Dan Melson: February 2020 Archives

The question every good loan officer hates is "What is your lowest rate?", usually the first thing in a phone conversation. People think that this sort of rate shopping is going to help them. The fact is that it almost ensures they are going to get ripped off or worse, as millions of people have discovered in the last few years - and most of them don't understand that this attitude is precisely what got them into the toxic loan that ruined them financially.

First off, everybody doesn't get the same choices. As I've said before, somebody who can prove they make enough money, has a history of paying their debt, and offers the lender a situation where there's 30 percent equity (or more) gets a different set of choices than somebody who can't prove they make enough money, has a questionable history of paying debt, and wants to borrow 100 percent of the property value (or more).

Second, different loans get different rate-cost tradeoffs. The loan that most people seem to consider the most attractive loan, the thirty year fixed rate loan, is always the most expensive loan out there. It always has the highest set of cost/rate tradeoffs. Why? Because on top of the cost of the money, you are essentially purchasing an insurance policy that says your rate will not change for thirty years. Even when long and short term rates are inverted there is a premium charged for the thirty year fixed rate loan. It makes a certain amount of sense; insurance policies are never free, and the thirty year fixed rate loan is the most desired loan out there. Simple economics: Higher demand equals higher price. Goods perceived as more valuable carry a higher price tag. So if you're looking for a thirty year fixed rate loan, and all you say is "What is your lowest rate?" you are likely to get quoted a rate from a Negative Amortization loan, the most toxic, least desirable loan out there, because it carries the lowest nominal rates. Even today with those gone, there are replacements which may not be quite so toxic, but are certainly nothing you actually want to be signing a contract for. If you want to argue with me, consider the meltdown we've been having these last several years caused by toxic loans. If interest rate (or worse, payment) is your only datapoint from the various loan providers you talk with, you are likely to do business with the one who quotes you the negative amortization loan, not the thirty year fixed rate loan. Matter of fact, the loan provider who tells you about the loan that you really wanted is least likely to get your business in this scenario, because you're focusing in on the red cape of rate and payment when you should be paying attention to other things.

Third, and most importantly, for every situation and every loan type, there is more than one rate available. Why is this, you ask? It seems obvious to you: Why not just choose the lowest rate, which has the lowest payment? It takes a little examination to see why.

The difference between the rates is in cost of the loan. There will be a rate called par. This is the rate at which the lender will loan you the money straight across. They don't charge you any money (discount points) to get a lower rate. They don't pay any of the costs of the loan. Getting a loan done really does take a minimum of about $3000 in closing costs (actually, that figure is for California, which believe it or not is one of the cheaper states to get everything done in - every other state I've done business in has higher closing costs), plus whatever the lender makes in order to do your loan. Whether points and closing costs are paid out of your pocket or added to your mortgage balance, you are still paying them. Indeed, when shopping for a mortgage, the phrase "nothing out of your pocket" from a prospective loan provider should immediately put you on guard.

For rates below par, you must pay discount points. This is an upfront incentive to a lender to give you a rate lower than they otherwise would. Every situation is different and should be analyzed with numbers specific to that situation, but as a rule of thumb: Unless you're getting a thirty year fixed rate loan and you have a history of keeping loans at least five years before sale or refinance, you should avoid paying discount points if you can, and accepting a rate with a bit of yield spread to offset origination is probably a good idea, even though it will be at a higher rate. The lower payments you get with the lower rate are rarely worth the cost of adding the points to buy that lower rate to your mortgage balance. People who don't qualify for A paper may not have this option, but more people qualify A paper than think they do. These days, with true subprime essentially extinct, it's A paper, what professionals used to call "A minus" which is essentially for people who barely miss qualifying A paper, or nothing.

For rates above par, the lender will actually pay part or all of your closing costs. It's rare that they will actually put money in your pocket, but it can happen. Note that this is different from a stealth "cash out" loan that adds the cash you get to your mortgage balance, charges you closing costs, and often puts a couple points on the whole amount of your new mortgage, and so where you've been told you're getting $2000 in your pocket, there may be $20,000 or more added to your mortgage balance. This is where the lender is actually paying part or all of the costs of the loan, so it is neither coming out of your pocket nor being added to your loan balance. This is called a "yield spread" or "rebate". Yield spread can be thought of as the opposite or negative of discount points, and discount points can be thought of as a negative rebate. There are never both discount points and yield spread on the same loan, although there can be origination points on loans where there is a rebate. I still believe it's a material misrepresentation, but that's the way Congress and HUD now require it to be done.

The critical fact that most consumers never figure out for themselves, and certainly never realize the implications of, is this: The vast majority of borrowers don't keep their mortgage loans very long. The median age for a mortgage was roughly two years when I wrote this and is still under 3 years. Fewer than 5 percent of all loans are five years or older. If you're the exception, bully for you. Otherwise, take heed and remember this fact: Whatever costs you pay for a mortgage are sunk at the beginning. This money either comes out of your pocket, or goes onto your mortgage balance. If it goes onto your mortgage balance it is even worse than paying it out of pocket because this money you owe sticks around a very long time and you pay interest on it. When you sell or refinance, (or when your rate starts adjusting), the benefits stop. They are over. Done with. If you haven't recovered the costs you paid to get a lower rate by that point in time, you have made a losing investment. Period. End of story. No chance for recovery. Matter of fact, even if you are technically ahead at that point in time, you can go negative later.

Let us consider a $270,000 loan. Smallish for California, but large in most other areas of the country. As I said earlier, real closing costs of doing this loan are somewhere in the neighborhood of $3400. Rates are lower now, but here are some real options that were available from one lender when I originally wrote this article:

You could do a thirty year fixed rate loan at par of 5.75 percent. Or you could get a one point rebate at 6.25, or you can pay one point and get 5.25 percent. Rates at this update are much lower than this, but this is still a good example to use so I'm going to leave the original figures untouched.

Assume you roll any costs into your mortgage like most folks do. Your starting loan balance will be $276,162 if you choose the 5.25% rate. If you choose the par rate of 5.75%, it will be $273,400. If you choose the one point rebate rate of 6.25%, your balance will be $270,666. These are real examples off the first rate sheet I happened to look at when I wrote this.

Let's compute the linear break evens: The 6.25% rate cost you $666 to get (Closing cost less dollar value of rebate). You pay $1409.72 in interest the first month. The 5.75% rate costs you $3400, and you pay $1310.04 in interest. The 5.25% loan cost you $6162 (Closing cost plus dollar cost of discount), and you pay $1208.21 interest the first month. Difference in cost divided by difference in interest.

6.25% versus 5.75% loan: $2734/$99.68 = 27.42 months.

5.75 versus 5.25 loan: $2762/101.83 = 27.12 months

5.25 loan versus 6.25: $5496/201.51 =27.27 months.

Actually, the break even is likely to come a month or two earlier. But let's compute what happens if you refinance again into a 5% fixed rate loan for zero real cost right at breakeven time, 27 months. This makes the residual cost of the previous loan as low as reasonable.

The 6.25% loan leaves a balance of $263,241. When you refinance under this scenario, the new monthly interest charge will be $1096.84.

The 5.75% loan leaves a balance of $265,193. The new monthly interest charge will be $1104.97. The extra money on your balance costs you $8.13 per month, $100 per year. Plus you still owe almost $2000 more. Yes, you have technically broken even at this point because you saved that much in interest, but that benefit is gone into the past, while the extra money you owe and the costs of it are still with you.

The 5.25% loan leaves a balance of $267,104. The new monthly interest charges will be $1112.94. The extra money on your balance costs you $16.10 per month, $193 per year, from here on out. Plus you still owe almost $4000 more.

These are actually favorable assumptions compared to the real world in that they treat the 5.25% loan option much more kindly than it deserves compared to the 6.25% loan. Furthermore, the breakeven on buying a loan down is usually 3-5 years, a much longer period. Also, in this example I chose to wait to refinance until you had theoretically broken even, even though you didn't, really.

Most people have done this multiple times. $10 or $15 per month doesn't sound like a lot, but do it a couple times and you have $100 per month, and owing tens thousands of dollars more than if you'd gotten a cheaper loan that carried a slightly higher payment in the first place. I believe in offering choices, but I also know which I would recommend and choose for myself.

One point that needs to be made again is sometimes costs get built into the back end of a loan, via a pre-payment penalty. Most loan officers will not volunteer whether there is a pre-payment penalty, and many will lie even if you ask, just to get you to sign up, knowing that once you sign up you will likely consider yourself committed. This may not be legal, but it happens, and is another reason to read your loan paperwork carefully and shop several lenders. Reading the Note carefully at signing of final documents is the only way to be sure that there is no prepayment penalty.

The tradeoff between rate and cost is the most important fact of loans, and almost nobody pays attention to all the money they sink into the front end of a loan that they never get back via the lowered interest rate they bought with it. Instead, they refinance (or sell the home and buy another, requiring a new loan), and how they do this over and over again, adding thousands of dollars into their loan balance, needlessly and wastefully.

Caveat Emptor

Original here

Sooner or later, a pretty fair proportion of the population are going to get an offer for a much better job, but the catch is that job is located in another city on the opposite end of the country. What are the major issues relating to the mortgage?

Well, first off, the relocating spouse may not have the job until they actually report for their first day at work. Many times people are told "Go there and you'll have a job," and when they get there, they don't. So no matter how much time you have in that line of work, until you actually have the job things are iffy and you can expect loan underwriters to reflect that. The job offer letter may or may not get the job done - it usually doesn't. Usually they want at least an employment contract, sometimes (particularly A paper) the first pay stub as well. It can be rough, and a waste of money to rent, but over the lifetime of a loan with a higher interest rate, it may pay off to actually wait until you've got that first pay stub.

Now just because the one spouse has a job offer doesn't mean the other spouse will get a job in their field. Sometimes they work in a field where there is no problem finding work, like health care. Sometimes they work in a field where moving means they don't have a career, and they're going to have to start all over in some other field. If you worked in a distillery and you're moving to Salt Lake City, you're probably going to need a career change. If that job is similar enough to the one you left behind, that's cool. But if you used to be a bookkeeper and now you're a retail clerk, then you do not have two years in the same line of work. Chances are your family is not going to be able to use your income to help qualify for the loan. They are not going to be able to use it at all until you have a job that has income. Since this can take a while, you really might be better advised to rent for a month or two (or even six, if that's the shortest lease you can find). Of course, if one spouse isn't working and doesn't plan to, this isn't really an issue.

Next, there are the issues with the property in the old city. Many times, especially in a market like the current one, the property has not yet sold, becoming a drag upon your ability to qualify for a new loan. If you can rent it, that's certainly one solution, but most lenders will only allow 3/4 of the monthly rent to be used to qualify you for a new loan, but will charge all of the expenses against this. Considering that around here it can be tough to get a positive cash flow for a rental property, you can imagine how tough it is when your monthly income from the property is chopped by 1/4, and how much more you will need to be making, in order to justify the loan. Furthermore, there are caveats to whether the lenders will accept any rental income. Be damned certain there is a paper trail on everything: accept no cash - checks only and keep copies of those checks - and even if the rental is month to month, have a written rental contract.

Another thing is that most folks expect to be able to use the entire amount of the new salary to qualify, and that's not the way it works. If you made $6000 per month for the past two years, one month at $9000 isn't going to move that monthly average income up very much. The computation is done on a weighted average basis - you've got 23 months at $6000 per month, or $138,000, and 1 month at $9000, which when added makes for a grand total of $147,000, or about $6125. When it was available, often newly relocated folks had to settle for sub-prime loans when they are normally A paper so that they could use bank statements or something else to qualify. Stated Income is also dead for now - only certain types of lenders can offer it, and they were getting so much as a proportion of their total loans that they stopped offering it. I don't know of a single lender that's actually funding stated income currently.

Showing enough of the right income - and a paper trail to document it - has never been so critical to those wanting a loan so that they can buy a home. In cases of relocation, it has become necessary that you pick a loan officer and work with them to dot all your i's and cross all your t's before you apply - lest you go through the entire process only to find on moving day that you have no loan.

Caveat Emptor

Original here

"What mortgage fees can i recover after loan denial" was a search I got. The answer is basically, "None."

The only thing that should be charged up front is a credit check, which costs about $20, and you should be prepared to spend that $20 several times over while you're shopping lenders. If you're worried about twenty dollars when you are applying for a mortgage, chances are that you shouldn't apply.

Once you have selected a provider, however, expect to pay for the appraisal before it is done. The new appraisal code of conduct means that they are going to get paid for any appraisal done. Loan providers have zero control over the appraisal process, and once ordered, no avenue of appeal if the value is low, while being obligated to pay that appraiser. This means every loan company out there has had to make a bleak choice: Decide whether to charge an upfront deposit, or jack up their margins so that the people whose loans close and fund pay for the appraisals of those that don't. As I said in Loan Providers Offering to Pay For The Appraisal, this means that those companies that offer to pay for the appraisal (i.e. choose to jack up their prices) will make more. Your choice as to which to deal with, but either way you choose, you will need to do upfront due diligence. My choice has been to require payment for the appraisal before I order it. I don't like doing this but I like the alternative of charging those clients who stick enough to pay for the clients who don't even less.

Deposits were historically charged by lenders who want to get you committed to the loan, and they do it for at least two reasons. The first is psychological commitment. Usually when I mention things like that, I get people who immediately come back with, "Those kind of mind games don't work with me!" I'm not looking for an argument, and with most folks, I don't know their past history well enough to come up with an example, but this phenomenon is essentially universal as far as humans go, and those few not subject to it are probably suffering from some other more debilitating psychological problem. In fact, the normal progression of a loan is a series of commitments upon your part. The decision to talk to potential providers. The application.

After the application, lenders want the originals of your documentation and money. The original documents are requested so that you cannot shop or apply for a loan elsewhere. I, as a loan officer, do not need your original documents for anything I can think of. I need the original of the loan application and a couple other items you fill out with me, but not of your pay stubs, your taxes, your insurance bill, or any other documents you have pre-existing. Copies are just fine for any lender I do business with, so long as they are clean and readable.

The next step is to get money out of you. If all they want is the credit report fee of about $20, that's fine and normal. Credit Reports cost money, and if you're just shopping around, a loan provider has two choices: raise their loan prices slightly so that they charge those people who finalize their loans more, or charge folks whatever the cost is to run credit when they apply.

But many loan providers want more than the credit check fee. A lot more. They want a deposit that varies from several hundred dollars to one percent of the loan amount, even two percent in some cases. They might say it's for the appraisal, and usually at least part of it does go to the appraiser. I used to say that you should not give it to them, but the standards behind that advice are changing. I've had my clients tell me about the tales they've been told, about how that money is to pay the appraiser. The best thing for consumers is that the appraisal should be paid for when the appraiser does the work. Unfortunately, the new appraisal rules prohibit the consumer paying the appraiser directly, and require the lender to pay the appraiser (as well as preventing the lender from firing bad appraisers). As I've said before, you want to be the one who orders the appraisal, and therefore controls it. Unfortunately, the new standards completely prohibit this consumer advantage. An appraisal done under the old way of business will cause it to not only be wasted money as it is unacceptable, it stands a good chance of costing a lender their ability to do any business. Therefore you may have no real choice but to put a deposit for the appraisal up-front. But don't give the lender any more than the appraisal money.

The reason they really want larger amounts of money out of you upfront is two-fold. First, it builds that psychological commitment I talked about a while back. Second, it makes you financially committed to a loan, which tremendously raises the level of psychological commitment. It means they've got some of your cash. Most people don't really understand loans, not deep down where it really matters. Consider, for a moment, which you would rather have: $400 cash, or a loan that costs $5000 less (not so incidentally making a difference of $25 on the monthly payment), but is otherwise identical. Dispassionately sitting there on the monitor in front of you, the choice seems obvious. You're going to have to pay that $5000 back sometime, and in the meantime you're paying interest on it. But move it to a situation where these potential clients have already put down a $400 deposit with an overpriced loan provider, and the vast majority of them won't sign up for my loan. Why? Because they're thinking of that $400 in cash that came out of their checking account, not the $5000 in extra balance on their mortgage. Companies want that deposit to stop you from going elsewhere, to a loan provider that can do the loan (or, more importantly, is willing to do the loan) for much less money. Practically speaking, they're not only guaranteeing themselves a certain amount of money, they are guaranteeing that the client won't change their mind about their loan.

So do you get it back if the loan is denied? Nope. At least I've never been told about an instance where it happened. That money was a good faith deposit. Legally, it was an incentive for that loan provider to do the work of that loan, all of which costs money. Provably costs money, I might add. The loan processor doesn't work for free. The underwriter doesn't work for free. The escrow officer doesn't work for free. The appraiser doesn't, the title company doesn't. Nobody works for free. Phone calls and copies and word processors to generate all of your documents from the title commitment to the loan documents. Some documents are the same for every loan and can be computer generated. Others, like the title commitment, require humans to enter literally everything on them.

But a deposit for more than appraisal and credit report isn't necessary. In fact, you can find loan providers out there (I was one of them, and would like to be again, but while I can blow off a $20 credit check if the loan doesn't fund, I don't make enough money off loans that fund to enable me to pay for $400 plus appraisals for loans that don't) who routinely work the whole loan on speculation of it funding. They might ask you to pay for the credit report and appraisal up front, but everything else is paid for when the work is done and the loan funds. I would much prefer that you write the check to the appraiser when they do the work, but I can't legally do that any longer. You might ask the advantages to the consumer of this. That advantage would be that these loan providers are not holding your money hostage. This means that if the loan falls apart because the loan provider told you they could do the loan and they couldn't, they're out the money, not you.

As of this update, the law of getting loans has changed a lot in the last few years, and it's to the advantage of the banking and other interest groups, not the consumer. Look to the people in charge of Congress for the reason (Dodd-Frank, to be precise). Furthermore, the lenders are instituting more changes because they can, now that there are a lot fewer lenders and less competition. I'm not happy about any of this, but even the best loan officers have two choices: Adapt as best we can, or find a new line of work. If the best loan officers trying their hardest to help consumers leave, ask yourself what would be left?

So if a loan provider asks for a large cash deposit up front to begin the loan, chances are that you shouldn't give it to them. Chances are they are trying to lock you into their loan by holding your money hostage, and when you discover at closing that they tacked thousands of dollars onto the loan charges that they conveniently "forgot" to tell you about or pretended didn't exist ("Escrow's a third party charge. We don't have to tell them about it until afterwards"), and now you are facing a choice between forfeiting your deposit and signing off on a loan that's not what you agreed to when you gave them that deposit. Better not to face that choice, by not agreeing to pay anything beyond the credit fee up front, and the appraisal when ordered. The purpose of this article is to help you understand - before you sign that loan application and fork over a deposit - exactly what your choices are and the possible consequences to you.

Caveat Emptor

Original here

Since May 1, 2009, we've been having problems with appraisals like never before. It's an interesting case study how the attorney general of one state used threats to blackmail a nationwide industry, installed personal controls and opportunities for graft into that industry, added a layer of overhead and administration increasing costs to consumers, decreasing compensation for appraisers, and many other things. Everybody in the industry - appraisers, loan officers, etcetera - agrees that this is one of the most misbegotten abominations to come down the pike in the political "let's pretend to do something to fix the problems without goring the ox of any major campaign contributors" response to the lending meltdown. The only people who don't hate it are the appraisal management companies.

To help enhance the integrity of the home appraisal process in the mortgage finance industry, in March 2008, Fannie Mae entered into an agreement with our regulator - the Federal Housing Finance Agency (FHFA) (then the Office of Federal Housing Enterprise Oversight) - and the New York Attorney General's office to adopt certain policies relating to appraisals for loans delivered to us. Following a public comment period, the Home Valuation Code of Conduct has been modified and will be effective for single-family mortgage loans (except government-insured loans) that are originated on or after May 1, 2009, and delivered to Fannie Mae.

The final rule is here.

I'm going to quote large chunks of it and comment

B. No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal company, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, inducement, intimidation, bribery, or in any other manner including but not limited to:

(1) withholding or threatening to withhold timely payment or partial payment for an appraisal report;

(2) withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser;

(3) expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;

(4) conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary value estimate requested from an appraiser;

(5) requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser's completion of an appraisal report;

(6) providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;

(7) providing to an appraiser, appraisal company, appraisal management company, or any entity or person related to the appraiser, appraisal company, or appraisal management company, stock or other financial or non-financial benefits;

(8) allowing the removal of an appraiser from a list of qualified appraisers, or the addition of an appraiser to an exclusionary list of disapproved appraisers, used by any entity, without prompt written notice to such appraiser, which notice shall include written evidence of the appraiser's illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP) or state licensing standards, substandard performance, improper or unprofessional behavior or other substantive reason for removal (except that this prohibition will not preclude the management of appraiser lists for bona fide administrative reasons based on written, management-approved policies);

(9) ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model (AVM) in connection with a mortgage financing transaction unless: (i) there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or (ii) unless such appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines, and so long as the lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value; or

(10) any other act or practice that impairs or attempts to impair an appraiser's independence, objectivity, or impartiality or violates law or regulation, including, but not limited to, the Truth in Lending Act (TILA) and Regulation Z, or the USPAP.

Most of this section is actually pretty reasonable, and I agree with the majority. But subparagraph 2 removes the ability of anyone - loan officer or otherwise - the ability to stop using a bad appraiser short of an actual provable violation. Anybody else see a problem here? This has, of course, been a long term goal of appraisers. But just because I can't get them convicted of actual malfeasance doesn't mean they're any good. In conjunction with subparagraph 8, once they're approved, we no longer have the right to stop using them. Waste the money of every client they get by coming in with a low appraisal? Set me up for fraud by coming in with a high one? I am completely helpless to simply stop using them.

Subparagraph 5 is another one I have issues with: I can't ask them not to waste my client's money if the value obviously is not there. A good loan officer wants an appraiser who will return an honest value no matter what, but when 5 minutes checking says the transaction isn't going to fly, this is a waste of client money.

What they are doing is called "rent seeking behavior". Look that up. And everything else about this section was already present.

III. Appraiser Engagement
A. The lender or any third party specifically authorized by the lender (including, but not limited to, appraisal companies, appraisal management companies, and correspondent lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. The lender will not accept any appraisal report completed by an appraiser selected, retained, or compensated in any manner by any other third party (including mortgage brokers and real estate agents). The lender may accept an appraisal prepared by an appraiser for a different lender, including where a mortgage broker has facilitated the mortgage application (but not ordered the appraisal), provided the lender: (1) obtains written assurances that such other lender follows this Code of Conduct in connection with the loan being originated; and (2) determines that such appraisal conforms to its requirements for appraisals and is otherwise acceptable.
B. All members of the lender's loan production staff, as well as any person (i) who is compensated on a commission basis upon the successful completion of a loan or (ii) who reports, ultimately, to any officer of the lender not independent of the loan production staff and process, shall be forbidden from (1) selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender or forbidden from performing such work; and (2) having any substantive communications with an appraiser or appraisal management company relating to or having an impact on valuation, including ordering or managing an appraisal assignment. If absolute lines of independence cannot be achieved as a result of the lender's small size and limited staff, the lender must be able to clearly demonstrate that it has prudent safeguards to isolate its collateral evaluation process from influence or interference from its loan production process.
C. Any employee of the lender (or if the lender retains an appraisal company or appraisal management company, any employee of that company) tasked with selecting appraisers for an approved panel or substantive appraisal review must be (1) appropriately trained and qualified in the area of real estate appraisals, and (2) in the case of an employee of the lender, wholly independent of the loan production staff and process.

So mortgage brokers as well as real estate agents are now completely cut out of ordering an appraisal. Actually, all loan officers are, apparently. So no more calling Appraiser A to find out how fast he can get me the appraisal. I have to use an appraisal management company, or delegate the ordering of an appraisal to an individual "appropriately trained and qualified in the area of real estate appraisals". In other words, appraisers decide who gets appraisal work. More specifically, senior appraisers decide who gets appraisal work. Not the hardworking young appraiser who's still trying to make friends. Not the independent appraiser who's willing to call other appraisers on what they're doing wrong or should be doing better. This reduces to "The old boys network decides who gets work". I thought we were trying to get away from that sort of thing - particularly when they owe no benefit of loyalty to anyone aside from each other.

Question: Would you like to have a real estate agent assigned by the old boys network without input from you? A loan officer?

This is going to have far reaching consequences for consumers, and they're not going to like it. One person, the identity of whom is not in any way controllable by them or anyone else with whom they have any contact, is going to control the outcome of their loan. Because The Mortgage Loan Market Controls the Real Estate Market, this is going to have the potential to break every single real estate transaction, randomly and arbitrarily resulting in unhappy buyers and sellers, lost deposits, and all other sorts of problems. If they take a disliking to you, all they have to do to spike the loan and the transaction is to come in just a little bit low on the appraisal.

IV. Prevention of Improper Influences on Appraisers A. In underwriting a loan, the lender shall not utilize any appraisal report: (1) prepared by an appraiser employed by: (a) the lender; (b) an affiliate of the lender; (c) an entity that is owned, in whole or in part, by the lender; or (d) an entity that owns, in whole or in part, the lender. (2) prepared by an appraiser (a) employed, (b) engaged as an independent contractor, or (c) otherwise retained by any appraisal company or any appraisal management company affiliated with, or that owns or is owned, in whole or in part by, the lender or an affiliate of the lender.

B. Section IV.A. shall apply unless: (emphasis mine)
(1) the appraiser or, if an affiliate, the company for which the appraiser works, reports to a function of the lender independent of sales or loan production;
(2) employees in the sales or loan production functions of the lender have no involvement in the operations of the appraisal functions and play no role in selecting, retaining, recommending, or influencing the selection of any appraiser for any particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender or forbidden from performing such work;
(3) employees in the sales or loan production functions of the lender are not allowed to have any substantive communications with an appraiser, appraisal company, or appraisal management company relating to or having an impact on valuation or to be provided information about which appraiser has been given a particular appraisal assignment before completion of that assignment;
(4) the lender, or its agents, and any appraisal company or appraisal management company providing the appraisal to the lender do not provide the appraiser any estimated or target value of the property or the loan amount applied for (except that a copy of the sales contract for purchase transactions may be provided);
(5) the appraiser's compensation does not depend in any way on the value arrived at in any appraisal or upon the closing of the loan for which the appraisal was completed;
(6) the lender and any appraisal company or any appraisal management company providing the appraisal to the lender has adopted written policies and procedures implementing this Code of Conduct, including, but not limited to, adequate training and disciplinary rules on appraiser independence (including the principles detailed in Part I of this Code of Conduct) and has mechanisms in place to report and discipline anyone who violates these policies and procedures;
(7) the lender's appraisal functions are either annually audited by an external auditor or are subject to federal or state regulatory examination, and, unless prohibited by law, the lender promptly provides to Fannie Mae or Freddie Mac the results of any adverse, negative, or irregular findings of such audits and examinations indicating non-compliance with any provision of this Code of Conduct, whether or not the examination was conducted for the purpose of determining compliance with this Code of Conduct; and
(8) the lender and any entity described in section IV.A. providing the appraisal to the lender recognize that, once the Independent Valuation Protection Institute is established, the Institute will receive complaints for review and referral regarding non-compliance with the Code of Conduct. Referrals and reports shall be made to Fannie Mae and/or Freddie Mac regarding such complaints and the Institute will provide information on the results of complaint reviews to Fannie Mae and/or Freddie Mac and make them available to the other parties to the Home Value Protection Program and Cooperation Agreement

This isn't independence. This is unaccountability.

An Independent Valuation Protection Institute (Institute) shall be created as approved by the parties. Subject to section IX, when the Institute is established, the lender will provide information to appraisers and borrowers regarding the availability of the Institute's services, which are expected to include: (1) a telephone hotline and email address to receive any complaints of Code of Conduct non-compliance, including complaints from appraisers, individuals, or other entities concerning the improper influencing or attempted improper influencing of appraisers or the appraisal process, which the Institute will review and report as provided in IV.B(8) and IV.C(2) of this Code of Conduct; and (2) the publication and promotion of best practices for independent valuation. The lender shall not retaliate, in any manner or method, against the person or entity that makes a complaint to the Institute.

So we can't complain about lazy worthless appraisers for anything less than an obvious violation of code - but appraisers can complain about anyone else. And we can't stop using them when they libel us. Even if the accusation is baseless. As I said above, this isn't independence. This is unaccountability.

The lender agrees that it shall quality control test, by use of retroactive or additional appraisal reports or other appropriate method, a randomly selected 10 percent (or other bona fide statistically significant percentage) of the appraisals or valuations that are used by the lender, including the results of automated valuation models, broker's price opinions, or "desktop" evaluations. The lender shall provide to Fannie Mae or Freddie Mac a report of any adverse, negative, or irregular findings of such quality control testing, and any findings indicating non-compliance with any provision of this Code of Conduct, with respect to loans sold to Fannie Mae and Freddie Mac respectively, and the Enterprise may enforce all applicable rights and remedies, including requiring the lender to repurchase mortgages or the Enterprise's participation interest in mortgages.

Here's the translation: Appraisers can't get in trouble for coming up with a value that's too low. Lenders don't lose money in the accounting sense when the appraisal is too low. All that happens is that they don't make money they could have made from doing that loan, an item that does not show up on financial statements. Appraisers can, however, get in trouble for coming in too high. Does anyone thing this means anything other than "They're going to come up with the lowest value they can justify?" That's where the incentives run. Result: Consumers get hosed (along with everyone else except the appraisers)

VIII. Representations and Warranties A lender shall certify, warrant, and represent that the appraisal report was obtained in a manner in compliance with this Code of Conduct. If the Enterprise determines, on its own or from a referral made by the Institute, that a lender is in breach of a material aspect of this Code of Conduct or in violation of a provision of the Code by a complaint referred from the Institute, the Enterprise will enforce all applicable rights and remedies, including suspension or termination of the lender's eligibility to sell loans to the Enterprise, if the lender fails to remediate.

Sounds reasonable, doesn't it? What this means is that a single appraiser making an accusation has the power to threaten a lender's ability to sell loans to Fannie and Freddie. Since those are far and away the most popular loans with the best rates, this means that lender loses most of their business - especially as VA and FHA can be expected to follow suit.

Fannie Mae put out a set of FAQ's to lenders a week or so ago

Scope of Coverage Q1. What loans are affected by the new Home Valuation Code of Conduct?

Fannie Mae has agreed to adopt the Home Valuation Code of Conduct ("the Code") for all conventional, single-family loans originated on or after May 1, 2009, that are delivered to Fannie Mae. For purposes of the Code, origination date means the date of the application. The Code will not apply to multifamily loans, or to loans insured or guaranteed by a federal agency; the Code only applies to 1- to 4-unit single-family loans sold to Fannie Mae. The Code will not apply to loans sold to Fannie Mae on or after May 1, 2009 that were originated prior to May 1, 2009.

This means every Fannie Mae loan since May 1, 2009. The same applies to Freddie Mac.

Q3. Does the Code allow an appraiser to update an appraisal for another lender?

Yes. The Code does not prevent an appraiser from performing an update of an appraisal for another lender.

That's nice. It still doesn't force a lender to release the appraisal, something that would have made a positive difference to the public. I order an appraisal and I can't perform the loan on the terms indicated, I should release it to someone else who can.

Q6. After May 1, 2009, is it permissible for Fannie Mae to purchase private label securities backed by mortgage loans that do not meet the requirement of the Code?

Yes. The Code applies only to 1- to 4-unit single-family loans sold to Fannie Mae by mortgage originators. It does not extend to Fannie Mae's investments in mortgage-related securities.

So it doesn't apply to what caused Fannie and Freddie to melt down. This whole code is a distraction from really fixing what went wrong.

Q7. Does the Code require lenders to obtain appraisals where they were under no such requirement pursuant to the Fannie Mae Selling Guide?

No, nothing in the Code requires a lender to obtain a property valuation, or to use any particular method for property valuation. Nor does the Code affect the acceptable scope of work for an appraiser in connection with a particular assignment.

Meanwhile, back on planet Earth, lenders are required by the Federal Reserve and SEC to use all due diligence. Every loan that goes south without a full appraisal is grounds for getting somebody fired. What do you think is going to happen? How often do you think lenders go without full appraisals now?

Q9. Does Section I.B.(9) specifically prohibit a lender from ordering a second appraisal?

No. Section I.B.(9) only prohibits a lender from ordering a second appraisal when they are attempting to influence the outcome of the first appraisal and are now "value-shopping." As a risk control measure for certain loan products, it may be common for a lender to order more than one appraisal, and this subsection does not prohibit that practice.

In other words, yes it does prohibit getting a second opinion if the first appraisal is a piece of garbage. The only exception is if the lender makes a practice of ordering a second appraisal for that particular loan product. More money for appraisers, and the second appraiser isn't accountable either.

I'm going to take these next ones together:

Q11. Does Section II of the Code require the lender to provide the appraisal free of charge?

No. The Code requires the lender to provide, free of charge, a "copy" of any appraisal report completed in association with a specific loan. The lender may require the borrower to reimburse the lender for the cost of the appraisal.

Q13. Does the Code prohibit an appraiser from collecting payment for the appraisal directly from the borrower?

Yes, for loans to be delivered to Fannie Mae. The Code requires the lender or any third party specifically authorized by the lender to select, retain, and provide for all compensation to the appraiser.

If you think this isn't going to cause problems, welcome to Earth and I hope we can be friends. This places the burden for payment upon the lender, who remember has no ability to control which appraisers they use. Paying through escrow might be a theoretical possibility, but it leaves open the possibility that the lender gets stiffed and has to pay out of their own pocket. Lenders are going to have a choice of 1) Requiring an upfront deposit for the appraisal or 2) Jacking up their margin so that clients who close pay for ones that don't. Either one of these is vile, and bad business. My company (and every other lender and loan officer out there) had to figure out which of them is the lesser of two evils. This is going to have implications for escrow accounting, as well - the number one reason that brokers and lenders lose their licenses (and 99% for completely stupid technical reasons having nothing to do with consumer benefit). From a benefit to the consumer standpoint, requiring the lender to release the appraisal to a new lender would be far superior. But that doesn't give appraisers power, see that they get paid, etcetera.

Q18. When selecting an appraiser, may lenders use a pre-approved appraiser list or panel? Yes. Lenders may use a pre-approved list or panel to select a residential appraiser, provided that (1) any employees of the lender tasked with selecting appraisers for the list are independent of the loan production staff; and (2) the loan production staff is not involved in selecting appraisers off the list for particular appraisal assignments.

Confirming and emphasizing what I said earlier. There is no way I or any other loan officer can keep from using a bad appraiser, no matter how bad they are.

Q19. May a servicer use an affiliate company to order appraisals for borrower-initiated private mortgage insurance cancellation based on current value?

Yes. The Code does not apply to appraisals for cancelling mortgage insurance based on current value. The Code is specific to "a mortgage financing transaction," and cancellation of mortgage insurance is not "a mortgage financing transaction." The Fannie Mae Servicing Guide states that "To determine the current appraised value of the property, the servicer must select an appraiser, order a new appraisal (which must be based on an inspection of both the interior and exterior of the property and be prepared in accordance with our appraisal standards for new mortgage originations)."

So feel free to value play games with the appraisal when you're trying to remove PMI. Why this would be such a straightjacket for new loans, and completely inapplicable for leaving lenders uncovered by mortgage insurance, contradicts all reason - but not politics.

In-House Appraisers Q21. May in-house appraisers prepare appraisal reports? Yes, in-house appraisers may prepare appraisal reports if the conditions of Section IVB. are met.

Q23. May a correspondent lender use in-house appraisers? Yes, a correspondent lender may use in-house appraisers if they meet the criteria in Section IV.B. of the Code.

In other words, so long as the appraisers are completely unaccountable. They can't even be fired for consistently producing bad valuations, so long as they don't go over the line into actual legal misconduct.

Appraisal Management Companies Q25. Is a lender required to use an appraisal management company for ordering appraisals?

No. A lender may order appraisals directly from an individual appraiser.

So long as it isn't any dirty filthy loan officer, anyone accountable to any loan officer, or in fact, anyone other than another appraiser doing the ordering. See above.

Q27. When a lender uses an appraisal management company, the appraisal management company is responsible for retaining and paying the appraiser. Is it likewise permissible for a mortgage broker to use an appraisal management company, since the mortgage broker does not technically retain or pay the appraiser?

No. The Code prohibits lenders from relying on an appraisal where the broker had a role in selecting, retaining, or compensating the appraiser.

Q28. May a mortgage broker provide the lender with an approved appraiser list for the lender to use when ordering appraisals for that particular broker?
No.

Q32. May a lender accept an appraisal prepared by an appraiser that was ordered by a mortgage broker?
No. The Code does not allow a lender to accept an appraisal prepared by an appraiser that was ordered by a mortgage broker as noted in Section IIIA. of the Code.

Q33. May a mortgage broker order an appraisal directly from an appraisal management company that was specifically authorized by the lender?

No. The Code prohibits brokers from ordering appraisal services.
Q34. Does the Code permit a mortgage broker to select an appraiser from the lender's list of approved appraisers, if the lender is responsible for the relationship with the appraiser, including compensation?

No. The Code prohibits lenders from relying on an appraisal where the broker had a role in selecting, retaining, or compensating the appraiser.

Once again, I'm mostly a correspondent. The restrictions on brokers don't mean that much to me, per se - just covering the fact that it applies to brokers too. This is just more emphasis that appraisers are no longer accountable in any way, shape or form. But they do seem punitive.

Portability of the Appraisal Q29. May an appraisal be transferred to a lender from a correspondent lender and, if so, under what circumstances? Yes, a lender may accept an appraisal from a correspondent lender that complies with the Code. Q30.A mortgage broker submits a loan to lender A, which orders an appraisal. The broker later decides to submit the loan to lender B because it is offering better terms, or for another reason. May the appraisal obtained by lender A be used by lender B (assuming the mortgage broker has no control over or involvement in the assignment)? Yes, a lender may accept an appraisal from a different lender that complies with the requirements of the Code and in particular Section III.A. in connection with the loan being originated. Lender A must be named as client on the appraisal report.

Note that there is still no requirement to release the appraisal - meaning the appraisers get paid again when the lender won't.

Furthermore, this means the lender's name is on the appraisal - not the broker who paid for it (if there is one), not the loan officer. You think a lender is going to release an appraisal when someone wants to take potential business away from them? I don't.

Now, my comments on the entire thing. There were abuses of the appraisal process. They need to be fixed. This is not the way to do it. This does absolutely nothing to stop collusion between an appraiser and another party, which was the largest problem that has not yet been fixed. Properties were selling for those amounts. It was not the fault of loan officers, whether lender, broker, or correspondent, that the values got so high. By far the largest root cause was the fault of the loan programs the lenders were offering, or rather, very aggressively pushing. If you offer a loan program specifically designed to make it look like someone making minimum wage can afford a $500,000 property, you can expect problems when people take you up on it. Yes, there were loan officers colluding with appraisers. There were also sellers, buyers, agents (Realtor or not), and everybody else under the sun colluding with appraisers. Collusion, problem though it was, was not the largest problem by an order of magnitude - that was loans that set the borrowers up to fail, and the lenders themselves with them. This solves neither of those problems. The largest one has already solved itself as lenders stopped lending money on a Make Believe basis. The lesser although still major problem of collusion this does nothing to stop. In fact, it explicitly states that communication between an agent and an appraiser is not prohibited, nor is communication between a buyer or seller and the appraiser, or for that matter, between a loan officer and an appraiser. It's when the appraiser takes exception that such becomes a problem - there is no new control on collusion anywhere in the process. All it does is prohibit responsiveness to the needs of the consumer.

All of the incentives in place are for appraisers to come up with a value that is too low. They no longer can lose business for bringing out appraisals so low as to constitute nonsense - they can't be pulled off the eligible list, and the lender has no power to direct future work away from them. The only real way they're going to get in trouble is by coming up with a value that's too high, and that's going to be rare, both because the system isn't set up to catch it until after the fact and because that's the only thing about an appraisal that can cause lenders lose money in a traceable, accounting sense.

I don't know how many self righteous appraisers have told me "We are the only representative for the house." This is nonsense (to be polite). The house is neither living or sentient. It's a thing. It has no interests. The legal responsibility of the appraisers is entirely to the lender, not to the consumer. Comparatively few appraisers understand how it damages a lender to have the value come in lower than it should - a loan does not get made where it should have been made, and the lender does not make money when they should have. Comparatively few appraisers care about the consequences to consumers of appraisals that are too low, who put money in the appraisers pocket only to be denied the benefit they paid that money for and that they should have gotten. What they have told me time and time again is important (by their actions, and more often than not, by their words) is putting money in their own pockets whether or not it benefits the consumer, whom they have no legal responsibility towards.

There will be no more developing a good working relationship between appraisers and anybody. I used to have a couple of appraisers I had learned to trust - they're honest enough that I don't have to worry about them returning a fraudulently high appraisal, they're responsive enough that I know when they tell me the value isn't there, it isn't. They've helped me to learn what to look for so that I know ahead of time whether the value is going to be there or not. I have never asked an appraiser to give me a higher value. All I have ever done is not used them again if they ripped off my clients, and comparatively few times at that (about 5, in over 1000 loans in every county in California, and quite a few in Florida and Nevada, so it's not like I've been limited to one or two appraisers in San Diego County). That ability to stop using problem appraisers is no longer something I'm going to have. I've had to get used to clients being ripped off, and there being absolutely nothing I can do. The only way to protect myself and my company from false accusations of manipulating the appraiser (and thereby losing the ability to do loans with Fannie and Freddie) is not to discuss anything with them verbally. I have stopped meeting appraisers, and am only communicate a bare minimum of information through things like email and facsimile, and I'm advising my clients not to be there either. I have a combo lockbox for the keys, so the appraisers can let themselves in.

So don't get mad at your loan officer. If the appraisal doesn't come in for a needed value, it won't be because of anything they could have done or not have done. Nor can we complain. Loan officers are very exposed to reprisal; the appraiser is almost completely insulated from any consequences. Appraisers can potentially kill our loan business with a single accusation - justified or not. We can't do a damned thing to them unless we can prove an actual violation - a much higher standard of action, especially as appraisal standards use a lot of words like "reasonable". In other words, judgment.

I would not presume to argue that appraisal standards did not need reform. They did, very badly. They still do, as this was not what they needed.

The appraisers organization, or actually, appraisal management companies, have somehow gotten themselves into a position like tenured college professors, and without any of the (debateable) reasons for that. But there are a lot of bad appraisers out there who waste appraisal money with absolutely no understanding of the damage they are doing. It's going to get a lot worse until public outrage puts a stop to it. Appraisers own the problem - there is absolutely no way to blame any future problems on anyone except appraisers. Unless the appraisers who have been creating all of the problems, and their organization, change their way of thinking and police their own problems, I firmly believe they're going to learn to appreciate the virtues of the old aphorism, "Be careful what you ask for. You might get it."

Like it or not, however, it's the de facto law of the land. Every loan officer has to have to live by it. The only way to stop it is for consumers to start expressing the outrage that they will soon be feeling every time an appraiser returns a garbage value that wastes their money. Express it loudly, express it repeatedly, express it to all of your congressional representatives and senators. Make them understand they have to actually fix the problem, which means taking the time to actually understand it and think, not finding one scapegoat and declaring someone else to be sainted by virtue of having obtained an appraiser's license. You don't fix problems by giving one person absolute power over a transaction with no real accountability to anyone else.

The appraisers were pushing for this, but appraisers didn't come out all that well by it. The execution is hurting them a lot precisely because they wanted to remove the ability of loan officers to choose an appraiser. This means good, ethical appraisers who earn business by doing high quality appraisals are not able to attract business any more. It's all lenders ordering from appraisal management companies, who charge as much as the market will bear and pay the appraiser as little as they can get away with. There being fewer appraisal management companies than appraisers, there is less competition and therefore prices are rising - I heard $700 for an appraisal quoted yesterday - while the appraisers are getting paid less (one company is only paying them $150. As my source said, if that's the way things shake out he will go get a job at Starbucks because he'll make more money and have health care paid too). The only real way lenders can order appraisals is through an appraisal management company, and working for an appraisal management company is the only way appraiser can get work. This bottlenecks the process, and puts appraisal management companies in a position where nobody has any choice but to deal with them. Upshot: The appraisal management companies are making money hand over fist, but everybody else loses. I strongly urge everyone with a stake in the real estate loan process (in other words, everyone who might like a loan someday) to write your congressional representatives and senators and get this abomination repealed now, before appraisal management companies become any more of an entrenched special interest.

The appraisers, for their part, have already discovered the gotcha! in what they pushed for. They already know that what they thought they were asking for is different from the reality.

Caveat Emptor

Original article here

"I am married but want to refinance my house only in my name. What do I have to do?"

Most lenders policies require the property to be titled in a compatible manner to the loan. Some few do allow the spouse to be on title and not a party to the loan, in which case they will be required to sign the Trust Deed, although not the Note. Most lenders, however, will require that if you are the only one on the loan, the property be titled in your name exclusively. So your spouse will be required to sign a quitclaim to "Jenny Jones, a married woman as her sole and separate property" (Or "John Jones, a married man as his sole and separate property). If you don't like the title being this way, that's fine and don't sweat it. You can quitclaim it back to "John and Jenny Jones, husband and wife as joint tenants with rights of survivorship" as soon as the loan records. What matters is that the people agreeing to the loan, as of the moment the Trust Deed comes into effect, is reflected in the official title of the property.

For those intelligent individuals whose property is in living trusts, this is also a common feature of getting a loan on the property. The lender will usually require it be quit-claimed from "John and Jenny Jones, trustees of the Jones Family Living Trust" to either the sole individual who qualified for the loan, as in the previous paragraph, or to "John and Jenny Jones, husband and wife as joint tenants with rights of survivorship."

All of that is the easy part. Now comes the hard part. If one spouse wants to be the only one on the loan, then they must qualify on their own. Only their income may be used. However, since most debts in a marriage are in the names of both partners, typically they are going to going to be charged for most debts on their qualification sheets. This really is no big deal if that particular spouse is earning all of the money anyway, but in most cases these days, both spouses are working, and they want to buy the biggest home they can, so it can be difficult to qualify them for that home based upon the income of only one spouse. Here's a typical scenario: He makes $5600 per month, she makes $5000. They have two $400 per month car payments and $120 per month in credit card minimum payments. But he has rotten credit, so they are hoping to secure a loan on better terms. By A paper full documentation guidelines, she only qualifies for a PITI payment of $1330 ($5000 times 45%, minus $920), which might get a one bedroom condo in a not so hot area of town. So then they have to go stated income in order to qualify for the loan on the home they really want - and stated income loans are dead, at least for now. As a couple they qualify for payments of $3850 ($10,600 times 45%, minus $920), which will get a decent single family residence in an okay area of town. You, the readers, can guess which of the two properties the average couple in this situation is going to shop for. Unfortunately, if they can't use his income, they don't qualify for the property they want. This is a real issue, especially if they went and got a prequalification from someone who figured both of their incomes in the equation, so here they are with a purchase agreement and they can't qualify like they thought they could. This is one reason I've learned never to trust someone else's prequalification of a buyer, because in this situation, the only way to make it happen is to put John, with his rotten credit, on the loan. Because he makes more money than Jenny, he will be the primary borrower, and so the loan will be based upon John's bad credit history, not Jenny's above average FICO. There used to be ways to potentially get around this, but the lenders have closed pretty much all those loopholes (and then some...) and so John and Jenny often don't qualify for the loan amount they need for the property they shopped for. Better to get John's credit score up where he will qualify for a good loan beforehand, of course, but usually these folks want a loan now so they can get this home they've already signed a purchase contract on. The ability to improve credit scores in a short period of time is limited, and it's even more limited if John and Jenny are short on cash, which is usually the case.

These can all be issues with the spouse who makes less money, also. Reverse the incomes, so that John, with his bad credit, makes $5000 per month and Jenny, with her good credit, makes $5600. So at least Jenny is primary on the loan now but that doesn't help a whole lot in the A paper loan market, where both borrowers have to meet the same standards.

Now, in point of fact many borrowers these days are ones that have settled upon a property before they even considered a loan, and are determined to get that property no matter what they have to do. Alternatively, they may have talked to someone about loans who gave them a budget which was in fact accurate, but they liked this property so much that they are utterly ignoring that budget. Such people are going to end up with bad loans or, more likely today, no property and a forfeited deposit. They want more house than they can really afford, and they want it now. When first I wrote this, I could get the loan for them, any competent loan officer could have gotten the loan for them, but there would be consequences down the road, because there are still those pesky payments they have to make (or negative amortization that builds up. Or both). A loan you cannot afford is a course for disaster, and the longer you're on it, the worse the disaster gets. And the lending standards now are much more paranoid on the lenders part. The Era of Make Believe Loans is over.

Another thing that bites a fair number of people is divorce, where one ex-spouse figures that because he (or she) qualified all by themselves so they should be able to make the payments all by themselves. But the loan officer back when they originally bought used stated income without telling them, and once that other income is gone, it turns out that they can't make the payments. Not only can they not make the payments, they cannot qualify to refinance now, even as a couple. Typically, most people live in denial about this for way too long, ruining their credit to where they can no longer qualify for the loan on the lesser property they would have been able to get if they had done the smart thing and sold as soon as they figured it out in the first place.

One spouse qualifying for a loan on their own has some real issues to be aware of, and that will turn and bite you if you're not careful enough.

Caveat Emptor

Original here

It's very simple really, and this is something I have never covered in the perhaps mistaken belief that it was too simple and everybody knew this.

The Note is the loan contract that sets the terms of the loan, repayment, etcetera. This contract is the document that controls, in conjunction with state law, your loan. Term of loan, interest rate, prepayment penalty, penalties for late payments, it's all there.

The Trust Deed is the security instrument. Without the Deed of Trust, the Note still creates the indebtedness, it's just not secured by anything specific. You still owe the money, but without the Deed of Trust the lender cannot force the sale of the residence (or take possession themselves) in satisfaction of that Note. Actually, I should say that they can't do so without recourse to the courts, and they would have to stand in line with all of the other unsecured creditors. The Deed of Trust creates that security interest, and makes the debt secured by a specific asset - the land given in the Deed of Trust. The Deed of Trust, unlike the Note, is recorded with the County Recorder with an official document number, and indexed in public records to as being associated with a particular piece of land, hence the ability to find it pretty easily.

You hear talk about a Note secured by a Deed of Trust. They're talking about a Note, and telling you that it is a note secured by Deed of Trust on a particular asset. Both real estate and automobile loans are routinely secured by a Deed of Trust against that particular property or vehicle, which is how the various holders of those loans have the ability to take back the secured property administratively, without recourse to the courts, provided certain conditions are met. If these loans were not secured by the pledge of a specific asset, these creditors would have to go through the courts, and stand in line along with credit card companies, etcetera. If they did not have a greater security interest, there would be no incentive to give real estate and automobile loans better rates than credit card holders get. So think about that before you advocate making it harder for lenders to foreclose. Every little bit you restrict a lender from its valid security interest means higher rates for everybody else as well. This is basic economics.

There's was a great brouhaha a while ago about "produce the Note." People who were in over their heads are telling lenders to "produce the Note" in order to proceed with a foreclosure. They're hoping for a jackpot, and a few years ago, in the case of perhaps one to two percent of all borrowers, usually with a loan that had been sold multiple times, the lender was unable to produce the note and the person ended up with a free house instead of losing it. I shouldn't have to tell you who ends up paying for those houses and the loans associated with them, should I? Here's a hint: It's not the lender or their stockholders. If you're completely clueless, It's customers of that bank and future borrowers who end up paying. If it gets bad enough, its the US taxpayers and depositors with over the insured amount in that institution. These days, however, "produce the Note" is a delaying tactic - figure the lender is going to find it in all but a very small number of cases - on the order of winning the lottery odds. It may take them a while, but it's a safe enough bet that they will find it. It may buy you a month or two delay, that's all - perhaps only a day or less. If you can solve the problem presented by the default in that period of time, all well and good. If you can't, all you've done is delay the inevitable and perhaps make it worse (The Trust Deed is part of the public record, and trivial to find and produce - the title companies can all do it within thirty seconds).

The two legal documents (or instruments) can be combined, but generally aren't, and I don't know why. However, this can be a problem for lenders who buy the loans from other lenders. It doesn't happen much any more, but it does still happen that lenders cannot produce the Note, and it usually is something that takes a while. Without the Note, there is no evidence of debt and therefore no loan to satisfy, and so you can have your lawyer insist that the Trust Deed be reconveyed. to clear the cloud it creates upon your title. Essentially, free money. Without the Reconveyance, however, it's difficult to sell the property and this can give the lender leverage to require repayment if you're trying to sell the property right now. Any unreconveyed Deed of Trust creates a cloud on title, and you need to clear that title in order to be able to sell, quitclaim, or even conceivably, will the property to an heir or even have it pass by action of law. If court action is required to clear a title, it's called a quiet title proceeding.

I'm not a lawyer in any state, so if a lawyer tells you something different than this, take their word for it, not mine. Even if I'm right in every other state, the lawyer is going to know that yours is the exception. This is simply the understanding of a layman who has had things explained to him by lawyers, and is attempting to pass on general knowledge of the differences and relationship between two loan related legal documents.

Caveat Emptor

Original article here

As a good buyer's agent, I love a challenge. When someone comes to me trying to make a budget stretch just a little bit further than it would usually go, that's the kind of client I love to have. My goal is always to make at least a ten percent difference to the price the client pays, the value of the property they get, or some combination of the two. Nonetheless, the ones who can almost but not quite afford what they want without me (or someone equally good) as an agent are the ones I really get off on working with. The single mom of two who I can help get into the three bedroom condo or PUD instead of two, so everybody gets their own room. The huge family (or multiple family) where everybody pitches in together for the house they're all going to live in together. The young newlyweds who are just getting started and may only intend to hold onto the property for a few years, but they're going to start their family there. One hopes you get the idea, and of course, preventing the "mistake" properties that are just going to suck a budget dry and be an ugly problem to sell.

There is nonetheless a thin but sharp divide between someone like that and someone who will only buy the Taj Mahal at a cut rate price. Someone calls me and asks for something that doesn't exist and isn't going to at a price they are willing to pay, I'm going to be completely upfront about telling them that what they're asking for is not realistic, and any agent worth a damn is going to do exactly the same thing. Anyone who can swing it is eager to buy the Taj Mahal at a cut rate price.

I did use the phrase "cut rate Taj Mahal" deliberately. If it's beautiful, people will want it. That's the way people are wired; women especially so, and women are the ones that make the "buy" decision. The only thing that prevents it from selling is if they can get more for their money out of some other property. An attractive property that is not significantly over-priced will sell in any market. Of course, it will sell for significantly more in a hot market than a buyer's market, but that's an entirely different subject. The property is on the market when it is on the market, and whether a seller could have made more by waiting is a subject for a different article. The point is that beautiful properties will sell, there is always demand for them, and if they are priced even close to the right level, you will get people lining up to buy them, competing to buy them. The probability of a cut rate offer being the one that is accepted is about the same as winning the lottery with a single ticket. An ethical listing agent won't let it go for less than it's worth. Heck, a crummy listing agent won't let it go for less either - they are paid on commission!

I just checked the statistics on MLS. When I originally wrote this, the San Diego area was down to 12099 active listings, while 946 had gone Pending in the last seven days, giving us about a 13 week theoretical supply (89 days) in inventory. That's a balanced market, no longer the buyer's market. But a sample of actives in a couple of diverse zip codes yielded that about 20% of the theoretical actives are short sales with an accepted contract that were allowed to remain on the active list. Looking at 80% of the actives number, and assuming that a short sale takes about ten weeks on average, that means the real numbers were about a 57 day supply of inventory - just over 8 weeks. This means we're edging down to a full fledged seller's market, and it wasn't yet Easter.

So what does this mean to buyers? The first thing to consider is that the above numbers are the statistical mean. You're lumping the beautiful property in a great neighborhood with fantastic schools with the cluttered, trashed, falling apart piece of garbage in an area where the schools mostly teach "Hanging out with an ankle bracelet", and then taking the non-existent middle course between the two. Assuming you don't really want the cluttered trashed falling apart ghetto property, this means you're competing for the property at the other end of the spectrum - by which I mean the highly desirable properties that are going quickly and for good prices. The morning I wrote this, I called the listing agents on two such properties that have been on the market less than a week, and got believable responses that both properties have already gotten multiple offers. Those properties are not going to go for a cut rate price, and buyers putting in low-ball offers to see if they work are wasting paper and wasting time. In such an environment, the days when I or anyone else could "steal" an attractive property like that for thirty-five percent under the appraised value are gone, as I must have predicted here in writing on at least three or four occasions - not that there was any great predictive ability involved.

If you're wealthier than Midas and don't mind spending your wealth on housing, this article just isn't relevant. For those looking to buy significantly below the limits of their means (and I do seem to get a fair number of clients in this category, for which I am profoundly thankful, and I can make an even larger difference than usual), large parts can be ignored because they have the alternative of increasing the budget if they don't like their choices at the current dollar limit. For those who want to stretch their budget and make every dollar count, it is critical, and failing to follow something very close to this model is a recipe for disaster. The idea is to make rational, informed choices that you will be happy with later.

The first thing to consider is your budget. In order to buy within a budget, you have to know what that budget is. There are no more "Make Believe" loans - and this is a Good Thing, as I'm certain the vast majority of the millions of people who went through defaulted Make Believe loans would agree. They could have afforded something good enough with a sustainable loan, and instead they chose a Make Believe loan in order to get the Taj Mahal, but now they're losing the Taj Mahal, and can no longer qualify to buy the eminently suitable property they could have had if they had chosen rationally in the first place.

I compute what every single buyer client can afford, whether or not they're planning to do the loan with me. I sit down and discuss the questions that need to be answered: "How much cash do you have for the down payment and closing costs?" and "how much income can you document for (the relevant period)?" and "What is your credit score?" I sit down and go over what those numbers mean in terms of purchase price in the current market, and then both the prospective buyers and I have got to agree upon a maximum purchase price we will consider. If the property cannot be obtained within that purchase price, it is a non-starter. There may be a certain amount of gray area as asking price is not the same as sales price, but the bottom line is that if I cannot persuade someone to sell for a price within the budget my client and I have agreed upon, we're going to put that property out of our minds. Most of the trouble I do get arises because there is a lot less slack in the asking price for beautiful properties new on the market than there is for less physically attractive properties that have been sitting a while. I have a choice as to where to put the dividing line as to what the clients see, and my default is always to allow them to see all the properties within a set mark-up of the agreed upon budgetary maximum, even though that may have attractive properties new to the market where the price is not that negotiable, or not that negotiable yet. Transparency, always transparency - even when it causes me problems.

The next thing to consider is "what does the property absolutely have to have?" The hard part here is cutting this list to the bone, if not all the way down to the marrow. You have got to focus on no more than one or two things at this level. It can be a good school district, it can be a certain number of bedrooms or certain size of lot, it can be a certain section of town, it can be a lot of other things but the critical thing is to get that focus laser-sharp. One thing, or at the very most, two. To paraphrase the immortal Monty Python, three is right out, and for reasons similar to those given in the Book of Armaments. You have got to be clear, and you've got to mean it. If it doesn't have this one thing, it's off the list of possibilities, no matter how beautiful it is. That's pretty easy for most folks. The logical corollary of that, however, is much more difficult: that if it does have that one attribute, the property is a serious possibility no matter how ugly, no matter how trashed, no matter any number of other undesirable factors. If you're not serious about this one point, you're not serious about stretching your budget. I'm not going to say that there's nothing a good buyer's agent can do for you, because it wouldn't be true, but if you cannot abide this corollary you have become your own worst enemy. This is at the heart of why there is money in fixer properties and why you might be able to find a bargain if you don't insist on perfect now. If someone else has already made it beautiful, people are going to line up to buy it at a very competitive price. If you want a budget stretching price, you've got to be willing to some degree to be the one who makes it beautiful.

This applies no matter what else you want. The ultimate expression is that if I run a search and there is one property that meets your budget and your "must have" list. This has never happened to me yet, but there's nothing that says it won't happen tomorrow. At that point, you have Hobson's Choice: that property or none at all. Mind you, "none at all" (i.e. continue renting) is likely to be the superior of those two alternatives in this situation, but it would certainly cut down on my time requirements. Also, there is always the option of "wait and see". Just because nothing on the market today fits the bill doesn't mean that there never will be. It's not for nothing that "patience" is the number one item on my list of Top Twelve Things That Help You Buy a Bargain Property.

Things usually aren't that cut and dried, however. Usually, there are several dozen possibilities, sometimes hundreds. This is because I will either keep badgering people to expand their criteria until there are enough possibilities to give a real selection, or I will tell them point blank that the list of possibles is short and once we have seen what's available, they're going to need to make a choice. It doesn't take very many properties on the alternatives list before there will be at least one worth buying whether they like it or not, and if they choose not to buy anything available within their budget, I have to reconsider whether I'm able to help them. If what you want isn't available at a price you can actually pay, nobody can help you.

Keeping in mind that thin line between my favorite clients in the "challenging but possible" camp and those in the "want a bargain on the Taj Mahal" camp, there are only two choices for an ethical agent who believes he's got someone in the latter category: Have a frank talk with the client in which these folks convince me that they have seen the light of what is realistic, or I must stop working with them. If I continue working with them when they have unrealistic expectations, I'm wasting my time, their time, and the time of every listing agent and seller whose property I want to show, because it's not going to happen, and it's my fault if I don't put a stop to the wishful thinking. I'm wasting money and gas and nice afternoons that we both could be spending doing something else and keeping myself from helping other people where I might make a real difference. My point is this: People looking for something unrealistic are not going to turn into happy owners. I can tell them they're not realistic, or I can put them into a property they are going to be miserable in. In the latter case, they're not going to be happy with me. If I tell them the truth in the first place, they might be able to respect my professionalism and refer someone else I can make into a happy owner. If I put them into a property where they are not a happy owner, then I might get one paycheck, but I'm going to be paying for it forever when those people tell all of their circle of influence how miserable they are and whose fault it is.

I'm not a wealthy broker running a transaction mill. Yes, I'm busy, partly because I'm good and partly because I earn my pay. I spend a lot of time and effort doing the best I can for each and every client, and I don't accept clients if I haven't got the time to do a good job with them right now. You really want an agent who follows this business model, by the way. "Firing a client" has real consequences to me and my family, and I don't do it lightly or often. Nonetheless, I will do it if I need to because the consequences of not doing so are worse.

Starting from a point where there are several dozen properties that potentially fit the bill of being within budget and possessing the absolute "must have" quality. This means the client has a range of options, and usually more properties coming onto the list by the time we've looked at all of them. We don't have to look at all of them, and in fact I don't think I have ever shown every single property on their list to anyone, but we could. In the meantime, if something catches their eye as being something they think they'll be happy with, especially once we've discussed downsides and potential downsides, it's a good idea to make an offer on it right away. In my experience, hoping for something perfect is more likely to net you frustration than a good property you'll be happy with at a good price. Beyond a certain point, the more you try for perfection, the less happy you're likely to end up.

The real point is that there will be a set of trade offs the client can choose between. This one will have more square footage, while that one will be beautiful, but have a homeowner's association that comes with it. This one will have some significant extras but need lots of cosmetic work, while that one doesn't have a lot of the lesser qualities they want but be move in ready. It's the client's money, therefore it's the client's choice. My principle jobs as a buyer's agent are to 1) Differentiate the obviously unacceptable and those with problems that laypeople may not spot from those that are real contenders, 2) Make certain that the client understands the ramifications of their choice before signing away hundreds of thousands of dollars in cash and borrowed money, 3) Negotiate as effectively as I can for a better deal, 4) Be aware of everything about that transaction and 5) be willing to take action, up to and including counseling my clients to walk away if something is wrong enough.

The more you require in a property, the more it will cost. There is a measurement for how desirable a property is, and the unit of measurement is the dollar. If you've only got a certain budget and you're looking to buy in the best neighborhood in town, it's going to cost you more than the same property in the ghetto. The difference is that value of the neighborhood. The same property in the district with the very best school system (or best school) is going to be more valuable than the otherwise identical property down where schools are just a taxpayer subsidized babysitting service where the kids learn undesirable behaviors. People seem to soak this up easily, but they aren't usually as fast on the uptake of "holding the neighborhood constant, you can have a beautiful turnkey property or you can have an extra bathroom, two bedrooms, and four thousand square feet on the lot by being willing to beautify a solid property or you can have a huge lot with a better zoning where the existing building needs to come down completely." All of these, and many others, are potentially valid choices and I can see where making any of these choices could be the most rational choice if your needs and resources match the right profile. It's my job to help you with that, too, but the final choice has to be yours. Nonetheless, there will be tradeoffs involved - you can't have it all. If I were some corporate or NAR flack, I'd be telling you otherwise, but the fact is that you're going to have to choose what's most important to you, and either create the rest yourself or do without. The more you have to spend, the broader your choices and the more you can expect to receive for that money, but even the richest man on the planet has alternative uses for the money that he's giving up to buy this property. Nobody has an unlimited budget.

Putting up with things that others are not willing to is worth some money - often enough for a major shift in the question of whether they're being realistic. I had some clients who were relocating from the primary flight path of a major jet airport. They laughed every time I talked to them about traffic noise as a negative factor, and that was fine. They had told me they didn't care, but they had also told me that this wasn't a forever property for them, which means that when they go to sell it, it's going to be a factor for them. They wanted to consider a property on what was essentially a frontage road to an interstate. I convinced them otherwise for a number of reasons that include that street might as well be a drag strip because mild mannered housewives with their hair up in curlers turn into testosterone fueled racing junkies there - all within feet of where children are playing in their yards. But if the traffic noise had been all there was to the issue, they could have used it to snare a bargain property because they would be willing to put up with something nobody else would. They were also shopping well beneath the limits of their means, so I was also able to put them into something in a better location with a lot more upside for the same money.

The bottom line is that more money buys a better property. Like any other good buyer's agent, I can stretch your available dollars, but there is a limit to how far I can stretch them. I'm aware of that limit, and so are my buyer clients because I will make certain that they are aware. There comes a point where a given set of search criteria flips from "challenging but possible" to "not likely to happen on Planet Earth." If that happens to you, you are wasting your time and everyone else's. Most buyers have to accept compromises in order to get what they need within their budget, and it's only going to get worse as we finish working our way through the problems that caused the meltdown. If you understand this in the first place, you're in a much stronger position when you start looking.

Caveat Emptor

Original article here

A high percentage of buyers out there have no idea of how qualified they really are themselves. They have no clue as to any of the major factors in determining credit-worthiness. To be fair, there are dozens, if not hundreds, of little details that can kill a loan dead. This is one of the significant advantages to dealing with a loan brokerage instead of a direct lender, because if a loan killing detail strikes, a brokerage doesn't have to start all over from square one. Pretty much all the paperwork is still usable, I just have to submit it to a new lender that can do the loan. But so long as a very few things about the buyer's situation are acceptable, I'm confident that a loan can be done.

Nonetheless, with a large minority of clueless loan officers out there, and still others who will keep stringing people along as long as they can, hoping to get an approval that's just not going to happen, sellers are understandably concerned. It costs serious money to carry a property, and an unqualified buyer stringing a seller out for three months before the transaction falls apart usually runs into five figures. That's what sellers are potentially looking at when they sign a purchase contract. RESPA strictly prohibits the practice of steering, while many listing agents have absolutely no clue as to whether the buyer making the offer can possibly qualify for the necessary loan. A significant number of listing agents violate RESPA anyway by requiring the buyers deal with a given loan provider. The way it was explained to me, even asking a buyer to get qualified with a specific provider and no other obligation counts as steering. Even as the buyer's agent, I can't so much as hint that there's any obligation to do the loan or qualification with me - all I can do is offer better terms. Carrots only, never sticks.

The correct way to handle it, of course, is with agreements for deposit forfeiture in certain circumstances. I don't list a lot of properties, and I'm certainly not going to point out something that isn't in my client's best possible interest when I'm agent for a buyer. I'll tell the listing agent that something seems like steering, and is therefore unacceptable, but I'm not about to suggest terms that could result in my client losing their deposit.

Some agents go overboard with deposit forfeiture provisions, and in a buyer's market like we have locally right now, being too aggressive with those is a good way to lose potential buyers. People are stupid enough to sign up for negative amortization loan that wastes thousands of dollars per year for precisely this reason - they understand money in terms of cash and payments. That deposit is cash, cash they usually spent a significant period of their life setting aside out of earnings. They understandably have a problem with potentially losing it. Even affluent and well qualified buyers may not want to accept the risks, which in a market like this is a good way to miss out on the best buyers, if not upon selling the property entirely.

There's no way to know for certain whether a loan is going to fund until it does. Pre-approval means nothing. In fact, lenders can pull funding back until documents are recorded. There is no guarantee that anyone except an underwriter can make that a loan will fund. Nobody can guarantee a loan except a loan underwriter. Period.

On the other hand, there is a compromise solution. You can't find out if the loan officer is a bozo except after the fact, but you can find out if there's no way that loan can be done. The borrower information you need to know is: Approximate Credit Score (FICO), How much they make, What their other monthly payments total, and whether they have any derogatory notations in the last two years, most notably payments 30 days late or more. You already know what the purchase price and down payment are. With this information, a decent brokerage loan officer should be able to tell if a loan is possible. When Stated Income loans were available, if the other side was doing a stated income loan, job title could substitute for actual income information. Within a twenty point band is close enough on the FICO score (e.g. 660 to 680), with differences in higher credit scores mattering less. There really isn't a whole lot of difference, even today, between a 721 and an 800 in terms of whether they'll qualify at all, and only a slight difference on loan pricing. There isn't that much difference between 681 and 719. Below 500, of course, regulated lenders can't do business and we're talking hard money only. But the loan market changes over time. If you're not a loan officer dealing with twenty lenders or more, you're going to have some real issues keeping on top of it yourself. Yes, this is privacy act information, but let's consider this: That property owner is risking an amount that's likely to run into five figures when they sign a purchase contract, because that's how much they're likely to be out if the buyer can't perform. It's reasonable to agree to give them a certain amount of information. For instance, an attestation of the credit report. W2s or 1099s with anything sensitive that the seller doesn't need to know removed. Bank statements, ditto.

I realize that these loan officers want something for their trouble, which is one of the two reasons why steering happens (kickbacks, even more illegal, being the other). Steering is nonetheless illegal. When I first wrote this, an agent whose counter my clients walked away from a few days prior got really defensive about it, but getting defensive doesn't change the fact that you are violating the law by asking the clients to so much as contact any one specific loan provider. The procedure for writing to HUD is very simple, and I'm sending them these easy packages off every time there's a problem with steering. It costs me about a dollar including postage, and I'm ridding the industry in my area of lazy problem agents, one at a time.

If you know these very few pieces of information, you can figure out things like debt to income ratio and loan to value ratio. You can know if a loan is going to be able to be done. If the buyer chooses a bozo of a loan officer, that's their prerogative, however unfortunate it may be for you. It doesn't change the fact that they could have qualified, which is all any loan officer can really tell you anyway. Matter of fact, a large proportion of the loan officers that agents try to steer towards are bozos. I recently had one agent try to steer my client to a loan provider who had blown a trivially easy loan for a previous client, who would likely have cleared $100,000 profit after fixing the property up, but instead ended up losing his deposit. I get angry about things like that. As I wrote earlier, just because the buyer is my client for the purchase doesn't mean I can force them to do the loan with me. If I can't force them to do the loan - or even put in an application - with me, what gives some lazy (expletive) of a listing agent the idea that they can? Especially when they don't owe the buyer fiduciary duty and I do? Only in as hard a seller's market as we had a few years ago is there any prayer of getting your way in that. Buyers with a competent agent now are either going to walk, or use the fact that you violated RESPA as leverage against you. Whichever it is, you've violated your fiduciary duty to your client.

The most important thing about a lender letter that says a given person is qualified is that the person writing it shows their work so that the fact of their qualification can be independently verified by any loan officer the agent may care to show it to.

Caveat Emptor

Original article here

I read with great interest you article on the internet about pre-payment penalties. I find my self in a situation involving a pre-payment penalty and would appreciate your advice on this. I currently have a loan in which the prepayment penalty is up on DELETED. I have gone to another lender for a refinance and have been approved for a loan. Since this loan process occurred before the pre-payment penalty was up, my current lender has included it in the payoff demand information. My new lender has approved funding a loan with this penalty ($12,000) included. Documents are scheduled to be signed DELETED and the loan will be funded (13 days before the penalty expires). If I try to push back the date of my loan, my interest rate will go up, and I may not even qualify for a new loan since my FICA scores have dropped. My intention is to go through with the loan and have the loan person hold onto the payoff check until DELETED, after the pre-payment penalty has expired. I will then request a refund of this amount from my current lender. Do you think this strategy is viable or can you suggest an alternative without changing the the time schedule or amount of my new loan?

Doing it that way is okay if you want to pay the penalty and are willing to pay interest and points and everything on the extra. If not, just have your loan provider get a rate lock extension. You'll pay roughly a quarter of a point in fees, but that's less than the interest - or the penalty. Have your new lender get a payoff demand valid from expiration of the pre-payment penalty forward.

Your new lender is not going to tolerate being second in line for several weeks. Until that previous trust deed is paid off, the loan to value ratio is higher than their underwriting allows, and I'll bet that debt to income ratio is as well. Suppose there's a fire during those two weeks? Is there enough money in the insurance to pay both of them? The answer is no. Until that prior loan is paid off, the value of the property is exceeded by the loans against it. This is the purpose of escrow - and there's escrow in a refinance as well as in a purchase. You don't get that check - you only get what's left over after escrow does their job, which includes paying off the prior lender.

As to your personal situation, why has your FICO dropped? Credit scores don't drop without a reason, and one credit check isn't going to make that much of a difference. Basically, it looks like your lender is trying to make more money off you, and feeding you a line of nonsense to facilitate it. By boosting the loan amount, their compensation in the form of origination and yield spread rises. Okay, so 1% of $12,000 is only $120 - but that's $120 more for basically the exact same work. Not to mention the loan is funded now and they get paid now. Loans that are finished don't fall apart. I'd bet millions to milliamps that they're intending to fund your loan before the penalty expires. If they weren't, there's no reason to have you sign loan documents that early. I wouldn't have you sign until your right of rescission runs out concurrently with your penalty.

From the information given, this is not likely to be a lender with your best interests at heart. About the only thing I can even think of where it might be in your interest is if there's a notice of default or trustee's sale looming - and then we have to consider whether paying that penalty and all of the costs of the loan is really in your best interest. And since you didn't say anything about either one of these situations, I have to question the wisdom of basically volunteering to pay 6 extra months of interest plus loan costs. In this loan environment, I just have trouble believing that the new loan is going to save you that much money over the course of the time you are likely to keep it, let alone over the two weeks early you're paying it off. Even if you're at 8% now and moving to a 4 percent thirty year fixed rate without points, you're spending $12,000 you don't need to in order to fund 2 weeks earlier. It's basically impossible to construct a realistic scenario where paying that penalty is in your best interest. And yes, rates are going up, but neither I nor any other analyst I read is expecting that much higher, that quickly - even if your rate isn't locked, and rates that aren't locked aren't real.

Rate lock extensions cost money. But sometimes they're still the smart thing to do. In your case, it's spend approximately a quarter of a percent of your loan amount (depending upon lender policy), or three to four percent for six months interest that I can't see any compelling reason for you to owe.

Caveat Emptor

Original article here

Not too long ago I got an email from an ex-prospect who decided to buy a developer's property without a buyer's agent. They persuaded her that she would get a better deal without them having to pay a buyer's agent commission. They then proceeded to hose her. She wanted to know if there was anything I could do. The only answer I could honestly give was basically, "Sorry! The transaction is already done!" This is the way that developers like it. Once the transaction is complete, the damage is done. You own the property, and you owe the money. The only recourse is through the courts, which takes years as well as lots more money - and that's if you win.

Many folks want a brand new house for one or both of two reasons. First off, there's that new house feeling. Secondly, they don't have to deal with a real estate agent, or so they think.

This is mistaken. The agents who work for developers are very pleasant, very professional sharks. They're not legally allowed to actually lie, but other than that, they have no significant responsibility to the buyers. Their responsibility is to get the most money on the quickest sale, period. If you let slip the wrong thing that leads them to believe you'll be a difficult transaction, you can be torpedoed before you even start. They're not there to tell you the bad things about a property, or that there's a better deal two blocks over. They have a responsibility to get the property sold. Period. The developers hire them from among the very sharpest, most ruthless agents there are.

Indeed, developers usually have higher hurdles for buyer's agents to jump over than any other seller can get away with. Buyer's Agents must accompany the client upon their first visit, and register them in writing. Seems minor, but anyone else who tried this would be dead in the water as far as getting agents to show their property, while developers will do both of these and more. With anyone else, when an offer comes in through an agent, that's enough. During the seller's market, many developers were refusing to pay commissions to any buyer's agents at all. This left potential buyers to pay their buyer's agents themselves or do without. The feeling on the part of developers is that buyer's agents spoil their party and prevent them from doing everything they want to their customers, so since they didn't have to deal with them, they weren't going to. The demand was there to sell the developments out whether they were willing to deal with buyer's agents or not - and if they didn't deal with buyer's agents, they would have things more their own way.

This changes in strong enough buyer's markets. Every last buyer is precious, so developers are grudgingly working with buyer's agents. I went to a development with a client a few days ago, and the developer's agent had no difficulty conveying the same sentiments as that classic San Diego bumper sticker, "Tourists go home - but leave your dollars and daughters." They wanted my clients - but they didn't want me. Some of it traces to the fact that they want the whole sales commission, some of it to the fact that clients with a buyer's agent working on their behalf have a stronger proponent and negotiate better bargains, meaning lower bonuses and less in commission.

Indeed, a buyer's agent is a fairly unique position in sales. A buyer's agent's responsibility is to get you the best bargain possible - lowest price for the best property. Since commission is based upon sales price, this is the only job I'm aware of that gets less money the better they do their job. The idea, of course, is the better they do their job, the more people will want you to do it for them. They may not make as much per transaction, but if a buyer's agent does more transactions than they otherwise would, they come out ahead.

Some agents try to leverage this by rebating a percentage of the commission they would get. After all, it doesn't take a lot of time to fill out an offer. However, it does take a lot of time to shop effectively for a given client. I'm making offers now for a client I've been working with for two months. I've probably spent in excess of a hundred hours physically looking at properties just for them, never mind researching the properties before I left, or all of the things that contribute to general market expertise. They looked at a few on their own - and stopped, because they were seeing better values with fewer issues through me. A good agent knows what else is available on the market - but the agent who sits there with a license and a fax machine has no clue. There's nothing ethically wrong with agents getting paid for sitting by a fax machine. I'm perfectly willing to rebate part of the buyer's agent commission if someone doesn't want me to scout and evaluate properties. If, however, you want someone who's able to recognize what is and is not value, and who is going to be a strong negotiator on your behalf, thereby getting you a better property at a better price, you need someone who gets out of the office and looks at property. Agents can't get that kind of expertise sitting in the office. And if your only qualifications are a real estate license and a fax machine, why are you making more than ten dollars per hour? What benefit does that have for the public? I visited a new development on behalf of some clients last week. They had one left, in which I spotted a foundation crack literally from side to side of the structure. I checked the area again today, because we're still looking, and that property has gone Pending. I'm not a licensed inspector or contractor, but if someone can spot this before the sellers have your deposit, it can really save your bacon. If I were a discounter, that would have been my clients, because they loved the property until I showed them the crack.

People in the financial press like to complain about real estate commissions being too large. But they are not as large as they are by some accident of nature. People didn't just decide to pay five, six, or seven percent of the sales price because someone told them to. Sellers do it because experience has taught them that they end up with more money in their pockets because of their listing agent's expertise. It's not a large jump from there to understanding that if the seller has someone whose expertise for one transaction is worth that kind of money, it's a real good idea to have someone on your side who knows just as much, not only about real estate in general, but your market in particular. Various businesses have been trying to offer real estate brokerage services at discounted rates since at least the mid 1970s from my personal knowledge. Traditional sales models have lost a little bit of market share, but they're still going strong. There are reasons for this. Reasons like how long it really does take to get a property sold, like how much work it really does take to know the market. Reasons like there is no way to evaluate the relative value of the property except by looking at lots and lots of properties. Reasons like the paperwork that has to get done, and the legal liabilities involved if something goes wrong, or the buyer isn't happy, or any of hundreds of other reasons. Not to mention all of the transactions that stop before consummation. Real Estate is the only occupation I'm aware of that anything like the work we routinely do, and doesn't get paid at all if the sale doesn't happen. When discounters work for less pay, the only thing that can give in this whole process is the services they provide.

Developers know all of this very well. They are not charities. They are out to make the largest profit possible. They don't hire discount agents. They hire the best agents they can get, and support them with large advertising budgets, because that gets the properties sold, and for enough more money to more than pay the costs of what they spend. These agents act very friendly, very charming and disarming, and completely ruthless. Developers' strategy of discouraging buyer's agents from being involved is part and parcel of ending up with more money in their own pockets. The only place for the money in their pockets to come from is the pockets of the people who buy from them. If you want to deal with a developer, you want someone on your side who knows enough about real estate and your market to stand up to the experts on the other side.

Caveat Emptor

Original article here

(Note: the available loan options have shrunk since this was first written, and the rates are significantly lower right now, but the main point is calculating what you can and cannot really afford)

Hi Dan, I am a first time home buyer and a big fan of the advice on your blog. I was wondering if you could offer some advice on my current situation. I apologize for sending you this question but I've had many sleepless nights over this and I really respect your opinion.

I've narrowed my search down to two properties, one is a condo in DELETED (where I work) and the other is a new home in DELETED (closer commute for fiance). As a first time buyer I'm looking to stay in this place 5-7 years and then if possible rent it out as an investment.

The new home builder has a 2-1 buy down plan so the rates on a $519,000 5/1 arm would be Year 1: 3.75%, Year 2: 4.75%, Year 3-5: 5.75% on the first mortgage and 9.375 on the 2nd (which I would try to refinance right away).

The condo is $335,000 (a similar model sold on recently for 400,000) and the rates are 7% on the 1st and 8% on the 2nd. Both loans are with 100% financing.

I really like the house but don't wanted to be lured into a larger loan if it might come back to bite me. I would go for the condo if it would be a better investment in the long run but would be sad without a yard. I my income is 94,000 a year and I have good credit, my fiance will also be contributing to the monthly payments.

Thank you for reading my lengthy email, I'd really appreciate your help!

I am not going to pass judgment on either property and its worthiness as an investment, its comparative value, etcetera. Those are buyer's agent questions. The real question I can deal with here is numbers: What can you afford? If you can afford both, is the more expensive property worth more money to you?

You make $94,000 per year, which equates to $7833 per month. Subprime will allow a fifty percent debt to income ratio, which means that for is total monthly housing and debt service, you can afford $3916. That's got to cover first, second, taxes, insurance, Mello-Roos and HOA, etcetera, as well as your existing debt. A paper fixed rate firsts allow basically 45 percent, while A paper hybrid ARMs are usually lower, and compute based upon the fully indexed payment, not that low initial payment. Matter of fact, what they're trying to sell you on looks like a Temporary Rate Buydown, so they can sell you the property based upon a low initial payment.

Let's look at these two situations.

On a $335,000 condo, that's a first of $268,000 at 7% and a payment of $1783. On the second, that's a $67,000 second at 8%, which is a payment of $492. At 1.25% (standard California rate) your property taxes would be $349 per month. Insurance is not required for condominiums even though it's both cheap and a really good idea, so it doesn't impact debt to income ratio. On the other hand, there will be HOA dues, and may be other monthly expenses such as Mello-Roos. As long as these, plus your other debts do not exceed your remaining $1292, you're likely to be able to afford it. Add in 75% of whatever your fiance will sign a lease for, as standard allowance for rent, in addition to the $1292. Bottom line, based upon the information provided, it looks likely that you can afford that condo.

On a $519,000 property, that's a first of $415,200 and a second of $103,800. The second gives a straightforward payment of $863. The first has an initial payment of $1923, but that's not the real payment. The real payment is $2423 - $500 more. Nor is this the qualifying payment that an A paper lender will use, which is computed based upon what would happen if that loan hit the end of the five year initial fixed period today. That rate would be 7.125, or a payment of $2797. Yes, I like 5/1 ARMs, but they are perversely harder to qualify for than fixed rate loans. I get that basic California property taxes would be $541, I'm guessing insurance would be about $100. Total is $4301, and we haven't considered Mello-Roos, HOA (if any), or your existing debt. On the plus side, we haven't considered your fiance's contribution, either, but it's not looking good as you're nearly $400 over your monthly total payment limit already, and that's without considering possibly lowered debt to income ratio guidelines.

Now, let me point out a couple of tricks going on here: That temporary buydown isn't free, or even cheap. Nor is 5.75 available on a 5/1 without points right now, from any lender I'm aware of. This developer is not going to do your loan for free just to unload the property, and they used the temporary buydown to make it look like the payment is lower. They came close to hooking themselves a sucker fish, too, from your email. The money to do all of this is coming from somewhere, and the only candidate I'm seeing is the pockets of the buyers. It's almost certainly a waste of money as well as defeating the purpose of a hybrid ARM to pay points and temporary buydowns - and you would be paying them. If not explicitly, through being able to negotiate a lower price on the property without the developer paying for all of that. Which would you rather have: slightly lower payments for a while, or a lowered amount of debt in the first place? They pad the price, so they get more money right away, while paying out a part of it to make the payments look lower for a while. If you offer someone a dollar for thirty cents, most of them will take you up on as many dollars as you have, then turn right around and hand you back a portion of the money you just handed them. When you reduce it to the basic mechanics, that's what is apparently happening here. Of course, the average consumer is clueless about this - all they understand is that they're getting a beautiful property that they didn't think they could afford for an initial payment they're happy with. Well, they really can't afford it, but someone who knows a critical bit more of how the game is played persuaded them they could.

All of this is one more argument why everybody should get a good buyer's agent. If you don't have one, especially in dealing with developers and their lenders, nobody has a fiduciary responsibility to you. That and shopping your loan extensively are the best ways to avoid rude awakenings expensive enough to jeopardize your entire future that there are. In fifteen minutes with a calculator and my professional experience, I may have just saved your financial future. The other side has people whose job it is to get that property sold for the most possible money and make money with that loan, too. They're paid to act like your friend while picking your pocket. If you really want to play that game without someone on your side who knows the same tricks they do, you're a foolhardier braver man than I am, Gunga Din.

Caveat Emptor

Original article here

Quite a while ago, I wrote Top Ten Reasons You Bought The Wrong House and Top Ten Reasons Your Home Isn't Selling. In that vein, I'm going to write a list of the most important things when you're shopping for a property. Lots of folks shoot themselves in the foot, and it's easy enough to see why in retrospect - but isn't it better to not make those mistakes in the first place? I'm going to count down from twelve to one and try to inject what humor I can.

12)Short escrow periods, but only if you can perform. That seller is out money every day of the escrow period, and every day that passes while the property is Pending is another day that other potential buyers aren't looking at it. This daily racking up of costs has been known to cause seller panic. Knowing that there's a limit to how many days the property is going to be tied up is certainly something that can be useful in convincing a seller that this is a better offer. Warning: The deposit is always at risk, so if you cannot perform within the time period you agreed upon, you could find yourself out the deposit money. Since this article was originally written, the time to reliably get a loan done has risen from 2-3 weeks to 2-3 months due to regulatory changes and procedural changes on the part of lenders to comply with those regulations.

11) Short term leasebacks: If the seller is living in the property, accepting your offer means that they have to get on the stick to find their next home. This can cause them quite a bit of anxiety, especially if they're not certain the transaction is going to close. The sellers can sign a lease and risk not needing the leased property while still having to pay a mortgage, they can enter into another purchase contract and find themselves unable to perform, they can find themselves living in a hotel because they didn't allow enough time, and with the problems in the market today, they can often be risking homelessness. If you're not in a particular hurry to move in (and you shouldn't be!), offering to lease the property back to them for up to thirty days after closing is a major anxiety reducer for the seller. Delaying your own gratification - the ability to turn that key and say "Mine, mine, all mine!" like Daffy Duck - can be a lever to get a better price or something else you want out of the seller. Short sales are a particularly good time to offer this - you're looking at an extra six weeks, possibly three months or more, before the lender gives their blessing to the transaction, then usually wants to close faster than the speed of light while the buyers are trying to get their loan done and the sellers are stressing about the tax implications and whether anyone is going to be willing to rent to them along with everything else. To add both parties suddenly having an urgent and immediate need to pack up for a move that they're not certain is going to happen and sign a new lease or give thirty days notice when they're possibly going to be without a place to live doesn't make things any easier. As long as the actual move-in happens within thirty calendar days of closing, loan standards for "owner occupied" loans are still satisfied, making it a win for everyone.

10)Buyers have liquid cash - Sellers have an illiquid property. Cash money is the universal problem solver - everybody takes cash, everybody needs cash. What most buyers have isn't the full price in actual cash - but the seller gets cash proceeds from the loan as well. That seller isn't sitting upon the crown jewels of the world either - they have the most illiquid investment there is, and they are attempting to exchange it for cash - that universal problem solver. Otherwise you wouldn't see that property listed for sale. The buyer is the one with access to the universal problem solver, and if that seller wants that problem solver, they had better be cognizant that their problems are not the buyer's problems until the deal is done. If the property has problems, it is the seller's challenge to persuade the buyer that it is worth the buyer's resources to deal with those problems. Otherwise, that seller is stuck with those problems.

9) Be willing to do without meaningless contingencies. The appraisal contingency is the prime example of this. By requiring an appraisal contingency, you're saying that you don't want the property unless everything is absolutely perfect - unless some appraiser can pretty much arbitrarily be persuaded to say the property is worth at least the official purchase price. That's a weak offer, and it puts a lot of sellers in the position of resistance because they "don't want to sell for less than it's worth". If more agents explained what the appraisal is and is not, this would be a much smaller problem. I am always looking for value, and always mindful of the minimum necessary appraisal amount, but I'm also pretty much always willing to give up the appraisal contingency if I even put it into the offer in the first place. If there's a loan, the loan contingency is going to cover my clients. If there wasn't a loan, why would you care if the appraisal came in? You shouldn't ever offer more money than the property is worth to you, so why should you care if the property appraises? Being unwilling to give up the appraisal contingency is the sign of a weak offer from a buyer who isn't really sold on the property.

8) Zig when everyone else is zagging. The time to buy a property is when nobody else is willing or able. If potential buyers are waiting for the market to bottom, if they're scared they'll lose money on paper, scared they'll lose their job, or just don't want to move right now because it's Christmas, that's the time to be out buying. On the flip side, as this whole housing bubble and Era of Make Believe Loans should have made clear to everyone, when everyone is convinced that prices are going to keep going up 25% per year and therefore real estate is selling like hotcakes is probably the time to sell yours and go rent until the bubble pops. Don't confuse mass psychology with the fundamentals of the market. This applies in reverse as well.

7) Know what cannot be improved or fixed. Location is the first item on that list. If the property is already the best in the neighborhood, it's not a bargain. If everything around it is selling for half the price, it's not a bargain, it's a misplaced improvement. The area is what it is, and while sometimes they do improve, it's not under any individual's control unless you're a corrupt public official capable of zoning that airport or that sewage plant out of existence. There are other items here - environment, view, desirability, etcetera - but what I wrote about location finds a good analog in each of them.

6) Look for properties you can improve: If they're the cheapest property in the neighborhood, that is an opportunity for profit. The beautiful turn-key property where everything is already perfect is not an improvable property - at least not at a price that's worth it, not only because everything easy has already been done, but because those properties are in high demand. When everybody wants it exactly as it is, that's not a bargain property. If you look at it and fall in love with the beautifully done kitchen and bathrooms, that's not a bargain property because most buyers are willing to pay a premium for those sorts of things. Which leads us into-

5) Look for solid, not beautiful. Even if it hasn't been updated in fifty years, a good floor plan is a good starting point. Most people will not look past an outdated surface to what is underneath - solid foundation, good floor plan, solid construction, good location, lot with plenty of usable space. Yes, you're going to have to do some work to make it shine, but you're looking for a bargain property, not the one that's already been over-improved by a devotee of one of those house-flipping shows. The people that have done that work expect a premium for all that effort. If you want already beautiful, you can expect to be the one paying that premium. If you're willing to take something solid and make it beautiful, you're going to be the one getting that premium.

4) Don't fall in love with one particular property Be willing to walk away if the negotiations don't work out, or if you discover something about the property that's worth walking away from. I see people get all worked up over the possibility of losing a $3000 deposit and sign on the dotted line for things that are going to take ten times that much money just to bring the house up to where it should have been already. I tell buyer clients that the ideal time to fall in love with a property is as I am handing them the keys - something that doesn't happen until escrow has closed and they actually own it.

3) Have a plan Why are you buying this property? Is it a starter property for a few years, are you trying to flip for a profit, or is the home you're going to live in the rest of your life? Are you planning to hold onto it and rent it out once you're done living in it? Is it the basis of the plan to use leverage in your favor so you qualify for a better property when you sell this one? Is this the end property, or is it a shortcut for getting where you want to be? Each of these possibilities has consequences and implications that make it advantageous to do one thing and not the other. A good agent knows what they are. Plan ahead for what you want, and the right things to do to achieve it are a lot more definite.

2) Good buyer's agent. This is the expert who will help you with how best to make the transaction in your favor, as well as reverse engineering what the sellers and their agent are trying to do. Everything about a real estate transaction happens for a reason. You want someone who can take the what and figure out the why from that, as well as the how of getting from where you are to where you want to be most efficiently and effectively. It is easy to find a good buyer's agent if you make the effort. But this is not number one because the best buyer's agent in the world can't do you much good if you haven't got the

1) Patience If you're only willing to look at a few properties, if you're not willing to investigate the property and the market, if you're not willing to consider that maybe another property might be better for you - if you're going to get your heart set on one beautiful property because it's the most upgraded one in the neighborhood, there's not much anyone or anything else can do for you. The more patience you have, the more I and other buyer's agents can do for you. If you're not in any particular hurry, we've got time to make things happen your way. If you need to be under contract in two weeks, you've got about a week to start negotiating an offer, and no plan B available if that first negotiation fails. This weakens your bargaining position, to say the least.

Bonus item: Higher Deposit People are funny about cash. Perhaps it's because they had to earn that cash dollar by dollar, not spending it on other things. Every dollar in that deposit represents something that they could have bought, fun that they could have had, but didn't. A large deposit is therefore indicative of someone who has made some serious sacrifices and is putting that money on the line in the pursuit of this property. That says a lot of positive things about how serious they are, how certain they are that they want the property, and how certain they are that they can make the loan happen. A large deposit is also (usually) indicative of someone who's in the habit of saving and therefore really does have good credit. The deposit is always at risk, but there are steps you and your agent can take to minimize that risk. Look at it from the seller's point of view: You've got someone willing to put thousands of dollars of their own money potentially on the line, versus someone who's scraping together change out of the seat cushions of their couch and asking for help from relatives because they can't save money. Which of those two offers would be more attractive to you?

Caveat Emptor

Original article here

This is going to be a long article and somewhat technical in places, but it needs to be covered and it's important to everyone who is thinking about getting a real estate loan.

"Fall-Out" is very simple: The number and percentage of dollars of loans that get locked that eventually fund. If I lock $1 million worth of loans this month, and fund $650,000 of that, I have a fall out ratio of 35%, and a "pull through" of 65% (my personal "pull through" is much higher than that, but this is an industry wide issue). The secondary loan market is putting immense pressure upon lenders to deliver a very high percentage of what gets locked. This has implications for the way loan officers need to handle loan applications, when they lock your loan, and many other things.

I got this email sent to me the other day from headquarters. It's representative of tensions going on between the interests of consumers and the interests of lenders, and has implications for what can be done to advance the interests of consumers and the direction the loan industry is likely to go in the near future. Because the email is long, I'm going to break it up and respond in pieces. I'm going to put the email text in various block quotes, while my responses will be normal text style. If I need to change some jargon in the body of the email to render it comprehensible, I'm going to change it and put the changed text into parentheses. Specifically identifiable information (personal or corporate), I am going to show as DELETED.

The question has come up many times "Is the brokerage business going to survive?"

I recently had factors explained to me that moves my answer away from just having a positive faith into a more realistic understanding of what elements will determine the outcome. Economic systems live or die on economics. Seems simple enough. If the brokerage channel is economically viable, then it will survive; if not, it won't. If companies are economical, they will survive; if not, they won't. And of course, the same is true for (loan officers).

In my discussions with that lender, I now have a better understanding of how fallout plays into the economic model and what lenders are going to do differently now to ensure their own survival. Brokerage channels are inherently more unreliable and inconsistent on fulfilling lock promises than retail banking. As such, the secondary market is paying substantially less for broker commitments than the equivalent banking commitment. When bank retail (loan officers) lock loans, they don't have the ability to move the loan for a better rate. The pull through on locks in retail channels is 10-20% higher than DELETED. The reason I bolded above is broker (loan officers) vary on pull through from 10% to 45% back to 100%. It's that inconsistency that prevents lenders from picking, say 40% fallout as the number. When you want the lock to exist, you want your cake. It's just broker LO's want both.

It shouldn't come as any surprise to anyone that this is changing, driven by the secondary market. When a loan officer locks a loan, the bank turns around and orders funding from Wall Street Investors at the rates available at that time. This changes with market conditions, and that is the reason why there can be half a dozen loan repricings per day as the market waxes and wanes with events. If that money that gets ordered does not in fact get used, the bank is out the money.

This is going to have effects within the industry. Consumers are going to find it much harder to get a loan locked without paying a deposit to the lender. The only way - and only loan officers - which are going to be an exception to this are loan officers who either 1) Float the rate while telling you it's locked, or 2) Ruthlessly weed out their loan applications of anyone who is less than fully qualified and completely committed to this loan. Since one or the other of these latter conditions applies to the vast majority of everyone, the practical upshot of would be a loan officer passing upon the majority of their potential income, which just is not going to happen.

Mortgage Loan Rate Locks have always been the horns of a dilemma for loan officers. Lock now and you risk the consumer bailing out on you if the rates fall, or demanding a renegotiation. Float the rate, and you risk those rates rising to the point where the consumer is angry, starts shopping elsewhere, or even just blows off the idea of getting a loan entirely. Consumers have had this choice far too easy for the last ten years or so, free-riding upon the intense competition between lenders. In case you haven't noticed, there aren't nearly so many lenders in business today as there were a few years ago. Lenders are going to start charging for a rate lock because they are now able to do so. This may change back again in a few years, but for now you can look at it as the way things are going to be for the foreseeable future.

Lenders need to have 75% pull through in order to make money. Think about it: in order for them to sell their portfolios, roll in all the costs of their operation, roll in all the "touches" on files that close and all the files that don't close, the lost hedge fees on loans that don't close, plus all the losses that occur on buybacks - 75% is the bar they have set. When a company is below that, they lose money.

As you've seen, lenders are starting to differentiate between profitable companies and unprofitable companies. DELETED volume makes a lender's effort at rehabilitation worthwhile. That lure is always there, but if the relationship doesn't work, it doesn't work. DELETED has long talked about fallout as a major problem, but lenders and DELETED have been giving it only lip service in the past. No longer.

If the brokerage business is to survive, the broker has to make it so the lender wins. No lender, no broker. Since the lender knows the relationship is symbiotic, many lenders are creating pricing tiers to incentivize companies to figure it out. That is only the first step. Lenders are now dropping unprofitable mortgage as they try to improve their execution price with Fannie/Freddie. In other words, the brokerage business will be smaller, more focused, more partner-like than what has been in the previous "sales" model of mortgage brokering. DELETED plans to "partner" with its top lenders and assure top tier pull through in order to get the best from each company. We need to make that commitment to them which will assure our mutual survival.

A very important shift must occur to be successful. The (loan officers) must shift their thinking to make sure the lender wins 80+% of the time. The math is very, very simple: What's the dollar volume that gets locked? What is the dollar volume that closes? What's the ratio?

I would take issue with the contention that "the lender needs 75% pull-through to make money". Their own captive loan officers rarely achieve 75% pull through. Talk to me about it when lenders start firing their "in house" loan officers for less than 75% pull through. But there is a point at which it is no longer profitable to do business with a given brokerage or loan officer, and a large percentage of loan officers are below that point. The upshot is that lenders are increasingly serious about this, and are terminating relationships that don't measure up. For that matter, they are terminating their own loan officers, albeit for mostly unrelated reasons. Net result: fewer loan officers, less competition, and the balance of power shifts more towards those loan officers remaining in the business, away from consumers. Nor is this going to be an issue at brokerages only - direct lender loan officers are going to get hit by it.

This is also leading towards a dichotomy that the lenders which are more reluctant to lock a loan are going to be able to get better pricing for their loans once they do lock. The lenders are passing along the negative parts of the investor incentives to whomever is originating the loan. If you've been reading this site very long, you've heard me say upon multiple occasions that "It's not real if it's not locked." But if I lock a loan for someone who is playing games, it hurts all of my clients as well as my ability to attract future clients, so I'm going to be really careful about which loans I lock, and I am going to be very upfront about what it's going to take in order to lock a given loan. I'd rather lose one loan than the ability to compete as strongly as I do, let alone lose access to a lender with useful programs. I am still disposed against the cash deposit in order to lock, but I may have no choice in the long run. Loan officers, whether they're brokers or work directly for the bank, have to keep lenders happy or pay the consequences, which means all of their clients also pay those consequences.

This is why the backup loan is dead - even I can't do them any longer. What this means is that you have to do real due diligence ahead of time, nail down prospective loan providers by asking them all the necessary questions and insisting upon a loan quote guarantee. Alternatively, you'll probably be able to make a cash deposit - but the loan originators are going to get very hardcore about keeping it if you don't fund your loan. It won't matter why - your fault, my fault, nobody's fault. The downside of all of this is that instead of having a third option, consumers are going to be stuck with either loan A or no loan at all, giving unscrupulous originators even more of an edge than they've got already.

Here's the tough part. It doesn't matter:

* That the house didn't appraise

* That the borrower didn't qualify

* That the rates dropped significantly

* That the borrower walked

* That the borrower was related to someone who got them a better deal

* That the Lender changed their program mid stream

* Etc, Etc, Etc.!!!

If you locked, the lender lost money. Of course those are good (loan officer) reasons, but if DELETED loses our lender relationships due to those reasons, then something's got to change. The thing that has to change (and will change) is what factors must exist for the (loan officers) to lock. Ideally, after Clear to Close, lock it and doc it and get 'er done. But many (loan officers) don't work that way. Well, I am asserting that ultimately there is no home anywhere in the mortgage business for the (loan officer) who locks first and apps later. No home for the (loan officer) who locks before he's run (automated underwriting system), seen the documentation, determined value, and checked with the lender. No one will be able to lock as what will soon be referred to as "old school". All brokers will have to conform to this mode of thinking.

He's unfortunately correct - and it's going to apply to all loan officers, whether they work at a brokerage or for a direct lender. It's going to take a very sharp loan officer to be able to get away with locking before clearance to close. Loan officers who do that are going to have to know the standards cold, and still they will be taking risks. But here's the thing - you want a loan officer who is willing to lock sooner than that.

I'm not certain that any of these except "lender changing their program mid-stream" is unpreventable. At the end of January 2009, Fannie and Freddie suddenly imposed a requirement that almost half of everyone with a loan in progress fell afoul of, and that they suddenly became over-conscious of the fact that they've had a major fall-out surge is supremely ironic, because that surge was nobody's fault except their own. "House didn't appraise" did not used to be a factor if the buyer's agent knew what they were doing. This has changed because the new appraisal standards are a disaster for consumers, loan officers and appraisers, and only good for corporations in the appraisal management company business. It's a bad news/good news/horrible news situation. The bad news is that good ethical appraisers and good ethical loan officers basically can no longer develop or keep a working relationship. The good news is that the less ethical examples of each are going to start running up against the better ones on the other side of the relationship, and the good ones are going to complain. The horrible news is going to be that there is nothing that good loan officers can do about rotten appraisers. If you don't think this doesn't have consequences, let me know - I need a good laugh these days. The appraiser's professional organization has learned the hard truth about being careful what you ask for, as appraisers are making less despite appraisals being more expensive, and it's not the careful and honest appraisers who are getting the work.

When I first wrote this, "Borrower didn't qualify" was ninety nine percent preventable by going over income documentation on debt to income ratio, asset documentation and being mindful of how much cash a buyer has to play with so that you know how much you need for loan to value ratio and cash to close, and if necessary, the the buyer's agent writes the purchase offer and negotiates it with the loan in mind. It's been a long time since the necessity of buyer's agents consulting a loan officer before you make a purchase offer began, and listing agents to require that a lender's prequalification or preapproval letter must be offer-specific - tailored to this particular purchase offer on this particular property at this particular point in time. If not, you might as well use the that letter for toilet paper because it doesn't mean anything. You can't fake up a loan any longer with a 100% loan to value stated income negative amortization loan. Agents have got to learn to be clear whether a potential buyer can qualify before they write the offer - and definitely before you counsel your listing client to accept it. It's also smart to build in a bit of wiggle room in the qualification. Lender standards are cold and hard thin lines - on one side, the buyers qualify, while on the other, they don't. If buyers have stretched to the absolute limit and the tradeoff between rate and cost on loans shifts upwards just a little bit, that can put a buyer on the other side of a hard line that says "No way". For buyer's agents, the need to be able to work within a client budget, and also to persuade those clients to stay within that budget, is here to stay. There are no more Make Believe Loans.

"But what if rates drop half a percent and the lender has a bad re-lock policy?"

Don't use that lender if they have a horrible re-lock policy. The re-lock policy is a feature of the product they are selling. Don't buy from them if you don't like that feature.

"What if their rates are terrific?"

Then use them, but keep your pull through at 80% or be subject to consequences.

And that's the issue. The brokerage community has never really had to pay the consequences. Now brokers will. Therefore, brokers and (loan officers) have grown up in the industry with the mindset of the child whose parents constantly threatens and repeats, but never follows through. The shocking turnaround seems unfair. But what really is happening is a movement to align value with value. "For those that help us win, they get value. For those that don't, they're gone."

This is a fact of life for all loan officers, whether they're working for a brokerage or a direct lender. It is therefore going to be a fact of life for consumers, and it is going to have effects upon their loan choices. Consumers are going to have to decide between great rates and the ability to cancel a loan without consequences. Consumers are going to be forced to choose between locking early and not having to make a loan deposit. I despise deposits, but there it is. Consumers are going to have to learn that there are things which may not be obvious on the face of it that are important to their loan satisfaction, to do their due diligence first, and if they don't do it right, they are going to be stuck. Consumers are going to have to learn the difference between merely talking a good game, and actually delivering the loan that was talked about. Loan originators are not going to accept dual applicants (lest they lose hundreds to thousands of dollars per loan when their fall out ratio becomes unacceptably high), and while all credit reports run within fourteen days count as one, it's going to be more than fourteen days between credit reports if you've had a loan fall apart in between. And consumers are going to need to be far more in touch with the consequences of their choices, as the ability of loan officers to shelter their clients is disintegrating.

I've spoken with several small to midsize mortgage companies throughout the country. They are being cut off by lenders for several reasons: low volume, high fallout, high touches. DELETED have avoided that fate due to our volume; however, there could come a time that volume won't even help if we don't move our pull through and quality into the next era.

This is from a lender this morning that supports my point:

What does a "loan lock" mean? One top agent sent out a note to her staff. "I think as a consumer, or even a loan officer, when we lock a loan, we feel like we are simply "securing" or "holding" that rate for a client. That is only part of it. Once a lock is made, at that moment, the investor is expecting delivery of that loan at the interest rate as part of their portfolio. (In essence, the loan might not be closed, but it is already sold.) If you can't deliver, or don't close on time, or you are just simply "trying" to secure a "deal" based on rate, then the investor is going to call your lender and ask, "Where is my loan? Where is my money?" Then your lender might try to "replace" that loan with another loan, or just say to the investor, "Sorry." You are not just simply holding for you and your client an "Insurance Policy" to try to get that rate, if by some chance you get the loan, you are, in fact, impacting the investors who are trying to make money on those sold loans. It may be hard to miss that "single day" rates are awesome...but, if you are not in Contract, and you don't have an Appraisal...and you don't have a true file you can close in 30 days...then DON'T LOCK...UNTIL YOU DO! LOCK when you KNOW you are going to close it. Lock AFTER you have an approval. Don't lock at multiple Banks. A lock is a promise to deliver!"

The lenders are starting to enforce that promise to deliver, and putting loan originators who don't deliver into the penalty box if not throwing them out of the game entirely. Anywhere that loan originators go, their customers will follow. The loan originators that survive are going to be the ones who are careful about locking, and make it difficult for clients to bail out of a rate lock without an over-ridingly good reason. The ethical ones are honest about it. The less ethical ones are continuing to give you the same snowjob you've always gotten from them.

One of the practical effects of this is going to be to essentially kill online mortgage quotes as being of any actual use whatsoever to the public. I am sorry to see this happen, but that's economic reality. When loan officers can't honestly quote you a binding rate and cost without building in an an ungodly amount of slop to account for how much the market may move between quote and lock, there are going to be two kinds of quotes: High ones that the loan officer is prepared to stand behind, and low ones that are the result of lowballing, wishful thinking and just plain lying. There will be no exceptions. The originators can either quote you a rate and cost predicated upon the rate/cost tradeoffs not going up, or they can make an honest allowance for that. In the first case, if the rates go up, you're either paying the higher amount or you're not going to have a loan, as loan originators certainly aren't going to do loans which cost them money, as these would require them to do. The only alternative for this brand of loan officer is to play the "wait, delay, and hope" game in speculation of the rate/cost tradeoffs coming back down. In the second alternative, you're going to be expecting consumers to sign up for apparently high priced but real loans versus shameless lowballs that are not going to be delivered on those terms when the loan is ready to go. That hasn't been working out very well for consumers these last forty years or so - I see no reason to expect it to miraculously change now.

These developments have made a lot of changes to effectively shopping for a real estate loan. The one thing that isn't going to change is that you're going to have to have a real conversation with several loan officers, and ask each and every one of them all of the relevant questions. Just getting a quote and hanging up is going to become even more of a recipe for disaster than it already is, and those who believe otherwise are fooling only themselves.

Caveat Emptor

Origianl article here

People are understandably hazy on the difference between pre-qualification and pre-approval. Pre-qualification is a non-rigorous process whereby somebody says that based upon the information as presented to them, it appears you'll qualify for the loan.

Pre-approval should be more rigorous. For A paper, it should mean that you have documentation of income and assets acceptable to loan underwriters, made certain debt to income ratio, loan to value ratio, and cash to close all work with this particular offer on this particular property. Some (for those qualifying A paper) might then taken that information off that documentation, including qualifying rate, income information, credit information, etcetera through one of the automated underwriting programs, and have it come back with an "accept". All that is needed is the actual underwriting.

Due to the nature of the loan and real estate market, very few people actually get a pre-approval. Why? It costs money to do all of that, and takes a lot of time. Furthermore, it's based upon a qualifying rate. If rates go up, you have two choices: live with a higher rate or pay more money to buy the rate down, and sometimes no matter how much money you pay, the old qualifying rate isn't available. You can't lock the loan with any lender that I am aware of until you have a specific piece of real estate, so your rate will float between pre-approval and a fully negotiated agreement to purchase. Nor is the fall-out rate significantly lower for pre-approval as opposed to pre-qualification.

Furthermore, people have an unfortunate habit of stretching to the very limit to buy more house than they should. If you attempt to build in a little margin on the pre-approval, you're going to qualify them for less money than someone else.

With sub-prime lenders, they don't have Fannie and Freddie's programs to fall back upon, and if Fannie and Freddie will approve you, you shouldn't be getting a sub-prime loan. So in most cases, they have to go through essentially a full underwrite of the file, and agree to pay a cancellation fee if you don't fund within X number of months. Remember also what I told you about having an underwriter do part of their work now, part later. Every time they pick up that file is a real possibility that they will find something wrong that is a good reason not to fund the loan, or imposing a condition that the borrower cannot meet. Result: Dead loan, and in this case where you thought you had it covered, it really ticks off the client, understandably so. I'm a correspondent broker; I can always submit elsewhere, but direct lenders are stuck, and the client doesn't exactly like paying that cancellation fee, either.

Many seller's agents are getting tired of getting metaphorically left at the altar because a preapproval and pre-qualification mean so little, and are starting to demand a lenders letters with special conditions accompany their offers. I do sympathize with their plight, but that doesn't mean that the solutions they are trying aren't illegal under RESPA or even merely Counter-productive. Loan standards are way too tight right now, unsustainably so in my opinion, but that doesn't change the fact that agents have to obey the law and really need to learn what loan standards are. I submit an offer on behalf of a client, the listing agents are required to submit it to the owners in any case. Most seller's agents wouldn't know what a qualified buyer was if it bit them. Income documentation? Credit Score? Debt to income ratio? They are happily clueless, and they don't know how to negotiate for an appropriate deposit, with appropriate controls on who gets it and when. Furthermore, they don't want to drive off potential buyers, although this is exactly what most of their tricks do. A good buyer's agent knows better in this current market, but on the other hand they don't want to waste time with an unqualified buyer in the first place, and many of them have no more clue than listing agents what a qualified buyer looks like.

I've told you before that a large number of listing agents are lazy clods whose skills are mostly limited to getting the seller's signature on the listing agreement. They don't want to do the work more than once, and will drive off willing buyers who actually are decently strong, hoping for someone like King Midas to roll in so they only have to do the work once. Never mind that if they do it right, most of the time the clearances and such only have to be done once. But in the current market, driving off any willing buyer with a decent chance of qualification is a good way to have the property sit for months. if not have the listing fail altogether. Every so often, when I'm calling around to check about showing properties, an agent will tell me that they have two offers. Sure you do, Mister. After it sits for six months, suddenly two separate groups decide it's worth buying when everything else on the market is languishing? If the two offers are real and not a figment of someone's imagination, neither one of them is good, or you would have accepted one and the property would be in escrow. If such offers are real, they're desperation checks from the sharks.

But even in a seller's market, requiring illegal pre-approvals is counterproductive, and may mean that you are disallowing the person who would give you or your client the best offer, and are very likely to be a well-qualified buyer. Yes, it may stop you from dealing with some of the "riff-raff", but the work it saves you could cost your client thousands of dollars, and you signed on to do that work. So if you're a potential seller, ask questions about this potential situation.

Caveat Emptor

Original here

The majority of the protections that folks have are aimed at helping non-professionals have a chance in the complex and nearly incomprehensible maze that is real estate. The legal presumption is basically that you are a babe in the woods, and can easily be led astray by the fast-talking real estate broker and the big bad mortgage lender. And actually, this isn't too far off. I have seen enough to know that however bad a choice Negative Amortization loans are for 99 percent of the population, an unscrupulous agent and/or an unscrupulous loan provider can talk 95 percent plus of the public into getting one of them simply by accentuating the low payment and not mentioning the fact that your balance increases, among other things that a fully informed consumer might regard as inimical about them. Particularly in combination, each of them hoping for a big commission (the agent from a house beyond what the client can really afford, the loan provider from the associated loan), they reinforce each other's credibility beyond all but the most skeptical of laypersons to withstand.

When you get into investment property, however, this isn't just your personal residence any more. This is no longer something every living person needs, a place to live.

You are now intending to make money.

You are now in business. You are a businessperson. It does happen, of course, but it is difficult to have much sympathy for a businessperson who doesn't know enough to conduct business of that nature. Some Poor Guy who wants to get in on the American Dream is entitled to significant legal protection against all the sharp and smooth operators out there. But once you get out of the realm of personal use and get into the realm of making money, now you are telling the world that you know something about this (or at least that you should know something).

You have promoted yourself into the realm of sophisticated user. The legal presumption is no longer that you are a babe in the woods, although you may be every bit as much of one as the person in the earlier example. But because you have promoted yourself to someone trying to make money, many of the protections and disclosure rules do not apply.

It's not like you went out and got a real estate license (unless you did) or passed the bar, which automatically gives you the right to a broker's license in most states. There are still significant protections even there. But if they wanted to push the point, your agent and loan provider could probably eliminate half the forms you're asked to sign. The three day right of rescission on refinances goes away because instead of being presumed to require consultation with professional experts, you are presumed to be a professional expert. Why are you in the business if you're not an expert?

Needless to say, this point has become quite the illuminator of experience for many folks who see others making money via real estate investments, and think, "That's easy! I can do it too!" All too often, people who may be used to the protection afforded the general public get burned when they are presumed to be experts by the law. Not that the government has done a particularly good job of protecting the general public, but the sharks in those waters have to make it look reasonable. The sharks who swim in the waters of investment property have no such limitation. They talked you into a bad loan? For your own personal use, you have the three day right of rescission and many banking laws designed to require that the bank show something that can be construed as a benefit to you, the borrower. Lower payment, lower interest rate, something that persuades a judge that a rational person might have done this. The person with an investment property doesn't have that protection. So what if it leads to bankruptcy? You did it. You must have had some reason.

I am not a lawyer, but I have seen enough happen to have some appreciation for the protections consumers do have. Real Estate investments, handled correctly, can make you a humongous amount of money. The point I'm trying to make is that they can also lose the unwary a lot of money. The amount of loose money available in real estate for the picking is the lure for a large number of professional sharks. A professional who wants to be one of those sharks has any number of ways to make something appear to be to your benefit when it really isn't.

Caveat Emptor

Original here

Just like "we'll beat any deal!" in any other competitive sales endeavor, this is a game. Actually, it's even more of a game for loans than it is anywhere else, used cars included. What they are hoping is that you'll go there last, and tell them what the best thing you've been quoted, and then they can sell you on their loan and most people will go with them, because "we're here, not there."

The first issue is that anyone can give a low quote. It's like the old joke, "Your lips are moving." Unless they guarantee that quote, that's all they're doing: flapping their gums. All a quote is is an estimate, and I've more than adequately covered the games it is legal to play with a Good Faith Estimate (or MLDS in California). By itself, A low quote means nothing. Loan officers can, legally, quote you one loan and deliver a completely different loan at a completely different rate with a completely different (higher, or course) closing cost. This has become a little more difficult with the new rules for the 2010 Good Faith Estimate, but there are still loopholes you can steer a supertanker through and the people who practice bait and switch are very good at hitting those loopholes.

The second issue is that even if they are quoting a loan they intend to deliver, unless they are quoting to the exact same standard, the quote game favors the lender who pretends third party costs don't exist, who pretends that you're not going to pay for add-ons that you are going to pay for at the end of the process, the lender who quotes based upon a loan that you do not qualify for. Are you going to pay these costs? Absolutely. Would you rather know about them at the beginning, so you can make an informed choice, or get blindsided at closing (assuming you even notice)?

The third issue is that they are looking for safe harbor, and they're hoping you give it to them. If someone brings them everyone else's quotes, they know what everyone else has talked up, how big the lies are that the prospect has been told, and they just have to tell one that's a little bit better. This is trivial when you've got all that information you've been freely given. This is called false competition. You've metaphorically given them a mark, and told them to "tell a more attractive story than this one." Easy enough in a storytelling context - tell the same story with a little more sex - and even easier with loans.

A good loan officer has no need to know what quote you've been given to tell you what the best loan they can deliver is. Tell them to quote you the best loan they can without this information. Ask them if they'll guarantee that quote, because a quote that isn't guaranteed - as in they pay any difference, not you - is worthless. That's how you can choose the best rate that can really be delivered, not by allowing someone the advantage of knowing how much they have to lie to get the business.

Caveat Emptor

Original article here

When Israel invaded southern Lebanon a few years ago, this picture from Reuters ran worldwide

The problem was that it was heavily photoshopped by a Palestinian stringer trying to make it appear like the Israelis were setting the entire city on fire indiscriminately. This was original photo:

It shows one fire and smoke from it drifting as it dissipated, presenting a far different picture of the situation. Instead of shelling everywhere, Israel was making precise strikes at locations where there actually were terrorists firing at their troops. Reuters got a lot of bad publicity out of this, and it cost them a fair amount of money because it wasn't what they were representing it to be. Reuters claims to be reporting the news as it really is without an agenda to grind, and items like this (of which there have been many) punch significant holes in their credibility with people who really pay attention to what's going on. (If you care, I got the photos from an article Little Green Footballs did on it)

So what's this got to do with real estate?

Unlike Reuters, listing agents don't have any sort of obligation to report the news as it is. Theoretically, agents and Realtors have a duty of fair and honest dealing with all parties, but this is more honored in the breach than in any other way, and they figure that if you can come out and see the actual property, doctored photos don't matter. It's their job to make the property look attractive. Hundreds of thousands of dollars are at stake. People lie, cheat, steal, commit felonies and risk jail to sell real estate for a higher price - on that scale, the minor dishonesty of doctoring photos just doesn't register. Result: Lots of photoshopped pictures.

I do not understand why people pay attention to online photos. Actually, I do. I'll admit to being a bit slow on the uptake - it must have taken two months back when I first started being an agent for me to stop paying attention to them. People think they're saving the time and gas of driving to ugly properties. The truth is that there really isn't a lot of actual correlation between ugly photos and bad properties, or good photos and worthwhile properties. I usually don't look at photos at all unless clients want to talk about them - I look at several other factors that tell me whether there's a possibility of finding a bargain here.

Most buyers, however, won't listen until they've had a certain amount of bitter experience with cold hard reality, which is that somewhere between the camera lens and the online listing pictures, there have usually been alterations made. I tell my clients point blank that I never look at photos, but when people are starting to look it seems they just can't help but shop for property by the photographs. After all, this apparently saves the effort of driving to the property! Even when I ask people point blank whether they've heard of photoshopping, they won't connect it to this situation - until they've dragged themselves to a couple dozen properties where the photos did their subjects entirely too much justice, if you know what I mean.

Instead of pictures, I tend to look at things like price (especially as compared to nearby properties), showing instructions, whether the listing acts like it really wants to sell or is doing the peasantry the immense favor of offering it for for their perusal, whether the listing agent works within a very few miles or is from further away and a few other data points that most clients never do figure out the importance of. Are they telling us it's a "fee simple" title while admitting there are HOA fees? If they're trying to play buyers for saps, chances are that property is not going to be a bargain or even so much as worth looking at. That listing agent is hoping to get a sucker to come in and via Dual Agency make an offer based on an undebunked rose-colored picture of the property. Not only is this another reason buyers want to find a good buyer's agent before they start looking at actual property, but it's a sign that there are likely to be other games going on once you make an offer as well.

Sometimes pictures not only haven't been altered, but don't do their subject properties sufficient justice. It is just as silly to toss a property from consideration for a bad photo as it is to include it because of a photoshopped one. The only way to see what it really looks like is to go look at it with your own eyeballs - there are no acceptable substitutes. I've seen just as many real pictures taken with bad cameras from poor vantage points as I have photoshopped ones. As I've discussed, just because flinty eyed buyer's specialists like myself have learned to ignore online photos, or at least take them with an appropriate amount of salt, doesn't mean everyone has. Good photos can bring people out to the property to look.

I do advise against photoshopping in significant ways. If the photo doesn't match the reality, most people will figure it out at some point. It's fine to choose a good angle that shows the property to advantage, but if you change an entire room full of clutter to what George Orwell would have called unpersons, people who actually come look at the property, which is what you want pictures to cause them to do, are going to be turned off. If you simply showed things as they are, someone might have thought it was good enough. It really is a matter of managing expectations. Lure people with a promise of something super, and the merely satisfactory doesn't cut it, but if they're only expecting the satisfactory, they might be happy with it.

I don't trust any real estate photos I can't vouch for personally, which means that I have learned not to pay a whole lot of attention to them. Similarly, doctoring photos doesn't really help. If potential buyers are obsessing about the cool pictures of the bathroom, the kitchen, or the backyard pool, they're more likely than not going to be disappointed when they actually go to the property, and disappointed people don't make good offers, which is what the sellers (and their agents!) really want.

Caveat Emptor

Original article here

I found you on the Web after doing some research for my parents regarding short sales and foreclosures. I appreciate your straight talk regarding the whole loan and real estate process which I know they find incredibly intimidating. Right now, they're sort of putting their head in the sand regarding their financial problems. I have been trying to help them stay afloat but it's becoming tight. My mom received a default letter from the lender last week since she was two months behind. She sent one payment last week and I wrote a check to her lender for this month's mortgage to bring her current. I told her I couldn't do this again. She wants to walk away from the house, I told her "bad idea." My parents can't make the payments anymore and I am wondering if they should sell or refi. Here are the stats:

They've got a 7% fixed for three years which they are about a year and a half into. The payment is plus or minus $3100. The mortgage is $468,000 with a $12,000 pre-payment penalty. I don't know how they got into this mess but seeing her struggle and cry each month is something I can't watch anymore. My father and she (they're in their early 60s) have 2 pensions and 2 Social Security payments they receive each month. They make enough to make their house payment but not enough to cover all the other bills. My mom's logic is - "If I didn't have the house payment I could pay my bills." I tell her that her home is more important, and looking at your articles it seems to me the consequence of not making your mortgage if far worse then not paying credit card and car loan debt. Their credit is good but they don't want the house because the mortgage is so high. They talk of renting but I am afraid if they walk away from the house-the consequences will be dire.

In your experience is their hope? I've offered to refinance with them, the three of us, but would that help? I already own a home with my husband - I imagine there are occupancy restrictions? I have good credit. If they sell, it would be short with the pre-payment penalty. Are their agents that would sell the house? I can't imagine they'd want to since there would be no money for a commission.

Here's the real crux of the matter: These folks owe $468,000 and have a payment of about $3115 at a seven percent interest rate. Those are cold hard facts. As of this writing, there just aren't any loans out there that will help them enough to be worth paying that pre-payment penalty. There are loans that would make it appear as if they can afford the loan for a while longer - with even more dire long term consequences. Someone could boost their interest rate by maybe a quarter of a percent in order to cut their payment slightly with an interest only payment - but then the hole would stay just as deep as it is, and all interest only payments eventually start to amortize. The longer it is before this happens, the worse the payment shock when it happens. Most interest only loans adjust upwards on the rate at the same time. Sudden forty percent increases are nothing out of the ordinary. Even a longer amortization isn't going to help very much - even assuming the interest rate doesn't change, by the time you add that prepayment penalty in there, you've got a payment of $2982, even assuming no loan costs or fees get rolled in.

The point I'm trying to make is that I can't see a way for them to really be able to afford this property. Matter of fact, I have a very hard time believing that the agent and loan officer who sold them on this situation didn't do something both illegal and unethical along the way, and your parents should consult a real estate attorney about that. Nor is refinancing with you on the loan likely to help. As of right now, despite the fact that rates are close to the lowest they've ever been, there just aren't any loans enough better than what they already have to be worth paying both the pre-payment penalty and the cost involved, especially given the circumstances that they have major hits to their credit situation with the late payments. Not to mention the fact that the appraisal is going to be problematic, even more so now than when this was originally written. Sure, there are still appraisers willing to say that property is worth $500,000 when it isn't, but they're a lot fewer, and the one positive thing the new appraisal standards now implemented have is making it very difficult to direct loans to compliant appraisers (the greatest negative from consumer point of view is I can't direct them away from utter incompetents, either). And if you can't afford to make their payment as well as your own, putting yourself on their mortgage is a good way to sink your credit as well as theirs. Then you have problems down the line with your own property.

I sympathize with these folks and you, but the only way they're likely to get rid of unaffordable mortgage payments is to get rid of the property. Unless, of course, they've got enough cash sitting around somewhere to pay their mortgage down enough to make it affordable. However, if they could do that, why didn't they put the money in as a down payment? I'd need more information to be certain, but I strongly suspect that it's time to own up to the truth, which is that they have purchased too much house (or taken too much cash out) and they cannot afford it.

With that said, "walking away" is just about the worst thing you can do in most situations. Now the lender has to go through the whole dreary process of foreclosure, with is going to effectively kill their credit for seven to ten years, and might cause the interest rate on any other debt they have to rise as well as making it more difficult to rent. They need a lawyer to advise them on their situation. Anyone in this situation needs a lawyer, and I'm not a lawyer. With that said, the following options are usually better:

You can talk to the lender about the situation. Lenders don't want to foreclose. They don't make money when they foreclose. In fact, they lose it by the railroad carload. If it'll keep them out of foreclosure, chances are good that the lender will agree to a temporary loan modification of the note which will give your parents time to sell the property. They may or may not agree to accept a short payoff as well. It'll depend upon the listing agent and the lawyer. And yes, banks will usually agree to allow agent commissions in short payoff situations - it gets the property sold, which means they lose less money than if it goes all the way through foreclosure and they have to hire an agent anyway.

Another option that can be worth exploring is the Deed in Lieu of Foreclosure. This is where you sign the property over to them in satisfaction of the debt. It has the advantage that it stops future hits to credit. Although Deed in Lieu is itself one of the deadly sins according to mortgage providers, it's not as bad as a Trustee's Sale in most cases, and you don't have all the individual derogatory reports of the late (non-existent!) payments between now and whenever the Trustee's Sale happens.

One thing to warn of is that all of this, except perhaps for the Trustee's Sale, is the cause for a 1099 to be issued for income through debt forgiveness. Your parents will probably owe taxes on this money, so I strongly advise them to consult a tax professional as well (As best I recall, it's ordinary income, the same as if they had earned it working). In some cases, there may be a deficiency judgment as well, while in others there may not be. Nonetheless, this money is likely to be for a much smaller amount than $468,000, so they can probably dig themselves out, given time, and without living completely poverty stricken and without completely torpedoing whatever financial future they may have.

I know you wrote to me as a loan officer, but with the rates and loans available right now - especially considering the late payments on the mortgage - there's nothing the loan officer can do that actually helps, although there are a lot of loan officers out there who would say they'd help. If they were sitting in my office, it would be time to put on my Realtor hat and talk about selling that property. I wouldn't be happy about it, but the universe doesn't particularly care about making me happy, and it's the best way I see out of a bad situation.

Caveat Emptor

Original article here

If you don't know, chances are your agent doesn't either. Even if you know, chances are that your agent is as clueless as a newborn about loans.

I and my clients get asked for all kinds of nonsense (to put it very kindly) by listing agents. Every single one of them has some kind of idea what makes a good lender letter, and none of them are correct. As of this moment, not one single agent (other than me) has asked for anything in the way of a lender letter that means a damned thing.

The first thing to get into your head is that there is no such thing as a letter that guarantees funding on a loan pre-purchase contract. No loan officer can write a letter that guarantees a loan will fund. The only guarantee of funding is a loan commitment written by an underwriter, which may or may not have conditions a particular borrower can meet. Commitments are always written to a specific property, and require (among many other things) either already holding title to the property or a fully negotiated purchase contract to buy a specific property. You tell me how any buyer is going to get that before the purchase contract is negotiated. Go on, we're waiting.

The fact is that loan officers cannot be held responsible for preapproval and prequalification letters. Unforseeable things really do pop up, and loan standards do change. I got lucky and didn't lose anyone when Freddie and Fannie changed their standards on investment property in late January 2009 - but that was sheer luck. Skill had nothing to do with it. I can name loan officers that lost sixty percent of their loans in progress through no fault of their own. One day those were perfectly good loans that everyone wanted - the next day nobody could fund them.

Sometimes, a full underwrite of the file finds that the borrower applicant has somehow misrepresented their situation. More often, there was something lurking in the background that the loan officer didn't know about and the borrower didn't realize was important. Upshot: there is no such thing as an infallible lender letter. Nor can you successfully sue the loan officer who wrote the letter. Since you can't sue the loan officer, many loan officers get very lazy about writing their lender letters. There is no magic bullet for determining who is and who isn't doing full due diligence. The loan officer writing a preapproval or prequalification has got to show his work, and you (or someone you trust) has got to have enough understanding of loans to follow that work and enough understanding of current loan standards to know whether such a loan can be done. There are no shortcuts to this that work, for all of the illegal, unethical, and just plain wishful thinking for shortcuts that get tried.

Let's list a couple of the wrong methods. The first and most common is dictating that you have to have a lender letter from a particular lender or loan officer. This is illegal under RESPA. I don't care how many years you've been doing it, or how many times you've done it, it's still illegal. it doesn't matter if the client is dictating the choice of lender, it is still illegal under RESPA. I don't care who the specific lender or loan officer is, it is still illegal under RESPA. Everybody involved is breaking the law - whomever designates the specific provider, you for going along with it, and any lender involved if they are aware of it. I offer the client the option of whether they want to go get the lender letter from the specified source anyway as a way of not making waves in the transaction, but this is common enough that I've gone to the trouble of making up a template for letters to send to Department of Housing and Urban Development later. The folks at HUD are well aware that agents and Realtors do this for kickback and mutual referral purposes, and they frown on it severely. You can win the argument for the transaction if you're silly enough to insist, but six months down the line HUD is going to be knocking at your doorstep for a RESPA violation, and it's probably not a good idea to be telling them how long you've been doing it wrong and how. An agent might keep their license over one although they're going to be facing hefty fines, and I'm sure that as a client you'd rush right out and sign up with an agent who has broken the law, right? Better for all concerned not to do it at all. If you're an agent who does this now, stop immediately. All it takes is one complaint, and HUD will often subpoena back records of all of your former listings. Ignorance is no excuse.

Of late, the "must have letter from direct lender" has gotten more popular, although this is another way of simply ruining a perfectly good piece of paper. No big loss, but getting your preapproval doesn't mean anything more from a direct lender than it does from a broker. Less, actually, as most loan officers working for direct lenders are a lot less experienced in the ways that loans get rejected. Nor are they any better at taking into account the effects of a specific transaction upon likelihood to qualify. They aren't any better at knowledge of lending standards, either. I've seen some pretty stupid letters from direct lenders that brokers with a broader knowledge of industry standards would laugh at. This requirement is useless if not counterproductive, and is usually practiced by agents looking for a cheap way to cover their backside in case the transaction falls apart, in which case they will show the client "See, they had a letter from National Megabank! If we can't trust them, who can we trust?" This entire line of thinking is what logicians call a Red Herring - an irrelevant distraction to the important question, and even counterproductive in this particular case, and if you have a competent real estate agent, they should know enough to know better.

Enough of what a good lender letter isn't. Let's talk about what it is.

First of all, a lender's letter must be specific to a given purchase offer. It has to be written in accordance with the purchase offer that is being made, and therefore written within no more than one business day prior to the tender of the offer. "Why" You ask? Because every single transaction is different. Rates change every day - or more specifically, the tradeoff between rate and cost changes every day. The purchase price being offered on this transaction is not the same as the purchase price they may have offered last time, and the down payment may not be the same, meaning the loan amount and the projected payment are not the same, either. The borrower may no longer have sufficient cash to consummate the transaction with all of these changes. All of this is basic, "hit the ball with the bat" level stuff. If any of it changes, so can the answer to the question of whether a loan is possible. There are people wandering around with lenders letters that are months old; with the standards changes and rate changes the only things those are useful for is tinder for a fire or a good laugh.

Second, and even more importantly, the loan officer must show their work. What's the borrower's known and documented income? What are their cash reserves available for this loan? You want a lender's letter that testifies to the exact amount of cash reserves the borrower has shown, details where any additional funding is coming from, and how long of a period how much income is averaged over (at least 17 months), to give a figure for monthly income. It should also specify the actual FICO score reported by each major agency. You can't hold the loan officer who wrote the letter responsible if the loan fails to fund, but you can hold them responsible for specific statements about assets and income and credit score. Not only that, having this information gives you the opportunity to check their work! Indeed, the only advantage of not showing such information is that it gives weak or unqualified buyer/borrowers a chance to pull the wool over someone's eyes, and since those buyers are risking thousands of dollars that is clearly not to their benefit either. These numbers are what is really important, not the identity of someone who writes a "black box" letter - "I don't know how they're qualified, but this says they are!" Wouldn't you really rather be able to check and know?

A good lender's letter will lead you through the calculations of loan to value ratio and the specific rate, point, and closing costs of the loan being contemplated, as well as required reserves for prepaid interest and impound account and compare it to known assets to determine that the buyer really does have enough cash to close the transaction. If they don't and you accept their offer, you are praying for a miracle because that is what it will take to make this loan close.

A good lender's letter will also go through the computations for debt to income ratio based upon the loan quoted. They have determined income averaged over a period which leads to average monthly income. You should be able to determine within a very close range exactly what the other costs of owning the property are going to be. The lender's letter should state a number for monthly debt service for existing obligations - credit cards, student loans, car payments, etcetera. This number is available right on the credit report, and if the credit report is not used as the source of this number, there should be a good explanation as to why the number on the credit report was not used. You don't need to know the social security number and all of the account numbers, or even all of the individual payments. What you do need to know - what you are entitled to know - is whether they qualify for the loan, which means the total of existing monthly debt service is necessary. It is also sufficient unto the task, which means you have no justification for asking for more information. If the total cost of owning the property and existing debt service fit within appropriate debt to income ratio guidelines, you have a qualified buyer. If not, you are wasting your time accepting their offer because they are not going to qualify. Stated income loans are all but legally dead, and I don't know of a single source that actually funds them right now - you can figure at least a two percent differential right now at the same cost as well as a rock bottom equity requirement of twenty percent - more likely twenty-five to thirty. Your buyer is going to have to document income to the lender in order to qualify for that loan, so they can bloody well tell the seller how much income they can document. That seller is making a decision of whether to grant credit, and if the buyers cannot qualify for that loan probably going to cost those sellers thousands of dollars. Therefore, the seller is completely justified in asking for this information - they are perfectly justified in requiring it.

The contemplated loan should have been priced within one business day of submitting that offer to purchase, and it needs to include both a rate and a total cost of that loan that you can check. Yes, the available tradeoffs between rate and cost vary every day, but the longer you go between pricing and submission, the more opportunity there is for change. I'm a lot more comfortable with lender's letters where the quoted loans priced with low to no points (if not a zero cost loan). Why? Simply because there is wiggle room on the quote. If rates go up a quarter of a point for the same rate tomorrow, or a week from now, the buyer can quite likely still make it work - particularly if they're not pledged right up to the limit of their available assets. Similarly, I like to see a lender letter that's built some wiggle room into the cash to close. It's the difference between a very qualified buyer who can still make the transaction happen if rates go up a bit or costs are slightly higher, and a marginally qualified buyer who is going to crash and burn if any little obstacle comes up (If the buyer was lowballed on their mortgage quote to use one all but universal example), or at least need the seller to bail them out with further concessions. If the loan officer who wrote the lender letter shows the work, it helps you know the difference between these two very different buyers, as well as between them and the completely unqualified bozo. It can be worth the risk of dealing with the marginally qualified buyer if you are getting a particularly good price and have the money to lose if the transaction falls apart, but it shouldn't be any surprise that the solidly qualified buyer is in a stronger bargaining position and likely to get a better price, thereby giving that solidly qualified buyer a reason to want to show all of this, demonstrating what a strong qualified buyer they are and what a strong offer they are making. Depending upon the seller's financial position, in San Diego this can be worth ten thousand dollars or more on the sales price of an average home!

I have shown that both the buyer and the seller are better off with a solid lender's letter that takes the cash and the income necessary to fund that loan and compares them in concrete numerical terms with the buyer's financial resources and liabilities. These aren't the only questions possible, and therefore the need for loan officer contact information. I call the loan officer on every single lender letter I get and ask questions - does this buyer own investment property being particularly important right now. If they're claiming something I don't believe can be done, I'm going to ask what lender is willing to fund that loan and then check if such a program exists to actually do so - and either I learn something new about the current loan market or I prevent my seller client from accepting an offer that cannot be consummated.

The important thing is concrete information being attested to, that allows any other person who knows enough about loans to retrace the work and verify whether a loan can be done under current conditions. If the agent can do it, great - agents should know enough about loans to do so! Even if they don't, any loan officer should be able to do the work. The identity of who wrote the letter is trivial - a distraction dreamed up by agents who are incompetent to judge, looking for kickbacks, or both. I prefer a letter with the required information from any loan officer that I don't know to be a complete and utter bozo, and even then, I have the information they are using to make that determination, which is one hell of a lot stronger than reputation or lack thereof. The critical information is specific concrete numbers about the buyer's situation that enable anyone who knows loans to make an informed decision as to whether this loan is doable, not whose signature is on it, or which letterhead it's printed on. When I make a recommendation to accept an offer or even just pass it along without a recommendation against, I am telling my seller that I have a reasonable basis to believe that this potential buyer has the wherewithal to make it happen. If I'm not doing the necessary due diligence before I do that, I have failed in my fiduciary duty - and that means knowing the difference between what is important and what is not. Having all the numbers for me or another loan officer to trace and check the work is important. The identity of who wrote the letter is not.

Caveat Emptor

P.S. If you're looking for an example of a good lender letter, you could do worse than The Qualification Letter I Use

Original article here

On a very regular basis, pretty much every buyer's agent who's worth anything gets clients who have difficulty making a decision. Not too long ago, I found a solid property with great potential that nonetheless needed about $20,000 of cosmetic work. In short, right now it was ugly and unappealing, but it had a WOW! view and it was priced $100,000 below a model match a few doors down. They looked at the property five times over the course of a month, and just as I finally had them willing to make an offer, somebody else put in an offer that was accepted.

Immediately, the property went from something they were reluctantly willing to consider living in to something they had to have, but at that point it was too late. The owners were already under contract. Unless the transaction fell apart - and it didn't - there was nothing anyone could do. Real estate needs one willing seller and one willing buyer. If someone else gets there first, you don't get the property. The seller's side has its own version - whomever competes the best for a given buyer wins. There are no prizes for second place.

There is no such thing as a perfect property. Unless you have an unlimited budget - and no one has an unlimited budget - there are always trade-offs. Trade-offs in the form of location, or amenities, or most obviously, price. You've probably heard trite little sayings like "paralysis through analysis" and the pithy "you snooze, you lose." They're trite because they're true. You must be willing to act when things aren't perfect in order to get any benefit. If you aren't willing to act in a timely fashion, you get nothing. The better the situation, the more risk there is of someone jumping in before you. Yes, sometimes this means you're at risk of being conned. There is no way to completely eliminate that risk. If you're only willing to jump into the perfect situation when all risk has been eliminated, you are wasting your time. Somebody else is going to jump first. The only way you're even going to buy - or sell - anything in those circumstances is if you're the victim of a scam. Reward is necessarily coupled with willingness to work and to accept risk. You can certainly work to reduce the risk, but there will always be an element of risk present. If you're not willing to accept any risk, welcome to the life of a spectator.

This isn't just my clients. Seems like every time I've taken something "Pending", I or whomever the listing agent is gets calls from people who are suddenly interested. I finished a transaction not too long ago where one suddenly interested buyer called the listing agent literally every day while it was in escrow. He was wasting his time. Once it's in escrow, you're too late. Unless it falls out, a thing that's not under your control, that property is committed to someone else. But it seems like the mere fact that someone wants it brings prospective buyers out of the woodwork, now that they can't have it. Kind of like sibling rivalry, only even more pointless because if it does fall out of escrow and become available again, you are sabotaging your negotiating position.

A few years ago now, I dealt with several families over the a few months who wanted to buy, but were convinced the market was heading down further. Fear and Greed was keeping them on the sidelines while the ratio of sellers to buyers has dropped from 42 to under 12. This ratio is the best measure of supply to demand ratio there is, and the most important indicator of the direction of the market. They are confusing past performance with market prognosis. Even during the most gonzo seller's market we've ever had, this ratio was about 4:1, and anything under about 12 or 15 to 1 indicates a seller's market. Furthermore, people who want to buy is building linearly with time, while the ranks of people who need to sell has already seen the strongest influx it's going to have, and the lenders are finally willing to act to prevent losing more money than they have to. On the buyers' side, everybody is crowding around, trying to get someone else to be the test penguin (1). On the seller's side, there is only so much desperation out there, and it appears that we've already burned through the vast majority, at least here in San Diego. Eventually, the buyers who are trying to get someone else to be the test penguin are going to realize that the people buying now are not getting eaten - in fact, just about the furthest thing from it - and they will jump in, en masse. (At this update, the biggest thing holding people out of the market is artificially restricted loan eligibility, due to Congress passing bad lending laws in 2008-10)

All real estate is only "good while supplies last." For sellers, this includes supplies of willing buyers. Since there is rarely more than one of property in a group, bargains only last until one person pulls the trigger. The easier the bargain to spot, the shorter the period to act. Even the hardest bargains to spot do not have an indefinite shelf life. Real estate is not like war, where if you don't attack the enemy, the enemy will attack you. So a bad plan now doesn't trump a perfect plan two weeks from now. But a good plan, acted upon in a timely fashion beats a perfect plan that waits just a little too long.

Caveat Emptor

Original article here

(1) Penguins don't jump into the water immediately. Instead, they crowd around the entrance to the water, and avoid being the first in, due to the possible presence of predators. However, eventually one penguin gets pushed in by the others. If he doesn't get eaten, the other penguins quickly follow. It is to be noted that those positioned to respond quickly, and hence most likely to be shoved in as "test penguins" also have the best shot at whatever food may be present. And the predators are always drawn by a hot market which enhances the likelihoods of making large amounts of money.

It seems every week I get asked about some new or revived trick that loan providers are pulling. The one thing they all have in common is that they are methods to avoid competing on price. What the basic terms are and how much it will cost you.

The first big weapon in the arsenal of most bad loan providers is the tendency to most folks have to shop loans based upon payment. Payment has no intrinsic relationship to interest rate, which is what the money is really costing you. But if you do tell people "$510,000 loan for $1498 per month" most people assume that payment covers the loan charges even though it doesn't. People who can afford $1500 per month payments go buy $510,000 properties based upon these payments, and only after they've signed the papers do they figure out that the catch is their balance owed is increasing by $2500 per month! negative amortization loans are the obvious problem here, but less ethical loan providers also use this fact to push interest only loans and temporary buydowns and loans that cost so much in discount points that it would take fifteen years to recover the cost through lower payments - and that is based upon straight line computation, not taking into account the time value of money.

The second tool bad loan providers use is the desire of most folks to get something for nothing, or at least appear to get something for nothing. This covers not only Mortgage Accelerators, but also Prepayment penalties and biweekly payment schemes and even debt consolidation. They show you an actual method whereby you might hypothetically have your mortgage or debts paid off in a fraction of the time and without apparent discomfort or compromising your lifestyle if you fit their profile and stick with their program. The slight of hand here is two-fold. First, these are distractions, and if you examined competitive products, you can tack these allegedly neat features onto just about any loan or do it yourself, while they're acting like their programs are somehow unique when they're not. Second, these programs see the lion's share of the benefits at least five years out - when for all practical purposes, nobody sticks with the program that long. I lumped pre-payment penalties in here, because they are an often hidden charge that brings the lender more money down the line when you refinance before it expires, or immediately when they sell your loan on the secondary market, but they don't show up anywhere on the loan paperwork as a figure in dollars you are being charged. at the time you agree to the loan. Nonetheless, most folks who accept pre-payment penalties end up paying them, and they are real dollars you end up paying.

The third tool in their arsenal is: If the cost of something isn't explicitly disclosed, most people will assume it's zero. If there's not an actual dollar figure associated with something, many people think it's somehow free. Many loan providers feel no need to disclose escrow charges, or lenders title insurance, among others. They'll mark it "PFC" as if they don't know how much it's going to be. The net result, as I've said before, is that you end up thinking that "$2495 plus third party charges and two of these points things" is cheaper than the provider who tells you they're going to deliver the exact same loan for $6000 all told (on a $300,000, loan, you're looking at over $10,000 worth of charges from the provider who didn't quote a total figure in dollars. People gripe about "junk fees" when the costs are real, but they've been deliberately lowballed. There never was a chance that they would end up not paying those fees - and they're high dollar value fees - but by not associating a dollar figure with these fees, less than ethical providers are causing people to think they're either free or something comparatively small, like the $2 per tire waste disposal fee.

All of these tricks feed upon ignorance. Ignorance of what they are really doing, ignorance of how financial markets work. The fact of the matter is that nobody is going to do a loan for free. There's a hard line where it's not worth my while to do a loan - I'd rather spend the time doing something else. Same thing with every other provider in the known universe. For some providers it's more than others, while for other providers, it's less than average. Everyone wants to make more money for the same amount of work. Competing on price is not a way to get a high number of dollars per loan - so many loan providers will do everything in their power to avoid competing on price. But there really isn't any other reason to choose a loan, other than that it's offering the same terms at a better price. A loan is a loan is a loan, as long as it's on the same terms at the same price. It's not like one loan is a Jaguar while another is a Prius and a third is a Mustang, or one is a Craftsman while another is a Colonial and a third is a Cape Cod. The only intelligent reason to choose a more expensive loan is if there is some facet of your financial situation that means you don't qualify for the less expensive loan. Unless lenders pull a major policy change in the middle of your loan process (as happened at the end of January 2009 - luckily I didn't have anyone in process who was suddenly unable to qualify), your loan officer should know what those are, and quote you an appropriate loan that you can qualify for in the first place. Many don't, but they should.

Because they don't want to compete on price, loan providers have a long list of gimmicks and irrelevancies they use to sell loans. Whenever the consumers figure out the problems associated with one, they come up with another or start pushing something else that consumers in general have forgotten about. Comparatively few people will do the research necessary to test the real value of these gotcha loans. They seem to be afraid that if they investigate, the value will somehow disappear. In reality, the vast majority of these come-ons (especially the heavily advertised ones) have no value in the first place. The ones that really do have a value to the consumer will survive scrutiny.

There is no magic wand to make loans more affordable. Not in reality. There is a reason why the thirty year fixed rate loan is the standard for consumers and lenders, and why moving away from it carries costs or risks or both. There are many valid reasons to choose another loan such as a 5/1 hybrid ARM or a fifteen year loan, but they are based upon accepting risks or costs or reduced benefits in order to get a lower cost of money.

Loan providers that don't compete based upon price compete based upon hiding the gotcha!, or pretending it's not important. If you understand the gotcha! associated with a particular loan, and are fine with it, that's great. If you don't understand the gotcha! chances are that it's going to bite hard.

Caveat Emptor

Original article here

My husband and I are currently in escrow with the sale of our home in California. Our buyers have been " difficult" to say the least. The buyers appraisal of our property came in $6,000 below the selling price which won't make a difference to their lender because the buyers are putting 50% down. Of course, they started threatening us saying, "you need to issue us a $6,000 credit since the appraisal came back $6,000 below our agreed upon price." We paid for a second appraisal through a company that was lender approved. The second appraisal came back $3,000 above the purchase price. We have 2 questions:

Is their lender required to accept or at least consider this second appraisal or can they simply disregard it?

If the buyers try to use the appraisal clause against us to get out of the deal, can we keep their earnest money since we have a documented appraisal showing a value of $3,000 above the agreed upon price on the contract?

Thank you for your insight and expertise.

There are three things to consider here: The contract, potential scams, and what's really important.

The standard purchase contract has two clauses directly relating to this question. The first is the loan contingency, the second is the appraisal contingency. The first isn't really a factor in your case, but it often is, as a failure to appraise for the purchase price can torpedo the loan if the down payment isn't very much. If these buyers needed anything close to the maximum loan to value ratio, that would be a dead contract as it's written because the lender isn't going to fund that loan. The second, more relevant clause in your case is the appraisal contingency. It states that the transaction, as negotiated, is contingent upon the property appraising for the official purchase price or higher. There's an argument to be made that your appraisal is enough to cancel that contingency, but in practice, appraisals can be had for inflated amounts quite easily. If the seller being able to obtain an appraisal for the sale price was the relevant condition, I'm not sure there would ever be a property that would fail to appraise for the purchase price or more. Spend $400 for your own appraisal and keep a $5000 deposit. Nice work if you can get it. Acting as a buyer's agent, I would never accept a seller's appraisal under any circumstances. This may be news to all of those who put "Appraised for $X!" in the listing, but there are too many ways to get an inflated appraisal. Point of fact, it's usually someone trying to justify a higher asking price than the market will support. It's never a reason for me to consider a property, and can be a reason why I shouldn't.

The real bottom line in the current market is now Home Valuation Code of Conduct - the buyer's lender orders the appraisal, and that's the value the loan is stuck with. Doesn't matter if it comes in $100,000 too low because the appraiser chose absolute B.S. comps - that's the appraisal you're both stuck with, at least with that lender.

To be fair, buyers can get low appraisals too, which leads us into the second subject: potential scams. You're in California. There just aren't many properties I'm aware of in California where $9000 difference is a major percentage of the selling price. If you were somewhere where the average house sells for $40,000, this would be cause for concern. Flipping for an extra 22 percent profit! But when the average property sells for $400,000, it's just too small an amount over too much of a major stumbling block to be worth scamming someone over. Not that it's an amount to be sneezed at, or impossible, but I just can't see someone running a scam for only 2.25% of the sales price. If this was a scam, I'd expect $30,000 or more in difference. This is too small a difference to be a likely scam in the real world.

Speaking of the real world, what's really important is your market. How many sellers per buyer, how long properties like yours are sitting in your area, what they're selling for when they do sell. Note that I didn't say what the asking price is. Any twit can put an asking price that's 20% too high on a property, and quite a few do - it's a great way to get listings from owners who don't know any better. It's called "buying a listing." The important data have to do with actual sales. Not pending sales, not the pipe dreams of "For Sale By Owner" properties, not what the model match next door is asking, but what they are actually selling for. Coin of the realm passing out of the buyer's hands. A willing buyer is a necessary component of every sale, just as a willing seller is. If you just want to list your property, you don't care about a willing buyer. If you actually want to sell, you absolutely have to have one.

The good news is that you appear to have one. The bad news is that they don't want to pay the amount on the contract any longer. Well, buyer's remorse strikes a lot of folks, but the stronger their buyer's agent, the more they're going to get that out of their system before they make an offer. On the flip side of that for sellers is that the stronger the buyer's agent, the more focused they are on value.

Against this situation, you've got to ask how likely it is you're going to find a better buyer soon enough such that you net more money off the sale. If the property is vacant and your carrying costs are $3500 per month, this buyer now will still net you more money than a different buyer who pays the amount on your appraisal three months from now. I only know the San Diego market, and if you're here, why am I not involved in the transaction? But no matter which way you decide, you're taking a risk. Some people will just take the money and run because they're unlikely to have their face rubbed in the fact that they were wrong - the property is sold and future offers are a waste of everyone's time - but that's a putrid way to make a multi-thousand dollar decision. Actually, it's not just a multi-thousand dollar decision. It's potentially the full value of the property and your credit rating as well for years if you default. If you've had a Notice of Default recorded on the property or something worse, they're being a lot nicer than some folks to only mess with you for $9000.

My point is this: There are potential upsides and downsides to every possible decision you can make in this situation. Can I tell you which way to jump? Not without more information. Will I tell you which way to jump? I don't risk my license and my livelihood for free. It's your agent's job to do that. If you're representing yourself, you've just run smack into one of the lesser reasons not to.

Matter of fact, whomever your agent is, the information you've provided draws a pathetic picture of their competence. There could be exculpatory information out there, but this is all basic, "hit the ball with the bat" level stuff that anyone who's been in the business three weeks should be able to deal with, and if they're that new, their supervising broker should have explained it to them, if their supervising broker had a clue themselves. If this transaction falls apart, go find an agent who knows what they're doing. Nor am I impressed with the buyer's agent from the information provided. When something goes wrong, telling the other side "you have to" is a good way to kill a transaction that can usually be saved. You don't have to do anything. You could tell them to take a long walk off a short pier. How smart it is depends upon factors I can't see from here. But this is why negotiation is the biggest factor in the game of real estate. Some folks won't, some folks can't, some folks just don't know how. They're going to suffer unless their agent does. Because all the preparation and work I do is wasted if I don't negotiate effectively. Any twit can say, "No," and quite a few do. They're hosing themselves if it's the wrong answer. The opposing fact is that the transaction doesn't start until you have an agreement, and if the other side believes they've been hosed, they can usually get out of it if they really want to.

They can get out of this one if they want to, and while you can be stubborn about the deposit, you'll probably lose in court. They have an appraisal contingency in the contract, and the appraisal came in lower than the purchase price, giving them the option of bailing out. Personally, I find an appraisal contingency on top of a loan contingency to be the sign of a weak offer from a buyer who is going to bail out at the first issue with the property - and no matter how much you love your property, there is no such thing as a perfect property. When I'm representing buyers, my job is to work on their behalf, but I am very willing to counsel them to waive either the loan contingency or the appraisal contingency, because as long as we have one of the two in effect, we can live with it, and it's a sign to better listing agents of a stronger offer that's more likely to close from a committed buyer.

Caveat Emptor

Original article here

Somebody asked, "What are my legal options when there's a change on a good faith estimate."

Short answer: Sign the documents or don't. Same thing with a Mortgage Loan Disclosure Statement here in California. Neither one means anything binding; that's why they call the one an estimate. Nonetheless, because there is a perception that they mean something, that people think the lenders are trying to disclose everything fully. The fact is that some are while others aren't, and there is no correlation with size of the lender, how well known they are, or even what the loan officer at the next desk over is doing.

The fact is that if the loan officer cannot persuade you to sign up with them, there is a guarantee that neither they nor their company will make anything. This creates an incentive to tell you whatever it takes to get you to sign up. Once signed up, most folks consider themselves committed or bound to that lender, and stop looking around.

But the only documents that mean anything, legally, all come at the end of the loan process. Note, Trust Deed, HUD-1. So you can see the motivation exists to pull a bait and switch, or more often just not to tell the whole truth. Nor will they point out the differences at closing from what you signed up for. That would get you upset to no good purpose, from their point of view. The fact is that a majority of borrowers don't take the time to spot the difference, and of those who do, some just don't understand how to spot the difference. Of those who do take the time, and do spot the difference, most will cave in and sign just to be done with the process, and of course there are those who are trying to purchase who won't get the property and will lose the deposit if they don't sign.

The fact is that these forms are estimates. They may or may not be accurate estimates. In some cases, the loan provider tells you about every single dollar you're going to need up front, in others they might as well be telling you the loan is going to be done for free at a rate two percent below any real loan out there. If they can't get you to sign up, they don't make anything, so the incentives are for them to over-promise and under-deliver. In other words, tell you about something better than what you'll end up with. The loan officers know what it's going to take to get the loan done - or they should know, anyway. But they often tell you a fairy tale that might as well begin "Once upon a time..." to make it seem like their loan is better than the competition, because if they can't get you to sign up, they don't make anything.

This has improved somewhat with the new 2010 Good Faith Estimate, but there are still enough loopholes that a loan provider who is so minded can drive a supertanker through them.

Now, the fact is that the vast majority of people out there go out shopping for loans in the wrong fashion. They find someone they think they can trust, because they are family, because they are the scoutmaster, or because they go to church with them. Exactly what type of loan will they deliver, and at what rate? With what costs? It is always a trade-off between rate and cost on any given loan type.

Even less likely to get a good rate at a decent cost are the people who do shop around, but won't give loan officers a chance to figure out what's really the best loan for them. The first group of people might stumble onto someone trustworthy who gives them a good loan at a reasonable rate for a reasonable cost; these people are going to fall for the biggest lie, because a loan officer can always tell you about a better loan than really exists and they are motivated to get you to sign up. They call around asking about the lowest rate or the lowest payment, and don't want to hear anything else out of the loan officer. They are going to get ripped off by whomever tells the most attractive lie.

The fact is that it's going to take a good, in depth conversation about your situation for a loan officer to figure out the best loan for you, and you want to have that conversation with at least three or four loan officers. Why? Because the first one could have told you exactly what they thought you wanted to hear. Ditto the second. Keep going until you hear a couple of different suggestions. Furthermore, once they've given you their suggestions, ask about the other suggestions you heard in the past. Don't shop by lowest payment quote; that's a good way to get stuck with an abomination like the so-called Option ARM or another loan type that you don't want. Don't shop by interest rate alone, because you'll get stuck with a loan that has six points and you'll never save enough money on the payments to recover those sunk costs. Shop by the trade-off between rate and cost, because there always is one.

At the end of the process, the lender has all the power. You need or want this loan, and they're the ones with it ready to go. In the case of a purchase, you've got a deposit you're going to lose and a home you wanted that you won't get if you don't sign the loan documents. If you sign the documents, you are stuck with the loan, that quite likely isn't on the terms you were originally told about. I pointedly did not say "promised" because the earlier forms are not promises unless somehow guaranteed, and with changes in the market it has become almost impossible to guarantee a quote.

One of the most important articles I have written is Questions You Should Ask Prospective Loan Providers, and the most important question in that list is "If I say I want this right now, will you personally guarantee this rate with those closing costs, and will you cover the difference (if any) between the quote and the actual final cost?" You won't get a flat "Yes." If you do get a flat "yes", they're making a promise on something that is not under their control, and I wouldn't trust it as far as I can throw an aircraft carrier. What you're hoping for is something like "Subject to full underwriting approval, yes we will guarantee this quote as to closing costs. Tradeoff between rate and the cost to get a rate changes every day, and we will discuss when to lock and the tradeoffs that are currently available once we have a loan commitment." This is a simple sentence that makes a specific guarantee subject to a reasonable condition, as loan officers never know if a prospective borrower is intentionally hiding or shading something at loan sign up. If you get a response full of nonsense about how long they have been in business, how they honor their commitments, or any such equivalent claptrap, then they are trying to buffalo you. None of the forms you get when you initially inquire about the loan is a loan commitment in any way, shape or form. I'd rather have a higher quote that was guaranteed than a lower one that wasn't, and I strongly suggest you adopt that attitude as well. For an illustration as to why: If the quote is guaranteed, there's no incentive to stick you with a rate an eighth of a percent higher so they can make a little more money - they're going to have to make it good. There's no incentive to pad the closing costs with junk, because they've got to turn right around and give it back to you. If I offered you a choice between two envelopes, one transparent where you can see the $100 bill (guaranteed), and the other one opaque where I told you there might be any amount from zero up to $110 in it (not guaranteed), which envelope would you choose? The same thing applies to loans. If they can't get you to sign up, they are guaranteed to make nothing, and this creates incentives to tell you about a better loan than they can really deliver.

So (if you can't find someone who guarantees their quotes) how do you force the loan provider to deliver the loan they told you about in the first place? You can't. I used to advise people to get a back-up loan, but once again changes in the loan industry have sabotaged this. It is no longer economically feasible for loan officers to do back up loans. On refinances, you may need to walk away and start over after two or three months of working on your loan. Unfortunately, on purchases you are pretty much stuck with the first loan provider you choose because there is a deadline on making the purchase happen. The power to control the transaction belongs with the consumer, but Congress and the major lenders making large campaign contributions have used the "loan crisis" as an opportunity to remove it from them.

The loan provider is going to make money, or they won't do your loan. Judge loans by the benefits and costs to you, not by how much they loan provider is making, or whether they even have to disclose it (brokers do, direct lenders do not). The important thing to you is that you were delivered a thirty year fixed rate loan at 6.5 percent without paying any points, as opposed to 6.625% with one point and higher costs, not that loan provider A had to tell you they made $4000 by doing it while loan provider B doesn't have to tell you anything. Sounds obvious, but I have seen people who chose the higher rate at more cost for the same loan, even stuck themselves with a prepayment penalty where my loan had none, because they thought I was making too much. In point of fact, I would have made a fraction of what the other guy did make, and by the only universal measure - delivering a loan with a lower rate, lower cost, or both - I performed work considerably more valuable to my client. So don't shoot yourself in the foot like that.

Caveat Emptor

Original here

Every so often I get questions about loan cosigners. The main borrowers do not qualify on their own, so they get someone - most often mom and dad - to cosign. Cosigners are a different thing, or so I understand, in the other major credit areas - automobiles, rent, etcetera. But this is about Real Estate.

The only time this usually makes a difference is in credit history. The main borrowers qualify on the basis of income, but don't have enough of a credit history to qualify. Sometimes they just don't have enough open credit to have a credit score. This is rare, but I did have one executive couple who made a habit of paying cash for everything (a good habit, I might add). They had precisely one open line of credit, a credit card they paid off every month, and the major bureaus require two lines in order to report a credit score. No credit score, no loan - it's that simple. Even there, the solution was to walk in to their credit union and apply for another, not to get a cosigner.

When you bring other folks into the loan, you're bringing their credit history, their potentially high payments, and every other negative they have into the loan. Most of the time, the folks who are willing to cosign do not materially aid the qualification process.

Pitfall number one: If the cosigners make more money than the "real" borrowers, they now become the primary borrower, and it becomes a loan on investment property as far as the lenders are concerned, adding restrictions, raising the trade-off between rate and costs of the loan, and perhaps making the loan require a larger down payment. This does assume they won't live there, but usually if they were going to live there, they would have been on the loan in the first place.

Pitfall number two: The cosigners are overextended also. Sure, they make $10,000 per month, but they have payments of $5000 per month already. There's nothing left over where the bank sees them as having enough money left over to help you out. They may, in fact, have money to spare, particularly if they make a lot of money, but according to the standard ratios, they do not. You can't have the cosigners be stated income or NINA if the main borrowers are full documentation. If you had to downgrade to stated income in order to qualify (back when stated income was available), that would cost a lot of money through higher rate/cost trade-off, not to mention requiring a larger down payment in most circumstances, going to a higher cost portfolio lender, whether you're in a line of work that's eligible for stated income under current guideline. Obviously, better that you qualify for a lesser loan than that you don't qualify at all, but you don't want to downgrade if you don't have to.

Pitfall number three: This one hits the cosigners. They are agreeing to be responsible for your payments in the event you don't make them. Suppose they want to borrow money for something else. Especially if it's a large amount of money, as real estate payments tend to be. It really cramps their ability to qualify for other things. This works the other way, also. People come to me for real estate loans who have agreed to be cosigners for a car loan are responsible for the $400 per month for that loan. Many times, this means they don't qualify for the real estate loan. So we have to prove to their prospective lenders that the "true" borrowers are making the payments. This is usually not difficult, but if the cosigners wrote the check for the payment anytime in the last six months to a year, it can be problematic.

Pitfall number four: This also hits the cosigners rather than the main borrowers. Suppose a payment gets made late. It impacts the credit of the cosigners as well as the "real" borrowers. It doesn't matter if you're the "real" borrower or the cosigner, it hurts your credit just as much and for just as long. If you cosign, you want some kind of proof that payment is being made on time, every month. You shouldn't cosign if you don't have the resources to make that payment pretty much indefinitely. Furthermore, should the cosigners decide to cut their losses, it can take months before the monthly hits to the credit stop. If the "real" borrowers don't want to liquidate, the cosigners may have to go to court to get out of it, and the only people who are happy there are the lawyers.

Finally suppose the loan being applied for has a Debt to Income Ratio maximum of forty five percent, and the cosigners make $10,000 per month, but they have expenses of $4300. This will mean that they only have $200 per month to contribute towards qualifying for the new loan. If the "real" borrowers weren't fairly close to qualifying without them, they aren't going to qualify with them. If they have expenses of $4600 per month, they have nothing to contribute to the loan qualification. In such cases, the work of asking them to cosign is wasted.

Caveat Emptor

Original here

An e-mail I got from a single mother I spent two months working with before she found a special low income program for a property she wouldn't have been able to afford through me. The first paragraph is her addition to me on the front of a forwarded message. I've redacted information that might lead to specific identification of the culprits or their victim.

(I haven't been paid anything on this, nor did I expect to be, despite the fact that they told her that I would be to close the deal. She felt obligated to me, but who wants to stand in the way of a single mom finding and affording a better property?).

Dan - This is an FYI. I really wouldn't recommend this program for any of your other clients, or if you do get them involved that you warn them that things stand a good chance of not going as promised. Judging by what is happening to me, I doubt that you ever received your commission from these people.

-----Original Message-----

Good Morning DELETED,

My name is DELETED and I've purchased a condo at DELETED. My close date was supposed to be June 28th. On June 28th I went to DELETED Title and signed off on all the final paperwork and had my bank wire them over $7,000.00. My first scheduled move-in date was on Friday, June 29th. I had to cancel (the move - DM) because it wasn't recorded yet. On Saturday, June 30th I drove over to the DELETED Sales office (my phone and internet has been shut off and transferred) and spoke with DELETED. My next scheduled move-in date was Monday, July 2nd from noon - 4 pm. I asked him if I had to change my plans again and he said "No - because you were supposed to close on the 28th of June and I can go online and see that you have wired your money and completed your paperwork I am going to make an exception and give you your key and let you move in on Monday."

Early Monday morning (we) started bringing all of our boxes and furniture downstairs. At 9 am I rented a U-haul. At 11:30 I went over to the Sales office for my key. I had scheduled someone to pickup and deliver the appliances I purchased for 12:30 pm. (The person who had promised the move in) was "in a meeting" and nobody seemed to know anything about my key. By 1 pm I was quite upset because I still had no answers and only 3 hours left to accomplish my move in.

DELETED sent someone down to try and make things right. I don't think a sobbing woman in their office was very good for business. They went over to the Uhaul place and had the truck reserved until Friday of this week and bought a lock for it. They told me that they would pay my rent and that I could get reimbursed for food if I kept the receipts. Hopefully they will really do this. (it occurred to me later that they also promised me a key and broke that promise) DELETED is calling DELETED (Title officer) twice a day for a status update and what they keep telling me is that the paperwork from the City has not yet been received.

Can you tell me if there is a reason for this and when I might expect this paperwork to be completed?

I'm in a bit of a panic now (to put it mildly) because I need to be out of the apartment so they can clean and paint it over the weekend. I have so little information, I don't know whether to put my things in storage, board my pets and get a hotel for my son and myself. This is also very stressful because most of my money is tied up in the condo and I'm bleeding what little money I have left....sleeping in an apartment on my couch and hoping that the truck on the street in front of my complex doesn't get ticketed or worse yet robbed. Hauling everything back up two flights of stairs was pretty much out of the question (For health reasons - DM).

I feel absolutely miserable. It would be quite ironic to wind up homeless after all this.

If you can shed any light on what is going on, or help me plan what to do next I would appreciate it. I'm really in the dark here.

My phone and internet are at the new place. I had been taking vacation time to move in, but I don't see the point now, so I'm back at work trying not to worry.

This is, unfortunately, not an atypical experience. Public program means you're on a bureaucratic schedule. It's not that bureaucrat's money that's getting spent. They don't get paid any different whether your loan funds and you get your property today, next week, or never.

Furthermore, it has been my experience that companies with the ability to use restricted provider public programs are often looking to boost their profit margin, and because the competition is restricted, they can often get it. That's one of the reason that FHA (among others) is looking to reduce their annual audit requirements, so that the small brokerages and those with thinner profit margins might be willing to sign up and endure the hassles. I've seen loan firms charge two extra points and over half a percent higher rate because the competition was mostly eliminated, and what was left was other high margin places. Special programs nobody else has are a license to print money, particularly if access to those programs is restricted by the government. The fewer providers who can do it, the less competition there is, and usually, the higher the mark up they want in order to for the privilege of being one of the lucky selected beneficiaries.

This is not to say that all public housing programs are difficult, or delayed, or costly. There are individual providers who provide just as good a product at just as good a price. However, the statistics seem to be a much higher than usual incidence of delays, costly extras, and just plain gouging going on due to restricted competition.

This is also not to say in any way, shape, or form that public programs aren't worth it. The lady could never have afforded this unit, part of an income restricted program, without a municipal government stepping up to the line on her behalf. Those with a knowledge of economics may realize that this means the other units were made more expensive due to this, likely pricing out other potential buyers so that this particular person could have a better unit. Robbing Peter (and Penny and Porgy and Poppy and pretty much everyone else) to pay Paul and the bureaucrats helping Paul, but that's a matter of housing policy supported by the voters, and my choice is to help Paul or not to help Paul. Peter, etcetera have already been robbed and they're not getting the money back. The bureaucrats will be paid exactly the same whether I help Paul or not. The only question will be exactly who gets this benefit, and I think that under the circumstances I might as well help Paul get them. And if Paul doesn't take it, somebody else will. From the perspective of a given individual's available options, such programs definitely assist people in affording housing superior to what they could otherwise afford.

However, you need to realize that there are likely to be delays and unexpected extras in a program like this. One of the requirements of many of these programs is a certain maximum amount of total assets - but if that's all you can have and you have to use some of them for down payment and closing costs, this can mean you're cutting it really tight as far as other expenses go. Indeed, on this scale, paying for an extra few weeks rent at your old place can be a real hardship - but that's the cold hard fact of what happens quite often. If you put in your thirty days notice to the landlord, you're stuck when escrow doesn't close on time. If you don't put in your thirty days to the landlord, you're stuck paying rent for the extra month, costing (in this case) a minimum of about 15% of her total liquid assets, never mind what was left over after what she put in her down payment.

There is no universal guide to this situation, and what works in some situations may be totally inappropriate in others. One of the best things is an elected ally in the bureaucrat's chain of command. Another is the willingness of a family member to step in with a gift or extend an interest free loan if you require it, because pretty much all of these first time buyer programs have income and asset limits, and if your cash falls short, everything you paid is pretty much wasted. You won't get the property, and you're unlikely to get that money back.

Anytime the government - city, county, state or federal - limits the providers who can work with a given program, they create a pricing differential between that program and the general market, as well as creating a situation where those providers have an assured income from people who don't have any other choice. Given this, the incentive to provide good competent quality work at a competitive price is pretty much absent, leading to situations such as this poor lady's. These programs all keep a list of their special participants, but sometimes there are ways for others to participate. It never hurts to ask, and it may very well prevent situations like this one.

Caveat Emptor (literally!)

Original article here

An email:

Hi Dan,

I was reading your article on "should you pay off your mortgage faster?" (DM: link here DELETED It'll be a fresh 30 year loan and I'm 44 years old so this discussion has interest, I don't really want to be making a mortgage payment at 74 ;).

I must be really dense but A: I don't get it and B: the table looks like it has an error in it to me.

Start with B: first - the investment column can't possible be correct. The assumption is you save or pre-pay $100 per month and invest at 8%. The amount for year 1 is $1,353.29, if you saved $100 per month at the end of a year you'd have $1,200 in principal + $100 * 12 months @ 8% + $200 * 11 months @ 8% + $300 * 10 months @ 8% etc. Even if you socked away the whole $1,200 on day 1 you'd only have $1,296 and have to pay taxes on $96.

What I don't get is this - by prepaying $100 on my mortgage I get a guaranteed return of 6% or 6.5%, whatever the mortgage rate is. I do not ever have to pay interest on that piece of principal again, it keeps on giving. Yes my payment stays the same but the amount going to principal increases by the amount of interest I am not paying due to the previous principal payment.

Now, the valid comparison to that is a risk free investment alternative no? I've got savings accounts currently yielding 4.5%, 5.3% and 5.4% APY, you might find 6% - might and it probably is an intro rate. Let's be generous and assume I can get the same rate of return on the savings as I pay on the mortgage and put that at 6%. If I pay $1,200 extra in principal on day 1 of the year I don't pay $72 in interest and can't deduct it. If instead I put $1,200 in a savings account on day 1 I earn that $72 in interest. It is a wash, The tax issue is a red herring since not paying the principal gives me a $72 interest deduction but the equal investment return is added to income so (72) + 72 = 0 Could it work out if you put the investment dollars at risk? Sure, but that is a gamble and an apples to oranges comparison.

I have different mental pots of money.

Pot 1 is investment dollars for retirement, 10% or so of income goes to a tax deferred account invested at various risk levels and doesn't get touched - ever. Until I retire at least!

Pot #2 home equity + the carrying cost on the mortgage which is the 25% or so of income that pays the PITI on the house.

Pot #3 is liquid reserves, currently about a years worth of #2's income requirements.

My goal is absolutely to eliminate the P&I part of PITI over time. With enough in pot #3 I'll be plowing as much as possible into principle reduction over the next few years once we get moved in and clear the costs associated with a new house such as drapes and furniture. I make a pretty decent salary but who knows how long that will last? As long as the job is secure I'll keep the current mortgage and pre-pay as much as possible. If a few years down the road I felt a little vulnerable to layoff or whatever I'd seriously consider refinancing the then smaller principle balance for a smaller required monthly nut and keep making the higher payments as long as the income stayed intact. Alternatively I may need to do that in 10 years anyway when my kid goes to College. What we are currently paying in private tuition from current income + available cash flow might be a bit short, or we may be ok - depends on where he goes. I'm a College administrator so if he goes here he gets a 100% tuition waiver, 50% at other state schools. And I did look at saving for College in one of the tax deferred accounts, we don't qualify for all the juicy ones based on family AGI. We could do a 529 but I've made the personal choice that we're better off driving the retirement savings and paying off the mortgage rather than killing ourselves to give the kid a free ride .

I like a guaranteed 6.5% return. With any luck the house will get worth more over time as well making the return even better. I played leverage to the max in 1999 when I bought a townhouse for 78K by assuming a mortgage, I just sold it 2 months ago and cleared $112K cash in my pocket, principle balance was 64K so 14K of the 112K was return of my principle payments. That was great but now we're in a little better position financially and I'd like to preserve it over time. I've owed huge piles of money to CC companies and auto loans in the past - don't ever want to go there again!

One other thought. Despite the current turmoil in the market houses do tend to be worth more over time. Probably not as good as the stock market if the time horizon is long enough but they do go up. In my case 60% of the asset value is borrowed so there is a leverage factor on the return. Here is the thought - under current tax rules that return is tax free where as the stock market return is not. It's all about risk tolerance I guess.

Upon examination, I think you're probably right, although I have assumed "a start of the month/year" program where the question was academic until you actually had some money to put to one place or the other; i.e. an initial $100 today and $100 every month, so a year from today you've got $1300 without interest. Kind of like the old problem where if you've got an eighty one foot wall and beams every nine feet, you need ten beams to have a real structure. One to start (at the zero point), and then another one every nine feet.

The pots of money idea is a good one, but most people shouldn't be limited themselves to theoretically risk free investments, especially once you've got your reserves. 1) They're not risk free 2) The big certainty if you don't take any risk is that you will make less than someone who did. Kind of like being chased by headhunters, and having a choice to sit there and be killed an eaten immediately or jump off a cliff into a river with crocodiles. Sure, the crocodiles might get you, or you might hit the rocks when you land and you might even drown. But if you do nothing, you're going in the stew-pot for certain.

Question: How do you think the bank or insurance company can afford to pay a return on the money? It doesn't come out of some hyperspatial vortex! They take this money and invest it in basically the same places you would. The difference is: They take the risk, they get the reward. This reward is plenty to pay their employee salaries, all the expenses of operating, plus your little pittance, and have plenty left over for the stockholders. If their results are adverse, what's going to happen to your money?

Question: If you never refinance, how hard do you think it's going to be to make a $1500 payment in thirty years? Assuming a 3.5% rate of inflation, about like paying $530 per month now. Shouldn't be difficult at all. If you do refinance, you are making a conscious choice that the other loan is, in total, a better deal for you. Sure you might not have a lot of income after retirement. My point is that with time and diversification, the assets you would accumulate from alternative investments will be more able to pay your loan out of interest than any money you saved.

Question: If you can't make the low payment, what will your equity situation be like? Once again, this is assuming you never refinance, but 29 years out, you'll owe roughly $15,000, and assuming average 5% appreciation, the property will be worth about 4.3 times as much. Even if you never paid a penny of principal down, that's well over a million in equity. This gives you options such as selling (take the money and run), a RAM (take the money and stay - which I generally advise against), a move "down market", etcetera. Stop thinking of money as something that pays the rent and other expenses, and start thinking in terms of what it can do.

Furthermore, it's not a risk free 6.5%. For most people, it's more like an effective margin of 4.7% or less. I'm not advising anyone to go out and strip equity without a very strong reason to do so so and a clear eye on potential consequences, but which after tax return sounds better to you: 4.7% or 7.2%? I agree with the NASD rule that prohibits member firms from accepting borrowed money for investments, but I have to admit that it does work, at least for the "average over time" numbers in theory. The 7.2% assumes investment income is all ordinary income, fully taxed every year. In point of fact, at least some is likely to be capital gains and some is likely to be deferred. The downside is that any investment return is purely speculative and you could lose your principal. You don't ever gamble with money you can't afford to lose, no matter what the long term odds. Nor do you put it all on the same bet, no matter how you split it up. On the other hand, the biggest risk is not taking any. Instead of paying off your mortgage, diversifying your money amongst a sufficient number of stock and bond investments is so likely to leave you with so much more in total net assets over the next twenty years that the expected exceptions are a statistical non-event.

Caveat Emptor

Original article here

Hi, my name is DELETED, I need help. I bought a house (a few months ago) because my boyfriend persuaded me to. This was supposed to be a real estate investment between us. I put the house in my name and i was supposed to get $9000 and he was gonna keep the rest to do the repairs. I never received my money and he never did the repairs on the house and we ended up breaking up (about a week later). I started getting suspicious, (a few days ago) I found out that the appraiser lied on the appraisal. He lied and changed the square footage of one of the comparable houses to make around the same square footage of my house showing that it sold for the same price I brought my house. There is more to make me think he lied. I found out that the mortgage person, the seller, my ex and the appraiser all know each other I think it was a set up. I have a lawyer, but what can happened after the loan is already in my name. This house is not worth what I bought it for he appraised it around $50,000 more. Will the mortgage company have to buy the house back because they are supposed to check it. When I looked up the appraisal company that he had on the appraisal, it doesn't even exist. Please give me some advise, will I be stuck with this house?

Talk to your lawyer. It sounds like you've probably got a good case for a civil suit, and can make criminal complaints as well for fraud and conspiracy. However, you have title to the house and a Note that says, "I agree to pay..." and a Trust Deed securing said Note. Just because you are the victim of a scam does not relieve you of your obligations under said Note and Deed of Trust. Not living up to those obligations is one of the best ways I know to make a bad situation worse. It's going to take a while - probably years - before you recover anything of what you've been taken for, if you ever get it. The wheels of justice grind slowly, and require a lot of lubrication in the form of money. Just because you're the victim doesn't change the process. It's conceivable that your lawyer may even advise you to let it go, if in their judgment you're unlikely to recover enough to make it worth your while.

Before we get into the main issue, let me cover a special red flag that was ignored. When you are buying a house, you are not going to get cash back - not with the approval of the lender. As I went over in Real Estate Sellers Giving A Buyer Cash Back, concealing something material from the lender is fraud, in and of itself.

Lots of people get talked into cutting corners in their transaction or doing without an agent because "agents don't really do anything." However, there are so many scams out there that any time you cut corners you risk getting taken for the full amount of the transaction. Lots of folks discount the possibility - until it happens to them. And it does happen. Real estate is the largest dollar value most folks ever get involved in, and scamming a little extra is likely to be major money in and of itself. A certain percentage of all transactions have issues - and when someone tries to talk you into short-circuiting your protections, that's pretty much a red flag that this is one of those transactions to beware.

Not falling victim is worth a lot more than those protections cost you. As a buyer's agent, my goal is to make at least a ten percent difference in the quality of property, the price, or some combination. I haven't missed that mark yet; and in some markets my average is closer to 35 percent. But that's in addition to preventing things like what happened to you. Having an agent gives you someone responsible to you. Someone you can sue if something goes wrong, so they have incentive to guard your interests. Someone with insurance (deep pockets!) and a license and a broker supervisor who should have monitored the situation. Not to mention who should be able to prevent the situation happening in the first place.

Can you stop collusion between the appraiser, the loan officer, and the seller? No. Stopping collusion is difficult, as anyone who has ever studied accounting can tell you. A lot of the curriculum goes into the subject of controls, and separating functions so that it's only with multiple people cooperating that assets get embezzled. But with an agent who knows your market on your side and bound to you, it's a lot less likely they'll get away with it. How likely would you have been to buy the property for the price you did if an agent had said, "I can get you a better property for the same money" (or something like it for less)? Kind of likely to short-circuit the entire scam, eh?

Caveat Emptor

Original article here

(Note: This article is a reprint of one of the earliest articles I wrote, from a time when rates were higher. The principles, however, are quite valid - and even reinforced by the fact that rates now are much lower)

The Truth-In-Lending is a form that can or does provide some useful information, but the useful information it provides is both smaller than most people think, and not in the numbers everybody looks at.

The first thing to be aware of is right below the title. "This is neither a contract nor a commitment to lend." They are telling you right there that this is an estimate. It may or may not be an accurate estimate. That depends upon the loan officer and the provider they work for. Again, the relationship between this form at the beginning when you apply for the loan and the loan that is actually delivered with the final documents can be extremely tenuous, even with the new rules that went into effect at the beginning of 2010..

The APR in the very first box is the result of an attempt by Congress to compress what is fundamentally at least a two-dimensional number into one linear measurement. It is intended to help give you a direct, one number measurement of the effective interest rate, given the expenses. But, in order to this it has to make some assumptions.

The first of these is that you're never going to sell the property, or at least not until after the period of the loan. Back in the early 1970s with stable secure jobs for a large portion of the populace not only in government but in private industry as well, and people living their whole lives in their first house, this was a reasonable assumption. No longer. The median time for ownership duration is about nine and a half years.

The second of those is that you're not going to refinance. This also was not an unreasonable assumption back in the early 1970's. Our habits as a society have changed since then. The fact is that the median age of mortgages (half older, half younger) is currently under 3 years. Only something like 4 percent of all mortgages are older than 5 years. I'll have other implications of these facts later, in other essays.

But by making this assumption, that you're never going to sell and never going to refinance (despite already having done so several times) and just make that minimum payment every month for thirty years, it allows the illusion that you're going to spread those costs out over thirty years, when the appropriate time frame is much shorter. This is a dangerous illusion. To give a specific example, because it means that, when measured by APR, a 5.5% loan with closing costs plus two points looks like a better loan than a 6 % loan with closing costs but no points. In fact, it is quite likely that the 6% loan is a better idea, and a 6.5% loan where the lender pays your all of your closing costs for you may be better yet.

Let's go through the calculation involved. Let's give the more expensive loan at a lower rate the benefit of every doubt. Assume they're both thirty-year fixed rate loans, so you'll actually keep getting benefits as long as you keep the loan. Assume the base loan we're looking at is $270,000, the same figure I've used elsewhere. This can be either an existing loan, or a purchase where you need $270,000 beyond your down payment to cover purchase price and costs of buying.

As we computed in looking at the Good Faith Estimate, the closing costs of doing this loan are somewhere in the neighborhood of $3400 or so. But "third party" costs, such as escrow and title, are excluded from APR calculation, so we're going to deduct about half of that, or $1700, from them when we calculate APR. I'm also going to assume that you actually pay all of your "prepaid" and "reserve" items out of pocket, which keeps things simple. Your actual loan amount in the case of the 5.5% loan with two points is $278,980, and your monthly payment is $1584.02. Your actual loan amount in the case of the 6% loan is $273,400, and your monthly payment $1639.17. The third loan has a payment of $1706.58 on a balance of $270,000 even. The APRs (a complex calculation) work out to 5.742, 6.059, and 6.500 percent, respectively. Looks like the first is a better bargain, right?

Your actual interest expense the first month is $1278.66 the first month for the first loan, $1367.00 for the second. This is a difference of $88.34, and this number is actually going to increase for the first several years of the loan. The rest of the money is a principal payment. Equity. Money you don't owe anymore. The principal paid the first month on the first loan is $305.36; on the second is $272.17, a difference of 33.19 the first month in the first loans favor. For the third loan $1462.50 represents interest and only $244.08 is principal. This is really looking like you make the right choice with 5.5%, correct?

But let's look at two years from now - about the age of the median mortgage. I'm going to use the loan in the middle as baseline.

Loan 1 has paid $2130.05 less in interest, and $806.37 more in principal than Loan 2. Looks great, right? But they also paid $5580 more for the loan, of which $4773.36 remains on their balance. Remember, fifty percent of the people have sold or refinanced at this point. When you sell or refinance, The Benefits Stop. But the cost is sunk. You paid it in full two years ago. And at this point if you sell this home, you will actually get $4773.36 less in your pocket than in if you had taken the 6% loan. This is somewhat compensated for by the fact that you spent $2130.05 less in interest expense. But you're still $2643.31 down as compared to the 6%, and there's no way around that. Meanwhile, the 6% loan itself lags the 6.5% loan by $414.07 at this point in time.

And if you refinance, it gets even worse. You're now paying interest on the $4773.36 in higher balance for the rest of the time you're got your home. Let's say the rate is 5% now because you got an even better deal. This means $238.67 per year, $19.89 per month extra that you're going to pay for as long as you have that loan, all for benefits that you don't get anymore and never paid for their costs in the first place. This is truly the gift that keeps on giving, isn't it? To the lenders.

Now let's look 5 years out, when over 95% of the people will have sold or refinanced.

At this point for loan 1, you have saved $5353.23 in interest and paid down $2044.02 more in principal, right? Yes, but you paid $5580 more for the first loan than you would have for the second, and you still owe $3535.98 of this difference. If you sell, you will get $3535.98 less to put in your pocket, although that will be more than balanced out by the interest you saved. Net profit to you of choosing the first loan: $1817.25, neglecting tax treatment. Boy did you make the right choice, right? But remember that over ninety five percent of everyone who made the same choice you did never made it to this point. Furthermore, if you're like most people and you intend to buy some other property where the transaction includes a loan, that loan will have a starting balance $3535.98 higher to start with than if you'd chosen loan number 2 in the first place. Assume you got a great rate on your new home: 5% even. This means you're now paying $176.80 per year in interest that you wouldn't be paying if you'd simply chosen Loan 2 in the first place. Assuming you intend to own property for the rest of your life, in a little over ten years your gain is gone.

On the other hand, you are doing safely doing better with loan 2 than 3 at this point. The difference in interest you've paid has more than made up for the difference in starting balance. Whether you refinance or sell, it's going to be difficult to make up $4122.80 with the interest based upon $1660.98. Assuming 5%, this is $83.05 per year it amounts to 50 years to recover. Loan 3 shows up pretty well against loan 1, though. $5196.96 difference in balance times 5% per year is $259.85. Divide the $1479.49 by this number and get that in 5.69 additional years, your benefits from loan 1 as opposed to loan 3 will be gone.

If you get a great deal and refinance instead of selling, that extra $3535.98 that you still owe on that mortgage is still there, and will be for as long as you own that home. Assume you got a really great deal of 5%. This means $176.80 per year of extra interest expense - just from the fact that your balance is higher because of sunk costs to pay for benefits that have stopped. Assume you keep your home another five years, so altogether you've had it ten years since the initial loan. This has cut your gain to $933.25.

This happens all the time. It is not uncommon for me to talk with people who bought their homes in the 1970s, have refinanced ten or twelve times, and now owe more than ten times their original purchase price, a good portion of which is directly attributable to unrecovered closing costs of the refinances. Here's the point: closing costs and points stick around, sometimes a long time after the benefits you got from them are gone, and people refinance or more often than most people admit. The only loan that can be ahead from day one is the true zero cost loan.

(At this update, I need to note that the Democratic-controlled Congress of 2009-2010 did everything in their power to make the true zero cost loan illegal, to make such loans appear as if they cost money when they don't, and to define terms in such a way as to prevent loan officers who offer true zero cost loans from calling them "zero cost" even though when you really crank the numbers, they are zero cost to the consumer).

Loans that have closing costs and even points will, in general, pay for those costs eventually, and more than pay for them if you hang onto it long enough, but you're sinking a significant amount of money in the bet upfront, money which is going to be around in your balance a long time. Furthermore, people don't hang onto these loans as long as they think they will, and very few people hang onto them long enough to see profits from high closing cost loans. Finally, the rate at which a zero cost loan can be done varies from day to day, and by quite a lot over time. Let's say six months from now I can do a 6% loan no cost. It costs you zero, and now if you're loan 3, you've got the same loan at a lower balance than the guy who chose the 6% loan 2 above, whom I can't necessarily help with those better rates.

Then three years down the line, rates really drop, and I can do 5.5% for no cost. A call to both loan 2 and loan 3 nets borrowers who are eager to cut their rate for zero cost, but I still may not have anything that helps 1 in the sense of being worth the cost of doing it. Now loan 1, loan 2, and loan 3 all have the same rate, but loan 3 owes the least amount of money, therefore has the lowest payment, and has the most equity in their home.

Here's another dirty little not very secret, but rarely publicly acknowledged, fact: People don't always refinance into a lower rate when they refinance. If you've been a homeowner 15 years or so, chances are reasonable that you've done it - possibly more than once. Don't worry, I'm not going to pillory you in public over it, but if you won't admit it to yourself then there's not a lot that can be done for you. People have various reasons for refinancing into higher rates, some of them reasonable, some of them relating to necessity, and some quite frivolous. But you'd be amazed at how often people looking to refinance expect me to believe stories that numbers show to be obvious fiction about how often they've refinanced a property. This is math, and if the numbers tell me you've been making payments on this loan for two years when you tell me five, I'll bet millions to milliamps that if I go check the public records that are maintained on every piece of real property in the country I'll find that Trust Deed recorded two years ago. Now, it's okay to tell some lies of certain kinds to your loan officer, and assuming that any prepayment penalty has expired, this is probably one of them. No harm, no foul. What a typical loan officer cares about is getting paid, and if you're withholding or correct information doesn't make a difference to that, there's been no harm done. A good loan officer will add, "Putting the client into a better position" to that first, paramount concern, and if the information you withheld would have resulted in a different answer to this question, you have only yourself to blame. (Looking for altruists in business is both pointless and hazardous to your financial health. Businesspersons donate huge amounts of time and money and energy to charities or other works for the public good. But we're at work to Make Money. I am very good at what I do and getting better because I want to Make More Money, and mistakes do the opposite of Make More Money). But you need to be completely honest with that wonderful person you see in the mirror every day who follows you around twenty-four hours every day, shares in all of your triumphs and joys, and has to deal with all of your mistakes for the rest of your life. Otherwise you're going to waste a lot of money on mortgages making the same mistakes over and over again.

Getting back to the actual Truth-In-Lending form, finance charge assumes you keep the loan the full term, as I have explained. Amount financed is subject to the same limitations as the Good Faith Estimate, and in fact assumes that the Good Faith Estimate is honest and accurate. So is the Finance charge. Neither of these, nor the Total of Payments, which is simply the sum of these two, is any more valid than the Good Faith Estimate this form is based upon. Do NOT use the Truth-In-Lending or APR as a way to compare loans, numbers-wise. Many people do precisely this because it's such a simple looking, apparently easy to understand form. But if it's based upon a Good Faith Estimate that's not accurate, it means nothing. Zip. Nada. Garbage In, Garbage Out.

Nope, the minimal information provided by this form is in the details that start about halfway down.

Demand Feature: If checked, this means the lender can require that you repay the loan in full, with a certain number of days (usually 30) notice. It can also mean there's a balloon on the loan.

Variable Rate Feature: if checked, this means that at some point, if you keep the loan long enough, become a variable rate loan. I've seen loans that went as long as ten years before a variable rate kicked in, or it can be right away. It all depends upon the loan you agree to.

Credit Life and Credit Disability are two products that I would generally recommend against unless it's the only life or disability insurance you can get. Some states do not permit them to be a requirement of the loan - and in those cases where the lender would otherwise require one or both, you won't get the loan as a result. (On the other hand, without these state prohibitions, many lenders would require them much more often, costing consumers in the aggregate billions. Just like everything else in mortgages, it's a tradeoff with winners and losers no matter what you choose.) Both of these products typically pay any benefits directly to the lender, when you want them to come to you or your family. Buying your own life insurance or disability insurance is typically a much better idea.

Property and Flood Insurance The lender can and will require you to maintain proper insurance on the property as a condition of your loan. In California, they cannot require this be for the full amount of the loan, but they can and will require you to maintain coverage for the amount of full replacement costs - what it would take to rebuild your property as it is from the ground up. Many lenders delegate the responsibility for making sure this is done on their behalf to big administrative operations that cover the whole country, and they are ignorant of individual state law even for such major states as California. Be polite, but firm, when they tell you they are looking for coverage in the full amount of the loan. Flood insurance is a separate policy that can also be required if the property is on a flood map. The lender can either demand your loan in full immediately or purchase insurance on your behalf and force you to pay the bill if you fail to show them continuing proof of adequate coverage.

SECURITY: The first box should be checked for purchases, the second for refinances. In rare cases I do see somebody taking out a loan on a home that is free and clear to get a better rate than they would on a new property they're buying, because they'll get a better rate that way. In this case, the second box should be checked.

Filing Fees are for filing the papers with the county recorder, and should be the same as listed on the Good Faith Estimate

Late Charge basically discloses what your penalty for any late payments will be. It is expressed as a percentage of your normal monthly payment.

Prepayment penalty: Should tell you honestly whether there will be a prepayment penalty on the loan, but often doesn't. Says nothing about the duration of it. Forget the second line. All of the costs to get you the loan are sunk and nonrefundable from the time you sign the papers. All of the interest that you pay as it is due is gone forever. You'll never see it again. They earned it. They're not going to give it back. I've never heard of a loan where in the initial contract the borrower was promised a rebate of part of those costs if they paid off early. Banks did make a lot of offers to discount loans if you paid them off in the late seventies and early eighties, but these were offers made at a later time, long after loan papers were signed, by the banks because they were losing their shirts buying money at 14% or so when it was already loaned several years earlier to customers at 6%. It wasn't a part of the contract in the first place.

Assumption: This means that if you sell the property, the buyer can keep your loan in effect. The VA loan is the only one out there that is generally assumable by the buyer if you sell, but there are some other loans that are assumable as well. It's not usually a good idea to let a buyer assume the loan, but there may be no alternative. The reason: You can still be liable for these if you do allow them to be assumed.

Then there's a line where there are two final square boxes to check, where "* means an estimate" and "all dates and numerical disclosures except the late payment disclosures are estimates. Expect the second box to be checked. It's all based upon the Good Faith Estimate. If they're stretching the truth there, the numbers here are going to be similarly distorted. And if it's not checked, that's "an inadvertent oversight" and unlikely to be prosecuted. Which is as it should be - unless there's a pattern of it, which is the case with all too many loan providers.

Caveat Emptor

Original here

Another relevant article: The Difference Between Note Rate (APY) and APR

I hear it and read it all the time - advice that says to pre-emptively reject the possibility of paying points. People that talk to me about loan rates that tell me they will not consider any loan that requires paying points.

What they're thinking is that they don't want to pay origination. They don't want to pay for the person who gets their loan approved, figuring that the interest rate is enough for the bank. Here's a cold hard fact: Nobody does loans for free. The interest you are paying does not go to the bank who does your loan. It goes to the actual investor who furnishes the money. And here's the fallacy that completely guts the advice: What has become the most common system of loan origination, where the originator is separate from the investor, has become the most common system because it is cheaper for the consumers. Despite Congress' recent attempt to eliminate brokers as competition for big lenders, brokers are still far cheaper.

Once upon a time, all residential mortgages were done by lenders who intended to hold them for the life of the loan. There was no origination. There was no discount. The Rate was The Rate, and they would give you whatever rate they were offering everybody else that week - if you qualified - as they wanted to make a certain comparatively high margin on the money. If you didn't qualify for The Rate, there were alternatives but none of them was advantageous. In any case, The Rate wasn't that great, but there weren't many alternatives at all, and all the banks charged about the same Rate, and there was pretty much always a prepayment penalty of some sort because they had to be certain they'd make enough money via interest to pay their employees for doing the loan.

This started changing a very long time ago, with the advent of Fannie Mae (and its younger sibling, Freddie Mac). Nonetheless, the two GSEs didn't work in a way that made their role obvious to the consumer until about thirty to forty years ago. The fact that they bought mortgages, allowing lenders to loan what was essentially the same money over and over again meant that rates went down, but also as part of the same phenomenon that lenders were no longer making money from the interest rate of holding those mortgages. The upshot was that consumers now had a choice: In order to get the cheaper rates made possible by the GSEs, they had a choice: They could pay origination, or they could accept a higher rate, such that the lender who did their loan received either a bond premium or yield spread premium, which amounts to a different piece of the same thing. The advice not to pay points for a mortgage actually dates from this period, as holdouts equivalent to today's portfolio lenders came up with what was an advertising slogan that made it look like dealing with agency lenders was actually costing you more, when in reality agency lenders were saving consumers money over the longer term, albeit with slightly higher upfront costs. But when it's saving you as much as two percent per year over the portfolio lenders of yesteryear (who began charging points themselves because they could), it doesn't take long to see that paying a point of origination, or one percent of loan amount upfront in order to get a rate two percent lower with the agency lender was a much better deal than the alternative.

Once started, the advice to not pay points took on a life of its own. After all, what's not to like about not paying for something? But origination points pays for a real service, and if it saves you money in your particular context, then it is worth paying. But if you reject in blanket fashion the possibility of paying points, then you never consider the very real possibility that it might save you money. Nor, in the modern world, is not paying origination a real possibility. I can make my money in the form of points, I can make it via an explicit dollar figure charge that amounts to the same number of dollars, or I can jack up the rate and make the money when the secondary loan market pays me more than the face value of the bond because the interest rate is above that of similar mortgages. Note that there is no option that says "your lender doesn't make money for doing your loan." If your lender doesn't make money, they don't stay in business. I don't do free loans. Nobody does free loans. If I'm not going to make money anyway, I'd prefer to stay home and play with the dog and teach the girls about TANSTAFL, because plainly there are an awful lot of naive children somehow getting through the educational system without absorbing this critical concept. Pretty much everyone else in the loan industry needs to make a living also. Refuse to pay origination, and you're back in the old days of portfolio lenders - with a rate two percent or so above the agency lenders for the same loans.

Points actually come in two forms. As well as origination, there is discount. Origination is going to be paid on every loan. It can come from a figure in points you are being charged that amount to a certain number of dollars, it can come from an explicit number of dollars you are being charged (that amounts to the same number of dollars as the points do), or it can come from jacking the rate up so as to receive yield spread (which must be disclosed) or a secondary market bond premium (which does not). It literally does not matter to me how I make my money - it's still the same number of dollars - but it is going to be made or neither I nor anyone else is going to do your loan. Some companies charge more origination than others, but if they can deliver a loan that is likely to save you money overall, that higher origination is worth paying. Don't lose sight of the forest because you're obsessed with one particular tree, and origination is not the only way that loan providers make money. Not too long ago, I had someone bring me a HUD-1 form where the lender hid eight thousand dollars of unnecessary additional charges in plain sight where the borrower couldn't recognize it, in addition to the $1500 they claimed was all they were making via origination. Nor do all forms of origination have to be disclosed. Direct lenders and correspondent brokers do not have to disclose what they make when they sell the loan to the final investor and so advice telling you not to pay points or not to pay origination allows them the ability to cut out other loan providers, at least with the gullible, which is most of the public. Deciding which loan you take based upon what the lender is apparently making is a recipe for being completely conned. Evaluate the loan in terms of the bottom line to you.

I happen to think it's both fair and a good idea to charge origination in terms of points. When I set the rate and cost of your loan, I'm risking more for a bigger loan - and working harder, too. If I make a mistake in pricing the loan, I have to pay a figure in points in order to make it good. If your credit score suffers a sudden drop, the difference isn't a flat fee - it's a charge in points. If you don't get me information I need promptly, or the lenders are just so snowed under that we need to pay to extend the rate lock, that's a charge in points. The bigger the loan, the more work it is to get it accepted by the investor. Conforming loans are, by and large, the easiest - but that's not to say they're easy with the current paranoid lending environment. Non-conforming loan amounts these days are like pulling teeth without anesthesia and it gets worse from there. The points charge for origination may go down in steps for larger loans, but for everyone in the industry, you're going to find that the bigger the loan, they larger the number of absolute dollars the lender needs to make it worth their while. They can hide it, lie about it, or risk scaring children of legal age away by honestly disclosing it, but I promise you that you are going to pay it in the final analysis.

Discount is an explicit charge for getting a lowered rate. This figure is always expressed in points. I can translate it into dollars for you, but the actual charge is a certain percentage of the final loan amount. Paying discount is pretty much optional, and the answer to the question of whether you should (and how much) changes with the type of loan, your situation, how long you're planning or likely to keep a particular loan, and the tradeoffs between rate and cost available at any given point in time. Discount points can be thought of as negative yield spread or bond premium, and yield spread or bond premium can be thought of as negative discount points. You cannot have discount points on a loan with yield spread or one where the loan officer says they will make what they need to on the secondary market. What you are paying in such cases is origination, not discount.

In neither case is cutting points out of a loan a matter of negotiating skill. Cutting points down is a matter of effectively shopping your loan and asking the right questions of prospective loan providers and nailing them down as to exactly what they are really offering and paying attention to the answers. You're probably not going to see huge differences of three points for the same rate or a full percent lower on the same loan for the same cost unless you're comparing yourself to someone who doesn't shop their loan effectively, but saving half a point on a $400,000 loan at the same rate is $2000, and saving an eighth of a percent on the rate for the same cost is $500 per year for as long as you keep the loan. I don't know about you, but that's more than enough to motivate me to spend the necessary time and effort to shop for a better loan.

In any case, evaluate loans in terms of the bottom line to you, not by how much the provider makes or has to disclose that they make. How much it's going to be in points and closing costs to get the loan done in the first place, versus what it is going to cost you in interest charges every month. They're not going to yield a single unequivocal answer, but rather breakeven points, or "How long do I have to keep this loan in order to get back my initial investment via lowered monthly cost of interest?" When you're refinancing, a zero cost loan is the only thing that can be ahead from day one, but even an ardent fan of zero cost loans like myself is finding them hard to justify in the current market, because the rate cost tradeoff is so shallow on that part of the tradeoff curve. In plain English, when you break even on increased costs in six or eight months due to lowered cost of interest, it's very hard for me not to recommend you pay those slightly higher costs, knowing that the median time people keep loans is about 28 months, and they'll get their money back four times over in that period, and keep getting it back all over again every six or eight months they keep the loan.

By the way, if someone won't guarantee their costs, how are you going to get those figures that gives you the answer of which loan is most likely best for you? The lender knows, or should know, what they can really deliver. You don't, except for what they tell you. If you're not going to follow this model, you're in the same position as the woman who goes to the singles bar looking for Mr. Right. What she's going to find is Mr. Right Now, the sleaze ball who says anything to get her into bed with him and leaves her feeling dumped on and used. The parallels are exact. Nothing wrong with it if all you're looking for is a quick roll in the hay - but I've never heard of anybody who went loan shopping with the intention of getting screwed.

If you don't nail them down with a written guarantee, loan providers can and will lie, omit charges that you are going to pay, and just flat out pull promises out of their backside in order to get you to sign up for a loan. The new RESPA rules only a little more difficult to lie, and it you don't sign up for their loan in the first place, there is no way they're going to get paid for doing that loan.

What I hope you take away from this article is simple: The idea that it may be to your benefit to pay points on a loan, and rejecting the possibility only encourages prospective loan providers to lie about what loan they are really going to deliver. Instead, nail them down as to exactly what they're willing to offer, whether they're willing to guarantee it, and what the limitations upon that guarantee are. Once you have this information, you have the information necessary to decide whether paying points is in your best interest - because it might very well be.

Caveat Emptor

Original article here