Dan Melson: August 2016 Archives

Minimum

Time was, a few short years ago, when I could reliably do a purchase money loan in two and a half weeks. That has now changed. There are three separate delays of one to two weeks that have been built into the process since then. I can usually get purchase loans done in 45 days - but it's not a solid bet.

The first delay is due to the Home Valuation Code of Conduct. I keep hearing rumors of repeal and efforts to repeal, but it's still there. Loan officers no longer have any control over the appraiser - who it is or who it isn't. Net result: the appraisal gets done when it gets done. Three days used to be a very long time. Now, I might get it in three days if I put a rush on it and am very lucky. Seven to ten is about what I expect, and if it's fifteen, that's what it is. Neither I nor any other loan officer has any control - or working relationship - with appraisers any longer. The appraisal is now a source for at least 20 times the problems it was a few years ago, and the new standards didn't stop what they hoped they would stop, but hey, this is the result of government work we're talking about here. The politicians got paid to create a new way to make more money off the system - mostly off consumers - and they did so.

I should also mention that where lenders would formerly accept loan packages with a pending appraisal, and even grant underwriter approval on them with a "prior to docs" condition for an acceptable appraisal, they are now generally requiring the appraisal be in the loan package before they will accept the package. Why? Because it didn't take them long to figure out how many problems the appraisal was now causing. Why should they do all that work when it's so likely the appraisal will render the whole thing moot?

The second delay has to do with underwriting. To cut right to the point, the current underwriting environment is super-paranoid. Underwriters are encouraged to dig for reasons you might not qualify. The lenders are judged and paid by the secondary loan market based in part upon default rates. If you've been paying attention, you know that there have been an awful lot of defaults lately. The lenders are determined to get the default rates down. Wall Street adds its own nonsense to the mix - many of the secondary market buyers have added requirements to the mortgages they will consider buying. Since the lender wants to be able sell these mortgage anywhere, they add all the requirements to their loan underwriting. Net result: Lots of delays to get to your file, extra hoops to qualify when they do look at it, and a very high proportion of rejected loans - many for absolute nonsensical reasons.

The third delay has to do with more direct government nonsense - Regulation Z and redisclosure of APR. Specifically, changes to the rules arising out of Dodd-Frank and a couple other congressional actions that claim to have been for the consumer but were in fact made to advantage large campaign contributors. There isn't a lender out there that doesn't force a recalculation and redisclosure of APR with a mandatory regulatory 7 day delay built in before you can actually sign loan documents. If they don't, they can be sued - but if they do they are legally covered - even if the old number was closer to what the correct answer is. Furthermore they can generate lock extension fees out of it, while incurring no costs. Nor is this the only possible delay caused by new government regulation - but this one hits Every. Single. Loan. Other potential regulatory delays can add three additional weeks to the time it takes to get your loan.

If I do my job correctly and manage everything just right, I can and usually do close loans in six weeks or a little less - those that aren't rejected in unpredictable ways, that is. However, that's a far cry from three weeks it used to be, and there are things beyond my control that can kick it over the 45 day mark. Furthermore, I have one of the lowest average closing times out there - the industry average is better than half again mine and a lot of the high volume places are more than double that 45 days it takes the good ones.

When I'm wearing my Realtor hat, I really hate this (actually I hate it as a loan officer too), but it's the way things are. I tell my buyers to write a 60 day escrow period into the contract. I'd rather the offer be rejected upfront due to the escrow period than have it accepted and lose the deposit when the buyers can't perform on time because the loan isn't ready. On the rare occasions I list one, I tell my sellers it's going to take sixty days for any buyers to qualify for a loan, and while the all cash buyer is certainly nice, restricting yourself to all cash offers will result in a lower sales price and less money to the seller. Furthermore, an offer written that includes both a loan and a shorter escrow period is a red flag in no uncertain terms that there is something wrong with the agent. Any agent who hasn't figured out that the 30 day escrow isn't going to work by now (at least for purchases with a loan involved) is incompetent or actively plotting something. There really is no third option. Sometimes I can tell which right off the bat, other times I need to call the agent. So if there is a loan needed to consummate, plan on a 60 day escrow for your purchase or sale of residential real estate.

Caveat Emptor

With housing prices having crashed in most of the higher cost areas of the country, many people who were formerly priced completely out of the market have become interested once again in purchasing property. The drawback is that because lenders are scared of zero down payment programs right now, if you haven't got a down payment you are just as solidly locked out of property as if you could not afford the payment. So I thought I'd go over the down payment requirements for purchasing real estate. Keep in mind as you read that these are minimums. If you have more of a down payment, that's better. You cut the amount you need to borrow, thereby cutting the payment and increasing affordability still more, and you also likely improve the loan you are eligible for.

More mortgage insurance companies are becoming willing to go 95% loan to value ratio, but the catch is they want to see at least a decent credit score (680+, with the best rates not coming until 740 or so) and a slightly lower debt to income ratio than if you had a larger down payment. If this isn't you, I would plan on having 10% of the purchase price for a down payment with conventional conforming loans - especially if you want to split your loan to avoid PMI. On a $400,000 property, 10% is $40,000, which is quite a chunk of change for most folks. This is the "no government involvement necessary" loan, up to $417,000 of loan amount (not purchase price, a critical distinction to make!). If you're putting 10% down on a $450,000 property, what you have is a conventional loan amount - $405,000 - not nonconforming, but a full on conforming loan, assuming you qualify on the basis of credit score debt to income ratio and loan to value ratio.

95% financing for conventional loans has become more available, making it more likely to work. When all that's available is one program from one lender, it can be withdrawn at any time, or you can fail to qualify, and that's it. Things that only one lender offers can vanish at any time, and there is no Plan B. If that lender pulls the program while we're in escrow, that's not Monopoly Money my clients are risking. But when there's multiple lenders and a couple different insurers, that's less likely to vanish like faerie gold. 5% of $400,000 is $20,000, which is a lot easier to get than $40,000.

FHA loans now require a 3.5% down payment as opposed to 3%. On a $400,000 property, that's $14,000. On the plus side, the funding fee (Currently 1.75 points) can now be added back in to the loan amount, yielding a 98.25% loan to value ratio when everything is said and done, but you need a 3.5% actual down payment or the deal is off. Furthermore, they have a financing insurance charge of 0.5 or 0.55% on top of your note rate, but better to pay the charge and get the loan you need than not pay the charge and not get the loan.

VA loans really have become the magic bullet. Not only do they not require a down payment at all, but closing costs of the loan (including the VA Funding Fee, if it applies) can be rolled into the loan on top of the purchase price. Furthermore, there's no financing insurance charge, and only very minimal loan adjustments, if any at all.

The good news, to counterbalance the increased down payment requirements, is that prices are much lower. The bad news is that if you wait for the lenders to lower down payment requirements again, prices will be much higher then. You see, it's the difficulty in finding people who can get a down payment that is partially fueling the fall in prices. They're not going to stay this low when that changes.

So how do you take advantage now? Where can you get the money for a down payment quickly?

I'll skim over the obvious and simple candidates: Savings, investment accounts, sell some of your stuff. If you have a spare Ferrari lying around you're not using, that's probably a peachy down payment for just about anything. Just because folks were all wanting to buy without a down payment, to the point where it became unusual for folks to actually have a down payment there for several years, does not mean that doing so is in any way mandatory. But if you are in one of these categories, you probably don't need to hear me tell you that money you have stashed away could be used for a down payment for the purchase of real estate. I'll bet you can figure it out on your own.

So let's look at the non-obvious ways.

Let's start at the least painful, at least personally: Retirement accounts. The tax code allows you to withdraw up to $10,000 from certain IRAs for the purpose of a down payment (talk with your accountant for details). Put two spouses together, and you've got $20,000. That may have been only 3% when properties were $600,000, but when the property is $300,000, $20,000 is almost 7 percent - more than enough for an FHA loan or even traditional financing now that PMI companies are back at 95% financing.

Second option: 401k and its siblings and cousins 403b, 401b, 457, etcetera. These are group retirement plans where you cannot withdraw the contributions for so long as you work for the company, government, or non-profit. But the majority of these have plan documents that allow those who have previously contributed to take out loans from their balance in the plan and repay those loans from future contributions. Let's say you've contributed $30,000 which has grown to $50,000. The mechanics do vary, but if you take a $30,000 loan and repay it $200 every two weeks from your normal 401 contribution, that's mostly a wash in most cases. Be careful for rules on interest rate charged and method of repayment, but the federal government's Thrift Savings Plan (among many other employer sponsored plans) allows loans for this purpose. Meanwhile, your original contributions may even continue growing. Once again, it depends upon your plan document and everything it lays out. There is a drawback: If you leave that employer, the loan may become immediately due and payable, or it may be converted into a heavily taxed withdrawal. Again, consult an accountant for details

If your family (or your spouse's family) wants to give you a gift for the down payment, that works. FHA rules specifically allow up to a 6% gift from family members, VA rules are similar even though they don't require a down payment, and even conventional lenders make it easy enough to use family gifts for a down payment. This may seem like a no-brainer, but many times Junior wants so much to do it on their own without help, that they refuse to see a very obvious solution even though it is the best and most painless way under the circumstances. You can always save up the money to pay them back even though it was a gift. Just because it's a gift doesn't mean you can't give them a gift back later; it just means that it cannot be a loan masquerading as a gift.

Many locally based first time buyer programs exist. There programs lend (not grant) you the money for a down payment. In some cases, 20% or more of the purchase price. Most of these take the form of a "silent second" mortgage where there are no payments due, and it you hang onto the property for a certain amount of time, the loans can even be forgiven. The drawbacks are several, but the usual elephant in the room is that these programs run out of money at Warp Speed every time they get a new allocation. I've heard of people who had tried three, four or more times at intervals separated by six months and still couldn't get into these programs due to budget limitations. It can be very difficult to get in on these programs. I applied for one back in April for some clients. Despite the fact that we were less than two weeks out of the starting gate from when the budget allocation had been received, there was nothing left in the program. So even though your loan person may be eager to participate in such a program, the fact that your application is competing with those of many other people may preclude it actually happening.

The final possibility is a personal loan. These can be either from banks and credit unions issuing a fully underwritten loan with market rate interest, or from family members deciding to make a below-market rate loan based upon the fact that they like you. Lenders take a truly large number of precautions to prevent the down payment money from being borrowed unbeknownst to them, but a fully disclosed personal loan, not secured against the title of the property, is perfectly acceptable in most cases. If does impact debt to income ratio, because you've got to make payments on the personal loan as well as the real estate loan, so it does constrict what you could conceivably afford in the way of purchase price. On the other hand, it does put the purchase money in your bank account today, when you need it, rather than two years from now, when there is an excellent chance prices will be much higher by then.

So there you have them, half a dozen possible ways to get a down payment quickly, while it really makes a difference to the home you can afford the payments for because prices are down. Which they are, in part, because people with down payments available to them are so difficult to find. If you need a down payment to buy and neither these not any other method of acquiring one will work, you're just going to have to wait it out until the guidelines are relaxed, or until you do manage to save up the money for the required down payment.

Caveat Emptor

Original article here

Quite a while ago, when loan standards were other than they have become, I wrote an article with the title Is a VA Loan a Good Deal? Back then, if you could qualify for a loan that was both A paper and full documentation, I could get you a better loan as measured by cost of interest for the same closing cost, maybe even if you didn't have a down payment. Lenders were eager to make loans at 100% loan to value ratio, and since conventional conforming rates have always been the lowest for a given cost, they could beat VA loans despite not being designed for the same situations.

That is no longer the case.

100% financing for ordinary conventional loans has completely self-destructed, at least for now. I am firmly of the opinion that it will be back for full documentation borrowers who can prove actual income via tax returns or W-2 forms, but for right now, it is gone. FHA loans only go to 96.5% Loan to Value ratio, and the down payment assistance programs that formerly enabled people to get FHA loans without a down payment have been put out of business by legislation. This leaves the VA loan as the sole loan program available that currently allows purchase of real estate without a down payment. Not only do VA loans allow over 100% financing, they have absolutely no ongoing mortgage insurance charges. There is a half a percent funding fee charged by the VA, but this is eligible to be rolled into the loan itself, and the funding fee is waived if the veteran has 10% or greater service related disability.

Not everyone is eligible for a VA loan. You must have earned it via time in the armed services. Currently active-duty service-folks are potentially eligible, providing they have met the criteria. In some cases, a spouse of a deceased serviceperson is also eligible for a VA benefit. This still isn't as many people as was true formerly. Thirty years ago, far more people served in the military than currently do. Even though San Diego is a military town, most veterans seem to leave when their tour is over, so the population of discharged veterans is lower than might be expected. They're here, but they have mostly come back because of civilian employment or following spouses who are themselves in the military, rather than choosing to retire here.

Indeed, Active duty servicemembers have an advantage over retirees. They are able to draw a housing allowance if they do not live in military housing - a housing allowance that can pay their mortgage instead of rent, and when reassigned, they can rent the property to another military family, knowing the military family receives that same allowance. A military family that exercises due diligence can retire owning five or more properties, all with positive cash flow, and most likely with huge amounts of equity, if not owned outright. Current BAH allowances for San Diego won't purchase a mansion, but they will cash flow out for quite reasonable properties in desirable parts of town. Since VA loans are all fully amortized, this will eventually pay the mortgage off, leaving them with only property taxes and maintenance for the expense of owning the property.

For a decade or more, VA loans were pretty much useless in high cost areas because of loan limits too low to purchase desirable properties. There for a while, they were only useful for one bedroom condominiums here in San Diego because the price of housing had so far outstripped VA loan limits that that was all that could be bought with them. That has now changed, both because prices have fallen and because VA loan limits have risen dramatically thanks to new legislation. Recent legislation has extended VA loan limits above "regular" conforming loan limits..

The one limit to VA loans is a good one to have: They require documentation of earning enough income to be able to afford the payments, either through tax returns or w2 form. This prevents something that has happened all too often for several years, real estate agents and loan officers selling someone a property that there is no way there are able to afford in the longer term. This was another reason VA loans were often bypassed for about a decade there, but I actually like this protective feature. Debt to Income Ratio is more important to protect the borrower than it is to protect the lender!

So even though not everyone is eligible for a VA loan, if you are one of those who has earned eligibility through service to the country, the VA loan has become the best "magic bullet" currently available to assist you in buying real estate. By not having a mortgage insurance requirement, or boosting the basic rate through adjustments as other loans have, and by requiring full documentation of income, they not only aid the veteran in affording the property, but have a significant protective element.

Caveat Emptor

Original article here

Many people are uncertain as to what closing costs are.

Basically, they relate to the costs of doing the transaction. There are people who work on getting your loan through the process of approval and funding, and those people have got to be paid. Anytime you're talking about a fee for a service that needs to be performed in order to get a loan done, that's a closing cost. This includes even origination, which is normally quoted in points, as the fee that the loan provider takes for getting the loan done. Not all loans have origination fees in points, but I'd say that in excess of 95 percent of all sub-prime loans and at least two thirds of all A paper loans nationally do. Of course, all loans have origination fees of some sort - the people putting your loan together and getting it funded are not working for free. It can be paid via Yield Spread, secondary market premium, or a couple other ways that don't result in an apparent cost to you, but you are paying for origination somehow. Nobody does loans for free.

Every loan has closing costs. They are a fact of life. You can choose to accept a higher rate on your loan such that the lender will agree to pay your closing costs, but that is not the same thing as not having them. Indeed, you should be very wary of someone quoting you significantly lower closing costs that anyone else.

When you are talking about closing costs, the vast majority of all loan providers used to pretend that so-called "third party" fees such as title, escrow, attorney fees in the states that use attorneys, appraisal, and notary fees do not exist. That has mostlychanged with the requirements of the new 2010 Good Faith Estimate. Although there are still holes in the rules, most of the games lenders play have changed towards misquoting the tradeoff between rate and cost.and then act all surprised when you complain about these extra fees that weren't on your beginning paperwork. Until the new rules came into effect (and it still happens because as I said there are loopholes in the new rules) people told me before they sign up for a loan that my fees seem high, compared to what someone else is telling them. The difference, of course, is that I'm telling them about all the third party fees upfront and the other folks they are talking to are doing their best to pretend those fees don't exist. They not only exist, but you're going to pay them as a part of any loan. Who would you rather do business with, someone who pretends it's going to cost you half as much as it will, or someone who tells you the real cost right at the start?

Now the critical difference between recurring and nonrecurring closing costs in that nonrecurring happen once, to do your loan, and then they are done. Recurring closing costs are those things that happen every month, like interest, property taxes, insurance, and the impounds for doing them, if applicable. Mellow-Roos and homeowners association dues also fall within the definition of recurring, but those items I just named are pretty much the full extent of the recurring closing costs. Pretty much everything else is nonrecurring. For example, you only need one appraisal, one notary fee, one escrow, and one title insurance policy per loan.

One thing that is often counted as a closing cost that should not be are discount points, which instead of being a charge for a service are a charge by the bank to buy you a lower rate than you would otherwise get. They are completely avoidable, and therefore not a true closing cost, not to mention that they're not a good investment even if you're paying them on your own behalf. There is always a trade-off between low rate and low cost. The lender will sell you a lower rate if you pay for it, but they won't give it to you free. Also, the new rules treat Yield Spread as a cost rather than what it has legally become: an offset to fees that causes the consumer to spend less money, making direct lender loans appear better than they are in comparison to Yield Spread.

The importance of the distinction between recurring and nonrecurring closing costs is mostly in purchase situations. If there is an allowance from the seller for closing costs, the wording for this on the purchase contract can be critical. Nonrecurring closing costs are far more limited than recurring, and just the impound account can add thousands of dollars to what you, as the seller, end up paying if you agree to recurring closing costs. It's up to you how bad you want to sell the property, but a buyer who needs you to pay recurring closing costs is likely not a very qualified buyer, and their loan is pretty likely to experience snags. I counsel my sellers to insist on substantial deposits and sharply limited escrow periods in such cases, and if the buyer is allowed discount points as part of what you're willing to pay, count on the fact that they are going to use the entire allowance you give them. If the buyer has a choice of allowing you to keep some of that money or buying themselves a lower rate, which also means lower payments, what do you think they're going to do?

Caveat Emptor (and Vendor)

Original here

One reason to check your referral logs every day: Sometimes you can find great material for an article. I got one about the three day right of rescission.

The three day right of rescission is a feature (or bug, depending upon your situation) with every refinance on a home that is a primary residence. The reason it exists is that loan documentation is massive, and confusing to the non-professional, sometimes intentionally so on the part of the lender. Some will throw massive documents at you so fast at closing that you never do figure out what's really important, delaying those documents until you show signs of just wanting to get it over with. Furthermore, until you see the final documents at signing, there is literally no way to prove that what your prospective loan provider quoted you on the Mortgage Loan Disclosure Statement (California) or Good Faith Estimate (the other 49 states) is actually what they intend to deliver. There's a lot of paperwork that can be put under your nose to make it look like that's what I intend to deliver, but until you have the final loan documents sitting in front of you, none of it means anything. Just because they give you those wonderful forms like a Mortgage Loan Disclosure Statement or Good Faith Estimate or Truth-In-Lending Advisory or anything else does not mean that is what they intend to deliver. The only document that is required to be an accurate accounting of the loan and all the money that goes into and comes out is the HUD-1, and that comes at the end of the process, and you get it at the same time as you sign the note.

I have said it before, but there are three documents you need to concentrate on at loan closing. Everything else is in support of those. They are the Trust Deed or Mortgage, the Note, and the aforementioned HUD-1. An unscrupulous lender certainly can slip stuff past you on other forms, but most won't bother. These three forms will tell you about 99.9 percent of the shady dealings. Some lenders and brokers will actually train their loan officers in how to distract you from the numbers on these three documents.

Once you have signed all of the requisite paperwork to finalize your loan (the stuff you sign in front of a notary at the theoretical end of the process), there is potentially a waiting period that begins. Purchases have no federal right of rescission, nor do refinances of rental or investment property, but if it's your primary residence and you are refinancing, you have three business days to call it off. Note that some states may broaden the right of rescission, and some may even lengthen it, but they can't lessen what the federal government requires.

As an aside, just because you have signed "final" documents does not necessarily mean your loan will fund. There are both "prior to docs" conditions as well as "prior to funding" conditions. The former means they must be satisfied before your final loan documents are generated, the latter means they must be satisfied as a condition of funding the loan. I want to emphasize that there will always be "prior to funding" conditions, but they should be routine things that make sense to do at that time, in that they cannot realistically be done any sooner. Many lenders, however, are moving "prior to docs" conditions to "prior to funding." This has always been prevalent for so-called "hard money" loans, but recently sub-prime lenders in particular have been emulating their example. The reasoning for doing this is simple. Once you've signed documents, you are bound to them unless you exercise right of rescission. Once right of rescission expires, you are bound to them period, until they either fund the loan or give up on the possibility of funding it. I strongly advise you to ask for a copy of outstanding conditions on your loan commitment before you sign.

Assuming that there is a right of rescission applicable, once you have signed final documents, the clock starts ticking. The day you sign documents doesn't count. Sundays and Holidays don't count. It is possible that Saturdays don't count, depending upon the law in your state. Here in California, Saturdays count unless they are holidays. It is three business days. So let's say that you sign final documents with a notary on a Monday of a normal five day week. Tuesday, Wednesday, the Thursday all go by while you have still got your right of rescission. Thursday midnight the right of rescission expires, and the loan can fund on Friday. Note that no lender can or will fund a loan during your right of rescission period, and every so often an otherwise excellent loan officer will have you sign loan documents before some other conditions are finished so that the right of rescission will expire in timely fashion to fund your loan before your rate lock expires. Remember that if the rate is not locked, the rate is not real, but all locks have expirations.

Applicable rights of rescission cannot be waived, cannot be shortened, and cannot be circumvented. Ever. There literally is no provision to do so in the law. This is both intentional and, in my opinion, correct. Kind of defeats the purpose of having it, which is to give you a couple days to consult with third party professionals before it's final, if it can be waived, because you can bet millions to milliamps that the sharks you are trying to protect folks from would have the folks sign such a document if it existed.

Now, just because the right of rescission has expired and the loan can be funded does not mean that it will be funded, much less on that day. For starters, good escrow officers will not request funding upon a Friday because the client will end up paying interest on both loans over the weekend for no good purpose. Once they request funding, the lender has up to two business days to provide it, and then the escrow officer has two business days to get everybody their money.

Also, remember those "prior to funding" conditions I spoke about a couple of paragraphs ago? If there's something substantive, it usually should have been taken care of prior to signing docs, leaving procedural stuff for prior to funding. But sometimes it can be in your interest to move them, if it means your loan is more likely to fund within the lock period, so you don't have to pay for lock extensions. On the other hand, there has been a movement towards making as many conditions prior to funding as possible, simply because once you have signed final documents you are more tightly bound to that lender.

In summary, if a right of rescission is applicable, start counting with the next business day after you sign final loan documents. After three business days, the right of rescission has expired and the loan can fund. Assuming a normal five day week, and that Saturday counts, as it does in every state I've worked in:

Caveat Emptor

Original here

Mortgage - Questions you must ask every provider about every loan when you are shopping. Permission is hereby granted to print this out and use it for non-commercial purposes so long as no alterations are made and copyright is preserved.

(Disclaimer: This list is trying to be as exhaustive as possible, but is likely missing some important questions. If you have one that I missed, send it to me: dm at )

Is there a prepayment penalty?

If so, for how long and under what terms?

What is the interest rate?

What is the amortization period?

Is there any possibility that the note will be due in full before the amortization pays it off? (Vaguely equivalent to "is there a balloon?" but a broader question)

Is the payment interest only, or principal and interest?

(if interest only) how long is it interest only, and what happens afterward?

Is there any possibility of negative amortization (the balance increasing) if I make the minimum payment? (See my post on the Negative Amortization Loan)

Is the nominal rate different from the real rate of interest I would be charged?

How long is the rate fixed for?

(If fixed for less than the full period of the loan) What is the rate based upon when it adjusts, what is the margin, and how often does it adjust?

What is the industry standard name for this loan type?

Is the rate you are quoting me based upon full documentation, stated income, NINA or EZ Doc? (Note: At this update everything but full documentation is essentially gone, but the others are likely to make a comeback eventually)

(If full or EZ doc) Assuming I have other monthly payments of $X (where $X is your other monthly payments), how much monthly income do I have to document in order to qualify? (If this is more than you make, Warning!)

How many points TOTAL will I have to pay to get that rate?

How many points of origination will I be charged?

How many discount points will I have to pay?

What are the closing costs I will have to pay?

(because they are allowed to omit third party costs from all estimates and totals, you must add the answers to the next three questions to the previous question unless the provider specifically includes them)

How much will the appraisal fee be?

How much will total title charges be?

How much will the escrow fee be?

Who will my title company be?

Who will my escrow company be?
(If escrow company is not owned by title company, i.e. same name, be prepared for unknown additional title charges).

How much, total, will I be expected to pay out of my pocket?

How much, total, will be added to my mortgage balance?

With everything added to my mortgage balance, what will my payment be?

How long of a rate lock is included with this quote?

What do you need in order to lock this loan?

I used to tell people to ask for a rate and cost guarantee up front. Unfortunately, due to changes in lender policy that are now universal, it has become cost prohibitive to lock a loan upon application. If a loan is locked but not funded, the lender will add additional cost to future loans from a loan officer. Note that this doesn't hit the consumers whose loans don't fund personally, but if your loan officer is the kind to disregard the hit, they will have been hit with bumps in their cost structure, costs that they will go out of business over if not passed on to you. Better loan officers have now replaced this with a set margin for their company and an ongoing discussion as to when to lock.

-------------

After you have finished talking to this person, go check out the numbers. If you have a calculator that can handle mortgage calculations, use it. If you're able to do the calculations yourself, even better. Otherwise, do a web search for payment calculators or mortgage calculators or amortization calculators, and try out a couple of different ones (because some web calculators on lenders sites are programmed to lie!). This is math - there is only one right answer! The numbers should come out the same except for rounding errors! If the difference is more than five dollars in any case, that's a red flag! (You should also make certain the reason for the difference is not operator error. For instance, automobile payment calculators assume a different first payment than mortgage calculators, but student loan calculators should be compatible with mortgages.)

Original here

Got this search:
"should I get a buyer's agent if I've already found a house"

The answer is almost certainly yes, but I am going to examine both the pros and cons. Full disclosure: This is most of what I do for a living.

The con is fairly simple. If the seller isn't paying a buyer's agent, they may be willing to sell more cheaply. Then again, they may not. One of the reasons people sell For Sale By Owner is that they're a little too greedy. Even if they have a seller's agent, their listing contract may call for them to keep the buyer's agent's commission if the selling agent sells the property without a buyer's agent involved, and this may cause them to be willing to sell more cheaply. They are under no obligation to do so, however - and without someone who knows the market on your side, the difference in price and terms of the agreement you could get with a buyer's agent is almost certainly more than this difference.

Many think the buyer's agent's job is to say, "Here is the living room." That's like saying the president's job is to look impressive. Sure, most presidents do look impressive and I do say "here is the living room," where it's applicable and something causes me to think my buyer may not have figured it out for themselves. Nor is it about looking in the MLS and my connections to find my buyer a property they like. It's not even about making showing appointments with listing agents and occupants.

My real job as a buyer's agent is to find you the best property for your needs under your constraints and get you the best possible bargain on it while making certain that the seller and their agent aren't hiding anything.

Many folks call the seller's agents and use them as their agent. This is what is known as a mistake. That seller's agent has a listing agreement telling them and the seller what the responsibilities of the agent are to the seller. They may or may not sign a representation agreement with the buyer. If they don't sign one, all of their explicit legal responsibilities are to the seller. They are working for the seller, not for you, and they have a contractual obligation to sell that property at the highest possible price as well as financial motivation in that their commission will be larger. The buyer's interests do not enter into it. Perhaps they do an excellent job of representing your interests anyway, but the odds are against it. Their legal responsibilities are essentially limited to "don't tell any lies and don't practice law without a license." While I was working for the FAA, we found out about an agent who had made a real good living for a while as a seller's agent and how he had done it: By telling everybody he showed a house in the area to that the airport was going to close. Ladies and Gentlemen of the jury, that airport land was dedicated solely to aviation usages by an Act of Congress, and if the county had wanted to close the airport (they didn't; they were making enough money to pay for every airport in the county there, and socking up a huge fund if they ever figured out something else aviation related to spend it on), they would have had to have paid back tens of billions of dollars to the federal government. We got a call from one of his victims one busy Saturday, who asked, "When is this airport scheduled to close?" We advised him that any proposed closure was news to us, and explained the preceding to the gentleman.

Even if the seller's agent does sign a representation agreement with you, in approximately thirty percent of transactions (from my experience) a situation arises where the best interests of the buyer and the best interests of the seller collide, in addition to the unavoidable issue of their interest are diametrically opposed on price. When this happens, no matter what they do, an agent representing both sides is stuck on the horns of a dilemma. If they do A for the seller, they are violating the best interests of the buyer. If they do B for the buyer, they are violating the best interests of the seller. Here's a hint as to which way they are going to jump in the event of conflicting interests: If they violate the seller's interests, they don't have a transaction at all. If you don't buy, they can always sell it to someone else, but if they lose the listing agreement, they are completely out in the cold.

Before I even point a property out to you, or if you find it surf the internet and ask, "What do you think?" I am evaluating the property for fitness, suitability, affordability, how it stacks up to other properties on offer, how many other properties are on offer, and what the details of the property likely mean in the way of potential problem issues. Just a for minor example, a property built in 1975 has to be concerned about both lead-based paint and asbestos; a property built in 1990 still has those worries but to a far lesser extent, as most building stocks with those concerns were long gone, and a property built in 2005 is more likely built over Jimmy Hoffa's final resting place than a repository for asbestos and lead based paint (it could happen, but the odds are long against it). I am not an inspector or a tester, but I can and do alert my clients to safety and environmental issues, potential repair bills, and all sorts of other items before we've made an initial offer. "Best thing you could do with this building is 'accidentally' run a bulldozer through it," is something I told a client in a few weeks ago, in the context of telling him the value, if any, was the land less the cost of demolition and haul-away. Initially built almost 100 years ago and haphazardly added to as well as obviously not in compliance with code, my client would have been facing the possibility of the county condemning the building as unsafe, and quite frankly, I didn't think anyone would insure it outside FAIR requirements. You're not likely to get that kind of talk from a seller's agent. Instead you get words like "charming," "funky!" and the ever popular phrase "needs a little TLC!". If you have a buyer's agent, the sucker they're looking for shouldn't be you. You might decide you want the property anyway, but you'll be aware of the issues going in to negotiations. Most importantly, if the sellers aren't going to be reasonable, you have someone who should be willing to tell you when to walk away. A listing agent cannot do that.

When it comes to the offer, a seller's agent is looking to get the highest possible price. Period. They don't care if you could buy a better property for less elsewhere, their responsibility to the seller and desire for a larger paycheck are in perfect alignment. A buyer's agent is responsible to you, and whereas buyer's agents get paid based upon the sales price, same as the seller's agents, they at least have a legal responsibility to do their best for you. If there are any complaints, a seller's agent can take refuge in the fact that it is their primary duty to get the best possible terms (i.e. highest possible price) for the property. The buyer's agent has no such shelter. Which would you rather have as your representative?

Buyer's Agents do not usually cost you, the buyer, any extra money. I'm sure there are exceptions, but I've never run into one. Both the Exclusive and Nonexclusive Buyer's Agent Agreements used by California Association of Realtors state, in the absence of additional agreement, that any commissions paid out of the "cooperating brokers" amount on the MLS count against the buyer's obligation to the representing agent. This is typically agreed to be two percent in California, and I don't know the last time I saw a residential MLS listing offering less than that to the buyer's agent. The way the transaction is structured is that the selling agent gets the entire commission, but agrees via the listing contract and MLS to share a certain portion with the buyer's agent, if the buyer has one. Good buyer's agents typically beat the price down significantly more than two percent, especially in the current market. I am equipped to do value battle with that seller's agent in ways that members of the general public are not, and whereas it's true they don't have to negotiate with my clients, they've got to sell the property to someone. It's not like the real estate fairy is magically going to convert this property to cash.

If there's something you should know about a property, the buyer's agent makes certain the question gets asked and the answer disclosed to you. This eliminates a lot of potential surprises down the road.

Finally the agent knows how to respond to unexpected or unusual situations. They should know how to deal with little niggling details that aren't quite cookie-cutter. None of these issues are common individually, but when you look at the entire transaction, most real estate sales have at least one such issue. Many of these look minor or even insignificant to those who don't understand the implications, but can amount to tens of thousands of dollars in repair, or even things that make property not suitable for the purpose people want to buy it for. At least 80% of the people who tell me how well they did without an agent also tell me something that informs any working agent that in reality they got taken - and that's without me so much as seeing the property or even the listing page.

In short, buyer's agents are the professional on your side, they typically do not cost you any additional money, they usually save you a significant chunk on negotiations, and if you have one, you're more likely to find out about potential problems with the property before you buy.

Caveat Emptor

Original here

There are several possible options to deal with this issue, depending upon the exact situation.

For A paper, both spouses must qualify, credit score-wise. If one spouse's credit is not up to the level that lender wants (and Fannie or Freddie require) they will be unable to qualify together. The way around this is a quitclaim to the spouse who has a good credit score as sole and separate property. The catch is that then the good credit score spouse has to qualify for the loan on their own. If the other spouse is the one that makes all the money, if the good score spouse is in a profession where the needed income isn't believable for stated income (stated income is essentially gone as of this update; this was a legitimate use for stated income although the risks should be discussed), or a whole list of other possible reasons, you may have to go sub-prime, which is also essentially gone. You will not be able to qualify for the same level of property you could with two documentable incomes.

For sub-prime, the spouse who makes more money is the one that will be used as the determination, so as long as the second spouse is in the same vague general ballpark, score-wise, you can still use both incomes to qualify. If one spouse makes slightly more money but the other spouse has a much higher credit score, it was usually necessary to do the stated income with the spouse who has the better score as the sole borrower. You can't do this if one spouse is a doctor and the other works fast food, but you can if they're both in the same industry, or in industries where the incomes are roughly comparable, so long as the job titles and employment history don't render the claim unbelievable. The classic example of this working is both spouses in sales, paid on commission. In some instances, a quitclaim can still be the way to go. However, note that with the current state of the market, it is necessary to stay within what the spouse with the usable income can afford on their own. Note that there are still risks that need to be discussed, most notably to the spouse with the better credit score, but it could be done when this article was originally written because stated income was available. It will probably come back at some point, but it's anyone's guess as to when.

Note that if you do a quitclaim, the property doesn't have to stay quitclaimed. As soon as the loan funds and records, you can quitclaim it back to husband and wife as joint tenants with rights of survivorship, or whatever you want. Quite a few spouses are understandably reluctant to give up all ownership interest, but it's a temporary measure; it doesn't have to stay that way. As soon as the loan funds and records, you get the spouse who qualified for the loan to quitclaim it back to husband and wife, or the trust, or however they want the vesting to be. The better escrow officers I work with will usually have the quitclaim back made up and sent out for signatures without even being asked (I found this out one time when my clients didn't want it quitclaimed back, and called me when they got the form in the mail. I just told them to shred it, and called the escrow office to tell them thanks but not to bother).

Caveat Emptor

Original here

With a lot of people running around like Chicken Little screaming about the sky falling, a lot of folks who would like to buy property due to the much-lowered prices are wondering if there is any way they can qualify for the loan. There are lots of people out there over-exaggerating the difficulty of getting a loan. Well, we do have some events in the market that make it harder, but despite the Chicken Littles, the answer to the question is "probably yes." There are some exceptions, and some caveats for those who do, but most people actually can qualify for loans to buy property.

The big caveat is that it may not be a huge beautiful home straight out of the showplace magazine in the best area of town. With the death of stated income and no ratio loans, you have to limit yourself to what you can document the ability to make the payments for. The ultimate sin of stated income was that it allowed unscrupulous real estate agents and lenders to sell people properties which there was no way they were going to be able to afford in the long term. There will be legitimate borrowers hurt, and hurt badly, by its demise, but the aggregate damage done by recurring abuse of stated income was far greater than the damage that will be done by its demise. I would like to be able to do stated income, but I can't think of any way to prevent its abuse, and so far, neither has anyone else. Yeah, I may think I'm a good guy, but everyone thinks (or claims) they're the Good Guys, including those who most emphatically are not. Stated income has been so abused in the last few years that I cannot bring myself to excessively mourn its passing despite the damage said passing will do.

The worst fall out of stated income abuse is all of the foreclosures, but right behind that is the death of the idea in the minds of most of the public that maybe someone who makes minimum wage thirty hours a week might have to settle for a property that might not be as big, as beautiful, and as desirable as the person who makes ten times the national median. If you want to make these folks able to afford the same property, there are only two ways to do it: make all properties equally unattractive, or give the government the power to decide who gets the good stuff, which merely substitutes one privileged group (those with special influence over the government - i.e. the point of a gun) for the current privileged group, who at least earned their money via transactions freely entered into where the other person must have seen some benefit. The guy making minimum wage realistically has two choices: Figure out a way to start earning the same money as the guy making ten times national median, or learn to accept that he can't afford quite as expensive a property, and instead of making with the Green Eyed Monster, be happy with what he can afford. There are ways to improve your property, and improve what you can afford, and I love helping those who will put forth the effort, but it's considerably more involved than waving some metaphorical magic wand. For those who think the prices are going to come down further, not going to happen. You can sit in denial while they do so, or you can take advantage before it gets worse. If you're willing to work towards your goals, I've written before about the best and quickest way to actually afford something you can't afford right now

Okay, enough with the economics lesson. You're here because you want to know if you'll qualify for a loan now, and probably how much you can qualify for. There are basically three loan programs in the first tier for consideration for most borrowers: conventional A paper, FHA, and VA. I'm going to cover each major criterion: loan to value ratio, credit score, debt to income ratio, in order for each in successive paragraphs, followed by an affordability table.

Conventional

Conventional A paper is the most tightened of the programs, and still more people can qualify than not, even with the tightened qualification standards. Here's the skinny in the current market: Most conventional loan programs want no more than a 90% loan to value ratio, but 95% has become more available of late as mortgage insurance companies return to that market. Turning that around, that means you need a 5-10% down payment for conventional conforming loans. Nonconforming (above your area's limit) has significantly larger down payment requirements. There are ways to get down payments in most circumstances if you want to, but the era of being able to in any wise pretend that real estate is somehow immune from real world consequences - like agents and loan officers who told people "Nothing down! Just sign on the dotted line and walk away if it doesn't work out!" are over - and this is one casualty of the meltdown that nobody with any sanity will mourn. Real estate is a wonderful investment, properly done, but those jokers weren't doing it right. In order to be doing it correctly, you have to plan ahead for what happens next, and have a plan to deal with it.

Where A paper lenders were accepting credit scores as low as 620, now they are pretty much wanting to see credit scores of 700 or at least 680, at least for loan to value ratios above 80%. It's not difficult to improve credit score into that range if you will try, but it can take a few months. Your choice: You can make the effort and get it done, or you can miss the best buying opportunity we are likely to see in at least the next ten to fifteen years. Or, you can somehow come up with a higher down payment. Your choice. Lenders have the money; they are entitled to set terms for lending it out. You don't want to meet those terms, you can wait until you have enough to pay cash - and paying all cash for real estate isn't nearly such a good investment.

Conventional loans still want to see the exact same 45% debt to income ratio they always have. There is room for some slop at high credit scores or with certain kinds of income, but if you plan for 45% in the first place, you're still within the loan guidelines they will accept. The way to figure this is easy: take 45 percent of your gross pay. Not what actually hits your account - but what your employer actually pays out. From this number, Subtract your ongoing debt service. That's the maximum you can qualify for. If you want to keep it to less, that's actually a good thing in my opinion, but the general issue is that most folks want to buy a more expensive property than they can really afford. Hence, the stated income debacle, among other problems. The number of people who can stay strong and within a budget when they're being shown much more beautiful properties "for not very much more on the payment" is relatively small. One reason I keep telling people to shop by purchase price, not payment. If it's outside of your budget, it might as well be on the moon for all of the good it will do you.

This 45% of gross income minus ongoing debt service has to cover all of the ongoing expenses of owning a property. Principal and Interest on the loan, monthly pro-rated property taxes, and homeowner's insurance. If they are present, it also has to pay homeowner's association, temporary assessments such as Mello-Roos, and any other regular recurring expense of owning that property. For instance, assuming a 10% down payment, 6% principal and interest fully amortized loan (high at this update), California default property taxes, and $100 per month for homeowner's insurance, plus 1% PMI for 90% financing (If they promise there won't be PMI for single loan at 90%, they are lying unless it's VA), here's a table of how much you need to make to afford it (assuming $200/month of other debt):

FHA

FHA loans are a federally insured loan program that anyone can theoretically get. FHA loans allow an initial loan to value ratio of 96.5%, so you only need 3.5% for a down payment. On the minus side, they charge a 1.75% funding fee, and PMI-equivalent of either half a percent annualized for loan to value ratios below 95%, or 0.55% annualized for loan to value ratios of 95% or greater. The upshot is that they are not free, but you can borrow up to 98.25% of the purchase price of the property (providing the appraisal supports that value). This is the lowest down payment of any generally available loan currently available.

The enabling regulations for FHA loans still do not require any minimum credit scores, which is all well and good, but the lenders have instituted a requirement for credit scores that vary from 580 to 640 in order for them to be willing to participate. They who have the gold make the rules, and they've had what are euphemistically called "adverse results" with lower scores. You may have read about that. The good news is that it's even easier to improve your credit score to this level than it is to improve to the scores conventional loans require.

Maximum allowable debt to income ratio for FHA loans starts lower, at 43%, but the FHA is willing to issue a waiver up to about 49% pretty easily if you will still have some significant money you can access after the down payment (6 months PITI reserves), or in other words, if the down payment does not represent every penny you have in the world. Nonetheless, if you start and plan for 43% and limit yourself to that, you are better off than if you try to go over. According to what people are most often trying to do with FHA, here is a table of what you can afford with 3.5% down payment, assuming 1.25% (California) property taxes, and the same $100 per month insurance as the previous example, and a base loan rate of 6.25%, as FHA rates are usually but not always slightly higher than conventional. Note that the slightly higher monthly costs are a result of the higher amount borrowed - the cost of money is actually slightly lower under the assumptions given. Once again, I'm assuming $200 per month of other debt; FHA is a lot less forgiving about front end ratio than conventional.

VA

The VA loan is a benefit earned by those those who have served in the armed forces. I don't know what the minimum service requirement is, but I do know that they allow a maximum loan to value ratio of 103%. A veteran literally does not have to come up with a down payment. Not only that, but they can include up to 3% of the purchase price into the loan on top of the purchase price. Not one other (non-scam) program I am aware of has ever loaned over 100% of value of the property, and this one is still doing it. Unlike the FHA, the VA only charges a funding fee of half of one percent, and no financing insurance. Furthermore, the funding fee is waived for those with 10% or more service disability. I certainly wouldn't serve in the armed forces just to be eligible for a VA loan, but it is a nice thing that veterans earn for all that they have gone through.

Credit score is as the FHA: none required in the regulations, but the lenders want to see the same basic minimums (580 to 640), and for the same reasons. Once again, credit scores are not fixed and immutable and they can be improved as well as hurt by events. Just because you suffer a blow to your credit does not mean you cannot counter-act it with by making an effort to improve it.

Debt to income ratio is the same as the FHA at 43%, with the same waivers possible for higher. Given the way most folks use VA loans, I am going to use an example of loans for 103% of purchase price, at 6.25% (for the same reasons as FHA), with, once again $200 per month of other debt service assumed. Once again, the reason it is as close as it is to the others here is due to higher loan balances under these assumptions. If you compute the same situation for all three loans, the person with VA eligibility will pay less than either of the others until the loan to value ratio is below 80%, when the conventional loan will be best. Keep in mind that in this case, the VA loan balance is about 14% higher than the conventional, yet the cost of housing is very comparable, and the VA has by far the lowest down payment requirement ($0).

Now there are other programs that make it easier to afford real estate, or to come up with the down payment. The Mortgage Credit Certificate and your locally based first time buyer program are a way to increase affordability and possibly come up with a down payment without saving it yourself. The drawbacks to these programs is that their budgets tend to be very limited, and what there is evaporates quickly when they do get an allocation of funds. The three basic loan types are there 365 days per year, and I've never heard of them being unwilling or unable to lend to a buyer who met their qualifications. Providing you meet them, you can get a loan, and therefore, you can buy real estate if this market strikes you, as it does me, as significantly underpriced, given the scarcity and ability of people to pay. Or as Warren Buffet says, "The time to buy is when there is blood in the streets." This principle is no different for real estate than it is for stocks or whole companies. If you can afford to buy with a good sustainable loan, you will be very happy that you did in a very few years.

Caveat Emptor

Original article here

I was approached by these folks a while ago via email.

I attempted to get them to write up the experience themselves but I wanted to write something about this before I completely forgot about it. This whole exchange is indicative of games loan providers play in order to make money.

I'm going to sketch this out chronological to the extent possible. What happened was Mr. and Ms. A got a postcard in the mail quoting low payments for their loan amount. They thought it looked great, and called the loan provider. The loan provider talked about these great payments on a loan that looked fairly real, and quoted an APR of 6.18. He told them that this was a great loan, and compared it to a 5/1 ARM in such a way that that was what they thought they were getting. No worries, because they were going to be transferred by his company in two to three years.

They asked my opinion about another item having to do with the loan, and something about what they said sounded funky to me.

Well, i believe what I'm getting is called a 5/1 ARM. Each month i have the 4 options of minimum payment, interest only payment, 30 yr payment, or 15 yr payment. (payments respectively would be either $A, $B, $C, or $D)

The minimum payment stays the same for every 12 months, then increases by about $90 each subsequent yr. I know minimum is not ideal, but i live in an area with high appreciation, and because of the ridiculous value of property in the area, & the school system in this county, it continues to appreciate regardless of trends elsewhere.

I'm told the loan comes standard with 3 yr prepay. I can pay the points I mentioned to make it a 1 yr, but it doesn't affect my interest rate coming down. That's at about 6.18%

Well, the part about property appreciating regardless of trends elsewhere is just plain wishful thinking. There is nowhere that is insulated from economic conditions. Nonetheless, it's not what we're talking about here. Does this loan sound like something else that I keep writing about?

Here's what I sent back:

That particular loan is actually a Negative amortization loan. I explain those here (same link as last paragraph - ed).

They are not wholly without redeeming qualities, but they are something to be done with a trembling hand and much looking over your shoulder. At the current rate, expect $725 to get added to your balance the first month - and rates are rising, so this is likely to accelerate, and your underlying rate is completely variable on a month to month basis. Even if they don't rise and you make the minimum payments, you will owe approximately $X after two years - an increase of $18,620 in your balance! Will it be an issue if you owe $18,600 more when you go to sell it? I think it likely that the answer is yes, but it's your call.

A 5/1 is something entirely different. It is a "A Paper" Thirty year loan with the interest rate fixed for the first five years, then adjusting once per year based upon LIBOR, not COFI or MTA. As A paper, there is not an embedded pre-payment penalty. Right now, in California, I have them at about 6.25 no cost no points no prepay, or 6.5 interest only, and truly fixed for five years.

Furthermore, there was another issue with the loan quote:

If I do the math, the first payment gives a principal balance of $X+2000, the second payment gives a principal balance of $X, The third gets $X+500 and the fourth $X+1300. If these are the numbers your loan provider gave you, which of these numbers is correct? Any of them? Unless you're paying the 1.5 points out of pocket, your loan provider should give you a quote which adds them to the amount you are borrowing. Did they do this, or did they pretend it was going away by magic?

They responded:

(sic)
oooh. sounding scary. So i left them a mssg asking which it was, a negative amortization loan, or a 5/1 ARM. I also asked for more info as I was sent spreadsheet which is missing some info. I am fwding the spreadsheet if you don't mind the attachment.

Well the loan provider had named the spreadsheet "2005_Pay_Option_Work_Sheet.xls" Pay Option is one of those "friendly sounding" names for a negative amortization loan. Well, I knew before what kind of scum bucket this loan provider was before I opened it, but doing so was confirmation, good enough to convict in court except that what he did isn't illegal, only immoral and unethical. Yep, it had all of the characteristics of a negative amortization loan as prepared by the worst kind of financial predator. Three or four payment options, including minimum, interest only, and 30 year amortized? Check. Prepayment penalty if you made any other payments (The so-called "one extra dollar" prepayment penalty I talk about here, which is not necessarily characteristic of negative amortization loans but certainly seems to occur there more than anywhere else). Check. Yearly minimum payment increases of about 7.5 of base minimum payment%? Check. Complete lack of disclosure that if you make the minimum payment your balance increases by hundreds of dollars per month? Check. About a 5 percentage point absolute spread between nominal rate and APR? Check. Complete failure to disclose that the "teaser" payment is based upon a "nominal" (in name only) rate of 1%? Check. Failure to disclose that the real rate was month to month variable from day one? Check. Failure to disclose that the index it was based on had risen in recent months and that unless said index went back down, the real rate would be rising? Check. Failure to include real and known closing costs in your loan quote? Check. That last is kind of minor as compared to everything else, but I'd be upset in a major way if it was the only thing wrong he did.

I sent Ms. A an email which said, in part:

"Option ARM" is a common, friendly sounding name for what is still a negative amortization loan. Everything about this loan, from the fact that it has a "payment cap" which is unrelated to a rate cap, screams negative amortization loan.

The 5/1 is a different loan provided for comparison, as the sheet tells you, and is a better loan for almost all purposes, as the second column of the comparison tells you. A 3/1 might have a slightly lower rate, or it might not. Ditto any of the 2 or three year subprime variants.

Intro period is telling you the period the competing is fixed rate for.

MTA loans are based upon a moving average of the treasury rate over the last twelve months. Since they've been going up, your real rate is likely to increase as some older and lower rates drop out of the computation in upcoming months.

Pay attention to the two footnotes on the payment options. "deferred interest" is characteristic of negative amortization.

(Name redacted for publication). They are not the only such company, but the translation into real english of their name must be "watch out for our piranha"

These loans are very commonly pushed because most people "buy" loans based upon payment, making them very easy loans to sell because unless you understand the drawbacks, you will think this is the greatest loan since sliced bread. These are up to forty percent of all new loans in the last year in some areas (including here), and are likely to contribute to a crash in housing values soon.

There are sharks and wolves out there, as this illustrates. Why people who would never buy a toaster oven without checking at least two vendors will sign up for a mortgage without shopping around is beyond me, but people do it. This is a trap that can be very hard to avoid unless you know what's going on, but if you talk to a few loan officers, and and go back and forth, chances become much better that you'll be saved by one of Jaws' competitors telling you what's really going on. Other, competing loan providers deal with this stuff every day. After a very short time, we get to the point where we can recognize it in our sleep. But we can't alert you to these kind of issues if you don't give us the chance.

Luckily, these folks gave me the chance.

They were in another state, and so I didn't get any business out of my good deed, but that's okay. I got this article. And now, you folks can read about it, and be forewarned.

Caveat Emptor

Original here

So what else is available, besides the thirty year fixed rate loan?

There are many kinds of loan out there. Here's a quick overview:

A Paper

In addition to the thirty year fixed, there are several other varieties of fixed rate loan available, and several that are not. Commonly available are five year fixed, ten year fixed, fifteen year fixed, twenty year fixed, and twenty-five, and although forty was making a comeback, I don't know anybody that's offering it now.

I tend to avoid them all with my clients, except for the thirty year fixed. You can always pay more if you have more money that month, but you cannot pay less, and the pure numbers actually say that you should not pay your loan off faster. The shorter the term, the lower the interest rate should be, as not only are they guaranteeing the rate will not change for a lesser period, but the shorter the term, the more principal you are paying every month and the less risky the loan is. Nonetheless, they are also harder to qualify for because the minimum payment is higher. Shorter term loans also take less advantage of leverage, although this is always a two-edged sword.

For instance, if you have $2000 per month payment that you qualify for, then at 6.5 percent interest rate, here are the loan amounts you qualify for:

Thirty year fixed rate loans also come in interest only loans, usually for five years interest only, but some lenders have ten year interest only available, after which it amortizes over the remaining twenty-five or twenty years - which of course means higher payments when it does amortize.

A paper loans also come in Balloon Loans, with thirty year amortization, where you make payments "as if" if were a thirty year fixed rate loan, but they are due in full after five or seven years (a few ten year balloons exist, and fifteen year balloons are almost exclusively Home Equity Loans). The shorter the balloon period, the lower the rate should be.

A paper loans also come in hybrid ARMs, with thirty year amortization and payoff term, but shorter fixed period. Unlike Balloons, you are welcome to keep them the full thirty years if you want to, but most folks want to refinance or sell before the adjustment begins. One, three, five, seven and ten years are commonly available fixed terms. Once they begin adjusting, they are based upon an underlying index plus a set margin above that, and the vast majority of A paper hybrids adjust once per year, and all the loans from a given lender will, once they adjust, adjust to the same rate no matter what you bought the start rate down to. For A paper, the base index is usually the one year LIBOR (until recently, the treasury rate was also available as a basis). COFI, COSI, and MTA are Alt-A negative amortization loans, not A paper, and all three varieties of negative amortization loan are the same stuff from different outhouses. There are probably a hundred times more negative amortization loans than there should be, because they were so easy for those in search of a quick commission check to sell by the payment when you slap a friendly sounding label like "Pick a pay" on them.

Finally, there are some few A paper that are true ARMS, or so close that they might as well be. Month to month loans, adjust every three month loans, and adjust every six month loans. Their adjustments are usually on the same basis as hybrid ARMs, and they have thirty year amortizations. Some are even available in interest only for a specified initial period.

Sub-prime

Sub-prime loans come in more flavors. The most common are hybrids fixed for two years, the next most for three. Both come in thirty and forty year amortization periods, as well as interest only. Interest only usually carries a higher rate for the fixed period, because they are riskier loans from the lender's point of view, but the payment is lower. These are usually called 2/28, 2/38, 3/27 and 3/37 loans, for the fixed period and the remaining term thereafter. Interest only variants are all 2/28 or 3/27, and when they begin adjusting they begin amortizing, which can make a sudden sizable difference in payments. Some sub-prime lenders also offer 5/25 and 7/23 programs, including interest only variants. Once they adjust, all of these loans adjust every six months, which is one way to usually tell if you have a sub-prime or A paper hybrid ARMs, as the latter almost always adjust once per year, although a few lenders also have A paper hybrids that adjust at six month intervals.

Sub-prime loans also have thirty, forty and even fifty year fixed rate loans, with some thirty year fixed rates (only) having an interest only option, usually carrying a quarter of a point higher interest and an interest only period of five years. Be aware that a large percentage of these products are actually thirty year loans with a balloon payment at the end, but as often as people refinance, such a balloon isn't relevant for most people. Nonetheless, the rate spread between sub-prime hybrid and sub-prime fixed is usually larger than the spread between A paper hybrid and A paper fixed. Where you might get the A paper thirty year fixed for one percent above the rate of a 5/1 ARM, the difference between a 3/27 and a 30 year fixed is usually closer to two percent (this is by recent standards. When I bought my first property years ago, I was offered a choice between 5.75 percent 5/1 and 11 percent 30 year fixed)

I tend to like the 5/1 ARM for myself and my A paper clients. It saves a lot in interest (usually more than a full percent over a thirty year fixed), and you've got five years where nothing can change, which is a longer period than most folks go without refinancing. The 5/1 is usually only about an eighth percent or so more expensive, interest wise, than the 3/1 while being a quarter percent or so cheaper than a 7/1. For the sub-prime clients, I tend to prefer the 2/28 if I think they'll be A paper at the end of two years, the 5/25 if not and if I can find it (3/27 if I can't). Of course, if you really want to pay the higher rates for a long term fixed rate loan, I may believe you're wasting money (in normal markets - not now), but it's your money to waste, and you're the one making the payments.

Two final types worth covering are the HELOC ("he-lock"), or Home Equity Line Of Credit, and HEL ("heal"), or Home Equity Loan. They are usually used as Second Trust Deeds, the second loan on a property. A HELOC is a variable rate interest loan, usually prime plus a margin, and there is often an interest only period. It is a line of credit, and so long as you stay within your credit limit, the initial underwriting covers it. Nobody does fixed rate HELOCs; what they do when you "fix the rate" is fix that part of it you've already taken out and lower the maximum available credit. HELOCs have two phases, a draw period, when you can take more out (up to the approved limit), and a repayment period, when you're repaying what you took. Most folks end up selling or refinancing, however. Home Equity Loans are one time, fixed rate loans. I've seen all sorts, but the most common is a 30 year amortization with a 15 year balloon, although the twenty year fixed is almost as common. You need to refinance, sell, or pay the loan off prior to the end of fifteen years, lest the lender call the note.

Caveat Emptor

Original here

I keep reading stuff on the internet advising people who are upside down to just walk away if they are a upside down on their mortgage. This has got to be right up there with the worst financial advice I have ever heard.

Here's the thinking: You owe more than the property is worth, and the loan is non-recourse. So the thinking goes that if you just stop making payments and walk away from the property, you're essentially paying yourself the difference.

Not so.

First off, debt forgiveness is taxable income. You borrow $500,000 for a home, that's exactly the same as the lender handing you $500,000. If they only get $400,000 back when the home sells, that's $100,000 of taxable income to you. While it is true that there is currently a temporary federal amendment to the tax code still on the books at this point in time, it will expire, and your state may not have such an amendment. The lenders really don't like this as it encourages people to lose them money, and contrary to campaign propaganda, it isn't the Republicans who have been dancing to the tune of the lender's lobby.

Second, your credit is going to take a hit that is going to last up to ten years. Not seven, not two. From Form 1003, the federally required loan application. Every single real estate loan through a regulated lender must use this form. Some of the "Thirteen Deadly Questions" on page four of the form:

a. Are there any outstanding judgments against you?

b. Have you been declared bankrupt within the past 7 years?

c. Have you had property foreclosed upon, or given title or given deed in lieu thereof within the last seven years?

...

e. Have you been obligated on any loan resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment?

f. Are you presently delinquent or in default on any federal debt or any other loan, mortgage, financial obligation bond or loan guarantee?

Look at question e again. There is no time limit. You will be answering that question "Yes" for the rest of your life. How do you think "I quit making payments because the value of the house decreased" is going to wash as an explanation to an underwriter? If you want your loan approved, even forty years from now, I strongly suggest you have done everything you possibly could to make good on the debt. Judgments typically last ten years, as does the notation, "Settled account." You are going to have a period of two years where lenders can't touch you, even if they want to, it can be ten years before they're willing to take a chance, and you're going to be sweating the fall-out to question e for the rest of your life, because that is cause for extra underwriter scrutiny, and a lender being unwilling to approve even minor variations forever.

Here's something lots of folks aren't considering: It's true that purchase money loans are non-recourse in California and many other states. That's a good thing, as far as it goes. But there are limitations upon that. One of the limitations is fraud. here's the legal definition of fraud:

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Did you "shade the truth" on your loan application? Lots of folks did. This is a big problem, and one reason why I have always hated stated income loans. Just because the lender doesn't hit it today when the property sells, doesn't mean it goes away. The lender has a minimum of three years to file a suit. They may file a suit even on comparatively small amounts of several tens of thousands of dollars, hoping that you don't show up in court. If you don't show up, the default judgment is entered against you, and that is very hard to overturn. If you lied on your loan application, that turns even a non-recourse loan into a recourse loan. They can go after savings, retirement assets, pension plans, attach your paycheck, you name it. Even if they don't want the rigamarole themselves, they can sell the rights to collect, or even put them out to law firms looking for a bounty on whatever they can get out of you.

Furthermore, if there's some reason to do so, they can pass the paperwork on for criminal investigation. Fraud carries criminal penalties, and it's the government footing all the bills of pressing the case.

Now here is another reason why you shouldn't walk away: If you do so, you are taking all of these consequences and bringing them into the here and now of concrete consequence of actions that have already been taken. But the real estate market is cyclical. Just keep making your payments, and it will come back. Maybe there are some exceptions to this, but I'm not aware of any.

Let's look at a personal experience I had with my first property. Bought for $90,000 in 1990, value peaked at $106,000 the next year, then crashed to $63,000. I didn't buy "zero down" like probably the majority in the recent price run-up, but the principle is the same. Some people thought they should walk away. Having lived through four previous cycles locally, I just kept on keeping on with the payments. By 1996, the property was worth more than I paid again, and not too long after, people who had just kept on keeping on with their payments were in a position to sell for a huge profit.

Had I sold while the property market was down in the nineties, I would have suffered most if not all of these consequences. By just making the payments, I effectively let time fix the market for me.

By making those payments, all you're doing is sitting on a temporary loss on paper, as opposed to turning it into a hard loss with real world consequences. The paper loss has precisely zero importance - unless you sell while the market is down. The only times the value of the property is important is when you refinance, and when you sell. It doesn't matter what the value is at other times - unless you make it matter by choosing to sell. If you've got a sustainable loan, keep making the payments, and in two years or five, you'll be in a position for make money again when you sell. What's hurting the real estate markets badly is excess supply and low demand, caused by people who have no choice but to sell, and fewer buyers than usual. What happens when these conditions go back to a more normal market? That's right, the prices go back right where they were - if not higher.

Furthermore, if you get out by selling short or through foreclosure, it's not like you're going to be able to jump back into something else any time soon. Absolute minimum two years, as above, and perhaps much longer than that. You jump out of an upside-down mortgage, and you're going to be sitting out the absolute sweetest time to be in the market - right when it starts to recover. You sell or allow foreclosure, and you turn that theoretical paper loss of $100,000 into a real concrete loss of $100,000. That's permanent, and you're out of the market until lenders are willing to take another chance on you, which could be never. But, if you stay in the property, when it starts gaining value again, you're still in the market. I know lots of people that turned $30,000, $50,000, $100,000 or more of temporary paper losses into profits several times the size, simply by holding on and allowing the market time to recover. Profit or loss on an investment is measured solely by price at acquisition versus price at disposition. If you buy for $500,000 and sell for $300,000, it makes precisely zero difference that it was worth $700,000 at some point in the middle. Similarly, if you buy for $300,000 and sell for $500,000, the fact that the property was worthless at some point between is irrelevant to the fact that you still made a $200,000 profit.

If you have an unsustainable loan, there are options to deal with the problem. Refinance if you can. If you can't, call your lender and see what you can work out, or try a loan modification. For their part, lenders are trying to keep the problem from getting worse than it has to be, and every time someone takes a loss because they couldn't hang on, the lenders take the exact same loss if not worse. There are limits to what they are willing to do, but I am amazed at some of the deals they really have accepted because they believe it is better than what will happen if they don't. Which situation would you rather be in: able to hold on and eagerly awaiting the market comeback that's going to happen, and will benefit those than hang on, or stuck with a bad situation permanently because you couldn't stand the thought of being upside-down on paper?

Caveat Emptor

Original article here

This is a reprint from an older article that talks about a very important distinction between an agent doing well for themselves versus doing well for their clients. It originally ran in August 2005.

Every day I pass by another real estate office where the agent has a big banner outside "I SOLD 101 HOMES IN 2004!"

This is what is called a production metric, and this one sounds fairly impressive at first glance, right? However, all that says is that they sold 101 homes, and cashed 101 commission checks, meaning their bottom line had a very good year. It doesn't make much difference to their paycheck whether the property sold quickly and for a good price. If it takes an extra six months to sell, all that does is push the paycheck into next year. More importantly, if it sells for only 90% of what they could have gotten, they still get 90% of that paycheck, as opposed to nothing. Makes one heck of a difference to the client, as that 10% could be most of their equity - the check they're counting on to help them buy their next property - or even all of it.

The question I want to ask is how good the price was for the seller. Anybody can sell homes quickly by pricing them 10% under the market. Last year's market was a hot seller's market. In some neighborhoods, a monkey could have sold it for $20,000 over the asking price.

Is there a generally available "did you sell it for a good price?" metric? Not really. The best I can come up with for a listing agent is whether the appraiser has difficulty getting value to support the sales price so the loan can fund. If the appraisal comes in less than the sale price, the loan will be based off of the appraised value, rather than sale value, and so whereas this is always a difficult situation to be in, that your sale in in this situation says that your agent really did get you a good price. It's comparatively rare, and with the buyer's market we have now, practically non-existent (at the update, it's common but for a completely different reason). But if the appraisal comes in close to the sales price, that says something good about the price. If the spread is appraisal forty percent higher than purchase price (like one property I recently represented the buyers on), not so much - but it does imply your buyer's agent did a heck of a job. Unfortunately for the sellers, the buyers aren't going to tell the sellers about the appraisal unless the value is lower than the agreed upon purchase price.

Production metrics of this nature are easy to game. When I worked in the financial planning business, the metric used was GDC - Gross Dealer Compensation. How much your firm got paid because of your work. Problem was, it always has two components: how much business you really brought in, and how much turnover there is in your clients accounts. I know people who work at the "no load" fund houses, also. That's their metric as well.

It's a good metric to have. Firms that don't get paid enough, don't stay in business. But, as a consumer, it's not precisely the sort of metric you want your financial planner to be judged on, and neither of these components measures anything important to you. Actually, I take that back. If there's a high ratio of turnover in the client account, it's always bad. There's always the temptation to call an existing client and sell them the "hot new investment" than it is to generate new business. If I was shopping for a planner, I'd look for a low ratio of Gross Dealer Compensation to total assets under management.

Matter of fact, there really isn't a metric in the investment world to measure how good an investment person is on any objective scale. What I'd really like to know is something like the return on investment of their lowest 25 percent of clients and highest 25 percent of clients, and compare that with market averages and each other. This would tell me things like "How much (of any gain or loss) is the environment of the market, and how much is them?" and "Are they giving consistent advice?" (Low spread = yes, high spread = no). And not one firm I'm aware of computes this information. Not to pull any punches, what they are all set up to reward is sales ability, not investment genius.

The same goes for real estate. Everybody is focused upon volume, when what's really important to the client is "How good a job did you do with the ones you got?" Not only does using the "volume of business" metric and pretending it's important help the established firms build a moat around their business, it distracts potential clients from what's really important: How good of a deal they are likely to get as individuals. There are any number of production metrics in real estate, but none the nature of "Did Agent A's selling clients get the best price?", or on the purchase side "Did Agent B's buyer clients pay no more than they needed to?"

Nonetheless, here are a couple of other ideas. If everything I sell is bought by real estate agents acting for themselves, it's not a good sign. The average real estate agent is buying property because the price is below market. They think they can re-sell for a profit, and it's usually not a little one. They're probably not interested in the property that doesn't have immediate equity built in.

If everything I sell is back on the market within a few months for a higher price, that's also not a good sign. That also means it was probably priced below the market.

The agent I talked about at the beginning of this article? I picked up a flyer listing about a third of those sales (thirty-two). Then I went to Multiple Listing Service and did a little search. Over half (18) were back on the market within 6 months for much higher prices. Almost forty percent (12) of total number of new owners identified themselves as being owned by licensed real estate agents on the listing. Seven have been subsequently resold for at least a 10% profit, closing within three months of the original sale, even in what became a softening market. Only three are still active. The rest have sold, all at a significant profit, even in what became a much softer market at the time.

So now tell me, does this agent's claim of "101 houses sold" seem like something that should make you want to do business with them?

Didn't think so.

Caveat Emptor

Original article here

Figures don't lie, but liars sure to figure - and filter, and slant, and just about anything else you can think of.

Someone sent me a link to this article in the Wall Street Journal of all places. It purports to analyze foreclosure data and comes up with a radically different answer than anyone else because of how they manipulate - and in my opinion, mischaracterize - the data.

All too often I get emails like this one

Greetings Dan,

My name is DELETED, I work for a company named DELETED based DELETED. We help businesses with a variety of online marketing functions. Thank you for taking the time to read this email.

I came across your blog and thought that it would be complimentary to one of our client sites within the mortgage and real estate sector. I wanted to inquire to see if you would be open to linking to my client, who is a well known entity within the mortgage and real estate industry.

We are looking to sponsor a blog post on your site that would concern something related to the mortgage industry and be informative in nature. We would be happy to provide monetary compensation, as well as unique mortgage/real estate content that you can use on your website. Or, if you prefer, you can write the post.

We do require that a link to our client be contained within the text of the post. The link would not be explicit, but rather an on-topic term embedded within the text that would link to our client's website. Again, the content would be provided by either you or myself as I have an extensive background in the mortgage sector.

If it's not obvious to you by now, I don't do these kind of posts, but many website owners see absolutely nothing wrong with it. I accept advertising - I just don't permit it to be perceived as anything but paid advertising, Other websites see no problem with accepting advertising disguised as analysis. Guess which approach provides more revenue, both to the advertiser and the medium they're paying.

"Shilling" as it is called, has roots going back at least a century, to hucksters who would pay someone to slip into the crowd and help them generate sales by pretending to be an ordinary member of that crowd. Given the nature of humanity, it probably goes back to Og the Caveman paying Ug the Caveman three dead rabbits to pretend that Og's hunting spears really would do a better job of killing everything from saber-tooth tigers to the tribal bully. It works better - and Ug gets more money - if Ug is known as a mighty hunter or a maker of hunting spears in his own right.

It is not, however, disinterested analysis. It is a sales pitch disguised as disinterested analysis. It dismays me that people don't understand that the internet has no filters on this practice, indeed, no quality controls of any sort more advanced than the owner of a particular website chooses to install. Every so often, I get a series of reminders that many people aren't nearly as skeptical as they should be.

A very few websites are like Consumer Reports, and accept no advertising of any kind, even paying full retail price for all the products they test. You can tell them (or at least it might be one of them) because it costs money to get their full unexpurgated reports. Others are at the other end of the spectrum, and will sell anything for a price while pretending to be disinterested analysts. I try to be more towards the Consumer Reports end of the spectrum - I accept but don't pursue advertising, I do not permit it to be perceived as anything other than advertising (and therefore, I don't get much of it), and any personal motivations I may have to shade the results of my analysis are right out there where everyone can see them. I also try to put numbers out where you can grab a calculator or spreadsheet and determine if I'm telling the truth and making valid calculations for yourself. It is for the reader to decide how successful and credible I am at my goal, which is educating consumers to the point where they can make intelligent well reasoned choices grounded in fact, while in the process generating enough personal clients who like the way I think to feed myself and my family at my chosen profession.

A shill has nothing in common with Consumer Reports, and nothing in common with my goals, beyond the desire to successfully make a living. Even Consumer Reports staff have a goal of feeding their families, although Consumer Reports is itself non-profit. If nobody was willing to pay for their tests, however, they couldn't keep their doors open very long. If nobody is willing to pay for my expertise and analysis, I have to find something else to do. What the internet shill is selling, however, is eyeballs and the illusion of credibility, not disinterested analysis.

I should also mention that whereas Consumer Reports' expertise is broad, it is not deep. I think they really do the best they are equipped for, but I have read the best they have to offer on the subject of real estate and mortgages. I read it it before I bought my first property, and recently went back when trimming my library (and as far as I can tell, they haven't improved their offerings on the subject since my first reading). The best I can say about it now is the same as then: occasionally mildly informative. If I had relied upon that rather than being able to fall back on a fair body of knowledge I already had, I would likely have done significantly less well than I did, which still had significant shortcomings. When it comes to real estate and loans, they just don't have the time or ability to educate themselves about the minimum necessary range of subjects to the necessary depth. These concepts of limits of knowledge apply to me, and to every other website and author out there. Sometimes we're just out of our depth or beyond our competence - and we may not always realize it. This is one reason why I don't write short articles, especially not when I'm straying outside the core subjects where I believe I've built some expertise and credibility of knowledge to an informed observer - I believe it's incumbent upon me to put the full argument out there, including assumptions, background, etcetera - so the reader can make an informed judgement as to whether or not I've got a real point. The reader can still kneejerk, but they're harming only themselves if the argument is valid. They can also argue the other way or some alternative viewpoint - that's the whole point of enabling comments, which I don't censor except for profanity and obvious spam - although I should note that you only have the evidence of what comments I have allowed, supported by my word for that.

And that's precisely my point - you have only the word of the author of any particular article you may find anywhere on the internet. It may be good, it may not. I try damned hard to make my analysis accurate and truthful and admit its assumptions, limitations, and exceptions. Sometimes I even discuss counter-arguments when I can or believe they are particularly important. But with the best intentions in the world, I can make mistakes. It is you the reader who have to make the final determination, in your own mind, as to how reliable what I say is and how useful it is to you. That takes evaluating evidence, and cross-checking with other sources and testing any points of disagreement with known facts to determine how well I have done and which of us is correct - if any of us is. If you were only buying a toaster, I doubt it would be worth the effort. But when you're talking about real-estate, mortgage, or the amounts involved in any kind of serious financial planning, the effort is damned well worth the payoff.

Caveat Emptor

Original article here

In talking about loan modification, I have said it is not a panacea. Let's look at why not, and situations where it just flat out is not going to work.

Loan modification is a strategy for the lender to mitigate their loss, not a "be kind to borrowers" holiday. The lender has to make out better by agreeing to the loan modification than anything else they could do. This means if they can get all of their money by foreclosing, but won't get all of their money via a loan modification, then they will foreclose. The first rule of getting a loan to pay for a property is that the lender always gets every penny of their money first. If they hadn't loaned it to you, you wouldn't have the property in the first place!

The obvious situation where a loan modification is not appropriate is where you have the ability to refinance in a more normal fashion. If you have the ability to refinance into something more sustainable, I'd suggest doing so without delay. The fact that you don't want to or may be hoping for something better is unimportant. What you're trying to do is keep your property, and not kill your credit-worthiness. If you are able to refinance, get it done.

The second situation is if you have 20% or more equity. In such cases, the lender is going to tell you to sell or refinance the property if you can't make the payments. Never mind that the market is down and it's a rotten time to sell, if the sale of the property will clearly net the lender their money, they are probably not going to agree to a loan modification. Plus, if you do sell, you come away with some cash. If you decide not to sell despite the lender's advice, they will foreclose. They're still going to get their money - which is what you agreed to when you took out the loan - before you get a penny, and you're still not going to have the house. I've written before about what happens to equity under foreclosureThe fact that you don't want to is basically irrelevant. Here's the situation: You owe them their money. You agreed to pay it back in order to get custody of their money and buy the house. They want it; They have shareholders to whom they have a fiduciary duty to get the best return on their money.

The third situation is if you have no income, or a clearly insufficient income to ever pay the loan back. If you're unemployed, there's not an income there to make the payments with. If you were a million dollar per year stockbroker, but now you're a minimum wage employee, you're not going to keep your million dollar property. You are asking them to modify the loan to help both you and the lender. But if the debt to income ratio is not going to work at any reasonable rate of interest, why should they modify your loan if there is no ability to make the modified payments? If all you can afford is 0% interest for the forseeable future, it's only going to get worse from here on out. They might as well bite the bullet and foreclose, because modifying the loan isn't going to do them any good. You''re still going to need to be foreclosed upon.

The fourth situation is new debts - particularly voluntary ones. Some folks see themselves headed off the edge and charge up a storm on all their credit cards, and take out loans for cars, furniture, etcetera. They figure that bankrupt for an additional $100,000 isn't any worse. They're wrong, by the way. If you only have one debt you can't pay, but four credit cards all with zero balances and you go to bankruptcy, you only included 20 percent of your lines of credit in the bankruptcy, and that hurts your credit a lot less than including those four cards and five more tradelines. The person who goes bankrupt with only one bad line of credit while keeping several good ones will probably still have open lines of credit, to boot, and therefore the means of re-establishing payment history. The zero balance credit cards will likely move you to a higher interest rate and more unfavorable terms if you declare bankruptcy, but they will quite likely want you to remain their customer. After all, they got every penny they were due from you!

But if you just took out another $20,000 in debt, that is, in the lender's eyes, evidence of irresponsibility. You already can't make your debt payments, and you go out and get some more? In cases like this, they're not very forgiving of the behavior. Why should they modify their loan when to their eyes you are simply likely to go out and get yourself further into debt?

Loan modification is a possible way out when you cannot refinance, there is no equity, and you have an income and have been behaving responsibly. You just got caught by circumstances beyond your control. If any of these do not apply, you shouldn't expect your lender to agree to bail you out by modifying the loan, when there is clearly no incentive from their point of view in doing so, and they're just going to lose more money if they do. They're not being mean when they refuse to modify a loan. They are simply facing the facts of the way that they lose the least amount of money.

Caveat Emptor

Original article here

I went out looking at properties for clients. From the showing attitudes I got, you'd think it was still 2003 and sellers were lords of the earth, not in a buyer's market where competition for buyers is fierce. One wanted two hours notice. Another wanted four. Two others another wanted twenty-four. Another was "make appointment," and one was even "property shown with accepted offer," which added a little humor to my day - but caused me to un-check it from my list of properties to view, and this won't change until that does or the asking price goes so low that my clients can't help but get a deal. Can you say, "Pig in a poke?" I'm pretty certain that's not the message the owners wanted to send, and their listing agent should have explained it to them. You want me to recommend my clients buy something sight unseen, it had better be priced for the worst case scenario. Sixty to seventy percent of comparable properties is about the most I might consider.

Ladies and gentlemen, when I'm scouting properties I want to go now. I have the time now, the properties are on the active list now, which means they are hoping to attract buyers now. If I print a list of fifteen properties to scout, that's because there's something that drew me to them now - not yesterday, not tomorrow. I go scouting where and when I have a need - a buyer's desire - and time. Sometimes this happens on not much notice. Always, there's the possibility the property gets withdrawn, expired, canceled, or goes pending between now and tomorrow. The kinds of properties I'm looking for are susceptible to all of these. I used to try printing out my lists day before - and it wasted so much of my time that I stopped. My time is valuable - I've only got 24 hours per day, same as everyone else. You want my attention in the form of eyeballs and footprints checking out your property, you'll make it easy for me to do so. Do not give me any wasted breath about virtual tours - what I'm looking for usually isn't there. What I'm looking to avoid certainly isn't there despite it being in the property. I hope I don't have to explain to anyone reading this about photographic manipulation or a listing agent's descriptions of the property. There is no even vaguely acceptable substitute for physically looking at the property. My buyers are hiring me because they trust my judgment, and they want me to weed out the turkeys before they waste their valuable time. There is nothing so precious to my business as the time my buyers give me to show them good stuff. I have learned the hard way to go out and inspect the property myself before I take my buyers.

So when I can make the time, out I go. I choose them now, and I go now. If I leave the office at noon and have to be back at 3 pm and the optimum route puts me past your place at 1 pm, you're not getting four hour notice. If you require 4 hour notice, I'm not dropping by. I may hit your neighborhood again next week or the week after, but if in the meantime I've found my buyers have found something they like, then they're not in the market any longer and I'm not looking for them - not to mention I've still got the conflicts between the constraints you imposed and my own. One thing I guarantee you is that when a buyer wants to make an offer, it takes a spectacular bargain and a rare agent to say, "But you haven't seen this other one yet," and I'm not going to say it if I haven't seen your property myself, because by saying it, I am risking my credibility to zero beneficial effect should it turn out to not be so spectacular. Furthermore, when you're looking for half a dozen buyers, you have zero time to waste. It takes literally every second I can find, make, beg, borrow, or steal to find good appropriate properties for that many at once.

Whether you realize it or not, showing restrictions are part of the whole attractiveness of the property, and they hurt your sales price. Every time they cause someone like me to bypass your property, they cost you money in terms of a delayed sale and missing potential buyers. If prospective listing agents do not explain this to you, toss them out. I strongly suggest my listing clients relocate anything so valuable that they're worried about it to someplace where people looking at your property can't get to - Mom's, storage, a safe, any place you consider safe. Anything else that might wander off will cost less than making your house less accessible. With modern lock boxes, a record is made of which agents were in the property, and we're pretty damned careful about our good name - with buyers or without.

If you're so nervous that you're going to have to hover in the background, your property is a lost cause. Been there, done that. I refuse to deal with aggressive sellers or listing agents while I'm discussing a property's virtues and faults with my clients. There is nothing to be gained for either one of us. I don't have a responsibility to either the listing agent or the seller, even though the seller is paying me. I'm not going to be quiet, I'm not going to agree with you, and if I have to wait until later to discuss your property, you can bet I'm going to include overly aggressive sellers among the downsides to this property. It might give me reason to counsel my buyers to do a low ball desperation check. It won't enhance the value of your property in either my eyes or that of my clients.

This is just as much the case for the do it yourself buyer, the "phone the listing agent now" buyer, and any other sort of buyer or person with the attention of prospective buyers. Most folks act now because they want to go now, and if your property is not available to view now, they will go view other properties now. If they find one they like, you missed out. If they don't view your property, they're not going to make a good offer. Every missed opportunity is a potential buyer you're wasting, and right now, good qualified buyers are scarce, at least in my neck of the woods. It doesn't take many missed buyers to make a failed listing, and if it happens, you did it to yourself. People aren't looking for a reason to buy your property - they're looking for reasons not to buy your property and "They wouldn't let me see it" is one of the best by any rational measure.

By making your property unavailable, you are raising the cost of doing business with you higher than the model match down the street with an asking price $10,000 higher. The hoops someone has to jump through to view your property are as much a part of the asking price as the dollar value you put on the listing. Restrictive viewing can cut your traffic and prospects more than adding $20,000 to the list price. Sometimes $40,000, and it can be six figures at the higher end of the market, but I'm aiming this at the average seller. So ask yourself if requiring 4 hour notice is worth that much money to you.

It's not easy to have your home always ready, I know. It's a real pain to always be on guard, never leave something out of place, never leave dishes in the drain or a full trash can in sight. If you've got a pet, particularly a dog, it's difficult to keep them cleaned up after and confined to the appropriate area every time you leave the house. May The Force Be With You if you've got children, because you're going to have to be a superhero to make it work. But even if your home isn't perfect, better that potential buyers see it in an imperfect state than that they don't see it at all. Agents like me learn to look past transient stuff like toys on the floor, and to help their buyers do so as well. If the buyers see it imperfect, it's possible they'll make an offer anyway. If it's likely to be a less attractive offer, it's still an offer, and you can choose to accept it, negotiate, or blow it off. Advantage: yours. If they don't see it at all, you're not getting an offer, or at least not any kind of offer worth considering unless you're desperate.

Sales is a game of inches, if not millimeters or microns. Particularly big ticket items like real estate. Sometimes sales are won or lost over incredibly trivial differences - and viewing restrictions are not a trivial difference. It's like the difference between a fourteen foot wall and an open door. Many people can't get over fourteen foot walls at all, others think it's too much effort, and still others see no reason why any effort they do make will be rewarded. So you want to present an open door to all potential buyers. Every little increase in the barriers you put in their way will cause a certain percentage of prospective buyers to not want to bother - and you'll never know if that's the one that would have made the best and highest offer for your property.

Caveat Emptor

Original article here

I keep talking with people who don't understand that a higher interest rate on a refinance can result in a lower payment even though the cost of money goes up. In fact, they don't understand why refinancing tends to lower the payment at all.

Before I go any further, I need to reiterate my standard warning that you should Never Choose A Loan (or a House) Based Upon Payment. There are all kinds of games lenders and loan officers can play to manipulate your apparent payment.

Now, as to why refinancing tends to lower the payment: It's actually very simple: Because you are extending the period of the loan. You're spreading the repayment of the principal over an entirely new thirty year period starting today, and going out thirty years from now, instead of thirty years from whenever you originally started.

Let's say you took out a home loan five years ago for $300,000 at 6% on a thirty year fixed rate basis. Your payment has been $1798.66, and assuming you've just been going along and making minimum payments, you have paid your principal down to $279,163. Even adding $3500 in closing costs into your loan balance, if you refinance again at exactly the same rate, your payment will drop to $1611.72. If you divide the cost by the payment savings, it looks like you break even in less than two years!

However, that isn't a valid calculation. What you're doing is taking a loan with a remaining period of 25 years, adding $3500, and swapping it for a brand new 30 year loan, serving no purpose except to extend the period for which you have borrowed the money by 5 years. Your monthly cost of interest actually goes up, because you owe $3500 more on the new loan at the same rate, not to mention that $3500 is real money you paid to get the loan done for no real benefit! Your total of remaining payments goes up by over $40,000! Even if you keep making the same payments ($1798.66), you have added nine months to your loan! This also leaves aside all kinds of games that can be played with payment in the short term.

Never choose a loan based upon payment. If you will remember this one rule, you will save yourself from more than fifty percent of the traps out there. Loan officers and real estate agents and everything else tend to sell by payment. You do need to be able to afford the payment, and I mean not just now but what it's going to go to in five years. With that said, however, remember the fact that payment can be extended out practically indefinitely. Used to be with credit cards taking 26 years to pay off by minimum payments, you could be paying off a restaurant meal 25 years after the crop it was processed into fertilizer for was harvested, costing you five to ten times the original cost of the meal. The same principle applies for real estate loans. Unless it's a cash out loan, or a higher interest rate, you're likely to cut the payment just based upon the fact that you are extending the term.

I have also said this before, but just because they quote you a lower payment to get you to sign up for the loan doesn't mean it'll be that low when you actually go to sign documents. In a case like this, it is very possible for them to conveniently "forget" to tell you about prepaid interest, impound accounts, third party and junk fees, and origination points, all of which will add to the balance on your loan and have the effect of raising the payment reflected upon the final documents. So you sign up expecting your payment to drop by $180 plus, and at final signing, you've paid $10,000 more than they told you about and you are only lowering your payment by $80, but it's all done and it would be wasted effort if you don't sign these final documents, so you do - blissfully unaware that you have actually done something worse than wasting that $13,000 you added to your balance to get your loan done. This is real money, despite the fact that it didn't come out of your checkbook - you've just added $13,000 to what you owe, removing $13,000 in real money to what you have. In fact, you've just added about $75,000 to the actual costs of paying off your property! And the loan company got paid to talk you into this!

If you're not sure if you should refinance, one of the questions to ask yourself is "What would happen if I keep making the same payments as now? Would I be done sooner, or would it take longer?" It's hardly a foolproof question, but taking a financial calculator to closing, and plugging the new balance and interest rate reflected on the new loan documents together with your old payment, and seeing whether it results in a quicker payoff, is certainly one good check upon the ability of slick operators to sell you a bill of goods. This doesn't work for cash out or consolidation loan refinances, obviously, but for "rate/term", where the attraction is is simply a lower payment or lower interest rate, it's certainly one question worthy of asking. An answer that's less than your current total doesn't mean it's a smart loan to be doing, but a longer payoff is a pretty universal indicator that it's not.

Refinancing to lower your rate can certainly be a major benefit to you, as I've said before, but you need to crank the numbers to see if it actually helps your situation, as opposed to stretching out your loan term to make it seem like your costs have gone down, when in fact they have done no such thing. With thousands and tens of thousands of dollars on the line, it might even be smart to pay a disinterested expert to run the calculations. Let's say you pay $200 for an hour of their time, which saves you from making that $75,000 mistake I describe above. The downside is you wrote a check for $200. The upside is that you don't end up writing checks for $75,000 more than you needed to. If you understand finance yourself, the computations aren't difficult, and that $40 financial calculator will save you as often as you ask it questions, although you might have to feed it a $2 battery occasionally. If you aren't certain how to do the calculations, or what calculations you need to do, by all means give your accountant a call.

Caveat Emptor

Original article here

It is nice to have a tool that I can use to keep people in their homes, rather than going through foreclosure or short sales, and killing your credit and ability to qualify for a home loan for a minimum of two years. That is the Loan Modification Program. It's very little comfort when turning someone away because there is nothing I can do to tell myself, "I didn't do it to them. I was trying to talk people out of it before it became a problem." Loan Modification gives me a tool with a pretty decent success rate (sixty to ninety percent, depending upon the lender). It's not a panacea, it doesn't work miracles, and it doesn't work for everyone. It also costs money. With that said, it's a much lower cost than a short sale or foreclosure, and it will work for more people than probably any other measure to prevent those results in people on a course for them.

A Loan Modification program is a modification to an existing loan. Because the lender is already on the hook for major losses, it's a lot easier to get pushed through than a new loan. If you are upside-down on your mortgage, it is a way to get your loan changed into something you can make the payments on without the lenders agreeing to write down the value of the principal, which just isn't happening for the most part. Loan to Value Ratio just isn't an issue. The idea is to reach a Debt to Income Ratio that enables you to make and stay current on your payments in the future. Most lenders are modifying loans for a debt to income ("front end") ratio in the low thirties - while some are modifying for a "back end" ratio in the high thirties. The idea is that this enables you to be current on the loan and stay in the property, while it turns the loan into a performing asset for the lender, preventing them from losing more money than they have to.

Lots of folks want the principal of the loan written down. The problems with this are two-fold. First, it becomes an immediate loss for that lender - a hard loss. They were owed $400,000, and now they are only owed $300,000. That's $100,000 in company equity gone. Second, it provides an opportunity for current owners to make a profit on money that was previously owed to that lender. If the person is able to sell for $350,000 (whether immediately or years later), they still make $50,000 less the expense of selling the property, while the lender is just out in the cold for that extra money. You get them to give you money so you make a profit? Lenders don't like that math. The chances of them agreeing to do a principal reduction are very slim. The figure quoted was 1.6% of mortgage modifications that actually happen include some sort of principal reduction - one in sixty - and those typically include issues like death or disability of the main breadwinner. Do you want to spend the $3000 to $7000 modification costs for a one in sixty chance, or do you want to do it correctly with an approach that is about 60% or higher (depending upon your lender) likely to work?

What lenders are often willing to do is modify the loan in such a way as to reduce the interest rate, or payments owed, in some fashion. This doesn't magically give you money, but it does make the dire consequences of owing too much money bearable. It is far better in most cases for your long term financial health than walking away or going through foreclosure. If you owe $400,000 at 8%, reducing that interest rate to 6% will make as much difference to affordability as reducing your principal by $75,000 and starting the loan over combined. Not to mention that every successful loan modification is a relief from delinquency. You start over on the newly modified loan completely up to date on your payments.

Here is the lender's situation: They are on the hook for the value of the loan. If you go through a short sale, they lose money - about a fifth of the value of the loan on average. This is an immediate charge against the company's book value. For properties that go through foreclosure, the percentage loss is about doubled, in aggregate. Nationally, foreclosures cost lenders $47,000 to $61,000 per property, in addition to the lowered value from being a foreclosure. If they agree to modify your loan, it's a hit against future income, but it is not a direct hit on the book value of the company, and it turns a non-performing asset into a performing asset as soon as you've made a payment or two - much quicker than foreclosure. Finally, it gives them at least a glimmer of hope down the road of recovering all of their money - a very good hope, in my opinion, as the market will recover in time - and keeps them from losing more money than they have to now. It also, not coincidentally, locks you into keeping the loan with them for the forseeable future, because nobody else is going to refinance an upside-down loan.

This is nothing short of a financial lifesaver: Let us compare the situation now with the situation in the early nineties. I bought my first property for $90,000 in 1990. It peaked in value at about $110,000, then slid straight down to $63,000 in 1994. I was upside down for a little while. But I didn't sell, and I didn't walk away. Had I done so, I would have lost $27,000 plus the costs of selling - turned a theoretical loss on paper into a concrete loss with major real world consequences. Instead, having a sustainable loan with payments I could make, I kept making those payments. By 1996, I was in the black again. Had I short sold, I would have locked in that loss, and my name would have been mud with lenders and I would not have gotten another loan after the short sale. Basically, by just keeping on making the payments, I kept from locking in a 30% or more loss, and turned it into over a 100% gain when the market recovered. Which situation would you rather be in: Ruin your financial future when you don't have to, or keep making the payments even though you may temporarily be upside down so you can eventually make a big profit? The property I had was the one I was tied to. I could have walked away, locked in that 30% plus loss, and been unable to get another loan for a minimum of two years, and have my credit cause me to be stuck with horrible loans for ten years (which would have cost me more than $27,000, if I could have gotten loans), or I could stick with the obligations I agreed to when I signed on the dotted line for that loan, have patience, and be rewarded when the market turned back up to the tune of better than 100% profit.

Now add being unable to make the payments to the situation I was in back then. That is the situation that lots of folks are in today. They not only cannot refinance, they can't make their current payments, either. Without something like loan modification, their situation is like Comet Schumaker-Levy 9, locked into a collision course with Jupiter, and nothing short of a miracle will break them off that course for disaster. You can use search engines to pull up some pretty spectacular images of what happened there.

Which of those situations would you rather be in? This market we are in now is a market in which the people who do the right thing (keep the property until the market recovers, instead of throwing it away because they happen to be upside-down on paper) will be rewarded when the market has worked through the immediate problems.

Funny how karma works sometimes.

Caveat Emptor

Original article here

I got a phone call from some out of state relatives looking to buy their first home. They want to buy a lender-owned property, but the only loan they have the down payment for is FHA. FHA has a few requirements that other loans don't about property functionality. It has to do with what they see as reasonable protection both for them and for people they lend to. One of those requirements is that if there is an air conditioner, it must work. It doesn't have to be able to actually cool the house, but it must function. The one in the property my relatives are interested in doesn't. Not only does it not work, it's been torn apart in order to sell the copper wiring inside. There is a loan that the FHA does that is aimed at this situation, called a 203k, but the sellers - a bank - are insisting upon a 21 day escrow. In blunt terms: Not Gonna Happen. I used to be able to reliably fund purchase money loans in less than 3 weeks. Dodd-Frank, however, has added at least 3 weeks to that, and government type loans take even longer.

Their alleged agent has made a suggestion: Pay to fix the air conditioner themselves, prior to purchase, so they can do a regular FHA loan. I have a suggestion for her, but it's not family friendly.

I do have to admit, it might work. But that's not the way to bet. Let's say they pay to fix the air conditioner, and escrow falls apart for any other reason. That money is simply gone. No realistic recourse is possible. If the equity was there to support recourse, the equity would be there to support the owner fixing it themselves. That's what should happen.

Escrows are falling apart these days for all kinds of nonsensical reasons, none of which agents or loan officers can prevent. Most of them have to do with underwriter paranoia on the loan. Because Wall Street has been so thoroughly burned by bad mortgage loans they are inserting extra requirements into loan underwriting. Furthermore, loan underwriters have become the lender's internal whipping boys so they have become extremely reluctant to pass anything that might strike them as a little bit out of the ordinary. Problem is, almost everyone has something out of the ordinary going on with their finances. It's the way things are. Net result: lots of loans denied for no reason the loan officer could have predicted.

Perhaps the inspection reveals more things wrong with the property. The seller obviously doesn't have the money to fix them, so the buyer has a choice between walking away - leaving their repair money behind - or accepting further defects and repair bills.

Perhaps something in the disclosures is a reason why the buyers decide they don't want the property. Maybe someone died there. Maybe someone was killed there. Maybe something related to religion pops up. Again, they're out any repair money they spend.

Things that need fixing on a property are the owner's problem - period. They are responsible for bringing the property into the condition required - not the buyers. If the sellers cannot or will not do this, that property is not one these buyers should consider. Similarly, if the buyers need a loan where the sellers are demanding things that preclude that loan, that particular property might as well be 100 times the price and located on the moon - it's not going to happen.

If there's a necessary repair that the buyers are willing to accept the property without the sellers making that repair - and their lender has no problems with it - that's perfectly fine, so long as everyone knows about it, it's fully disclosed and agreed to, etcetera. I have never seen a situation where such a needed repair didn't impact the price by more than the cost of the needed repair, but that's what negotiations are for. The bottom line is: Buyers should never spend money to repair a problem that belongs to someone else.

Caveat Emptor