Dan Melson: March 2014 Archives

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 the lender 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 (sixty months is most common), 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 if they do all it means to you is that other people will join in your misery if the payments aren't made on time. 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, the non-resident ex-spouse is 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 responsible the mortgage, it will hit your debt to income ratio. This can mean that you will not be able to qualify for another mortgage. In my experience, it is rare that it does not. 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

Original article here

I sold my house in (state) in august 2001 I hired a title attorney whose (local company X) acted as a agent for (national company Y). The facts are that there were errors and omissions which led to negligence in the performance at the closing of the property. The property taxes for the year 2000 were not paid. The title company did not do their duty and gave clear title to the buyer. Now, more than 5 years later Company Y is claiming I owe them these back taxes plus accrued costs. I would kindly appreciate some feedback

Yes, you owe the money.

The title insurance policy you bought insures the person who bought the property. Property taxes are part and parcel of all land ownership. A reasonable person should have paid those taxes. But they didn't get paid.

This doesn't mean that someone didn't screw up. Every title search needs to include a search for unpaid liens that includes property taxes. That's just the facts of the matter.

However, this does not relieve you of your duty to pay those taxes in full and on time. If it was an obscure mechanics lien recorded against your property erroneously for work that was never done, you'd have a great case. If it was for stuff that you paid, and had reason to think you paid in full even though you were short, you might have a case. But not stuff that every reasonable property owner knows has to be paid, and didn't get paid at all.

Let us consider what would have happened if you still owned the property. The county would be sending a law enforcement official around with delinquency notices, which would include interest and penalties for late payment. If those weren't paid, they'd send law enforcement around another time with a tax foreclosure sale notice. You would have to pay those taxes.

It's no different because you sold. Because property taxes are a valid existing lien on the property, albeit one they missed during title search, they paid it to clear the buyer's title, as the policy requires them to do. On the other hand, when an insurance company pays a bill like this, and title insurance is insurance, they acquire the right to collect payment via subrogation. This fancy word just means they paid the damage on behalf of someone, and now they have the right to collect payment, just like auto insurers who pay for the damage to your vehicle and go sue the party at fault, for which that person's liability insurer usually pays. In this case, the person with the liability to pay that property tax bill is you. I'm not an attorney, so I don't know, but there might be a case you can build against the person who did the title search for the interest and penalties that have accrued since the search. Before that, the bill was all yours, and given that it was for 2000, should have been paid before August 2001. On the other hand, that title company might not have had a duty of care to you, despite the fact that you were the one who paid the bill, as the insured was your buyer, not you. Furthermore, the cost of paying the attorney can often go to several times the cost of paying the taxes and penalties. You'd need to talk to an attorney for more information. You might want to call company Y and ask if they'll settle for the bill as of the sale date, because they don't want to pay for an attorney any more than you do, and they did screw up, and if they hadn't, you would have paid the bill back then, right? Company Y can then recover the balance from their agent, company X.

Any lien that exists before the sale, discovered or not, is your responsibility. The only time that I think you are going to get off the hook is if you are dead and your estate probated and distributed before the lien is discovered. Basically, you've got to die to get away with it. Perhaps intervening bankruptcy might do it as well. I don't think so, but I'm not a lawyer. If you had died, the title company would still have paid, as the policy requires to protect the buyer, but would have had no choice but to eat whatever amount they paid, because there would be nobody alive who they would have a valid claim against.

Caveat Emptor

Original here

I've gotten several emails to articles recently having to do with straw buyers, and more search hits. Straw buyer fraud is popular because people want a better loan and many don't see anything wrong with it since "we intend to repay the lender". However, they are intentionally deceiving the system that lenders have evolved that prices loans in accordance with the risk involved in a given borrower and situation. Furthermore, straw buyer activity opens you up to potentially unlimited legal liability. All of those wonderful consumer protections that our government is so happy to enforce go out the window if you commit this or any other kind of FRAUD. Furthermore, straw buyer scams are one of the biggest potential "stings" in schemes perpetrated by scamsters. You can trivially find yourself liable for much more than the property you have a mortgage on is worth.

A "straw buyer" is someone whose credit is used to purchase a property and secure financing, but whom isn't actually going to own the property. Sometimes they cooperate willingly and sometimes they are victims of identity theft, but it's always illegal. It is also, as these two cases illustrate, hazardous to your financial health.

The most common scenario is Person A wants to buy a property, but convinces person B to step in as a "straw buyer" to obtain terms that Person A could not. Alternatively, person A steals person B's identity, and forges all of their information on the purchase and loan papers. In both cases, person B is not the person really purchasing the property, but their name is on the mortgage. In the first case, person B is fully responsible for the loan and everything else that goes on, as well as having committed FRAUD. In the second case, they've got a long hard row to hoe to convince everyone that they weren't involved, because with hundreds of thousands of dollars on the line, it is worth the lender's while to be as hard-nosed as possible. The lender does not particularly care about justice in this case; what they want is the money they loaned out to get repaid.

The closest thing to benign that happens in straw buyers is when one relative, let's call him Junior, convinces another relative, call her Mom, to use her good credit so that Junior can afford the payments on a house he really does want to live in. Please note that this is still fraud - you are deceiving the lender for the purpose of getting a better loan than you would be able to obtain if you told the truth. Good agents and good loan officers want no part of this, because it doesn't matter how benign the intent, the fact of the matter is that it is still fraud. The lender discovers it, or if payments get missed, that agent or loan officer is legally toast. Note that this is different from Mom buying Junior a property for Junior to live in, or helping Junior afford property Junior wants to buy. There is sometimes a thin but always bright line between legal and illegal activity, and starting to deceive people - telling anything less than the whole truth and nothing but the truth - is always a sign you have stepped over the line.

Once you get away from this most nearly benign straw buyer scenario, things degenerate quickly and there are many scams and frauds that can be pulled. Many of them involve appraisal fraud. Most common is that someone persuades you to allow them to apply for a loan on your behalf to buy a property for them, which has supposedly appraised for $700,000. You end up responsible for a $700,000 loan on a $400,000 property, and the people who pull this scam walk away with $300,000 (or more) free and clear.

There are also all kinds of scams involved with people that want someone else on the mortgage, but themselves on title. If you quitclaim off of title, this does not absolve you from the mortgage. In general, the only way to absolve yourself from the mortgage is for them to refinance in their own name, and since they are claiming they couldn't do this, that just isn't going to happen. It's one thing for one spouse to qualify for the mortgage on their own but legally quitclaim it themselves and their spouse, husband and wife as joint tenants with rights of survivorship. It is something else entirely to quitclaim it to Joe Blow (or Jane Blow), but allow yourself to remain on the mortgage. If Mr. or Mrs. Blow does not pay the mortgage, guess who is liable?

I get hits on this site every day asking, "How do I remove myself from a mortgage?" The answer is that you don't. The lender has your signature on the dotted line that says "I agree to pay..." The only way they are going to let you off is if the people remaining qualify for the loan without you - by which I mean a refinance. Even most loan assumptions (for loans where assumption is possible and approved) are subject to recourse for at least two years, usually longer. This is one reason that for divorcing couples, it needs to be part of the dissolution agreement that the property will be sold or mortgage refinanced before the dissolution is final to protect the spouse that isn't keeping the property (they're often entitled to some cash from the equity, as well).

There are good and strong reasons why straw buyers are illegal, reasons that start at fraud and run through confidence games of all sorts, which are also fraud, albeit with a personal as opposed to corporate victim. The games that can be played on you when you cooperate with a straw buyer request start at major financial disaster, and often include felony jail time.

Caveat Emptor

Original here

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

Thanks,

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

B.S.

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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



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

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



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

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

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



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


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

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

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

Caveat Emptor

Original here

I've seen a fair number of questions on impound accounts in the last several months. An impound account, also known by the confusing term escrow account because the lender is holding it in escrow, is money that you give the lender in order to pay the property taxes and homeowner's insurance on the property when they are due.

The first thing to note and emphasize is that money going into an impound account is not a cost of doing the loan. It is your money. You own it. It will be used solely to pay your property taxes and your insurance. At the conclusion of the loan, whether you paid it off with cash or refinanced or or sold the property, you get any money left in the account back. The lender is required to send you the check within sixty days of loan payoff.

An impound account is meant to address any lender's two largest worries in regards to a loan: Uninsured destruction of the property or losing the property to an unpaid property tax lien.

The problem with an uninsured destruction should be obvious. The structure is destroyed or heavily damaged and no money exists to rebuild. The borrower doesn't have it and the bank isn't going to throw good money after bad. Here in California, the average property is worth maybe $500,000 or so, but without the home sitting on it, the property may only be worth fifty to a hundred thousand. Within ten miles of my office sit hundreds, probably thousands, of new homes that sold for $700,00 and up even though they sit on a lot that's less than 5000 square feet (0.115 Acres). Many condominiums are over $400,000. Given the location, a 5000 square foot lot may be $200,000, but it's not $500,000, and the lender will take a loss even on the $200,000 because they're not in the business of real estate. They loan $500,000, it burns down without insurance, they lose $350,000. People also lose their jobs over this.

Property tax liens are a major issue as well. They automatically take priority over everything else, and the rules about what the condemning governmental entity has to do are much looser than they are for the bank. They will usually do quite a bit over the minimum, but they will sell the property most of the time, no matter how minimal the best bid. Minimum auction amounts and many other things mandated for when lenders sell the property go out the window when it's the government. Many times this situation can require the lender to step in and pay the property taxes, intending to turn around and sell the property themselves merely to take a smaller loss.

A lender wants you to pay property taxes and homeowner's insurance, and they want to know you've paid them. They encourage this via the method of impound accounts. The theory is simple. Every month you pay the lender, in addition to your actual loan payment, an amount equal to your pro-rated property taxes and homeowner's insurance, and they will take this money and pay those bills when they are due.

No lender is perfect about these, and some are less so than others. A large percentage of the biggest and worst messes I have ever dealt with came about as the result of the lender somehow messing up the inpound account. Others have arisen because even though the lender acted within the law, the client got angry about something. Sometimes it's for a good reason, sometimes it's not.

Because lenders want you to have them, however, they are ubiquitous, and every lender I know of charges extra on your loan if you do not want to do an impound account, unless you live in a state which prohibits the practice. Usually this amount is about one quarter of a discount point. On a $500,000 loan, this amounts to a charge of over $1250 just to not have any impounds.

On the other hand, in places where property values are high, you can have to come up with $5000 or more at loan time just to adequately fund an impound account. Here's a computation of how much you need to fund it works. The lender will divide the annual property taxes and homeowner's insurance by twelve. This will be the monthly payment. The lender is legally able to hold up to two months over the amount required to make the payments, and they want this reserve. So they will look at the projected payments for the next year and figure out how many months they need up front to always have two months worth in reserve. I'm writing this on February 3, and California taxes were due on the first even though they are not past due until April 10th. But the lender uses February first to calculate even though they won't actually make the payment until early April (they earn interest on the money, whether or not they pay any. Some states require that interest be paid, but it is typically something small and worthless like two percent).

February first is usually when the lenders here in California figure will be the low point of the account for the whole year. But if you closed on a loan in February, you wouldn't make your first payment on that loan until April first, and of course, they cannot count on you making your February payment right on the first. So they are going to figure that you will make payments on the first of every month April through January, ten months, before they have to pay your property taxes. Since they have to pay twelve months, and they get to keep two in reserve, that's fourteen months of payments they want to have on February first. Fourteen minus ten is four months that you will have to come up with in advance, or have rolled into the cost of your loan. On a $500k property, that's about $2000 for property taxes even in a basic tax zone, and if your insurance is $1200 per year, you'll have to come up with another $400 for that. $2400 into the impound account.

It gets better. Because the property taxes are due within two months of your purchase, you're going to have to come up with your pro-rated share right up front as well as paying for an entire year of insurance. Since California requires six months property taxes at a time, that adds almost another five months taxes and twelve months insurance up front. Total cost of this in the example given: $3700. Actually, this is due whether you have an impound account or not. Total you need just for property taxes and homeowner's insurance: $5900.

It can be worse. Suppose you were closing on a refinance in October. You originally bought in February. You are only going to make two payments (December and January) before the insurance is due, so your impound total for the insurance alone $1000 for insurance. You are going to have to come up with $3000 to pay the first half of your property taxes, plus because you only have two payments before the second half is due, another $3000, or six months payments for that. Total due, $7000.

There are really only two methods for coming up with the money for an impound account: Bring in the cash from somewhere else, or have the lender loan it to you, adding it to your loan balance. Except in rare circumstances where you are refinancing the same property with the same lender (and usually not even then), existing impound accounts cannot be used to "seed" the new account. This is because it's your money, held in trust. The rules for these accounts are rigid, and I'm not certain I understand well the rules about whether a bank even has the option of rolling one impound account into another.

This typically means that you have to come up with a good chunk of change out of your pocket for a short period, or add the additional amount into your loan, where you'll be paying for it as long as you have a loan on the property. Every situation is different, but most often I prefer to either come up with the money myself or not have an impound account. The extra charges may be sunk as opposed to refundable, but I'm not paying interest for thirty years on thousands of dollars.

Furthermore, if you are adding the money to create the new impound account to your loan balance, since it's going in before the computation of points, it can add another $50 to $100 to your costs of the loan per point you're paying. Minor in and of itself, but adding insult to injury if the loan has points involved. More to the point is that adding impound creation it to your loan balance means there may be a couple years before your balance gets as low as it was before the refinance, just from this. Indeed, the fact that it raises your loan balance is the worst thing about the impound account issue. On the other hand, unless you have a "first dollar" prepayment penalty, what you can do is turn around and put the check for the previous impound account when it arrives into paying down the new loan. It typically won't bring you even, and it won't reduce your contractual payments on the new loan (although that is usually a good thing), but it will ameliorate the damage to your loan balance.

Initial loan closing is not your only opportunity to start an impound account if you want one. If you don't have one to start with, the lenders will be very happy to let you start one later. I've literally never heard of a lender saying anything but "YES!" (usually with a pump of the fist) to a request for an impound account. Why? Because now they know that your taxes and insurance will be paid, and get to use your money, and after you paid a fee for no impounds. Oh, happy banker!

If you want to cancel an impound account, expecially within a year of whenever the loan was funded, you can expect to pay the "no impounds" fee, possibly prorated, but usually just the whole thing. Roll thousands of dollars into your loan balance where you'll be paying interest on it and then pay a lender's charge for no impounds? Ouch!

Can you force the bank not to do any of this? Not really. They don't have to lend you money. Yes, they are in the business of lending money, but if they don't loan it to you, they'll find other uses for it. Somebody else is always willing to accept the bank's terms. You try to violate guidelines that lenders have established in order to lend you the money, and you'll be told, "Sorry but you don't qualify." The golden rule of loans is that those with the money make the rules.

Furthermore, those lenders who didn't require this would be at a competitive disadvantage as regards rates, because their loan portfolio would be a significantly riskier one, and they would have to increase their rates to compensate for this. You could qualify for a better rate or lower closing costs somewhere else. Better to not argue. Assuming that I already have an impound account, all the extra I lose is a maximum of sixty days interest. Two months interest on $5000, even at ten percent, is $83. That's a lot cheaper than any of the alternatives.

Caveat Emptor

Original article here

If you read the papers and the congressional record on the 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 here 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. On the day I originally wrote this, for thirty year fixed rate conforming loans, 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 more than three points in the one direct lender retail 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 funding the loan. 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 before, and twelve months before that it was more like $4.00. But there was a lot of money chasing not very many borrowers just then, and it hasn't changed much since. 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 Questions you should ask loan providers. That is another change for the worse in the new lender environment, but the way. When I originally wrote this, I could lock every loan upon application and guarantee the price immediately. As I explained a few months ago, that is no longer the case. The lenders have begun charging me (and therefore my future clients) too much for loans that are locked but not delivered. It's hard to blame them, but it's still not a beneficial change for consumers.

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. 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. There is always a tradeoff between rate and cost in every loan. 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 apparent (not real!) advantage over brokers. Let's consider an actual real world example: A few days before I originally wrote this, 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)

item
payoff
closing cost
origination
new balance
payment
lender
$300,000
$2900
$3060
$305,960
$1859.05
broker
$300,000
$2900
$0
$302,900
$1840.46

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:

loan
payoff
closing cost
origination
yield spread
"total cost"
new balance
payment
lender
$300,000
$2900
$3060
$0
$5960
$305,960
$1859.05
broker
$300,000
$2900
$0
$2726.10
$5626.10
$302,900
$1840.46

First, note that the actual amounts owed by the consumer after closing the broker originated loan are exactly the same whether yield spread is counted as a cost or not. It makes zero difference to what the consumer actually pays. The loan amount is the same, the interest rate is the same, the payment is the same.

Why does the government want to make it look like the broker loan is more expensive than it really is? In the second example, appears at first glance 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 officially considered 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 big bankers who bundle million dollar campaign contributions made out!

Let me make something explicitly clear: Low cost real estate loans cannot be done without yield spread. The loan provider has to make enough to stay open. The closing costs are real, and the people performing those functions need to get paid or they won't do them. If they don't do them, the lenders will not approve your loan. There are three ways to pay these costs: yield spread, out of the consumer's checking account, or (on refinances with existing equity) by adding those costs to the loan balance, where they are still paid plus the lender gets interest on them!

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 "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 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, even though it's an accounting phantom never really coming out of the borrower's pocket in the first place, 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.

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 except major banks. 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 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

Original article here

Many people are unaware how profoundly lending policies influence the market for residential property and the various kinds of housing and methods of construction. So I am going to go over the various gradations in available loans for various types of property.

Pretty much everyone is familiar with the standard house, built on site, mostly by hand, from basic materials. Called "stick built" to differentiate it from other building methods, this is the default housing that everyone is familiar with. Once emplaced upon that property, there is no real way of getting it off the property intact, and therefore it is appurtenant to the land. This might come as a shock to people who concentrate on the house, but when you buy a property, you are buying the land upon which it sits - the lot - and the structure comes along because it is appurtenant - attached and cannot be moved off easily. It is this type of property which has been at the forefront of liberalization of lenders loan policies, precisely because it is both universally desirable and non-portable. That land is defined by its boundaries. It isn't going anywhere. The structure isn't going anywhere that the land isn't, because in order to remove it, you pretty much have to destroy it. It's built on a several ton concrete foundation, which, if you nonetheless manage to pick it up, is still overwhelmingly likely to crack if not disintegrate, not to mention ripping out plumbing, electrical, and other connections.

Because the land isn't movable and the structure isn't either, lenders have gotten comfortable that you're not going anywhere with that structure. Because the combination is so universally desired among consumers of housing, they have gotten comfortable with giving loans for almost the full purchase cost of the property, knowing that it takes a special set of circumstances for them to take a loss on the property, and they can charge higher interest rates in order to insure against that. (I am using insure in the statistical, law of large numbers sense that is the essence of insurance.)

Once upon a time, lenders treated condominiums far less favorably than single family detached housing. But it was always obvious that condominium units weren't going anywhere, and in recent years condominiums, in all their incarnations, have reached a level of acceptance among housing consumers that assures their marketability, and even the price discrimination against high-rise condominiums is gradually dying out. It is far less than it was just a few years ago. For condominiums four stories and less, the only difference their status made until recently had to do with required expenses and Debt to Income Ratio: There is no homeowners insurance requirement, because the association dues pay for a master policy, but there is the additional expense of Association dues to charge against the borrower's monthly income. As far as Loan to Value Ratio goes, condominiums are precisely like single family residences, and you can find the same loans just as easily for them, at the same rate cost trade-offs, or very close. More and more, the fact that it's a condominium is becoming irrelevant to loan officers. Until Fannie and Freddie recently reinstated the requirement, most lenders had completely eliminated the "percentage of owner occupied units" guidelines that used to be such a bugbear for getting condominium loans approved. FHA has also always had the requirement for sixty percent owner occupancy to get loan approval. For these reasons, among others, condominium prices have taken off. In the last fifteen years, they have gone from being about half the price of a comparably sized and furnished detached home, to the point where they are basically proportional to detached single family homes, and in some areas, higher price per square foot due to the fact that they are a viable less expensive consumer's alternative due to (usually) fewer square feet to the dwelling, and so less expensive overall if not proportionately so.

(Fannie and Freddie reinstituted the requirement to make it look like they were doing something constructive in response to their bankruptcy. But truthfully, the only real effect it has is if the complex isn't fifty or sixty percent owner occupied now, it never will be because people who want to be owner occupants can't get loans because they don't have the down payment for other loan types, while landlord investors don't have any problems with the down payment requirements for portfolio lenders or commercial loans. Result: Fewer people can take the first step onto the property ladder.)

The first real step away from the "stick built' house is the modular dwelling. These are piece-manufactured at factories, and assembled in pieces on site. Usually, it's something like one entire room-wall in a piece, with all the necessary plumbing and electrical already embedded in it, although sometimes it does take the form of entire rooms. Think of it like modular furniture, which is manufactured in individual pieces, but those pieces are intended to be put together so that instead of an arm chair and an ottoman, you have a chaise lounge. The important difference is that unlike modular furniture, once that modular house is assembled on that foundation, it's not going anywhere. Try to disconnect the plumbing hookups, or disassemble the pieces, and all you will likely have is much smaller pieces than you started with. Once assembled, modular housing isn't going anywhere. It is permanently attached to that land. For this reason, lenders are in the process of phasing out pricing discrimination against modular housing as opposed to stick built homes. For some lenders, modular gets the same exact loans as stick-built, for a few, there is a hit to the rate-cost trade-off that may be anywhere from a quarter of a point to a full point. Over half of the residential lenders in my database are happy to do residential real estate loans for modular housing on pretty much the same terms as stick-built. 100% percent financing (when that was available), interest only, even the horrible negative amortization loan were all available on modular homes. As a result, prices of modular homes may be a couple percent lower than those of stick built properties, but they are very comparable and the the investment potential is just as strong and there is no large amount of difficulty getting them sold due to the difficulty of getting a loan. Some lenders still don't want to touch them, but it's pretty easy to find lenders that will, and on the same terms as they do any other property, so the lenders who still will not lend on modular properties are hurting no one but themselves by dealing themselves out of possible business.

The next step away is manufactured housing on land owned by the home owner. Technically speaking, modular housing is a subset of manufactured housing, but when most lenders are talking about manufactured housing, they are talking about homes built at the factory in entire sections, and assembled with only a few total joins at the home site. True manufactured housing is portable, where modular really is not. If you're in Idaho and decide to move that house to your property in Georgia, it's doable.

Because it is portable, as you might guess from things I've said here about the prevalence of attempted scams that lenders have had issues with people dragging them off. You'd be right. Lenders file foreclosure papers on the land, and the homeowner metaphorically backs up the pick-up truck and takes that residence somewhere else, leaving the lenders with a piece of land and no residence. Because there is no longer a residence on it, it's not worth anything like what it was when there was a residence on it. Lenders have lost multiple hundreds of thousands of dollars on individual properties around here. You get burned enough times, you start getting wise. Those real estate lenders who will lend on manufactured homes require a laundry list of conditions, and even if they are all met, they won't loan 100 percent of the value, or anything like it, and there will be an additional charge of at least one full point of cost on their regular loan quotes. Cash out loans are typically limited to sixty-five percent of value, making it hard to tap equity. Furthermore, due to accounting standards and depreciation, Fannie Mae and Freddie Mac made a rule that manufactured homes were limited to twenty year loans, which drastically limits not only the type of loans available to their owners, but also has the effect of restricting what they can afford to borrow, because the payments principal has to be paid back over a shorter period, and the difference between a twenty and thirty year repayment is much greater than the difference between thirty and forty.

Because loans for manufactured homes are more expensive, harder to get, and amortized over a shorter period of time, this has the effect that even if someone wants to purchase a plot of land upon which the primary residence is a manufactured home, they cannot afford to pay as much for it. Let's say par rate on a thirty year fixed rate loan for a stick built house or condominium is 6.25%. To keep it simple, let's hypothesize that someone can afford loan payments of $2000 per month. That gives a loan amount of just under $325,000 for the stick built house ($324,824). Now because of the minimum one point hit, the equivalent rate on the manufactured home loan, even though it still sits upon owned land, is about 6.75%, and you're limited to a 20 year loan, giving a loan principal of about $263,000. The same person who can afford a stick built loan of $325,000 can only afford $263,000 for a manufactured home. This means that the manufactured home is not going to sell for as much money, because for what most people think of as the same price (monthly payment) they cannot afford as much manufactured home as stick built. This leaves completely aside such issues that magnify this difference as the fact that because the loan terms are more favorable, it's more cost effective to improve a stick-built home, so equivalent stick built homes have more amenities and are therefore even more attractive and more desirable. Not to mention the fact that the lender will require a minimum twenty percent down payment on the manufactured home, where they might not require more than 3.5 to 5 percent on the stick built. The people who are in the market for relatively inexpensive housing are first time buyers, and most first time buyers are trying anything they can to make the required down payment as small as possible. Very few of them have the larger down payments. This means that even if they are inclined to purchase a manufactured home, they are going to be constrained to purchase a stick built house by lending policy. That $263,000 loan I talked about earlier in the paragraph is only available if the buyer puts a down payment of $65,750 or more in addition to closing costs. For the vast majority of buyers, this limits their choice to stick-built, or none at all - If you only have $20,000 total, that's not going to stretch to the down payment on the manufactured home, where it will stretch for the 'stick built'. For these reasons, when people go to sell manufactured homes, one can expect the prices to be more than proportionately lower than those of comparable stick-built homes, and so investments in manufactured homes do not tend to pay off nearly so well as property earlier on this list. They are worth less than comparable "stick-built" properties because of lending policy,

There is one further step down on the list: Manufactured homes on rented land. These are not, properly speaking, real estate loans at all. There is no land involved. If there is no land involved, it's not real estate. Since there is no land involved, the loans are not real estate loans. They are listed in MLS because the people are buying and selling housing, but they are not real estate loans. It is very difficult finding lenders who will lend on them at all, and those few who will mostly do so through their automotive department (Credit unions are one good source for this kind of loan). Furthermore, whereas space rent might be cheap if it's your only cost of housing, it is expensive as compared to homeowners association dues, let alone property taxes, and the loans are still all twenty years or less. Because lenders don't like to touch them, because the down payment requirements are large, and because of the additional expenses imposed by space rent, prices for manufactured housing on rented land are microscopic by comparison with everything else. Even here in southern California, $100,000 buys a really nice 4 bedroom place where by comparison the lowest priced 4 bedroom anywhere in the county right now are $337,000 (manufactured on owned land, and way out in the hinterlands of east county).

Lest anyone think that this is in any way shape or form due to inferior construction, it is not. Because these buildings are manufactured on assembly lines which are largely robotic, there are many fewer problems with things like forgetting to nail at appropriate intervals, workers getting distracted, not getting corners square, and all those sorts of problems. I'd bet that a manufactured dwelling is probably of superior construction to a site built dwelling, all other things being equal. It is purely lender policy, as influenced by the history of their experiences with these kinds of properties, which is driving these differences.

So before you think a property is a great bargain, consider what kind of property it is, because even if you have plenty of income and a huge down payment and these concerns are irrelevant to you, when you go to sell it your prospective buyers will generally not have those things, and every time you eliminate a possible buyer from being able to consider a property, you statistically make the final sale price lower, and you statistically make the sales process take much longer. Eliminate enough potential buyers, and you're going to be very unhappy indeed.

Caveat Emptor

Original here


It has become a trend for real estate agents who think they're being "smart" to require an automated underwriting approval.

These are automated underwriting programs from Fannie Mae and Freddie Mac saying that Fannie or Freddie will buy the loan providing that everything is precisely as represented. The advantage to automated underwriting is that it will often approve people who might not qualify under manual underwriting rules, but usually due to a particularly stirling credit score Fannie and Freddie will move someone who's marginal to an acceptance. The problem with automated underwriting is that absolutely nothing can change or it is no longer valid.

Let me tell you a true story that has happened to me twice now with different processors. In both cases, I ran automated underwriting on loan and got a full regular approval. Then my processor, for reasons known only to them that neither one of these two women were able to articulate to me, decides to run automated underwriting again on exactly the same refinance and gets a level 3. This is not a good thing. Level 3 acceptance is not the third level up the corporate food chain approving the loan. Think of it like life insurance, where level 3 means you're getting three bumps up the cost ladder because you're a riskier bet for the insurance company. That's what level 3 is. They'll still take you, but they want to charge extra. In each case, it could just as easily moved from "accept" all the way to "caution" (Freddie Mac's code word for "No, we won't buy it") What Level 3 meant in practical terms was that instead of making money on the loan, I lost money but completed the loan anyway because that's good business and the right thing to do for the client who trusted me. However, not every lender follows that business model.

If anything about the assumed scenario changes, automated underwriting that was previously done is useless. The two classics are if the purchase contract is for a little bit more or if the tradeoff in rate and cost gets a little higher rise a tad before they are locked. If the down payment is a couple hundred dollars less, or a slightly lower percentage of the purchase price. If one of the buyer's credit cards lowers the credit limit, resulting in a credit score a couple of points lower, that could trigger a change. The list of possible reasons for a change goes on and on.

There are exceptions and points in the process where as long as something is still within the same basic band of guidelines, you don't have to run automated underwriting again. For instance, if an appraisal for a refinance comes in slightly low but you're still within the same loan to value ratio band, I've funded loans without re-running automated underwriting.

The thing to take away from this is not to put your faith in automated underwriting from Fannie and Freddie. Above the cutoffs for manual underwriting, it is extremely finicky. It can be finicky even below those guidelines, as one of the above mentioned processors found out. Truthfully, if lenders didn't give price breaks for automated underwriting, I wouldn't do it except in those circumstances where the buyer doesn't qualify under manual underwriting rules.

In fact, the real Gold Standard for preliminary approval is manual underwriting. Going through manual underwriting isn't sexy, and it doesn't generate a result that looks like it was Handed Down From On High. "Hey, I put this information into the computer and it said I was approved!" as voices from heaven sing "Hallelujah!" (at least in the mind of that deluded individual). But if a borrower qualifies under manual underwriting rules, then they qualify. Maybe that lender won't give their loan officer that quarter of a discount point for automated underwriting, but they will fund the loan provided everything checks out and there aren't any loanbusters. Somebody will approve it and it will fund.

If there are loanbusters present, automated underwriting won't catch that any better than manual. As a matter of fact, manual underwriting is better at catching loanbusters before it gets that far. If the buyer's ratios are tight and qualification depends upon rates that might not be there tomorrow at a cost they can afford to pay, that shows up quite well under manual underwriting. As a listing agent, if I see someone with a 44.9% debt to income ratio and just barely enough cash to close under the listed assumptions, I know that's a shaky deal at best. Automated underwriting doesn't tell you how close to the line it is, it just tells you the result. Manual underwriting lets you know how resilient the buyer's ability to carry through on the purchase is likely to be if something goes a little bit differently that projected. I don't know about you, but in my experience, transactions where everything goes precisely according to the initial plan are about as common as battle plans that survive contact with the enemy.

(Note however, that the originator of that quote strongly believed in planning the whole campaign out in an extensive and detailed manner beforehand so that when issues happened, he and his officers knew what their options were and were not. As a result, he was the most successful general of his day even if most Americans have never heard of him. While Lee and Grant were mucking about mostly over a small patch of Virginia for years, Helmuth von Moltke the Elder planned and executed two successful winning wars in a single campaign each)

As a listing agent, I will not accept automated underwriting results attesting to the buyer's qualification. I want to know how subject to failure this offer is. As a buyer's agent, I don't write them unless clueless listing agents demand them. The object, after all, is to get the property for the buyer at a price they are willing to pay, and beating the listing agent up on this subject is counterproductive to that, no matter how stupid it is. If you're a seller and want to know how qualified a buyer really is, insist upon seeing the manual underwriting numbers.

Caveat Emptor

Original article here

Undisclosed Short Sales

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What happens if a home you signed to purchase goes into foreclosure before the closing date?


We were supposed to close on a home four months ago. On the day of closing we get a call from the seller's realtor that the sellers owe 22K and need time to figure out negotiations w/the mortgage company. We go through a series of extensions & hear a variety of excuses from the sellers realtor (sellers haven't turned in paperwork, wrong forms filled out &new ones were overnighted, etc) In June, a Lis Pendens was filed & our realtor checked it out. He talked to the sellers realtor & found out that it had been filed but has been negotiated off &was no longer in effect. On 8/9 our realtor gets a call from the sellers realtor that they have finally been in contact with the mortgage company &there is 1 more paper that needs to be completed & they are "on top of it". After not hearing anything last week, I check with the online courts to see if anything else has occurred to see that a foreclose decree was noted for 8/4. What happens now? Can we purchase the home from the bank?

Somebody has not been "on top of it". Probably at least two somebodies, and they're not exactly fulfilling full disclosure requirements, either.

Yes, an Notice of Default adds thousands of dollars to fees due. But what do you think the lender would rather have: An already negotiated sale that is consummated and they get (most of) their money now, or go through that whole dismal foreclosure process, not knowing if anyone else will put an offer in for anything like the offer they already have, and knowing that they're going to need to spend thousands of dollars more on the property, and it's going to hit their reserves so there's several million dollars they can't lend?

What is going on here is an undisclosed short sale. What this means is that the lender isn't going to get all of their money, or the transaction would have closed by now.

So what's most likely going on is that the bank is taking their own sweet time about approving it, but your realtor has allowed the selling realtor to feed you a line of BS. Indeed, they've probably actively cooperated. They're probably afraid of losing the commission, but if they keep it open "just a little longer" maybe the lender will approve it.

It's the listing agent's job to talk the lender into approving the sale. Perhaps the bank is imposing some conditions that the seller can meet, but does not want to. Perhaps the bank is demanding some money, or that the realtors reduce their commission, and they don't want to. Perhaps the listing agent is just clueless, but I doubt your agent has exactly covered themselves in professionalism either. A good buyer's agent can talk a clueless listing agent through it.

The person with the power to break the logjam is you. Talk with a lawyer, but if you put in a 48 hour notice to perform, the lender is likely to suffer a sudden attack of rationality, especially in this market. They'll almost certainly net more money through the sale than through the foreclosure process, but if you allow them to go on ad nauseum they will keep the transaction open as long as possible. You see, once the transaction closes they can't get their money back if a better offer comes along. Therefore, they are trying to put you off for as long as possible in the hopes that such a better offer will come along. From their point of view, they have this transaction well in hand, they are just hoping to get more money from someone else, and the longer you allow this to go on, the higher the likelihood they will. If this happens, the lender may be happy but you won't be.

If you don't force the issue, the only possible resolution is unfavorable to you, assuming you really do want the property. There are possible issues with the deposit, and damages they could owe you and you could owe them, which is why you need to be careful. But putting them on Notice to Perform is the thing that is going to break the logjam one way or another, and your agent should probably have done it months ago. You're stuck with this one for this transaction for now, but if this transaction doesn't close you should probably find a new agent. Good agents know that if they are willing to risk losing a particular deal, they will not only better represent their clients interests, but also that they will end up with more deals overall. Approached correctly, it's a way to have even the client whose entire family has their heart set on a particular property understand that you are acting on their behalf, not just looking for a commission, and they will send you their friends, and they will come back to you when it's time to sell, or to buy another property.

I straightforwardly advise buyers to avoid short sales because of issues like this. Lots of other agents dispense that same advice. So sometimes, sellers try and skate by without disclosing the fact that it is a short sale. It is, nonetheless something they need to disclose.

Caveat Emptor

Original here

Is it unwise to use the listing realtor as your purchase realtor?


A house I'm interested in purchasing is being sold by the realtor selling my house. Although she's done a decent job selling my house, I fear she won't negotiate well on my behalf if she has to divide her loyalties between these listers and me (a potential buyer). How awkward would it be not to use my listing realtor to purchase a new home?


I would not undertake dual agency myself. If I do find a buyer for one of my listings, I'll refer them to someone else for negotiations, or at least get them to acknowledge in writing that I am working for the seller only. Everyone in the industry whom I respect agrees with this position. There is a always a conflict of interest between buyer and seller. Anybody who tells you otherwise is trying to rationalize money in their pocket.

It'd be okay to use her for any property she's not listing. If you want that one, however, go find another buyer's agent. You should also be aware that the right mindset, attitude, and skills to be a good buyer's agent are significantly different from the ones for successful listing, and many excellent listing agents don't have the mental tools to be as helpful to buyers as they are to sellers (the opposite applies as well). But there's nothing obviously against your best interests for using to help you buy when she's not the listing agent.

In every transaction, there is a tension between the interest of the sellers and the interest of the buyers. In fact, the only point on which they are more often in convergence than not is whether the transaction should proceed. It is in the interest of the sellers to get the most money possible for the property. It is in the interests of the buyers to pay the lowest possible price. Except in the highly unlikely case where the most that buyer might possibly have paid is the exact same price that is the least that seller might have accepted, and that is in fact the sales price, such simultaneous duties cannot both be met. Since such happenings would be freak coincidence, and not only are they not known until afterward, any such lookback is prone to an agent indulging in what psychologists call confirmation bias.

Furthermore, there is tension between the interests of the buyer and the interests of the seller in other matters as well. Not far from here is a condo conversion project, just recently finished selling out. About 1993, there was a resident of that complex arrested on suspicion of serial murder. I am unaware of whether he was eventually convicted, but I do know they dug up several bodies as I was unfortunate enough to drive by when they were removing them. California law requires the disclosure within three years of anyone dying on the premises, but at three years and one day there is no requirement for disclosure that I am aware of. Nonetheless, if one of my clients wanted to buy one of those units it would be part of my duty of care to that client's interests to make certain they were informed. Would you not want to know about your building being used as an impromptu cemetery for several bodies? But acting as a seller's agent, I would be forbidden from making that disclosure. Which client's interests do I follow? (This doesn't even consider the now-patched foundation, a more important issue as far as I'm concerned)

Suppose my client is having difficulty qualifying for a loan. Okay, obviously I'm not doing the loan, but I cannot force clients to do their loans with me and the only thing I can offer is carrots, never sticks. But suppose that I, as buyer's broker, find out from the loan officer on day 24 that they've been disqualified because the processor told the underwriter something they shouldn't have, and the loan is back to square one. If I am acting as listing agent as well, my duty to the seller requires me to inform my client of this difficulty. But my duty to the buyer is equally clear about it being a violation of my other client's best interests. Whose interest is paramount? Whose interest do I disregard? These interests are in direct conflict - there can be no compromise resolution. Indeed, as a listing agent I will demand information that it it may not be in my buying client's best interest as buyer's agent be disclosed, and vice versa. If they agree of their own volition, or some other agent talks them into it, then we have a willing buyer and a willing seller and full disclosure from my end and best interest of the client in furthering the transaction and so on and so forth. If I fail to ask because I am also representing the other side, I have not represented my client's best interests. If I talk either client into it when I am representing both, then I have, ipso facto, violated that client's best interest by getting them to agree to something which is not in their best interest. Did I do it because such was in their best interest, or the best interest of my other client? Even if I did act in their best interest, can I prove it? Probably not - in fact, I'll bet money against. Can I prove it in a court of law if necessary? No way in hell.

I like to make more money as well as the next person. But accepting dual agency is logically and provably a violation of my duty of care to someone in every case, no matter how the transaction turns out. No matter what you do, it's kind of like the old joke about someone playing chess with themselves. Sure you always win. But you always lose as well, and when you have a fiduciary duty to someone else, setting up a situation where you are guaranteed to lose is in itself a violation of that fiduciary duty.

So I urge you in the strongest possible terms to go find another agent to represent you. There's absolutely nothing wrong with using the same agent to represent you in multiple transactions, even simultaneous transactions. But I would never use the listing agent for a property as my buyer's agent, and I would not allow an agent I was listing a property with to act as buyer's agent. Force them to pick a side and stay on it, and since they've already got a listing contract, they have already made their choice.

This is incidentally another argument against Exclusive Buyers Agency Agreements. If they show you one of their own listings under an exclusive agency contract, they are the procuring cause and you must pay them. Nonexclusive contracts should also have explicit releases if the agent is also the listing agent.

Caveat Emptor

Original here

Continued from Part 1: Preparation and Part 2: Process

This is about the long term consequences of the decision to buy or not to buy a home, and economic benefits analysis into whether you should want to buy. In order to answer the question of whether it's better to buy or rent and invest the difference, you need to compare the costs and benefits of owning to the costs and benefits of renting over a comparable time frame. If you know you're moving in three years or less, it can be hard to come out ahead, just due to transaction costs. On the other hand, if you've got the wherewithal to turn it into a rental property after any future move you already know you're going to make, that can make the owning calculation move decisively in favor of owning. Be advised, all the headaches of being a landlord are greatly magnified if you're not within easy commuting distance to keep an eye on the property yourself. Also, if you cannot achieve positive cash flow on a rental property, odds are good that you should sell it. This isn't a blanket recommendation, just a rule of thumb.

Now it happens that I've programmed a spreadsheet to answer the "buy or rent" question in a time dependent manner, which is the only way it really can be answered. I keep using a $300,000 home and $270,000 loan as my default assumptions here. I'm going to pull a few more assumptions out of my hat, but I'm going to do my best to make them reasonable assumptions. 6.25 first trust deed, 10% second for any loan amount over 80 percent of value. Five percent annual property appreciation (perhaps a tad low in the long term), 1.2% yearly property tax (darned close for most California properties), yearly tax increases of two percent (Prop 13's legal maximum in California), non-deductible homeowner's expenses of $200 per month, 4 percent inflation, $1500 in non-housing deductions on Schedule A of your federal taxes, marginal tax rate of twenty-eight percent, and a return net of taxes on any alternative investment with the same money of ten percent. I also assume you're married (That makes a difference on how much your default deduction is).

Since state and local income taxes are different everywhere, I'm going to neglect those. They would functionally move the equation in favor of home ownership, but the effects are relatively minor in most cases. Furthermore, because investments are only worth your net proceeds after you actually sell them, I'm going to deduct seven percent of the theoretical market price of your home investment in any given year before I compare the net benefit of buying a home to renting and investing any money you didn't spend on buying. This is questionable to be sure, as most people will just spend at least a certain percentage, but I'm in the mood to be generous. You'll see why in a moment.

I'm also going to assume here, very unrealistically, that you never refinance, but that's actually a middle of the road assumption, as far as net benefit goes. The actual spreadsheet works a couple of other assumptions, and refinancing every five years and making a minimum payment usually comes out better, while refinancing every five years and keeping a thirty year payoff goal usually comes out worse.

Here are the net results:

Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Value
$300,000.00
$315,000.00
$330,750.00
$347,287.50
$364,651.88
$382,884.47
$402,028.69
$422,130.13
$443,236.63
$465,398.46
$488,668.39
$513,101.81
$538,756.90
$565,694.74
$593,979.48
$623,678.45
$654,862.38
$687,605.50
$721,985.77
$758,085.06
$795,989.31
$835,788.78
$877,578.22
$921,457.13
$967,529.98
$1,015,906.48
$1,066,701.81
$1,120,036.90
$1,176,038.74
$1,234,840.68
Monthly Rent
$1,900.00
$1,976.00
$2,055.04
$2,137.24
$2,222.73
$2,311.64
$2,404.11
$2,500.27
$2,600.28
$2,704.29
$2,812.46
$2,924.96
$3,041.96
$3,163.64
$3,290.19
$3,421.79
$3,558.66
$3,701.01
$3,849.05
$4,003.01
$4,163.13
$4,329.66
$4,502.85
$4,682.96
$4,870.28
$5,065.09
$5,267.69
$5,478.40
$5,697.54
$5,925.44
Equity
30,000.00
47,979.07
66,906.50
86,833.25
107,813.09
129,902.79
153,162.25
177,654.70
203,446.90
230,609.35
259,216.47
289,346.90
321,083.67
354,514.53
389,732.17
426,834.57
465,925.28
507,113.76
550,515.76
596,253.68
644,456.99
695,262.65
748,815.58
805,269.15
864,785.74
927,537.24
993,705.71
1,063,483.99
1,137,076.39
1,214,699.45
Net Benefit
-21,000.00
-7,516.04
7,147.46
23,091.84
40,427.33
59,273.84
79,761.82
102,033.27
126,242.72
152,558.43
181,163.62
212,257.85
246,058.50
282,802.46
322,747.86
366,176.10
413,393.96
464,735.97
520,801.42
582,152.57
649,284.52
722,739.36
803,110.70
891,048.67
987,265.32
1,092,540.71
1,207,729.42
1,333,767.79
1,471,681.92
1,622,596.32

Yes, after 30 years you are $552,000 better off from having bought a $300,000 home, as opposed to continuing to rent for that whole period. Not to mention that you own it free and clear for the cost of maintenance plus property taxes, as opposed to paying over $4600 per month rent.

This is a fascinating study in leverage. If, on the other hand, taxes start out at 2 percent and rise by 4 percent per year, the peak year in absolute terms is year 22, at $101,964 net benefit. On the other hand, I'm running rent increases at exactly the general rate of inflation and they almost always go up faster. Back to the first hand, resetting variables in the last set of suppositions to default and changing the appreciation rate to approximately like the long term average - 7 percent - while making a net return of 8.5 percent on investments bumps the net benefits of buying that home to $1,630,195.38. Five and a half times the original purchase price!

One more scenario: Restore to default values. Say you lose $30,000 of value, or ten percent of purchase price, in the first year. It does take longer to be ahead of the game - more than 6 years - and the net benefit after 30 years (as opposed to investing the money at an assumed return of 10%) is "only" $437,223.05. For the mathematically challenged, this is still nearly one and a half times the original value of the property! Yes, the money will be worth less in thirty years. We all know about inflation. Would you turn me down if I offered to give you $437,000 in thirty years time?

I've been playing with this spreadsheet for quite a while now. Under the basic assumptions I've listed above, it's kind of hard to be ahead of the game by buying a house instead of investing in the stock market after less than two years under any kind of reasonably average assumptions. On the other hand, it's very difficult not to be ahead after five to seven, and way ahead after ten.

After thirty years, most sets of even vaguely reasonable assumptions have you so far ahead by buying the home that if you didn't watch over my shoulder as I built the spreadsheet, a reasonable person would be skeptical. Heck, I knew which calculation the numbers favored, but I really never stopped to think how strongly they worked in favor of home ownership. It is difficult to come up with a reasonable set of assumptions and starting numbers where you aren't ahead by significantly more than the original purchase price of the home. Yes, we're all aware of the issues with inflation, and the ratio illustrated here, with a 4 percent rate of inflation, is a little more than three to one (which remembering the rule of 115, seems reasonable, so the first approximation check validates this). So what this means is that by purchasing a $300,000 house that you're going to live in for the rest of your life now, you're adding more than $100,000 in today's dollars to your net worth in thirty years if you just invested the difference between rent and the costs of owning. Actually, it's usually more. That safe, conservative, middle of the road $552,000 net result after thirty years from the first example converts to more than $177,000 in today's money! No flipping, no games, no wild schemes, no re-zoning jackpots and no wealthy benefactors to come along and pay you twice what it's worth. In fact, in this scenario you never talk to another real estate or loan person as long as you live, and you've still effectively "gifted" yourself with almost sixty percent of the property's purchase price immediately upon taking possession.

This should persuade most folks that they should want to buy a home, and that you don't want anyone else to. After all, the more poor schmoes there are, the better this will work for the rest of us. Actually, that last crack about poor schmoes isn't true, because the law of supply and demand is always in effect. But is shows how good for the overall economic health of the nation encouraging home ownership is.

Caveat Emptor

Original here

Continued from Part 1: Preparation


I am considering buying a home, although I have not made up my mind on the subject. This is not due to indecision, but rather due to a lack of necessary information. There are many factors to be considered in my case, and in order for me to make an informed decision about buying, I need to solve for several variables involving cost.

My questions to you involve what steps I can take to solve those variables. Should I begin with a pre-qualification or loan approval? Will a lender invest time and resources in me when I have no specific property in mind, and I may ultimately decide to continue renting? Should I start by speaking with realtors in order to guage what is available in my price range? Will realtors invest time and resources in me when I have no loan arranged and I may ultimately decide to continue renting?

Also, what is the proper sequence of action for someone who is seeking to collect all the relevant information in order to make reasoned decisions about buying a home?

Well, as I said in Part I, a major question is whether you can trust real estate agents to answer the question honestly. Some will, most won't. If they tell you to buy, they make money. If they tell you to keep renting, they don't. Mind you, if you can afford to buy, the numbers are overwhelmingly in favor of that, as we'll see in Part 3. Nonetheless, one trusts that you see the potential for abuse.

Nobody should have a specific property in mind when they first approach an agent. Smart buyers won't make an offer without looking at a certain number of properties first. The only exception is if you're buying the old family home from your parents or something. You've agreed on the price, and the terms, and now you're going to pay an agent to make sure all the paperwork is done and filed correctly and the inspections are done and all of that sort of stuff. This is a smart thing to do, by the way, but most people in this kind of transaction seem determined to "save money" when a low percentage agent's fee or some flat fee would be an astoundingly good investment.

You needn't worry about whether lenders and agents will "invest time in you." Those who are unwilling to spend time on you in such circumstances should be avoided. Yes, I want my time to be spent on people who really want to buy and are capable of buying, which is why a basic prequalification is among the first things I usually do. I don't want to waste your time showing you stuff you can't, or shouldn't, afford any more than I want to waste my own. But there's a lot you can do to qualify yourself, so that you know how strongly you're inclined to buy, and approximately how expensive a property. This way, you know that the agent or lender isn't leading you down the primrose path with properties you cannot really afford. This is a severe problem, especially in expensive areas. I've said it before and I'll say it again. You need to know how much house you can really afford in a sustainable situation, and you have to make certain your agent knows and sticks within your budget. The one who shows you the five bedroom house, when you can really only afford the three bedroom condo, is not your friend. I'd fire such an agent the first time they showed you something you could not reasonably get for your known housing budget (which is one reason of many I recommend against Exclusive Buyer's Agent Agreements, and don't ask for them unless I'm giving them something beyond MLS listings for their exclusive commitment). The agent who shows you the three bedroom condo you really can afford when everybody else is showing you the five bedroom house you can't, is your friend, whether the "Oooohhh" factor is there or not, and even if the "Eeewww!" factor is there. Curb appeal is how sellers sucker buyers (and yes, when I'm a listing agent I'll help you with that in every way I can. It's the most important part of my job to help my client get the best deal they can. But right now I've got my buyer's agent hat on, and my job is to help buyers see the diamonds in the rough and not pay more than they're worth).

Once you've done your self-qualification, that's when I'd go find a real estate agent. I wouldn't worry about an actual lender's prequalification as long as you know what your credit score is. A good agent is going to do a prequalification anyway, and if they're a loan officer as well, they'll set you up there. An agent who doesn't do loans should be able to provide recommendations for someone to do the prequalification, and if they don't recommend the same loan provider for the loan as did the prequalification, I'd go back and check with the provider who did the prequalification anyway, as well as finding other prospective loan providers, not to mention pointedly not accepting the new recommendation for a loan provider. Despite the fact that I'm a loan officer who also does real estate, I'm not sure I'd trust a real estate agent with my only loan application. I came to being an actual real estate agent from being a loan officer for several years first - and then I went and learned how to do real estate. The average real estate agent who does loans never spent an apprenticeship doing loans, never learned the ins and outs, and has no clue whether they can deliver what they put on the Good Faith Estimate (Mortgage Loan Disclosure Statement in California). They just figure "It's the same license, so I can, and it's an easy way to earn a lot more money from the same clients!" They don't really know loans, they've just figured out that it's a way to make more money. Furthermore, there are too many shady personalities out there, and way too many real estate agents think they know how to do loans but don't. There are a fair number of crooks and incompetents and just plain gladhanders, who only care about whether they're getting a commission on this particular offer, out there, but most of what I do as a real estate agent can be plainly seen and understood by my clients. What a loan officer does is much less transparent to even the most sophisticated borrowers until it is too late to change to another provider. I've seen way too many people burned by only applying for a loan with one provider, and am very upset that lenders and the government are making it more difficult for consumers to obtain a good loan. I've only ever not been able to do one loan on the terms quoted and locked (and I did my darnedest to help the provider who could, where most loan providers in my shoes would have obstructed to the best of their ability, as I've also learned by bitter experience), but I've seen a lot of people who applied with the loan provider who talked a better deal but who couldn't deliver any loan at all, much less the one they talked about. Many times they have come back to me in desperation two days before escrow expires, or seven days after it was supposed to expire, and I can't always help them in time then. Be very careful in choosing your loan provider, especially if it's a purchase.

Take any newspaper advertisements you see about rate, however, with great heaping cargo ships full of salt. I'll cover what's really available later on, but for now what you need to know is that loan companies advertise with teasers like negative Amortization Loans and short term ARMs and hybrid ARMs that takes five points to buy the rate and you still won't get it when it comes time to sign the final papers. The whole idea is to get you to call, so that they can sell you what they really do have. I don't think I've ever seen a real rate on a real loan that I would be willing to get for myself advertised anywhere, in any medium. Even the so-called "best rate" websites and newsletters are notorious for cheating. I've gone right down the line calling them and asking about loans that were supposedly the standards they were quoting to, and gotten not one answer that was within half a percent of the rate quoted on the website or in the newsletter. Nor were any of the websites or newsletters I've complained to (or my company complained to, when I worked for an internet lender that was signed up with them) interested in enforcing the rules. I don't know one single loan provider who advertises actual rates that they can actually deliver anywhere. Those few companies who are actually willing to do it have all quit advertising in disgust and gone to finding clients in other ways.

Concluded in Part 3: Consequences

Caveat Emptor

Original here

I am considering buying a home, although I have not made up my mind on the subject. This is not due to indecision, but rather due to a lack of necessary information. There are many factors to be considered in my case, and in order for me to make an informed decision about buying, I need to solve for several variables involving cost.

My questions to you involve what steps I can take to solve those variables. Should I begin with a pre-qualification or loan approval? Will a lender invest time and resources in me when I have no specific property in mind, and I may ultimately decide to continue renting? Should I start by speaking with realtors in order to guage what is available in my price range? Will realtors invest time and resources in me when I have no loan arranged and I may ultimately decide to continue renting?

Also, what is the proper sequence of action for someone who is seeking to collect all the relevant information in order to make reasoned decisions about buying a home?

Well, a major question is whether you can trust real estate agents to answer the question honestly. Some will, most won't. If they tell you to buy, they make money. If they tell you to keep renting, they don't. One trusts that you see the potential for abuse.

The question here of "Should I Buy A Home" really separates into two basic questions: "How much home do I qualify for?" and "Is there a better alternative, financially?" You can then decide if buying or renting is the better alternative for you.

Qualifying yourself to buy a home, or to use better phrasing, figuring out how much home you should buy, is easier than most folks think. You can look in the classifieds section or on any number of internet sites to find out what the asking prices for properties like ones you might want to buy are in that neighborhood.

The personal information needed is easily available. First, you need to know how much you make per month, as you make mortgage payments monthly. Next, how much your mandatory payments are. Third, about what your credit score is.

Most people know how much they make per month. "A paper" guidelines go between thirty-eight and forty-five percent of gross income for your total of all required monthly debt and housing payments. Subprime lenders will go up to anywhere between fifty and sixty, with most limiting your debt to income ratio to fifty or fifty-five percent. I'd recommend staying within A paper guideline, but calculators are easy to use. So multiply your monthly income by thirty-eight percent, forty-five percent, fifty percent, and fifty five percent. This gives you a set of four numbers, which you may call anything, but I'm going to call A0, B0, C0, and D0. They correspond to what should by standard current loan guidlines be easy total debt service payments for most folks, moderate payments, difficult payments, and extreme payments.

Now most people have recurring debt of some sort. Credit card payments, car payments, furniture payments, student loans, etcetera. This does not include monthly bills that you are paying as you go. You know what your monthly obligations are. Whatever this number is, call it $X. Subtract $X from each of those four numbers above, so that you have the numbers that you really have available to spend on housing in each of these four scenarios. Obviously, the smaller $X, the more house you will be able to afford on the same income. I'm going to call these numbers created by subtraction A1, B1, C1, and D1.

These numbers you have must cover all the recurring costs of owning a home. These include not only the principal and interest payments on the loan, but property taxes, homeowner's insurance, homeowner's association dues if applicable, Mello-Roos districts here in California, and anything else that may be applicable where you want to buy. Within the industry, the acronym most often used for this is the PITI payment, for Principal Interest Taxes Insurance, with the understanding that it includes anything else necessary as well. Association dues and Mello-Roos districts are a function of where you buy. Every condominium or coop is going to have Association dues or some equivalent. Mello-Roos districts are limited time property tax districts assessed to pay for things like municipal water and sewer service for new developments. Most newer developments here in California have them, and the equivalent districts are becoming more and more prevalent in newer developments elsewhere. Homeowner's Insurance is mandatory if you're going to have a loan - no lender is going to lend money on an uninsured property, but note that even the best homeowner's policy does not include flood or earthquake coverage, so if you're buying in an area where that is a consideration, the extra cost of a flood policy or earthquake policy is probably worth it. Condominium owners should have a master policy of homeowner's insurance paid for by their association dues, but it's still a good idea to have an individual policy for your unit, called an HO-6 policy here in California and by the NAIC.

Property taxes are paid to city, county, state and possibly utility districts, but your county tax collector should be able to quote overall rates. There is no way to know how much they will be from here, but you can make an estimate, if nothing else by calling the county and asking. Note that they usually quote taxes in terms of a percentage tax value per year. Multiply assessed value by tax rate to get a per year tax bill, then divide by twelve to get a per month value. In California, there's a rule of thumb that property taxes per month are approximately one dollar per thousand dollars purchase price per month in most places (it will be more if there's been a bond issue approved or any number of other circumstances), so take the last three digits off the purchase price and that is usually close to your monthly tax liability. $250,000 purchase price? $250 per month. $500,000 purchase price? $500 per month.

By subtracting off all those figures, you get a range of monthly payments for the loan that you can actually afford. Call these A2, B2, C2, and D2. Armed with these and your credit score, you can figure out what kind of rate you might qualify for. When this article was originally written thirty year fixed rate A paper purchase money loans of no more than eighty percent of the value of the home could be had without points at something between 6.25 to 6.5 percent. When I originally wrote this, "Piggyback" seconds would go to 100% of the value of the property, but that is no longer the case, so if you don't have 20% down and you aren't a veteran, you're going to pay PMI in some form. You can usually get significantly lower rates by being willing to accept a hybrid ARM (I've been doing it for fifteen years), but some people aren't comfortable with them.

Knowing the payment you can afford, the interest rate, and the term of the loan, you can calculate how much of a loan you can afford. Knowing any three of principal, interest rate, payment, and term, a loan calculator can tell you the fourth. Do this with your four values, A2, B2, C2, D2, and you get four potential loan principal amounts, A3, B3, C3, and D3. These correspond to loan amounts where the payment should be easy, moderate, hard but doable if you are disciplined enough, and a real stretch. To this, add any money you have available for a down payment, and subtract projected purchase costs (maybe $1000 plus 1 percent of home value). This gives you four values A4, B4, C4, and D4. These correspond to the purchase price of the homes you can afford under those four prospective loan amounts. You can then compare these amounts with what is available, and at what price, in those areas you might wish to buy.

Continued in Part 2: Process

Finished in Part 3: Consequences

Caveat Emptor

Original article here

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 one San Diego suburb 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.

First time buyer programs 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 to that one, 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

Original article here


There's an old saying in sales: "The best way to achieve your dreams is to help others achieve theirs". I wasn't able to run it down to the original attribution, but it is as true a saying as can be imagined. The first thing to understand about any transaction that doesn't flow from the point of a metaphorical gun is that all parties are made better off thereby. The way to get as much as possible for a property is to show prospective buyers that they are getting as much as possible for their money.

As a seller you have real property. As fantastic an investment as it is, it is also completely illiquid. You can't go up to the counter at the grocery store and pay with a couple square millimeters off your lot. You have to have cash and for whatever reason, you have decided you want cash. You can't spend real estate, just like you can't live in cash. Buyers have cash or the ability to get what is cash to you via the loan they take out to cover the difference, and they want a property. Therefore, you have the makings of a real exchange that leaves both parties better off provided that you can persuade them that your property is the one that they want.

What you want is for prospective buyers to be willing to pay you as much cash as possible. Since Make-believe loans are no longer with us, this means you have to show real value to them. At the present time, the only widely available loan that does not require a down payment is the VA loan, and selling to someone with a VA loan has its own set of issues. What this means is that the buyers need a down payment, and they are going to have to qualify for a real loan with an ongoing income stream. Neither one of these is easy. Buyers understand money they had to build up for the down payment dollar by dollar out of their paychecks is real money much more clearly and at a more visceral level than they have the same understanding about money they borrow. They understand the payments they are going to have to make at least as clearly, and neither one of these is subject to the same kind of handwaving "let's pretend you can do it" loan qualification as they were a few years ago. Therefore, buyers are aware of value today in a way they were not aware of it a very few years ago.

One thing that you must understand in your bones before your property hits the market is that buyers are shopping for the lowest possible price for the best property they can get. Nobody ever bought a property because it was that property's "turn" - quite the opposite in fact, as the longer it's on the market, the less valuable a property is perceived as being. They bought it because it was the best value for them that they could afford. If there's a better property out there cheaper than yours, that's the one buyers will want. They will not automatically come to your property when that one sells, either, unless you're the best remaining value on the market. If another property comes on the market that's a better value, that's the one people will want instead of yours. It's what you did when you bought. Understand that's what everyone else wants to do when they buy. You are competing for those buyers attention and you are competing for their desire.

Fortunately for sellers, every buyer values property in slightly different ways, and therein lies your potential for profit. Some buyers want the absolute cheapest property they can get, while most people will pay more for certain amenities. But what every single buyer has in common is that you have to offer them something that they perceive as being more valuable to them than the difference in price between yours and the cheaper property down the block or around the corner. Not more valuable to you, the owner. More valuable to them, the buyer. Otherwise, they're going to buy the cheaper property, or at least make an offer on that one instead of yours.

Each and every buyer has a mental list of amenities they are willing to pay extra for, and ones that they are not. If your property is priced higher because you expect them to be willing to pay more for something in particular and they are not, your property is stricken from their list. The more things you try this with, the narrower your marketing niche. This is why you need to understand how prospective buyers think - what marketing folks call "hitting a target market" You or your agent need to understand the target market for your property, and work to hit it. This is not to say that no property ever sold to someone who wasn't in the precise target market, but those people are not usually willing to offer as much money, which defeats your aim in properly marketing the property because you want the people who are willing to pay the most for your property. People are willing in general to pay more for beautiful kitchens, good floor plans, extra bathrooms and nicely landscaped yards they can actually enjoy, but not every person and every target market is so willing. Your area, your neighborhood, and your location also influence your target market, and most particularly, the target market's willingness to make an offer and their willingness to make a higher offer in negotiations. Practically everything else in the way of amenities means you are trying to hit a narrower target market in order to get the most money, and any time you narrow your appeal, you have to make even more effort to be more attractive to the prospective buyers who are left in your target market.

Another thing to understand is that if the prospective buyer cannot see the property with their own eyes, they are not likely to make an offer, and they are definitely not going to make a good offer. The phrase "pig in a poke" comes to mind. Fewer people who are able to see your property means a lower selling price. What this means in practical terms is make the bar to seeing the property as low as you possibly can. Yes, it's a pain when someone wants to see the property and you had a quiet day at home planned, but think of it this way: Your property is probably valued around $400,000 (at least in San Diego that's a good ballpark mode, in the mathematical sense of the word). If it makes a difference of 1% to your sales price, you are effectively paying yourself $4000 for a month or less of making your property accessible - and 1% is a very low estimate of the difference this makes to sales price. Put the heirlooms away, put the dog in a run or a portable kennel, get a lockbox on the door so people can see it when you or your agent aren't there (both conditions make it much less likely you'll get an offer). If it's tenant occupied, anything you spend to negotiate with them to make the property completely accessible will likely more than pay for itself. When my clients ask me "can we see the property today?" and the answer is "No, because it's tenant occupied and we need to have 24 hours advance notice" what do you think happens? We go see other properties, and if they like one of those, they're no longer interested in yours. When that happens, you're left with something you don't want - an unsold property. If you still wanted it, it wouldn't be on the market, now would it?

Caveat Emptor

Original article here

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 rules 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 for the purchase - 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 (right after purchase or getting ready to sell) 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 so the sinking goes in a more seaworthy manner with no more casualties than necessary. 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 a few 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 for back into dollars is a lot more problematical. The same principle 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). Still, 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

Original article here

This article started with another one of those desperate consumer fishing calls a while ago. Loan standards have tightened since then (In my considered opinion, over-tightened and the lenders and Wall Street will figure it out within a couple years). Stated Income is no longer available, and as much as I dislike stated income loans, there is a group of people for whom they are the right choice. Negative amortization (aka "Option ARM" "Pick a Pay" and many other friendly sounding names) is no longer available, and that's 99.999% a very good thing, but there was a tiny niche of people who had a legitimate use for them.

This particular phone call began with her saying said she had to have an Option ARM. I told her I had them available to me (then), 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 went during the relevant time period.

She either bought a property more expensive than she could really afford, or refinanced a property she already owned for cash out, and could not afford a real loan now. 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 and make it worse. 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 any lender would have accepted at that time for stated income (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 in The Doctrine of Delaying The Moment Of Truth. 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. After I propose a solution, 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

Original article here

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 first what my 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 plus 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, making that money one of the best investments you will ever make. 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. It may not show up on an accounting form, but that doesn't mean it doesn't exist. It does, and there are an awful lot of people making a good living off people who don't understand that simple fact.

Caveat Emptor

Original article here

One of 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 this article.

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 sort of actual 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. However, the Democratic controlled Congress of 2010 had to be bullied (by 60+ of them losing their jobs!) into allowing another temporary fix at the last moment. 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 Administration. 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 proper 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. Go get a real policy that will actually benefit your family if the circumstances where it is needed arise.

Caveat Emptor

Original article here


Hard as it may be to believe, I've never done an article comparing asking price to sales price. It's way past time.

Asking price is quite simply, a written representation of an offer the seller would be willing to accept. It's amazing how many agents have forgotten that, if they ever understood it. If the seller would not be willing to accept that price, they are committing an intentional misrepresentation when they enter the number as the asking price. In short, fraud. This violates the legal requirement of "fair and honest dealing with all parties" which agents agree to upon commencing the practice of real estate. It isn't fraud on the scale of which many were guilty during the Era of Make Believe Loans, but it is still fraud. By entering an asking price of $X, you are representing in writing that the seller would be happy to accept that offer. But if there are already higher offers from qualified buyers (as is very often the case in some markets) you are defrauding those who come to investigate that property based upon the misrepresented asking price.

Why do agents do this? Some of them hope to generate a bidding war. Bidding wars are certainly nice, but they are unlikely to bid the property back up to the price it could have gotten by setting the asking price correctly in the first place. In such cases, it's the obviously lower than comparable properties price for a valuable asset that attracts potential buyers, and if the low price is no longer applicable you can expect them to lose interest.

Most of them do it as a way to make contact with prospective buyers who don't know any better, so they get a chance to act as that client's buyer's agent. Never call the listing agent to show you a property. Their loyalty should be given first, last, and always to the seller of the property. If it's not, they are failing in their primary duty as an agent and you definitely don't want an agent who would hose their client so they can get more money. If their loyalty is so given to their listing client, it isn't being given to you, the buyer. Either way it's a bad situation you should know to avoid. Because it happens and it isn't rare or even uncommon. In fact, it is disturbingly pervasive, especially when the market is hot.

Sales price is the price at which two unrelated parties decide to willingly exchange a property for money, because both of them believe they are made better off by the exchange. You need to understand that, too. If you don't, petition the courts to appoint a conservator for you, because it is the basis for all economic transactions other than the ones that flow from the point of a gun. If two parties are related - whether parent and child or corporation and controlling interest in that corporation or any other permutation - it is not a true sale because the goods being exchanged on the record are not the only ones being exchanged, and it should not be used for comparison for other properties. Related party transactions are tough to do correctly, and many people don't understand that until they get bitten by it. In fact, an awful lot of what appears in MLS for two days or less is quite likely a related party transaction pretending to be a regular "arms length" transaction. Some are because an agent is hosing their clients, others are because someone wants a loan and therefore is trying to make it look like a legitimate arms length transaction when in fact it is not.

There are still plenty of reasons why both parties can agree on a sales price that leaves each of them better off in their own opinion. One of them needs a place for their kids to grow up, while the other no longer has that need being the classic reason. Perhaps one of them needs to buy another property somewhere else, and the proceeds from this property enable them to do that. I can go on all day, and I'll bet most of you can, also, if you try. The point is that in order to be a viable transaction with a hope of actual consummation (In other words, the exchange of property for other valuables actually takes place), both parties to a purchase contract must believe they will be better off after they make the exchange. Otherwise, one of them is going to find a reason to not actually carry through.

Sales price is generally lower than asking price. Not always, and certainly not where everything on the market is seeing multiple offers within the first week, but in general this is so. There are exceptions to that rule. Just because someone would be content to accept an offer if it were the only one does not mean they will feel compelled to accept that offer in the face of better ones. My objection to the abuses of the process detailed above is in asking prices that everyone involved knows are not anything like the price the seller can expect to receive.

Nor does the act of putting a certain asking price on a property mean that you're likely to actually get that price, no matter how long you wait. I don't know how and why the urban legend about "if you wait long enough, someone will meet your asking price" got started, but it is pure myth. The longer a property is on the market, the less desirable it is perceived as being by most buyers, because what buyers really think is "It's been on the market for sixty days and everybody else passed on it. What's wrong with it?" The longer a property is on the market, the more you are likely to have to reduce your price in order to actually sell.

The numeric relationship between asking price and sales price is complex, and governed by many variables. The ones that leap immediately to mind include the economic target market, the ease of qualifying for a loan, interest rates on loans (The mortgage market controls the real estate market), sales prices of similar properties under prevailing conditions, and most importantly, general economic supply and demand. In other words, how many people want to buy versus how many people want or need to sell. If the first number is higher than the second, expect prices to rise. If the second number is higher, expect them to fall, at least in terms of affordability if not absolute numbers. If you don't believe me, consider how fast real estate market conditions change when a relatively small number of people drop off one side of the equation at the same time a few more jump onto the other.

Caveat Emptor

Original article here

"What do I do when the loan falls through"
That depends upon when it falls through and what situation you're in. If you're in a refinance situation, you generally keep making payments on your old loan until and unless you can find a refinance that is better that you qualify for. There is one exception to this: balloon loans. Balloon loans must be paid off in full on thus and such a date. These dates are known at least five years in advance, but some people insist upon leaving it to the last possible instant. Don't do this. If you have a balloon loan, start the the refinance process at least sixty days in advance of the balloon date.

If you're unable to refinance your balloon in time, lenders whom you ask for forbearance will generally will give you at least some time in extension of the old loan, but at a much higher interest rate. This is very kind of the lenders because they don't have to give you an extra minute under any terms. The agreement ran out last week and you didn't pay them; they are entitled to foreclose if they want to. Good thing that the lender usually doesn't want to.

If you're doing a purchase, loans are taking 45 to 60 days now. Minimum. That's just a fact of life. The agent who writes a purchase contract for less than 60 days in escrow is not your friend if there is a loan involved.

However, I also need to say that if purchase money loans fall apart, it's a real good idea to re-confirm that you can afford this with some independent expert. It's not a red flag, precisely, but it is definitely a yellow caution signal. Ask "Why did the loan fall through?" Make certain it isn't something to do with basic affordability or needing cash you don't have. Loans do fall through for stupid reasons (I had a loan I had to move from one lender to another not too long ago because they first lender wouldn't give them the usual credit for 3/4 of the rent because the tenant in their rental property had paid the deposit in cash despite the tenant having been there for nearly a year, showing rental checks, etc, and without that rental income, my client's other income fell short of qualification). Loans also fall through because the basic checks show you cannot afford the property. Loan qualification is there for your protection as well as the lender's

However, loan providers will generally not admit that loans fell apart before the last minute, even if they were rejected out of hand back on day three. Actually, that's a trick they pull quite often; tell you about loan A intending to deliver loan B, and then at the last minute tell you that you don't qualify for A but you can have B. This keeps you from having time to shop around after you discover what a rotten loan they really have for you. They knew about what loan you would and would not qualify for within a week unless they are hopelessly incompetent, but their advantage lies in keeping mum until you have no choice but to accept loan B. In another amazing coincidence, loan B usually has a long prepayment penalty, and buying it off - if you can - costs two percent on the rate, and they'd have to send it all the way back to underwriting to see in you qualify, and that will take weeks, so why don't you just sign for this loan right now. They may even say, "We'll fix it later." Yes, they will volunteer to get paid again after you've spent several thousand dollars on that prepayment penalty. I had a guy come to me quite recently, trying to fix one of those after the original company failed to do so. Unfortunately, the coals he'd been raked over, and with his credit score, there was nothing I could do and he lost the property.

So it's now day thirty-one of a thirty day escrow, you've got a $10,000 deposit on the line, as your loan contingency expired back on day eighteen. What now? I used to tell people to apply for a back up loan, but nobody can do them any more. Well, the situation isn't necessarily lost.

First, call your seller, or have your agent call their agent, and find out if they'll extend escrow. If it's a hot seller's market and they won't, you're hosed, but in a buyer's market, they will if they're smart. Most sellers, even in a buyer's market, will want you to pay extension fees and that is to be expected. The reason escrows are usually limited days is so they don't have to keep spending money on you if you can't qualify, and they do spend money on the transaction. This may cost you an extra $100 per day for up to ten days, but when the alternative is losing $10,000, that's very worthwhile.

Loan providers who admit in the first week after you've given them standard qualifying information that you're not going to qualify for the loan they initially told you about are almost certainly honest, and likely thought you really would qualify. Because they could have put off telling you, but didn't, I would bet serious money they're honest, and it's worth giving them another shot. But the longer it goes, the less likely it is they intended to deliver the original loan. I might believe someone like that in the second week - but I wouldn't believe that story from anyone in the third week after applying, even if they were backed up by affidavits from everyone from Diogenes to George Washington.

Loans fall apart all the time. Locally, the percentage of purchase escrows that fall apart because the buyer cannot in fact qualify for the necessary financing is around forty percent. So take precautions to make certain that situation does not happen to you.

Caveat Emptor

Original here+

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This page is a archive of recent entries written by Dan Melson in March 2014.

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