations, they're far more likely than not to try all sorts of games to get it back down as soon as you're in escrow. Better to serve notice right away that you won't play. Now some bozo agents think that starting from an extreme position, whether high list price or lowball offer to purchase, gives them more leverage, or that somehow you're eventually likely to end up in the middle. This is bullsh*t. Concentrated, distilled bullsh*t. The whole concept of negotiating room is nonsense promulgated by weak negotiators. A transaction requires a willing buyer and a willing seller. Price the property to market if you want it to sell. Offer a market price if you want the property. When I originally wrote this, the Quickflippers™ had a distorting effect on this, and disconcertingly many of the properties being offered for sale are owned by people who bought with the intention of the quick flip for profit, rather than buy and hold. Many of those looking to buy still fall into this same category, and I suspect this is much the same in other formerly hot housing markets as well. They had become addicted accustomed to the market of the previous few years, when a monkey could make a profit on a property six months after they paid too much money to purchase it. That is not the market we face today. This market favors the buy and hold investor. Actually, if you remember the spreadsheet I programmed a while back, I've pretty much confirmed that the market always favors the buy and hold investor, it's just been masked by the feeding frenzy of the past few years, where John and Jane Hubris could come off looking like geniuses when it was just a quickly rising market and the effects of leverage making them look good. It's just that the support for the illusions of Mr. and Mrs. Hubris has now been removed. Now, what to do when your offer has been rejected. There are two possibilities. The first is to walk away. If the home really is overpriced, and there are better properties to be had for less money, you made a reasonable offer and were rejected, you're better off walking away. I don't want to pay more for a property than it's comparable properties are selling for, and I especially don't want my clients to do so either. The sort of people who go around making desperation check offers walk away without a second thought with considerably less justification. The second is to consider that the property might really be worth more than you offered. Okay, a 3 bedroom 1 bath home did sell for that price in that neighborhood, but when you check out the details, that was a 900 square foot home on a 5000 square foot lot and the one you made an offer on is a 1600 square foot home on a 9000 square foot lot, and in better condition with more amenities. It's a more valuable property, and you can refuse to see that from now until the end of the world and you're only fooling yourself. The reason you thought the property was attractive enough to make an offer was that it had something the others you looked at didn't, and most of these attractors add a certain amount of value to the property. The more value there is, the more folks are willing to pay for it. This is why one of the classical tricks of unethical agents is to show you a property that's out of your price range, then figure out a way to get a loan where you qualify for the payment. This property is priced higher because it has features that add more value and a reasonable person would therefore conclude that other reasonable persons would be willing to pay more for that property than others. Landscaping, location, condition, more room, amenities. There's something that the seller thinks reasonable people would be willing to pay more for. It's kind of like taking someone who can afford a $10,000 car and showing them a $25,000 one, then telling them they can get interest only or negative amortization payments to get them into it. You only thought you could afford the $400,000 home, but they've got a way that you can get into the $600,000 home, which obviously is going to have many things that the $400,000 home lacks. Consumer lust does the rest. Cha-ching! Easy sale, and the fact that they've hosed the client doesn't come out until long after those clients made a video for the agent on move-in day when they're so happy they've got this beautiful house that they didn't think they could afford (and really can't), and they gush gush gush about Mr. Unscrupulous Agent, who then uses this video to hook more unsuspecting clients - never mind that the original victims in the scam lost the house, declared bankruptcy, and got a divorce because of the position Mr. Unscrupulous Agent put them into. You want to impress me with an agent, don't show me happy clients on move-in day. Emotional high of being brand-new homeowners aside, until recently, any monkey of a loan officer could get anybody with quasi-reasonable credit into the property. What happens when they have to make the payments? More importantly, what happens when they have to make the real payments? Given the current environment, the question, as I keep saying here, is not "can I get this loan through?" but "Is it in the best interests of the client to put this loan through?" You want to impress me with an agent, show me a happy customer five years out "My agent found this property that fit within my budget, told me all about the potential problems he saw, got the inspections and loan done, and it's been five years now with no surprises, and the only problem I've had was one he told me about before I even made the offer." Of course, the real value of the property may be beyond your range or reach. If your agent showed you something you could not reasonably acquire within your budget, you should fire them. I accept clients with a known budget, I'm saying I can find something they want within that range. If it becomes evident I was wrong (eyes bigger than wallet syndrome) the proper thing to do is inform the client that their budget will not stretch to the kind of property they want, and suggest some solutions, starting with "look at less expensive properties" and moving from there to "find a way to increase the budget" and finally to "creative financing options." That's a real agent, not "Start with creative financing options but somehow 'forget' to mention the issues down the road." There is no universal always works strategy for rejected purchase offers. It's okay to do desperation checks, but be aware that most sellers aren't desperate and that it's likely to poison the environment if the seller isn't that desperate. Poisoning the environment is okay if you're a "check for desperation and then move on" Quickflipper™, but if you're looking for a property you want and have found something attractive, it's likely to be counterproductive so that you may end up paying thousands more that you maybe could have gotten the property for if you'd just offered something marginally reasonable in the first place. Make a reasonable offer in the first place, and you're likely to at least get a dialog. And if the seller rejected what really was a reasonable offer for an overpriced property, the only one to lose is them. If their property isn't worth what they want, nobody will pay it. Move on. Their loss is someone else's gain. The only way to tell how much of the "blame" for a failed offer attaches to each property is to examine the market - what is selling for what price in that immediate neighborhood. Properties in the same condition, of about the same size, built at about the same time. Not across the highway in the brand new development with an extra bedroom and bathroom when this one is thirty years old. Not across the other highway in the eighty year old slums and half the size. You can't make the other side see reason. All you can do is examine whether you were reasonable or not. Caveat Emptor (and Vendor)
Original here]]> tag:www.searchlightcrusade.net,2007://3.3491 2012-05-06T16:00:00Z 2012-05-06T16:03:44Z

Got this search: "should I get a buyer's agent if I've already found a house" The answer is almost certainly yes, but I am going to examine both the pros and cons. Full disclosure: This is what I do for...

Dan Melson http://www.searchlightcrusade.net/ mistake. That seller's agent has a listing agreement telling them and the seller what the responsibilities of the agent are to the seller. They may or may not sign a representation agreement with the buyer. If they don't sign one, all of their explicit legal responsibilities are to the seller. They are working for the seller, not for you, and they have a contractual obligation to sell that property at the highest possible price. The buyer's interests do not enter into it. Perhaps they do an excellent job of representing your interests anyway, but the odds are against it. Their legal responsibilities are essentially limited to "don't tell any lies and don't practice law without a license." While I was working for the FAA, we found out about an agent who had made a real good living for a while as a seller's agent and how he had done it: By telling everybody he showed a house in the area to that the airport was going to close. Ladies and Gentlemen of the jury, that airport land was dedicated solely to aviation usages by an Act of Congress, and if the county had wanted to close the airport (they didn't; they were making enough money to pay for every airport in the county there, and socking up a huge fund if they ever figured out something else aviation related to spend it on), they would have had to have paid back tens of billions of dollars to the federal government. We got a call from one of his victims one busy Saturday, who asked, "When is this airport scheduled to close?" We advised him that any proposed closure was news to us, and explained the preceding to the gentleman. Even if the seller's agent does sign a representation agreement with you, in approximately thirty percent of transactions (from my experience) a situation other than price arises where the best interests of the buyer and the best interests of the seller collide. When this happens, no matter what they do, an agent representing both sides is stuck on the horns of a dilemma. If they do A for the seller, they are violating the best interests of the buyer. If they do B for the buyer, they are violating the best interests of the seller. Here's a hint as to which way they are going to jump in the event of conflicting interests: If they violate the seller's interests, they don't have a transaction at all. If you don't buy, they can always sell it to someone else, but if they lose the listing agreement, they are completely out in the cold. Price conflicts of interest happen on every single transaction. The buyer's interests are to get the property as cheaply as possible. The seller's are to get as much money as practical. This is a fundamental conflict of interest, and the entire business of real estate is set up to camouflage this conflict, especially from the buyer. It is quite likely not in the best interests of buyers to buy a particular property at all, but if you're contacting a listing agent to make an offer, you are asking the professional opinion of someone who has a legal and ethical obligation to not only sell it to you, but to get you to pay as much money as you possibly can. Before I even point a property out to you, or if you find it surf the internet and ask, "What do you think?" I am evaluating the property for fitness, suitability, affordability, how it stacks up to other properties on offer, how many other properties are on offer, and what the details of the property likely mean in the way of potential problem issues. Just a for minor example, a property built in 1975 has to be concerned about both lead-based paint and asbestos; a property built in 1990 still has those worries but to a far lesser extent, as most building stocks with those concerns were long gone, and a property built in 2005 is more likely built over Jimmy Hoffa's final resting place than a repository for asbestos and lead based paint (it could happen, but the odds are long against it). I am not an inspector or a tester, but I can and do alert my clients to safety and environmental issues, potential repair bills, and all sorts of other items before we've made an initial offer. "Best thing you could do with this building is 'accidentally' run a bulldozer through it," is something I told a client in a few weeks ago, in the context of telling him the value, if any, was the land less the cost of demolition and haul-away. Initially built almost 100 years ago and haphazardly added to as well as obviously not in compliance with code, my client would have been facing the possibility of the county condemning the building as unsafe, and quite frankly, I didn't think anyone would insure it outside FAIR requirements. You're not likely to get that kind of talk from a seller's agent. If you do, they're working against the best interests of their clients. Do you really want an agent who will do that? Instead you get words like "charming," "funky!" and the ever popular phrase "needs a little TLC!" When it comes to the offer, a seller's agent is looking to get the highest possible price. Period. They don't care if you could buy a better property for less elsewhere, their responsibility to the seller and desire for a larger paycheck are in perfect alignment. A buyer's agent is responsible to you, and whereas buyer's agents get paid based upon the sales price, same as the seller's agents, they at least have a legal responsibility to do their best for you. If there are any complaints, a seller's agent can take refuge in the fact that it is their primary duty to get the best possible terms (i.e. highest possible price) for the property. The buyer's agent has no such shelter. Which would you rather have as your representative? Buyer's Agents do not usually cost you, the buyer, any extra money. Maybe there are exceptions, but I've never run into one. Both the Exclusive and Nonexclusive Buyer's Agent Agreements used by California Association of Realtors state (You want the non-exclusive agreement for a lot of reasons,), in the absence of additional agreement, that any commissions paid out of the "cooperating brokers" amount on the MLS count against the buyer's obligation to the representing agent. This is typically agreed to be two percent in California, and I don't know the last time I saw a residential MLS listing offering less than that to the buyer's agent. The way the transaction is structured is that the selling agent gets the entire commission, but agrees via the listing contract and MLS to share a certain portion with the buyer's agent, if the buyer has one. Good buyer's agents typically beat the price down significantly more than two percent, especially in the current market. I am equipped to do value battle with that seller's agent in ways that members of the general public are not, and whereas it's true they don't have to negotiate with my clients, they've got to sell the property to someone. It's not like the real estate fairy is magically going to convert this property to cash. Alternatively, if they keep you out of an unproductive bidding war, isn't that also saving you money? Finally, if there's something you should know about a property, the buyer's agent makes certain the question gets asked and the answer disclosed to you. This eliminates a lot of potential surprises down the road, and gives you the opportunity to have a reason to exercise your contingencies. In short, buyer's agents are the professional on your side, they typically do not cost you any additional money, they can save you a significant chunk on negotiations, and you're more likely to find out about potential problems with the property if you engage a buyer's agent. Caveat Emptor Original here]]> tag:www.searchlightcrusade.net,2009://3.4683 2012-05-05T15:00:00Z 2012-05-05T15:12:43Z

Once upon a time, this was a good way to get more money for your listing. This led to a classic tragedy of the commons. Because it didn't take hardly any extra time, and there was no reason not to...

Dan Melson http://www.searchlightcrusade.net/ claim that there are multiple offers, you do need to have multiple counters in point of fact. Because the flinty-eyed buyer's specialists know better. Even if they do, in fact, believe that you've got multiple offers, we're going to tell our clients that it's best to counter back as if the seller is lying. Essentially, we call their bluff. If they do have multiple offers and someone is stupid enough to play ball with them, that's no skin off my client's nose. It's not that much of a seller's market, and it won't be again anytime soon. If this seller doesn't want to be realistic, we can keep looking until we find a seller that will. This is why property sellers need to protect themselves from lazy agents. For an intelligent buyer in this market, even if there are multiple offers upon a property, it doesn't make us willing to offer more for the property. It means we want to expedite our deadlines for the sellers to respond, and it means we're likely to make subsequent counters with a multiple offer contingency (in other words, we're making offers on multiple properties now. If another offer gets accepted before you accept ours, we're going with that one). Mostly though, it means that this seller, and their listing agent, have their heads stuck in the land of wishful thinking, and it's time to consider another property because we can't force the sellers to be reasonable. Nobody can make them sell against their will, but we can find another property where they seller isn't so far gone in denial, and where the agent has done a better job of explaining the realities of the current market. It's not like there's any shortage of choices. Let's face it: Unless you fax over the competing offer, complete with all terms and the competing agent's name and their contact information so I can verify it, there is no reason for me to believe that you have a competing offer. If you do this, the offer is either better than my clients', or not as good. If it's not as good, the leverage is provides is minimal, in any market. If it's better than my clients' offer, it's either something my clients are willing to beat or it isn't. If it isn't, your leverage is still negligible. It's only if the other offer is better, but my clients are willing to beat it, that this trick offers you any leverage whatsoever. In this market, it's more likely to make us act like I discussed in the last paragraph - because no property is worth getting attached to before you own it. Let me baldly state that I also understand the potential benefits of collusion with your friend the agent from another office. She colludes with you on your client's property, and you collude with her on hers, each stating that they do, in fact, have clients making thus and such offers on that property. Since once again, it's trivial to convince yourself that it's in your client's best interest, even verified offers aren't going to mean a whole lot to a smart buyer's agent. The buyer's market may be less than it once was, but there are still no properties worth a buyer getting attached to them before closing. And for all the properties I've made offers on where the listing agent claimed there were multiple offers, I've never had one of them offer any real evidence. People willing to price their properties to the market, and negotiate realistically, can sell properties very quickly due to the fact that comparatively few sellers are competing well for the buyers that are out there. In the last couple months, I've been involved in the sale of two beautiful properties - and two others that were plug-ugly, but sold quickly because the sellers and their agents had their heads in the right place. In one instance, I even had someone bidding against my clients, but we nonetheless consummated the sale quickly. If you're trying to sell and you negotiate unrealistically, you are only hurting yourself. That buyer's agent can find them something better, cheaper, making the agent's client much happier. Even if you do have multiple offers, it might be a good idea not to particularly act like it. You can check the multiple offers box without being aggressive about it. The property I mentioned earlier? Where the agent and seller acted like it was god's gift to prospective buyers? It's still for sale, and my clients have moved into another property. The relocation company that owns it is out roughly $6000 per month. Had they priced it to market, and negotiated reasonably, they likely would have sold. If they simply negotiated reasonably, they would have sold it to my clients. My clients have their new home - they're happy. The sellers? Not so much. They're paying about $6000 per month for an empty property. It's been on the market for a year now, and it's not like they have any real alternative to selling. That's $70,000 they've flushed down the drain to no good purpose, and it's not like there's any chance of them getting more than the property is really worth. For listing agents who refuse to act like their clients are competing for buyer business, they are violating client interests no less than if they counseled the client to accept an offer from someone acting as a straw buyer for the agent, personally. In fact, I rather suspect this particular agent of being Sherrie Shark, but there's nothing I can do for the owners as a buyer's agent. It's not legal for me to so much as contact them without going through "Sherrie". Nor would it benefit my clients in any demonstrable way. It just gets me and potentially my clients caught up in a legal morass to no beneficial purpose. So the owners are high and dry on their own. It's our profession's problem, but there's nothing I can do about it as an individual. The only person who can do anything about it is the property owner; this is one of many reasons why it's important to be careful in your choice of listing agent. Unlike a buyer's agent, you need to commit to a listing agent for a given period of time, and if you commit to the wrong agent, you have wasted your time of highest interest, when you will get the best price for the property. Caveat Emptor (and Vendor!) Original article here]]> tag:www.searchlightcrusade.net,2009://3.4677 2012-05-04T14:00:00Z 2012-05-04T14:24:23Z

One of the casualties of the lending meltdown is the high loan to value second mortgage. With many properties locally having lost twenty percent or more of their value, a second mortgage on a property that ends up in default...

Dan Melson http://www.searchlightcrusade.net/ loan to value second mortgage. With many properties locally having lost twenty percent or more of their value, a second mortgage on a property that ends up in default may well lose every single dollar the lender put into the loan. It shouldn't surprise anyone that lenders don't want to get into that kind of situation. Even though I (and most other credible analysts) are convinced that real estate is now undervalued, the money markets are still in fear mode over the money they have lost or are on track to lose. The result is that lenders of junior financing aren't nearly so willing to go close to 100% financing any longer. Even when the same lender is lending the money for both loans, the people who underwrite the second mortgages are (usually) a different division. So when the property goes to foreclosure, the division who underwrote the first mortgage may end up with every dollar or nearly every dollar of their invested money, and they come up smelling like a rose. The division that underwrote the second mortgage that got wiped out and came out with 10 cents on the dollar loses their shirts, and everybody gets fired. I don't have one single subordinate loan program offering over 90% financing - doesn't matter the credit score or how much we can prove the clients make. The lenders have all decided they are not willing to accept the risks of a high loan to value second mortgage. That's their prerogative - they who have the gold make the rules for lending it. With the situation as I've have discussed, and second mortgage lenders in the process of losing every penny they put into loans, they understandably don't want to do it. There was an alternative for quite a while. There were, for quite a while, still any number of lenders who would accept 100% financing on one loan with Private Mortgage Insurance (aka PMI). That has been gone for a couple years now. In fact, for a couple months it was really difficult to get financing over 85%, but then they started removing the declining market indicator in July 2008, and now it's pretty easy to get 90% conventional financing, and I have a couple of ways to get to 95%. Considering that FHA financing only goes to 96.5% and is far more difficult to get, this means that the difference between conventional financing and FHA is small in terms of down payment, and considering the premium FHA-eligible properties command, being able to go conventional may save you money despite a PMI rate that's higher than for government loans (VA loans have become the only widely available 100% financing) Private Mortgage Insurance is an insurance policy that the borrower pays for but which insures the lender against loss. It does get the borrower the loan, but that is the only good the borrower can expect to get out of PMI. It does not prevent your credit rating from being ruined, it does not prevent any deficiency judgments that you may be liable for, and it definitely won't prevent the 1099 love note that tells the IRS you owe taxes on debt forgiveness. All it does is shift the entity that loses the money from the lender to their insurer, so that if you default, you'll be dealing with the insurer instead of the lender via subrogation. What is going on here is that lenders are shifting the risks to insurers, who are in the business of taking risks via the Law of Large Numbers. Yes, the insurers know they will lose a certain number of these bets, but they are comfortable that overall they will make money at it. It is to be noted that lenders can improve their profit margins by self insuring, but they're not in the business of insurance. I'm certain some of them insure themselves in one way or another, but they isolate the risks away from their lending divisions, which are in the business of making money by loaning it out and having those loans repaid in full. When a lender loses a dollar because the loan wasn't repaid in full, that hits them where it really counts - bond rating, stock price, value of their mortgage bundles on the secondary market. When an insurer loses a dollar due to paying a claim, that's part of their daily business. They're in the business of paying claims, fully expecting premiums to more than pay for those claims. As I said in One Loan Versus Two Loans, PMI is more expensive than splitting your mortgage into two loans, but when nobody wants to do second mortgages with less than ten percent down payment, the choices may narrow down to accepting PMI or not buying the property. The only other alternative that comes to mind is a private party loan, either in the form of a Seller Carryback (which comparatively few people are willing and able to offer) or the "good in-law" loans that were popular before lenders started liberalizing their standards in the 1970s. (I haven't been in the business that long. I've never heard the phrase actually used by another professional, although I actually did a transaction that involved one not too long ago. I learned it from textbooks, as even in the early nineties when I both bought my first property and went back to college for my accounting degree they were a fading memory) Paying PMI does have the net effect of decreasing the loan that potential buyers will qualify for, so this development should cause some small amount of additional downwards pressure in prices. For those interested in irony, the lenders are contributing to their own immediate losses by bailing out of the low equity financing market. People who have to pay a higher effective rate for the money can't afford to spend as much for a property, which means that current owners, whether they're borrowers or lenders, won't be able to get as much money for them. One last thing before I finish. Don't get too hung up on the fact that you may end up paying PMI when experts (myself included) advise you not to. It's one of those voodoo words and concepts like "points", that people freak out about because they've been warned about them but they don't really understand. Just like points, many experts, myself included, often advise you not to pay PMI. But if you have one loan that is over 80% loan to value ratio, you are going to be paying PMI in one form or another. As I said in How Do I Get Rid of Private Mortgage Insurance (PMI)?, it can be a separate charge or camouflaged by being built into the rate, but you're still paying it. There are advantages and disadvantages to each choice, as I explained in that article. Choose your alternative with your eyes wide open and an understanding of the consequences, not because someone scares with with the voodoo phrase, "PMI." Caveat Emptor Original article here ]]> tag:www.searchlightcrusade.net,2009://3.4676 2012-05-03T14:00:00Z 2012-05-03T13:57:24Z

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

Dan Melson http://www.searchlightcrusade.net/ HI, My name is DELETED and my husband and I are searching for a way to get out of our Negative ARM loan before we get upside down. Our problem right now is our loan to value. Our loan right now is at $547,367.80 and is only getting higher. Our house just appraised at $620,000.00. We have a prepayment penalty of $20,000.00 and would just like to get that covered. We feel we need a Jumbo loan if possible. Our wish is to get into a 40 or 50 year fixed. My husband makes good money and I will be working in a couple of months making a decent income. Right now I am doing temp work. We can afford payments for our mortgage if we were to refinance but we are having a hard time finding someone who will take the risk with us. If there is a risk. We are just trying to get out of this loan that is going to end up taking our house from underneath us. Our credit is good and I feel there is a way something can be worked out Can you help us? I will try, if you're in California. First, let's stop and think a minute about your situation and what will benefit your pocketbook, rather than mine. If you pay the penalty, your new loan is going to be approximately $570,000, even without points. The issue is that neither I nor any other loan provider can get you a loan that isn't available. $580,000 is more likely, considering prepaid interest, etcetera, unless you have some cash to pay it down. $570k and $580k are both within the band of 90 to 95%, so I have to price it as a 95% loan to value ratio. Right now, that can't be done on jumbo loans, and since your loan is neither owned by Fannie and Freddie nor underwritten to Fannie and Freddie standards, the 125% refinance program is unavailable to you. I don't have any such programs over 90% - but it turns out that I do actually have a refinance that can be done on a "jumbo conforming" up to 90%, albeit with PMI. So suppose you don't have to pay the penalty? Now staying at or below 90% loan to value is a real possibility, and the loan can be priced as a 90% loan, giving better trade-offs. The way we might be able to do this is to check if we can get your current lender to refinance you. It'll likely mean renewing your prepayment penalty, but better that than paying $20,000 in penalty. Even if you end up with a higher rate than you might otherwise get because your lender doesn't have the lowest rates, $20,000 is almost four percent of your loan amount. Over the course of the 3 years of the new prepayment penalty (since that's standard for negative amortization loans), you'd have to save over a percent per year to break even with another lender. As I said in "Getting Out of Paying Pre-Payment Penalties", sometimes lenders will not require you to pay a penalty if you refinance with them and accept a new penalty. In short, if we check with your current lender first, we might save you $20,000 cash plus the interest on it. So let's figure out who your lender is and ask. The second alternative is to find out how long until the penalty expires. Make at least the full interest payments every month until your payment expires. How long do you have left on the penalty? If you've only got six months or a year left, rates just weren't low enough when I originally wrote this to make it worth your while refinancing, especially Jumbo loans, which even if your loan to value ratio was below 80% would have still cost you nearly two points for a 7% loan. If you pay at least your current "interest only" payment, you're not getting in any deeper. When the penalty expires, maybe rates and the market will be in better shape and you'll get a better loan. Matter of fact, waiting was a moderately good bet that would have paid off back when I originally wrote this, especially as opposed to just flushing $20,000 paying that penalty. If people had less than a year left on the penalty, I was urging them to make the interest only payments (or more), and come back to me about three weeks before it expired. Conditions have changed now. In fact, at this update, rates are much better than when I originally wrote this article. For "Jumbo conforming", rates below 5% are very possible, but I don't know how much longer that will be the case Even if you're only six months into your loan, we'd have to save you about about 1.5% on the rate for you to come out ahead by paying that penalty. $20,000 times 12/6 divided by $547,000 gives a current rate of 7.3%. As you'll see, a blended rate of 6.67 is about as low as I could have gotten for this situation when I originally wrote this. Your rate would have to had to have been at least 8.2% when I originally wrote this for paying that penalty to have been in your best interest. The loan market today is a very different creature than it was a couple years ago. Let's look at the alternatives, assuming your lender will waive prepayment with a new loan. Even so, let's look at a loan amount of $558,000, which is about where you're going to be with closing costs and one point. Before I close, it occurs to me to mention that before refinancing, you have to be certain you are actually able to make the new payments. Because the fact is that you owe $547,000 right now, and that's a cold hard fact that nobody is going to change. Quite often, people get put into negative amortization loans because that was the only way they're going to make the payment on that much debt even for a little while. If you cannot realistically make these payments, delaying the inevitable will only cost you more. As things sit, you might come away with a few thousand dollars if you sold now, and then you can buy something you can really afford. If you wait, things are going to get worse, and you're going to end up with a short payoff and a 1099 love note that says you owe taxes, plus maybe a deficiency judgment, having your credit ruined, and still not having the home of your dreams. This doesn't make me popular right now, but what people like you are going through now is the result of people in my professions who wanted to be rich and popular, rather than actually doing what was best for the clients. Were I in your shoes, I'd likely be asking a lawyer if there's some liability on the part of your lender and real estate agent. Caveat Emptor Original article here]]> tag:www.searchlightcrusade.net,2010://3.5019 2012-05-02T14:00:00Z 2012-05-02T13:55:32Z

Yes, it sounds like a scam to me, too. But it's real. This isn't to say that there are scammers out there promising the same thing. But there is a legitimate program that accomplishes this. Actually, there are no...

Dan Melson http://www.searchlightcrusade.net/ sounds like a scam to me, too. But it's real. This isn't to say that there are scammers out there promising the same thing. But there is a legitimate program that accomplishes this. Actually, there are no fewer than six such legitimate programs - three from Fannie Mae, three from Freddie Mac, all sourced in the Help For Homeowners Program. I don't think it's going to help a large number of people, but I'm going to talk about it in order to help the ones it does help separate fact from fiction. There are technical differences in the programs, governing the relationship of your current loan servicer and the loan originator you apply for the refinance with. But the programs are essentially similar, and use the same rate structure. Which of these three programs you apply for makes no difference to whether a consumer qualifies, or the rate cost tradeoffs offered by a particular mortgage originator. What's that they say about a difference that makes no difference? It doesn't really matter who you choose to refinance with, or which of the three programs you end up with - the rate structure is the same. So if you do qualify, shop normally for the best loan for you. You don't get any discounts or preferences by going through the same loan servicer you currently have - but the deals that are being offered are very different from originator to originator. Yes, different programs, but same underlying rate structure and your loan ends up being owned by the same people. The only difference is the tradeoff between rate and cost that a given provider offers. In short, if someone offers you a better deal and is willing to stand behind their quotes with something real, there is no rational reason not to do business with them. Ask prospective loan providers all the same questions and see which one is the best. No matter which of these programs you apply for, they have the following restrictions in common First, your loan must be currently held by Fannie Mae or Freddie Mac or underwritten to Fannie/Freddie Standards. This means you have to have qualified by their standards originally - these programs will not help or refinance people who got subprime loans! They will ask privacy act questions (Freddie Mac more so than Fannie Mae), so I'm including these links for convenience - use them at your own risk. Does Fannie Mae Own Your Loan? Does Freddie Mac Own Your Loan? Alternatively, you can run a search for the two websites through the search engine of your choice, and find these exact pages through the main webpage of the respective government corporation. They're each one click from the main webpage, although the correct Fannie link is a bit more difficult to spot than the Freddie one. Second, the original application can have contained no misrepresentations or fraud. This restriction essentially eliminates folks who qualified via stated income procedures. If you could have documented the income to qualify, why didn't you? In every case, it would have gotten you a better rate or a lower cost for that rate. The reason people got stated income loans is that they couldn't. Third, you must qualify normally for the refinance with one exception. You must qualify on the basis of Debt to Income Ratio, and practically speaking, the automated underwriting program has to accept your loan. The only requirement that has been relaxed is Loan to Value Ratio. This isn't a charity program; it's loss mitigation for Fannie and Freddie. They're not just throwing taxpayer money at a problem - these programs are intended to keep them from losing money by enabling people who would qualify for a new loan if values hadn't receded so much and keeping them in their home rather than going through the foreclosure process and saturating the market and causing still more waves of this. A thoroughly intelligent business alternative for the lenders - much the same reason the lenders finally got serious about loan modification. But individual banks couldn't offer refinancing programs of this nature unless they wanted to become portfolio lenders, which most of them don't and can't. It had to be the underlying investors that offered these programs, something Wall Street is loath to do but Fannie and Freddie can be instructed to do by the federal government. Fourth, there are potentially issues with loan subordination. Lots of folks got a first mortgage for 80% of the value of their home through Fannie or Freddie, with a balance of up to 20% of the value on the property through a second mortgage. Alternatively, if they did put the full twenty percent down, they got an equity loan in order to take cash out at some later time. If you have a second mortgage and refinance your current first, the second mortgage automatically slides up to first secured position, and your new loan would take second place. That's not acceptable to Fannie or Freddie, and for good reason. So if you do have a second mortgage, the holder of that second mortgage must to agree to subordinate to your new loan in order to be acceptable to Fannie or Freddie. Fannie and Freddie are not allowed to pay off second mortgages under these programs - that's not a risk they have currently taken; they're not going to throw even more money at the program and take more risk. As I said, this isn't charity, this is loss mitigation. Some second mortgage holders may not agree to subordinate. There is nothing that can be done to force them. All you can do is explain why it is in their best interest and hope they see reason. Some second mortgage holders may demand conditions upon their subordination and you must satisfy those conditions to get them to agree to subordinate. One condition that I would expect to get is that the balance on the first mortgage not increase, which means you have to pay closing costs out of pocket if you do have a second mortgage - no rolling them into the balance of your new mortgage. I need to take a moment here to explicitly state: the 125% maximum loan to value ratio applies to the first mortgage only. It's fine under these programs if there's a second mortgage that sends the comprehensive loan to value ratio (or CLTV) above 125% - so long as the holder of that second mortgage agrees to subordinate. Finally, there are PMI issues. It isn't necessarily that there is no PMI. What is the case is that Fannie and Freddie will allow your current PMI status to continue. What this means is that if you're not paying PMI currently, your new loan will not have a new PMI requirement imposed. If you are paying PMI currently, the current PMI provider must agree to continue the status quo (mostly they will; insurance companies aren't idiots and they're mostly not constrained by regulations that didn't forsee this situation). For example, let's say your loan was originally funded as a ninety percent loan to value purchase money loan. Such a loan would have had PMI in some form, either regular or lender paid. If your value went up at some point and your PMI requirement was removed due to a loan to value ratio that was below eighty percent, there will be no PMI on your refinanced loan. If your PMI is still in effect, it would need to be carried over from the existing loan to the new loan, but it would not be increased if the current situation was less favorable than the original situation. Normally, if you were now in a ninety-five or one hundred percent or even above 100% loan to value situation (as many people whose values have declined would be), the risk to the PMI provider would increase, and therefore they would charge more money in order to undertake that risk. That is not the case with these special programs. The PMI providers are already on the hook for these losses; again, this is a way that might mean they don't have to lose that money. If they're smart, they will accept the risk of transferring the existing PMI to the new loan. As I said earlier, these are insurance companies, not securitized lenders or investors subject to Federal Reserve and SEC rules. Mostly, they are smart, and therefore willing and able to accept the change. They may impose conditions of their own, like the balance not increasing by more than a certain amount, but mostly they are likely to accept the risk. Finally, to re-emphasize, if there is currently no PMI on your loan, there will be no PMI required on the new loans under these programs, even though Fannie and Freddie and every other lender in the country would normally require PMI with a first mortgage with over an eighty percent loan to value ratio. The reason why this would normally be so has to do with Federal Reserve regulations - but with the Federal Government basically owning Fannie and Freddie now, and the Federal Reserve having its own reasons for wanting to help clean up this mess, regulations can get modified or exceptions. One other word of caution: The better your credit score, the better your payment record, the better your loan to value ratio, the better the loan you can expect to receive. Someone with a 780 credit score and an eighty-two percent loan to value ratio can expect a better loan (lower rate/cost tradeoff) than someone with a 620 credit score and a 124% loan to value ratio. Those who have been more responsible will get something better than those who have been less responsible. But these loans do actually stand a decent chance of helping someone who needs it, providing they're in the group that's been targeted by the program As I said, I don't really expect these programs to help a large percentage of the people in trouble, but even a small percentage of many millions is tens to hundreds of thousands, and I am certainly not opposed to these programs helping those people they can help. These programs are not charity; they have been put into place with a rational, ruthless eye towards Fannie and Freddie not losing money they would otherwise lose if they hadn't undertaken these programs. If they will potentially help you, start contacting loan originators and asking about Fannie and Freddie's 125% loan refinancing programs. Even I'm not certain about all of the various program names (I only care about the ones I can do - but as I said at the beginning of the article, which of these programs you apply for is irrelevant to the consumer - only Fannie and Freddie really care about the differences between their three programs each, because the rate structures are the same, the qualifications are the same, etcetera. Doesn't matter whether you apply through your current loan servicer, another lender, a broker, or a correspondent - shop for the best deal and the best loan for you and your situation). Loan originators will know what you're talking about, and applications are now being accepted for these programs. Caveat Emptor Original article here Disclaimer: Yes, I have been doing these loans under the programs aimed at broker and correspondent originators. ]]>