Dan Melson: December 2007 Archives

Carnival of Personal Finance

Sometimes you're closer to major news than you think. Fellow LLP member Rick Sincere was working for Benazir Bhutto.

New video of Bhutto killing, medical report raise doubts about security, government account

Captain's Quarters has the video, if you're so inclined. I didn't see the need to view it (I have the kids today), but his commentary makes plain that the Official Pakistan Government Story has severe credibility problems.

North Korea misses deadline for nuclear declaration

Is anyone surprised? Anyone at all?

One excellent place to cut pork: Subsidies keep flights at small airports in the air

Of course, it's all small potato molecules compared to unchecked growth in entitlement programs.

A worthwhile review of Iraq from historian Victor Davis Hanson

Our modern day system of slavery, at Wizbang

Chinese economy not as big as we thought.

Fred Thompson takes his case direct to the voters in Iowa. Seventeen minutes and worth it, even though I could have done without the overtly religious part.

Senate holds 12-second session to block recess appointments

I'd feel a lot differently about this if the senate was bringing the nominees for floor votes in a timely fashion. The senate has the right to confirm or deny certain appointees. But this together with their current behavior of doing a virtual filibuster on all Bush nominees is partisan politics at its worst, denying the president the constitutionally mandated power to make appointments. How is the job supposed to get done if the president can't put anybody into it? Holding them for a presumptive Democratic president after the inauguration not only means the job doesn't get done for a year while the work and problems pile up. It also frustrates the constitutional separation of powers, not to mention the implicit promise that the person who is president when the vacancy occurs gets to choose who goes into it. The eventual result of this thinking is nobody ever gets confirmed by the senate - "after all, it's only four years until the next election!". Not that I think the government doing more is a good thing, but they've got to have someone responsible for what's already there. I'd be in favor of a constitutional amendment giving the senate three months to vote thumbs down on somebody. Meanwhile, the nominee goes to work right away. And of course, there's always impeachment and all the other methods of removal.

Happy New Year, everybody! I will have a new article, appropriate for the new year, tomorrow and Consumer Focused Carnival of Real Estate on Wednesday, but I'm not currently certain about Thursday and Friday

At a very young age, my parents bought me a book of Aesop's Tales. Aesop has gone out of style, probably because these are stories with a moral lesson, and it seems the modern society is actively averse to moral lessons. But one of the ones that has stuck with me was the tale of the dog with a bone and the reflection in the water.

It happened that a Dog had got a piece of meat and was carrying it home in his mouth to eat it in peace. Now on his way home he had to cross a plank lying across a running brook. As he crossed, he looked down and saw his own shadow reflected in the water beneath. Thinking it was another dog with another piece of meat, he made up his mind to have that also. So he made a snap at the shadow in the water, but as he opened his mouth the piece of meat fell out, dropped into the water and was never seen more.

It is precisely this mistake that I'm writing about, and it applies to all real estate transactions. The dog's mistake wasn't that he wanted more. That's normal and natural, and I've certainly never done business with anyone who didn't. The dog's mistake was wanting the other benefit as well as his own, and not realizing he placed the benefit he thought he already had on the line in order to obtain it. But, as he discovered, the goodie that the dog in the water had was only a reflection of his own goodie. In order for the dog to have his own goodie, the dog in the water had to receive his. They are mirror images of the same thing, and one cannot exist without the other.

A lot of what gets written alleging to be good financial advice violates this very simple lesson.

Some things are a cost of doing business. If I don't pay for all the things that enable me to serve my clients, I'm out of the real estate business. Yes, they cost money, but if I didn't spend that money, my income would be zero. For consumers, this includes things like property taxes and HOA dues and Mello-Roos. If you want that property, they are inseparably attached. It is correct to include them in calculations as to whether a property is worth acquiring or worth keeping; it is not only pointless but counterproductive to try and get out of paying them.

This applies to the costs of acquisition and selling, as well. Be certain you understand the real costs involved. They may be large, or seem large, but doing without any of the professional services that have evolved is likely to end up being a lot more expensive in the end. If one is cheaper than another, there is a reason. Find out why; and while it may be that someone is just comfortable making less money, other explanations are such as they do not provide important services that really do make a difference are more likely to be closer to the truth. Don't expect them to tell you this, though, especially since most people will just believe fairy tales like "full service - discount price", and won't investigate why prices or loan quotes are lower. It shouldn't surprise any adult that sometimes it's worth paying extra. If this were not true, none of us would have our own cars, let alone seven seat luxury model vehicles. Cars are about the most expensive mode of transportation there is, but the vast majority of all adults in this country own and drive at least one. Including me. The reason is because the abilities they convey are more valuable than the costs they entail. if you don't pay the cost, you don't get the benefit, and yet many people will fool themselves into trying.

Most importantly, though, the lesson applies to negotiations for the sale of real estate. There's nothing wrong with making the best deal you can, but once you have the contract, honor your end of the bargain. Negotiate issues revealed later reasonably, and in good faith, based upon their own merits. It sometimes happens you find out the other side is getting something fantastic out of the deal. That's not a problem. It's a benefit. Insurance they're going to carry through with their end of the deal, which is a good thing because you wouldn't have signed off on it unless you thought you were getting about the best deal possible, right?. Real estate transactions are based upon making both sides happy with their side of the deal. You can't force someone to sell a property to you or buy it from you. Even attempting that is a felony. There can be circumstances that make it more likely someone will accept a proposal that they might not in other circumstances they would not, and very few people have unlimited time, money, or energy for a transaction to happen. But whatever the other person - other people - in the transaction are getting out of it, those benefits belong to them, and if it appears as if those benefits are in jeopardy, the other side can usually get out of a purchase contract. It may cost them something in some instances, such as the deposit, but successful suits for specific performance are rare, and more so where there's a competent agent involved on that side. Not to mention all those court costs.

The practical upshot of all this is that if you fail to act in good faith, that good deal that you thought you were getting is completely gone, and there's a significant chance you'll end up spending thousands of dollars on legal action as well. All transactions flow from perceived mutual benefit. The other side has to believe they are getting a benefit in order to want to consummate the sale. Figure that if the other side wants out, they can get out. In fact, many over-aggressive later negotiations give the other side grounds to exit the contract without penalty. Nobody's going to buy a property where they can't run the water or flush the toilets, but once the sellers agree to fix that problem in an acceptable manner, don't try to get anything extra out of them. If the septic system is bad, they can either install a new one, (maybe) fix the existing one, or hook the property up to the sewer. Asking them to re-plumb the entire house is not (usually) reasonable, and asking them to re-wire the entire house is, in the immortal words of Monty Python (Book of Armanents, chapter two, verses nine through twenty one), right out. If you find out you're not getting such a great deal, then you're likely to be the one looking to exit the contract, and if they fail to give you satisfaction with a newly discovered issue, maybe you should want to. There's nothing wrong with exercising the inspection and appraisal contingencies, assuming you have them in the contract, or forcing the buyer to consummate the transaction or get out of the way of someone who will, or getting the lender to deliver the loan they said they would.

Greed envy is one of the banes of a successful transaction, and if you don't have a successful transaction, you don't have anything positive, and you quite likely have significant extra expenses. To go back to the dog and the bone, a failed real estate transaction is worse, because not only have you lost your bone, you've lost everything you spent in obtaining it, and you still don't have what you wanted, whether it is your new property or cash for your property or new financing. If you make your initial choices based upon the benefits to you, the fact that someone else is getting a benefit as well is not something to cause you heartburn and make you want to take it away from them. That way lies disaster. Instead, think of it as insurance that you're going to be getting that benefit that you wanted enough to sign the contract or loan application in the first place. And if you're not going to be getting the benefit you thought you were, maybe you're the one who's going to want out.

Caveat Emptor

Article UPDATED here

Our home isn't worth what we owe. So say you were just an average person selling and buying a house, meaning you put your house up for sale, get a contract to purchase on it then go put in offer in on a new house. Then you generally get a pre-approval, then the loan from a lender for the new house prior to closing on the old house. You then go to the closing sign the papers for your old house and then afterwards sign the papers for the new house. How would the lender giving you the new loan know that you were short selling the old house when everything happens the same day? It's not going to show up on my credit for at least 30 days and by that time I will already own the new house. Get it? Is this possible?

This is not the first time such a scam has been tried.

The loan application asks you about what property you own now. Falsify it, and you're likely going to spend a few years in Club Fed. Since it's unlikely you'll make mortgage payments there, this will compound the problem (Just try this on the judge: "I couldn't pay because I was in jail for lying about my financial situation, so it's not my fault!")

Furthermore, the current mortgage is going to show up on your credit.

The condition the underwriter is going to put on the new loan approval is going to go something like "Show property has been sold and debt paid in full"

Believe me, they're going to investigate. They're going to want a copy of the purchase contract and a payoff on the loan for it. Since the debt isn't going to be paid in full, they're going to figure out that you've got a short sale going on. It's not going to happen "same day" if there's a short sale. They're going to want to verify that the other lender is not going to pursue a deficiency judgment. If you're still going to owe the other lender money, the payments are going to hit your debt to income ratio (DTI).

All that said, if you come clean about the situation starting with your loan application with the new lender, it's possible you'll still be approved - just not the same day you close on your sale. They're going to want something that says your current lender isn't going to pursue the deficiency, but it is possible. Theoretically speaking. They're also going to want to figure out what you're going to owe the Revenuers, and how you're going to pay it. Then they're going to take that into account in underwriting the new loan.

(NB: With HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007, this may be zero on the federal level but there may still be consequences on the state and local level. Check with your CPA or EA for more information)

But trying to hide the situation is pretty much going to be a guaranteed rejection. Furthermore, whether or not you intended fraud, if you'll look up the legal definition of fraud, what you were asking about falls well within that definition, as you are deliberately attempting to conceal relevant financial information. I wouldn't be surprised to find the FBI paying you a visit. In fact, I'd be surprised if they didn't. Banking fraud having to do with amounts at risk large enough to finance real estate is a serious felony. ALWAYS tell the truth, the whole truth, and nothing but the truth on a loan application. Better to be rejected based upon the truth than accepted based upon fraud.

If you wait until the short sale is consummated to apply for a new loan, there are 13 questions on page 4 of the standard form 1003, the Federal Loan Application. At a minimum, questions a, d, and f (having to do with judgments, lawsuits, and delinquencies) are going to have interesting possibilities, but there is no question that directly asks about a short sale. It does shows up on your credit report for 10 years, as debt not paid in full. Mortgage debt not paid in full, amplifying the failure in the eyes of mortgage lenders. If there's a deficiency judgment, that will show up as well, for ten years from the date of the judgment. I can't recall ever having dealt with someone in this situation; but it's definitely a factor a reasonable person might want to consider in deciding whether to grant you additional credit, right? If your worthless brother-in-law wanted to borrow $1000 despite having stiffed you on other debts in the past, you'd be within reason to consider that fact in your decision as to whether or not to loan the money. Particularly if the purpose of this loan was directly in line with the purpose of prior defaults. The situation is no different with mortgage lenders.

Caveat Emptor

Article UPDATED here

I am currently living with my parents and they wish to deed of gift their house to me but they still have a remaining mortgage on it. Is it possible to do this or do they have to pay off the mortgage first? Thanks

They can gift the house to you without paying off the mortgage. However, the mortgage still has a valid lien on the property, and must be paid or they can and will foreclose.

The mortgage will still be in the names of the people who signed the paperwork (your parents) and therefore any credit benefit or dings will also belong to them. You could find yourself in the unenviable position of being unable to refinance, despite having made the payment for however long, because you're not getting credit for making those payments. Read the contract: it is possible that the loan is assumable. Even if it isn't, it's possible the lender will agree to add you to the list of those responsible (This can only help them; they're not letting your parents off unless/until you do a full refinance. Of course, adding you to the loan doesn't earn anyone a commission, so they might tell you that you need to refinance as it gets them paid, or helps them make a quota)

Quitclaiming is both legal and extremely simple, but has potentially severe tax consequences. Please check with an accountant in your area first. I'd also tell you to check with a lawyer, because each state has its own laws about the effects of how property is held. Nor will quitclaiming the property help if the purpose is to shelter assets from legal action, and if this is to enable your parents to qualify for Medicaid, all fifty states have "lookback" periods of at least thirty months, where the state will recover the value of any assets disposed of in that time frame.

If you are the party quitclaiming a property on which there is a mortgage, be advised that you are still responsible for payment of that mortgage. The lender has your signature on a contract that says, "I agree to pay..." They may or may not have other signatures, but all it means if they do is that other people will join in your misery. This happens all the time. Husband and wife divorce, one keeps the property, the other quitclaims but is still on the mortgage. Time goes by, and the ex-spouse who retained the property and the mortgage fails to make all of the payments on time. Bad consequences ensue for the "innocent" ex-spouse. I have seen this feature used maliciously by vengeful ex-spouses. I would advise requiring a spouse who retains the property to refinance solely in their own name, and if they are unable to qualify, requiring the property be sold. The other spouse is also entitled to a share of equity in many states.

If the property ends up being sold through a Short Payoff, the lender is almost certainly going to drag the "innocent" ex-spouse (whose signature is still on the dotted line) back into the situation. Basically like being an Alabama fieldhand prior to the Civil War or a male whose girlfriend decides not to have an abortion (Admittedly she puts up with nine months of pregnancy, but thereafter puts the child up for adoption and walks away - he gets hit with a lien for child support from the county for 18 years). Despite not having lived in or owned the property for years, they're still tied to that property by that piece of paper they signed. The ex-spouse wasn't the owner, so they had no ability to control or influence the sale, but they're still on the mortgage, so the lender can get their money out of them.

Finally, for as long as you remain on the mortgage, it will hit your debt to income ratio. You are obligated to make those payments, so it's a part of your credit-worthiness. Especially considered in conjunction with likely alimony and child support in the case of a divorce, you may have difficulty qualifying for another property, even ones that would have been well within your means before.

Caveat Emptor

Article UPDATED here

Fact Sheet: The Mortgage Forgiveness Debt Relief Act of 2007

Not good, no matter how you slice it: Benazir Bhutto assassinated.

Now I strongly suspect rival opposition party leader Nawaz Sharif of demagoguing her death. There are, as of yet, no indications that Musharraf, the current leader of Pakistan, had anything to do with her death. Indeed, I see indications against it, as it would have been trivial for him to bar her from returning, equally trivial to order her death. In fact, Musharraf is the one (still living) person I see as losing the most by the creation of an opposition martyr, as well as the death of another powerful figure who doesn't want the country controlled by Islamic fundamentalists. But the fact remains that Pakistan is a dangerous place, not least due to fundamentalist Moslems threatened by the idea of women (or friends of the West) in power. It doesn't exactly help the US, either, as she wasn't any fonder of the extremists than we are, nor were they any fonder of her. Under the "Who Benefits?" question, I'd have to say those Islamic fundamentalists will benefit more than anyone else. Furthermore, the modus operandi is certainly consistent (shot at close range by an assailant who then blew up himself plus about 20 others).

Michelle Malkin has a link to Al Qaeda claiming credit. I was thinking just the other day that if I was Osama, I'd want to be quiet until after the election in the hopes that the Short Attention Span Theater that is US politics will give him a president who has political capital invested in this whole war thing going away. It appears he's gone one better; killing off allies and potential allies who fly under the American Political Radar. Strategic thinking. This whole war thing isn't over yet, folks. Not even close to over. More decades of kicking the can down the road aren't going to help.

The US is investigating the claim.

Jokster Who Died in October at 88 'Sends' 34 Friends Holiday Greetings From Afterlife

I do have a couple of new articles set up and ready to go for the next couple of days, so you might actually want to check back. I won't be in the office tomorrow, though. I'm taking off for my wife's birthday.

Went to the San Diego Zoo Christmas Day after the annual Christmas morning ritual.

Here is a picture I took. Notice how everything is nice and sharp, except for one blurry black and white spot?

That is the new Giant Panda cub (Zhen Zhen) falling out of a tree. I got lucky and caught her picture in mid fall.

Everybody gasped, of course. Then the keeper admonished us to use quiet voices, as this sort of thing happens quite often to pandas while they are learning to climb trees. Zhen Zhen sat there for a moment, then ambled off in search of a place to climb back up.

Here's a picture of that:

A reader named Terri at Educating the Wheelers sent me an email giving me a heads up on the antics of the state of Illinois. here is the link. Here is the original article at blackprof. The link to the original source is broken, but here is the Illinois Department of Financial and Professional Regulation, here is the full text of HB4050, the new law, here is a synopsis, among other things, and here are enforcement regulations.

Critical sections:

Based on information submitted to the Department by the originator, requires the Department to make a determination as to whether credit counseling is recommended to the borrower. Requires the Department to notify each borrower for which it recommends counseling of all HUD-certified counseling agencies located within the State and direct the borrower to interview with a counselor associated with one of those agencies. Requires the borrower to select an agency from the notice and to interview with a counselor associated with that agency within 10 days after receipt of the notice. Prohibits the borrower from waiving the recommended credit counseling. Requires the title insurance company or closing agent to record simultaneously with the mortgage a certificate of its compliance with database reporting requirements and, if it fails to do so, provides that the mortgage is not recordable

Changes the definition of "pilot program area" to all areas designated by the Department of Financial and Professional Regulation because of high foreclosure rates due to predatory lending practices. Deletes a requirement that a broker or originator provide each borrower with a notice disclosing the names of at least 3 lenders and comparing the rates and terms of those lenders (emphasis mine). Provides that nothing in the predatory lending database provisions is intended to prevent a borrower from making his or her own decision as to whether to proceed with a transaction.

blackprof's take:

Nevertheless, Tuesday was a key moment in African-American History. On Tuesday, in addition to Mrs. King's passing and Justice Alito's elevation, the State of Illinois enacted a law that requires all mortgage applications within nine Chicago zip codes to undergo a process of review by the state's Department of Financial and Professional Regulation. The department's review process determines whether mortgage applicants in these neighborhoods must undergo compulsory credit counseling. If they must, then the mortgage lender must pay the cost of the counseling.

Anyone familiar with Chicago geography and demography knows these nine zip codes. They are all neighborhoods on the South and Southwest side of Chicago. They are predominantly African-American neighborhoods. These neighborhoods are some of the most impoverished in the City of Chicago, and indeed, the nation. On Tuesday, they suddenly became much poorer.

Although the legislators responsible for the new law were motivated by good intentions, they failed to consider the inevitable consequences of their bill. They wanted to protect poor homeowners in certain neighborhoods from high interest rates and predatory lending practices. The new law, however, necessarily increases the costs, time and uncertainty associated with mortgage applications in these black neighborhoods. The cost of credit counseling will be born by and charged to mortgage applicants. This, in turn, will necessarily decrease the price that new home-buyers can afford to pay for homes in these neighborhoods. If they can choose to buy in other neighborhoods, where housing money is more affordable, they, on the margin, will. Furthermore, recent studies of credit counseling programs suggest that these programs have little effect on borrower behavior. The end result is that homeowners in these poor black neighborhoods suddenly have less equity in their homes than they had on Monday.

Legislation like this is often motivated by an unspoken belief that poor black people are incapable of making important decisions for themselves. We see this belief reflected in the protection of failed public schools, and now with respect to personal finances. But the very people for whom such a law was enacted were responsible and wise enough to save to make the down payments necessary to buy these homes in the first place. Suddenly, these same people must have their choices reviewed and second-guessed by state bureaucrats who have no stake in the outcome, or accountability for incorrect or unresponsive decisions. It is hard to imagine the fate of a similar but broader law imposing credit counseling upon all Illinois residents, including white professionals residing in the Chicago suburbs of Evanston, Winnetka, or Kennilworth. Would there have been enough votes in Springfield to impose these "benefits" on everyone, rather than just the residents of the Southwest side of Chicago?

I'm just a nuts and bolts guy. I see some issues here:

First, by increasing the cost of doing business in the relevant zip codes, the law is increasing the lender's cost of doing business. It is not plain how the lenders will pass this on to the consumers, but pass it on they will. This has the effect of making loans more expensive. I can see two methods: either requiring everyone on the state of illinois to pay more, or requiring only those owners actually within the area to pay it. If they require only those within the area to pay, an excellent case can be made that higher loan costs makes for functional redlining, and the federal courts can intervene, and almost certainly will, possibly invalidating the law. If they require that everyone pay the extra costs, this functionally raises the cost of doing business everywhere in Illinois. This will also make it harder to qualify for loans in the requisite areas, as lenders will have incentive to throw roadblocks in the way of potential clients from those areas. Due to redlining regulations, I'm not certain how far that lenders will go, but it certainly won't make loans easier to get or cheaper.

Second issue: no matter the intent, no matter who pays, this will cause loans to take longer and cost more, in addition to previously discussed costs of the program. For previous work as to why, see my essay on Mortgage Loan Rate Locks. The point, however, is that the State of Illinois is going to take some unknown period of time to consider the case. Then the client is potentially going to have to go to a credit counselor, who is going to have to get paid before providing the necessary legal blessing to the transaction. Furthermore, if the credit counselor wants more work at the expense of delaying the transaction, they can apparently make it happen by my reading of the law. All rate locks are for a specified period of time. Given this, there are three alternatives. One, float the rate (don't lock) and hope that rates don't rise. Second, lock for a longer period, which costs more. Third, pay an extension. Since the outcome when you don't lock for long enough or don't pay extensions is pretty much universally "worst case pricing" (i.e. the worse of rates when you locked or current rates), this means significantly higher loan costs, loan rate, or (most likely) both.

Third, as I said before, since this is going to motivate lenders to not want to do business there, and makes it harder to get loans in the effected areas, and quite likely increase the rates and costs of loans in the area as a consequence. This directly restricts how much of a house, price-wise, people in the area can qualify for, which in turn will have the net effect of decreasing sales prices in the area, further hurting current residents.

There are probably further detrimental aspects to new requirements, but the Illinois legislature deleted an existing requirement that, while apparently weak and subject to abuse in that a prospective loan provider was free to provide a prospective client with information only on loans that are worse than the first proposal, at the very least gave the client some further information as to alternative loans.

In short, the actions of the Illinois Legislature in this instance could, according to my understanding, basically be taken from a manual on "How To Hurt Poor People Even More".

Caveat Emptor (and Caveat Voter)

Original here

Is there any program that i can qualify for a home with no down payment?

Lots of them. We may not be talking number of grains of sand on the beach or drops of water in the ocean, but there are more ways to get get into a property with no down payment than most laypersons would believe.

Many loan officers would have you believe that it is a hard loan or that takes something special to get 100 percent financing. It doesn't. In 95 percent plus of all cases, that's just setting you up for three points of origination, setting them up to ask you for referrals, and trying to get you to not shop around. Nor is it a difficult loan to do. As long as you meet the guidelines, 100% financing is routine. Many lenders are begging for these loans, even today. It's still almost to the point where fat middle aged men like me have to be careful not to allow ourselves to be alone in the office with young attractive female lender representatives. When I wrote the original article, I talked about how in my humble opinion, some of these lax underwriting processes were setting the lenders up for unbelievable losses, but as long as I and my clients are telling the truth and playing by the rules, there was no reason why my clients should not benefit. I don't often say "I told you so!", but I did.

The first way to get 100% financing is obviously to have a lender loan you 100%. However, the best way to structure it, in the vast majority all cases, is the 80/20 "piggyback" loan. Unfortunately, right now lenders aren't doing piggybacks above 90% of purchase price. This will likely change when the market is restored to rationality, but we have to live with lender rules, good or bad. He who has the gold makes the rules, and all that. As I discuss in One Loan Versus Two Loans, avoiding mortgage insurance (PMI) saves you money, if you can. There are also a plethora of other ways to structure it, if there is a reason to. One rule that I have learned the hard way is never apply for a first and a second from different lenders, even if it looks like the rates will be better applying that way. Even if both wholesalers swear on the name of Domingo Montoya, don't do it. You are wasting your time. If the lender who wants to do the first won't do the second, there is a reason, and the reason is that this person is unlikely to be approved for the second, and the transaction doesn't close until both loans are ready. If I've got the first with the lender, that's leverage that a good loan officer can use to get them to approve marginal seconds. Not so with lenders who are just doing the second. Not to mention that there is ten times the potential for confusion and several times the work coordinating between lenders.

What do you need in order to get 100% financing, you ask? Well, that's a variable. If you have can prove you make enough money to justify the loan (see Levels of Mortgage Documentation), a credit score of 600 to 620 is still sufficient. The higher the credit score the better the loan, but if you've got a 620 and can prove you make enough money to qualify, the loan can be done. The possibility does not vanish completely until you are below a 580 credit score, although comparatively few lenders will go below 600 for 100 percent financing, and they're all high interest subprimes, competing for loans no one else will do.

If you can't prove you make enough money, some subprime lenders may currently do 100% financing on a stated income basis down to 680 credit score, and maybe down as low as 660. A paper 100% stated income is a thing of the past, and I don't anticipate it returning soon, if ever. Be very careful about overstating your income as you are still going to have to make that payment every month. Stated income loans are a good way to get in serious financial difficulties if you don't understand their limitations. Therefore, despite the ability to inflate your income, I strongly advise against it. Furthermore, as I've said elsewhere, the rates for stated income loans are higher than for full documentation loans, and they become progressively more so the worse the credit score gets. Plus, sub-prime loans aren't as good as A paper in the first place, having higher rates and pre-payment penalties which can only be bought off by accepting much higher rates. Not only is it difficult to get 100% stated income financing, but it will be 2% or more higher than the rate that the person who can prove they can make enough money will get. For all of these reasons, I strongly advise you to stay within a budget where you can prove you make enough money, even (especially!) if it means you have to settle for a lesser property.

Now things like being 30 days late on your rent, and how long of a rental history you have will also influence your ability to get 100% financing, not to mention the rate you will be offered. As with so many other things, take care of your credit and it will take care of you. Make payments of whatever nature, in full and on time. Better yet, don't incur any debts you don't have to. The number one obstacle to being able to afford the loan, and therefore the property, is for most people existing debt.

Suppose your credit is so bad that you do not qualify for 100% financing from any lender? Well, not all hope is lost, although it really does constrain your choices. Most lenders will permit seller carrybacks, so long as they are subordinate to lender financing. So if the lender is willing to give you 90% financing, you can do one of the things that called 80/10/10 financing: 80% first, 10% second, 10% third that is a carryback with the seller. There are a multitude of ways to structure a deal if you know your limitations in advance, but you do have to know them.

Now not every seller is going to be willing or able to carry back money. They are selling the property because they want money, or something that money can buy but the property won't get them. If the seller doesn't have enough equity to cover the costs of selling plus what you're asking to borrow, your offer is probably not going to appeal to that seller. A good buyer's agent will steer you away from properties where the seller doesn't have the equity to work with you. Another thing is that sellers may want you to offer more money in order to accept your offer. Furthermore, they might charge you a really hideous interest rate as an incentive to pay them off ASAP. And they may realize that the reason the lenders won't give you 100% financing is because you are not the best credit risk out there. I certainly don't hesitate to tell my listing clients a lot more about the limitations of carrybacks than there is space for here. I'm a decided non-fan of seller carrybacks, as the request tends to indicate a poorly qualified buyer who may not be able to secure any financing. Nonetheless, given the current buyer's market, some sellers are willing to carry back financing in order to get rid of the property, particularly if the offer is for top dollar. Once the market turns back towards the sellers at all, the ability to do this is likely to vanish. There are many advantages to being willing to shop in a buyer's markets, of which that is only one.

So obviously, you need to know if 100% financing through the lender is possible or likely for someone in your particular situation. You need to know this before you go making any offers to purchase property - and there are types of property where 100% financing is only an option with a seller carryback.

Now, a couple of final points: Just because you can get 100% financing does not mean it's a good idea, or that you should. You get better rates from lenders if you put money down, and writing offers that include having money for a down payment shows a seller that you are serious about buying the property. Other things being equal, I'm going to counsel my sellers that an offer that comes in with even a 5% down payment is a much stronger offer than anything that comes in wanting 100% financing. As a loan officer and buyer's specialist, I've dealt with enough of these that I know the questions to ask to determine if it is likely to work, possible, or ain't gonna happen.

Furthermore, speaking of strong offers: You will need a decent deposit to convince the seller that you're serious about buying the place. Most 100% financing escrows are currently failing, a fact most listing agents are painfully aware of without having any clue as to how to tell if the buyer is qualified. The seller is going to spend a lot of money on the escrow for your attempt to purchase that property, and has to give you sole shot for however long an escrow period you agree to. This means they can't work with other offers while they're working with you, and time is money to a seller. They want to know that if you can't consummate this contract in a timely fashion, they are going to have some compensation for the trouble and expense. Prospective buyers with 100% financing can expect to have to put a larger deposit down. Somebody offers a $500 deposit on a $500,000 property, that's going to be rejected so fast and so thoroughly that your fax machine will spin. So if you really have no money, even though you can obtain 100% financing, trying to buy a property in this fashion is likely to be a waste of time.

Caveat Emptor

Original here

Bush signs bill giving struggling homeowners relief

This is temporary relief from the income tax on debt forgiveness. If you're going to do a short sale, get it done now.

Private Papers on California's new healthcare boondoggle.

Arnold had positively flipped his lid on this issue. Talk about how to kill a state economy.

I am reminded of the F. Paul Wilson classic "Lipidleggin'" (read it all. Shouldn't take more than a couple minutes)

It's so nice to read stark, coherent sanity in another real estate site. Here is one beautiful example: Looking Through the Wrong End of the Telescope

Ask yourself what the transaction means to you. If you worry about what the other guy is getting out of it, you're going to hose yourself, certain as taxes. Like the dog in Aesop's fable, grabbing for the other bone only to lose your own. If it's the best deal for you, it simply is not important what how much the seller is walking away with, what you think the market in the area will do for the buyer, how much the agents are making, or what the loan officer is making. I have seen people rape themselves financially over the fact that they didn't want someone else to get a benefit. There is no area of a real estate transaction that seems to be immune from greed envy. Stake it through the heart before it bites you, because it will suck you dry worse than any legendary vampire.

Selectively playing hoaxes: This tale, The Tale of an Ivy-League Hoaxer, suddenly got splashed all over the papers and the blogosphere when it was admitted to be a hoax. I had only read about it on one conservative blog before that, and it hadn't been in any of my news sources. Now it's everywhere.

Compare and contrast the the Columbia noose story, which was all over the news for over a week until Columbia figured out it was likely a hoax and sequestered all evidence, and the media allowed it to fall down the memory hole. Here's search engine results to refresh your memory http://www.google.com/search?q=Columbia+noose&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

Here's what I wrote on October 26

Has anybody other than me noticed that the Columbia Noose Incident has fallen into the memory hole? this is the most recent substantive information I can find. And as I said then,

Remember that I promised an apology if it turned out there was credible evidence that the Columbia Noose incident wasn't a put up job? Remember that I also predicted it would fall down the memory hole if evidence surfaced that it was? I've been trying to follow developments, and there just isn't much.

The difference lies in who is being slandered and libeled. Some animals are more equal than others.

I find myself in agreement with John Leo, who notes the important difference, although he notes some news sources who did pick it up before it was revealed to be a fabrication.

I was thinking we were ready for a recovery here in San Diego, but if these go through unamended, that will not be the case. Just in time to be the Grinch that Stole Christmas, the Federal Reserve has decided to perform a gigantic belly-flop into a situation that was already being dealt with, and make it worse.

From the AP story:

Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee and contender for his party's presidential nomination, called the Fed proposal a "significant step backwards." Rep. Barney Frank, D-Mass., said it shows that the Fed is "not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other."

And these are the Democrats, who never met a government regulation they didn't like.

Alright, enough hyping it up and let's get to what's available, which isn't much yet.

Here's the Press Release, and from the Federal Reserve website, here is the summarized version (actual text not available either in Federal Register or on Federal Reserve website yet)

The proposal would establish a new category of "higher-priced mortgages" that should include virtually all subprime loans.1 The proposal would, for these loans:

* Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers' ability to repay the loans from sources other than the home's value.

* Prohibit a lender from making a loan by relying on income or assets that it does not verify.

* Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.

* Require that the lender establish an escrow account for the payment of property taxes and homeowners' insurance. The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

The proposal would, for these and most other mortgages:

* Prohibit lenders from paying mortgage brokers "yield spread premiums" that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.

* Prohibit certain servicing practices, such as failing to credit a payment to a consumer's account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and "pyramiding" late fees.

* Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.

* Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term "fixed" to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or "teaser" rates.

* Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.

Let's take these bullet point by bullet point, and consider their effects upon consumers and the marketplace. Actually, let's take the first two together:

Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers' ability to repay the loans from sources other than the home's value.

Prohibit a lender from making a loan by relying on income or assets that it does not verify.

Goodbye, not only Stated Income loans, but NINA loans (aka "no ratio") as well.

I'm not going to pretend stated income hasn't been abused, seeing as how I've been one of the loudest voices condemning it for the past several years. Both Stated Income and NINA nonetheless have their uses, and do help significant and increasing segments of the population. Indeed, they are necessary for increasing segments of the population. Here's why: When documenting income, there are only three acceptable ways to do it. A paper is limited to income reported on the Adjusted Gross Income line of form 1040 (or the equivalent line of forms 1040A and 1040EZ), or for certain salaried employees, W-2 forms. To this, subprime adds the ability to document income via bank statements, but they don't give credit for 100% of income, and it's only net income that finds its way onto bank statements. This makes bank statements a bad way to try and qualify for a loan, because there are a lot of situations and loans where a consumer could qualify by real income, they cannot qualify based upon bank statements. Qualification by bank statements is also subject to a lot of abuse and manipulation, so I don't like to do it as it can leave me vulnerable to a scam artist.

But if you make commission or are in construction or are a contract employee or aren't an employee at all (i.e. self-employed), all of which are large and growing fractions of the population, the only acceptable way to document income is with a 1040. But if you look at form 1040, there's a whole lot of stuff that gets deducted from income prior to this determination, not to mention a lot of other expenses are deducted on Schedule C (among others) and never show up on the main 1040 at all. Upshot: People who have to qualify via form 1040 are penalized in their ability to qualify for loans. It is very common for self-employed people to be making the money to afford the loan, but to be unable to document it. This rule would prevent those people from obtaining that loan. I have seen circumstances where the secretary could document more income than the owner of the business - and it wasn't that he was hurting or that it was a new business - it was a going concern and he was donating more than the secretary's base salary to charity every year.

Similarly, the allowance for income from investments in entirely nonsense: three percent per year. For crying out loud, savings bonds pay more than that. If I have a million dollars in investments, my income had darned well better be above $30,000. What's going on is that this is a safe harbor allowance because the investment markets are unpredictable, but it's not a realistic estimate.

Finally: What about the people who got into their current homes and current loans through stated income? How in the nine billion names of god are they supposed to refinance out of their current nightmares if nobody can do stated income or NINA loans for them? This starts the tidal wave of foreclosures we just averted all over again. I realize that it's theoretically for sub-prime loans only, but expect this proposal to have a major negative impact on every local market, if enacted.

Next up:

Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.

I can get behind this. In fact, I've been begging for a mostly stronger version of this for years - that no prepayment penalty can last longer than the period of fixed interest rate. Focus on the real cost of money, dadgum it! (The way the Fed puts this merely emphasizes once again that they are bankers rather than economists or financial planners). It's possible for a loan like a thirty year fixed with an initial interest only rider to increase the payment without changing the fact that it's the same rate but that's a comparatively rare thing. How about combining the two restrictions? Negative Amortization loans have a low fixed payment, but the interest rate is variable from day one. But if the Fed won't take my suggestion, I'll take what I can get.

Require that the lender establish an escrow account for the payment of property taxes and homeowners' insurance. The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

And the Fed is back to putting their foot in their mouth (after stepping in dog doo). There have been so many impound account problems over the years that many states (California among them) have dealt with the issue and actually prohibited lenders from requiring an impound account, or even from pricing the loan differently if the consumer doesn't want one. Lest there be any doubt, this is one of the few things that the state legislature of California has done right in the last thirty years. This proposed regulation is incompatible with California state law as it exists. Upshot: I'm not a lawyer, so I'm not certain. It could be that there's no more new loans in California until the discrepancy is resolved. This is a regulation to protect bankers from themselves and from the saner moments of various state legislatures. It also raises the opportunity cost of refinancing, because as I explained in my article on Impound Accounts, the consumer has to either roll this money into the balance of their new loan (where they'll pay interest on it for as long as they have a loan) or come up with thousands of additional dollars in cash until they get the check from their old impound account. Like I've said many times, the Fed is composed of bankers, and makes its decisions for the benefit of bankers, not consumers. This proposal serves nobody but bankers.

Prohibit lenders from paying mortgage brokers "yield spread premiums" that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.

This I can live with. Not that it's not subject to manipulation, but I can live with it. As I've said when I explained Yield Spread, I just plan to make my money on origination and rebate the money for the yield spread to the consumer. Alternatively, I can "pad" what I actually expect to make by a little bit when I have the consumer sign off on the yield spread. Tell them I'm going to make a full point when I'm actually looking to make eight tenths, or three quarters when it's really a half. Of course, this is bankers trying to make brokers appear less competitive by distracting consumers from the net terms to them, because if I deliver the loan I originally said I would, it makes no difference to the consumer if I make two dollars or two million via yield spread. If my loan wasn't the best they were offered, they'd have gone with someone else. One small side benefit is that it might keep some idiots from floating the rate while telling the consumer it was locked.

Two more at once:

Prohibit certain servicing practices, such as failing to credit a payment to a consumer's account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and "pyramiding" late fees.

* Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.

I find it mind-boggling that these are not already prohibited by the Federal Reserve. I thought they were. Rock. Gravity. Use your imagination. Of course, this will have no impact upon state chartered institutions, but California must have dealt with this one a long time ago.

Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term "fixed" to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or "teaser" rates.

I find it mind boggling that this wasn't done years ago. I've written about this many times. Must be all those congressional campaign contributions the lenders make. Once again, however, absolutely no effect upon state-chartered lending institutions.

Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.

Second part first, about not charging fees until after consumer receives disclosures: This is actually good. However, it's not a common problem, and it doesn't prohibit deposits, which a lender can then keep after they fork over the disclosures. Deposits are not fees. Once an unscrupulous lender has the money, good luck getting it back. This is why the more ethical loan providers are strictly "fees at time of service." You pay for the credit report when it is pulled. You pay for the appraisal when the appraiser does the work. You pay for the survey (in those states where it's required) when the surveyor does the work. But if the lender has your money, they can hold it hostage, even if it's not technically theirs yet. Practical effect in limiting unscrupulous practices: zero. In fact, it provides the unscrupulous with a bit of ready made misdirection. "It's just a deposit - we can't charge any fees until we give the disclosures" then immediately charge the fees out of the deposit even though the disclosures are pure nonsense.

Which is another problem. As I have gone over ad nauseum, none of the initial disclosures is in any way binding. Here is a very partial list of how lenders legally lowball each and every one of the initial disclosure forms. Truth-In-Lending, in particular, is based upon figures in the Good Faith Estimate or California MLDS, which are thus subject to low-balling. As any high school student who's ever messed up their chemistry or physics experiment can tell you, if you are basing your calculations upon bad measurements, the answer is going to be wrong. Logically, faulty premises produce a faulty conclusion. Or to quote the old programmer's maxim: Garbage In, Garbage Out. It doesn't matter how you get there. The mathematical calculations used to generate the Truth In Lending form require that the numbers used to generate the base document be complete and accurate. Since that is not the case, Truth in Lending is a joke, and for most practical purposes, you should ignore APR.

All in all, this looks somewhat like hearing Mighty Mouse's famous, "Here I come to save the Day!", only to look around and see Tennessee Tuxedo (If you're not familiar, the fact that he was voiced by Don Adams of Get Smart fame should tell you all you need to know, but the cartoon penguin was even more of a bungler). The good stuff should have been taken care of decades ago, the rest is more menace than anything else. "The Federal Reserve will not fail!" If only! I'm starting to think that Peter Sellers is not dead, only in hiding, secretly running the Federal Reserve as Inspector Closeau. It would explain a lot.

Caveat Emptor

Article UPDATED here

Article UPDATED here

Guidelines for the Consumer Focused Carnival of Real Estate.

As always, I arranged the entries that met guidelines into three levels, based upon originality, usefulness to the consumer, and how much thought and effort and research went into an entry.

Last time, I was very happy at the quality of the articles I received in submission. This time, quite a bit less so.

The Highly Recommended Category:

I almost didn't award a Host's Choice Award this time, but upon reflection, it goes to Loose Lips Sink Ships (or The Strategy of Silence in REI). I'm not certain if this was intended partially or even completely tongue-in-cheek, but the underlying advice is good: Don't let ignoramuses talk you out of a properly vetted investment. On the other hand, do talk to experts - as many as you can. If one of them voices a valid concern you can't answer, that's the proverbial horse of a different color.

Your host submits Which Makes More Difference - Buyer's Agent or Listing Agent?

Recommended articles

Full Doc, Stated Doc, and All The Other Mortgage Doc Types makes a couple of errors, as noted in comments, but is good information and worth reading.

Cool Gifts For The Real Estate Lover, Investor, Homeowner: A Photo Gallery is kind of commercial, but not in a self-promoting way, and also interesting.

Met guidelines

Student Housing - A Niche Market - The "Echo Boomers" are off to College is an good overview of issues, and would have made the "recommended" category had it been less explicitly a commercial. But even with the mandatory deduction, I still think it merits inclusion.

Are Subprime Loans Worth It For Your Mortgage? is a basic wide category article that offers very little in the way of useful information. In reality, the reasons for going subprime vary, and are most often a combination of credit score, low equity/down payment, and ability to document income. Furthermore, very few sub-prime lenders maintain public branches, unless they're a branch of a lender that also does A paper, and the actual profit margins are higher for sub-prime lenders. But it met guidelines for inclusion.

Ameriquest Compensates Victimized Mortgage Borrowers is only worth reading if you're one of their victims. But it met guidelines for inclusion.

Sam Zell says Subprime Crisis "Manageable" seems to be a classic "appeal to authority". But it met guidelines for inclusion.

Buying a Home near campus is a good investment is a very basic "think about this" article. But it met guidelines for inclusion.

I was looking for an excuse to exclude Rent Back House Tips To Avoid Home Loss, as it provided almost no useful information and made absolutely no mention of the fact that a very large fraction of these deals are scams with one purpose or another (most often to purchase a sucker's home for a below market price under terms they'll never meet for repurchase). But it met guidelines for inclusion.

Please, can we do better next time?

Consumer Focused Carnival of Real Estate will return in two weeks (January 2nd, 2008), here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be December 31st. And please Read the Guidelines before submitting.

Carnival of Personal Finance

San Diego Special Edition

Lieberman endorses McCain for President. The article says former Democrat, which is inaccurate. He was the Democratic nominee for Vice President in 2000. His voter registration says Democrat. When the NutRoots&trade gave defeating him their all, he formed a new party in 2006 and successfully won the general election through that party, but his own registration remained Democrat (there being no law that a party's nominee must be themselves a member of that party). He remains one of the more left-wing members of the U.S. Senate on everything except the War on Islamic Fundamentalism. He caucuses with Democrats and voted for a Democratic nominee to run the Senate.

Here are two key quotes from the article:

"Political party is important, but it's not more important than what's good for the country and it's not more important than friendship," Lieberman said.

When was the last time you heard that in American politics?

Lieberman backed McCain. He said he had intended to wait until after the primaries to make a choice for the 2008 presidential race, but McCain asked for his support and no Democrat did.

In other words, the contenders for the Democratic nomination don't want his endorsement (as they are afraid it'll alienate the NutRoots that hold the Democrats more tightly than the Christian lobby holds the Republicans), but John McCain does. I don't agree with Joe Lieberman about much, other than the War on Islamic Fundamentalism, but he has earned my respect, as has John McCain (although I'm still not planning to vote for him in the primaries).

The press is trying to spin the fact that a former Democratic party nominee to national office has decided to cross party lines and endorse a member of the opposition party, a stinging rebuke to all of the Democratic candidates. And I speak as someone who has decided that if the Republicans nominate Huckabee (whose appeal to Republicans seems to stem entirely from his personal appeal to fundamentalist and evangelical Christians), I'll vote for Hillary Clinton, whom I completely detest personally (although not Obama or Edwards. Bad as Huckabee would be, he wouldn't be that bad). Due to his ongoing attempts to repeal the first amendment, McCain is way down my list of Republican candidates, but I'll vote for him before Ron Paul or Huckabee. My preference list at this point, from the top down: Fred Thompson, Duncan Hunter, Rudy Giuliani, and then I'm not sure who. As things stand, I could and would hold my nose and vote for McCain or Romney in the general election over anyone the Dems have on tap. But there are Republicans who would not likely get my vote in the general election, and Huckabee is one of them.

You can't choose some hypothetical generic candidate. You have to decide which actual person running for the job would do the best, or at last resort, least bad.

I like this embedding thing! Merle Hazard sings a parody of the financial situation set to a possibly recognizable tune. Guest appearance by Arthur Laffer (who is an excellent speaker, by the way).

While we're at it, Iowahawk has a parody that's better than most.

Watching the Watchers: Why Surveillance Is a Two-Way Street

Because otherwise "1984" becomes hopelessly optimistic. Surveillance is here, and it's here to stay. Let's at least even the odds between the rich and powerful and official and everyone else.

UPDATE: I'm probably going to be doing fewer new, never before published articles for the next two weeks until New Year's Day. Reprints will be more common until then, including perhaps the entirety of the Christmas-New Years week. Indeed, the only new work article I'm certain of at this moment will be the consumer focused carnival of real estate on Wednesday.

If you read the papers and the congressional record on the current housing crisis, you might think yield spread is the central culprit for the entire meltdown. You would be wrong.

Yield spread is a beneficial tool, offered voluntarily by lenders, that is an alternative to consumers paying all of the costs of a mortgage themselves.

No matter who does your loan, broker or direct lender, they need to get paid for doing it. If they cannot make money at it, they won't be in the business of doing loans. There are high cost loans and low cost loans, and any number of ways of paying those costs, but there is no such thing as a free loan, and anybody who pretends otherwise is either a naive child or lying through their teeth. There are a very few loan providers out there who will finish loans on which they don't make anything in order to keep their promise about the terms of that loan to clients, but there has never been a loan in the history of the world where the provider planned not to make anything.

Yield spread arises as a by-product of the price that the lender receives on the secondary market. For thirty year fixed rate conforming loans, as of a couple days ago, at 5.5%, lenders were making about 20 cents per hundred dollars over the actual dollar value, in addition to the roughly $1.30 per hundred dollars the lowest priced lender I had was charging brokers. For a $300,000 loan, this means they were making roughly $4500 for a loan where the broker did all the work from attracting the customer onwards through the rest of the loan (the rate cost three points in the one direct branch I saw last week, so they'd be making about $9600 there). None of this covers all the fees for service, aka closing costs, or loan price adjustors. This is purely from the act of putting the money to the deal. At 6.00%, the lenders were making about $1.56 per $100 of loan amount directly, and that's about where wholesale par was, the loans that brokers could do without any explicit charge for the money. The direct branch wanted a point and a half to do that loan. Finally, at 6.5, they were making about $2.31 per hundred dollars directly from the secondary market, and they were agreeing to give brokers about seventy-five cents of that in the form of Yield Spread.

What this boils down to is that wholesale lender is looking to make about 1.5% of the loan amount, no matter what loan the consumer is put into, merely for the act of loaning the money. It is out of the difference between the number the wholesale lenders charge, and what their retail lending branches charge, that brokers make their living. If brokers can get the loan done for less than the retail branch, and still make money, the consumer comes out ahead.

There is no requirement for lenders to offer Yield Spread. They don't do so to enable brokers to hose customers that they would rather have walking into their own retail branches. They do it to compete for the business of people who have discovered that using brokers is actually a way to get the same loan cheaper. They do so because other lenders do so. Because they really want that $1.50 per hundred dollars loaned, they'll willingly give up most of any amount over that to encourage brokers to come to them, rather than the other lender. As I've said, in loans there is no difference in brand names. It's just money. So long as the terms are the same, it really doesn't matter if you're making the check for payments out to "International Megabank, Inc" or "Fifty-Third Bank of Podunk," and that really is the only difference. In fact, using brokers as a way to expand their reach is one of the ways small lenders can become major players quickly, without the expense of opening branches. More than one major household name has done precisely that. By the way, this $1.50 per hundred dollars loaned is very low by historical standards - it was roughly $2.50 twelve months ago, and twelve months before that it was more like $4.00. But there's a lot of money chasing not very many borrowers right now. Nor is any of this in any way evil. As a matter of fact, it has enabled much lower interest rates for consumers than the traditional lending model where the lenders held the loans for the duration.

Nor do lenders like paying yield spread. They'd rather have the entire secondary market premium for themselves. They offer it for one reason and one reason only: Because the brokers would otherwise take their clients to a different lender who did offer it. Most brokers operate on a set margin per loan, especially the better ones. The good ones are willing to disclose this margin, the bad ones will do everything they can to hide it. This margin may vary between loans. If borrower A is a slam-dunk A paper borrower, that loan can be done a lot more easily than a sub-prime borrower who needs to qualify based upon bank statements, and will eat up a lot less of my time and therefore, the loan should be done on a thinner margin. Whatever this margin is, it can be paid via origination (a charge for doing the application and getting the loan done), it can be paid via flat dollar charge to the borrower, it can be paid via yield spread, or it can be paid via a combination of these. But it is going to get paid. When I quote a loan, I quote it in terms of terms and total cost to the consumer, including what I make, and if I'm not going to make enough to make it worth my while to leave home, I'd rather not do the loan. Others quote higher, building a bit in that they're prepared to negotiate away if the client asks. Still others just make believe that they're going to deliver the loan on better terms than they will actually deliver it to get you to sign up with them - but the chances of anyone actually pricing the loan so as not to make anything are zero. Consumers looking to tell the difference between better and worse providers should ask for a Loan Quote Guarantee, as well as all the other Questions you should ask loan providers.

Yield spread is nota cost paid by consumers. It doesn't show up anywhere in the list of charges they pay. Were its disclosure not mandated by federal law, the consumer would have absolutely no evidence of its existence except, possibly, the absence of other charges or the fact that they have been paid without the consumer having to shell out a dime. I agree with the disclosure law, by the way. Indeed, I want to expand it to require lenders to disclose the secondary market premium they would be paid assuming they sold the loan. Now consumers do pay for yield spread indirectly, of course, with increased interest charges during the life of the loan. But they pay those same charges whether incurred as a result of a broker earning yield spread or a lender being able to make the money on the secondary market. Furthermore, paying those charges will be to the consumer's benefit if the increased charges for interest offset or more than offset the higher fees they would have to pay in order to get a lower rate. Most consumers do not keep their loans long enough to justify the higher fees for a lower interest loan. Similarly, if the loan is going to go to from a fixed or set rate to a variable rate loan before the higher costs for a lower rate have been recouped, whatever wasn't recovered before that happens has been wasted, as all the loans of a given type reset to the same rate when they adjust - doesn't matter whether you got a zero cost loan out of Yield Spread, or you paid five points to buy the rate down, and therefore the payment. But the 4.875% 3/1 that closes today will in three years reset to the exact same rate and payment as they 6.25% 3/1. Well, not exactly. Because assuming they did what most borrowers do and roll those costs into the loan, that 4.875% loan will have a higher balance owed than the one that was initially 6.25%, and therefore will have a higher payment when they both reset. So yield spread has done the latter borrower a favor by helping them control overall loan costs.

Let's look at what happens if we count yield spread as part of the costs of the loan. First off, it makes it appear as if loans including yield spread are more expensive than ones without. This gives direct lenders an advantage over brokers. Let's consider an actual real world example: A few days ago, a retail lending branch offered one of my prospects a 6.125% loan for one point, while he came back to me and I locked him into for 6.125% for ZERO points, a price which included me making about nine tenths of a point in yield spread. Assuming closing costs are the same (in fact, mine are lower than theirs), here's what the client sees now on a loan with a $300,000 loan payoff. (I'm also going to assume anything other than actual costs, such as prepaid interest, are paid out of pocket)

This reflects reality. The client ends up with a loan balance $3060 lower, and a payment $18.59 lower, through getting exactly the same thirty year fixed rate loan through me as he would have gotten through that lender.

But if I have to count yield spread as a part of the cost of the loan to the consumer despite the fact that he's not paying it, here's what the sheet looks like:

Note that it now looks like the consumer is paying almost as much for the broker loan as for the lender loan. They're not. Keep in mind that this is for exactly the same thirty year fixed rate loan at 6.125% - except that the consumer's loan balance if they go through the broker ends up $3000 lower. That $2726.10 in yield spread is not a cost to the consumer. Indeed, Yield Spread is only a cost to the lender. Note that the consumer's balance and payments in no way reflect yield spread, and my client has been told about it, but really doesn't care. Being a rational consumer, he shopped for the loan on the best terms to him and his family. He doesn't care if I'm making ten cents or ten million dollars. All he cares about is I get him the exact same thing for a cost that is thousands of dollars less. But if Yield Spread is listed as part of the cost on the Good Faith Estimate (or MLDS in California), then it appears as if that lender's loan is a lot more competitive than it really is, i.e. $5950 to $5626, not the reality of $5960 to $2900. Furthermore, this was an uncommonly broad difference, that still looks like the broker is offering a better loan. Far more common is a differential spread of half a point or so. If the price differential were only half a point, the broker's loan would look more expensive, while being in fact less expensive to the consumer who doesn't know yield spread is an accounting phantom as far as they are concerned. The consumer would still be saving money with the broker - about $1500, a full 25% of the actual costs of the loan, but listing yield spread as a cost makes it appear as if the lender's loan is cheaper when it is in fact more expensive.

Furthermore, listing yield spread as a cost has some other effects. Suppose you live in an area where the cost of housing is about $60,000 to $80,000 or less. Under the same bill in congress proposing to count yield spread as a cost to consumers even though it is not, is a provision limiting total costs of loans to six percent. Six percent of $60,000 is $3600. Six percent of $80,000 is $4800. There literally is not a loan that a broker can do under these limits. I can't keep the doors open on $700 per loan, which is all that's left after those $2900 of fixed closing costs at the low end. It's not like I get to spend every dollar the company makes on my family. Even at the higher end, it's probably not worth my while to accept a loan on which I can only make $1900. Effect: Brokers in those areas go out of business, but direct lenders are still in business, lessening competition. They can jack up the rates until the secondary market will pay them enough, and secondary market premiums aren't part of costs, even in the artificial environment of this new bill. Result: Rates rise, lending margins rise, competition is less. Big Winner: direct lenders, who clean up with all the extra money they make. Big Loser: brokers, who go out of business. Of course, consumers lose, too, as do real estate agents because prices are lower as a direct result of higher rates, but hey, that's okay because the bankers who bundle million dollar campaign contributions made out!

Suppose you live in an area, such as I do, where the cost of housing and loans is enough higher for this not to be a danger. One cold hard fact is that there are still people who bought years ago that bankers have a free field with because brokers cannot legally do their loans and still make enough money to keep the doors open. Consider a $200,000 loan, where 6% is $12,000, so the maximum loan cost just isn't a factor. Such a person, realizing that they've owned this property ten years and refinanced five times, decides they want a zero cost loan, because they'll come out better. Well, a broker can still get them a loan that doesn't really cost them anything, but brokers no longer are legally capable of calling it a zero cost loan, because legally, yield spread is a cost. All we can do is call it by some name that sounds like a legalistic way to lie. So now lenders can advertise "true zero cost loans," and brokers are breaking the law if they try, despite the fact that they offer the same loan at zero real cost to the consumer with a rate a quarter of a percent less than the lender will. Indeed, for all the low cost options, the lenders now appear to be cheaper than brokers even though they are not. Also found in this same legislation currently in Congress is a provision to make it illegal for brokers to get part of their compensation via yield spread and part via origination. This is the vast majority of my current loan business, because it's the range where the Tradeoff between rate and cost is best for consumers. Say I figure I need eight tenths of a point to make a loan worthwhile for me to do. If the yield spread for the rate the customer chooses is three tenths of a point, I need a half point of origination to make it work. But now I can't do this loan the simple way. I have to charge eight tenths origination, and even though I agree to rebate the three tenths of a point of yield spread to the consumer - in other words, it's going into the borrowers pocket, not mine or anyone else's, it still legally counts as a cost of the loan. So the new accounting with the requirement of adding double counting the yield spread to the official cost of the loan makes it look like the broker's loan costs 1.1 points, even though the consumer is only paying five tenths net, getting three tenths of a point in their pocket. If the trade off was seven tenths of yield spread to one of origination, it looks like a 1.5 point loan by this new accounting, even though the consumer is only paying one tenth of a point. Result: Consumers are going to have to have an accounting degree to realize that the broker's loan, which looks more expensive, is in fact the cheaper loan.

Needless to say, this is the exact opposite of what the government should be looking to do. But the mortgage banking industry has much bigger pockets than the mortgage broker industry, and they realized quite early on in this whole meltdown that if they painted brokers and yield spread as bad and controlled the narrative and their bought friends in congress controlled congressional testimony, they could make this entire housing meltdown for which they were more responsible than any other group into a public relations opportunity to restore the dominance of residential lending they had forty years ago. Bankers don't like paying yield spread, and they don't like competing with brokers, whose costs are lower because nobody expects brokers to have flawlessly landscaped offices with three inch think carpet, security guards, and armored bank vaults, or to wear $2000 suits. They do so only through what they saw as a tragedy of the commons type mechanism, where they could compete for broker's business at the costs of lessening their own margins, or not get any. Of course, this tragedy for lenders was a boon for consumers, but their responsibilities are to their own bottom line, and if they can legally shackle brokers, not to mention legally keeping their competition among other lenders from competing for broker business, those lenders are all better off.

Who's not better off? Well, basically everyone. Lessened competition, loan documents that make it appear as if one provider's loans are more expensive than actual while not making equivalent disclosures about other provider's loans, all of this translates into higher loan prices for consumers. It may seem penny ante to object to consumers paying a few hundred dollars extra here, a few thousand dollars extra there, but when you put it together across 100 million units or more, this translates into hundreds of billions of dollars per year, all sliced into fewer pie portions because the lending industry just effectively got a lot smaller, and with brokers diminished the costs of entry just got a lot steeper for any new lenders who want a piece of the action.

Yield spread is a tool, and a highly beneficial one from consumer's point of view. It has been one of the largest contributing factors in the rise of brokers, and through brokers, of making mortgages more affordable to consumers. It is not a cost to the consumer, and should not be treated as such, although it should be disclosed, as it is required to be. It can be misused, as it was in the case of negative amortization loans, but the ultimate indictment there goes back to the lenders who offered the loans and the high yield spreads, with regulators and mortgage brokers solely in supporting roles. Indeed the best way to fix this entire problem for the future would be to fix the disclosure rules to make the process clear to the consumer, as I wrote last month in How to Avoid A Repeat of the Housing Market Mess - but if Congress starts to fix those, nobody would be able to hose the consumers, and (sarcasm on) we can't have that, can we?

Caveat Emptor

Article UPDATED here

Spent the day looking at property for clients. I had twenty picked out off MLS, and I only managed to get in to see ten. I had twelve theoretically vacant on lockbox, and eight occupied that needed some kind of contact. Of those eight, I only got into three - and I made at least an initial call the day before before. Of the twelve theoretically vacant on lockbox, five had something going on - pesticide notice on the door, key missing out of lockbox, lockbox itself missing. All I can surmise is that these people don't really want to sell. And if they don't need to sell, they should pull the property off the market until the market improves.

People don't make offers without seeing the property. And good agents don't take clients to see a property unless they've seen it themselves. I had that reinforced today by no fewer than four of the ones I did get to see (For crying out loud, man, that lender is paying you a five digit commission to sell that property. Buy a box of trash bags and put the former occupants' trash in them. Or pay a couple high school kids to do it. If the property sells, and especially if it sells for a higher amount, you're ahead of the game. I understand you're not a contractor, but leaving ankle to knee deep trash strewn about every room says that you just don't care)

via volokh Conspiracy, I find that Jake Guttentag (aka "The Mortgage Professor") has written in the Washington Post (and evidently on his web site prior to that) about many of the problems with proposed fixes to the current mess. The last two paragraphs:

However, borrowers often make their decisions on the basis of incomplete and even misleading information from lenders. Instead of requiring lenders to assume responsibility for borrowers' decisions, let's make them responsible for providing borrowers with the information they need to make their own decisions.

The formulation of disclosure rules has long been viewed as a proper responsibility of government, because this is the only way to assure uniformity of disclosures across the market. But the federal government has proven that it is not up to this task. The existing mandatory disclosure rules are obsolete and shamefully inadequate. Every attempt to fix them gets bogged down in politics. It is time to try making lenders responsible for disclosures.

This should sound familiar to regular readers of this site. I've said many similar things.

I have in the past exchanged a couple emails with the Professor, and was formerly a member of Upfront Mortgage Brokers (which he founded) and from observing his actions, he seems to have his priorities in the right place for consumers. We don't always agree, but I have to say that I respect where he's coming from.

Read the whole thing.

I'm working on an article on yield spread. I hope to have it up Sunday or Monday.

Can I qualify for first time home buyer financing if I buy a duplex and live in one and rent out the other?

I thought if I bought a duplex, lived in one side and rented out the other would be a good idea to help pay the mortgage. I would live there for a couple years then move and rent the entire duplex as an investment property

It would be very popular to answer "yes".

However, the fact is that the only nationwide first time buyer program in existence, the Mortgage Credit Certificate, explicitly disallows all multiple unit property from participating.

Furthermore, I've dealt with the federally funded local first time buyer programs throughout southern California (in excess of forty different municipalities). In every single case I'm familiar with, it's a requirement that it be a single family residence. Just like the MCC, no duplexes, no apartment buildings, no "2 on 1" properties. Condos, townhomes, and PUDs are fine, but nothing intended for more than one family to live in.

People sometimes get confused because of the way residential property is defined (1-4 units), but just because something qualifies as residential property doesn't mean it is eligible for a first time buyer program.

Finally, for every first time buyer program I'm aware of, the government assistance goes away (as with the MCC), or worse, becomes immediately due, should you move out. For example, in the municipality where my office is located, they have a very nice "silent second" program. It means you only have to actually pay the mortgage on a potentially much smaller amount, usually wiping out a need for PMI or a conventional second mortgage, while the city's second accrues at a very low rate. But if you move out, they'll call the loan, which means you've got thirty days to get them their money somehow before they foreclose.

(They also flatly refuse to subordinate, meaning you're not going to be able to refinance without paying them off, so you'd better choose a fixed rate loan that you can really afford for your primary mortgage in the first place)

There may be municipalities somewhere where this is permitted under their local programs, but I've never heard of one, and I do suspect it's prohibited in the legislation and regulations for the federal administration that funds these local programs. The First Time Buyer programs are intended to stabilize neighborhoods, and make it a little easier for people to be able to afford to buy housing they intend to live in. They are not intended to help you build a real estate empire - as a matter of fact, that's somewhat counter to their purpose. They are also never free of strings. If you intend on taking advantage of these programs, it would behoove you to make certain you understand what those strings are, as well as all of the implications, before you've got a purchase contract. Some of the strings on first time buyer programs are real deal-killers. For example, a city about a half hour's drive from my office has one that looks really nice at first glance, but restricts both who you sell to and what you can sell for, eviscerating the economic benefits of ownership and making you essentially a renter who also pays maintenance and property taxes. Unless you're just going to live there forever, which may not be under your control, that's not a desirable situation. Probably better to buy in the city next door, which has a more useful for your financial future "silent second" program much like the one described above. You need to be careful with first time buyer's programs, lest you end up in a situation that does not justify your expenditures with future benefits.

Caveat Emptor

Article UPDATED here

Carnival of the Capitalists

U.S. refuses `Any Wounded Soldier' mail

"Are we going to forget our soldiers because we are running in fear?" Fena D'Ottavio asked. The suburban Chicago woman was using her blog to encourage friends to send mail to unspecified soldiers until she learned of the ban, which she called a sad commentary on society.

Talk to the folks at Soldier's Angels, They'll get you hooked up.

I keep forgetting to add them to my siteroll. Sigh.

Ridiculous Warning Labels

The contest winner was "Danger: Avoid death"

Why Police don't want to be recorded (via Instapundit)

A teenage suspect who secretly recorded his interrogation on an MP3 player has landed a veteran detective in the middle of perjury charges, authorities said Thursday.

Unaware of the recording, Detective Christopher Perino testified in April that the suspect "wasn't questioned" about a shooting in the Bronx, a criminal complaint said. But then the defense confronted the detective with a transcript it said proved he had spent more than an hour unsuccessfully trying to persuade Erik Crespo to confess--at times with vulgar tactics.

The Lying Detective was charged with twelve counts of perjury. I hope they send him to prison for all 84 years and then some, to reflect abuse of position.

Here's the question: How often does this happen where there isn't a recording? How can we trust police when they cover up each other's wrongdoings instead of insisting their fellow officers do the job they were hired to do, in the way they were hired to do it, or get out? This sort of thing does more to undermine the justice system than anything else can possibly do.

Having done both, there's no question in my mind. For the average person and the average transaction, the buyer's agent makes a lot more difference. In the aggregate, a good buyer's agent has the opportunity to make a lot more difference to the situation than a listing agent.

There are exceptions. I don't know any rule of thumb that don't. But the leverage is all on the side of the buyer's agent. There is nothing about the situation that the listing agent deals with that does not have its roots in the purchase of that property.

That listing agent does a lot of work, and provides a lot of value. They have absolutely no input, however, on the identity of the property being sold. You can clean it, paint it, put additions in, landscape it. It's still the same property the people originally bought, however long ago. Nothing that listing agent can do is going to change the location or basic construction. If those are a problem, it's because of the buyer's agent, who could have directed the owners to a different property. Without a bulldozer, nobody is changing the basic construction, and nobody is changing the location of the property, period.

Maybe there was no buyer's agent. The observation stands. Whether the people acted as their own agent or went along with Dual Agency, somebody did it. If a better buyer's agent, or one actually working for the buyers, could or would have brought something to the owner's attention that led to them not making an offer on that property, they wouldn't own it now. Therefore, it lies squarely in the purview of the buyer's agent.

From the first moment prospective owners consider visiting a property, the buyer's agent is involved. Even before. The buyer's agent should be working with the prospective owners on what they can afford, what they must have, and what they can live without. Everything in real estate is a tradeoff. Price versus number of bedrooms versus location versus time to buy versus literally hundreds of other characteristics. Amenities that will make a positive difference later, whether in price or in ease of sale, are a buyer's agent's responsibility, as is keeping people from paying extra for things that don't make a difference.

Your ability to enjoy a property for the period of time you live in it traces directly to how well the buyer's agent did their job. All of that time you lived in the property, whether you realize it or not, you were either praising or cursing that buyer's agent. Maybe you could have done better with a bigger budget - but the buyer's agent can always make a difference. Maybe you could have done better with more patience -it's up to the buyer's agent to make that clear. Whether you're able to rent it afterwards, how easily and for how much, the marketability of the property when it comes time to sell, the repairs you have to make, and the differential between that property and the rest of the neighborhood as far as desirability and sale price, all trace back to how well the buyer's agent did their job.

Owners can modify property. The buyer's agent should have made clear what's likely to make a difference in the sale price, and what's more likely to end up being simply for your own enjoyment. Most major work typically does not return anything like 100% of the cost in terms of sale price, meaning the remainder of that cost had better be indicative of how much enjoyment you personally got out of it in the interim. A good agent will go over likely remodels that will do you some good, whether they're helping you buy or sell, but truthfully, in which case is it more likely you'll do some significant work?

The most salient part of a buyer's agent's job is to keep you from wasting money - paying more for the property than you can get an equally valuable property for nearby. By the time the listing agent comes on the scene, that's a moot point. The property is what it is and is worth what it's worth. If it's good, the listing agent has a much better success story. If it's not, all the listing agent can do amounts to rearranging the deck chairs on the Titanic. On listings, it's really rare that I have have more than two weeks to work with a property before it hits the market. I can help the owners make what's there more visually attractive, but I can't really change it much in most cases. When I'm helping buyers, the vast majority of the time I can keep them from dealing with a problem property at all.

When I'm listing, my clients own a property, and they would like to exchange it for cash. I can get more people interested enough to view it, I can stage it so it's more attractive to them, and I can definitely concentrate my efforts on people fitting the property in terms of lifestyle and requirements. But the property itself pretty much already has to fit their requirements, at a price they can afford. If it doesn't do the former, they won't make an offer, and if it doesn't do the latter, the escrow will fail, as the era of make-believe loans is over. I can't really make a two bedroom structure into a three, no matter how many agents try by entering the larger number. I can't magically add another tub, or an entire bathroom, either. If the lot is 5000 square feet, steeply sloped, and planted in water efficient desert plants, that property is not likely to be attractive to the family who wants a place for their young children to play outside. Potential buyers are going to figure the basic elements of this out, and they'll do it before they make an offer. It's not like it requires any intellectual feats more impressive than Og the Australopithecus was capable of. Or even George of the Jungle. I can market the property ahead of this curve, or behind it. The former leads to fewer showings, but better, more qualified prospects. The latter leads to frustrated clients who have opened their house to dozens of prospects, but no offers. That's one of many real differences the listing agent makes.

But when I'm helping some people buy, the only limits upon the process are the number of properties that match my client requirements. My buyer has either cash, or the ability to get it, and that's what every seller wants. Consider groceries: With two or three dollars you can always walk into the store and buy a loaf of bread of your choice. But if you choose the wrong loaf, changing that loaf of bread back into dollars is a lot more problematical. The same thing applies, greatly magnified, to real estate.

Good agents can spot most of the signs of destructive settling, of likely non-permitted additions, leaky roofs, bad plumbing, ancient wiring, and the vast majority of the time, good agents will talk clients out of a problem property before it gets to the point of an offer, and steer them to a property that they're going to be much happier with (and usually for about the same price, if not less). This translates to a property that's much easier to sell, and for a higher price, than the one I talked them out of. Not to mention fewer, less costly repairs, and increased general enjoyment for the time they live there. Not to mention administrative details such as if the sellers of the Nightmare (house) on Elm Street never have my client's deposit money, we definitely don't have to go hand to hand combat in the courts to get it back, and if they don't get into a bad situation in the first place, my clients don't have to pay attorneys to get them out of it - Maybe.

If our clients want to know what my company's stake in them buying one property versus another, I think we should tell them (once we look it up). It shouldn't be relevant to the thought process of either client or agent. Either this property is the one with the better trade-offs for the buyers, or it isn't. If it's not, I shouldn't be trying to sell it to them. If it is the best possible purchase, the fact that the seller wants to pay my company eight percent of the sales price to get it sold versus two and a half or three doesn't make it not so (and no, I've never seen anything higher than five, although the ones offering more than customary are as likely to be overpriced as the ones offering too little, and more likely to have problems that will be revealed at some point in the escrow process). If my client wants to weigh my motivation, they're entitled to do so. If I need to do some introspection on my own motivations, pretending I don't isn't going to help me. But the vast majority of the time, it means I need to explain myself better, and show the client so they can see what I'm talking about with their own eyes.

When you really think about who makes the most difference to the future of the prospective client, basically all of the factors line up on the side of the buyer's agent. There is usually nothing about any situation any listing agent ever deals with that does not have its roots in an issue a buyer's agent did or did not deal with. Talk with successful, experienced, long term, multiple property investors. They'll tell you the same thing - they made most of what they made because of what they bought or didn't buy. The money was really made on the purchase; the sale only formalized the exact dollar amount. This also illustrates why you need to be able to get rid of ineffective buyer's agents, hence my recommendation of non-exclusive buyer's agency agreements. It's easy for agents to talk a good game in the office, and it's easy to burn a few listings they don't really want you to buy. You want someone who will continue to be a good buyer's agent, because they haven't got you trapped by their agreement for months. The vast majority of the people I work with never go see another agent, but that's always their choice, because they know from having seen me in action that they're not likely to find anyone as good, not because I have them stuck in an exclusive agreement for six months. Show me someone who requires an exclusive agreement, and I'll show you someone who isn't secure in their own ability.

Caveat Emptor

Article UPDATED here

Moderately good news for sellers, not so great for buyers.

I wrote a few days ago about the federal government and lenders agreeing to freeze rates.

This isn't a panacea, by any means. It may not help people who had interest only loans, which will still begin to amortize. It won't help those already in default. It certainly won't help those who bought with negative amortization, who never were paying the real payments.

That said, it will give those who could afford the initial cost of money, but have been frustrated by the fact that prices have declined and they're upside-down and therefore cannot refinance into a "normal" loan type because of that fact.

Practical effect on the market: Nothing immediately, as in right this instant. But based upon statistical summaries of who has what loans, at least half of the people who would have been forced into foreclosure in coming months are going to be able to hold on. The vast majority of these, given the five year breathing space given by the government deal, will be able to keep making their payments until such time as they are able to sell or refinance normally. This means the "huge tidal wave of foreclosures" that market doomsday advocates have been going on about becomes a shallow wash.

The statistician and the financial planner in me are actually both in admiration of this move. It not only doesn't cost taxpayers any money directly, I suspect that the longer term effect will be to save us some money, as fewer lenders go down and we have to stand up for fewer government guarantees. It won't help those who couldn't afford their loans in the first place, but it will give aid and comfort to those who suffered solely from price declines. I've said over and over again that the only time the value of a property is important is when it's bought, sold, or refinanced. Unfortunately for those who bought with 2/28s or 3/27s that have now reset higher (or are about to), refinancing is one of those times. They bought with a loan that they really could afford now, just not indefinitely. They knew they were going to need to refinance, and were counting upon their value not to have decreased critically when that time came. However, prices in much of the country have critically decreased. This means that when they needed to refinance because their rate reset, now they were prevented from doing so by the terms on which lenders will extend replacement financing.

Yes, these folks should have limited themselves to properties they could afford on a thirty year fixed rate basis, and I lost a lot of business through preaching about making the situation sustainable. However, I don't have it in me to throw people out of their homes for the (sarcasm on) horrible crime (end sarcasm) of not following my advice. The agents and loan officers who gave such people horrible advice are heaving a huge collective sigh of relief, but my desire for schadenfreude isn't great enough to endure the consequences for all those others, either. Furthermore, the more the market declines, the worse everyone gets hurt. This includes people who were thoroughly blameless as well as people like me, who did our best to avert the disaster. I also suspect that most of the malefactors are still going to get burned, having advised clients to do things which are not covered by the government agreement.

In fact, the government plan helps affected homeowners in direct proportion to how well they really could afford their property in the first place. Also being voluntary on the part of the lenders, it wouldn't have happened if they didn't see it as being in their best interests. The plan gives them cover for doing en masse what they would have had to do for those borrowers individually. All in all, the government has accomplished a noteworthy feat of financial judo.

Furthermore, it carves the heart out of any predictions of coming disaster in the housing market. There is not going to be a huge amount of involuntary supply hitting the market in the coming months. In point of fact, a large percentage of the people who would have lost their homes to foreclosure have already "voluntarily" placed their properties on the market, as the least damaging avenue available to them as individuals. Many of these did not even know they could ask their lender for a modification. Some still don't know that it's true in general, but due to the publicity about this deal, have done so about their loan in particular.

Indeed, I would expect a certain number of people to withdraw their properties from the market, as they contact their lenders and find out they can now afford to stay. They bought these properties because they wanted to live in them, after all. It's only been four days since the announcement as I write this, so I wouldn't expect to see such results of that yet, as it's going to take a while before the homeowners are sure they can take it off the market.

Here's one fact: we've seen a slight uptick in new escrows locally this last week over last, from 450 to 470. The ratio of supply to demand, at 40 to 1, is the lowest I've seen it since the early days of summer. Smack in the middle of Christmas season. You might have seen me write that nobody wants to move the Christmas Tree before, despite it being the best time of year to buy, not only vis a vis sellers but also for tax reasons. Given the market environment, this is indicative of an uptick in demand more than anything having to do with supply. In the middle of Christmas season.

So here we are seeing a small increase in demand as well as the seeds of a decrease in supply. At the time of year when activity is usually at its lowest. What does this tell you?

I've been saying for six months that mass psychology is the only thing keeping this market down. The old Fear and Greed, reversed in their effects from two years ago. People afraid prices are going lower, or greedily betting that they will. But trying to time the market - any market - is a bad idea.

San Diego Area Median Income is now $69,700 per year. For the mathematically challenged, that's a monthly income of $5800 per month. Using standard Fannie and Freddie standards (and A paper lenders have been sitting pretty these last few months), that means that the median family can afford $2613 per month. As I type this, I've got a 6% thirty year fixed rate loan for less than one total point. If someone doesn't have a down payment, add PMI of just under 1%. With $100 per month for insurance, they can afford $320,000. With $200 per month for HOA dues, that's still almost $310,000. There are seventy-five properties on the market in the same zip code as my office where the asking price is that low. If you consider the properties where it could be bargained down that far, it's at least 120 and probably over 150. In one zip code. Median income families without a down payment, and below average (but not putrid) credit. There are over 100 zip codes in the San Diego MLS.

There were 774 sales consummated in the last 30 days, throughout the county. And keep in mind that $69,700 median includes statistics of minimum wage people as well as CEOs. A couple where each earns $15 to $20 per hour can easily afford a starter property, even without a down payment. No, they can't afford the brand new 5 bedroom 4 bath 3000 square foot mini-mansion that advertisers are telling us everyone "needs", but they never could, either. Our parents raised families of five in three bedroom 1200 square foot homes, our grandparents raised families of eight in one and two bedroom 600 and 800 square foot apartments. There's no reason why a family of four can't fit in either one - no reason except envy, that is. For the last decade or so, marketers have been telling people that they didn't have to settle. Well, that was never true, and the loans that enabled people to pretend it was are no longer to be found. I wrote yesterday about the long term benefits of home ownership. You can have what you can afford, or you can miss out on the benefits altogether. Matter of fact, as I've said before, the best way to leverage yourself into what you want is to start by buying what you can afford now.

Given these facts, I'm thinking that we're seeing the low point of the market right about now. The horrible part about relying upon mass psychology and using it to try to time the market is that mathematically, at least fifty percent of the people who do so will be left in the dust when the market takes off. All it takes is one good month, and a market turn fueled by the mass psychological phenomenon (or the collapse of such) becomes a positive feedback loop. In fact, if the market does get worse, that only exacerbates the strength of the recovery when it happens. Affordability-wise, we're back where we were in 2003, or maybe 2002. Given the scarcity of new land for development and other constrictions of supply, and the fact that we're not suffering from any shortages of people who want to buy property here, this may be the best opportunity to buy in San Diego we'll see in our lifetime.

Caveat Emptor

Carnival of Personal Finance

Carnival of Real Estate

Sometimes, we'd all be happier if life imitated Scrappleface more often.

Putin eyes full merger with Belarus

One way to stay in power. New political entity, new constitution, no more term limits.

I think I've learned how to embed videos without using bandwidth that I'm paying for.

I've seen this linked to all over the place the last few days:

Here's one of the Not-So-Secrets of the Universe that most people just won't stop and think about:

There's an awful lot of people out there with an awful lot of passive wealth. Often it's inherited. It may also be from a windfall of some sort. The people who have it often suffer from at least two of the following three failings: laziness, excessive greed, and stupidity. They keep hearing about what wonderful returns this or that hot investment paid this last year. Because of this, they spend a lot of time chasing last year's hot investment, buying in when markets are already overheated, and when the inevitable letdown comes, they don't come out very well, and often end up eating a huge loss.

These last few years, housing was the "It" investment. Before that, internet companies. Before that, biotech. Before that...

The thing that all of these investments have in common is that they really are terrific investments, played properly. But if you overplay them expecting a fast payoff, remember the old saying about how "If you can't point to the sucker in the group, it's you."

There is another thing these have in common, by the way. When the performance chasing money exits, there's always an opportunity. That's real estate now.

Quite a while ago, I wrote an article Passive Asset Allocation, which is pretty instructive in how not to be one of the performance chasers.

Hugo Chávez tried to overturn the results of Venezuela's recent vote but was rebuffed by the military

But by midweek enough information had emerged to conclude that Chávez did, in fact, try to overturn the results. As reported in El Nacional, and confirmed to me by an intelligence source, the Venezuelan military high command virtually threatened him with a coup d'état if he insisted on doing so. Finally, after a late-night phone call from Raúl Isaías Baduel, a budding opposition leader and former Chávez comrade in arms, the president conceded--but with one condition: he demanded his margin of defeat be reduced to a bare minimum in official tallies, so he could save face and appear as a magnanimous democrat in the eyes of the world

I am not surprised. Nobody should be surprised at his antics. This is what I wrote December 3. The man has a history of electoral fraud worse than anything Chicago has ever been accused of. If the real tally was as close as Reagan vs. Mondale in 1984, I'd be amazed.

HT: Captain's Quarters

Just got another one of those desperate consumer fishing calls.

First off, she said she had to have an Option ARM. I told her I had them available to me, but...

She interrupted me to say she had to have it Stated Income, or if necessary, no documentation. Yes, I told her, even those are still available, but...

She interrupted me again, wanting to know if they were no points and no prepayment penalty. I said that while I hadn't done a loan with a prepayment penalty in years, Option ARMS without prepayment penalties don't exist. She then said, "We've come to the end of the conversation," and hung up.

Obviously, she's been burned by someone. Just as obviously, someone else gave her a shopping checklist for a loan, or she made it up herself. She wants it all, she's not going to settle until she gets it, and she's not going to let some horrible awful salesperson lead her astray like last time. In fact, she's so determined on this point that she's not going to let anyone try to save her, either.

As regular readers have no doubt figured out by now, here's her history. She didn't tell me this, but It doesn't take much if you understand the way the market has gone these past few years.

She either bought a property more expensive than she could really afford, or refinanced a property she already owned, and could not afford to buy now, for cash out. Not understanding that minimum payment is not the same thing as the cost of the money, and that you should Never Choose A Loan (or a House) Based Upon Payment, she signed upon the dotted line, not really understanding anything that was going on except that she wanted that house, or that cash.

Along she went, happy as a clam, until she got smacked upside the head with the real cost of money, aka the interest rate she was paying. Gravity never quits, and compound interest working against you is even worse than that.

And here's where it gets really sad. Instead of figuring out her mistake, or cutting her losses, she is determined to repeat the mistake. So determined that she's not going to let anyone stop the process before it gets even worse than it is today, however bad that is. She didn't mention anything about loan to value ratio, but I'll bet it was higher than the 80% that's the most anyone will do one of those stated income now (if debt to income ratio wasn't outside of any acceptable range there would have been better loans to do in the first place). What's the definition of insanity again?

The loan she wants is not going to happen. But that won't stop people from telling her that they can do it, figuring once they get an application and psychological investment, not to mention hundreds of dollars of her cash, then they come up with something else at final loan signing, chances are that she'll sign it and they'll get paid. I went over this just a few days ago. The loan they'll get her probably won't be as bad as what she wants, but it's unlikely to do her any good. She owes what she owes. If she could afford the loan, she wouldn't need stated income or negative amortization, and she probably wouldn't have needed them in the first place.

Furthermore, she's shopping her loan from a checklist of things somebody told her were good or bad, completely ignorant of the fact that she can't have them all. There's a reason I tell people they need to ask all the questions on this list from a prospective loan provider. It's not a simple matter of shopping your loan until you get everything on a shopping list. Some things do not go together at all, like negative amortization loans without a prepayment penalty. In all cases, there are tradeoffs between A and B, C and D. You decide which you want more, or which you don't want more, or, in the case of points and cost vs. rate, where on the spectrum of the tradeoff between rate and cost you want to be. Some providers may give you a better set of tradeoffs than others, but those tradeoffs still exist, and pretending they don't is a good way to end up with a putrid loan. Somebody will tell you about a loan that doesn't exist in order to get you to sign up with them.

Before you can ask the questions, however, you've got to let a professional have a reasonable chance at figuring out the best loan for your situation. In order to do that, you've got tell them enough information so they know what your situation is. Then you can ask those questions and give me the third degree, and if you're smart, you're going to shop it around until you get a couple or three different opinions, and cross check the information each provides against the other. You might still get conned, especially if you don't make the effort of comparing and cross-checking answers. But as I went over in The Ultimate Consumer Horror Story, if you won't talk to sales persons, as in real conversations, I can pretty much guarantee you're coming away with your own private version of the Nightmare (mortgage) on Elm Street.

Caveat Emptor

Article UPDATED here

Carnival of Debt Management

Rate Freeze agreement reached

The Bush administration has developed a plan to freeze interest rates for five years for thousands of strapped homeowners whose mortgages were scheduled to rise in the coming months.

The proposal was developed in negotiations led by Treasury Secretary Henry Paulson with the mortgage industry. It would freeze introductory "teaser" rates on subprime mortgages, preventing them from resetting to higher rates for five years.

This is a good plan, and about as far as I think the government should go - a voluntary agreement with lenders that gives those lenders public cover for doing something en masse that they were going to have to do for basically all of the people it covers individually.

For negative amortization loans, it's no help. The real rates on those were always in the sevens or higher, so people who fooled themselves into thinking they had 1% loans, or whatever it was the lender dangled out there to make the low payment look legit, have no affordability objection coming. They might have a legal objection for fraud, but that's another story. People who got those were fooling themselves from the start.

For those people who got something with at least an introductory fixed rate they could handle, it will give them up to five years of breathing room, at levels they could afford - and we're talking interest rates, the real cost of the money they've borrowed, not nominal payments. Furthermore, five years of breathing room translates into plenty of time for the markets to recover, so at that point in time, they are not likely to be upside down on their mortgage, which means they'll likely be able to refinance or sell for a profit.

For the lenders and investors, they are making money now, at the rates people have been paying. As I said on Monday, it has become obvious that if they insist upon getting the higher rates and payments, they'll end up with defaults and losses. This allows them to behave as if they did people a favor.

Finally, it doesn't cost people who didn't sign up for mortgages they couldn't afford didn't any money. The federal government doesn't get money from thin air, and a bailout would cost the people who didn't make stupid, avoidable mistakes large amounts of money.

And for those who were using "a coming tidal wave of foreclosures" for thinking real estate markets are going to decline further, I think you need to seriously re-evaluate your position.

Today would have been my father's birthday, were he still with us.

I'm planning to take the family to the Zoo on Saturday, agent or not. My brother and I spent a lot of days there with my father, so it's a good place to go to remember him, even if we can't feed the elephants any longer.

This also gives my girls a place to have memories of us, for when we're no longer around. It will happen, eventually. One generation into another, the activities and time we spend together and the way we treat others - that's what really sticks with kids, not the teddy bear or Game Console or computer we give them for Christmas or their birthday. By this standard, I'm wealthier than a lot of billionaire's kids, and will try to make certain my girls are just as well provided for.

I had the idea for this article some time ago. It took me a long time to decide to share it publicly, because quite frankly, knowing what I know now, I was an idiot. I was still young enough to think I knew more than I did. Now that I've learned a lot more, I still don't know what I thought I knew then, but I'm getting closer. When I repeat transactions of this nature now, I don't repeat these completely boneheaded mistakes.

The year was 1990, and I was still working for the federal government in my first career, air traffic control. Controllers are not your most humble of people, and for better reasons than most. Most days, I could go home secure in the knowledge that without me there, a couple of airplanes would have crashed together, and even if everyone walked away from it, however unlikely that was, there would have been anywhere from a couple hundred thousand dollars in damage to millions. But, as you're about to see, this has nothing to do with competence in real estate.

Before I go any further, let me tell you that things could have been much worse than they ended up being. I understood a lot of things about real estate and finance, even then. Even then, I knew enough to know how simply full of excrement most of the people claiming do it yourself real estate was the way to go were. Ignorant. Guilty of wishful thinking. Neglecting terms in mathematical equations. Just plain wrong.

I simply thought I was better than that. At the time, I thought I did pretty well. But in retrospect, boy did I get taught a lesson by a pro.

Let me tell you what the problems weren't. It wasn't that I didn't understand how to check out a property. I grew up a contractor's son. From the time I was old enough to wield a paintbrush with a modicum of control, I was helping my dad on his projects. Some of my earliest memories are of helping my dad mix and pour concrete. You name the project, I've pretty much done it. I learned how to spot construction defects, problems, and things that needed to be fixed before I figured out that girls didn't have cooties. I have an excellent idea of what's involved in fixing most of them, much better than you get by watching any of those home repair or decorating programs. Furthermore, I had my dad with me to help me spot potential problems.

I did pretty darned good on the loan. Through both intentional and accidental learning (i.e. formal classes and having friends and co-workers older than I was, and listening to the problems they had had), I had a pretty good understanding of the pitfalls there. I knew what the options to compare were, and I knew why a 5/1 ARM is better than even a 7 year balloon, and how both compare to 30 and 15 year fixed rate loans. Through the financial markets, I understood that there was a tradeoff between rate and cost. I could have maybe shopped it a bit more, and probably should have taken a less expensive loan, but the higher cost for the lower rate worked out in my case.

(Amazing that for all the "do it yourself without an agent" advocates out there, I've never encountered a single person encouraging you to be your own loan broker, despite the fact that I can get a newly licensed person up to speed on common loans a lot more quickly and easily than I can teach them the rest of what they need to know to act as an agent)

My problems wasn't location, or lack of knowledge of the area. I bought less than three miles from my mom's house, about four from my dad's. I had been on that street at least dozens of times prior to buying that property. I knew the area cold, and I love the area even today.

It wasn't a failure to shop, or not knowing what would do well upon resale. I did my homework, and looked at a dozen properties before I made my offer. It certainly wasn't failing to do research, on the internet or elsewhere. I read several books that are still well-regarded today. Yes, this was before the World Wide Web, but newsgroups and forums existed back then, and were easy to access, and I always had a good internet connection. It's become easier to use the internet since then, but the signal to noise ratio has gotten considerably worse. Not that it was stellar in the first place, but I find more spectacularly wrong "information" out there now with an agenda of selling some thing or idea in particular, than I did then. At least in the newsgroups, you could always count upon having opposing points of view. Just surfing the world wide web, you're at the mercy of the publisher of that particular website if you don't know any better.

Now here's what the problem was: My ignorance. Ignorance of the market, ignorance of procedures, ignorance of what everything meant and the implications thereof.

Let's be honest. It could have been much worse than it was, even with everything else covered.

What I was paying attention to was asking price, not comparable sales. Furthermore, since I hadn't been in any of those comparable sales, I didn't have the basis for a valid comparison and pricing. That listing agent did. Furthermore, the local real estate market at that time was getting ready to fall, much like things were in much of 2006. Sellers were just starting to realize things were not likely to fall their way in the future. A good first offer would have been $10,000 less than I offered, then negotiate hard, and settle on maybe $8000 less than I actually paid. Considering prices were much lower then (still under $100,000!), I overpaid by about 10%, and there were enough properties on the market, and few enough buyers, that if they hadn't been willing to negotiate, I could have walked away and found something just as good for about that price in the exact same area.

It gets worse. Because I didn't know what local procedures were, I ended up paying just under $3000, more than a buyer's agent would have made, in various fees that were really the seller's responsibility. Not to mention using the wrong escrow and title company.

All told, my ignorance cost me somewhere between ten and fourteen thousand dollars, out of a purchase price significantly under $100,000, and it could have been much worse. There were no issues with title of construction defects or anything else. This meant ten to fourteen thousand dollars more to pay interest on. Rates then were higher than most people have since become accustomed to (The seller was proud of the fact they had an assumable loan at 10%). I can do a better loan cheaper today on a thirty year fixed rate basis than was available on a 5/1 ARM back then. On top of that, it made the difference between not needing PMI on my loan and PMI being required, at about $80 per month in addition to the extra interest. PMI used to be much more expensive than it is now, also, and the whole piggyback loan thing was not yet a real option.

Lest you not understand, the listing agent was doing nothing other than her job with all of this. She was responsible for getting the best possible deal for her seller. If a sucker swam into the net, so much the better. I understand this now. I didn't then.

One more thing that may not be clear to the average reader: Most real estate transactions doesn't get dissected like this, in retrospect by someone who is now a trained professional with lessons to learn from it. Most people never realize how much they've been taken for, and I did a lot of things right that most people working on their own behalf don't.

Why did I make this mistake? I was in, "I don't want to deal with sales people!" mode, even though that's precisely what I was doing, and even if it had been "For Sale By Owner," that doesn't magically change the fact that the person who wants to sell it has become a sales person by that act. I was so focused on "not wasting money with a commission," that I rationalized doing one of the biggest transactions of my life without expert help. Even if I had ended up paying the buyer's agent commission out of my own pocket (I wouldn't have) that would have been at most a quarter of what not having one cost me, and it could have been much worse. Even so, I rationalized my way into completely wasting four to five times the amount I would have spent. The difference between 99 percent of the "do it yourself" crowd out there and me, is that I have subsequently looked at what happened with more experienced and educated eyes, even though what I have now learned makes me want to hide my face in embarrassment.

I could pretend it came out better than it did. This was before I was married, and the only person who was hurt by this was me, and my wife wasn't there, so she doesn't know enough to keep reminding me about what a loser I was (not that she would). But that wouldn't help me not to make the same mistake again. I can have my ego and false illusion of invincibility, of thinking "I'm da MAN!", or I can face my mistakes, learn from what I did wrong, and not make those same mistakes again. I know which bodes better for my financial future, and that of my family. I've decided I can take the ego hit more easily than I can take repeating the same mistakes next time, let alone for one of my clients. I've since acquired one of the most valuable skills anyone can have: The ability to assess when you're beyond your level of competence. I've done a lot of loans since then, and a not insignificant number of real estate transactions, and I keep learning new things with most of them. The largest difference between me, now, and me, then, is that I've learned a lot more about the problems with believing you know something that is not, in fact, true, and how to investigate and research and just plain ask other professionals who have previously dealt with a given issue. This knowledge and experience and skill doesn't come at a price most people consider "cheap". But it will save most likely save you several times what it costs. Offer most people the choice between spending a flat $1000 or a ninety percent probability of being forced to spend between $4000 to $5000, and the rational, logical choice is obvious. It's the cheapest insurance you will ever buy, in terms of real cost to expected benefit - you're getting several times the expected value in return. Now consider that with property values several times higher than that now, the amounts at stake locally are ten times that or more.

Caveat Emptor

Article UPDATED here

The guidelines for this carnival. Please note that they have been amended to give future hosts the explicit right to reject overtly commercial entries and obvious link fishing, spam or otherwise

As always, I arranged the entries that met guidelines into three levels, based upon originality, usefulness to the consumer, and how much thought and effort and research went into an entry. This is the first time in quite a while I've had three entries in the "Highly Recommended" level, and we did get one at the end that was good for a little bit of humor.

It was a close call between the two eligible entries, but I have to give the Host's Choice for Most Useful Information award to Stewart Hsu, who gives us an excellent article directed at investors on the cap rate. Consumers invest also!

Silicon Valley Blogger over at Digerati Life gives us an excellent article on Split Real Estate Markets: Which Homes Are Holding Up In Value?. Property values have nothing to do with what the "average person" can afford. How many people make enough to afford a given property is far more important, and the wealthy didn't go for Negative Amortization Loans and risky subprime.

Your host submits The Doctrine of Delaying The Moment Of Truth, discussing the dichotomy between how consumers should want to treat proper disclosure, and how they do, and how it hurts them.

There were no second category ("Above Average") articles this time, but Tradeline Solutions with 3 Reasons Why I Can't Cry For Countrywide would have made it if they hadn't started directly pitching their services towards the end.

The rest of the "met guidelines" entries:

Green Rising says the St Louis MLS is starting to incorporate information on the environmental sensitivity of a project.

From the UK, Mortgage Blog has a basic article on How To Sell Your House for a Higher Price

The Truth About Mortgage sends us a basic handwaving article about What Causes Mortgage Interest Rates to Move?

Finally, to top it all off, a bit of humor:

One of the pastimes of the real estate community is kind of like something fishermen do: tell stories. But instead of the one that got away, we tell stories about the horrible things we've encountered and the "What were they thinking?" moments. These are always good for a little bit of humor, at least in retrospect. Bigger Pockets has one of the better ones of this genre.

Consumer Focused Carnival of Real Estate will return in two weeks, here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be December 17th.

Just got another in a long series of emails about this horrid product: (identifying details redacted)

Learn How To Make More Money Per Client ($500-$1000)

In This Workshop You Will Learn Why The Most Successful Mortgage & Real Estate Professionals Across The Country Partnering With DELETED?

To Maximize their Income

To Gain and instill Loyalty with current and past clientele

To Exponentially amplify their business success

A Win/Win decision that will impact your business and your client's lives

Because the Demand for Mortgage Protection Insurance is exploding across the country

You notice how "helping your clients" is nowhere on the list of benefits?

Here's another ad of theirs I found online, in the help wanted section:

DELETED is now looking for former Account Executives of Direct Mortgage Lenders, former Account Executives for Title companies & Current Life insurance salespeople that are licensed. DELETED Insurance is offering a new way for Mortgage companies to add an additional revenue stream to their company. We are offering Mortgage protection to them to sell to their clients. You will be responsible of managing your pipeline and territory management. This position is 100% commission. We offer the highest commission splits in the business. First year earning potential can be a 6 figure income. There is also opportunity for you to become an area sales manager in your area. If you are familiar with Mortgage protection insurance or Mortgages, you will know why mortgage professionals will say yes to this product.

Notice how they say they'll take currently licensed people, but those are not the candidates they're really looking for? There's a reason for that. People who have been around the insurance business know about this market sector's history of abuse, and how it always seems to be the sales people who take the fall when the regulators shut it down, while the higher ups walk because they "have it right here in writing that we told those people what they were doing was illegal," while winking at anything that brings in more sales, if not actually encouraging it - just not in writing.

and one more ad, on lendertalk

I am offering Mortgage companies to sell mortgage protection insurance.

Here now simple it is to sell.

1. get your lifie insurance license (sic)
2. sell to past and exsisting clients (sic)
3. Earn 80% of the total commission
4. wrap the first year premium into the loan (emphasis mine)
5. Never have to meet the client
6. everything is done at the time of close
7. Recieve check 72 hours after closing (sic)

average commission is $650

Look forward to speaking with you on this.

At purchase, you can't really put the premium into the mortgage. The only way to do so is fraud. You're either paying for it in cash, or you're paying for it by effectively decreasing your down payment. You cannot do it in conjunction with 100% financing, unless the seller is paying, and I wouldn't want my clients doing so. At refinance, it's at least a possibility. But does a sane financial planner want you increasing your mortgage by about $1000, paying interest on it and possibly kicking the loan over into the next higher Loan to Value category (thereby effectively raising the rate on the whole loan) so that you can purchase the most awful policy of life insurance going? Additionally, many states have rules on buying insurance with borrowed money, and agents knowingly accepting such. California is one of these. This entire pitch element would appear soliciting someone to break the law, perhaps in multiple particulars. Experienced agents know this - newly licensed ones may not.

In order to understand what's going on with this product, you have to understand what Mortgage Protection Insurance is and what it is not. First, what it is not: It is not Private Mortgage Insurance (PMI). Private Mortgage Insurance is an insurance policy that insures the lender against loss, which you pay for as long as you require it. Private Mortgage Insurance can be a required item in getting a certain loan, and as much as I detest it, for loans above 90% of the value of the property, it's the only real alternative as of this writing, for reasons I go into in 100% Financing or Low Down Payment or Low Equity: PMI May Be The Only Option.

Mortgage Protection Insurance is a decreasing term life insurance policy, which is supposed to pay the lender off directly in the event of your demise. It is not required by any lender. If lenders were going to require some insurance policy, they'd require disability insurance, which is needed three times more often than life insurance, with worse longer term consequences for loan viability. Lenders do not waive requirements or fees for Impound Accounts because you buy Mortgage Protection Insurance. As I said, disability is a far more common cause of lender losses than life insurance. But I got email from someone in California who was told that by a loan officer who wanted to sell Mortgage Protection Insurance (FYI, in California it is a prohibited practice to require an Impound Account, or to charge a higher fee for not having one. Yes, this means that we all pay for it with a slightly higher rate/cost tradeoff. But we all have to live within the law, and my point is that purchasing Mortgage Protection Insurance makes no difference to the impound account, despite what this person was told).

This is a very lucrative field as far as making money goes, as you can see not only from the advertisements above but also a on-line search. The ability of practitioners and sales persons to make money is not an indication that a product is bad, but it is a sign of potential abuse. Any time you have the potential for a lot of money by cutting not very many corners, it's a warning sign that says in no uncertain terms to be careful.

The first real objection I have to this product is that decreasing term life insurance is probably the worst life insurance policy that it's possible to buy, and I'm telling you this from the point of view of someone who wants life insurance and can't get it on any kind of reasonable terms (This is not an invitation to a solicitation. I tried very hard to get life insurance on reasonable terms when I was licensed, because I understand what a good investment it can be). First off, it's term life insurance, with all the issues inherent in term insurance: rising cost of insurance, no use of tax advantages, likelihood of voluntary cancellation, likelihood of wasting every single penny you pay. Now add the fact that as your overall cost of insurance goes up, your coverage goes down. It doesn't take any kind of genius to tell you that increasing revenue for decreasing liability is an insurance company's dream scenario, while not being nearly so wonderful from the consumer's point of view. At some point before the insurance company's risk of (decreasing!) payout becomes significant, actuarially speaking, the vast majority of consumers simply cancel. Their premium tables are calculated to encourage this.

Next to consider, we have health considerations. Entropy hits us all. More and more health conditions start happening as we get older. It's scary to think about, but right now is probably the best health you will be in for the remainder of your life, and you're buying a policy of life insurance where the benefits decrease in absolute terms when most people need them to at least stay constant, if not increase. Inflation isn't going to stop because you bought a policy of life insurance. Thirty years ago, $25,000 was a fairly serious policy. These days, most companies don't sell amounts that small, and the ones that do, charge much higher rates for such small policies. The more you understand about financial planning, the more you understand that your ability to profit from life insurance is likely to increase as you age, not decrease. But when you go to buy more later, because you've finally figured all this out, you find out (as I did) that now you've got health conditions that either disqualify you, or raise your rates outrageously. And you want to buy decreasing term insurance?

There are also estate tax considerations. The Congress of 2001 understood the need for estate tax reform, but in order to get the votes to pass it, the advocates had to accept a sunset date of December 31, 2010, after which time everything goes back to the way it was prior to the reform. The people who passed that legislation knew that Congress was going to have to revisit the issue before it expired. Unfortunately, here it is December of 2007, and the current Congress has made it plain they're not going to do anything, which wipes out the possibility of reform prior to the start of the next Congress in 2009, and if nothing happens to shake the current incumbents out of their state of lethargy during the next election, there we are at the sunset date with nothing happening, and the situation resets to where it was before 2001. Ouch. As I've said, I'd rather have AMT reform because estate tax is essentially voluntary, but most people seem to volunteer to pay estate tax, which is and remains the highest rate taxation in the country, and it has crushing implications. The value of a life insurance policy, unless you've done the work necessary to avoid volunteering for estate tax, is part of your taxable estate. In this case, your family will owe taxes on on it, and the lowest bracket is almost forty percent, just on the federal level. Lots of folks assumed that estate tax was going to be going away, as that was the obvious signal sent by the Congress back then, but that's looking less and less likely given the current Congress and the unlikelihood of change in the next one. Maybe it's just me, but I don't see any advantage to paying off the mortgage only to have my heirs forced to visit a loan shark in order to pay the taxes.

But the ultimate killer objection to this product is the fact that it's just plain a bad idea to take life insurance proceeds (that can be completely tax free if you take the steps) and pay them to anyone except your chosen beneficiary. I've gone over this before, in Mortgage Life and Disability Insurance. What your heirs can do with such money, prudently invested, completely shatters any consideration of taking the money and paying off the mortgage, which your heirs can nonetheless decide to do with any policy. Why in the world would you want to take that decision out of their hands with a policy that dedicates the benefit if you should die to that lender? You buy life insurance to benefit your family, not your mortgage lender! Even if you understand nothing about leverage and how it works, this just isn't good financial planning!

So if anyone tries to sell you this product, just say, "no thank you!" and indicate in no uncertain terms that you will not be purchasing this product, and if it's a requirement to get the loan done, you're going to go elsewhere to get your loan. I'm not saying life insurance isn't a good thing - in fact, I'm saying the exact opposite - but you don't want to buy this particular sub-species of policy.

Caveat Emptor

Article UPDATED here

Carnival of Personal Finance

Carnival of the Capitalists.

Deal near on mortgage defaults

Paulson told a national housing conference that this effort involved a "pragmatic response" to current realities as the economy goes through the worst housing slump in more than two decades. The number of homeowners struggling to meet higher payments because their initial introductory rates are resetting is currently soaring.

Translation: The investors are making money on these clients now. They've come to realize that the "hand over fist" action they were anticipating isn't going to happen, and if they insist upon full payment, they're not going to get anything except defaults out of it.

Hit a investor hard enough, with a big enough sledgehammer between the eyes, and they will learn. Real estate loans are not a magic "make money risk free" machine. They are no safer an investment than the underlying property, and usually worse. Of course, an awful lot of lenders didn't have reserves to give them time to take advantage of the learning curve.

I don't write about sports much. Here's something long overdue, but for reasons the article doesn't mention

Walter O'Malley elected to Hall of Fame

O'Malley moved the Dodgers from Brooklyn to Los Angeles after the 1957 season - a baseball version of the California Gold Rush that helped open the West to the national pastime. He received the minimum nine votes necessary for induction.

"Mr. O'Malley was a visionary by opening the gates to the West Coast. He linked the entire nation to the game of baseball,'' Dodgers Hall of Fame manager Tommy Lasorda said. "What a contribution he's made.''

Now, here's why O'Malley deserves induction in two words: Jackie Robinson.

This is to take nothing away from Mr. Robinson, who was by all reports a fantastically talented ballplayer as well as having the heroic temperament necessary to put up with the abuse heaped upon the first major league ballplayer (outside of the "Negro Leagues" as they were called at the time). But as gifted as Mr. Robinson was, he needed one thing more in order to break the color line:

He needed someone willing to hire him.

That someone was Walter O'Malley, who, in the wake of World War II's end, hired not only Jackie Robinson but several other non-white ballplayers before he even knew if Jackie Robinson was going to work out. Abuse was rampant, not just for Robinson and the other players, but also for O'Malley. Many season ticket holders canceled in protest of O'Malley's decision. It would have been far easier had he given up, or stopped at only one. Nonetheless, he stuck to his guns and continued the process of hiring the best talent he could find, regardless of skin color.

And not only every professional athlete who has benefited from this, but the entire country owes him a debt of gratitude for taking the first concrete step toward ending discrimination in this country. Before any of the Civil Rights Acts (1957, 1964 and 1965), before Brown vs. Board of Education, even before the military was integrated by President Truman's executive order. When the history of civil rights is written, Walter O'Malley deserves a significant mention, right alongside Jackie Robinson.

Sudan President Pardons British Teacher

So she's pardoned for something that shouldn't be a crime at all, after she's already served half the sentence, and she has to leave her job and the country, and that's supposed to make me feel better about Sudan?

Killing bullet for Venezuelan democracy dodged, for now: Chavez loses referendum

Humbled by his first electoral defeat ever, President Hugo Chavez said Monday he may have been too ambitious in asking voters to let him stand indefinitely for re-election and endorse a huge leap to a socialist state.

"I understand and accept that the proposal I made was quite profound and intense," he said after voters narrowly rejected the sweeping constitutional reforms by 51 percent to 49 percent.

Considering Chavez' history of electoral fraud and intimidation, the actual vote must have been something of a landslide.

Chavez, who was briefly ousted in a failed 2002 coup, blamed the loss on low turnout among the very supporters who re-elected him a year ago with 63 percent of the vote.

Translation: Even his former supporters can't see voting his way any longer, even if they have been intimidated into not voting.

Monitors say Russian vote unfair

Foreign election observers and Russian opposition groups accused authorities Monday of manipulating a sweeping parliamentary victory for the party of President Vladimir Putin, who hailed the vote as a validation of his leadership.

In other news, water is wet and dog bites man.

The people of Russia put off worrying about Putin's authoritarian tendencies just a little bit too long.

At this point, he's not going away peacefully.

Many voters said they were pressured to cast ballots for United Russia, said Alexander Kynev, a political expert with the election monitoring group Golos. In Pestovo in the western Novgorod region, some said their they ballots already were filled out for United Russia, he said.

In Chechnya, where turnout was over 99 percent, witnesses reported seeing election authorities filling out and casting ballots.

It's amazing how 95% of those whom he brutally repressed decided to vote to keep him in power!

And if anyone believes this, contact me. I've got a great deal on land in Florida.

Too funny not to mention: Clinton Cranks Up Rhetoric Against Obama

Hillary Rodham Clinton suggested Monday that Barack Obama has too little experience and perhaps too much ambition

As opposed to some other unnamed candidate? Except, of course, for the "perhaps" part.

The introduction of the new puppy went very well. This was the right thing to do for my elder daughter, and not co-incidentally, a certain little black and tan dachshund, whom my daughter named "Julia." Also, Mellon hasn't whined the last couple nights with the puppy for company, something she had been doing since Thing died. I told my wife this was the best idea she's had since she married me.

The new puppy is a chewer, which we'll have to put a stop to, but she's also a cuddler, which Mellon isn't. It was kind of nice to read on the couch with a warm puppy last night.

Here's a picture, taken about 10 seconds after my daughter first saw Julia, who climbed right up into the position you see.

The younger daughter is insanely jealous of course, but she's not old enough for a puppy of her own. But 1) She's learned enough not to hurt the new puppy, and 2) that will furnish me an additional argument on my side for another puppy in a couple of years when she is ready.

Got an email from the guy I got the puppy from the next day. The night I picked the puppy up, her daddy tangled with "the vet said (the tooth mark) was from a HUGE coyote or the mountain lion that's been seen in the area", and evidently gave as good as he got. One tooth mark on him. Blood in and around his jaws. Coyote or Mountain lion, impressive and lucky for a twelve pound dog, even of a breed that was created to take on badgers in their dens.

One of the worst things about the loan process, and indeed, found throughout the whole real estate industry, is the idea that if you can just delay telling the client about something they won't like, it's more likely they'll continue with the transaction anyway.

The horrifying thing from a consumer's perspective is that it works.

Hundreds of thousands, if not millions or tens of millions of people, become victims of this common psychological fallacy every year.

This makes use of the fact that longer something goes on, and the more they do towards it, the more heavily that people become psychologically invested in that particular goal, even to the point of obsession. This happens in other areas, too. For instance, whether you're for or against the Iraq War, you've probably noticed that as time goes on, and the more the other side of the debate does to further their position, the less they're likely to be disposed towards consideration of yours, the more shrill they get, and the more hardened in place their mental armor, regardless of the facts. I'm not writing this to take a side; I'm writing this to illustrate that this is something both sides have observed - accurately - about the other.

So what is the practical effect of this in the real estate world? The honest practitioner who tells you right away that something is wrong loses the business, while the shady character who pretends everything is proceeding right on course gets rewarded. If it's a loan, in neither case is the loan they initially talked about going to be delivered, but by pretending that it is until such time as the final papers are ready, the shady character still gets the business. The practitioner who tells you the truth, and tells it right away like they should, behaves like everyone says an ethical practitioner should behave, loses the business, while the crook who pretends nothing is wrong still gets paid, because when the final documents are submitted they're still not going to point out the differences - so if you don't spot them yourself, you're going to be unknowingly signing far different documents than the loan you initially agreed to. I've said this before, but in loans, it's good if they tell you about problems right away.

In the practice of buying and selling real estate, agents often face analogous situations. Leaving aside the fact that the listing agent is working for the seller and not the buyer, you need to understand that if a buyer's agent conceals bad information about a property until after the contingency period has passed, they've got a much higher probability of a sale, and therefore getting paid. A good agent will tell you about all the issues they see on every property as you go, while the agent you might wish on your worst enemy is enthusiastic about every property. The former is due diligence and properly discharging that fiduciary duty I keep writing about, trying to make certain the client understands what they're getting into because there is no such thing as a perfect property. The latter is about grabbing the easiest commission they can, as quickly as they can. A good buyer's agent will be present for all inspections if they can; a bad one is too worried about getting sued. A good buyer's agent wants that inspection and appraisal and title report done the instant the purchase contract is fully executed, if possible, and goes over them with you. A bad one delays ordering them, and mails or hands them to you without comment. There is a seventeen day contingency period for loans and inspections on the default contract; if anything is concealed longer than that without there being an obvious reason why it couldn't have been discovered until that moment, you have been the victim of such a practice. It isn't like them not telling you means the property doesn't have that problem; it only means you don't know about it yet. If you buy the property in ignorance of a defect, though, it will still be present and you'll still have to deal with it - and without any help from the current owner who has gone their merry way with your money.

I get emails every week from people who have been burned by both of these, and there isn't a way to fix it retroactively, and I only have a few thousand regular readers. This stuff happens all the time, and quite often, people don't even realize it has happened to them. So how do you defend yourself from this situation, knowing that this is where the incentives lie?

For loans, ask questions, ask for Loan Quote Guarantees that mean something, and apply for a back up loan. Be forgiving if your loan person tells you about a difference between their quote and the final numbers right away, particularly if they tell you why. Most important of all, read your final closing documents carefully. Until then, they can pretend that everything is all sweetness and light, and the crooks do.

For property, it's a little bit harder and starts earlier, when you're looking for a buyer's agent. Go out looking with several, and keep looking at least until you find one that tells you bad things about every property as a matter of course. There really is no such thing as a perfect property. Never use the listing agent as your buyer's representative, as they have an obligation to get it sold, for the highest possible price, and telling you the whole truth isn't conducive to that. Always shop by purchase price, never by payment, which varies with loan rates anyway. And most importantly, go over those reports yourself. Be there for the inspections and appraisal, and go over all of those and the title report as well. Above all, make certain you never sign anything without a full understanding of what it says. Many times, critical disclosures get hidden among trivial stuff that happens with every purchase, so they can catch you off guard.

Real estate transactions are for a lot of money, and people in the professions do get paid thousands of dollars per transaction. Nonetheless, trying to save yourself commission costs is far more likely to cost you more money than it is to save it. But with such large amounts at stake, you want to take precautions against being sold a fairy tale that has no chance of actually ending up with happily ever after. The real world is what it is, whether or not they tell you about it. If someone made an honest mistake about something, the sooner they tell you about it, the more likely it is they are honest. If they delay telling you, all by itself that's a stronger indictment of their ethics and practices than anything a grand jury can do.

Caveat Emptor

Article UPDATED here

Ken Harney has some welcome news on Move afoot to end uninvited mortgage pitches

To a certain extent, these are a good thing for consumers. However, it gets way overdone.

What happens is this. Let's sat I get a client into my office, they apply for a mortgage, and I run their credit. The three credit bureaus, Experian, TransUnion, and Equifax, then turn around and sell the fact that this person has just had their credit run under a mortgage inquiry code, together with some of their more easily obtainable information.

Result? My clients are besieged with mortgage pitches. For months, every time they answer the phone it's likely to be someone else who has paid the money for a "red hot mortgage lead".

Needless to say, my clients aren't happy. I have had several clients come out and accuse me of selling their information to telemarketers. Now, the fact that I encourage folks who come here to shop their mortgage around notwithstanding, it would be shooting myself in the head to sell their information to other providers. I know what I've got, I know what I quoted them, and I know I intend to deliver. The only thing that will stop me is if they do not, in fact, qualify for that loan, despite leading me to believe they will. If someone is satisfied with what I intend to deliver, far be it from me to tell them to shop around because they might be able to do better. My family and I do have to live, you know. I won't stop or prevent or hinder them from shopping their loan around (which alone sets me apart from 90 percent plus of the loan providers out there), but telling them to do so is just not part of my job description at that point in time. It's like expecting the mechanic as he starts working on your car to tell you that you might be able to get a better deal somewhere else.

Indeed, if I had the option of paying extra for that credit report so my clients aren't besieged by unsolicited offers, I would take it every time. Not only would my clients be less harassed, but the prospective providers who pay for that sort of information are not precisely known for their sterling character, if you know what I mean. I've had clients tell me stories of people determined to sell them negative amortization loans without informing them of the drawbacks. I've had clients tell me of people determined to get their business that they told them of loans that do not exist, often with conspiratorial pitches like, "This is the loan they won't tell you about! You have to ask for it!" Well then, why are you offering it? By all means, put it out there on the table and let's compare the two loans by cranking the numbers, but the vast majority of the time it turns out the reason you have to ask for that sort of loan is that it's a piece of garbage and no self-respecting loan professional would expect you to accept such awful terms.

I'm going to tell you about the numbers of such pitches. Because each of the big three credit bureaus is innocent of the actions of the others, it starts in three places, each of which pitches to the prospective providers that it sells the information no more than four places. I don't know why the number four became magic, but it seems to pop up everywhere in the mortgage leads industry. So each of them sells to four, and there are three of them. That's twelve people you're going to be getting a phone call from right there, and never mind that you're on the "Do not call" list.

But what's going to happen the majority of the time is that somewhere around ten of those who initially buy the information are resellers. They pay sixty bucks a pop, and turn around and sell the information to four other folks at twenty-five bucks a pop. Some of these places are in turn resellers; indeed, some of them got this information directly, which is all that keeps the whole process from snowballing until people are besieged by what seems like every last person with a valid mortgage license for the area. So twelve, forty-eight, hundred forty four, four hundred thirty two wannabe mortgage providers swarm each person I run credit on. I try to remember to warn them, but there is nothing I can do to stop it from happening, however much I might want to. You can, if you'll contact the opt out beforehand, but no mortgage provider can opt you out of this. We have to put the correct information in the credit pull in order for it to be accepted by the lenders.

Now do not get me wrong. It is a good idea to shop your mortgage and I have even repeatedly told people who come here that they should actually sign up with at least two prospective providers, a main and a backup, because at the end of the process the power is all in the loan provider's hands and it is often abused. Having two loans ready to go defuses most of the potential for abuse, leaving aside the issue that I guarantee my quotes in writing when the client decides they want it and gets me enough information to lock the loan.

But there is a major difference between that and setting this pack of wild ravening prospective mortgage providers on my clients, willing to promise the sun, the moon, and all of the stars and planets if my clients will simply drop me and sign up with them instead. There is a major difference between agreeing that shopping the loan is a good idea, and throwing my clients to a pack of hundreds of telemarketers who call for months - sometimes as long as two years, so that they seem to be part of the next wave the next time those folks need a real estate loan - and bulk mailers who are almost singlehandedly responsible for global deforestation and accelerated filling of our urban landfills. If it does happen, I will be pleased to see it end.

I'm also gratified to see National Association of Mortgage Brokers on the correct side of this:

But the National Association of Mortgage Brokers doesn't agree. When credit bureaus sell overnight trigger lists to third-party lead generators, the brokers argue, they fail to comply with a key provision of the Fair Credit Reporting Act: that anyone receiving consumers' personal information must be in the position to make a "firm offer of credit" or have previously received permission from the consumer to obtain credit file data. Third-party lead generators obtain no permission and are in no position to make any credit offers, firm or otherwise.

There is a world of difference between suggesting you shop your mortgage and making certain you shop hundreds of providers, whether you want to or not.

I would suggest contacting your congresscritter to register your support for this proposal.

Caveat Emptor


P.S. In the meantime you can stop it from happening to yourself at www.optoutprescreen.com or by calling (888) 567-8688.

Original here