Dan Melson: December 2019 Archives

My take on the matter is "mostly no", but they do have some uses.

The one advantage that they usually carry a lower interest rate. There have been exceptions to this, just as there have been exceptions to the 5/1 hybrid ARM carrying lower rates than a thirty year fixed rate loan. There was a period not too long ago where for exactly the same cost I could deliver a 30 year fixed rate loan three eighths of a percent lower in the interest rate than the best fifteen year fixed rate loan then being offered. I just checked again, and the world has gone back to normal in this regard with the 15 year loan being lower interest rate for the same cost. So that is one benefit - lowered interest rate and lowered cost of interest. For a $300,000 loan amount, that would save you $1125 per year in interest charges, or $93.75 per month to start with, and increasing as time goes by. Solid benefit. Mathematical Fact.

Now let's consider the drawbacks. The first is that the payments are much higher. Why? Because you have to pay that principal off in half the time. I'm considering rates to be had at wholesale par when I originally wrote his article, but these are equally valid in other contexts. On a $300,000 loan at 4.75% for a fifteen year loan, you're paying $2333.50 per month, versus $1633.47 at 5.125% on a thirty Suppose you have unexpected expenses, lose your job, or take a pay cut. On a fifteen year loan you are still obligated to make that additional $700 payment every month. The payment isn't twice as big, and it does save you a very large chunk of change if you pay your loans off. But there's nothing stopping you from voluntarily paying extra on a thirty year fixed rate mortgage, either. A month before, I was telling people who wanted fifteen year loans to do exactly that. If the rate on the thirty year fixed rate loan is lower (as it was then), it's a 100% gain to get a thirty year fixed rate loan and simply add extra to the principal payment every month. Plus you have the option of not doing it if your finances change.

Let me make another observation: most folks don't pay loans off - even 15 year loans. Statistically, the number of folks who haven't sold or refinanced before five years is is less than five percent. Some situation will arise which makes it better to pay off that loan early, via a sale or refinance. When it happens and you have been adhering to a fifteen year payoff schedule (whether you have a fifteen year loan or thirty year fixed rate loan you've been paying extra on), you get a large extra chunk of cash back on a sale, or you owe a lot less on a refinance. Bully for you, good show, and all that. But don't kid yourself that it led to an earlier payoff of your loan.

If you're the sort of person who is just buying their primary residence, going to pay it off without ever refinancing, just going to spend the extra money when the loan is paid off, and would never consider investment property or alternative investments, that's about the limit in complexity we're talking about here. Verdict: yes, get a fifteen year loan. But if any of those assumptions is not valid, then we've got some more work to do.

First off, if you're the sort of person who is looking to get into investment property, especially more than one: Higher minimum payments hit your debt to income ratio (and cash flow) hard. It would be very easy for me to come up with a scenario where you would be accepted on three or four thirty year fixed rate loans, putting the power of leverage to work for you where it does a lot more good, where you would be rejected for a second 15 year loan, simply because the debt to income ratio doesn't work. With the unavailability of stated income, this is going to bite an awful lot of people and keep biting. Where you could have your own property and three investment properties all with positive cash flow on thirty year loans, you could quite likely be stuck with your own property and possibly one investment property on fifteen year loans, and even if the loans were approved, be in serious negative cash flow land. Negative cash flow is a very bad thing for real estate investors - it's the number one reason why real estate investors are forced to do bad things they don't want to do, like sell in a tough market. If you've got positive cash flow and sustainable loans, the question is "How long is it going to be before I sell for a huge profit?" not "can I hold on another month?"

Second, we haven't considered a hypothetical alternative investment yet. Let's look at this very situation, and suppose we can earn an annualized 9% with alternative investments (right now, with the financial markets in the state they are in, I would bet on the historical average of about 10% being too low, for people with the guts to buy into a down market). Let's consider what happens when we take that extra $700 per month the fifteen year loan would require, and invest it. After 15 years, it has become $264,770 - which is actually more than enough to offset the difference in what you owe ($204,868 versus zero), despite the fact that the thirty year loan carries a higher interest rate. Start investing that $2333.50 you were paying every month to the fifteen year lender in exactly the same investment at exactly the same yield. Carry it out another fifteen years, and where both loans are paid off, that thirty year loan and invest the difference strategy has netted you $1,281,520.44, versus $883,009.86 if you waited the fifteen years to start investing while you paid off your property, a difference of almost fifty percent. Mind you, this does presume you actually make that investment every month, but if you're just treating it as an abstract problem to see which use of the same money nets you more money at the end point, the thirty year mortgage and invest the difference strategy really does come out way ahead. In the real world, nothing pays a smooth 9%, and there will be fluctuations - but those fluctuations are more likely to benefit the strategy that starts investing earlier.

If this seems counter-intuitive, consider that by taking the fifteen year loan, you're taking money you could earn (an average of) 9% on, and using it to pay off a tax-deductible 4.75% debt. Doing that doesn't make a whole lot of sense to me, and the numbers in the previous paragraph don't even take into account tax deductions for home interest, which will cause even more advantage to the thirty year loan. An accountant probably wouldn't bother running the numbers unless you insisted upon knowing exactly how much it would cost you..

One final item before I go: It is much harder to recover the cost of points on a fifteen year loan than on a thirty. Most people never do get the money they spend back on thirty year loans, but on fifteen year loans, it can be truly horrid. For the rates in effect today, it takes over half again as long to recover the cost of two points on a fifteen year fixed rate loan as it does on a thirty year fixed - and since the loans are for a shorter period, you won't get them back as many times over, even if you do keep the loan long enough to pay it off. I have seen many rate sheets where the payment and cost of interest actually works out lower for a higher interest rate, due to the costs of buying the rate down. In such circumstances, you literally never recover the additional costs. Watch your actual costs, and things that may not be costs like prepaid interest and money to seed an Impound Account. On fifteen year loans, they become proportionally much more important than on thirty year loans when they find they way into your mortgage balance, especially if the payment was something you only marginally qualified for to begin with.

Caveat Emptor

Original article here

One thing that is very common in the mortgage industry is masking loan costs by rolling them into your loan balance. People are less sensitive to being asked to roll this money into their loan balance than they are about writing a check out of their bank account. In the latter case, everybody understands that this is money you busted your backside to earn and save. In the former case, a lot of folks don't understand that the money is every bit as real.

Indeed, one of the standard ways to deflect questions about cost that seems to get taught to every loan officer by every loan provider is the phrase, "Nothing out of your pocket." This does not mean there's no cost. That's not what it means. What it means is that they don't want to talk about what the loan is really going to cost, as they're going to have to do if you're writing a check. Therefore, they want to roll it into your balance on the refinance. Most people in most situations have had their property value increase since the last time they got a loan, which likely means there's plenty of equity to cover it.

For purchases, you can't really do this because your value is never more than the purchase price. There are only three places for loan costs to come from: Your pocket, your down payment, if you have one, which reduces to your pocket, and Seller Paid Closing Costs. Seller paid closing costs are an agent and loan officer favorite, because it makes it look like you're not paying them, even though you are. If nothing else, a smart seller would rather take $10,000 less in purchase proceeds than pay $10,000 of buyer's closing costs, on which they are going to pay commissions and taxes to boot.

This trick of making it appear like you're not paying closing costs is one of the best ways to get stuck with an awful loan, but most folks won't do the research until after they've already gotten burned. You are paying those costs in one fashion or another, I personally guarantee it. There is more than one way to pay them, but if you don't know how you are paying them, you are probably not paying them the way you want to, and you're almost certainly paying too much as well.

There is ALWAYS a trade-off between rate and cost in real estate loans. It can be very intelligent to pay some or all of your closing costs by accepting a higher rate, especially if you don't plan on keeping the loan very long. Most people don't keep their loans nearly long enough to justify paying high closing costs. If you know you're going to sell or refinance within a few years, or think it likely that you will, it's likely to save you money if you accept a higher rate that has lower costs. On the other hand, if you're 100 percent certain that you're going to keep this particular thirty year fixed rate loan the rest of your life, sinking a couple of points into reducing the rate can be an excellent investment. However, be aware that if you later decide to refinance or sell after all, you're not going to get your previously sunk costs back.

People get talked into rolling multiple points into their loan because it reduces their rate, and therefore their payment, aka the check they're writing every month. Let's consider two rates and the associated costs I quoted the day I originally wrote this, on a maximum conforming loan, thirty year fixed "A paper" (Rates are much lower now, but the principle remains the same). 6.5 percent was 1.5 points, or $6255 in real money, plus about $3400 in total closing costs when you consider title and escrow and appraisal. You'll find a lot of loan providers will go a long way to avoid quoting you the actual cost of points in dollars. But at 7.00 percent, I could give them back about 15 basis points, or $625, towards reducing their closing costs of about $3400. So assuming a $417,000 loan, this person would really get:

rate 6.5 7.0

useful $ 407,345 414,225

cost dif +$6880 -$6880

int/mo $2258.75 $2432.50

int dif -$173.75 +173.75

breakeven 39.6 mos 39.6 mos

However, that's dodging the real purpose of this essay. Suppose a loan officer was to pretend that these costs didn't exist when quoting you their loan rate. Their loan would appear to be cheaper, so that you would be very likely to sign up with them, but when the facts became apparent later on - that those costs exist in reality, whether your loan provider tells you about them up front or not - you're likely to continue with their loan anyway, because you don't have time to get another loan for one reason or another, or you just decide to stick with what you've started.

Furthermore, by pretending you don't have to pay loan costs, that makes it easier to get you to accept outrageous ones. Suppose your choices were to pay that $9700 in points and closing costs to get that 6.5% rate in cash, or you could pay $15,000 by rolling it into your loan balance. It is a sad fact that most people don't understand that this is about a point and a half more in costs that are every bit as real as dollars coming out of their checking account. However, most people are a lot more careful with dollars in their checking account because they understand that those dollars are real money. They had to earn it, dollar by dollar - in the form of so many minutes out of your life per dollar if you earn an hourly wage. Then they had to not spend it right away, as soon as they got their pay! Most folks figure they have something to be proud of if they save ten percent of their pay, but if you make $5000 per month, it takes over a year and a half to save $9700 if you save 10% of your gross pay. They understand that $9700 in terms of the nineteen months of their life it took them to save it. If they're just rolling it into the balance of their mortgage where it's being paid for by the fact that the home increased in value, it may be more than half again as much money, but a lot of folks somehow think it's not as real, and they'll accept rolling it into their balance much more readily than writing a check. It doesn't matter if you're writing a check or putting the money into your balance - a dollar is a dollar. By accepting the higher cost loan, not only are you wasting over $5000 of your money, but you're paying interest on it in the meantime.

If it's an expensive loan, it's an expensive loan, whether you're rolling it into your balance or paying it direct out of your checking account. If you're paying too much money by rolling it into your balance, you're still paying too much money, and it's at least as bad as if you wrote a check or even counted out the cash. Doesn't matter whether you're writing a check or rolling it into your mortgage balance. So before you sign that loan paperwork, ask yourself if you'd be as happy with that loan if you had to write a check for every single dollar, or even count it out $20 at a time like an ATM machine. Chances are you'll be a lot more careful with your hard earned money.

Caveat Emptor

Original article here

One thing prospective home buyers need to understand and don't is that there is always a reason for a low asking price. There is always a reason for a low asking price. Sometimes that reason is something you can deal with, sometimes it isn't, but until you know, you're risking your money on an unknown.

Look at the situation from the seller's point of view: They have this valuable property. They want to get as much money for it as they possibly can. So unless it's your mother or favorite uncle or similar family member giving you a deal on property they've owned forever, get religion about the fact that there is a reason why they're asking fifty thousand dollars less than all the comparable properties. It could be that there's a broken slab. It could be that there's a condemnation about to start. It could be the golf course is about to close, or that a chemical manufacturing plant is about to get built. It could be something you can't see that will cost loads of money down the road, such as a broken water pipe undermining the foundation. It could be any number of things. Every once in a while, the reason is because their agent persuaded them to put a low asking price on it as one way to get lots of suckers to come out and bid against each other and run the price up (That rarely works, though).

Usually, the asking price on properties of this sort should be even lower. It only seems low because you don't know what's wrong with it and what it's going to take to fix the problem - if it can be fixed. Lots of prospective buyers don't seem to understand this. The "get rich quick" scams never point it out - doing so would severely restrict their supply of people willing to plonk down hundreds to thousands of dollars for whatever "system" they're trying to sell. But it's true, nonetheless. There are any number of reasons for a low asking price, but there's always a reason.

Every once in a while, the reason is "because they need a quick sale." But just because they tell you that doesn't make it true. Even if it is true, doesn't mean it's the only reason, or that you know the reason why they need a short sale. Just because you know one reason, doesn't mean you necessarily know all the reasons for the low asking price.

If you read between the lines on MLS, you can often figure out what the reason is before you even go out to a property - or at least an agent who does this all the time can. But it takes careful reading, and thinking about what they're really saying - or what they're not saying. Keep your eyes open when you visit the property, and the reason for a low asking price usually becomes obvious - or at least one such reason does. Fairly often, there are one or more secondary issues that aren't so obvious that may well cost even more to fix than the obvious issue that leaps out and grabs you.

If you're certain you know what the issues are, and you are able to deal with them, that's what people call an opportunity. But that is a very different thing from walking in cold and taking somebody's word for the fact that the little old lady who used to live here needs to sell because the nursing home needs the next month's payment (Hint: this doesn't happen. Granny can get a Reverse Annuity Mortgage if she's that desperate, and whereas I recommend against RAMs in almost all cases, this is one exception where they are the lesser of two evils, as compared to just giving away a big chunk of equity).

When there's a low asking price, be thinking in terms of things that most buyers can't deal with. Defects that prevent some or all loans from being funded. Probate where there is no money to rectify even safety and habitability issues. Things that prevent your average buyer from actually carrying through on an intention to buy a given property.

Sometimes, as with lender owned properties, it's merely that no one knows if there are problems or not. Maybe it's just cosmetic stuff like paint and carpet, maybe it's a bad floor plan, and maybe it's something a lot more serious. Get yourself a good buyer's agent and go into the property with your eyes open. Be religious about investigating the property; you're risking the full purchase price, not just the down payment, whether you realize it or not. Plus interest due on the loan, of course. Buying a property like this is always a risk - but it's what insurance underwriters call a speculative risk. As opposed to a "pure risk" where there is only opportunity for loss, speculative risk means there is opportunity for gain, as well. Gambling is the poster child for speculative risk so you need to understand it's a gamble, but when you buy a property of this sort, there is opportunity for both gain and loss. It's never difficult to understand the opportunity for gain - people will stand in line to point those out to you. It's the opportunity for loss that you've got to watch out for. A good buyer's agent will save your backside on this score more often than most people would believe.

Caveat Emptor

Original article here

What I still am unclear on is the pool and how (in my opinion) it's crazy to finance $40,000 into a mortgage when you *plan* on refinancing in a few years. By *plan* I mean you take out a mortgage that you know isn't what you want but you took it because the builder forced you into it with "incentives" or they just plain wouldn't build a house for you if you don't use their lender and the builders lender is looking out for the builder, not you. I guess you can't *know* that the pool won't add value . . . especially in a new area where there are no comps . . . but am I crazy here?

Another situation I don't get is with all the "upgrades" they try to get you to buy with a new house. Blinds, paint, water softener, ro water filter, counter tops, cabinet upgrades. I wonder if you would be better off just getting the cheapest options and then upgrading later when you can afford to pay cash. I can guess that's the case but people figure life is too short to live in a a despicable house that has a kitchen with laminate counter tops instead of granite!! (I have laminate and somehow my wife and I manage.)

And that leads me to the pricing on new homes and how the builder sets the price and somehow the lender will lend you money on a house that may or may not be worth what you end up paying (granite counter tops may add value to the house but probably not $10,000). The more I learn the more I realize how much I still have to learn.

Builder upgrades are an almost entirely different set of rules and calculations than after-market upgrades. There are reasons for this that mostly reduce to "The lender can do a lot of things if they really want to, but most lenders don't have a reason to want to." For all of this, keep in mind that my normal stomping grounds just don't have a whole lot of new developments any more, so I don't deal with developer issues a lot, and it's very possible for the rules to change while I'm not doing any developer deals. I'm working with one set of clients right now who might end up buying in a new development, but it's been over a year since my last set of clients who bought just one (although if there are any developers reading this, I do have one investment firm client who wants to buy out the last of any new development that isn't moving quick enough).

The normal after-market upgrade, if you want a normal mortgage loan for it, has to be justified in terms of the property's current numbers. In other words, if you want to take $50,000 cash out to put in a pool, you must already have $50,000 equity available to you. You have to qualify for that loan debt to income ratio and loan to value ratio exactly as if you were going to take that money and buy lottery tickets with it. In other words, without the value of the proposed pool or other improvement added to your property, solely based upon the situation as it sits now.

With builder upgrades, however, there's a little more latitude built in - especially where the builder controls the lender outright. Sure, the property is really only worth maybe five thousand more with that pool they charge you fifty thousand dollars for installed, but because the basic number equates to money in their pocket directly, as well as money that they're going to earn interest on, they have a motivation to be more forgiving than in the case of the lender who is not getting $50,000 placed into their left hand while they loan it out - at interest - with their right. In many cases, even if they don't control the lender directly because they're not that big yet, the developers have made an agreement to indemnify the lender for any losses they take as a result of lending that money. The builder is secure in the knowledge that they'll make a lot more from the increased number of upgrades than they'll lose from the small proportion of defaulters. However, this should explain to consumers why sometimes builder's preferred lenders can do things nobody else can - because they're getting paid to do it. Furthermore, because they can do something nobody else will, they can charge a premium, either in rate, points, or both, over general market rates. Because the consumer wants the home with these upgrades, and because this is the only way anyone will lend on it, there's money to be made! Usually, there's plenty of money to go around - the consumers are, in aggregate, paying for it. Surcharges and premiums on the secondary mortgage market can go anywhere from two and a half percent up to six percent, perhaps more. On a hundred $500,000 homes, four and a half percent is over two million dollars additional clear profit. Even if three of those homes default, losing roughly fifty thousand in each case, they've still cleared more than two million extra profit for having done this.

(This is not to say that many after-market contractors don't have their own finance department cranking out trust deed financing even if the equity may not be there to pay it right now. But this way they get the job, which means they make the money for that job, and most of these contractor loans carry rates well above regular current market, so they can make more on the job as well as on the loan. How remarkably analogous!)

An additional thing to be aware of is that being technically 'upside down' on your loan as far as any other lender is concerned, if rates drop it will be difficult to refinance and take advantage of them.

As for whether it's smarter to upgrade with the builder or wait and pay cash, there's an argument for each side. On one hand, the argument for waiting is that you are a lot less likely to owe more than the property is worth if you need to sell. Furthermore, you're not paying interest on depreciating fixtures, a classic double whammy anyone who's even bought a car on credit can relate to. It also lowers the likelihood of getting into a situation where you have to sell or refinance while you're upside-down on the mortgage.

Because you're not asking for anything special or difficult in the way of financing, you can at least theoretically go anywhere for your financing. Builders in California cannot legally require you to use their lender, which is not to say it doesn't happen - sometimes very blatantly in violation of the law - but that's the theory, anyway, that you should be able to shop the market. If you want a loan any lender can and will do, you're going to get a better price on the loan - fact. The loan on a property with builder upgrades, however, is often something only the builder's chosen lender will do.

Finally, the cost of most upgrades is rarely recovered in increased sales price when the current owner sells. Spending a dollar, and paying interest on it, to make back twenty cents in eventual increased sales price strikes me as shooting yourself in the foot. It is to be admitted, however, if it was worth a dollar to you to have the upgrade, the twenty cents is icing on the cake.

Against this, however, is the cold hard reality of labor costs. If you build in granite counter-tops in the first place, the only increase in costs is the comparatively small increase for more expensive materials. If you wait until after it's done, you've got to tear all the old work you've already paid for out, then pay the labor costs to put the new counter-tops in, as well as new materials, the cost of haul away, etcetera - not to mention the restaurant meals you'll be eating while it gets done. At anywhere from $15 per hour up, plus benefits plus markup, that labor isn't cheap, and it's usually at least a couple of workers for several days.

Builders know all of this, and that it's very attractive to roll the upgrades into the cost like this. When they build a property "on spec" (meaning it hasn't sold before the framing is done at the very latest), they typically build in all of the upgrades they can, and if you went to them to take a completed property off their hands, but wanted something not upgraded, it's likely they will be unable to accommodate you (This is a negotiating opportunity on the rare occasions it happens!). They don't tend to build very many "on spec" around here, or anywhere else if they can avoid it without worse consequences, but that's what they do when they do it.

There's also one more argument in favor of builder upgrades: You won't get your extra money out of them, but in slow markets like right now, it's more likely the property will sell if you do need to sell it. There are always suckers out there who will zero in on the upgraded property because "it's soooo beautiful!" even though there are better bargains nearby. Real estate fixers and flippers worldwide make their fortunes on the backs of these people, but they're legal adults deciding this stuff is worth their hard-earned money. Who am I to say it isn't?

Builders set their prices on the same motto as Poul Anderson's Polesotechnic League: "All the traffic will bear!" (I highly recommend his Van Rijn and Falkayn stories, by the way.) Profit isn't evil, it's what motivates developers to build places for people to live. But there's nothing that says you have to cater to it by forking over excessive numbers of your hard earned dollars, either.

Caveat Emptor

Original article here

The genesis of this article is Something's Gotta Give, a report (.pdf format) from the Center For Housing Policy. Furthermore, there is an article in the Washington Times from UPI that connects the dots on the tactical level.

The Center for Housing Policy report details some of the costs to society. Not surprisingly, when people are forced to spend a large portion of their income on housing, they have less to spend on other things, and so they can't spend as much on other things. Lest you think I'm talking about Lexuses, Lattes and Liposuction here, I am not. I'm talking about bare minimum things like food - as in people going hungry because they don't have enough to eat. Far from talking about liposuction, I am talking about basic medical care and insurance. I am talking about clothing, which, rightly or wrongly, people use to judge the worth of other people, and people who cannot afford good clothing are not given the opportunity to advance because no one will hire them. I am talking about basic transportation needs, without which people's job-hunting prospects are limited to the places they can walk. If you cannot get from work to home and back again in reasonable amounts of time, then you're either not going to live here or not going to work there.

Nor am I talking about the needs of some nebulous underclass. As the NHC report makes clear, these are people earning up to 120 percent of national median income. Furthermore, they are among the fastest growing classes of worker.

Below the first level effects, there are others lurking, largely unmentioned in the report. But malnutrition, parental depression, and lack of good medical care are the causes of many other ills. Malnutrition allows health problems to become chronic and generates more health problems. These are people who have more difficulty getting and holding jobs. So long as we have societal programs of social insurance, these folks are going to cost us, as a society, tens to hundreds of billions of dollars annually. If they can't hold a job, they've got to get money somewhere. No job means welfare or crime, and both are bad situations not only for that person, but for everyone else as well. Poor or no medical care makes any problems they have worse than they need to be, further increasing both explicit costs, what we actually spend on them, and implicit costs, money they don't make, taxes they don't pay, and other stuff that they suck out of society. Long commutes people suffer in order to buy housing they can afford means less parental supervision of children, leading to delinquency, increased crime, and other problems a few years out. Most critically, difficulty with money is the number one cause of divorce, and when families go through a divorce, the standard of living suffers even more and more long term societal troubles ensue.

Who is causing all this bad stuff? The short answer is that we all are. The cold hard fact of the matter is that they are not making any more land. Housing needs land. Land that is in use for other uses, whether it is industrial, commercial, open space, or other housing is not available for housing. Higher population means we (as a society) need more places to live. Anytime we add a person or a family, we add the need for that person to live somewhere. We can't just push them under the workbench in the garage until the next time we need them. Well, actually, I suppose we could, but I am certainly not going to vote for policies like that, nor, I imagine, is a majority of the electorate. So that fry cook at Lenny's, the cashier at the supermarket, and the nice lady who helps you carry your purchases out to the car at Home Despot, all need places to live.

Cold hard fact number two: In the high density places where jobs are to be found, land is expensive. In fact, it is far and away the most costly thing about a place to live. I can show you places where the lot goes for $350,000, while the finished home goes for $500,000. Considering the economic realities: Developer has to buy the land, then apply for permits that take years, then put the homes up for sale. Developer has to pay for the land, the cost of the money to own it for the years that are necessary, the property taxes, the cost of the permits, the cost of the people to get the permits, the labor and materials to build, and of course, they have to pay the people that sell the finished product. Except for the comparatively minuscule costs of labor and materials to build, these are all fixed costs! They are what they are. So if the developer pays another $5000 for labor and materials, and can sell the house for $200,000 more because it's got two more bedrooms and Italian marble floors, that is obviously the way for them to make a better profit. So they build the higher end home, which cannot be afforded by the lower income buyer. If the government requires so many homes to be set aside for lower income people, that merely increases the money they have to charge for the rest. Plus the "low income" buyers are likely to sell as soon as their contract limitation on doing so runs out. Just because Mr. and Mrs. Lower Income Couple only make $40,000 per year doesn't mean they don't realize they can make enough money to pay their rent for the rest of their life by selling the home that the city forced the developer to sell them at a reduced price for a huge profit. It's not like there's any difference between their home and the house next door that the developer sold for full price. I assure you that they are keenly aware of this. This makes getting into low income housing akin to winning the lottery in expensive parts of the country, and that is not what it is intended for.

There are obvious solutions to this. More housing. High density housing. Shortening the approval process, and making it less expensive and less uncertain. But the observable trend is in the other way. Why?

This is where it comes down to you and me. We're making it tougher for the developer to get those permits. When developers offer to buy property with the intent of building, neighbors come out in force to protest. Oh, we use all of the high-sounding names like "open space" and "habitat protection" and "quality of life" and even the mostly honest "No higher taxes to pay developers costs!" They come out and throw obstacles in the way of the project and sue in court and delay as best they can - which raises developer's costs, forcing the rest of us to pay for them. Or at least the for the people who eventually buy those properties to pay them, thereby raising the cost for the end consumer.

But the real issue, the elephant in the room that everyone desperately wants to ignore, is scarcity. We all want housing to be scarce. Why? Because we're already owners, that's why. If there's not enough of something, the price goes up and people wanting to buy have to pay the people who already have more money in order to buy. Whether people who obstruct developers will admit it to themselves or not, they are trying to vote themselves a profit at other's expense. The cashiers who work at the stores in the strip mall where you buy groceries need to live somewhere, and the lower on the socioeconomic scale they are, the closer that they have to live. It has almost nothing to do with the "Eeevil!" developers or any other corporate alleged malefactor. If developers have to charge two million dollars per house to make a profit, they will build two million dollar houses. Or three. Or none at all, if they can't make enough for a profit. If they need to charge two million dollars per property to make a profit, they are not interested in building the $300,000 properties that a family with two breadwinners earning $15 an hour might be able to afford. It's the buyers that pay for it, and these buyers are real people just like you are, who need a place to live just like you do, and if they can't get one in a sustainable way, will do it in an unsustainable way, as too many people have. Sometimes it works out, more often it doesn't, with even worse effects down the road.

If you really want to watch something both amusing and eye opening some time, go to a planning commission approval hearing where you have nothing at stake. Let's say the proposal is thirty miles away on the other side of the city or county and you never go there. And watch them try to have a discussion about high density housing.

Oh!, the carrying on I've seen! The histrionics! The burying of the real issues! The hysteria! Ask for the mike and mention "property values" and the NIMBYs will go ballistic, guaranteed. "It's not about that!" some will scream. Then why, once all of the other concerns have been dealt with, do they continue to oppose the project? Or do you think it's really about a little bit more traffic on the roads, or open space that most of them can't see and never go use? "Ruining the character" of a neighborhood where they might know two or three other families at most? Why then, won't the people live near where they work? "Because it's not a nice neighborhood!" "Explain," you will say, and they will oblige with "Because it's all condos and apartments and it's a nasty neighborhood and and everything is expensive and property values don't go up!" And there the real agenda slips out. Figuring it out and getting them to admit it is about as challenging as dynamiting fish in a barrel.

A while ago now, the City of San Diego had just made a rational attempt to plan for housing affordability, lessened commutes, etcetera. Called the "City of Villages" concept, it envisioned more decentralized and distributed services, employment, and shopping, and in particular, a lot more high density housing with neighborhood parks and social centers. It's dead because the objections of suburbia which saw their future increase in property value drying up (as well as losing the ability to exclude the peasantry from their community). The objections of members of my profession who tried everything they can to obstruct it also helped kill it. Let's face it, when everybody who has a job in a county of about three million people is trying to get to one of three places, and then out of those same three zones where everyone works, all at the same time, it's a recipe for a traffic jam. Add in the fact that the median commute is something over twenty miles, and many people drive well into the next county over (80-120 miles) and it's a recipe for an extended traffic jam. We have three full-blown interstates and at least a dozen spur and connecting freeways, and they're all jammed solid at least ten miles and two hours one way every morning, and the other way at night. This doesn't make any kind of sense.

People in my profession aren't exactly blameless for the high cost of housing. Real Estate, as a profession, is responsible for a significant amount of price increases due to encouraging speculation and selling exclusive lifestyles. Actually let's stop for one quick moment and consider the idea of "exclusive lifestyle." Doesn't it have to do with excluding the masses? Making yourself one of the well off? Raising ones' self? It's not like the money to buy you out is coming from nowhere, and the poor schmuck who buys the property is going to have to deal with every penny of it.

Everytime I go into the MLS, a large percentage of the results have the statement "Quiet cul-de-sac," and these are all homes built within about the last thirty years. Cul-de-sacs were comparatively rare before then. Even in San Diego, with all of our hills and slopes and irregular terrain, neighborhoods older than that are designed for open access. The streets are laid out on a grid. Major and secondary roads cut all the way across entire developments. You can get from point A to point B without going around the whole thing. Cul-de-sacs were rare, and mostly there because the developer could get a few more homes into irregular terrain that way.

This suddenly changed sometime right around 1970. Suddenly developers realized that the "exclusive" label added to the value they could receive. Now streets were designed not to encourage access, but to discourage it. They start and stop and start again for no reason other than to discourage access. The quickest way to get from one major road to another, on the other side of the development, is to go all the way around the development. The developers lost very few homes to the redesign, if any, but now they could sell the cachet of "exclusivity," as in keeping the helots out. The start of accelerated growth in home prices traces to this period. It's also worthwhile to note that when these "keep the peasants out" neighborhoods start downhill, they tend to go a long way down, very fast.

The motivations for driving the prices up on the behalf of my profession are certainly understandable human motivations. We make more money on bigger transactions from the same amount of work and expense. That doesn't make them good for society, but higher profit for performing your professional function is at least an honest motivation. Ditto for the motivations of City, County and State. You're taking up X number of square feet of land, and they're not getting any more land in their jurisdiction. If the price goes up, they can sock you and they can sock the merchants and they can sock everyone in the area for more money. More money means more money for salaries - their salary. Their cronies. More lucrative contracts, necessitating more campaign contributions.

Fact: Given the current economic situation, the only way to get developers to build more housing that low income people can afford is to make housing for low income people more profitable than other housing.

How do you accomplish that? Allow more high density housing, but force them to plan the impact correctly. Enough parking, water capacity, sewage. Give the developers the parameters up front, so they know whether or not they can meet it, and enact a "must issue if standards met" law. Let the community get involved in setting the standards, if they want, but make them universal throughout the jurisdiction. Same standards for hoity-toity-ville as for the wrong side of the tracks. And make the citizens themselves subject to the same requirements. Make waivers as tough to get for homeowners as for developers, and come down hard on non-permitted activity. I just pulled up a couple dozen properties on MLS, and the well over half of the listings had the notation somewhere that "X may not be permitted." In my experience the owners know damned well that they didn't have the proper permits, but that it's very easy for the people who buy it from them to get a waiver as theoretically innocent, and they know that there's very little enforcement even if the new owner doesn't get it retroactively approved. So they put on an extra bedroom or bathroom without permits, knowing it made the property more valuable when they sell it, and because if they don't get a building permit, their property won't be reassessed until they sell. Incidentally, most of them don't use licensed contractors, either, but rather what our wonderful government euphemistically calls "undocumented workers" because contractors have to report where they did the work and woe be unto the contractor that does something without the proper permits. This means that the people who go through the process that society has agreed is necessary to perform competent, safe work in accordance with code, pay their people in accordance with the law, report their income so that a fair share of taxes are paid - the people who are playing by the rules - get cut out. Either do away with those rules or come down on the people who violate them, please. But I suppose that since it's "the little guy" who wants to make some money illegally, that makes it Okay? Even when in order to buy the property, this "little guy" has to have income in the top ten percent of the population? Didn't think so.

I am not trying to get all holier than thou on anyone here. I am as much of a capitalist as anyone, and more so than most. Capitalism works, but it works better when everyone has to follow the same set of rules. I'm tired and disgusted of bending the rules on behalf of one class but not another, because of lying, self-serving propaganda. My younger brother works - when he can find work - as an on the books construction worker at about $13 an hour or so. This works out to $26,000 per year if he was working full time all the time. This is well below the federal poverty line for a family. So far below that were he married and his wife working a minimum wage job, they still wouldn't beat the poverty line. Compare this to the "handymen" who work off the books, without any qualification beyond their word that they can do the job right, and who claim they make $80,000 per year when they're asked how much they make in order to get a loan. The taxes they don't pay means that you and I pay more. The property taxes their clients don't pay mean that you and I pay more. The permits that their clients didn't get means that there are more building code issues out there that someone else is going to have to deal with - after said client makes the inflated profit on the sale of the home, despite not having properly paid the increased property taxes they should have (and that they could well afford to pay, I might add).

Contrast this with the hell a developer has to go through, often for years, in order to get a project greenlighted and never knowing for certain whether some stupid technicality will put the whole thing back to square one. For smaller developments, it's hard to find a place where it they are economically feasible, even with higher sale prices.

Furthermore, no developer with a lick of sense is building condominiums here in California right now. For ten years, they have unlimited liability for anything that can be considered a "construction defect." There are several highly profitable law offices that actually make a career out of going around nine to nine and a half years after the project is sold out, and telling homeowner's boards they can get them money. Usually this is done without any prior complaints, and they don't have any knowledge of actual conditions there - they just know they can get money. There was a period not too long ago where you just couldn't find condos that weren't going through a lawsuit, which is why it was eventually dropped from many underwriter standards. I'm certain that a certain percentage of them had legitimate complaints, but there were just too many lawsuits filed with exactly the same sort of timing for anything else to be the explanation. For the record, what the developers are doing is building them as apartments, and then they are being converted after the unlimited liability period has expired. This is a severely bad thing, societally, but a full explanation would digress too far.

If a developer wants to build high density housing, there should be a fixed set of steps - parking, utility upgrades, etcetera - they have to go through, and then approval is immediate and mandatory - provided they actually sell the units for the stated price. If they renege, they are prevented from selling at all until they've gone through the whole approval process from the start, with no mandatory approval.

Put this into law, and watch the prices of available housing drop. We could even structure it into tiers, Tier A where the approval process is basic and automatic, Tier B with somewhat higher prices but more hoops and less certainty, and so on. Make sure you index these tiers to the median cost of housing in the area! I would love to be able to find young families affordable three or four bedroom condos with community parks and play areas - but three bedroom condos are scarce whether or not they are affordable, and four bedroom might as well not exist, affordable or not.

For the last decade or so, the various governmental entities even been requiring developers to set aside infrastructure projects which, under current rules, are more properly the realm of government. They have to build schools and deed them to the government. Funny, but I thought with the increased tax base they are getting and all the mandatory school laws that that was the government's job. It doesn't do anything beneficial for the price of the homes in the rest of the development. Ditto parks, which are an excellent and admirable idea, particularly near high density housing, but should not be part of a government shakedown to cut down on the profit margin of land the developer paid their own money for, and went through an extended approval process for. The population is already there, and whether the developer builds new housing for them or not, the government would be responsible for finding school and park space. At the very least, the government should reimburse the developer for the proportional cost of the land and utility capacity, and do the building themselves.

Many of you reading this are thinking about money - dollars and cents. And you know, that's fine. I like it when clients make money on their property. It's part of my job to help them make money on their property. But there's a difference between a reasonable profit at 5% increase per year, and extortion because you happen to own a place to live and there isn't enough housing to go around because you're doing your best to get policies enacted to make certain that there isn't enough housing to go around - Jay Gould writ in miniature, millions of times over, and without the long term benefits much of what he did had.

The gentrification has reached the point in many areas of the country where you need to be in the top ten percent of all income earners in order to afford to buy a place to live - any place to live. That's great and wonderful if you're seventy years old and you can sell your home for a three quarter of a million dollar profit to your retirement nest egg and go live somewhere cheap. It's not so hot if you're a young working class couple looking for a place to live that you can afford and here is where all the jobs are. The damage done to the latter far outweighs the benefits that accrue to society because of the former.

If this continues, what happens next? Instead of having to be in the top 10 percent, now you've got to be in the top five percent, or the top one percent. If mommy and daddy never owned a house, or were so unlucky as to sell for less than stellar profit, you won't either. If there's no place to live that you can afford, you have to stay with mom and dad - but what if they don't want you, or they're in no shape to host you, or they just don't live in the only place you can get a living wage job? Suppose now you're twenty-five or thirty, engaged or even married, and still cannot afford a place to live? This is a recipe for social disaster.

At one percent homeownership rates, we're below what the homeownership rates were when we had tenements and slum lords, even if they are single family homes in older areas of town. And many people who have been engaged in "condo flipping" are themselves priced out of the market. There are damned few folks who cannot be priced out of the market if it gets bad enough, and if policies remain unchanged, who is to say that it will stop just before you become one of the victims, the permanent underclass? Even if you're one of that fortunate class who isn't priced out, when there are ninety-nine people who want housing for every one who can actually afford it, what do you think is going to happen at the ballot box, or in the streets if necessary? I'd rather start now, while we can plan it rationally, as opposed to later when any old low quality crackerbox will be thrown up in panic mode anywhere and anyway it can be just to keep people from rioting in the streets. At this update, housing prices have fallen quite a bit from peak, but even without the unsustainable financing that drove the bubble, this is only a temporary lull that will allow politicians to ignore the problem for a few more years.

Other things that need to happen. Tax codes need to be rewritten. this article traces the most recent acceleration to 1998 - coincidentally about two years after the $250,000 profit exclusion on housing ($500,000 for married couples) was enacted. All you had to do was live in it for two years, and bang! you didn't pay taxes on the gain. I believe that instead of keeping it in the current "cliff" form (after two years you qualify for the full exclusion), I think it needs to be phased in over a longer period of occupancy. Two years gets you maybe $50,000, then another $25,000 per year until ten years are done. It's hard to argue that someone who makes more on flipping houses every two years than they do on their day job deserves to make that money tax free, when the poor shlub in the next cubicle who can't qualify to get into the first house pays taxes on every penny he earns.

I also suspect that we would benefit from more limits on Section 1031 exchanges (and reverse exchanges), which has to do with not taxing profits from real estate when it's replaced within six months with other real estate. Don't get me wrong, it's a beneficial code section overall and I'll keep helping clients with them, but I have to question whether someone who makes an exchange and then refinances to strip equity is really doing something to earn all that tax free money, or just engaging in paper transactions that make it look like they contributed something. I don't blame the participants for taking advantage of what is in the code, but some of what I have seen, and much of what I have heard about, is of questionable economic benefit to the country.

Zoning also needs to be heavily looked at, and not just for high density housing. "Granny flats" are just too useful, but prohibited by blanket R1 zonings with no exceptions allowed in too many neighborhoods. Many folks don't want and don't have room for granny to live in the same dwelling, but if they could put up a small second dwelling, whether attached or not, granny could live there rather than off somewhere else where the choices are often "completely alone" or "in a nursing home," by which I mean they are one of the best ways to keep granny out of a nursing home. Furthermore, granny flats are also good for young adults who may not be able to easily afford housing on their own. None of this was a problem before 1970, and it's not a problem now - except in so called "modern" "exclusive" neighborhoods where we've made it a problem.

Caveat Emptor

Original here

For all of the rants I post about bad business practices, there are a lot of things the mortgage industry gets right. One of these looks like a red flag not to do business with them, and may seem like a cruel trick, but it is neither.

With every single loan that is done, you, the client, will get a package in the mail from the actual lender. It looks very official, and in fact it is.

Depending upon lender policy, it usually contains intentional mistakes on things such as the loan type, rate of the loan, or the points involved.

And every so often, I get a panicked phone call because I forgot to warn the client the package was coming.

The point of this particular package is not what it appears to be.

You see, every so often, some criminal wanders into some loan office and applies for a loan on a property they don't own. Sometimes loan brokers actually go out and meet the client in their home, but other sorts of loan providers sit in their office and business comes to them. Therefore, the bank has really no way of knowing if this is the actually the person who owns or even lives in the property. So they mail a loan package to the owner of record.

The idea is that if you haven't applied for a loan, you're going to speak up. You're going to call the bank, the broker, and everyone else asking, "What the heck is going on? Is somebody else trying to get a loan on my property?"

This is the point of the particular package. It's an anti-fraud measure meant to catch criminal activity before the lender is out hundreds of thousands of dollars. And it has just worked.

Caveat Emptor

Original here

This was originally published in 2005, but is one facet of the meltdown that is still going on, unfortunately.

I found this article by Ken Harney in the paper.

WASHINGTON - Call it funny money for the housing boom: Now you don't need actual cash in the bank to buy a house. All you need is somebody who says you've got money in the bank.

Need a hundred grand on deposit to convince a lender that you deserve a million-dollar mortgage? You've got it . . . even though you haven't really got it because you "rented" it from a company in Nevada for an upfront fee of 5 percent - $5,000.

Sound bizarre? Welcome to the wonder world of "asset rentals" now being investigated by bank and mortgage industry fraud experts. It works like this: Say your loan officer discovers that you lack the financial wherewithal needed to qualify for the mortgage you want. Rather than lose your business, however, the loan officer turns to a service that offers "asset rentals." For a flat fee of 5 percent of the amount you need, the service will verify to anyone who asks that the $100,000, $500,000 or $1 million in bank deposits you've claimed on your loan application documents are yours indeed.

I am sorry to say that this is not the first time I've encountered said phenomenon. Nor lenders. This is why assets require seasoning or sourcing. In other words, the lender requires you to show that you've had it and built it up over a period of time, or they want to know where and how you got it.

Most loans should not require a large amount of assets - A paper loans, the best loans of all, want one to two months Principal, Interest, Taxes, and Insurance (PITI) for full documentation (and I can usually get it reduced), three to four months if there is a "payment shock" issue. "Stated income" loans are no longer available, but when we had them, six months PITI was the standard requirement. Neither of these is a large number if you're really making the money, and they can be in a variety of places.

Some sub-prime lenders, however, will take large amounts of money in an account somewhere as evidence that you can afford the loan. These loans usually end up looking more like a propagandized No Income, No Asset loan than anything else. They don't get the best rates and terms, even for sub-prime, and there's likely to be a nastily long pre-payment penalty on them as a GOTCHA! The loan provider, be it broker or lender, is likely to make a lot of money on them - In California there is a thing called section 32 limiting total loan compensation to six points, which on a $400,000 loan is $24,000, and many so-called "discount" real estate agents turn around and require their clients to do the loan with them. It doesn't do you a bit of good to save a couple thousand on the sale or purchase in order to get ripped for twenty on the loan, where it's easier to conceal it. I can point you to many of these so-called "discount" houses who do these loans all day, but they are not loans you should want. If a friend came to me and asked for one, I'd try my best to talk them out of it.

But wait! It gets better!

This and other e-mail pitches, copies of which were provided to me by mortgage industry recipients, carried the sender name of Loren Gastwirth, identified on the e-mail as vice president-marketing for Morgan Sheridan Inc. of Mesquite, Nev. The asset rental attachment carried the name Independent Global Financial Services Ltd., with an address in Las Vegas.

... to a Zexxis Co., with the same Mesquite, Nev., address on Loren Gastwirth's Morgan Sheridan card. When I called the number listed for Gastwirth, I received no reply, but instead heard back from a person identifying himself as Allen Paule. Paule is listed in corporate filings with the Nevada secretary of state as the "registered agent" for Morgan Sheridan, Independent Global Financial Services, and Zexxis Corp.

Paule said the asset rental and employment pitches - including downloadable attachments and forms carried on Morgan Sheridan's Web site - were not connected to his firms. He said, "somebody hijacked our Web site." He confirmed that a Loren Gastwirth works for Morgan Sheridan. And he also confirmed that Independent Global Financial Services, Morgan Sheridan and Zexxis Corp. have overlapping ownership and management. According to Nevada corporate records, a Paul Gastwirth is listed as president and director of Morgan Sheridan.

The Web site of Vault Financial Services Inc. of Las Vegas lists Paul Gastwirth as CEO of that firm, and president of Independent Global Financial Services, "a company specializing in asset rentals and enhanced credit facilities for individuals and companies worldwide."

In other words, they are playing a Nevada Corporation shell game (There is a reason Nevada Corporations are a red flag for underwriters). A long head swallowing tail chain of corporations, each of which is likely to be a shell set up to insulate criminals from the consequences of their actions. The stuff about "somebody hijacked our web site" is almost certainly bogus.

but it gets better yet!

That's where the asset rental service's "VOE" (verification of employment) program comes in. Essentially you indicate on a faxed form what annual or monthly income you or a home buyer client needs to qualify for a mortgage, and the asset rental company will verify to anyone who asks that you have been paid those amounts.

The cost: just 1 percent of the claimed annual income. "For example," says the pitch, "$100,000 of annual income - cost of $1,000. Minimum is $50,000." The e-mail came with attachments that directed payments for asset rentals and employment verifications to an account number at Wachovia Bank in Roanoke, Va

In other words, they're also volunteering to help you circumvent one of the most basic protections to the whole process, making sure for both the lender and the borrower that the borrower can afford the loan. If you cannot afford the loan, you are probably better off without it, although many people don't realize that this requirement is partially for their own protection. If you can't make the payments, you're going to get foreclosed on. If you get foreclosed on, you're likely to lose everything you put into the house and get socked with a 1099 form which the IRS will use to go after you for taxes as well.

Lest you not have realized this by now, all of this is FRAUD. Serious, felony level FRAUD. Lose your home and go to jail FRAUD.

I'm going to share a little secret with you, widely known within the industry but not in the general public. That real estate agent or loan officer getting you your house or your loan may not be the brightest financial light bulb in the world. Many loan companies and real estate offices select for this, usually by only hiring people who have never been in the industry before. Some of them are even among the biggest names in the business. They select for sales ability and "make sales" attitude, not the knowledge (and more importantly, willingness) to say, "Wait a minute! Something is not right here!" Especially when it may cost them a commission. And hey, if the companies involved lose a few low-level sacrificial victims to lawsuits and the regulators, that's no skin off the owners' noses and they still got the commissions out of the transactions those people brought in before they were busted. These schemes are pitched to the agents and loan officers as a way to "save" a client. Sounds like it's in your best interest when you put it that way, right? It is not. The bank discovers this (and Nevada Corporations, among others, are a red flag that loan underwriters look very hard at) Most of these deceptions are discovered before the loan gets funded - meaning that the client they were helping to commit FRAUD wasted their money, and they have a case against the agent and employing broker, whose insurance will probably not cover the issue.

The ones that do get funded are even worse. When the bank discovers the FRAUD, they have a right to call the loan. This means you have a few days to repay the loan, or they take the house. All of those wonderful consumer protections the federal and state governments have enacted become mostly null and void, because you committed FRAUD. You can count upon losing all of your equity in the home, and getting thrown out with nothing. Furthermore, depending upon company policy of the lender, you may find yourself sued in court, and possibly even under criminal indictment. Judgments for FRAUD are nasty, and they don't go away. Convictions for FRAUD can really mess up your life completely and forever, not just in applying for credit, but in employment and other ways as well. If your loan is sold to another lender before the discovery happens, the probability rises even further, because the new lender is going to sue the old lender, who is going to take action against you as part of a defense that says they were acting in good faith. The shell corporations that pretended you worked for them or had deposits with them will be long gone (or untouchable) of course. You may have a claim against the agent, loan officer, broker or possibly even original lender, but if someone else beat you to it or they are out of business for some other reason, good luck in actually collecting.

In short, relying upon an agent or loan officer as an expert without doing your own due diligence is likely to get you in hot water. As good rules of thumb: Never lie. Never allow someone to lie on your behalf. No matter how desperate you are, it's likely to buy a lot more trouble than it's worth.

Caveat Emptor

Original here

Have a "looking for cheap" attitude, especially on services meant to protect you.

It's great to have a "looking for value" attitude. If I cost more than someone else, it is in your best interest to ask why, and ask me to justify what I make in terms of value provided to you. I don't resent people that are looking for value. If I can't show them something they agree is more valuable to them, then I can't blame them for going with the person who may not offer everything I do but works cheaper, and truthfully, I'm probably not the agent they should use. There's plenty of room for all levels of service in the industry.

But to have the attitude that "cheaper is better" presupposes that there is only one possible level of service, and therefore, anyone who provides it any cheaper must therefore be a better value. This is preposterous. I just finished a transaction where my brokerage made about $7000 grand total for the purchase of a condominium and the associated loan. Somebody else might have rebated close to half of the buyer's agency commission - but somebody else didn't get my client a condo for $75,000 less than a model match in the same complex that sold six weeks previous - over a 25% difference in price. Furthermore, that $7000 was the grand total of what the brokerage made. That's not what I got to put in my personal bank account. That's got to pay office rent and electricity and all the costs of staying in business for the brokerage. Once I get my share, I've got to pay taxes and mileage and licensing and continuing education and all the costs I have as an individual of staying in business.

You may get the idea that what's left over isn't as much as most people assume it is. Now you know why discounters cannot afford to provide the same level of service a full service agent can. There are full service agents out there providing discounter service for full pay, but there are no agents providing full service benefits for discounter pay. Even if they were doing twenty transactions per month per agent, they simply aren't making enough to stay in business by doing it that way. Full service agents - the ones providing the type of service which sees results like that - aren't doing twenty transactions per month. Maybe four, possibly five, more likely three. Not twenty.

If you're working with an agent who doesn't have the time to do the same due diligence (and may not have the expertise), you're either going to deal with it yourself or hope that the other side of the transaction isn't intending to do anything unethical. Even if they're not intending to do anything, that doesn't mean that nothing will have happened on its own. Sometimes, it really is nobody's fault. When I originally wrote this, I was working on a transaction where the septic tank failed the inspection and the inspector said it needs to be replaced. The seller is out roughly $20,000 in order to be able to sell the property. It was fine a few months ago, but isn't now. Nobody's going to buy the property if they can't flush their toilets, so this needs to get taken care of. If I hadn't done my full due diligence, my clients would have had a nasty surprise that cost over twice the total check the brokerage got for the transaction.

It's not just agents. Appraisers and inspectors are two allied professions where spending just not quite enough can mean they missed what you were paying them to find. Or the appraiser charges you $50 less, but takes three weeks to get it done, during which time you're out four tenths of a point in lock extension fees. On a smallish $200,000 loan, that's $800.

This also applies to loans. It's trivial - and legal - to low ball people who want to know what sort of loan they're likely to get. The lenders who want to low-ball know all the loopholes. Are they quoting what they actually intend to deliver, or are they just getting into the spirit of a game of what amounts to liar's poker where the only way to call the bluff is wait until the end of the process? In such a situation, there's no real reason not to say you've got, "Ten nines," but nobody really has ten nines - I just looked and dollar bill serial numbers are only eight digits long. But if there's no proof until final documents are ready, what happens when they deliver a loan that's pair of ones? I'll tell you: Most people are still going to sign those loan documents. I've gone over how much lenders can legally low-ball quotes in the past. If they can't deliver their quote, they can't deliver it, and it gets you no benefit. I get many people hitting the site every day asking questions that indicate to me that their lender presented them with an entirely different loan than they initially told them about to get them to sign up. Unpleasant consequences to the lender: Zero. Consequence to the borrower: Now you have a choice between signing the documents for this loan, or doing without. Chances are that you're going to sign their papers anyway, which means that lender will be rewarded for lying to get you signed up, and the attitude of "looking for cheap" is what did it to you. I dealt with any number of people who metaphorically plugged their ears and refused to listen to the downsides of the negative amortization loan. It doesn't change the fact that there are enormous downsides, or how bad they are. It just means you don't know about them. But they sure did have that low payment (for a little while). I'd say it was too bad that so many of them lost their property and their investment, but it wasn't coincidence - it was baked into the recipe from the start.

In real estate, breaking the law is only the second best way to create problems for yourself. Since in the current environment, you can count on law breaking being discovered, that should tell you how bad looking for cheap is.

Caveat Emptor

Original article here

Hello,

When my husband and I bought our home 2.5 years ago (two bedroom condo) we qualified for the loan ($250,000) based on both our incomes. Then I had a baby and stopped working. We've never missed a payment or even been late, and we're getting by just fine by being frugal. However, our loan is a 5/1 ARM, and I'm skeptical of our ability to pay the adjustable rates once our fixed years are over. Our original plan (when we got the loan) was to see about refinancing at the end of those five years. (Five years worked well for us because my husband was still in school and we knew we'd be here about that long, if not longer.) However, now that we no longer have my income, all the mortgage calculators online are telling us that we can afford a loan of just about half the value of our home. What do we do in a situation like this? Is it possible to do anything other than sell our home once our five years are up?

A few other (maybe) pertinent details: currently we're paying interest only on our first mortgage (4.75%) and a principal and interest payment on our second mortgage (8.75%) Our home has gone up in value since we bought it, and we've made some improvements as well. Likely selling price right now (based on comparable properties that just sold in our area) is $325,000 to $340,000.

What do you think?

The first thing I want to ask someone in this situation is "How long do you have until reset?" The second would be, "Are you going to be able to afford the payments when it hits reset?" These two answers I'm fairly certain of, looking at the information provided. The third would be "Do you intend to change something about the situation before that time?" and "What's your market trends?" would be the fourth. In San Diego, I know the answer to four, but question three would be a guess, and you're not in San Diego or close to it, so my answer to question four doesn't apply to you.

You have the loan. It is already funded. You have lived up to all the qualifications you agreed to in order to get it funded. You don't have to do anything other than make the payments in order to keep this loan. If this were a 30 year fixed fully amortizing loan that you were already making the payments on, there would be no reason for you to do anything, because that rate is very hard to beat by enough to make it worth refinancing. If you have already got the loan and you can afford it indefinitely, you don't have a problem.

Unfortunately, that's not the case here. You're fine for now, but not forever. You have a known time approaching at which point you will be unable to make your payments. To make matters worse, even with rates the lowest they have been in fifty years right now you're not going to qualify to refinance. That's the worst news. If you were in a situation where your current income was enough to qualify for a new loan, this would be fixable at your convenience. Unfortunately, again that is not the case.

The mildly bad news is that you're not paying your balance down much. Assuming you're not paying anything extra, you're not going to pay that $200,000 interest only first down by anything, and you've only paid the $50,000 second down by about $1000 now, and you'll only pay it down to about $47,800 by the end of the fifth year.

The mildly good news is that you've got 2.5 years left to do something with. You could go back to work, and if you do so now, you'll have two years continuous same line of work before the 5 years are up. Your husband could also start making more money, as is common the first few years out of school. Or some combination of the two. Assuming you make as much as you used to, you should be able to afford the property. Doesn't really apply to these folks, but if rates are lower than the last time you got a loan it can really help. On the flip side, if they're higher, that's can be a real problem.

This 2 1/2 years is time on your side. I keep telling folks time makes a great ally or a horrible enemy, but it's never neutral. Right now, it's on your side - giving you time to do something to change the situation. Once the adjustment hits, or even gets close, time will become your enemy. Don't waste time, but right now it is on your side.

The really good news is that your market has gone up, and you have a good amount of equity. This is about as surprising as gravity, but it is still good news. You're under 80% loan to value ratio if the numbers you gave me are valid. I wouldn't touch your loan right now, if I were you, but if you were in a sub-prime situation to start with, chances are good that you'd be A paper by now. You've got a 5/1 A paper loan with plenty of the initial fixed period left - but there's a lot of folks out there with 2/28 C paper. Especially if your adjustment had already hit, moving from 8% adjustable to a 5% or less thirty year fixed A paper without points (as of this update) makes a lot of sense. Even if you don't want to sell or refinance now, know that that kind of equity means you've got some breathing room if you've got to have it.

There is one more piece of good news: A paper 5/1 hybrids use a lower maximum debt to income ratio than do A paper thirty year fixed rate loans. What this means is that the income to qualify for the thirty year fixed rate loan and its payment are not going to be as much higher as you might think. Especially since A paper uses the fully amortized and adjusted payments for 5/1s in the qualification ratio. With 'A paper' loans, it harder to qualify for a 5/1 than it is for the thirty year fixed rate loan even though the payment may be much lower.

The bad news is that if you sell, you're going to sacrifice some of that equity. It costs money to sell property. Assuming yours sells for $325,000, you'd probably only net roughly $299,000, of which your loans would eat $249,000, leaving you with $50,000 in your pocket. Right now, a lot of places are in a world of hurt for trying to sell, so your could be out more than that and still have to take a lower price in order to get it sold. If your condo was in San Diego, for instance, you'd be doing extremely well to net $35,000 from an actual sale right now, even if your condo really was worth $340,000. The condo market is just saturated with sales that people couldn't really afford. I think this will change soon enough to surprise a lot of people, but I don't know for sure.

Let's assume that you don't intend to return to work. If your loan was adjusting any time in the next year, it would be time to sell. However, you've got some time. If your market doesn't look like it's in danger of collapse, I'd probably wait. If your market is on the road to recovery, selling later would be better. Most likely, more than enough better to justify waiting. If your market is just peaking, however, you've got a real issue, and you might want to get out now before you've lost all of your lovely equity.

One former possibility was planning to wait and refinance, doing the loan "stated income", telling the lender that you make more money than you do. This was always dangerous. Quite aside from the fact that you are intentionally defeating one of the most important safeguards for your protection as well as the bank's, this is not what stated income was intended for, and you need to be careful that you're actually going to be able to make the payments without going backwards (in other words, no negative amortization). Furthermore, stated income is gone and with the way the government is pretending it was always evil, may not come back for a long time. Better would be a fully amortized loan, but since you're already in the property, interest only is acceptable. If the situation is at least stable, why incur the costs of selling while the property meets your needs? However, at this point we do not know what the rates will be two and a half years from now. I don't know what the maximum rate you could afford is. Can you afford even an "interest only" payment on a 6% loan ($1250/month on $250,000), which is roughly 1/3 more than you're paying now? 6.5%? 7%? Finally, no interest only loan is interest only forever. Getting another interest only loan is recycling the problem you find yourself facing now.

This isn't a situation that can be tackled using only numbers, but the situation is not likely to be sustainable as it sits. You do have some choices on the table. The three most obvious are that you can go back to work, your husband can start making more money, or you can start making plans to sell the property. Any of them beat the default option, which is "do nothing and let the situation ambush us when time is up." And if you decide it's likely you'll be able to afford to refinance, keep an eye on rates. A point at which it makes sense to refinance could come at any time. I think the rates today are a freak low caused by a perfect storm economically, but there's nothing that says they cannot go even lower. Unfortunately, since you're not able to refinance right now due to low income, even the best rates ever aren't going to be any help to you, as your debt to income ratio is going to prevent a new loan from being approved. You somehow need to start making more money, enough more in time enough to be able to afford your property, or your best option is going to be to sell before you lose the property after the loan adjusts.

Caveat Emptor

Original article here

Or: Figures don't lie, but Liars Sure do Figure!

NOTE: At this update, rates on first trust deed loans are about as low as they have ever been while rates on second mortgages aren't particularly low. However, that won't last forever and we are likely to see a fresh round of this nonsense in the near future. The figures are unchanged from when I originally wrote the article, but it's the attitude that's important.

We've got a lot of people with loans in the low fives, interest rate wise, and we will soon have another wave of people with interest rates in the high fours. Lenders and loan officers need to have someone refinance now in order to get paid. One of the tricks they use to persuade folks with low interest loans to refinance is Weighted Average Cost of Capital, which really does take a page out of corporate finance books, but ignores a lot of details and alternatives.

This was an actual example that someone put online as an argument to refinance:

Current situation:

$350,000 first at 5.25%
$100,000 second at 8.5%
$50,000 consumer debt at 12%

This person then used standard practice to compute a weighted average cost of capital of 6.575, and justify refinancing all of it into a new first at 6.25%. They also assumed a tax bracket of 40%, which is a little higher than most folks pay, even with state tax figured in. Furthermore, it just took for granted the fact that there's enough equity in the property to absorb the full amount of excess debt without PMI. Robert Heinlein introduced me to this kind of attitude in Stranger in a Strange Land, calling it "straining at flies and swallowing camels," which is an apt description of what's going on. Theater.

What's really making the calculation work in favor of refinancing is that $50,000 at 12% without deductibility, and assuming a tax bracket higher than most people are in. Even the top federal bracket is 39.6%, so if you live in a state without income tax (quite a few), the article was overstating any possible current benefit. Furthermore, those states without income taxes tax mortgage loans on the basis of size, some of them pretty steeply. I just got an email from someone in one of those states back east, and for a mortgage under $250,000, the state was charging about $7000 in taxes. That's almost a 3% surcharge on the base mortgage, and if you're going to roll it into the balance, you're likely to be paying points up front. You're also paying interest on it basically forever.

Doing the calculation on the basis of pure interest rate calculation, like the manuals teach (I've got an accounting degree) ignores the costs of consumer loans. For corporate transactions, the costs are built into the the interest rate of the obligations. For consumers and residential real estate loans, this is not the case. You're going to be paying thousands of dollars for the privilege of refinancing - points and fees, and in many states, taxes. As I've made clear in the past, there is ALWAYS a Tradeoff between Rate and Cost in Real Estate Loans, and the standard WACC computations do not include cost of doing the loan in whether it's worthwhile, only the rate. This makes it seem like the rate with three or four points is necessarily better than the rate with none, when in reality it's likely to take eight to ten years before the lower rate pays for its cost in terms of interest savings. Most people will never keep a given real estate loan that long in their lives.

Now just for a moment, let's give the author of that article everything they're asking for. In order to be able to absorb this debt without PMI, the property has to be worth $625,000 minimum, plus 125% of whatever fees and prepaids get rolled into the balance.

What this means is that I could at that same time, without touching that 5.25% first, refinance that second into a 30/15 at around 7.25% (lower today), and still get paid half a point yield spread to do a very easy loan that costs the consumer less than $1000 all told. You see, not only do we get a price break for the bigger equity loan, but because it's only 80% Loan to Value Ratio (actually CLTV), and so we get a price break of

$350,000 at 5.25%, 40% aggregate tax bracket, 70% of the loan, =2.205% contribution from this
$150,000 at 7.25%, 40% aggregate tax bracket (on 2/3) 20% of loan = 0.870% contribution
$150,000 at 7.25% non deductible on 1/3 10% of amount =0.725%
2.205%+0.870%+0.725%=3.8% weighted average cost of capital, which essentially ties the projected 3.75% on 6.25% which is 40% deductible, but the lowered cost more than covers the difference in interest - $250 per year - for ten full years, just based upon the difference in closing costs, never mind points or cost of interest on the increased balance.

So why do loan officers push a full refinance when there are better options? Quite simply, they make a lot more on first mortgages than second, so it's in their best interest to make it seem like refinancing a first is in your best interest, even when it clearly is not. Second mortgages are something I'll do for existing clients, but it's not business I chase because I just can't make enough to make it worthwhile, and chances are that a credit union is going to do about as well as I can. First mortgages, however, are a different matter - and not just for me. The projected first mortgage would make me roughly 7 times what that second does, and my margins are low by comparison with the rest of the industry.

Because of facts like this, you need to know enough to think about alternatives like refinancing a second and leaving a low interest rate first untouched. This is also why you need to talk to more than one potential provider, to increase your chance of getting one of them to give you a better way of doing things.

Caveat Emptor

Original article here

January first and July first mark turning points in the year for California real estate, as property taxes are collected for a period running from July 1 through June 30. They are paid in two installments, the first due due November 1 (past due December 10) that covers the first six months, from July 1 to December 31. The second is due February 1st (past due April 10th), and covers the second six months, from January 1 to June 30. Other states have different set ups. For instance, Nevada property taxes are paid quarterly.

Most folks don't actually pay their taxes until just before the "past due" date. If you have an impound account, the bank doesn't send the money until sometime around December 8th and about April 5th, respectively. But they are due and payable on the dates above, and whether you are refinancing or selling or buying, if they are due they need to paid either before the transaction is consummated, or through escrow. Prorated taxes aren't part of refinance transactions. If they're due, they have to be paid, and the current owners need to pay all of them. But for sales, what happens is the property taxes are paid past the date of the sale, or not paid up in full through the date of the transaction.

Let's pick a date the transaction closes. Say June 15th. The taxes were paid back in April through June 30 by the seller. But the seller didn't owe taxes past June 15th; they don't own the property any more after that. The buyer owes the other fifteen days' worth. So the way it is handled is that the buyer comes up with, in addition to the purchase price, fifteen days of property taxes and pays those to the seller as part of the transaction. This way the county gets its money on time, and everyone is still even.

If the effective date of the sale was, on the other hand, July 31st, and the seller has paid only through June 30th, then the seller will owe the buyer for taxes for the month of July, because the buyer will be paying those come November. So thirty-one days worth of taxes are taken off of the sales price by escrow and given to the buyer because they will be paying for those thirty-one days worth of taxes in November.

Prorated sales taxes are part of most sales transactions. The only exceptions are those taking place within the periods from November 1st to December 10th, and February 1st to April 10th, where taxes are paid through escrow, and not even those if the current owner already paid the taxes. Be advised that during the last couple of days it can be tough to get an written receipt that you paid before past due, especially if you have to walk them in, so if the transaction hasn't recorded at least three or four days before the end of the grace period, you want to go ahead and pay the taxes. If the transaction doesn't close, the government doesn't care why they weren't paid before the end of the grace period; you'll have to pay a penalty for being late.

Caveat Emptor

Original article here

Most days I get loan wholesalers coming into my office. I'm always happy to talk with them, providing they want to talk about what I want to talk about. They usually want to talk about this gimmick and that gimmick and the other gimmick. They feed me lines about service and fast turn around and quick approvals and loan commitments. Ladies and gentlemen, these are all things that every lender should be capable of, and if someone hoses one of my clients, I'm no longer interested in doing business with them. Everybody makes mistakes, it's how they deal with mistakes that I am interested in. I'm very forgiving if they make their mistake good, completely unforgiving if they do not.

What I want to talk about is two things. The first is loan programs nobody else has, or that nobody else has in that category. Suppose a lender has a program to deal with people in default just like everyone else with only a small penalty. If they have something special, I'm all ears, and I make certain that goes into my database. I expect the rates for the underlying program to be higher, but that's cool. I'll price loans with them anyway, and if they're the best I can do for the client, I'll use them. Next time I have somebody in default, though, they get my first call, because they've got something nobody else does, or very few do. At this update, however, with the federal government controlling and tightening all the major loan markets and regulating all the competing private products out of business, it's rare that a wholesaler has such a program.

The second thing I want to talk about is price. A loan with given terms is the same loan no matter who is carrying it. So long as they are both legal, my client sees no difference between National Well-Known Megabank and Unknown Lender from Nowhere. The loan is the same. If the rate is the same, what's important to my client is how much they have to pay in order to get it. This comes back to The Trade-off Between Rate and Cost. If one lender's par pricing is a little bit lower, I can either get the client the same rate cheaper, or I can get the client a lower rate for the same price. There is otherwise no difference between standard loan terms for the standard loan types. I can always get the client a lower rate for the same price if they'll accept a prepayment penalty. If they want a true zero cost loan, the rate will be higher. How much higher or lower? That varies with time and the lender involved. But except for the rate printed on the contract and the cost to get that rate, these loans are the same.

Wholesalers don't want to talk about price, and they don't want to compete on price. If they're competing on price, they're making less money in the secondary market. Less money for the same work. I can't blame them. Suppose I walked into your office and proposed cutting your pay by somewhere between twenty and fifty percent? Somehow, I don't think most of you would appreciate it. But turn that around, because you're in my office now, as consumers, shopping for a loan, and you want the loan with the terms you want at the best price possible. If I get a lower price from the lender, I can pass it on to you. I can maybe even make a little more money while still saving you some money. Aren't you entitled to a bonus when you make money for your company or their clients? Ask yourself this: If I saved you $1000 and $20 per month over the next best quote, would it break your heart if I made an extra couple hundred? It shouldn't. When I'm out shopping, it doesn't bother me at all. By delivering the item on better terms to me, that company has earned whatever money they make.

This doesn't mean I necessarily look for the lowest price. When I'm shopping for myself, many times I'll buy something that is close to the top of the line. Why? Because it has something worth more than the extra money to me. What is worth extra money in real estate? Getting you a better bargain. You spend three percent instead of one, but your $500,000 home sells for $25,000 more, or it sells when it perhaps would not sell under a less aggressive marketing plan. $25,000 minus the 2% difference in commission ($10,000) is $15,000 in your pocket because your agent can afford to market and negotiate more aggressively on your behalf, never mind the difference between selling and not selling. Can a full service agent guarantee a better result? No. But I can tell you through personal experience that I find it much easier to get a better bargain for my clients who are buyers from someone who listed with a discount brokerage or flat fee place, and my clients are probably going to think I'm superman by comparison before the deal is done. But note that the difference in price does have to be justified. A loan is a loan is a loan, as long as it's on the same terms, but buying and selling real estate is an entirely different ball game.

A couple days before I originally wrote this, I got an email calling my attention to someone calling me an "alarmist", and furthering that with an accusation that I was trying to paint everyone else as a crook. Nope. There are a large number of basically honest practitioners out there, and a significant number of scrupulously honest ones. But there are also a fair number of people out there who, like my loan wholesalers, don't want to compete on price, don't want to compete on service, basically just expect to make money by virtue of the fact that they've got a license. Do I blame them? In most cases, no. As I said the day I launched this site, this is the way they were trained and they don't know a better way is possible. Plus they want a larger amount of money for the same work rather than a smaller. Many of them resist changes for the better for the consumer because it means they will make less money for the same work. Seems like every day there's a seminar advertising that they'll teach agents and loan officers how to attract clients without competing on price. This is what is behind the rise of the corporate agent. You see their billboards everywhere, saying how great they are, but that doesn't make it true, any more than agents working at Biggest National Chain With Large Advertising Budget are better than the agent who doesn't. It's all a matter of individual performance. Find an agent who will spend the time to get you the best service themselves - and this is not the corporate agent who spends all their time running their office and whom you will never actually talk to once you have signed the dotted line on the listing.

Well, suppose someone makes enough money per transaction to be happy, even though they are competing on price? Then what they want to do is attract more business, which is a part of what I'm trying to do here. More importantly, I'm trying to give you, my readers, the tools necessary to get yourself the best possible bargain. Nor am I trying to tell you that I'm purer than the driven snow, and I don't think I ever have. That is for you to judge with the tools I put out, and there's no way to know for sure unless and until I do a transaction for you.

How far you want to go with these tools is up to you. Real Estate transactions are the biggest transactions most folks undertake in their lives, and as a consequence, small percentages tend to be a lot of money by the standards of lesser transactions. If you only want to do a few easy things, they should save you some money or net you a better result. If you want to do the work for the whole nine yards, they should save you a lot more. But when you have the tools, you are better armed consumers, more likely to get bargains that are better for you, given your situation. Like all tools, they are to be evaluated on the basis of how well they do the job. If they are used properly and nonetheless fail you, you are right to fault them. If there are tools that do a better job, you are right to use those instead. But to say, essentially, "Pay no attention to that man behind the curtain!" is not the optimal response to the issue. Through issues clients and potential clients have brought me, I have encountered every single issue I raise here. There not only is a man behind the curtain, you need to keep your eyes on him and you need to learn how best to deal with him. That is what this site is about.

Caveat Emptor

Original here

I've been looking around for an answer to this but my searches haven't returned anything useful.

Say you buy a house and with that house you finance in a pool. House was $210,000 and pool is $40k. $250k mortgage. Okay, so two years later (the average!) you decided to refinance. Especially since you didn't get a good deal in the first place because you wanted a new house and to get the incentive you decided it was okay to finance with the company the builder tells you to finance with. Anyway, in those two years the housing market slumps a bit but for the most part after that time your house doesn't loose value. At the same time, the pool does not add value to your house. Comps in the area put your house at $220,000 but you still owe $245k. Is it possible to refinance? Was all the refinance hype only because the markets kept going up? Is this the reason why people who got an bad loan, maybe thinking they could refinance, are going to loose their house because no one will refi a house that isn't worth more than it was when you bought it?

(sic)

No, the refinancing craze was only partially because values kept going up. Rates kept going down as well. What this combination meant was that not only were better rates coming along all of the time, but that people who were stretching to the utter limit for 100% financing could refinance into more favorable loans as their equity picture improved. If you bought for $180,000, and comparable properties are selling for $360,000 now, that's 50% equity even if you didn't have a down payment. So people who bought for $180,000 were refinancing into single loans without PMI once values hit $225,000. Let's use the rates when I originally wrote this as a comparison. Instead of a first for $144,000 at 6.25% and a second for $36,000 at 9%, with payments of $886.64 and $289.67, even if the rates are absolutely the same and you refinance after 18 months for the $177,000 you owe (paying closing costs out of pocket), when your appraisal says $225,000, that's one loan at 6.25%, with a payment of $1089.82. This cuts $86.49 off the monthly payment, which is how most people think, and cuts your monthly cost of interest by $81, which is how smarter people think. It probably isn't worth refinancing at anything like par for such relatively small savings, but rates were dropping at the same time. This led a lot of unethical agents and loan officers to lead a lot of clients down the primrose path by saying things like "real estate always increases in value," and "You can hold on for a year, right? You'll have equity and we'll be able to refinance you." Lots of folks have a tendency to assume trends of the moment are going to continue, and it's amazing how consistently they get burned by this assumption.

A lot of what I wrote for the original article is no longer true, but there are two new twists: a cluster of special programs from Fannie Mae and Freddie Mac allowing refinancing up to 125% of value (now ended) for loans originally done "A paper" and Mortgage Loan Modification for loans that were originally sub-prime or variable rate, basically renegotiating your existing loan. As a note, the so-called "minor" modifications of forbearance and displacing any missed payments to the end of the loan have over a forty percent recurrence of default within about a year. In plain English, unless your situation has changed permanently for the better (e.g. found a better job, or recovered your previous one) or you have fully worked through the one time problem that got you into trouble (e.g. temporary disability that is now in the past), all you're likely to be doing is delaying the inevitable. Most people need at least an interest rate modification that puts them at a bearable debt to income ratio. Better the bank do this than lose money through a default. On the other hand, many people want their principal modified, which is not likely to happen - one case in sixty are the statistics I'm hearing, all of them having to do with the "killer Ds" of death, disability and divorce. Rather than reduce the principal owed, the bank might as well lose the money they'll lose by foreclosing. At least that way, they know their losses are at an end.

Rates as I write the update are the lowest they have ever been, but prior to that tumble due to the financial meltdown, had been broadly rising for a while. People don't like refinancing when it will raise their rates, and quite often, they can't afford to refinance, even if they have to, if the payment is going to go up. This has caused many lenders to get desperate, and is certainly one of the reasons for the way the negative amortization loan had been pushed. Loan Officers don't get paid unless they are originating new loans this month, and negative amortization loans look wonderful on the surface, when all you know about is the minimum payment. (I've also published an article debunking the Weighted Average Cost of Capital scam some lenders are also using to persuade people to refinance out of low rates into high ones).

If your equity situation has deteriorated due to decline in property value, however, it can be a real problem. Outside of the two alternatives I talk about above, both of which are temporary, lenders don't want to risk money in situations where Loan to Value ratio doesn't support them getting all of their money back if you default. The problems created by declining value are far deeper than the benefits that arise when prices are rising rapidly. When the loans total $500,000 and the property is only worth $420,000, that's a problem. That's a real problem. Lenders do not want to lend more than a property is worth. The highest financing regularly available is 100% of value, even when the market was going gonzo with Make Believe Loans and 90% is the highest refinance I'm seeing now. The situation I have just illustrated is a 120% financing situation. On a straight refinance, that's not going to happen. Period.

Now before anyone goes too far off the deep end, being upside down is no problem at all if you don't need to sell or refinance. You just keep making the payments and everything is fine. It may be possible that real estate won't eventually return to the pattern of appreciation we've come to expect these last hundred odd years, but that's not the way the smart money is betting. You will have equity again. I was upside down myself for a little while after I bought in 1991. It was no big deal. I just kept making those payments, and the prices came back. By the time I had a reason to refinance, I was back at 80% loan to value. For those people who have sustainable loans, being upside-down is a non-event.

Where it becomes a serious problem is when you've got an unsustainable loan. Whether it's negative amortization, or something somewhat less hazardous to your financial future such as a 2/28 or something short term interest only, you're looking at a time when refinancing is going to be pretty much mandatory. If you could have afforded the payment it's going to adjust to, you could have had a sustainable loan. But people have a tendency to stretch too far and buy more of a property than they can really afford.

There used to be more options and potential options if you needed to refinance while you're upside down. The one involving the least amount of mental effort was and is to come up with the difference in cash. Most people don't want to do this even if they have it, but it's an option. Actually, it's a pretty good option if you have that cash.

There second option for refinancing was a 125% equity loan piggybacked onto an 80% first loan. The first problem was that the terms on these were ugly. It's not likely to cut your interest rate or your payment, and they are all full recourse loans, where purchase money loans are mostly non-recourse. This doesn't work for a lot of people, not the least of the reasons for which is that the lenders that were offering these when prices were increasing rapidly have largely withdrawn them from the market now that prices have been decreasing. 125% loans were a function of a rapidly increasing market. I can't remember the last time I had a wholesaler offer me one. Still, if you're in trouble it can be on option worth asking your current lender about - the worst that can happen is they tell you those are no longer available. The situation is this: If you can't make your payment now and go into default, they lose money. If you can afford the payments on the 80/125 combo loan, and don't go into default, they won't lose money, not to mention they potentially move you from a non-recourse purchase money loan to a full recourse refinance, a very good thing from the lender's viewpoint. Easier to do a loan modification, but this option might be available.

In some circumstances, it is conceivable if highly unlikely that the holder of a second trust deed may agree to subordinate their loan to a new first. They're not going to agree if your payment or the loan amount on the new first increases, so you're going to have to pay all closing costs out of pocket. The amount on the new first is also obviously going to be above 80% of value, so you're likely to have PMI on it, but if it gets you from a 2/28 that's adjusted to 9% to a 30 year fixed at 7, it's probably worth doing. If the second goes from sitting behind a $410,000 first at 9% to sitting behind a $410,000 thirty year fixed at 7%, it has become more likely that second loan is going to be repaid in full, where if you default on the first trust deed that second is likely to be completely wiped out. Obviously, the holder of the second would rather not do this - they'd rather be refinanced out of their losing position. But nobody is going to come along and rescue them from their bad decision making if the property is only worth $420,000 and you owe $495,000. If you need to refinance your first in order not to lose the property, the holder of the second can either agree to subordinate, step up to the line themselves and be on the hook for the full amount, or be wiped out completely when the first forecloses. The options for them might all be bad, but subordination is the least bad.

The next option is the worst of all possible worlds: default and foreclosure. This is something you want to avoid if there's any way around it. Slightly better is a Deed in Lieu of Foreclosure, where you sign the title of the property over to the lender. Lenders may or may not allow this if you're upside down, though. Typically, they want to have at least a little bit of theoretical equity in order to agree to a Deed in Lieu. On the other hand, if they avoid the money that the whole default and foreclosure process costs, they may agree. A Deed in Lieu does hit your ability to get a future real estate loan, although it's not nearly so bad of a hit to that or your general credit as a foreclosure, particularly if you can see it coming and take action before you have a spate of late payments. Most folks won't.

Finally, if you need to refinance and can't, you can get yourself a good listing agent and execute a sale subject to a short payoff. This has potential consequences for your financial situation that start at 1099 love notes and might include a deficiency judgment. This is definitely not something to try "For Sale By Owner" or even with a discount listing agent. You're going to need an on the ball full service agent in order to make it happen, because the lender isn't going to listen to you as the owner, and a discounter is unlikely to be willing and able to devote the time necessary to get the lender to approve it. The big advantage to this is that it doesn't hit your credit nearly so badly as a foreclosure, perhaps less even than Deed in Lieu, and if you want another real estate loan sometime in the next decade, you would probably rather do a short sale than go through foreclosure.

None of these situations where you need to refinance a mortgage you can no longer afford, but owe more than the property is worth, is a good situation to be in. But if you take action before you've got late payments or a notice of default, let alone a notice of trustee's sale, you can get away surprisingly little damaged. The worst thing that can happen, will happen if you don't do something to fix an untenable situation before it gets that far.

Caveat Emptor

Original article here

With many people pushing various "cash back to the buyer" schemes in real estate, a note of caution is needed. Actually, it's more like an entire symphony of caution. Because if there is a loan involved, you run the risk of committing fraud.

Some people reading this won't care. "What the lender doesn't know won't hurt them," is something I've heard and seen too many times to count. After all, that lender is just some nameless faceless megacorporation, not anybody they care about.

To those people, I say, "The FBI will make you care." Given the spate of abuses, and the current level of panic at many lenders and investment houses, even if your transaction comes off without a hitch and the lender gets repaid in full, you may find yourself on the business end of an investigation. The kinds of real estate and loan places that are willing to pull so-called "harmless" fraud are also willing to pull no holds barred fraud where the entire idea is to defraud the lenders - or you. Where you have the lenders losing money, and a pattern of abuses, you have potential for the FBI to become interested in all of a businesses transactions, and once the FBI starts looking, rebate fraud is so easy to spot that a seven year old could probably do it. They find a known shady brokerage or a lender branch where management doesn't care, and it becomes what military pilots call a "target rich environment." It's worth the resources to investigate all of that brokerage's or office's transactions.

Here's what happens. A wants some cash to fix the property up, and so arranges with B to jack the price enough higher so that B can rebate the difference to A. A then procures 100 percent financing on the increased price, B gets the increased price, and rebates it to A.

Alternatively, A writes an offer with a real estate licensee who rebates part of their commission, while providing lesser "services". Usually, the question I want to ask those rebaters I encounter is "Why do you make more than minimum wage?" The answer is because suckers who think in terms of cash in their pocket don't understand what they're getting into.

In either case, this cash back somehow doesn't get disclosed to the lender, and it needs to be. Because if the official purchase price is $X, but B is giving A back $Y under the table, the real purchase price is $X-Y. If the lender knows about the cash back, they will treat the purchase price as being $X-Y. At the very most, for 100% financing, they will only lend $X-Y. Since this defeats the purpose of the cash back, the sorts of people who do this predictably will not disclose it to their lenders.

This is fraud. Even so-called "harmless" fraud where the people fully intend to repay the entire loan (and eventually do) is still fraud. The lender doesn't have to lose a single penny in order for you to have committed fraud. The definition of fraud is "An act of deception carried out for the purpose of unfair, undeserved, and/or unlawful gain, esp. financial gain." The legal definition is a little more complex, "All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated," but is essentially similar. Had you told that lender about the cash back, they would have treated the purchase price as being less than the official price. Hence, fraud.

There are all manner of crooks out there encouraging people to do this (and other things). I've seen numerous advertisements for various "real estate investment systems", and people who represent themselves as real estate professionals and real estate investors and real estate authorities and even real estate licensees who urge people to commit federal felonies for various reasons on the surface that always reduce to "So the crook can make money." Whether it's through a commission they wouldn't have because the client can't be persuaded to do it the legal way, or money they intend to make selling their "Foolproof System!" to thousands of pure deluded fools, they do a lot of damage. Nor does it get you off the hook if you were following the advice of alleged professionals, as lots of people in federal prison can testify. Even if you didn't know it was illegal, even if people you had reason to trust told you it was legal, you are still responsible.

The rebate itself is not illegal, according to my best understanding. Once again, I'm not a lawyer and I don't even play one on TV, so check that out thoroughly, but it is my best understanding. The illegality happens when you deceive the lender, either by omitting information a reasonable person would agree is relevant, or by actively saying something that isn't true.

It's more than possible to get cash back and be compliant with the law - it just defeats the purposes most people have in mind with cash back, which is to make the lender think they paid more for the property than they really did, and so lend a greater amount of money or on more favorable terms, or both, than the lender otherwise would have, had they known about the cash back. In other words, FRAUD

If you inform the lender, they will treat the purchase price as being the official price less the rebate. So if the official price is $400,000, but you're getting $20,000 back, the price the lender will lend based upon will be $380,000, and it doesn't matter if the appraiser says it's worth $400,000, or $400 million. $380,000 will be 100% financing, not $400,000, $360,000 will be 95% financing not 90%, and I'm certain you can figure the rest. Lenders evaluate property based upon the LCM principle, which is Lesser of cost or market. You only paid $380,000 in real terms, which makes it a $380,000 property at most. It doesn't matter whether this rebate is direct from the seller, or some third party. They look at it in terms of "How much of your hard earned money are you actually going to part with?" If some cash is coming back to you, you aren't really parting with whatever number is on the purchase contract, are you?

Where most lenders will cut a certain amount of slack is in closing costs. If the money is not actually coming back into the buyer's pocket, but instead being used to pay for costs of the purchase transaction or costs of the loan, most lenders will give that their reluctant blessing. Because all parts of the transaction are subject to negotiation as to who gets what and who pays what, the lender will usually understand that in order to get that price, the seller agreed to pay this cost or that cost. I don't expect this to last forever because I can point to a lot of abuses that are happening, but it happens to be the case right now. I believe that sooner or later, lenders will clamp down on this practice and refuse to allow it, but for right now, most of them are still willing to do so.

Even the most forgiving of lenders, however, draws a bright and hard line if any of that cash finds its way back into the buyer's pocket. So make certain it doesn't, or that the lender knows about it. And make certain that the lender has been notified in writing of every penny that's paid on the buyer's behalf by anyone else for closing costs. Because you don't have to be directly involved in a conspiracy to get drawn into a fraud investigation, and once it gets started, you can never be certain you won't be sitting in a courtroom somewhere, charged with fraud and conspiracy and anything else they can think of to throw at you. Even assuming you win, it's going to be a big hit to your wallet and a bigger one to your reputation. Not to mention the little detail of some portion of your life spent wearing "special" clothing as a "guest" at Club Fed.

Caveat Emptor

Original article here

I have questions to ask you about the loan for house. I have been work with one broker since DELETED and I just tell her on the phone that I chose her and that she can start to do the escrow but I didn't sign any application and papers for her. Two weeks later, the appraisal had been done. Can I stop to work with her because she promised me to look for lower rate later, but she didn't do anything about it. If I stop to work with her, do I have to pay any fees for the appraisal and bank approval for the loan and how much it may costs? (she had only done the bank approval and ordered the appraisal). Thank you very much for helping me.

This is pretty open and shut. Usually it's less clear. You haven't signed anything committing you to the loan. She probably has civil recourse on the appraisal - if she wants to spend thousands in lawyer fees to recover a few hundred. Since that's silly, I don't think it's likely she'll pursue it. Her case hinges on her having ordered it because of your verbal representation you wanted the loan. One more thing in your favor is that the date on the Good Faith Estimate and California MLDS needs to be within three days of the date she ran your credit report, not to mention the Truth In Lending Advisory and everything else. Not likely, if you haven't signed anything.

Most loan providers, ethical or otherwise, won't start work without a loan application package. Ethical ones because they've got legal obligations to meet, less ethical ones because there will be an origination agreement in there obligating you to pay their expenses if you don't go through with it.

If you have signed such an agreement, there's probably something in there obligating the loser to pay the prevailing party's legal fees. Since you're likely to lose if they push their case, this shifts the presumption as to what you want to do, which is pay the appraiser. You can fight it in court if you want to, but you're likely to end up paying for both sides legal expenses in addition to the appraisal bill. Since the chances of you winning in court are pretty minuscule, you would be well advised to just pay the appraiser.

I've said it before, but it's likely that lenders who promise to pay for an appraisal are going to more than recover those costs elsewhere in the loan. Suppose you've got a $300,000 loan. If all you see is the fact that you're not writing a check for $400, that loan provider can, by being willing to loan you the $400, trivially make two extra points on the loan, or $6000. Just because you're not writing that check directly doesn't mean you're not paying every penny of it via higher rates, or higher origination. Furthermore, they're not likely to pay for the appraisal without an origination agreement that obligates you to make good their expenses.

The true low cost mortgage providers won't pay for the appraisal. If you've got a low cost provider, they're either going to have to absorb the costs of the appraisals that don't pan out, or they're going to have to charge their clients whose loans fund for the ones who don't. In either case, this means a higher loan margin. Usually, there's a good margin there on top of the appraisal. I can point to providers who use the fact that they pay for the appraisal as a wedge to extract thousands of dollars in junk fees as well. Most of the people for whom that is a selling point only understand money when they write a check or fork over cash. They don't understand about how money they roll into their loan balance is every bit as real.

If you do decide you don't want a loan, the appraisal is the vast majority of the money you should be out, because that and the credit report (somewhere between $13 for a single person and about $40 for a married couple) are the only third party expenses. This doesn't mean that the less ethical won't try and soak you for other fees, because they will, and junk on top of those fees. Depending upon the origination agreement you sign, you could be on the hook for thousands of dollars - more than a low cost provider would make if they actually fund the loan.

I need to say this again, also: Just because you paid for the appraisal, and are therefore entitled to a copy, does not mean you are entitled to take it to another loan provider. The appraisal must be in the name of the correct loan provider, and if the prior loan provider does not release it, the appraiser will not re-type it. Even before new appraisal rules rendered it pointless, the games that were played by loan providers who refuse to release appraisals are legion. Most will want money to release it, money such that you may be better off getting another appraisal. Even the most ethical will not likely release the appraisal just because you find a better deal - or think that you have. They've spent anywhere from hours to days of time - time they have to pay for, even if they can't show a receipt - on your loan. Expecting a loan provider to release the appraisal without money is like expecting your mechanic to release your car without being paid. Therefore, you want to be the one that controls the appraisal, if you possibly can (Thanks to the rules within Home Valuation Code of Conduct, this is forbidden). Some appraisers don't like this, because it's in their interests for you to pay for more appraisals, but the law in most states isn't nearly so hard nosed as most appraisers would like you to believe.

One final thing: When I originally wrote this, rates had risen quite a bit in the last few weeks. I had a purchase client whose transaction hit a snag in a property defect that had to be corrected before any loan could be funded, and it was much more cost effective for them to pay for rate lock extensions than it was to re-float the rate. A tenth of a point per five calendar days is a lot less than the almost half of a percent re-submitting the loan to a new lender would make in the rate. In such circumstances, any reasonable loan that's been locked for a couple weeks is likely to be better than anything available today. I can look for a lower rate all I want. It's not likely to be found, unless their current provider is pretty high margin.

Caveat Emptor

Original article here

The answer is yes. Mind you, the only generally available 100% financing left is the VA loan, but few sellers are going to be willing to consider any offer that doesn't have a significant deposit.

Consider the situation from the seller's point of view, and the answer becomes obvious. Here is someone who is proposing to not put any of their own money into the deal. What's their motivation to consummate the deal? Not much, when you come right down to it.

No listing agent in their right mind is ever going to counsel their clients to accept a "zero deposit" offer. It costs money to give this person the only shot at a property for two months or more. (Nobody sane who needs a loan is going to want an escrow period less than 60 days - the time required to fund a loan has more than doubled because of Dodd-Frank). At an absolute minimum, that seller is risking the money to pay their mortgage, taxes, and insurance for thirty days. On a $400,000 property, that's well over $3000, and the amount at risk for the seller is more likely to be twice that. This is money that is gone and they are not going to get back, all based upon the buyer's representation that they want the property. If the buyer isn't putting any cash at risk, there's no disincentive for them in trying to try for a property there's no way they'll qualify for. Meanwhile, the seller is out money on a daily basis from the time they agree to lock the property up in escrow.

Some of you are no doubt asking about pre-qualification or even pre-approval. The problem is that whatever the loan officer said, there's no real way to back it up. It is illegal to require that prospective buyers be pre-qualified or pre-approved with a given lender or loan officer - a strong case can be made that just the simple request is a RESPA violation. I have said repeatedly that the only pre-qualification or pre-approval that I trust is one that I did - but I can't require prospective buyers to do that, and any decent agent is going to learn to ignore the request.

The only thing that means anything to that seller in the way of a guarantee for buyer performance is cash - a cash deposit from the buyer that is at risk if they can not or do not consummate the deal in a timely fashion. This is even more the case than usual if the buyer isn't putting any of their own hard earned money into the deal itself. If a buyer is willing to put 5%, 10% or more into the deal, they ought to understand the effort that that money represents, whether it's through saving it or just through having it not earn 10 percent per year of thereabouts in the stock market. If you're putting up cash you've spent years saving, you understand what that money represents. If you haven't made the sacrifices to save such a down payment and you want to just waltz into a property without putting down a deposit, well, odds are that you've got a rude awakening coming. Because over forty percent of all purchase escrows end up falling apart. So if I'm acting on behalf of a seller, one of the first questions I'm going to ask is "What evidence is there that this person can consummate the sale in a timely fashion, and what are they putting up that they're willing to lose if they change their mind or can't qualify?"

Pretty much every agent who's ever had a listing has had offers come in that were rejected on the basis of "not enough deposit," or that were acceptable in every particular but that. The intelligent thing is counter for a higher deposit or fewer contingencies on it.

Some folks are going to ask about substituting a higher purchase price. The issue that you're going to run straight into is the appraisal. In most cases, offers that include 100% financing are a little inflated anyway. When you add still more money to that, a sufficiently high appraisal becomes difficult. Even if the appraisal comes in high enough, though, we come full circle to the obvious question, "What good is that higher purchase price if you never get it?" If the buyer can't qualify or changes their mind, you don't get that price, and since there is not much penalty for such an outcome, there is no reason for them not to tie the property up in escrow, where nobody else can buy it, either.

For these reasons and many others, nobody sane is going to accept an offer that doesn't include a deposit. Don't waste your time making one.

Caveat Emptor (and Vendor)

Original article here

Every once in a while I get someone who is unhappy with required paperwork for privacy reasons. There are three forms that are the driving force behind this.

The first is the standard form for a mortgage loan application, known in the business as the 1003. Admittedly, the form does ask for rather a lot of information. It's comprehensive, and intended to paint your complete financial picture, so lenders can make a decision on whether or not to grant the loan. It also asks for irrelevant items like ethnicity so that the government can track whether the lender is discriminating (and they are dead serious about requiring ethnicity. If you decline to state, whoever takes the application has to make a guess). This also means it asks for a lot of information that a lot of people would, justifiably, rather not give out. Plus it's a pain to fill out. So some people don't want to, and quite frankly, I understand where they are coming from. Unfortunately, this is a government mandated form, designed to collect not only the necessary financial position data but also additional government mandated information. If you want a real estate loan, filling one out is is a legal requirement. There are only two ways to avoid filling out this form completely and accurately. In order to avoid filling it out completely and accurately, you must either 1) Lie or 2) Buy the property without a loan from any regulated entity. Lying is not recommended. It is a very bad idea. Lying on a 1003 is perjury, and there's likely to be a charge of fraud added into it. You are told point blank on the form that the information required to make a decision on your request for a loan. Misrepresenting your financial position in order to induce someone to lend you money is pretty much textbook fraud. Or you could do without a loan - buy the property for cash, by trade, for services rendered, etcetera. There really are all sorts of possibilities, but even if you put all of them together I don't think they amount to one percent of all transactions. Finally, you could get a loan from an unregulated entity. Basically, this means individuals. Borrow the money from Mom, from the mafia, or from a hard money lender. Unfortunately, even if Mom has the money, she may not lend it to you. And the latter two possibilities charge a lot more interest than the regulated banks, as well as other potential problems.

The second form that often become the issue is form 4506. This is the one that says your lender has a right to look at your tax returns (or a transcript with Form 4506-T). When "stated Income" loans still existed, many people thought that this meant the lender was violating the terms of a so-called "Stated Income" loan whereby they say what their income is, and the bank agrees not to verify the amount, but only the fact of the source of income. Well, the lender always has the right to insist on tax forms for documentation of income, and sometimes they do. But this is a method used to spot fraud after the fact. They don't often use this form to verify income, and it isn't to your advantage to force them to use it. As the form states, the IRS typically takes 60 days to respond to this request. You and everyone else concerned want the loan done before that. If the lender wants your information, they're going to require it whether you've signed this form or not. In either case, if they want the information, it's better for you to furnish it directly and immediately.

If you refuse to sign the form, they are well within their rights to deny the loan. So they are going to require you to sign the form as a condition of getting the loan. I can commiserate with you all you want, but it won't make any difference. Options to get around this are basically the same as for the Loan Application: Friends, family, or Lenny the Loan Shark. One of the 4506 forms is almost a universal requirement for lenders, especially in the aftermath of the Era of Make Believe Loans.

The final form that causes resistance is the Statement of Information. Like the Loan Application, this form has a lot of detailed information, and sometimes people don't remember all of it. This form has nonetheless become a routine requirement, but of title companies, not of lenders. The reason for this is fairly easy. Let's say your name is John Smith. Let's say you live in Los Angeles County. There are going to be a large number of documents in the public database in which John Smith or some close variant (e.g Jack Schmidt, Eoin Smythe, or Jon Smitt, among others). Any one of these could have an effect upon the policy of title insurance. Some of them, like a child welfare lien, never go away. Back when I worked for title companies, I could tell you about having to go back forty years, and in some cases further, looking for documents which might pertain to the person in the transaction. In populous counties, the list of documents alone can go to a hundred pages of single spaced stuff, and the title company has to be certain that 1) it isn't you, or 2) it doesn't effect the transaction for some reason, before they agree to issue the policy of title insurance. Guess what? The reason the document list is so long is because of the commonality of the name, so the long lists come up a lot more often than the short ones. Even if your name is something truly unusual (mine is uncommon), they've got to check out all close variants, anglicizations, and whatnot. So to toss out as many documents as they can, as quickly as they can, the title company requires a Statement of Information. Without that, it can be prohibitive to even run through the preliminary check. These people they are paying to do these searches rapidly become skilled and fairly high paid employees, even if they start out cheap. So the title companies want you to fill out the Statement of Information. It's one of those forms you don't want to lie on or conceal information on as well.

Don't want to do it? The title company will tell you they don't want your business. No policy of title insurance, either owners or lenders. That's your choice if you don't need a loan on the property and you're willing to take the seller's word that they really do own it and that there are no title issues. I wouldn't be. I've dealt with too many properties where there were known title issues. Nor are lenders nearly so glib about it. In order to get the loan, they require a lender's policy of title insurance, and whether it's a purchase or a refinance, you need a lender's policy of title insurance. If you're dealing with Lenny the Loan Shark, he doesn't care that you've lost the property to the forgotten first wife (via a three day marriage) of Mr. Jones, three owners before you, whose brother apparently inherited and sold the property in thirty years ago, but then the former Mrs. Jones just found out about it and sued for possession. If she (or her heirs) can prove her claim, she's going to be awarded the property. So you want title insurance.

Now, there are some protections you have under law. In California, I cannot use information obtained by real estate loan applications to sell your information to third parties. It's illegal, even if I wanted to, which I don't. Once the loan is closed, however, the lender can share your information with sister companies. Heck, I've had lenders I was placing a loan with take the information I've gathered and call the client to offer them a direct deal. Cancel the transaction with me, they say, and they'll give the client what they think is likely to be a better deal. Pretty sweet, huh? Steal my payment for the client I spent my time, money, and effort to find, and then brought to them. Unfortunately for these lowlifes, I do loans cheaper than they usually expect, and instead of canceling, the client reports it to me. Needless to say, these lenders don't get any more business from me. Title and escrow companies can similarly share information for marketing purposes. I always tell people who are concerned to write that they opt out of all marketing on the first form the title or escrow company wants them to sign or fill out. That puts the onus on them not to share your information.

Caveat Emptor

Original here

On a regular basis, I see advertisements for real estate offices that say "discount broker - full service".

This is nonsense. Actually, it is a calculated lie.

A discount broker has consciously chosen a business model whose economics do not permit them to give the same service provided by a full service provider. Here's the rundown.

A discount broker's listing agreement typically calls for them to receive 1 percent of the sales price, and the "selling broker" to receive the area standard, whether it's 2.5 or 3 percent (perhaps higher in some areas). Some few will reduce the selling broker's commission if they end up engaging in Dual Agency, but in most cases, they're after representing the buyers as well, which is bad from your point of view. Assuming your sale price is $400,000, you're paying them $4000 to represent you, and $10,000 of your money will go to representing the buyer. Which do you think has a greater call on their loyalty?

A Full Service broker's listing agreement typically calls for both sides to get the same 2.5 to 3 percent.

So a discount broker is saving you 1.5 to 2 percent of the cost of selling your home, if it sells. However, the majority of the ones I'm familiar with also want to be paid in cash up front, as opposed to making it contingent upon the successful sale of the property.

Let's ask: what does a selling broker or agent do?

They put your property on MLS and put a sign in the yard, of course. And when there is an offer, they serve as "go between" on the negotiations.

This is all a discount broker can afford to do. They have expenses of being in business. Rent, machinery, assistant's salary, etcetera. It's not like they get to freely spend every dollar they are paid, and you're not paying them enough that they can do more. Furthermore, their business model requires them to sell more properties than a full service broker, just to stay in service. The difference in their compensation between a $450,000 sale and a $470,000 sale is only $200. Which would you rather have - the high likelihood of a $4500 paycheck in a couple weeks, or the hope of a $4700 paycheck eventually? They're human too. They are much more likely to advise you to take the sale in the hand now even when you would likely do better to wait. Even though it would make a difference of nearly $20,000 to you (and that may double the money you actually get from the sale in many cases, while making the difference between walking away with money and a short sale in others), it's not important to them. Full service brokers are hardly perfect either, but they tend to be at least somewhat stronger negotiators on your behalf. At least the $20,000 difference it makes to you means $500 or $600 to them.

A Full Service broker can afford not only the Multiple Listing Service and the sign in the yard, but also ads in the papers and other places that people actually see. MLS is the single best way to sell a house, but hardly the only one. Signs in the yard help me find clients and keep my fellow agents from bugging you for the listing, but rarely actually sell that house. Ads in the correct papers at the correct time are the second best way to sell the property, and full service brokers can not only afford them, but they are motivated to do them by the "carrot" of the doubled commission if they also find the buyer. Open houses also help significantly, and full service brokers and their agents have a business model which makes holding frequent open houses worthwhile and advertising them correctly a paying proposition. Furthermore, you're likely to see better offers off of these sale sources. MLS offers are more likely to be people looking to buy on the cheap, whereas advertisements and open houses target people who want to live in your neighborhood. Once you have an offer, full service types tend to be tougher negotiators. Finally, once you accept an offer, the prospect of getting a larger paycheck motivates them to work harder getting the sale consummated, including being at the property for inspectors so that you don't have to. Some discount houses do a decent job of this last, but full service do better.

Which of these alternatives is better? Well that depends upon the state of the market and your situation. In a white hot market where everything that gets listed gets four offers within three days and bidding wars break out between prospective buyers, a discount broker or agent is likely to be the way to go, especially if you mostly care about getting it sold, as opposed to getting the highest possible price. If, on the other hand, the market is a much cooler one like most of the country nowadays, and it takes considerable effort to bring in any offer, or if your property has issues that make it undesirable (less 'curb appeal' than average), you're likely to want a full service broker or agent. Furthermore, if you want to get the best possible price, you want an agent who can and will devote the necessary time to your property.

Your situation also plays a part. If you don't care if the property sells tomorrow, next year, or at all, a discount broker is likely to meet your needs. After all, if you don't get a good offer, you'll just keep the property. On the other hand, if you need the property to sell fast, or if you need the offer to meet certain criteria, and most especially if it would be difficult for you to accommodate inspections yourself (for example, if you're now hundreds of miles away), a full service broker or agent is likely to be the choice for you.

I have seen many sales where paying a full service commission would have caused the seller to end up with more money in their pocket, and I see more every week. They are far more the rule than the exception. Saving that two percent on agent compensation usually means you didn't get 10% or more you could have had on sales price. Or it means the property didn't sell at all, versus selling for a good price. My article Production Metrics versus Consumer Metrics illustrates yet another aspect of this dilemma.

Discount Real Estate Brokers should also not be confused with Discount Mortgage Brokers. The "discount" part of a real estate broker's name usually refers only to listing agreements - people who want to sell a property. For customers who approach them as property buyers, these places usually receive the same full commission that anyone else does. There are exceptions where they rebate part or all of their commission for buyers, which should be disclosed and committed to in writing. But typically if you use them to buy, if it's 3% for the full service folks, it'll be 3% for them (and if you're listing with them in a Dual Agency situation, the difference gets rebated to the buyer, not to you). Furthermore, I have directly encountered several of them who benefit from the presumption that any loans they provide will be as low cost as their real estate services, and this is far from the case. I've had direct dealings with very well known discount real estate brokerages, and their margin on the loan they got their borrower was much higher than mine - from triple to more than four times what mine would have been. My responsibility was to my clients, so I kept my mouth shut and got my clients their money for the sale of the property. But inwardly I was definitely wincing.

Caveat Emptor

Original here

Well, sometimes. Okay, most of the time. But not always.

Foreclosures: Bargain hunters beware!

Myth no. 1: A big spike in foreclosures is right around the corner...
...That's because in most of the country, anyone who has owned a home for even a year or two is likely sitting on enough equity to sell or refinance if the loan payments become unaffordable.

Used to be true. Not so much any more. When prices are going up 20% per year, this is true. When prices have slid as much as they have, anybody who bought for peak or near peak prices is in trouble, not to mention the folks in negative amortization loans that got into a situation where they can't afford the real payment, and now they owe thousands of dollars more than they paid. Nonetheless (as the article mentions) the banks want the loan repaid. They don't want to own the house. A "hard money" lender will foreclose fast and hard, but a regulated lender wants the loan repaid, and they'll pretty much take a loss anytime they foreclose, and it's always bad business, because it's always someone who won't use that bank, and who tells all their friends and family. The bank isn't going to have a representative there to tell their side of the story, so no matter how justified they were in foreclosing, it's bad for business. They will put it off as long as they possibly can.

It can take a couple of years after payments start being a problem before the lender decides to cut their losses and foreclose. Sometimes the individuals concerned go to heroic lengths to stay out of foreclosure, drawing out all their savings, even their retirements to meet the payment. They are usually ill-advised to do so; nonetheless I understand the emotional attachment that occurs. The peak for foreclosure is usually somewhere around the fourth year of the loan. Foreclosures have been falling for years in my local area, as the option ARMs really became popular in 2004 and the trouble really got bad in 2007 have been mostly dealt with.

Myth no. 2: Foreclosed houses sell for far less than their market value.

In a study of foreclosure sale prices in more than 600 counties nationwide in 2005, Christopher Cagan of data provider First American Real Estate Solutions found that, on average, foreclosed properties sold for about 15 percent less than comparable homes in the area that were not distressed. But in states where real estate prices have risen the most, including Arizona, California and Virginia, foreclosed properties sold for within 5 percent of full market value.

This is true. Furthermore, many foreclosure homes have maintenance and repair issues. If I can save myself several tens of thousand dollars of equity by fixing the property up a little bit and cutting the price a little in order to sell it before foreclosure, I'll do it. On the other hand, if I bought it for $500,000 with a 5% down payment on a negative amortization loan, and now it's only worth $420,000, my investment is long gone, and any work I do and any money I spend is helping nobody but the bank. Some people may even strip the copper out of the walls for scrap (I've seen what a few such people have left behind). Some people may even take a sledgehammer and break things in one last act of spite.

In highly appreciated areas, the auction is usually the worst time to buy. Get them from the owners before the lenders pile on all the default and foreclosure fees, while there is still something to save for the owner, equity-wise. Get them from the lenders as REOs after they fail to sell at auction. Depending upon who forecloses, that can wipe out entire trust deeds. For instance, if there's a first and a second on the property, and the first forecloses, that second is gone. Dust. History. Worthless paper with unimportant markings, basically good for fire starter. If it originally sold for $500,000, and there's a $400,000 first and a $75,000 second, but the property is only worth $420,000 now, that second holder is crazy if they show up to the auction to defend it, especially since the holder of the first has added thousands of dollars in fees, every penny of which gets paid before the second gets a penny. The second is unlikely to get a penny, and bidding on it is throwing good money after bad. It's a waste of an employee's time, if nothing else. For buyers at auction, there's a key phrase to remember: cash or the equivalent. You don't win the auction and then arrange financing; you have to have that first. This doesn't apply to sales before and after the auction. Nor does California's ninety percent rule.

You are not (if you're smart) buying at auction sight unseen. You can usually make an appointment to see the property in the days before the auction. You should also look at other properties in the area. Know the market before you bid. Know what you intend to do with the property, know how much it's going to cost. Depending upon the law where you are, there may be a building inspection required, or perhaps you can take an inspector with you. This costs money, so you may want to preview once before you haul the inspector out there. Do your homework before you toss your money into the ring. That's what the people who make money at foreclosure auctions do. It's a full time job if you want to do well, and if you're not doing it all the time, a good agent is a lifesaver. Every situation is different, and it takes a certain amount of experience to know the best way to approach buying a given distressed property. You're competing with people who do this full time for a living. Ask yourself questions like "Why should I be willing to pay more for this property than Joe, who's been doing this for twenty years?" Auctions get crazy and emotional. If you have someone there to help take the emotion out of it, you are less likely to waste large sums of money. If you have someone there to help point out the pitfalls, you've probably just saved yourself every penny of their commission and thousands of dollars more besides. So long as they do what they say they will, of course.

No matter what else is true, there is always an element of risk in buying a foreclosure, more so than most other homes. The owner (the lender) has never lived in the property and is exempted from most disclosure requirements. Often, they honestly don't know about problems that exist. This doesn't mean they don't have to tell you about problems they know about, but having never lived in the property or dealt with its maintenance issues, they just have no reason to know about many problems that really do crop up. Furthermore, the lender addendums that lenders will require to be signed make buyer due diligence difficult, and lenders will not fix anything they don't have to. It can be a real struggle forcing them to make repairs to safety and habitability issues, as they are required to do in California. It is also my experience that the agents that work for lenders aren't at all hesitant to defraud buyer's lenders in concealing property defects that are loan killers - a buyer's lender who may be another branch of the lender that owns the property.

Buying foreclosures is not generally for people who want to just move their furniture into a property. Buying foreclosures can be quite rewarding, but you need to have a certain amount of financial resources to be able to withstand the consequences of the risk if it goes bad.

Caveat Emptor

Original article here

On a fairly regular basis I get email asking what I think of this or that loan calculator on the web, this or that predictive model for real estate prices or loan rates, etcetera.

Loan calculators are pretty simple when you get right down to it. Numbers go in, other numbers come out. It's just math - except that you've got to be careful about the numbers going in. Just because your balance is $400,000 now does not mean it'll be $400,000 after the refinance. It's very possible to do a zero cost refinance that adds nothing to your loan, but most people don't do it. Furthermore, I know I've said this before, but the only calculator out there that I trust is one that I know the provenance of. I've caught more than one company that had programmed its calculator to low-ball the payment. There's no way to tell for certain except using your own calculator, and if you have your own financial calculator, why are you using the web? You can cross check, however, because it's rare that two calculators will be mis-programmed to yield the same wrong answer. Also remember to add in closing costs and prepaid interest and escrow accounts, if you're going to have one, and always figure the cost of any points after everything else is added in there, because that's what the bank is going to do. Finally, don't take it for more than it's worth. Just because they tell you, "nothing out of your pocket," does not mean there are no closing costs. They exist. Somebody is paying them, somehow. Unless you know for a fact otherwise because you've discussed it and know where the money is coming from, I'm certain that "somebody" is you, and they're getting rolled into the balance of the new loan. I've had people bring me paperwork from other companies showing new loan balances thirty thousand dollars higher than they were expecting, with correspondingly higher payments. (I've also told people to never shop for a loan based upon payment more than a few times, also)

For spreadsheets, what you can get is usually an analysis of one variable per spreadsheet. I've programmed a loan comparison spreadsheet, but it only compares two alternatives at a time and it's not really suitable for use with the public, because you have to understand the limitations and GIGO factor. Just like I've got spreadsheets that answer the "rent or buy" question, among others, but you have to understand the limitations on the results imposed by your model.

As a computer programmer, I make a pretty decent loan officer. In order to compare financial information via spreadsheets, you have to understand what points of comparison the calculations are meant to compare. If your data is out of whack, if your assumptions are away from reality, or if you're trying to apply the comparison outside its design limits, what you get is useless.

I have several spreadsheets I have programmed and use. All of them have limits that need to be understood in order to get useful information out of them.

The first is a rent versus buy spreadsheet, that I first talked about in Should I Buy A Home? Part 3: Consequences. In that article, I spent a good paragraph telling you what my assumptions were in cranking the numbers. I think they are good and reasonable assumptions for the markets I have seen in my area in my lifetime, but many people might not. I just had someone make a comment to the effect that "rent doesn't increase with inflation." Well, it hadn't been keeping pace with the cost of buying the last few years when he said it, but that's not the case now. Even then, that wasn't the same thing as not increasing roughly with inflation. Furthermore, we've gone through a period when landlords were keeping rental rates low in the attempt to have someone else pay most of the mortgage of their investment property. Judging by the "loaf of bread" or hourly wage comparisons, or anything else except the price to buy, local rents have increased by a factor very close to general inflation over my adult lifetime. Whatever you think of my numbers, though, the fact remains that they are assumptions, and if they do not correspond to future numbers, the conclusions they reach have no bearing on the real world.

The second limitation upon this sheet is that it's assuming smooth increases. This is not what happens, as anyone over the age of ten ought to know. Over longer periods of time, the data may tend towards an aggregate average, but that says nothing about any given year. In reality, some years are plus thirty percent while other years are minus twenty. Even if my assumptions for averages are good, the spreadsheet that predicts the next thirty years is useful mainly to predict overall level of the market many years out. The numbers for any particular year are so much garbage, as far as the real world goes, where a 5% differential between estimate and actual is often enough to render something worse than useless. Even if my assumptions for average return are right on the money (and if I didn't think they were pretty close, I'd use others), any particular year could be at the top of a peak or the bottom of a market trough. If you know what state the market will be in in a particular year three decades out, why the heck aren't you richer than the ten richest billionaires in the world combined? Knowing what the market was going to do these past few years is a lot easier than knowing what it'll be like thirty years from now! I have what I think are good predictions based upon good models, but I don't have any god-level knowledge of where any part of the economy will be thirty years from now, and neither does anyone else. We see the future dimly, reflected through the present and the past.

Speaking of which, let's drag one of the standard disclaimers out and air the dirty laundry. "Past performance is not indicative of future results." Averages of past results may be the only way we have of predicting the future, but those results depend upon unknowable factors. Somebody could invent something tomorrow that utterly changes the face of housing thirty years out. You think the urban planners of the 1920s foresaw urban sprawl? I know for a fact that they didn't. What no model of the future can predict is unforeseen factors. I can't tell you what they will be or what effects they will have, but I can promise you there will be some. In 1894, Michaelson (who first measured the speed of light) said, "Our future discoveries must be looked for in the sixth decimal place." This just a few years after the formulation of Maxwell's equations, and within a year Rutherford had changed the atomic model forever, while the basis of quantum mechanics was being laid, and less than ten years later were Einstein and relativity. Michaelson was right in a technical sense that precise measurements were the key to unlocking future discoveries, but wrong in the sense he meant it, that all the major discoveries had already been made. My predictive model is more detailed than most, and I do my best to include all of the factors I see, but I have no way of including factors that I can't see, and one thing I can promise you is that there are some. It may work out that I guess right anyway, but that doesn't mean there weren't any unforeseen factors, just that I got lucky despite them. The further out the model goes, the more it is dependent upon subsequent events no one can predict. Someone could announce man-portable fusion power tomorrow, or "Star Trek" transporters, or any of dozens of new potential technologies that could alter the world, and that's just the technological possibilities. Politics and demographics will utterly change in the next thirty years (When I graduated high school, more people were predicting the world conquest of communism than the collapse of the communist system. Mr. Carter's presidency was not the United States' shining hour).

Just because we know that the precise numbers are wrong, however, doesn't mean that those numbers have no value in predicting the future. The way the numbers will move relative to each other is much more important information. Population is increasing and will continue to increase. Demand in major urban areas and desirable areas will continue to rise faster than supply, and since such areas are where most of us live or want to live, the price of real estate will quite likely continue to increase faster than inflation. Particularly types of housing which are universally desired, such as detached single family residences sitting on a certain amount of land owned basically fee simple. PUDs and townhomes are less desirable for most folks, true condominiums less desirable yet, and below that are apartments. Offer most people the chance to move up on the ladder of desirability, and they'll take it. Since the only thing preventing most people from doing so is price, price is what's going to make it ever harder to make that transition to more desirable housing. Living space in a desirable location is a scarce good. Living space, desirable location or not, is a limited good. The only way to change this is to somehow manufacture more space or arrange to have fewer people to share it. I'm not aware of any plans to manufacture enough space to make a difference to the billions of people on earth, so I'm guessing that barring worldwide nuclear or biological warfare, population density is going to increase, demand for housing is going to increase, and supply is going to stay pretty much right where it is. Nonetheless, this is only a guess. My guess is that housing will be about four to five times as expensive as it is today thirty years out. If it's only twice as expensive as today, we'll all still live in million dollar houses. If it's eight times, we'll be in four million dollar houses. The wider the net, the more probability I have of being right - and the less useful the information is. Unless the price right now is something like two cents, nobody sane is going to invest money for that long without a better idea of what the payoff will be.

Whether I'm right or not is something nobody knows right now, or even how close. Actually, not being quite that much of an egotist, the question in my mind is more akin to "how far off will I be?" But the data is still useful, because it tells me that as long as my assumptions are anything like real, we're all looking at living in million dollar real estate - the only question is exactly when. It tells me what people will be need to be able to pay every month, at least in a general sense, and it tells me that more and more people are going to get priced out of real estate, or down into less desirable housing, and that real estate is therefore going to be a quite satisfactory vehicle for creating personal wealth.

Each of the changes has consequences, assuming it does indeed happen. If it's difficult saving the money for the down payment when homes are $300,000, how difficult is it going to be when they're $1,000,000? At a guess, three times as hard. Fewer people will be able to do it, proportional to the numbers today.

On the other hand, no system of projecting the future is better than the limitations imposed upon it by limited foresight. If the population of the United States drops to 1789 levels all of a sudden - or 1607 levels - all bets are off. Of course if that happens, most of us won't be here to worry about it, and the ones that are will have bigger problems than the price of real estate. It's pointless to waste time worrying about the price of real estate in such possible circumstances, where the price of real estate would be the least of our worries.

Caveat Emptor

Original article here

You might get what you pay for. You don't get what you don't pay for, despite the fact that the local dog target loves giving discounters free puffery.

I'm not against discounters. I'm very happy to do a discounters work for a discounter's price. Fifty percent of the pay for less than ten percent of the work and almost none of the liability is a real win as far as I'm concerned. The difference is that I'm not willing to pretend that you're getting the same value from me. In fact, the amount of value the buyer receives from their alleged "agent" is pretty much negligible, and it would be a lie to pretend otherwise.

Let's illustrate with a recent example. Some full service clients of mine had gotten interested in a property. They wanted a fixer property with potential and a view, and they asked me to check this one out. Yes, it had a view, but the view was of a high school stadium, making peaceful enjoyment of the property rather hit and miss, subject to the local sports schedule. It had some potential, true, but every surface in every room needed to be redone. It is going to take $100,000 to get that potential, and the property would only be worth maybe $40,000 more than the owners are asking. Leave out those pesky numbers and a less capable agent can make it seem like a great bargain. If all you're thinking of is a potential $5000 rebate check from the buyer's agent, which can be fraud for reasons similar to these, you may think you got a deal from a discounter. Lots of people never do figure out how much that rebate check actually cost.

If they had been clients of a discounter, they would have been in escrow on the first property. Too bad about that $100,000 they'd have to spend to get $40,000 benefit. On the other hand, I found the same people a property not far away that needed about $40,000 worth of work to be worth $120,000 more than the asking price. What does a discounter do? Write the offer on the first property. Now you've got a property you need to put $100,000 into to make it usable, that's worth only $40,000 more than you paid. Money the discounter would have rebated: roughly $5000. If they didn't have a full service agent to compare with, it even looks like a great deal, because none of the value I provided these folks shows up on the HUD 1 form, or anywhere else as numbers on paper. The value is still there, as my clients know.

If you know enough about the state of the market, what problems look like and what opportunities look like, you may spend less with a discounter, or get a rebate that doesn't cost you several times that difference. If you know everything a good agent does, there is no reason not to put that money in your pocket. But if you know everything a good agent does, why is the discounter making anything? Why aren't you doing your own transaction? Why aren't you in the business yourself and getting paid for your expertise?

A full service agent goes a long way past filling in the blanks on Winforms and faxing the offer. When I go out looking at 20 to 30 (or more) properties per week, I'm not just finding individual bargains. I'm also learning about the general state of the market, what things to look for in a given neighborhood, what common problems are with a given model of house. I know what's sold in the neighborhood recently, and I know what it looks like because I've been inside it, and I know how it compares to other stuff that's out there now. I have a pretty fair idea of what it's going to take to beautify properties, and I know what they'll be worth when the work is done, because I know what other stuff that already looks like that has sold for recently.

Real estate is a career. It may not absolutely require a college education, but many agents have one, and know many things you can't learn in college - because the professors don't know, either, unless they're active real estate agents. A good agent spends a lot of time and effort not only learning their local market, but keeping their knowledge base updated. This thing changes constantly, and it doesn't even change uniformly. How did La Jolla get to be La Jolla? I assure you it wasn't some random seagull anointing the neighborhood from above with the Bird Dropping of Higher Property Values. Rancho Santa Fe doesn't even come close to the ocean, and it's the highest mean property value zip code in the nation. How did your neighborhood get to where it is? Is it likely to change, and how? What are the known and probable upcoming changes in the neighborhood? How is it likely to effect your prospective property? Wouldn't you like to know about that redevelopment zone - or the railroad tracks they intend to drive through the area?

Full service can be a very hard sale when all that you consider is the numbers on the HUD 1. There just isn't any space for "Agent kept you from making a $60,000 mistake," let alone, "Agent showed you an $80,000 opportunity." But people who know property know that there is a lot more to every transaction than the numbers on the HUD 1. If you're dubious, may I suggest this experiment when you're ready to buy: Find a couple full service agents willing to work with a non-exclusive buyer's agency agreements, and sign them. Then compare what happens as compared to the service of the discounter you use for properties you find yourself. There is no need to sign even a non-exclusive agreement with a discounter, by the way, as any sales contract will note the agency relationship for that transaction. Like I said in How to Effectively Shop for a Buyer's Agent, let the ineffective alternative select itself out.

I'm perfectly willing - happy, even - to do discount work for "discounter" pay. I only make half the money, but I can service a lot more than twice the clients for a much smaller level of risk and still be home in time for dinner. I'm even a better negotiator than dedicated discounters, because unlike them, I know what's really going on in the areas I serve. However, saying "full service at a discount price," does not make it so, and I refuse to pretend that it is. Same as saying a fifth-hand Yugo is the same as a new Ferrari, saying something like discount service is the same as full service does not make it true. Furthermore, the people who approach me for discount work usually end up understanding that a real professional is worth a lot more than the extra money I make, and are happy to pay it. Most people have no problems understanding that the reason a good car commands a higher price than a bad car, let alone a skateboard, is because a good car provides more value. People will pay $100 per seat for decent - not great - musicians in concert when you couldn't pay them enough to attend a garage band practice session. Why should this principle hold any less true for expert help in what is likely to be the biggest transaction of your life?

Caveat Emptor

Original article here

Every purchase contract I write includes an addendum for Wood Destroying Pests. In California, this is accomplished via form WPA, a one page addendum that requires an inspection and details responsibility for who makes repairs. The work needed is separated into two sections. To quote from the actual standard report, Section I work "CONTAINS ITEMS WHERE THERE IS EVIDENCE OF ACTIVE INFESTATION, INFECTION OR CONDITIONS THAT HAVE RESULTED IN OR FROM INFESTATION OR INFECTION," while Section II is "CONDITIONS DEEMED LIKELY TO LEAD TO INFESTATION OR INFECTION BUT WHERE NO VISIBLE EVIDENCE OF SUCH WAS FOUND."

The standard around here is that the seller pays for Section 1 items, the buyer for Section 2. The reasoning for this is quite solid: The lender isn't going to fund loans for properties where they know about termites in the process of eating the property that they're taking as security for the loan. They could very well end up foreclosing upon a property that cannot be sold, or cannot be sold for the amount of their loan. Federal Reserve Regulations frown on that, to say the least.

So when I got this from an agent on an REO, I was skeptical

Hi Dan,
The bank will not pay the termite - Section 1. They said we must get bids and the buyer will need to pay for it. This is not allowable with VA. I already know how much it is - $1550 - I ordered the report. The property needs tenting.

I forwarded that to my clients, who responded:

Thanks for the update. As usual I have some questions.

1. (irrelevant to this article)

2. We are definitely eager to see the termite report. Are they likely to give it to us, and if it does show serious structural damage, can we back out?

3. Is the VA loan going to hinder this or is it a simple matter of writing another check?

4. Would they have told us about this if we were going the conventional loan route?

My answers?

2) They have to give us the information if they have it. Not only is it in the contract and the law, disclosure laws require it. The only legal way not to disclose it is if they honestly do not know. That isn't the case - they're telling us there is known Section 1 work needed.

3) Section 1 work eliminates the VA loan as well as any others unless it's done. It's a condition of the contract. The lender is going to want to see the report. When they see the report, they're going to say no. Section 1 work is a loan killer, no matter the loan type. The only ways to get around it are an all cash offer, or agreeing to eliminate the termite clearance from the contract.

4) They would have had to. See answers to 2 and 3

However, this work is the owner's responsibility - in this case, of the lender who owns the property. Section 1 termite work impacts safety and habitability; not to mention that no agent who doesn't hose his clients is going to agree to clients paying section 1 work before escrow is completed (in other words, before you even take title). Since transactions fail to close for other reasons at the last minute, this means you could end up paying for the work and not taking title. The property and our offer were predicated upon the property being in a certain condition, but now we know it is not in that condition. Work is needed to bring it up to that condition. Therefore, the property is worth less without that work being done. The owners can do this work, or they can give an allowance in the price, and since this work is necessary to get a loan, not doing it makes a major difference in the price.

You can decide what you want to do. This may be just a testing tactic. If we respond strongly, they may give on the issue. If they don't, I would very strongly advise you to reconsider the property - it's very possible that you would end up spending the money to tent the property and still not getting the property. But that isn't my decision to make.

I am certainly going to advise against deleting the wood destroying pest addendum from the contract offer, which would enable us to pretend to our lender that no such damage exists. Not only is it fraud (and they would come after all of us), but what happens if it were to turn out that damage was greater than represented by the sellers?

If they are going to stand upon what the agent is representing here, the property is worth considerably less than the asking price, and they are trolling for an agent who will allow their clients to be hosed in the interests of getting a commission check, or willing to commit loan fraud.

We went back and forth a bit, and this was what I ended up sending back to the listing agent:

My clients are indicating that their offer was predicated upon the Wood Destroying Pests Addendum.

Section 1 Work is required to be done by every lender and every loan type I am aware of. Failure to disclose it (when known to exist) to the lender is fraud. Therefore, it needs to be done prior to loan funding, and therefore prior to transfer of title. Since the only non-fraudulent way to get a lender to fund such a loan is to do the work, it is the responsibility of the current owner to obtain a termite clearance.

Furthermore, since required Section 1 work impacts both safety and habitability of a property, an "as is" transaction does not shield the current owner from the need to repair this fault.

So the current owner is advised that they are required by the terms of our offer and the need for most potential purchasers for financing to do the work.

Otherwise, may I suggest you solicit "all cash" offers?

Here is the situation: The current owner and listing agent know that there is Section 1 work that needs to be done. Knowing this, if we were to conspire with them to eliminate that particular phrase from the contract, we would be guilty of fraud, in that we would be asking the new lender to fund a loan where we know there is a disqualifying condition of the property, but failing to advise them of it. This would be particularly pointed in the case of an agent who also does the loan (and therefore has a fiduciary duty to the new lender), but it doesn't let everyone or even anyone else off the hook: That listing agent is conspiring with malice aforethought to keep relevant information secret from the new lender, as are the current owners, who happen to be a bank, and therefore should be fully apprised of what usual lending standards are. Fraud, fraud, and fraud.

They ended up rejecting our counteroffer. Chances are they'll find someone who doesn't mind committing fraud. Lots of agents do this, as evidenced by the fact that she barefacedly proposed this fraud in written communication (email). That doesn't change the fact that she is proposing an intentional concealment of known information that a party to the transaction (the new lender) has a legitimate interest in knowing, and that is just as much fraud as appraisal fraud, concealing cash back from the seller to the buyer, or any of a large number of other ways to commit fraud in consummating real estate sales. Remember that agents owe a duty of fair and honest dealing to everyone, not only contracted clients. That includes the buyer's lender, whomever it may be. Just because you may not deal with them directly doesn't make them any less of a party to the transaction. Lots of escrow officers and agents are discovering this now in regards to concealing sellers giving buyers cash back, because the property is therefore worth less than presented. The exact same principal applies to the termite report.

Caveat Emptor

Original article here

I read a lot of the info. you have on your web page ... thank you.

I don't live in San Diego so I'm not looking for a home.
What I am trying to decide is whether to sell or refinance.

I live in DELETED. My mortgage payments are now approx. $2,400. I cannot afford to refinance into a fixed rate mortgage or interest only. I wanted to reduce my payments and I was recently offered a neg-amortized loan.

While I do have plenty of equity in the home, I balk at the thought of using my home as a piggy-bank. It's just not my style. I feel like I made a terrible mistake. I had a very modest home ... fairly low payments & property taxes ... but I wanted more, so I sold it.

I bought a good-sized lot with the proverbial "fixer-upper." Mistake #1 I should have thought of it as the "MONEY PIT."

Anyway, five years later and I've just survived a remodel but I'm still struggling.

Do you have any sound advice/suggestions?

First off, despite your market being somewhere I am licensed, each area's market is significantly different. Unlike the loan market, each commuting area has enough of its own concerns that nobody can keep track of more than one - not really. If someone called me out of the blue and asked me to list a property even a few miles outside my normal area of San Diego County, I would not have a good idea what it should list for. I can do a comparative market analysis, but that's just cranking numbers, and there's a lot more to market knowledge than cranking numbers. In the last week, I've looked at between 50 and 60 properties, and in the case of 20 to 25 of them, I can explain to an idiot why it is priced wrong by at least 10%. Sometimes they're under, sometimes they're over. Whichever it is, it's not good for the owner. Some agents will tell you there's no harm in being high, which is a premeditated lie. Properties that sit on the market because they are priced too high will sell for less money than the owners could have gotten, and that's if they sell.

Some properties are obvious money pits, while others are vampires, charming on the surface, while they embed their fangs permanently in your wallet. The best opportunities, however, are all fixers. The reasons a good buyer's agent is worth more than they will ever make are legion, no matter how much our local dog-target keeps pushing discounters. I just got a call from one pushing a property I previewed last week. Yes, it had a view, but the view was of a high school stadium, and every surface in every room needed to be redone. It's got potential, but it's going to take $100,000 to get that potential, and the property would only be worth maybe $40,000 more than they're asking. Leave out those pesky numbers and a less capable agent can make it seem like a great bargain. On the other hand, I found the same people a property not far away that needed about $40,000 worth of work to be worth $120,000 more than the asking price. Money the discounter would have rebated: roughly $5000. Difference in outcome: $80,000 in prospective equity and $60,000 of wasted work. Prospective differences in listing agents are every bit as large.

Now, let's consider the kinds of issues that might give you a better idea about what to do about your situation.

You say you've been through a remodel and have significant equity. That's good news in that you are not "upside down", but should be able to sell the home for more than you owe on it. That's better than a lot of folks right now.

However, the unavoidable fact is that it costs money to sell. A good listing agent is going to cost money - and a bad listing agent will cost you more, and this cost is no less real for the fact that most of it won't show up on the HUD-1. A good listing agent is going to tell you to offer a good buyer's agent percentage, also. Furthermore, you're going to buy a home warranty, and a policy of title insurance. I warn my fixer clients that it's going to cost about eight percent of value to get the fixed up property sold at a good price - so they might as well include that estimate in the calculations of whether the property is worth buying in the first place. I'd rather work a little harder, and have a client that keeps coming back to me because they keep making a profit worth making. When I originally wrote this, if you had a property that appraised for $500,000, you might have only gotten $480,000 or less on the purchase contract - and you may have had to give allowances on top of that. $480,000 less eight percent is $441,600, and if you have to give a $15,000 allowance for closing costs, that's $426,600. So you can have a good amount of equity on the face of things, and be upside-down in fact when it comes to the actual sale. Even if you have $100,000 in equity, it just turned into $25,000 to get you out from under a loan you can't afford. It depends upon your local market, the condition of the property, and the neighborhood it sits in. Things are better than that now, but there are many new issues, most of them brought about by regulators that I'll grant meant well but didn't understand what they were doing.

On the other hand, given the fact that you cannot afford your payment, your alternatives do not include doing nothing. If you try to do nothing, you will have your credit ruined and lose the property as well as quite likely get a 1099 love note from the lender that says you owe taxes and possibly (depending upon whether or not your loan has recourse) a deficiency judgment. So doing nothing is not an option.

When I originally wrote this, another alternative was a negative amortization loan. Those are pretty much history now with long overdue regulatory changes, but I'll leave the example just in case they come back: Something fairly middle of the road in a negative amortization loan would have a payment based upon a nominal (in name only) rate of 1%, for which the payment on $400,000 would be $1287, saving you $1100 per month in cash flow. On the other hand, if your real rate is 7.75 (reasonably median), at the end of two years you owe $433,500, and that's not including the prepayment penalty. After three years, when most negative amortization penalties expire, you owe $452,000, assuming rates stay exactly where they are, which I do not expect them to. Even if you got the loan for zero cost, you spent $1450 per month of your equity. In order for you to come out even, you'd have to net almost $479,000. That means you need to get a little over $520,000 sales price in three years if you don't have to fork over that $15,000 allowance, or $537,000 if you do.

It's true that you don't have to make only the minimum payment every month. Nor do you want to. However, let's be honest with ourselves. For most people, most of the time, they will. Even if they had it to spend on the mortgage, the kids need shoes, they "need" a new car, or they "need" a vacation. My understanding is that less than 5 percent of the people who have negative amortization loans make bigger payments than minimum more than five percent of the time. So whereas you won't necessarily owe this much in three years, it seems a pretty good bet to me.

Now here's where people helping people in situations like yours get grey hairs. We're guessing at where the market is going to be in three years. Not only about what we think the general market will be like, but what we think this property will be worth. Some things are consistent. For instance, unless you do another remodel, it's unlikely your property will spontaneously acquire brand new cabinets and stainless steel appliances, and since you are stating that you can't afford your current payment, it's unlikely that you'll be able to purchase such. Your property will probably compare to the rest of the market about like it does today, or maybe a little worse. The carpet will get older, the paint on the walls will be a little older, the shingles on the roof will have used three more years of their useful life. You get the idea.

On the other hand, the market really doesn't have to gain much to offset this. Mostly it just has to firm up, and if it does so, then even a two and a half percent annualized rise in prices would cause you to break even. On the average, that's trivial. Less than half the overall average annualized rise. On the other hand, it's not something I or anyone else can guarantee. It's investment risk. The market could start sliding again, or it could be completely flat. Once you buy an investment, any investment, there is no way to remove risk from the equation completely. One of the things that caused the problems a lot of the country has in the current market was agents who promised the people that their property would appreciate - and sometimes it doesn't. It's one thing for people to make the choice knowing the risks; it's quite another to sell them property by telling them that "real estate always appreciates," or even that "Real estate never loses value." Both are patently false.

People have a tendency to assume that the market will keep doing what it has been doing in the most recent past. At the last update, lots of people were writing how my local market is going to lose another 20% in the next year - completely ignoring that we're no longer priced at economically unsupportable levels, and indeed, we were about thirty percent below where a macroeconomic analysis of real estate prices suggests that we should be. We didn't lose 20% - in fact things went up. The excess inventory ("high supply") that was half the reason the prices fell has been steadily falling for the last year, people are now finding that they can qualify for more house than they thought (removing the bar that has been choking the demand side). Decreasing supply and increasing demand: What do you think is going to happen? Furthermore, buyers were coming out of the metaphorical woodwork at that point in time. I had been running every second of the last previous three months, and I hadn't been soliciting - every last bit of business I can handle was been coming my way all on its own. Furthermore, in the high demand areas of town we were starting to see regular bidding wars like we did in 2003 and 2004, only this time the people involved have hefty down payments, and are qualifying for "A paper" thirty year fixed rate loans full documentation. Five years ago, military personnel had to settle for crummy housing unless they were an O-5. Now I'm finding even E-6s and E-7s beautiful detached homes, bigger than my own, of recent construction that they can actually afford to buy at current prices with full documentation loans.

There is one more level of complexity to add, though. What are you going to do for a place to live if you sell? What do the alternatives look like? How are rents, and what are likely to do in your area? Are landlords going to have to increase those rents? Are people moving out of your area, causing them to drop? A good agent in your area will know. Rents here are seeing significant upwards pressure, and although this isn't your area, the Era of Make Believe Loans is over. Sane landlords can't pretend that as long as rent makes up for the majority of what they spend, they'll eventually get it back with profit when they sell because the prices are rising as fast as they were. Apartments and condos make economic sense to rent out - single family detached housing, not so much.

These, then, are some of the things to consider. There's less risk in the "sell now" option, but you're accepting a significant hit by exercising it. If you hang on those three years, you might be just fine, or you might be hosed even more completely than you are now. When I originally wrote this, given that you know you can't afford the property, if you had come to me in San Diego, I'd probably have advised you to sell now (That advice would likely be quite different now). Selling is the safe option, however unsatisfying it is. Once you have sold, the hemorrhaging is over - you're not bleeding green every month. Sell to someone who can afford the property, and who can afford the risk that it will further decrease in value over the short term. The assumption would be that they would be getting a deal - but what if you hold on to the property and the dice come up snake eyes? You are looking at a maximum length of time before you will have to cut your losses or have them cut for you. This is a recipe for a disaster even bigger than selling now.

Caveat Emptor

Original article here

That was a question I got.

One point, either discount or origination, is one percent of the final loan amount. After all of the loan amounts and fees and what have you are added, for a loan with one point, multiply the amount by 100 and divide by 99, and that will be your final loan amount. For a loan with two points, multiply by 100 and divide by 98. The general formula is multiply by 100 and divide by (100-n) where n is the total number of points. If you're just looking for a quick and dirty purely verbal estimate, it's ok to simply add 1 percent per point, but any actual paperwork should use the correct procedure.

Points come in two basic sorts, discount and origination. Origination is a fee your loan provider charges for getting the loan done. Some brokers quote in dollars, most quote in points because it sounds cheaper than an explicit dollar cost. Most brokers out there charge at least one point of origination. To contrast this, direct lenders do not have to disclose how much they are going to make on the secondary loan market. And many direct lenders still charge origination. Judging the loan by how much the provider makes (or has to tell you they make) is a good way to end up with a bad loan. My point is that it's the rate, type of loan, and total net cost to you that are important, not how much the guy is getting paid for doing your loan, or whether they have to disclose it all. Remember two things here, and they will save you. First, loans are always done by a tradeoff between rate and cost. For the same type of loan, the more points you pay the lower your rate will be, and vice versa. Second, remember to ask about "What would it be without a prepayment penalty?" It's a good way to catch people who are trying to slide one over on you, and the lenders pay a lot more for loans with a penalty, and the lenders make a lot more on them when they sell them to Wall Street, so they often do them on what looks like a much thinner margin until you ask the question "What would it be without the prepayment penalty?" Remember it.

Discount points are an explicit charge in order to offer you a lower rate than you would otherwise have gotten. To use an example I ran across the day I originally wrote this, six point five percent with one point, seven percent without. As I type this update, the rates are much lower, but the curve between the two is much steeper at the low rate end. On a four hundred thousand dollar loan, one point is essentially four thousand dollars, either out of your pocket where you're not earning money on it, or added to your mortgage balance where you are making payments and paying interest.

Is it a good idea to pay discount points, or is it a better idea to pay the higher rate? That depends upon the loan type and how long you keep it. Let's say the loan is $396,000 without the point, $400,000 with, just to keep the math easy. Your monthly interest charge on the first loan when I originally wrote this was $2310, on the second it was $2166. On the other hand, you would have paid $361 principal on loan 2, only $324 on loan 1. Here's the bottom line, though: You've got to get that $4000 back before you sell or refinance. Just a straight line computation, that second loan saves you $181 the first month. $4000/$181 per month is about 22 months to theoretically break even (and it's a little faster than that, because loan 2 pays off more principal per month). On the other hand, even after you've theoretically "broken even" there is a period where if you sell or refinance, you will inexorably lose money because you're paying interest on a balance that's higher than it would have been.

Let's run the actual numbers. If the above loan is a thirty year fixed and you keep it four years, you're well ahead. You've saved yourself $6944 in interest and your balance is only $2159 higher. $6944 - $2159 = $4785. Even if your next loan is at ten percent, you're only losing $215.90 per year. Especially when you consider that at a cost of money now versus later, you'll never make it up, because you can invest that $4785 you saved and it'll pay more interest than that. Similar numbers apply to today's loan tradeoffs.

On the other hand, let's say the rate was only fixed for two years rather than a fixed rate loan. After that, it is a universal feature of hybrid ARMs that they all adjust to the same rate. You are theoretically ahead by $363, but because of your higher balance, even if the loan adjusts to five percent, you're losing $154 per year due to your higher balance, and there is nothing you can do about it. Play now, pay later - and you still owe more.

There is no cut and dried answer about whether it's to your benefit to pay points. I tend not to do it, myself, because rates do vary a lot with time, and money you add to your balance sticks around in your balance. If I've got a zero or low cost loan and the rates drop half a percent, it's worthwhile to refinance for free. If I have a loan I paid a point for, I'm going to have to pay that same point again to see a benefit on refinancing, and as we've already discussed, if you don't keep the loan long enough, you've wasted your money. The national median time between refinances was about two years when I wrote this; now it's up to three. I see no reason to pretend I'm any different from everyone else, but some folks do have a history of keeping loans a long time. You need to make your own choice to fit your own situation.

Caveat Emptor

Original here

I got a question about "what does it mean if my loan is not funded after right of rescission?"

It likely means your loan provider lied to you, probably from day one. Once you have signed documents, there shouldn't be anything but procedural matters left. Things that cannot be taken care of earlier. Things like final payoff coordination, the escrow officer using funds to pay homeowners insurance. Every once in a while, a good loan officer will get a subordination moved to prior to funding because it's on the way, but it is necessary to start the three day right of rescission now in order to fund on time under the rate lock you have.

Every once in a while, it'll be because of something happening to you in the meantime. Lenders who are risking hundreds of thousands of dollars don't just sit there and presume nothing has changed since the first time they checked it out. They are going to check again, right before they put the money to the loan, to make certain that nothing the loan was based upon has changed. So sometimes while they are doing a final Verification of Employment (making certain you still work there), the answer comes back that the borrower doesn't. The final credit check comes back with a score that no longer qualifies under that program. These are not the loan officer's fault, except inasmuch as they didn't warn you not to do whatever it was. Whether you quit your job or were fired, the result is no loan. So I always tell folks not to change anything about their life or credit without checking with me first. Neither I nor they can really do anything about layoffs, of course, but the point is not to voluntarily do anything that messes up your loan.

The vast majority of the time, however, what's going on is that the loan officer never had the loan. There's some condition holding it back that you, the borrower, can't meet. They have a choice between hoping to get around it or going out and actually finding a loan that you can qualify for and telling you about that instead. I shouldn't have to draw you a picture as to which choice they will likely make. Many times, they were teasing you with a loan that you had no hope of qualifying for as an incentive to get you to sign up. This is a standard "trick". They get you wanting that loan, which sure sounds good, and you apply. Unfortunately, that loan was never real, or never something you had a chance of qualifying for, but now they've got you signed up. Now you've done their paperwork, and you're mentally committed to their loan.

If it's an honest mistake, they are not going to have you sign documents. They're going to come back and tell you as soon as there is a condition they can't meet on loan qualification. But the question was about when you have signed documents and the loan doesn't fund. They can keep stringing you along, hoping it will happen, or they can come clean and tell you they can't do the loan. In the first instance, they might still get paid. In the second, they likely won't, because if you're smart you'll go elsewhere. Needless to say, this can waste a lot of time getting "one more document" from you or jumping through one more hoop. If the loan doesn't fund at the end of the rescission period and you are not certain as to why, you've probably been had. This is why I always tell people to ask for a copy of all outstanding conditions on the loan commitment before you sign final loan documents. Ask them to explain them, too. You see, once you sign loan documents and the rescission period expires, you're stuck with that loan provider. You can't go elsewhere unless and until they give up. Even if you have a back-up loan waiting to go, they can't do anything until the other loan funds or gives up, which could be weeks. Not a bad situation for an unethical loan provider to be in. In the meantime, the seller cancels your purchase and you're out the deposit. Or the rates go up and you're not getting a refinance on anything like the terms you might have really qualified for at the start of the process.

Caveat Emptor

Original here

Not very long ago, the purchase market in many areas of San Diego went through a phase that could only be described as "piranha feeding frenzy". This sort of market reinforces several pieces of advice I have given here. First, What Happens When You Over-Price Real Estate?: properties priced correctly got multiple offers, properties priced a little under optimal were seeing bidding wars, while properties overpriced just a tad sat until the price got reduced low enough to counter the very high "days on market" counter. Second, all of the subsidiary ideas in How to Sell Your Home Quickly and For The Best Possible Price also got illustrated to anyone paying attention. Properties that were clean, uncluttered, and easy for buyers to get in to see (as well as priced correctly) are seeing multiple offers within a week, while corresponding properties without those virtues are sitting with no offers. Buyers and their agents even learned to avoid short sales, other things being equal.

But the most important thing is something that you kind of have to be a buyer or a buyer's agent to appreciate, and that is to be very careful you don't list your property with someone who doesn't have the time to dedicate to selling your property quickly and for the best possible price.

Here's the situation: You've got this one agent or brokerage. Their signs are all over on listings. "Must be pretty good," people think, and they call that agent, who comes out, schmoozes them, may even talk them into pricing the property correctly, and gets a signed listing agreement.

This agent then promptly disappears to schmooze more prospective listings. When previewing or showing properties where the owner is home, I've made a habit of asking a question of them that really asks about talking to their agent. It's damningly consistent how often these people tell me they can't so much as talk to their actual agent. Even talking to the agent's office staff is dubious. The agent themselves? No way. The only calls these people are getting from the listing office is new agents without listings hoping to use their property for an open house to make contact with buyers and bring more business to their brokerage that way. But working to actually sell the property they've agreed to undertake fiduciary responsibility for selling? Not so much.

Despite the barriers, I managed to talk to one of these listing agents last week. She told me "I have no idea how many offers I've got on the property. My office staff is handling that. I'm too busy because my transaction coordinator isn't doing their job."

Say WHAT? Whose job do you think all of that is? That transaction coordinator doesn't have their name and signature on the listing agreement. They didn't sign it, representing that they would diligently work to sell the property on the best possible terms. The office staff, including the transaction coordinator, is there to dot the is and cross the ts to enable the agent to handle more "big stuff". They are not there so that the agent can disengage themselves from the listing, or go heap more work onto the pile that the poor office staff has to deal with. Yet when I managed to indirectly suggest she should perhaps not accept any more listings until she had a handle on the ones she already had, she acted like I was some kind of alien monster, here on planet Earth to consume the poor hardworking agents such as herself, and usurp their Rolls-Royces. She's making money hand over fist - but her clients are getting hosed.

When I make offers - offers with reasonable deadlines to respond - they are sitting there, without response, for the week I give them, and usually several weeks beyond. It took one company six weeks to respond to a one week deadline offer, and I've got others where if they do eventually respond, the clock is sitting at nine weeks or more. Some of them are plying the time-honored (and horribly weak) technique of the "best and highest" offer - but even they're not picking one for weeks. This is pathetic. And then they have the gall to complain when they eventually do call back that my client has moved on and is no longer interested in their property. Just because it's like I'm talking to a black hole is no excuse to terminate the conversation, eh?

Not that the response to the "normal" listings and lender owned listings is great, but the response to short sales are far and away the worst. It seems that many agents are just having their back offices send all of the offers directly to the lender. No response to the offer, no negotiation and consultation with the actual owner of the property, no fully negotiated purchase contract, and definitely no fighting to get any particular offer accepted. Then they get upset when, after two months of this nonsense, most of the offers have moved on, including the highest, and none of the remaining offers are willing to match that highest offer that the lender just approved. In case you haven't figured it out yet, this means they're back to square one as far as actually getting the property sold, only the "days on market" counter stands so high they're going to have to cut the asking price even further to get any new buyers interested. Never mind that the lender might well have approved any of the offers if the agent had dug in and negotiated it correctly and fought for that offer. Never mind that the agent could certainly have gotten more money out of most - if not all - of the offers simply by coming up with reasons why it was in the prospective buyer's best interest to do so.

These poor people in the back office have no clue which offers are strong and backed up by a buyer's actual ability to perform, either. For that matter, neither do most listing agents. Letter from some lender asserting without evidence that the buyer is supposedly able to qualify for a loan in the amount of whatever loan amount is required? Worthless. What was the qualifying rate used to justify that conclusion and is it still available? What's their debt to income ratio and is there any wiggle room if the rates are a little bit higher, if there is some unreported debt, or if there's some kind of special tax assessment? Is the allowable loan to value ratio going to work for this property? Do these buyers have the cash to close? Nor is pre-qualifying with their favorite lender any better - not to mention that requiring a buyer to do anything with any particular third party - even simply requring prequalification with a given lender is illegal under RESPA.

To make up for the back office and agent's incompetence at deciding whether a given offer is backed by an ability to perform, listing agents are attempting to impose onerous and abusive requirements for buyers in order to make that agent's life easy - not to get the most money from the quickest sale and the fewest problems. I just read a listing that said no offers will be submitted without seven different illegal requirements, and a host of others that certainly act to discourage buyers with even halfway competent agents. Starting the "due diligence" period as soon as the offer goes in, before there is a fully negotiated contract, so the buyer has to spend money when they might not even get a contract, and when they technically do not have the right to have inspectors at the property? Requiring buyers to qualify with or even to use particular lenders? Requiring the contact information for the buyers themselves, allowing them to bypass the buyer's agent and contact the buyer directly? All of those are violations of major legal principles involved in real estate - and I've seen them on many listings within the past few weeks. Nor are they in the nature of "fiduciary duty" because they enable both the agent and their client to be hauled into court for violations of the law, costing far more than the principal could possibly make even if they buyers didn't understand their legal rights. Quite frankly, what these requests most often do is scare away qualified buyers who are competently advised, as well as causing the property to be worth less to the ones that do stick around.

The way to get good responses is first, to not put onerous conditions upon the property in the first place, and second, to respond in a timely fashion to every offer. Whether you counter-offer or explain that there are better offers on the table is determined by circumstances. But by responding to prospective buyers, engaging them in the process, and letting them know you take them seriously, the listing agent and their client are building psychological buy in for the buyers. They are giving the buyers a reason to believe that there is a real possibility of getting this property, and given such, they will focus upon this property. Until there's a fully negotiated purchase contract, those buyers are free to wander off in search of other properties, and if not responded to in a timely fashion, pretty much all of them will. Why not, when there is no response? Even "Talk to the hand!" is more response than I'm getting out of most listing agents these days.

Any time you have multiple offers, that is a golden opportunity to play them off against each other, netting more for the clients. These "top producers" are completely blowing these opportunities, which incidentally would net them more money in commissions, as well, but they're too busy signing new listing contracts to properly service the ones they've got. I'd be too ashamed of myself to associate myself with these listings. I'd certainly never brag about it in the vein of "I sold all these properties!" Have they no professional pride whatsoever? Kind of like someone who's supposed to be a maker of fine cabinetry bragging about creating steaming piles of excrement.

Let's examine the economics of the situation. Say that an agent can have thirty listings, of which three or four will close in any given month and a couple more agreements will expire. Suppose they are getting 90% of the sales price a dedicated agent with two active listings who sells them all quickly will get. Let's say the "top producer" averages 3.5 sales per month, while the not so top producer who actually serves their client interests averages 1.8. Let's do the math.

First off, that "top producer" has thirty signs on thirty properties out there advertising them and their services. The agent who serves client interest has two at any given time - and not the same two for very long. It's repetition and consistency that sell services to more members of the public who don't understand how these things work. Most yard signs (not my occasional listings - thanks to an idea I got from Greg Swann) advertise the agent, not the listing. But people driving by the same sign every day for six months are a lot more likely to call the agent to sell their property than the ones who drive by the same sign for only four to six weeks. Benefit: "top producing" bozo, not consumer. This turkey is selling about 12% of their listings per month, as opposed to the agent we're considering, who sells 90% of their listings per month.

Let's examine who makes how much, as far as the agents go: "top producer" gets 3.5 commission checks per month for 90% of the commission, because they found a buyer that produced 90% of the sales price. Let's say the median price in the area is $400,000, and commissions are 3%. 90% of $400k is $360,000 times 3 percent times 3.5 checks per month means they average $37,800 per month in revenue to their brokerage, of which some goes to the brokerage and some to them. The agent who really gets the property sold gets $400,000 times 3% times 1.8 checks per month, which means they average revenue to their brokerage is $21,600 per month. Which agent do you think the brokerage values more?

Now let's look at individual consumers and how they come out. Let's assume 8% overall cost of selling the property, and a loan for 70% of the value of the property, in this case, $280,000. The person who chooses the "top producer" walks away with $51,200. The person who chooses the agent who actually makes the effort to sell their property walks away with $88,000 - more than sixty percent more money in their pocket. If the loan is for 90% of value, or $360,000, the "top producer" client is going to be short $28,800, while the real agent's client is still going to walk away with $8000 in their pocket. Not to mention that the property sells quickly, so you don't have all the monthly expenses of maintaining it even though it may be vacant. If you bought for $300,000 and have a $280,000 loan at 6% here in San Diego, that's about $1800 per month that the consumer saves, considering insurance, for every month the property didn't sit on the market unsold. All of this is real money! Not to mention the clients of the agent who limits how many clients they work with have a 90% per month probability of ending up happy, while the "top producer's" clients only have a 12% chance of ending up with a sold property, and they are not going to end up nearly so happy.

So if you still want a "top producer" after reading all of this, be my guest. They're easy to find. Just look for all the yard signs sitting in the yard for months - if the listing didn't fail completely. Look for corporate advertising blanketing a particular market channel. But if you look a little bit harder, you can find a competent agent who has the time and will actually work hard to sell your property, properly manage the offers they do get, and sell the property for a better price much more quickly, ending up in much more money in your pocket.

Caveat Emptor

Original article here

"challenging underwriters mistakes in housing loan paperwork" was a search that I got.

You can't challenge them. Butting heads with an underwriter is stupid and counterproductive. There's only one person who gets a vote, and it's not you, whether you are an applicant, processor, or loan officer. The underwriter may not be the original application of the saying "a majority of one," but it certainly fits the situation.

Keep in mind that as a loan applicant, you will never communicate directly with your underwriter. It is an anti-fraud measure constant throughout the industry. If someone tells you that you are talking to your loan's underwriter, either they are lying or the loan has just been rejected on procedural grounds.

If a loan officer believes that the underwriter has made a mistake in the underwriting of the loan, it is far more constructive to find out what it was - on what grounds the client was rejected. Actually, loans are usually not flatly rejected, they simply come back with conditions the client cannot meet. A loan that actually gets rejected usually has further adverse consequences for the borrower's credit, and is usually pretty good evidence that the loan officer was promising something they couldn't deliver.

It does happen that underwriters, like loan officers, mis-compute things, miss things, and misconstrue things. This is one of the hardest lessons for a loan officer to learn: NEVER tell the underwriter anything that they do not absolutely have to know in order to approve the loan. The client has a rich uncle that gives them $10,000 every year? The client makes millions in the stock market as well as their salary? The client simply has millions in assets and they could buy the property for cash if they wanted? I wouldn't breathe a word of any of this to the underwriter. Not a peep, if I had my druthers. The underwriter will start asking all kinds of questions, asking for all kinds of documentation, both on the existing assets or income and on the likelihood of it continuing. If you're familiar with how the stock market works, you might have an appreciation for how hard it can be to prove that you're going to have income from it in the future. That underwriter isn't interested in trends or suppositions or even the fact that it's happened the last twenty years in a row. They want proof it's going to happen in the coming years. When accountants won't write a testimonial (trust me, they won't), you're out of luck.

Sometimes the underwriter comes back with conditions that are beyond the bounds of reason. Dealing with this is part of my job, but it's more akin to a negotiation than a confrontation. I've got to get them to tell me what has them concerned, and see if there isn't some other way to reassure them on whatever grounds they may have for concern. Remember, if the loan goes sour, both the underwriter and I are going to hear about it. It may cost them their job, and I may have to come up with thousands of dollars to pay the lender. Not to mention that the client isn't exactly happy. The underwriting process, properly used, is as much for the protection of the client as the lender.

So what I've got to do is find out what concern caused the underwriter to place this condition on the loan, and then a more reasonable alternative may suggest itself. If you ask in the right way, conditions can be changed if the request is reasonable. But you've got to know what you're doing. If the alternative you suggest does not adequately address the underwriter's concerns, they are within not only their rights, but also in full compliance with regulations where you are probably not, to refuse to make the change. Sometimes the underwriter and the loan officer disagree as to the computation of income, for example. By definition, the underwriter is right - unless I can persuade them that my way is better. Just human nature, you can't do that by challenging them, you have to persuade.

It is possible to run into an intransigent underwriter. That's one reason why brokers have the advantage over direct lenders, who are stuck with the same group of underwriters all the time. I can pull the loan and resubmit it elsewhere. Given that particular lender isn't going to approve the loan anyway, they won't fight too hard. On more than one occasion I have had the lender come back and issue an exception on their own when I pull it for re-submission elsewhere, but the ability and willingness to actually take it elsewhere is essential to this. And it is sometimes possible to go over a given underwriter's head and get an exception from the supervisor, but it tends to poison the well when you attempt this, whether it is successful or not. When you're asking for special consideration for your clients, they tend to look much harder at all of your clients. I've seen a couple loan officers talk themselves into one approval through an exception with the supervisor, only to have their other loans that were going through smoothly kicked back out for further underwriting. So you have one happy client, and three or four that otherwise would have been happy and who now are not. Sounds great if you're that one client, but how would you like to be one of those three or four others? Not a good situation for anyone to be in. Taking the approach of collaboration works better.

Caveat Emptor

Original here

My aunt is going to move to a new condo and wants to sell her old one. I would like to buy her old condo as an investment and rent it out (as I am already a home-owner). This whole investment/rental buying is all new to me.

She has lived there about 5 years and the value has increased more than double. Obviously I would love to be able to keep her tax base. I am thinking about getting an interest only loan to help me get into this. Can I get a loan for 100% of value? My aunt will need the entire amount to purchase her new place. What suggestions do you have to make the loan process easier and pay the least amount in fees?

It is worth between 360,000 to 390,000 (we haven't yet got an appraisal, this is from comps in area). My wife and I currently have a house in (City) with a value of 650,000 and a mortgage of 400,000. We both work and have some extra income, maybe 400 a month that we could supplement against a renter. I think we could qualify for the loan, but then we would have to refinance our house to cover a down payment and closing costs. We don't have any savings to pull from. My wife hopes to retire in 2 years and I will in about 8 years.

Investment property is a different item from a personal residence, in several particulars. First off, even if it's residential, the loan is a riskier one to the lender. A loan on investment property is going to carry a surcharge of 1.5 to 2 discount points (one discount point is one percent of the final loan amount), over and above any other charges for the rate you choose. Furthermore, despite a lot of research, I don't know a single lender that will currently do a loan on investment property for more than 80 percent of the value of the property (When I originally wrote this, it was 90-95 percent, but there has never been such a thing as a zero down investment property loan). So you need a down payment of at least twenty percent.

The good news is that whereas you do not have savings to pay it, you do have a considerable amount of home equity. Depending upon your exact situation, either a "cash out" refinance or just taking out a HELOC (Home Equity Line Of Credit) might be in your best interest. It depends upon your current mortgage and your credit, and I cannot make a recommendation one way or another without looking at the market you're in for current comparables, running your credit, and seeing what can be done. If you've got good credit and income, and have had the good credit and income for some time, it's more likely to be in your best interest to simply take out the HELOC. I have some without prepayment penalties and are zero cost. If your credit or income has improved of late, it may be in your best interest to refinance, or if you've got an ARM that's about to adjust anyway. Assuming you're "A" paper, you may now be a conforming loan where you would not have been when you took it out, although taking the cash out could cause you to exceed, once again, the conforming limit. Therefore, the acknowledgment that a HELOC is likely to be the way to go.

Cash flow is also an issue with investment properties. If you don't have a tenant, you get zero credit for the rent at initial purchase from A paper. If you do have a potential tenant, with a signed lease for at least one year, the lender will give you a credit of seventy-five percent of the proposed rent towards your cost of owning the home (principal, interest, taxes and insurance). Some subprime lenders will credit you with ninety percent, but their rates are typically higher in compensation. With the vacancy rate in urban California being about four percent, even ninety percent is a bit low, but the standards are what they are. I know many people who are making money hand over fist on rentals where the bank thinks they are paupers.

There is no such thing as an easy documentation investment property. Indeed, for any loan, for all real property you have to show the full breakdown for each property you own. When I first wrote this, you could state your overall income in most cases, and most folks with investment property had to do stated income due to the cash flow computations being so restrictive, but with the disappearance of stated income loans this option no longer exists. Most folks are probably going to have to incorporate and apply for cross-collateralized commercial loans - requiring higher interest rates and still more equity - in order get loans for investment property.

In urban California, however, prices had gotten so high that I did not remember (when I originally wrote this) the last time I saw a single family residence being purchased for rental purposes that "penciled out" with a positive cash flow. As I said in my article Cold Hard Numbers, this is one of the things that convinced me California real estate was overvalued. The penciling out part has now changed. Rents are up and prices are down, and due to all of the pressures placed on landlords by the changing loan rules for investment property, expect rents to continue to climb. I'm in escrow with some folks buying a better house than they're renting right now, and their monthly cash flow requirement is still going to go down, even before the effects of income taxes and all those lovely deductions for mortgage interest and property taxes.

(Got some spare cash lying around? Condominiums are wonderful investments at current price levels in my neck of the woods)

Now, as long as you have the cash flow to last until rents catch up, this is fine. But you need to be very certain that you do have that cash flow. When I originally wrote this, if you were buying for $360,000, that was a first loan at about 6.75 percent right now of $288,000, which gives a payment of $1868 (rates are lower now). Additionally, there's going to be Homeowner's Association dues of probably about $200, and taxes (assuming no Mello Roos) are about $375 per month, or about $200 if you can keep your aunt's tax basis. That sums to $2443 or $2268 if you can keep her tax basis. Now ask yourself how much similar units are renting for? If it's less than $2050 (or $1875 if you can keep the tax basis), your $400 per month isn't going to make up the difference. You might consider a negative amortization loan in this circumstance, but be advised that you're eating up your investment every month, the real interest rate is actually higher than the 6.75 percent, and prices may go down and not recover for several years, leaving you holding the bag for a big loss. It's a risk some folks are willing to take, others are not. I'm willing to do them for people in this situation, but only after I explain all the pitfalls (Option ARM and Pick a Pay - Negative Amortization Loansand Negative Amortization Loans - More Unfortunate Details cover most of them). Usually people who have been informed of the pitfalls decide that these loans are not for them, which is one of the reasons why I question whether the risks have been adequately explained to the forty percent of all local purchases being financed by these. (At this update: Anyone still have any doubts on that?)

Indeed, given the fact that you're going to have to make payments on the Home Equity Line of Credit as well, it's difficult to see how your $400 per month of extra cash flow is going to stretch to cover. If your credit is decent, I could have gotten you into the property, but that's not exactly doing you a favor if you find it impossible to make the payments.

Caveat Emptor

Original here

A Home Equity Loan, or HEL (pronounced "heel") is a one time loan, much like a car loan. You get the money all at once, pay it back so many dollars per month, and when it's paid, it's over. The most common Home Equity Loan is probably the 30/15, which is like a fully amortized thirty year fixed rate loan except that it's got a balloon payment at the end of fifteen years, when the remaining balance is due. Since very few people do not sell or refinance much sooner than that anyway, the fact that it has a balloon just isn't important to most folks. I do not know why, but the rates for true thirty year fixed rate home equity loans are much higher than for 30/15s. Fifteen and twenty year fixed rate Home Equity Loans are also pretty common, these being truly fixed rate loans without balloon payments, but the payments for those are significantly higher, so many people are not willing to consider them.

A Home Equity Line of Credit, or HELOC (pronounced hee-lock) works more like a credit card than anything else. At one point in time, I actually had a VISA card linked to a HELOC. There is an initial draw, which can be $0, and your monthly payments are based upon your actual balance. If there is no balance, no payments. The main difference is where credit cards are usually indefinite period and you can keep charging on the card as long as you pay your bills and stay within your limit, HELOCs usually only have a five year initial "draw period" when you can actually take more money, followed by what is most commonly a twenty year repayment period where you are making payments, but cannot draw any additional money. Unlike Home Equity Loans, HELOCs are variable interest rate loans based upon the prime rate on a certain day of the month. Also unlike Home Equity Loans, HELOCs are lines of credit, where you can take more money as long as you are within the draw period and under your limit. Also, so long as you are within the "draw" period, the minimum payment is usually based solely upon the interest accruing in any given month. It's only after the draw period ends that most of these loans begin to amortize as far as the minimum payment is concerned, but you can always pay extra.

With both Home Equity Loans and HELOCS, they are assumed to be Second Trust Deeds, with a different kind of mortgage in first position. But because the closing costs can be much lower than for a regular first trust deed, it need not necessarily be so - you don't have to have another mortgage in front of them. Indeed, sometimes with comparatively small mortgages (usually under $100,000) it can save you money by selecting a Home Equity Loan or HELOC instead. Even if the rate for the Home Equity Loan is a quarter of a percent higher than for a fixed rate first mortgage, it can save you money by not costing you $2500-$3500 in closing costs. Often, you can find competitively priced second mortgages where the closing costs are zero. So if you can save $2500 on a $100,000 balance, it'll take you ten years to recover the difference in closing cost at a quarter of a percent per year, if you buy with a traditional first mortgage, and most people refinance within three years anyway. In such cases, it can make sense to choose a Home Equity Loan or Line of Credit instead.

Home Equity Loans and HELOCs are priced upon the degree of risk that lender is assuming. If you're taking out a $100,000 loan on a half million dollar "free and clear" property, you can expect better rates than someone taking out the same loan when there's a $300,000 loan already in place. One thing to be aware of is that because Private Mortgage Insurance is typically not available, lenders for Home Equity Loans and HELOCs have significantly greater equity requirements, and they are not typically willing to insure any amount over 90% CLTV, or comprehensive loan to value ratio, at least not as of this writing. Given how badly they were burned by piggyback loans, I would not expect this to change any time soon.

Caveat Emptor

Original article here

Not interested? Most people aren't when it's talking about how they got taken advantage of in the past. First off, it's in the past so it is over and done with, and there's no use dwelling on it, right? Second, there's the ego thing. Nobody who's been bragging about what a great deal they got likes to find out they've been had. Taken for a ride. Conned. Big time.

Anyone reading this who isn't interested in improving what happens next time can tune out now, because that's what the rest of this article is about: educating you in how to shop for a loan and what the tricks are, and if you've never had a real estate loan but want one someday, chances are you'll benefit from reading it too. If you're the sort of person who isn't interested in improving your future loan, chances are you're not a regular reader because helping folks understand their financial options for next time is the most consistent thing I do here.

On a very regular basis people tell me how they got taken advantage of by a loan provider. Actually, a lot of them think they're bragging about what a great deal they think they got, when in their situation, I wouldn't take that loan if the bank paid me. High points charges that stick around in the balance essentially forever. Points on hybrid ARM loans (3/1, 5/1 and 2/28 are the most common). Prepayment penalties, especially needless prepayment penalties, or prepayment penalties that last longer than the period of fixed interest rate. Fixed rate loans where hybrid ARMS are more appropriate. Long terms where a shorter term would be more in your best interest. Most loan officers are looking for an easy sale, and no loan officer ever complains that a sale was too easy to make. Failing an easy sale, they'll look for any sale. If they don't get you signed up for any loan, they don't make any money. They are not responsible for your best interest, they are responsible for making money and not stepping over legal limits which are very different (in the sense of being less restrictive to loan officers) than most members of the public believe. If ever a loan officer tells you that in your circumstances, they wouldn't refinance, make sure you get their contact information and put it someplace you will be able to find it when you go looking for your next loan because such a loan officer is a treasure worth keeping.

First off, if your credit score is above about 660 and you have a prepayment penalty, chances are excellent that you were taken for a ride. People with credit scores above 660 should usually be A paper, not subprime. A paper does not need a prepayment penalty except when the loan officer wants to get paid more. A 2 year prepayment penalty is worth a good chunk of change on the secondary bond market - usually about 4% of the loan amount. This means that if you have the $270,000 loan I use as the default here, they made almost $10,000 over and above the normal price spread when they sold your loan. And even when they retain servicing rights, lenders sell loans over 95 percent of the time. At the very least, you should get some kind of benefit for accepting a prepayment penalty A paper. A current "maximum conforming" loan of $417,000 would be worth almost $17,000 more to the lender with a prepayment penalty than without. This, all by itself, is often a reason they stick folks in subprime situations. If you think you're A paper, make them show you the turn-down from the automated loan underwriting program (Desktop Underwriter or Loan Prospector) before you even consider a subprime loan.

Since I first wrote this, it has become more difficult to get A paper loans in the 660 to 720 range, especially if you're in a situation above eighty percent loan to value ratio. Keep in mind, however, that 720 is the median credit score nationally (half above, half below). It isn't difficult to get a 720 credit score if you will try, and that FHA loans are now much more useful than they were for avoiding the need for subprime loans. No to mention that it's very difficult to find a real sub-prime loan these days - the few sub-prime lenders left that I'm aware of have basically the same qualification standards as A paper. The way I'm putting it is they're looking for borrowers who don't think they're "A paper" but are.

If your credit score is below 620, you're almost certainly stuck with a loan where you have a prepayment penalty by default. Buying it off is usually a good idea, but buying them off isn't free. Between 620 and 659, there's some wiggle room as to whether you will get an A paper loan. If you have twenty percent equity in the property or are making a 20 percent down payment, chances are good you'll make it full documentation. Since Stated Income loans are not available anywhere I'm aware of at this update, full documentation is the only way to get a loan.

But most people never undertake the most important step they can to get a better loan. They don't shop multiple lenders, and by shop multiple lenders I mean have conversations about the best loan for your situation. When I first wrote this, I advised people to ask for a quote guarantee and sign up for a back up loan, but changes to the way lenders handle mortgage loan rate locks mean that nobody can give those at loan sign up. But shopping a very few lenders and having real conversations will likely save you $10,000 over the period you keep an average loan. There are lenders out there doing oodles and scads of business charging borrowers thousands of dollars more than the average lender.

I have changed where I hang my license several times since I entered the business, and the one thing (other than looking for loan officers who don't understand the way the business works) that most of the firms out there have in common is that they don't want to compete on price. They know they may have to the first time, but they want the client that just automatically comes back to them that they can soak for two or three points on every loan, in addition to whatever they earn for the prepayment penalty. I understand this yearning very well; it's a normal human desire to want to make more for the same amount of work, and also to lock up the customer for the future. If all you think about is how easy the loan is to get, you are these firms' favorite type of client. Guess what? You may not see their extra $10,000 or $15,000 as a separate charge on any of your paperwork, but it is there and you are paying it, and someone who knows what they are looking for can find it. Most folks would never dream of paying $50 for the same toaster that everyone else is buying for $13.99 at Target, but the way loans are priced is confusing at first sight, and people don't want to sort it out. It's pretty easy, actually. Figure out what kind of loan you want and qualify for, then price the rate/cost trade-offs of that loan type amongst the various loan providers. Figure break-evens on the extra cost of the lower rate. One rule I have never encountered an exception to is that if a loan provider pushes a low payment to sell a loan, they are a crook. If they sell by interest rate, they may be worth talking to, providing the loan type is what you're looking for. If they sell by the Tradeoff between rate and cost, they're definitely worth talking to. And if someone suggests a different type (i.e. not 30 year fixed), hear them out but make certain they tell you all of the details. There is always a reason why one loan is significantly cheaper than another loan. Never sign up for a loan until you are certain you understand what that reason is

Another very common tactic used to induce your business is advertising. Remember the loan ads that went "Lost another one to (mega corporation which shall remain nameless)"? That particular mega corporation is not competitive rate-wise or underwriting wise with others. Joe ShadyBroker who earns six points on every loan can often deliver better rates than they will. What they were trying to via their advertising is create the illusion of low prices by telling you they have low prices. Then, when you call and they quote the superficially low payment due to a rate where you have to pay three points to get it, they've got the average potential client suckered. Because their payment on a 2/28 loan with a 3 year prepayment penalty where you have to pay three points to get the rate is lower than mine on a thirty year fixed with zero points, people will sign up. Why? Because it looks more attractive to them at first glance. Get the calculator and the checklist of questions and ask the questions and do the math. Nobody can take advantage of you without your consent, but those who allow themselves to be intimidated by numbers are giving their consent. Actually, with most places, it's like begging, "Oh, please, I want to pay thousands of dollars more to get a higher interest rate!"

If someone doesn't ask questions like "how long are you planning to keep it?" or "how long do you usually keep real estate loans?", especially if they just launch right in to a spiel based upon a low payment, they are a cash-sucking Vampire. They may be an intelligent vampire doing what they are doing in full cognizance of what it does to you, or they may be an innocent vampire who doesn't really understand the business and who is being controlled by a green-blooded master cash-sucking vampire, but in either case you don't want to do business with them. Yes, these are sales questions. Yes, they get you talking to a salesperson, who then has a possible opening to talk you into something that may not be in your best interest. If they don't ask the questions, I guarantee that they're trying to push you into something that isn't in your best interest. Which is better: Not talking to a salesperson and being certain of being messed with, or talking to a salesperson and possibly being messed with? Note that there is no option that says "Don't talk to a salesperson and not get messed with." If their people don't know enough to help you from their own knowledge, those sales folk were probably intentionally hired because they didn't know any better. It is not a crime to make money. They are looking to make money, I am looking to make money, everybody in every line of business is looking to make money, including your employer - that's how they pay you. If I were independently wealthy and never needed or wanted to make money again, I certainly wouldn't be doing real estate loans, and neither would anyone else. You can take the attitude that you're going to pay a reasonable amount, and while you can take steps to hold that amount down and make certain it doesn't get outrageous, you know you're going to pay what it costs, or you can take the attitude that a cheaper quote means you'll actually get that rate at that cost when the overwhelming probability is that they're lying to get you to sign up. You need to look gift horses in the mouth. If someone's quoted fees are lower or higher than everyone else's, there is a reason. If they're too low, it's probably because they're pretending that a large percentage of what you are going to pay doesn't exist, because that gets people to sign up. Ask them if they will guarantee their total fees in writing. If the answer is anything less than a (qualified) "yes", they are lying. Actually, most of the liars won't tell you "no" in response to that question. They'll try to distract you with some line about how they're a major corporation or how they honor their commitments or any of several other lines that mean absolutely nothing. The MLDS and Good Faith Estimate are not commitments. Major corporations pull the same games as everyone else. In fact, they usually get away with playing even worse ones than Joe ShadyBroker because of their "name recognition". Even though the government has stepped in and made it harder to justify changes to the amounts, the companies who do this have figured out all the loopholes - and there are some big ones.

So shop around. Ask every single prospective loan provider every single question in this article. Pull out the calculator to see if it's believable, to see if the numbers work.

The typical savings of being a savvy consumer is literally thousands and likely tens of thousands of dollars every time you get a real estate loan. You may not see the savings directly on the HUD-1 at closing, but they will be present nonetheless. If you don't accept a prepayment penalty, that's thousands of dollars you've saved yourself down the line when you've been transferred and need to sell. If you get a rate that's a quarter of a percent lower (for the same price!) on a $270,000 loan, that's $675 interest you are saving per year. That's a couple of car payments; perhaps enough to let you buy for cash next time you need a car. If you invest the difference over the potential lifetime of your mortgage, a difference of over $127,000! If you save yourself the two extra points of origination that they were going to charge you, that's over $5500 that either is in your pocket, and that you can invest or spend on other things, or $5500 that isn't in your mortgage balance, where you're going to pay hundreds of dollars in interest on it per year ($357.50 per year at 6.5% interest), in addition to owing the base sum.

My point is this, folks. If I were a financial advisor trying to score an extra quarter percent commission off of you, most of you would be upset. Many people are so upset by 0.25% 12b1 fees in mutual funds that they won't pay the advisor who would save them a lot more money than the 0.25% per year simply by simply reminding them of sound investment principles. If I were a car salesperson trying to pad the cost of the car you were interested in by $5500, a large percentage of the population would most likely slug me. But because real estate transactions are complex and people don't want to take the time to understand them, they unwittingly walk into situations like this, and many people do so repeatedly throughout their lives, making the same mistakes about every two years. The dollar amounts are large enough that even small differences are thousands of dollars. If you're not going to guard your pocketbook, most loan providers will pick it.

The workman is worthy of his or her hire. The person who gets you the loan is entitled to be paid. Judge the loans on the bottom line to you; how much it costs and what you will get. The proof that they got you a better deal was that they delivered a better loan, not that they made less money. And if the person who does your loan can make an extra half-point while actually delivering you a loan that is the same rate on the same loan at less cost than the other provider, haven't they earned that money? You came out ahead because of their work - had you gone with any other loan, you would have paid more or had a higher rate. They made more. Definition of win-win. There is a loser here, by the way, but you'll never know who it was. It is the lender or the broker you didn't sign up with. But by finding you a program you fit better, the loan officer you did sign up with got you a better deal and made more money. It happens every day, if you make the effort to look for it, and go about it in the right fashion.

Caveat Emptor

Original here

I have never had someone tell me they wanted more information than this letter provides. I also require the prospective loan officer to fill if out for prospective purchasers of my occasional listings.

DELETED (Mortgage Corporation)
Address DELETED
City and ZIP DELETED
Phone DELETED

My name is Dan Melson and my License number with the Department of Real Estate is DELETED. I have funded in excess of one thousand real estate loans

This is to certify that I have performed initial investigation as to whether Mr. Client and Ms. Client are eligible for the contemplated loan and purchase under the purchase contract being submitted on (property address)

I have run their credit score with all three major credit reporting agencies. Credit scores as of DATE are

Person Equifax Experian TransUnion

Primary Borrower XXX XXX XXX

Co-Borrower XXX XXX XXX

The credit report lists their current monthly debt service as being a total of $X/month, and according to Mr. Client and Ms. Client, they have no other debts.

I have in my possession copies of paystubs for current year and w-2s or tax forms for the prior year, acceptable to lenders for documentation of income. These indicate pay for the last thirty days as well as year to date pay and prior year.

Total Income for the period to be averaged $X (DELETED months)

This indicates an average monthly income of $X

This monthly income, per (details of specific loan) guidelines, allows a total debt service plus housing of up to $X per month.

Projected Property Taxes: $X/month
Homeowner's Insurance: $X/month
HOA Dues: $X/month
Mello-Roos: $X/month

Fully Amortized Loan Payment: $X/month ($X at Y%, type of loan, pricing date)

Total of housing and other debts : $X/month

Since this is less than the total allowance based upon income, I have reason to believe Mr. Client and Ms. Client will qualify for the loan based upon Debt to Income Ratio. Projected back end Debt to Income Ratio: X%

The Allowed Loan to Value Ratio for contemplated loan per lender guidelines is X%.

I have in my possession current bank and other asset statements indicating the presence of liquid assets in the amount of over $X

Projected down payment: $X
Projected loan closing costs: $X (includes loan closing costs including all third party costs as well as points, if any)
Projected impound account and prepaid: $X
Other projected expenses: $X (Inspection and anything else I know we'll need)

Total: $X

Accordingly, Mr. Client and Ms. Client appear to be in possession of sufficient cash to fund the projected down payment and other closing costs.

Therefore, according to known underwriting guidelines applicable to the specific loan indicated above, having verified and tested Debt to Income Ratio, Loan to Value Ratio, Credit Score, and cash to close, I have a reasonable basis to believe that Mr. Client and Ms. Client will qualify for the above contemplated loan in a timely fashion to complete the contemplated purchase in a timely fashion.

Sincerely

Dan Melson, Loan Officer
DELETED (Mortgage Corporation)
Address DELETED
City and ZIP DELETED
Phone DELETED
Fax DELETED

This website does not speak for my brokerage, therefore I do not use their name here, but those are filled in on the real thing. Actually, I use computer generated letterhead. This is the precise equivalent of an accountant's testimonial letter. Whomever it is given to needs to be able to contact me with questions, and I am responsible for specific details I mention. Without those details, I might add, whatever paper this is printed upon is completely worthless.

I write every one of these specific to a given property and a given purchase contract and loan pricing as of a given date, and usually with quite a bit of wiggle room on the actual rate and cost. It doesn't do any good to write that the loan depends upon getting financing that may not be available tomorrow if the rates rise even slightly. It certainly doesn't do anyone any good to write that "Mr. Client and Ms. Client are pre-approved for a loan up to $X" without specifying the parameters I used to justify that statement. Debt to Income Ratio, Loan to Value Ratio, Size of loan, size of payment, estimated closing costs, estimated cash to close, specific tradeoffs between rate and cost that vary daily (at least) - all of these have an effect upon whether the prospective buyer will qualify for this loan under this proposed contract today. Without all of this information, the seller's determination as to whether to grant credit by signing that purchase contract is missing some vital information. It's not that any prequalification or pre-approval is actually worth anything, in the sense of being able to hold that loan officer responsible for any and all failed loans, but they can be held responsible for material misrepresentation. Without a representation or relevant facts used to reach the conclusion, what assurance have you that the person who wrote it didn't just flip a two-headed coin? "Sure, they qualify!" (I'll figure out what they really qualify for later, but they sure are happy with me for saying they qualify...)

The whole idea of such a letter is that the person to whom it is presented can go to any competent loan officer and ascertain whether or not this loan can be done. I have never had anyone call me for more information or for verification - which means one of three things must apply: 1) The people on the other end can tell that the loan can be done, 2) They're just putting the letter in the file for CYA, 3) They're just asking for this letter so they can illegally refer people to a specific loan provider who refers the clients back to them or gives even better kickbacks.

I'd like to see this or something like it standardized across the industry. If you're going to write a letter, you might as well write one that means something, that contains enough information for the person on the other end to be able to make a reasonable determination of whether this is, in fact, a reasonable transaction that has every likelihood of becoming a fully consummated transaction. That is the only possible excuse for requiring such a letter in the first place - your client's best interest. You can satisfy your client interest without violating RESPA - all you need is the information to know whether the loan officer writing the letter based that letter on solid facts or not.

Caveat Emptor

Original article here