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People ask for referrals all the time, and many folks will stumble all over themselves to provide referrals. Some of them really are excellent providers. Others are not so good, but the person providing the referral has an agenda of their own, and you have to be aware of the possibility. Never give anyone your business without shopping it around just because someone referred you to a certain provider.

In many cases, the reason why you are referred to Company X Realty or Company Y Loans has nothing to do with any allegations of them being an efficient, diligent, effective or inexpensive provider of those services. Number one on the list of reasons why people tell you about X Realty or Y Loans is because company X or company Y refers business back to them. This isn't illegal, but when you ask a real estate agent for a referral to a low cost mortgage provider and you get referred to one of the ones that's competing on the basis of consumer name recognition, you should realize that the mortgage providers with national advertising campaigns are not among the low cost providers. For analogous reasons, I usually advise people to stay away from the national realty chains, even if they're not local to me. But I digress. The point is that the person who refers you to this person is effectively getting paid by referring you to them. Not exactly a sterling reason to trust their motivations in making this referral.

Indeed, this is one of the ways that lenders in particular avoid competing on price. Ladies and gentlemen, so long as it is the same type loan on the same terms, a loan is a loan is a loan. The only real difference is the tradeoff between rate and cost, or, in other words, price. But lenders do not want to compete on price, because that means they don't make very much money. In fact, they want to avoid competing on price, and the captive audience from referral business is one prime example of how they do it. Joe Realtor sends Jane Lender business because Jane refers business right back to Joe Realtor, and because the client has been told that Jane Lender gives great loans at a great rate, the client doesn't shop loan providers like they might otherwise have done, leaving Jane a freer hand to charge a higher markup.

These are not the only reasons why referrals happen. For instance, here in San Diego, many real estate agents will refer to one particular loan officer because they know that loan officer won't tell the client any inconvenient truths, such as, "You cannot really afford this house." They refer to this loan officer because that loan officer will just keep their mouth shut and put the negative amortization loan through, and everybody gets their commission check. But this sort of thing happens in markets where there are affordability issues for the average person.

Finally, explicit kickbacks are illegal, and there are limits on how often Joe and Jane can buy each other dinner out or whatever arrangement they have to transfer wealth, but that doesn't mean it doesn't happen sometimes. After all, there aren't any Department of Real Estate employees following Joe and Jane around 24 hours per day, so this kind of stuff gets hidden all the time. I've had more than one blatantly illegal offer of referrals for kickbacks since I've been in the business. Some of these folks are brazen. No, there's no percentage in turning them in, either. This is one of those situations the saying about, "No good deed goes unpunished," was invented for. One guy who did turn someone in years ago told me about the thousands of dollars in legal fees he incurred, plus three years of investigation that shows up on your license as an unresolved complaint. No thank you. Sometimes, you have to content yourself with remaining apart from any illegalities, while warning people that this sort of thing does happen.

Caveat Emptor

Original article here

I still don't have the tooth pulled, but as of late last night, it seemed like the antibiotic had finally caught up to the infection, and the pain went down a lot over a couple of hours. It still hurts, even with pain killers, but it's not like being actively and continuously stabbed any longer. I'm going to try moving down to the Vicodin the general dentist gave me today instead of Percocet, and maybe I won't be quite so out of it, so maybe I can write something.

This whole experience has been a real eye-opener in another way - exactly how bad alleged customer service really can get. It's a confirmation of my policy: Nobody working for me is allowed to talk to my clients. They are allowed to take a message, and they are allowed to answer simple questions where there is reason to believe the client will probably be happy with the answer. They are not allowed to call my clients without direct specific instructions that I just don't give them. Other than that, there are many reasons why every client gets my cellular number, and is encouraged to call me directly, and this article is going to talk about one of the many disasters this prevents.

My tooth had started hurting on Monday, and so I'd gotten a dental appointment on Thursday, but late Tuesday afternoon, the pain basically exploded. Unfortunately, by the time I could call the dentist, the office was closed for the day, but the dentist gave me a pain-killer and anti-biotic first thing Wednesday. Being a general dentist, Vicodin was the strongest thing he could give me, and it just didn't do more than take the very worst of the edge off for a couple of hours, and I had to wait six hours between doses. But to remove this particular tooth, he had to send me to an oral surgeon. Meanwhile, the infection kept getting worse.

By the time I got to the oral surgeon's office on Thursday, I was literally crying with pain despite the Vicodin. They gave me prescription for Percocet, but said they needed medical clearance from my cardiologist and my regular primary care doctor to pull the tooth. They were also worried about the blood thinners I'm usually on. My cardiologist sent back an answer to them promptly that said it was absolutely fine to pull the tooth, and I could stay on the medications as well, or the dentist could take me off for as long as he felt necessary. Basically, according to her, there was no need for any special precautions, but she was happy to go along with anything the oral surgeon wanted.

This wasn't good enough for the dentist's office staff. No, no, no - they had to have the cardiologist say exactly how many days I had to be off the blood thinners before and after surgery. She responded once again by saying that the answer was "zero days" as far as she was concerned. She gave clearance for the dentist to take me off the blood thinners if he thought it advisable, but she did not see such a need for me to stop those medications from a cardiologist's point of view.

Despite being the answer any reasonable person could have hoped to get, this was not a response the dentist's office staff was prepared to accept. I do not know if this was a programmed answer or if the dentist himself directed it, but I have no evidence whatsoever that the dentist was involved in any of these discussions. No, according to these bozos (remember, these are office staff - not nurses, not dentists, not even dental assistants as far as I'm aware), my cardiologist had to give a number of days before and after that I was going to be off those blood thinners before the tooth could be pulled. Keep in mind that the cardiologist - a very sharp young lady with an advanced medical degree and several years experience applying it - had twice said that this was not required. And she was being refuted by office staff. This went back and forth for two days, and I'm still in increasing pain the entire time, including the possibility of increasing complications as the situation is allowed to build.

Matters did not improve when my primary care physician finally responded, saying that she wanted me to be off the blood-thinners before surgery. Then the dental office staff went really berserk, trying to say that since there was a contradiction, both physicians had to consult with each other and issue a joint letter. I tried very hard to explain to them that they were dictating terms of practice to not one, but two highly qualified medical practitioners, and that the terms of both instructions could be satisfied by simply doing what the more stringent of the two had asked for - and since I'd stopped them on my own when this whole issue first started, that was already accomplished by this point, so how about scheduling me for that tooth extraction?

No, no, no. That wasn't acceptable at all to these little tin-pot dictators. And at this point, my willingness to put up with any more of their nonsense basically evaporated. Keep in mind that I had been at home, in pain, unable to eat anything solid, for two full days since they had made their demand, and it's 4:00 Friday afternoon, so we're looking at three more days of pain and lost work before I can even schedule an appointment, never mind actually getting to that appointment or the aftermath. Meanwhile, whatever is going on in my jaw continues to get worse. Buddha only knows what complications this delay is going to cause. I asked for the supervisor, then for the dentist. The supervisor was part of the problem, and they wouldn't let me speak to the dentist, nor have him call me back.

Ladies and gentlemen, part of the reason and necessity for any licensing program at all - and this principle applies just as strongly to agents and brokers as it does to dentists and doctors - is that you have shown qualifications and a sufficient understanding of the thing you are professionally licensed in to make decisions and accept the normal decision-making responsibility of that practice. If you are not willing to accept that responsibility, or have willfully insulated yourself from it, then you are not worthy of your license and definitely not worthy of my business. I did manage to go back and get another referral from my general dentist, but the first oral surgeon's office staff refused point blank to return my medical records - in violation of state law - claiming that "office procedure" was not to release those records. Let's see: "office procedure". I don't intend to try it, but do you think a realtor might get away with claiming "office procedure" to defuse an accusation of breaking state law or RESPA? Let's say you get pulled over for speeding. How well do you think telling the officer that "office procedure says I'm not allowed to do less than 80 mph" would work in getting you out of a ticket, or do you think the officer might be justified in doing something more than merely writing you a ticket in such a case?

Not only that, but by failing to turn over my doctor and my cardiologist's existing letters, they prevented the second oral surgeon from extracting the tooth yesterday, therefore, the pain continues, as well as everything else involved. By refusing to turn over the X-ray that my general dentist took, they were keeping records they had no rights whatsoever to keep, as they had taken it in the first place under pretense of being willing to extract the tooth, they explicitly added to the cost of the replacement for the job they agreed to do by accepting it - but didn't. Both the state dental licensing authority and the insurance company are going to get complaint letters detailing these facts. I can hope to put them out of business, or at least to cost them all of the clients they might have gotten from my insurer, and my general dentist certainly isn't going to send anyone else their way.

What is the lesson here, the applicability for my own business? Well, it's one I already knew, but it's been quite a while since I encountered jokers who were so determined to exercise their own petty power to the utmost. This is why I want to handle all client communications, and why an agent that doesn't is setting themselves and their customers up for a bad experience. Yes, it means I can't accept quite so many clients as I could if I were fobbing off as much as possible on an office staff - but I'd rather make a little bit less money and have clients that are 100% satisfied, making it much more likely that they will come back to me or send others to me. Because anyone who isn't 100% satisfied is poison to my business, and they're not likely to come back or send me anyone else, which makes letting office staff insulate me from my clients is far more costly that the somewhat lowered earnings ceiling of handling all customer communications myself.

When choosing an agent or loan officer, you want one who tells you to call them, not the office staff, and who handles your calls personally, not by telling someone else to call you back. It's perfectly fine to have staff handle communications between agents or offices or service providers. But someone who's too busy to handle your concerns and issues themselves also can't keep track of what those issues and concerns are - and it's likely to bite them and you. Considering the dollar amounts involved in real estate, I don't want to be bitten and I will do anything I can to keep my clients from being bitten. Be careful that any agent or loan officer you choose acts the same way I do.

Caveat Emptor

One of the things the place I work does to attract clients is advertise foreclosure lists to our clients. Several times a week, people call and ask for the lists, and we say, "Great! Just come on down, fill out a loan package and an agency agreement, and we'll get them to you fresh every morning, and when you see one you might be interested in, we'll help you get it!"

Before the end, over 95% of the people have stopped us, saying they are already working with someone. "I just want the foreclosure list. Can't I get it?" Well, we pay money for that. Why should we give it to someone who is not our client and has the ability to pay for it on their own? Why didn't their agent get it for them? (Everyone can get a weekly list for free from the county - but that list is worthless except as a time waster, because that list is three to ten days out of date and they've already been swarmed.) If they want to work the foreclosure market, they should have signed up with an agent who has daily foreclosure lists. They haven't even found a property they are interested in yet, and already they know their agent isn't cutting the mustard for their purposes. But they are still stuck with them.

Another trick high margin ("expensive") people use is social groups. Nothing wrong with social groups and using people you know there, but make certain you're not paying three or five times the going rate for a loan, and that your agent really knows what they are doing before you sign on the dotted line. Church groups, soccer coaches, scoutmasters - I can't tell you all of the social acquaintances I've rescued people who became my clients from. These predators look at other members of the group as a captive audience. It isn't so, of course, those people have the option of going elsewhere - it's just difficult socially, and many of them are unwilling to make the effort.

One of the worst of these is family. Your brother, sister, aunt, or nephew is in the business, and your family makes it difficult not to choose them. "You simply must use your sister Margaret!" Well, if subsidizing Margaret to the tune of two points more than anyone else would get is your cup of tea. Around here, that's $8000 or so for the average transaction. You are not writing the check for the extra to Margaret directly, but you're paying her just the same.

Lest I be misunderstood here, there is nothing wrong with using friends, family, members of your social group. Please do check with them. The mistake is not in giving them a shot; it lies in giving them the only chance. That's what you call a monopoly situation, and the chances of you getting the best possible treatment are horrid. But if Aunt Marge or Uncle Bob know you're shopping around, they have more incentive to do their best work. If they know you're not, well I hate to break it to you, but the average person is looking for a bigger paycheck for the same work, and this includes friends, family, and social acquaintances, particularly because you are not the one writing the check, but you will pay for it, guaranteed. The worst mess I've ever had to clean up was caused by my client's uncle, who had been in the business twenty years, and was trying to extort just a little too much money for the deal to work.

On the other hand, when my cousin calls me out of the blue, I can cut him a deal because here is a transaction that I didn't have to spend time and money on wrestling it in the door; it walked in of its own volition. This is far and away the toughest part of any transaction, and one of the most expensive to any real estate practitioner - getting a potential client into your office. It's why the "big names" spend so much on advertising nationally, and give their folks half (or less) of the cut a smaller place will give them. (Hint: just like in financial planning or any other service, what's important is always the capabilities and conscientiousness of the individual performing the service, not the company).

So here's how you live up to the social expectations. Give them a shot, but not the only shot. If you are looking to buy and they are an agent, sign a non-exclusive buyer's agreement with them. This gives you free rein to work with other folks as well; just don't sign any exclusive agreements. Most agents, unfortunately, want to lock up the commission that your business represents and so they will present you with an exclusive agreement. The harder they argue for an exclusive agreement, the more you should avoid them. All that an exclusive agreement does is lock you in with one agent. If they are a lazy twit, you either have to wait until the agreement expires, use them for your transaction anyway, or hope you can get them to voluntarily release you. There is no way for you to force them to let you go. I get search phrases like "breaking an exclusive buyer's agreement" hitting the site every day. The only two ways to break an exclusive agreement are 1) wait for it to expire, or 2) get them to voluntarily let you go. I've never heard of the latter happening. So don't sign an exclusive agreement in the first place. Sign a non-exclusive agreement. This puts all of the motivations for work on your side, where they belong. The one who finds the property you are interested in will get the commission, but they have to work for it, as your business isn't locked up.

This also gives you an out if Aunt Marge or Uncle Bob doesn't cut the mustard. You can tell anybody who gets their nose out of joint, including them, that you gave them the opportunity to earn your business, and somebody else did a better job. The other guy saved you money, the other guy found you the property you wanted, the other guy got you a better loan. You wanted to do business with them, but they didn't measure up. Case closed, and Aunt Marge or Uncle Bob will drop it if they are smart, because the more stink they raise, the more likely it is that another family member, friend, or social acquaintance will pass them by in favor of "Could you give me the name of that guy who helped you?"

The only exception to the non-exclusive buyer's agreement is if they are giving you a service that you would otherwise have to pay money for. I am not talking about Multiple Listing Service - those are free and plentiful. I'm talking about real time information not available to the general public - like daily foreclosure listings. Our office pays hundreds of dollars per month for that as a way to bring in business. It is reasonable for someone working the foreclosure market thusly to be asked to sign an exclusive agreement, because otherwise there may be no way to determine who introduced you to the property (Lawyer's Full Employment Act strikes again!)

For sellers, unfortunately, you've got to make a commitment to list with one agent. It's just the way it has to be, economically, in order to get them to commit to spending the kind of money it takes to get a good result. But you can interview more than one agent. What are they going to do to sell your property for the highest possible price? Put it in the contract when you do sign. Everybody can put it in the MLS, and during the bull housing market we had for years, where unless the property was obviously overpriced you'd get multiple offers within a week, a lot of monkeys masquerading as agents made a good living doing that and only that. That doesn't cut the mustard any more. I work more with buyers than sellers, but there are venues that sell the property, venues that bring people to open houses, venues that generate people looking for the cheap bargain (which you don't want) and venues that generate people looking for property like yours in your neighborhood (who is your ideal buyer). Especially in a major city, these are all different venues, and the agent who knows which one is which is worth more than you will pay them, and the cheap agent who doesn't is likely to cost you a lot more money than their cheap asking price saves you.

For loans, I've written about this before, but shop around, ask questions of every loan provider you interview, beware of red flags, and stick to your guns. Try and find someone to act as a backup loan provider if you can, and do the work so both loans are ready to go when you need them. If you get multiple volunteers for backup provider, that would tend to indicate that they know that the loan you're telling them about isn't real. That's the question I ask before I volunteer to put in the work of a backup provider. "Could the loan they are telling me about be real?" If the answer is no, I volunteer to act as backup. Every single time, it's been my loan the person ended up getting. Your prospective loan providers should know the market if they are competent. Make use of that knowledge. And lest you be tempted to quote something at those loan officers that is not real, it's a self-defeating strategy. Honest loan officers will tell you point blank they can't do that, while the scamsters are going to get into the spirit of the situation, by which I mean saying anything it takes, no matter how fanciful, to get you to sign up. And those who are knowledgeable about the state of the market always know what is likely real and deliverable, and what likely is not.

Caveat Emptor

Original here

For at least the last thirty years, I've been hearing "affordable housing" advocates yammer about the high cost of housing, and how working families can no longer afford "decent" housing, which they apparently consider to be the three or four bedroom, two bathroom detached home. They go on and on about what is necessary to create more of this type of housing and our "moral obligation" to create more of it. Against this, we have their actual actions, politically allying with forces that make housing more expensive by constricting the supply.

Newsflash: Making business difficult for suppliers of a good does not lower the price nor improve the availability of that good.

Who does artificial constriction of the housing supply hurt?

Certainly not developers. The price of the actual permits, last I checked was in the $20,000 per unit range. But the decreases and constrictions and delays in supply add something like $160,000 to the price tag of that same unit. The people who want housing are here. If the demand is there and the supply isn't, what does that do to price? Oh, those poor developers! They're being hurt to the tune of $140,000 additional profit for each unit they build. Please, Brer Fox, don't throw me into that briar patch! To stay within the genre, trying to harm developers in this sort of fashion is a tar baby for those trying to do it.

It sure as heck doesn't hurt the wealthy, either. They can afford housing. Matter of fact, the constriction of supply makes their real estate investments appreciate more rapidly. Increasing demand and regulatory brakes on the ability to furnish supply is pretty much the recipe for rising prices. Furthermore, this encourages speculation, driving bubbles like the ones that we just went through. It wasn't the wealthy that got hurt by that bubble. It was the folks who could just barely qualify and the people who stretched more than they should have or told fibs in order to qualify. Who was that? It certainly wasn't the wealthy. High end housing was the first to start sitting longer, because the wealthy weren't worried about getting priced out.

It certainly doesn't hurt current owners, who ride the price wave in the same manner as the wealthy investors, if not quite to the same level of profit. Anytime the ratio of demand to supply rises, so does price, and anyone who already owns benefits. These are folks well-established in life for the most part, along with high income individuals and those who inherited wealth. Sound like anyone who needs to be getting what is effectively a public subsidy?

So who does keeping the supply of housing low hurt the worst?

The young. People just getting started out. People who won't get started for another fifteen years, by which time current housing prices will seem like the Golden Age. Every time there's a new household but no new housing, the price goes up. We're going to keep gaining new households, and I don't see enough new housing on the horizon. You do the math.

Transplants coming from where housing is cheaper. Even if they own a $100,000 house free and clear, that's only a 20% down payment on $500,000. Lots of San Diegans seem to have an attitude about transplants - but most of them are themselves transplants. The question of "who is a transplant?" is very much a question of where you draw the line. Speaking as a second generation native, my take is let's just trash the whole transplant prejudice thing. People want to live here. Providing they're in the country legally, they have the same rights to do so that my family and I do. We can create the housing for them, or we can create shortages, which lead to higher prices and unaffordable housing for everyone.

The working poor. Yes, the very people the affordable housing folks claim they want to help. But keeping the supply low, delaying the arrival of more units onto the market while keeping others from happening at all, is a recipe for rising prices. A couple making $15 per hour each makes just over $5000 per month, which translates to about $2300 they can afford for housing and all their debts. Assuming they have no other payments, that's a purchase price of a little over $300,000. That might buy a severe fixer detached home or a condo in decent shape. What happens the next time they need to buy a car? Unless they're one of the rare folks who still manage to put money aside every month, they have to consolidate the car loan with their mortgage in order to afford it. Ditto any other sudden expenses. This is the opening movement to a symphony of financial disaster.

I know that the political alliances in this country have gotten completely nonsensical, but it's past time for affordable housing advocates to break away from the same party that houses the anti-development and anti-business activists. Yes, ACORN, I'm looking at you (among many others), with your "retain voter registrations of your favorite party, trash registrations of their opposition" drives (blatantly illegal, by the way, and this isn't the only such story by any means). Never mind what's the matter with Kansas, I want to know what's the matter with affordable housing activists. By any reasonable measure, they're making the problem worse with their political alliances, by supporting the agenda of their natural antithesis. If their game is to actually make housing more affordable, most of them are miserable failures at what they say they're working towards.

Of course, if the game is to make the problem worse, so that people have no choice but to deal with these organizations as supposedly the only hope of the working poor, thereby increasing their own power, these organizations are doing just fine. Trojan horses for empire building are one of the classic recipes for political success.

Caveat Emptor

There are many ways of suckering real estate consumers, and cash as an inducement to get people to swallow a raw deal is one of the most common.

From sellers (usually developers), "free" upgrades are one of the most common. They overprice the property by $50,000, and make you feel like you're getting a deal with "$10,000 worth of free upgrades" that really cost much less. In many cases, they're pre-installed and if you wanted to buy one without the upgrades, they would be unable to accommodate you. But if you're not working with a good buyer's agent who is looking out for your interests, you'll never hear about better properties offered for less.

From agents, they offer commission rebates or reduced price listing packages. But to pretend that these packages offer the same level of service as more expensive packages is ridiculous. If you're looking for a cheap MLS listing service, I've seen them for less than $100. But if you want someone to market your home, look for and attract the buyers you really want, or negotiate on your behalf, you are going to be extremely disappointed. When you are dealing with a strong sellers market like we've had for most of the last decade and don't care if your property sells for the best possible price, discount listing services may be the way to go. If you are dealing with a buyer's market, if you have some issues with the property, if you really want someone to market it in such a way as to find your ideal buyer and get the best price, the more expensive agent who does more work is likely to get you enough more money to more than pay their increased compensation.

Agents who offer a portion of the buyers agents commission back are not the most proactive agents out there. They do not typically advise you as to the state of the market and whether there is a better buy out there. They aren't looking for the better bargain, they don't know enough about the state of the market to be strong negotiators, and they're certainly not out scouting properties looking for value and trying to spot issues before you make an offer. They do the minimum necessary to get a commission - they literally cannot afford to do more. It is trivial for a more involved agent to get you a better overall bargain.

Some sellers will offer cash back to the buyers. This needs to be distinguished from paying the closing costs you would normally pay as the buyer, which is legal and acceptable, providing it is disclosed to the lender. When the seller offers to put cash back in your pocket, you have the choice of either disclosing it to your lender or not disclosing it. If you don't disclose it to the lender, congratulations! You have just committed fraud, and lenders do get their dander up over it. If you do disclose it to the lender, they will base their loan off (at most) the net sales price, which is the official price minus the rebate. This shoots yourself in the foot other ways, as well, because it will likely increase your tax assessment, and could increase your cost of insurance.

Cash back from a loan provider is most often an intentional distraction, so that they don't have to compete on the real price of the loan. They tell you you're getting $10,000 cash back instead of how much the loan is costing, they can hit you for an extra $2000 in closing cost markups and three points of origination, not to mention that what they are really doing is adding all of that money AND the $10,000 to boot to your balance, where you'll not only owe the money, but pay interest on it for years. Plus it's likely that they stuck you with a higher than market rate of interest as well, because you were distracted by what you thought was free money, so they make more money there, also. Shop your loan by the terms, rate, and total cost to you. All of this can trivially eclipse the $10,000 they put in your pocket - even if they weren't adding it to the balance of the loan.

Offers by a lender to pay your appraisal fees are most often trying to lock up your business from their competition. They're not competitive on price, so they apparently offer you a $400 freebie, while charging you $2000 extra in marked up closing costs, those same three points of origination I talked about, and then they ding you $500 for the appraisal on the final paperwork. This is one of the best ways to get a very high markup on a loan that there is. If you like paying more for a loan than you need to, a "free appraisal" is one of the best ways to go about it.

Finally, this article wouldn't be complete without mentioning several of the ways that quoting low payments for a loan can mess you up. The average consumer may know better in other contexts, but they still shop for real estate loans by which one has the lowest payment. This is basically financial suicide. There are so many loan providers out there pushing negative amortization loans, in which your balance owed increases from month to month in order to allow you to make lower payments, that even when I warn potential wholesalers that I don't want to hear anything about negative amortization loans, at least half of them get themselves thrown out of my office by trying to get me to sell them. They also have higher real interest rates - the price you should pay the most attention to - than many other loans. Right now, you can most likely get a thirty year fixed rate loan at a significantly lower real interest rate than the equivalent cost for a negative amortization loan.

Nor is this the only game played by quoting low payments, merely the most prevalent and most egregious right now. Interest Only loans, short term hybrid ARMs, and Temporary Rate Buydowns are all quite common. Even if you manage to dodge that bullet with those who quote you low payments in order to sell you a loan (unlikely), there are still all of the standard games that get played with payment. They fudge the math, they "forget" to include the costs in the computations, they pretend you are going to pay the costs of the loan out of pocket when they know good and well that you intend rolling them into the loan, they just lie about their rates and the costs to get them, or, to be able to quote a low payment, they quote you the rate that costs so much that you will never recover the costs of that loan over its entire lifetime and pretend it doesn't have those costs. The payment is determined by how much you borrow, at what rate, with what length repayment schedule. The math is the same regardless of the lender. You need $X for the obligations - either the current loan or the purchase. Adding the least cost and being charged the lowest interest rate (always a trade-off between the two) makes for a lower real cost to the loan. Remember, when you refinance, or buy another property, you're paying for your loan rate all over again, so all that money you paid to get a lower rate is gone when you let the lender off the hook by refinancing or selling the property. Most folks do this far more often than they realize.

Greed is good, Gordon Gecko not withstanding. But let's make it rational greed, because thinking that you are getting a freebie and not asking what it really costs is likely to cost you many times the amount of what you think you're getting for free.

Caveat Emptor

Original here

For at least the last thirty years, I've been hearing "affordable housing" advocates yammer about the high cost of housing, and how working families can no longer afford "decent" housing, which they apparently consider to be the three or four bedroom, two bathroom detached home. They go on and on about what is necessary to create more of this type of housing and our "moral obligation" to create more of it. In light of the current situation, I'm going to make a conscious effort to continue my occasional series on factors that influence the overall market for housing. I'm going to examine the broad macroeconomics involved, the assumptions necessary, whether it is or is not long term sustainable, and the choices we face in sustaining or curtailing it.

Today's topic is how the housing market of today came about and what sustains it. A century ago, roughly eighty five percent of the population did not live in major cities, but rather in small farming communities which more or less blanketed the nation. Suitable land for housing could be anywhere, and so it was much more readily available and much cheaper. When the criteria is "anywhere there's land I can farm," you can choose any arable parcel and build a house on it. Even if you don't live on a farm but in one of the small towns, when you can walk the length of the town in five or ten minutes, it's a lot easier to arrange housing for everyone. If one particular town becomes too crowded, the next one over became attractive. If you need a place for a few more people, one of the farmers whose land immediately surrounded the town could usually be persuaded to sell some land. The cities were dense affairs, much more like european cities than is the case today. Indeed, the few large cities we had built up before the war still retain that urban core with dense multistory housing that is characteristic of the period. The typical pattern of the day was that young women, in particular, would continue to live with their parents until marriage. Young men of marriageable age would most often live in rooming-houses or boarding houses once they became gainfully employed. Apartment dwelling was only somewhat expected for young couples just getting started and urban dwellers who might have been together for many years, yet could not afford anything better in close proximity to their profession. Urban housing was tight-packed because the land was very expensive by standards of the time, and urban transportation was communal to a far greater extent than today. It is much more common today for even people in Manhattan to own and drive cars than it was before World War II. The use of steel as a building material was a big deal for those urban centers because it meant that it was possible for them to build further up. San Diego is very much a post war city, but even we still have areas that were built in those times - packed in tightly, cheek by jowl, extremely dense living. Once upon a time, before reliance upon military work and bad policy ruined it, San Diego was a major west coast port and the base for the largest fishing fleet in the world - two of my aunts married tuna fishermen. Even further out, in what were before WWII the "newly urban" areas of North Park and National City, the housing very much resembled classic "company town" housing - 600 and 800 square foot one and two bedroom cottages sitting on 3500 square foot lots. These were the era's predecessor to the exurban bedroom community of today, usually owned by members of the skilled trades or young professionals. The core suburbs today such as La Mesa were still economically speaking, farming communities. Even Mission Valley was mostly farms until the early sixties. During this time frame, only the comparatively wealthy lived in larger houses within city limits. If you go to Mission Hills above Old Town, or Grant or Banker's Hill (and here and there in other neighborhoods) you can still see a very few of the large houses for the Well-to-do of that era.

Indeed, the three bedroom, two bath detached house in an urban setting for the working class is almost entirely a creation of the post World War II mood in this country. For several years, very little housing had been built, and now these men who had gone off to war and saved the world as seventeen and eighteen year olds who had traditionally remained with their parents or moved on to boarding houses until they got married were now returning as twenty-two and twenty-three year olds who were traditionally married and starting families by that point in their lives. The women to marry them wasn't a problem; the housing to put the new families in was. These folks had several years of savings (war bonds, the wartime sacrifices, etcetera), and the traditional apartments were considered a poor and at best temporary inconvenience until that new modern post-War marvel - tract housing - could be built in sufficient numbers. And if such housing was horribly inefficient in terms of land, utilities, and transportation, nonetheless we were the wealthiest nation in the history of the world, and accommodating their desires for such was the least the nation could do for our valiant warriors. Furthermore, with the aforementioned savings they had accumulated during the war, the young men and their new wives could afford to pay for this new housing. If you're wondering about "It's a Wonderful Life," keep in mind that most of that 1946 movie takes place well before the war, and even by the time of its release, the country hadn't yet shifted very far from the way things were done pre-War.

The land was available and largely vacant then, and certainly could not and can not be covered effieciently by public transportation, but the newly affluent families (through savings during the war and better jobs after) could afford far more automobiles as well. For the first time, women were staying in the work force in significant numbers until motherhood. There was plenty of land available. As a young child in the early sixties, I can still remember when there was space between all of the suburbs, even when we drove to Los Angeles to visit family members or Disneyland. I-5 was brand new thanks to President Eisenhower, and from the point we got out of the Pacific Beach, there weren't any towns visible from the road, just widely separated houses, until we passed Oceanside and Camp Pendleton, at which point there wasn't anything more until San Clemente and San Juan Capistrano, then another good long way past that before there was anything more again. It wasn't until just before Disneyland that we saw more city. The I-5/405 split in the middle of present day Irvine was out in the middle of nowhere back then. My parents almost bought a 320 farm just east of the Del Mar fairgrounds the year I was born. One of my best friend's parents had considered a farm in Mission Valley, despite the fact my friend's father was in the navy. If you clicked on the images, you know none of these are empty land any longer.

Why not? Suburban housing and to a lesser extent, support services have eaten it up. The only open area between the Mexican border and the Tejon Pass is the stuff that's been held aside for other reasons, such as Camp Pendleton, which the Marines badly need. Los Angeles with 3.8 million people has an area of almost 470 square miles, while by comparison cities of similar population elsewhere such as Ahmedabad in India, Alexandria in Egypt are a fraction the physical size. If we're going to keep doing the same thing, we're going to run out of places to put everybody. In fact, in Southern California we have essentially done so. New development is taking place in Hesperia and Victorville, or out past Banning, or out in Hemet or eastern Murrieta, all of which are an hour and a half minimum trip time from the center of the urban areas they service, even if you're driving it at an hour when there's no traffic.

This also creates a lot of logistical problems. Most inhabitants of the cities concerned would have no trouble naming the most salient problem, which is transportation. When you have that many people that spread out, and you need to move them all significant distances at pretty much the same time, it takes a massive amount of transportation infrastructure to do so. US 395, the predecessor to I-15, was one lane each direction from Escondido until just a few miles south of present day I-10. But it isn't just transportation. Utilities are a much larger headache to supply than sixty years ago as well, and the logistics of keeping that many people supplied with groceries and gas and everything else make the transportation and utilities problems seem easy.

Finally, there are legal and political barriers to continuing to build housing in this manner. Environmental concerns are the most obvious of these, but building codes, zoning, and other concerns form significant obstacles to its continuation, as does the consumption of land. Once upon a time Southern California was some of the most productive farm land there was. My wife's uncle was a well-off citrus grower until the developers bought his land for millions of dollars. I can remember (barely) large tracts of citrus in El Cajon and Lemon Grove and Escondido. The only reason the hillsides north of Escondido are still relatively uninhabited avocado farms is because they're steep enough to render development difficult. The same applies to all of the other agricultural land remaining.

All that aside, I would like for housing prices to be affordable, and for everyone who's going to grow up in this country for the next century to be able to afford the type of housing they want, where they want. Absent some major changes in public policy and employment practices, it's not going to happen. The land no longer exists, we can't afford ongoing losses in arable land (look up how few countries in the world are net exporters of food), the transportation networks are saturated, environmental regulations are restricting development as are legal hurdles such as necessary permits (which add roughly $20,000 per unit to the cost of new housing, but over $100,000 to the price due to constricted supply), and lets not forget legal challenges from NIMBYs, BANANAs and environmentalists who already have their 3 bedroom 2 bathroom suburban home, and whose property values just happen to increase in a manner directly dependent upon how far they can constrict the supply of new housing. In short, the current situation does not appear to be sustainable absent major societal changes.

Caveat Emptor

Or: Please don't believe everything you read on the internet!

Rarely a week passes by that I don't get a request from someone to link to their website or article. I'm happy to link to good sites and good articles with real consumer information. Unfortunately, this is not the majority of what's out there.

I got three requests in the last day. Two were obvious spam sites, one didn't even address me by name. The third was a little harder, an article that claimed to be written for consumer benefit. Unfortunately, its five main paragraphs were wrong on every point of substance, and so vague as to be useless on everything else. But when I sent them an e-mail suggesting they improve it, I got a three letter response: LOL.

For those of you who may not understand geek speak, this stands for "Laugh Out Loud." In other words, my request was laughable to them. They wanted free links to the site, and were willing to research email addresses and such, but weren't willing to produce actually informative correct content. My primary hypothesis, which I'm not going to bother to test as it involves motivations I don't care about, is what they did write fit their own agenda better than something closer to verifiably correct. I see people writing - or who have written and are flogging - articles with similar points to that one every day.

Unfortunately, this attitude is far too common. People build these websites to optimize their chances of getting a relevant search term hit. None of the search engines tests any site for reliability of the information it contains. A search engine referral is not a guarantee or even indicator of reliability - it means they found the relevant search terms there. Testing the veracity, correctness, completeness, and usefulness of the information contained is left as an exercise for the potential reader.

I also get e-mail from consumers. One recently thanked me, saying it's easy to find real estate information, but it's difficult to find good loan information. Actually, it's just as difficult to find correct real estate information. More of what's out there is somewhere in the general vicinity, but just because it's apparently closer to the truth does not mean it doesn't contain deadly traps, made all the more plausible by association. When you're talking about real estate and mortgage loans, there's a lot of money at stake. This is all the reason necessary for some people to say whatever it takes. Remember, none of the search engines tests for reliability of the information, and failure to examine everything you read - particularly in an area where few people have competence but many people think they do - can often lead to a situation which appears to be successful until years later. Real Estate is one of those fields. I'm going through a transaction right now where it's becoming more and more challenging not to speak ill of the listing brokerage as a whole. I've got the buyer's end done and there's no termite clearance, no zone disclosure report, none of the other required disclosures, they took the lockbox off without informing me or my clients (itself a violation of MLS rules) so we couldn't do our walk-through yesterday, and that's not all by any means. That seller is sitting fat dumb and happy - and liable for basically everything in the known universe. Yes, it's a discounter. Why do you ask? Oh, right. Because I've got to do their work so that my client is aware of what they need to know before we actually consummate the transaction. But I don't have any legal liability to do so as the buyer's agent. It's simply my desire to prevent my client from unknowingly walking into a bad situation, and if I didn't, it could be ten years from now when my client discovers something, and goes to court for a fat settlement from sellers and listing agency, or even forcing them to buy the property back. Apparently successful for years, but in the end a disaster. Not to mention a couple of things that I can't talk about until the transaction records.

People have various reasons for building websites. In some cases, they're trying to sell advertisements. In fact, there's a lot of those sites, where the entire purpose of the website is to collect money from people clicking off of the site to one of their paid advertising links. I've got some of those; One direct, a couple more through AdSense and BlogAds. It pays my bandwidth charges, and usually some of my domain renewal. I'm far pickier than most about my ads, and I'd like to get to the point where I can tell AdSense to take a hike, because they don't allow me any ability to reject individual ads that may be objectionable.

Other people build their website with the explicit intent of selling something specific. I'd like to sell something specific: My services as a real estate agent and loan officer. However, I'm nonetheless doing my best not to write anything that I could not defend in an academic thesis if I were a professor and tenure was at stake. I don't get offended when people question what I write unless it's in an obvious shill way. Furthermore, I'd like to think I'm as evenhanded and complete as possible in dealing with the pluses and minuses of everything. Everything I write is designed to be tested for its veracity. In other words, if you check out what I say, whether in an actual transaction or by checking with knowledgeable neutral parties, I would be very surprised if there were substantial points of disagreement. This isn't to say I can't make mistakes (Brian, you were right about 45 day locks in January. I blew a thirty day lock for the first time since 2003, and had to pay the 5 day extension out of my own pocket). But that I try very hard to make everything I say verifiable by independent test makes me highly unusual on the internet. Some people are every bit as careful as I try to be. Others are somewhat less careful. Probably the majority do not care so long as it enables them to sell more of whatever they're selling.

What I'm trying to say is that you should make every attempt to test everything you see on the internet, including my stuff, before you bet large amounts of money on whether we're right by conducting a real estate transaction in accordance with what we say (Although if I'm your agent or loan officer I become responsible for what I say financially and professionally). That's one of the reasons why I'm not hesitant to drag out a calculator or spreadsheet and show you the numbers. If it cannot be expressed in mathematics, it's not fact - it's opinion (Thank You Mr. Heinlein for teaching me that while I was still young enough to absorb it. This isn't to say that if it can be or is expressed in mathematical terms that it is true. You've got to crank the problem and see if everything matches). Try to debunk it if you can. Does the evidence - independently gathered - confirm directly, confirm circumstantially or tangentially, confirm with exceptions, partially confirm, fail to confirm, contradict tangentially, contradict circumstantially, or contradict directly what is said? In the absence of substantial contradiction, is what we say at least internally consistent? If there is contradiction, how far does said contradiction unravel the claims? It's very different if it contradicts the central point or points and causes everything to fall apart, versus if it only contradicts some tossed off side track. Logic and the scientific method are always your friends.

Another trick is to observe whether the source admits things that bolster an opposing case, or something against the point they're trying to make. The more opposing viewpoints or evidence against their point they entertain, the more likely they're honest. Especially if they're scrupulous in the way they handle to evidence against them. None of this helps if the central tenet of what they're telling you is flatly contradicted by a known and verified fact, but in the absence of such, honest treatment of the merits of alternate explanations is a very good sign.

The quality of the confirmation or contradiction - how credible and detailed the piece of information you use to check it - is also important. You could find yourself having to check out many different interpretations before you're certain where the truth really lies.

Absolute truth can be a difficult thing to attain, there is often room for differences of opinion, and there are many logical fallacies to which even people of good intent can fall prey. The difference between a valid and invalid argument or statement can be very fine. Please, do not take anything you read on the internet as gospel truth without thoroughly vetting it for incorrect information, false premises, and false inferences. I don't believe I'm infallible. I do see stuff on the internet every day which is thorough nonsense even though it may appear credible on the surface. Sometimes it's with malice aforethought, sometimes it's an honest mistake, sometimes it's a simple misunderstanding of source material, and sometimes it's even just viewing source material from a viewpoint that distorts the answer. For my part, I try very hard to get it right and to cover information that might disagree with what I'm saying, but there's a reason why I end every single article here with

Caveat Emptor

It's the same reason the phone company doesn't want to compete, General Motors doesn't want to compete, Wal-Mart doesn't want to compete, Disney doesn't want to compete, and Microsoft will do everything in its power to appear as if it doesn't have to compete. They make less money when they have to compete, and they have to provide a better quality of product.

But people know that all of the above have competitive alternatives. If you don't like one brand of automobile, there are dozens of competing alternatives. Ditto retail outlets. "Kid safe entertainment" is a bit more of a niche market, but there are competitors if you'll look. Finally, we should all be aware that computer OS's are one of the biggest Drazi Wars there are. But there is competition.

But many agents and loan officers make their living by pretending there is no competition, or by actively manipulating consumer choices to preclude the possibility of competition. This takes many forms, from requiring large deposits for loan officers through exclusive agreements with agents. There's nothing fundamentally evil about this - everyone needs to make a living. But there's nothing that says any particular consumer - by which I mean you - has to put up with it. Furthermore, the agent or loan officer who is confident enough to work without these devices is likely to be a better, stronger practitioner. Ask yourself who you'd more easily believe has more on the ball: Someone who tries to keep you from considering the competition, or someone who's happy to compete? If you were interviewing two applicants who want to work for you, who'd be more likely to get the job: The person who walks out as soon as they find out you're considering someone else as well, or the person who gets their act together and out-competes the other applicant? If you were interviewing with two companies who wanted to hire you, which offer would you be inclined towards: The one where you have to hide the other interview, or the one who's willing to compete head-on for your services?

Nobody's going facilitate competition for the job they want. Nonetheless, it is to your advantage to force them to compete. If you don't understand why, consider that for all the griping about various phone companies, the situation is far superior to what it was when there was only one. Here's a particularly poignant reminder of that era.

Here's the facts of the situation: If you're only going to talk to one provider, they can quote you anything they want. There is no check upon the situation. If I were the only loan provider in California, I could charge anything I wanted. I'd auction my services to the highest bidder, work a couple hours, one day a week, make as much money as I wanted and go on to spend the rest of the time having fun with my family. If anybody didn't like the level of service, that would be their problem. But that's not the case. In fact, the further it is from being the case, the harder I have to work, the less money I make per transaction, and the better the service I need to provide. It's also the case on the voluntary level, which is to say if you voluntarily restrict yourself to one potential provider, as well as the involuntary. It doesn't matter how many loan providers and real estate agents there are, what matters is how many you talk to.

People in the real estate business get told all the time that the way to success is to avoid competing, especially to avoid competing based upon price. If ever a week has gone by without some clown wanting to charge me a thousand dollars to learn how to avoid competing on price, or avoid competing, period, I certainly can't remember it. They work, by and large, on two levels - pretending you're the prospect's friend while engendering fear of the competition. "You know I'm your friend, George. You know there are sharks and cutthroats out there who will take your money and leave you high and dry, but you know I won't do that, George." And there are sharks and cutthroats out there. The guy talking to his friend George here is one of them. This is the way he talks George out of checking up on him, comparing his services and prices to either objective standards or to any other provider's. Nor are women any superior - in fact, I've had a report of one of the worst sharks I'm aware of preaching a "female solidarity" line of attack to cut out her competition. Other sharks attack via ethnic or religious solidarity, or even political similarities. What these have in common is that none of them have anything to do with competence at real estate, and they may not have anything to do with conscience. I've seen people preaching the gospel about taking care of your fellow man while extorting thousands of dollars from their client's pockets. Newsflash: The sale of Indulgences went out with the Reformation, and for good reason, too. I'm certain it happens with other religions, as well, it's just that there's fewer members of those religions around.

One of the ways I constantly see this abused is even people who should know better advising their readers to "ask someone you trust for a referral." Well, referrals are great - if the person making the referral knows what they're talking about. If they don't, it's just another goat lined up for sacrifice, willingly led in by the previous victim, If not worse. Here's an article from just a couple days ago (HT: FraudBlogger.com, who always has a relevant example of bad behavior handy). No matter how trusted the source, it still needs to be fully vetted - you need to do your own due diligence, and part of that is comparing them to some other potential service providers.

There just isn't any valid advantage from the consumer's point of view to forking over a large deposit or the originals of any documents to a loan provider. They don't need originals, and the only thing that large deposit does is give them some money to hang onto if you find a better loan. All of the better loan providers I'm aware of work on the basis of "fees at point of service," not requiring a deposit in advance. In fact, a cash deposit can induce people to accept loans that are many times the amount of the cash deposit worse than other, available loans. People understand that check they wrote out of their account is real money, where most of them are a little bit hazy about loan costs paid by rolling them into the loan balance. I saw someone pass by a loan I had that was four thousand dollars cheaper up-front and would have saved them $1000 per year they kept it because another lender already had a $1500 deposit from them. Here are a few more pointers on shopping for a real estate loan.

Admittedly, I have come to the reluctant conclusion that it is in the consumer's interest to list their property for sale via an Exclusive Right to Sell. However, this doesn't mean you're not going to shop extensively. This only means that you're going to make that commitment to one agent once you have done that research. Failing to do so risks locking your property up with an incompetent agent. When you ask "what's so bad about that?" ask yourself if you'd be happy taking ten to twenty percent less for the property (or worse!), after you keep paying the mortgage six more months? Around my area, with the median sale being $423,000 last month, and assuming a loan at six percent on eighty percent of value, not only does signing up with someone who can't get the job done cost you $42,000 on the sale, it'll cost you about $2200 cash for every month that property doesn't sell! Realize it or not, you're risking a lot of money on an agent, and just because you're not writing a check to them directly at sign up in no way changes this. However, I don't advise going with the agent who asks for a short term listing, either. That's an appeal to cowardice - decide by theoretically not deciding, and make no mistake, you are deciding when you sign a listing agreement for any period of time. This isn't to say you can't bargain the time for commitment down if you're willing to take a chance on a less experienced agent - it's just saying don't decide by pretending not to make a decision. That way lies disaster. Here are a few more tips about Shopping for a listing agent.

For buyer's agents, there really isn't a reason for an Exclusive Agency Agreement, except to allow an agent to wrap up your business for whatever period of time. There isn't hardly an excuse. The only place I can see it being an effective alternative for the consumer is if they're working the foreclosure market, and that agent is spending the money for all of the "quick notification" services so that the client doesn't need to. But the vast majority of the time, agents are locking in people who simply don't know any better with an exclusive agency agreement. I've seen listing agents who wouldn't show a property without an exclusive buyer's agency agreement - a clear violation of fiduciary duty to the seller, not to mention a huge Conflict of Interest if they actually want to put an offer in on that property. Non-Exclusive Agency Agreements protect the buyer's agent just fine, but they also give you the right to fire non-performers by just not wasting any more of your time. You can also use them to separate the wheat from the chaff among buyer's agents. Sign any number of Non-Exclusive agreements you want. The good agent will still do their work; while the lesser agents will select themselves out. While we're at it, here's a few more tricks to finding a good buyer's agent.

Agents and Loan Officers don't like this. It means they might not get the business when they're exposed for the buffoons that some of them are, and it means they might not make as much money for the time they put in. Nor is exercising your choices as an informed consumer simple - far from it. You also need to consider what agent services are worth how much to you. But considering the average price of real estate around here, and the cost of the loans that most people need in order to buy, doing proper diligence beforehand will save most people more money than they make in a month - perhaps more than they make in a year, possibly more. When you consider the differences in that light, the hourly pay for doing your due diligence about agents and loan officers and forcing them to compete is absurdly high.

Caveat Emptor

It may not come as a shock to you, but loan officers, along with many other salesfolk, speak a different language than the rest of the population. What will probably annoy you, however, is the number of times they'll say something that sounds like a phrase out of English, but really is from Salesgoodspeakian, a bizarre tongue in which the true meanings must be learned by osmosis from the particular subculture's dialect, while intending to communicate something entirely different to the poor schmuck who, after all, doesn't understand salesgoodspeakian.

This post is intended partially as humor, partially as education. I'm going to start it with a few of the most common ones, and update it by adding more and reposting from time to time. If you've got a good one, either with or without translation (and whether from one of my fields or not), please send it to me along with the context, if appropriate (dm at). Even if you don't have a translation, I'm pretty good at major dialects of salesgoodspeakian. It is to be noted that these phrases are not red flags, but more in the nature of yellow flags. If they just occur on a stand-alone basis, it's something that's likely to proceed from yellow to a red flag, particularly with repeated yellows. On the other hand, if the person uttering them proceeds to issue a clarification in plain English, issues an amplification rendering the translation void, or translates and explains the salesgoodspeakian, it's possible you've just been given a real world green flag that this is an ethical person. For instance, my absolute favorite loan to do is a true zero cost to the consumer A paper loan (and no prepayment penalty!), which I usually explain as "Nothing added to your mortgage. You've just got to do the paperwork with me, and come up with the money for the appraisal, which will be returned to you when the loan funds". And it's also possible you've been given a reinforced red because they lied.

And yes, I've had clients who came to me report every one of these. Some of the translations are a little exaggerated to make the point, but the spirit remains the same.

The salesgoodspeakian to English phrasebook:

Mortgage dialect:

"Stress free loans" two percent higher than you'd qualify for with better documentation and a little more work and less greed on the loan officer's behalf.

"Won't cost you anything out of your pocket" - Six points and $5000 in well-padded closing costs added to your mortgage loan balance, though.

"Thirty Year Loan" fixed for the first two, if they're feeling generous that day, but it does have a thirty year amortization. With five year prepayment penalty of course!

"How does a 1% rate sound?" Like you're a misleading weasel trying to get me to do a loan that digs me in deeper every month with a three year prepayment penalty that keeps me trapped even after I figure it out (See Negative Amortization Loan)

"Industry standard" - Everybody else at this company does it that way, too, because the boss says to, and I don't know any better. (This is very much the "G" rated translation. Please note that there are industry standards - things that pretty much every company in the industry does. Some of these standards need to change, some just are, and some are actually beneficial).

"Everybody knows there's 2% origination fee." Actually, everybody knows no such thing. But if I told you about it in the first place, you might have gone with somebody honest.

"Brokers can charge you anything they want" - so can I, but brokers have to disclose their compensation and bankers don't.

Found on the same billboard:

"Rates as low as 4%!" on an "adjusts every month" loan that's going to 6% next month and who knows what thereafter. With five points. While I have you on the phone, let's sign you up for it.
"No Points!" we've got no points loans. Not on the loan we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, what's your name?
"Low Fees!" compared to the multimillion dollar Oil For Food bribes, $23,000 is low. Now about that 4% loan, what's your social?
"Easy paperwork" but the start rate goes to 6% for the first month, adjusting to 8% next month. Still five points. Not for the rate we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, when can you come in to sign?

Real Estate Dialect:

"Sure houses are expensive, but the loan is cheap" No, this property isn't worth what they're asking for it. But since you don't know any better than to buy based upon payment, it lets us get you into a loan that you're going to think you can afford, until long after we have our commission!

mortgage humor real estate—

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

HR 3915 is not the answer. We've been here before (in the early 1990s), congress did something remarkably similar except a little bit more sane. It didn't work then. Why would we expect it to work this time? Among many other problems with the bill, if prohibiting yield spread being used by brokers to pay loan costs and their own compensation is a good thing, why not get the whole of the problem and prohibit lenders from selling notes above face value at all? The differences are two: The premium that lenders make from selling loans above face value is more than yield spread (usually double yield spread or more) and whereas yield spread is disclosed to consumers, the premium a loan will sell for on the secondary market is not. This proposal is a payoff to lending industry campaign supporters, in order to make it more difficult for brokers to compete. Nor is there any legal requirement for a lender to offer yield spread. If lenders feel it is being abused, they have the ability to refuse to offer yield spread. But of course, then the lenders that continue to offer it will attract more business from brokers - an incentive for individual lenders to make more money by breaking ranks with their competitors. Lest you not understand, if individual lenders can not break legally do this, the lenders as a whole will make more money, and consumers will lose.

I've also seen proposals put forth that federal licensing, a la the NASD, will solve the problem. Preposterous. There's lots of counter-evidence on this one. Black Monday 1987. The dot com bubble of 1996-2000. Pretty much everybody in the securities business is multiply licensed, and it didn't prevent either one of these. The securities business may be a little tighter than the real estate business, but that doesn't make it something to emulate, nor does it mean that licensing will solve problems, as I have illustrated with these two well-known examples, and could illustrate with many others, less well-known but no less telling. If we're going to have licensing requirements, I favor toughening those requirements, but not for this reason.

The causes of this mess are not simple, and a real solution will not fit in a sound bite.

The problem was one of responsibility. Responsibility in law and legal responsibility in fact.

Lending practices had become decoupled from responsibility. Not only had the lenders become insulated from the consequences of offering ill-considered loan programs, mortgage originators had become insulated from the consequences of making an unsustainable loan, the agent from the consequences of selling clients a more expensive property than they can afford.

The point of immediate failure was the loans associated with real estate, and so I'm going to focus there for this article. It wasn't buyer cash, or the price of housing. You can do anything you want with your cash, and the worst thing that can happen is that you don't have it for something else. If the day after you buy a million dollar property for cash, the market collapses and it's suddenly only worth fifty cents, you've still got that property, you just don't have the million dollars for other uses. Whatever the purpose it was going to be used for, it can still be used for. There are no issues with being unable to make monthly payments, no need to refinance when you're upside down because you can't make those payments, and you're not on the hook for money you probably don't have and can't get by selling the property. That's part of money management for adults. But for loans, you're making payments on existing debt with money you are theoretically going to earn in the future. The most critical factor is not the immediate payment. It's the cost of that money - the interest on the loan and the initial costs to procure that loan. Some people still don't understand that these are not the same thing. People tried to pretend that the real cost of the money didn't matter, only the monthly cash flow - until the real cost of the money rose up and bit millions of people in denial. It was the money for debt service that gave people difficulty, and the inability to pay the real cost of that money that financially crippled the vast majority of those that got hurt, and those who are going to get hurt in the coming months.

If I had to look at one place to stop future problems like this before they start, it would be in the loan. How many people would be in difficulty today if lenders had been unwilling to make the loan? That real estate agent can preach for months about how great this house is, Mr. and Ms. Wannabe Homeowner can pine for it all they want, and Mr. and Ms. Seller can proselytize about how wonderful an investment the property is. The fact remains that if the buyers cannot qualify for a loan large enough to buy the property (in combination with their cash on hand), it's not going to happen for those buyers at that price. If they've got the price in cash, there isn't a problem. As I said, the worst that can happen is that they don't have that cash for something else.

The entire lending process was so skewed that it's difficult to communicate to someone who's not a professional in the field. Let me start by describing three of the leading poster children loans that led to the housing meltdown.

100% loan to value ratio loans done on a stated income basis. Stated income loans were an early enabler of the housing boom, and they do have legitimate uses. Their traditional niche is persons who are self employed business persons, who are allowed any number of tax deductions not allowed to the corporate employee, because congress wants to encourage the next Microsoft, the next Google, or the creation of legal, medical, and accounting firms, among others, to foster the competitive element in those professions. If there really were only four accounting firms, they could get together, section the country off, and charge anything they wanted for any quality of service they wanted to deliver - not exactly conducive to happy consumers of these services - and congress gives the owners of those businesses certain tax advantages to encourage the formation of these firms. However, since income is documented via federal tax return, this causes them to be unable to document the same income that someone working as an employee of a larger firm who really is making the same money. Hence, the stated income loan, where someone "states" their income, and in return for a higher interest rate, the bank agrees not to demand documentation of that income. The problem is that if the consumer really doesn't make that income, they're still going to have to pay that same cost of money.

The traditional control upon the stated income loan was nobody did them for 100% of purchase price. And today, we're back to that traditional state of affairs. When you have to put between ten and twenty-five percent of the gross purchase price into the transaction in the form of your hard-earned cash, not only is the lender insulated from losing money if you default, but most people are going to do some hard investigation to make certain they really can afford it and aren't putting that money at risk. Before I write a check for $100,000, I'm going to make darned certain that what comes after is going to enable me to protect that investment. Nor was stated income ever a blank check: You had to be working in a field, and with a job title, where people really do make the income you "stated". Even though the bank wasn't verifying it, it had to be believable. But for several years, these were available for people with credit scores as low as 600 who didn't put anything down. To many people's minds, these consumers weren't really risking anything. here's my rebuttal to one such alleged professional who wrote me an email asking for an endorsement of his program about a year ago. To this way of thinking, this loan removed risk from the prospect of the reward. After all, the consumer wasn't putting any of their hard earned money into the deal, so if it should just not work out for any reason, the consumer could just walk away, whereas if it did, the consumer was in the money! The thinking of these people (who were looking to get paid for their alleged wisdom) was that the consumers weren't risking anything with these loans, so there was no reason not to do these loans and these transactions. As I said then, investment risk is not and never can be zero. There is no such thing as a risk-free investment. Risk can be camouflaged or hidden, but it's still there. Good investment consists of managing that risk. Furthermore, these alleged professionals sold people property and the associated loans based upon this false assessment. Whether a given individual was truly unaware of these consequences, or maliciously lying in order to get a commission, the result should be the same: I put it to you that they are unfit to practice either real estate or loan origination, and they should be permanently barred from the entire real estate industry, after making restitution and serving some appropriate period as involuntary guests of the government.

The 2/28 interest only loan is one of the more common examples of what I have been calling short term adjustable loans. Unlike the 100% stated income loan, which was offered by many A paper lenders for a while, this loan is explicitly subprime. The way this loan, and others of similar mien such as the 3/27 interest only loan, work, is thus: There is an introductory period, during which the loan rate is contractually fixed at a set rate, and the borrower pays only the interest that accrues every month on the loan. For example, if the loan is at 6% for $200,000, the monthly payment is $1000. The attraction is that the payment, and hence, the perceived cost of money, is lower than the same loan fully amortized, for which the payment is $1199. But now let's get to the reason why it was the subprime loan that was offered, instead of the A paper equivalent, various hybrid ARMs such as the 5/1 ARM or 10/1 ARM: Because qualification standards in the subprime world were written to allow borrowers to qualify on the basis of Debt to Income Ratiofor the loan payments at this initial level of payment, rather than based upon the fully indexed payment after this initial period and with a lower maximum debt to income ratio to allow for the fact that that underlying index might well rise, as A paper standards require. Furthermore, thirty year fixed rate loans are available subprime, albeit at higher rates. The net effect of all this was to allow people to qualify for a larger loan than they could really afford, and made sellers, real estate agents, and lenders very happy, and buyers happy for a certain period of time. After all, here they have this house that they didn't think they could afford, much nicer than the one they thought they could afford. It must have been a great bargain, because the apparent cost, or in terms they understood, the payment, was the same!

Unfortunately, that temporary payment is not the real cost of that money. Well, actually it is to begin with in this case, but if that cost changes, and in this instance we know it will, then good risk management means we need to plan for it. In this case, we know from the start that on day 731, that interest rate is jumping to 8.2%, the underlying index plus a margin stated in the contract, and assuming that the index stayed the same, that's what we'd be going to in two years. Bad enough in the case of an amortized 2/28, where we know the payment is going to jump to $1437, a roughly 20% increase over $1199. It's tolerable to do these loans on a refinance for people whose credit just needs a couple years breathing space, after which they'll be eligible for A paper (provided, of course, they know that's what's going on before they sign the application). But for the interest only variant, the payments jump from $1000 per month to $1521, a 52% increase, and that's assuming the underlying index (in this case, the 6 month LIBOR) stays exactly where it was back then.

The most egregious loan of all, the negative amortization loan, should never be a purchase money loan for a primary residence. If you need a negative amortization loan to qualify, you shouldn't buy that property. Period. But it was marketed under all sorts of friendly sounding alternative names, like "Option ARM", "Pick a Pay", and the ever popular "1% loan." Who wouldn't want a loan with a cost of interest of 1%? Sign me up for that!

However, the 1% was a nominal rate only. You were allowed to make payments "as if" your actual loan rate was 1% or something similar. That was not your actual cost of interest for one single solitary second. The actual cost of interest was somewhere between seven and about nine percent, depending upon the situation. This while I had thirty year fixed rate loans in the low 6% range, and lenders were going out advertising to convince people who had gotten 5% thirty year fixed rate loans to refinance into these. You're only writing a check based upon a 1% rate, but they're charging you 8%. That payment is $643 on $200,000, but they're actually charging you $1333 to start with. The difference ($690 the first month!) goes into your loan balance, where they can charge more interest on it next month! Then, when you hit recast (within 5 years at the very most), which in this case we will pick to be 15%, which happens in month 39, and your monthly payment jumps from that $643 to $1756, a 170% increase, and you discover that you now owe $230,000, and the property was only worth $212,000 when you bought it, and you discover it's worth less than that now. You have severe difficulty refinancing to something affordable, even if you didn't trigger a pre-payment penalty. Once again, the lender made the qualification decision based upon the debt to income situation computed using the minimum initial payment! And until the customer is completely unable to pay, the lender is booking all that income from deferred interest. That's what their financial statements write up as income! That bank executive looks like a genius for getting you to sign up for a loan with an interest rate 2% higher than you could have had, or 3% higher than the one you did have. I read an interview conducted with one of those executives back towards the beginning of 2007, who basically said, "The people who sign up for these are all idiots, but I've made a lot of money off them," to which I thought, "No you haven't. The accounting just looks that way right now on paper." Twelve months further on, that company is in bad trouble. To make matters even worse, both this loan and the 2/28 were also offered on a stated income basis!

Lest this be in any way unclear, nobody was coercing lenders into offering these products. They were completely free not to. In fact, I can name a couple of household names that hung back, and never did offer negative amortization loans. But with the huge although false incomes lenders and mortgage investors were reporting upon these three types of loan (and others), there was a mad stampede for a while to see who would offer the most over the top loan program. For that matter, mortgage brokers were free not to participate, and real estate agents were free to limit themselves to real loans their client could afford, and more than one did, not matter how they suffered professionally while their competition was offering make-believe pie-in-the-sky math. But so long as that mortgage broker and their client was following the rules set down by the lender, the only people the lenders can blame is themselves. So long as the mortgage broker and real estate agent made certain their client could in fact afford that loan, there is absolutely nothing wrong with having your client buy a property with a stated income loan for 100% of value. If the program the lender offers falls apart in the aggregate on loans that were precisely as presented, there is no one to blame but the lender themselves.

The problem is that disclosure and transparency were nowhere to be found in the vast majority of these loans. I can imagine otherwise sane adults signing off on all this sort of problem loan even if they were fully informed, but not in the numbers that are causing all of the problems. There are rational reasons why someone might do every single one of those loans. These loan programs are not new - it was the way they were marketed and sold that led people to sign up without understanding the consequences. Lest anyone be unaware, bad consequences hitting large numbers of borrowers always translates to bad consequences for lenders holding those notes, something that the lenders themselves had forgotten.

Lack of real disclosure is at the heart of the problems with our entire system of real estate in general, and of loans in particular. Lack of disclosure of what is going to happen should the consumer stay in that loan. Lack of disclosure as to what is really going on. Lack of disclosure - really a lack of transparency - in the entire loan process. I know - every good loan officer knows - what loans are available and what loans are potentially deliverable to a given applicant. It really doesn't take much in most cases. Credit report, income documentation, purchase contract. Every once in a while there's something unusual going on that prevents the loan you thought you could do, but for the vast majority of loans out there, that's enough to tell a competent loan officer what you qualify for. Furthermore, if a loan officer doesn't know all the salient points of the mortgage loan they're trying to persuade someone to sign up for, I don't think anybody sane would argue that wasn't gross negligence. "I can't tell you what this loan is going to do, but I think it's a really great loan for you!"

In the overwhelming majority of cases, however, that loan officer knew exactly what loan they would be able to deliver, at exactly what real cost, before the borrower signed the loan application to begin the process. They knew exactly what the terms would be, and exactly what the cost would be, exactly what the final loan amount would be, and exactly what the payment would be, not only now, but for the rest of the loan. This is all easy math, and the only thing more difficult than what a third grader needs to know to get into fourth grade is computing the payment once you have the total. Some of it may be subject to revision if you find out the client had their current balance or whether there was a prepayment penalty wrong, but you should be able to get it within no more than a dollar, otherwise. It is one of the lending industry's big dirty secrets that the lender who underestimates the real figures by the largest amount will win the business. The one that tells a given consumer the best fairy tale gets their signature on a loan application. Despite the fact that these fairy tales are not binding in any significant way without a Loan Quote Guarantee, rare indeed is the consumer who will penalize the lender who lies to get them to sign the application, by not signing the final loan documents thirty or sixty days later.

I've already discussed the major ways in which people were qualified for loans they couldn't really afford, and the ways that were available to a competent loan officer to make it appear as if a given client could afford a given loan. And people who don't understand what was wrong with these are still looking for them. I got a search hit yesterday for "1% loan 120% of value." I get comparable search hits most hours of most days. People think these loans are good for them because they enabled them to buy a more expensive property than they could really afford (or "cash out" refinance for toys when they shouldn't have). But the real cost of the money was there and lurking all along, and none of this was explained to them. Furthermore, the vast majority of people whom I explained it to proceeded to go ahead and do it anyway, because it was so attractive to them now. They didn't do it with me, despite the fact that I told them if they were certain they wanted to do it, I could get it done. They went out to someone else who pretended the downside wasn't there. The downside was there, but by pretending it wasn't, these providers persuaded millions of people to do loans where they were cutting their own throat in slow motion. But people didn't want the truth - that they were heading towards an inevitable disaster - they wanted to pretend that everything was hunky-dory, and they richly rewarded those who pretended it was so.

How do we prevent this from recurring? Three answers: mandatory and full timely disclosure, a more transparent process, and more responsibility in fact. None of these are present currently. The lending and real estate industries and their lobbyists will fight all three of these, but they are all necessary if we really want to deal with the problem.

Let's detail what I'm talking about.

Instead of the joke that is the current Good Faith Estimate (Mortgage Loan Disclosure Statement in California), let's require prospective loan providers to tell the whole truth about a loan before the client commits by signing up. It's not difficult for a loan originator to figure out what the real costs are going to be, and what the rate really is going to be. We've already established that if they don't know all of the characteristics of a loan before they try to sell it, something is wrong. So the loan originator really should know everything about a loan as soon as the prospective consumer furnishes basic information. Let's make it mandatory to tell the consumer the truth of all of those neat little details when they sign up, rather than when they sign final paperwork. Let's start with a real accounting of the new balance: "This loan will cost you 1 point of origination and 1 point of discount. Administrative costs to finish the loan will be $3022, including all third party fees. You have indicated that you will/will not be adding the cost of one month interest to the loan in order to skip one payment. There will/will not be an impound account set up to pay property taxes and homeowner's insurance, requiring an initial amount of $n/a, which will be paid by check/adding it to loan balance. Starting from your initial balance of $200,000, this leads us to a final balance on your new loan of approximately $208,186. If this number is not correct within $100, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents." This puts an honest accounting of what the loan is really going to cost in the consumer's hands right away. It removes the incentive for low-balling, because the client is going to know about any changes ten days in advance - enough time for their competitors to get the loan done. Here's an article discussing how much it's legal to low-ball a loan quote, and the lenders keep pretending that quote is real, even though they know it isn't, right up until loan signing, where the consumers usually have no choice but to sign the documents for the loan they were lied to about all along.

Then let's have a section on characteristics of the loan: I don't like 2/28s, but let's use one for an example, just to show how well undesirable terms should stand out: "The initial interest rate will be 6%. This will be fixed for 24 months. After this initial period, your interest rate will be determined by 6 month LIBOR plus a margin of 2.8%, determined every 6 months. Should this index remain where it currently is, your interest rate will be 8.2% upon full adjustment. This loan is fully amortized/interest only for a period of n/a months/negatively amortized for up to n/a months, after which, it will fully amortize. If this loan features negative amortization, your balance will increase by $n/a if you make the minimum payments for this period. Should any of these numbers other than the value of the applicable index change, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents." This lets the consumer know exactly what they're getting into, before they have no choice but sign the documents or lose the deposit, while still have time to shop for something else.

Let's disclose the effects of any prepayment penalty, as well! "This loan does/does not include a prepayment penalty. Should you pay it off within 24 months of funding, you will be required to pay a penalty of 100% of six (6) months interest upon the loan. At current values, this is approximately $6245.58. If any of these values changes by 1% of the estimated value, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents." Let's put a dollar figure on that pre-payment penalty, so people know what they're risking. It's not like this is Monopoly money!

Now, let's disclose the payments, and the real costs of keeping the loan: "The initial monthly cost of interest on this loan will be $1040.93. Assuming the underlying index remains constant, the cost of interest will be $1422.60 per month at full adjustment. The minimum initial monthly payment will be $1248.19. Assuming the underlying index remains constant, the monthly payment will be $1543.14 at full adjustment. If any of these values changes by 1% of the estimated value, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents."

Next, a little bit of transparency: "This includes a rate lock of 30 days, and is subject to change until such time as the lender accepts the rate lock. Your loan is/is not currently locked. If it is locked, your lock expires n/a (date) and the loan must be funded by that time in order to receive this rate. Should any of these numbers other than the value of the applicable index change, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents.

Now, some real transparency! Let's tell the consumers what it will take to qualify: "This loan requires full documentation of income/stated income/no income requirement. It requires a debt to income ratio not exceeding 50%, and a loan to value ratio not exceeding 80%. This quote is based upon a FICO score of 640, with the following mortgage delinquencies in the preceding 24 months 2x30 0 x 60 0 x90, and the following non-mortgage delinquencies n/a x30 n/a x 60 n/a x90. Based upon known debts service of $1643 per month, of which $1483 will be replaced by this loan, and prorated monthly property taxes of $166 per month and prorated insurance costs of $72 per month and other monthly housing costs of $230 per month, you will need an monthly income of $3753 to qualify for this loan, and the property must appraise for a minimum of $260,250 in order for this loan to be accepted by the underwriters. If any of these values changes by 1% of the estimated value, your loan provider must present you with an updated estimate via this form at least ten calendar days prior to final loan documents. Note that misrepresentation of your financial position or of the property value is a felony punishable by up to five years in federal prison, and conspiracy is a separate felony offense also punishable for up to five years in federal prison, and you may also forfeits legal protections afforded most consumers" Most people can look at this and tell if they qualify. No more loan providers baiting someone with a loan they know they're not going to qualify for! There could even be a standard list of common "loan busters" attached. Finally, it lets people know that they need to tell the truth, the whole truth, and nothing but the truth in order to receive all of those nice protections the law has granted consumers against lenders. Furthermore, other people, such as agents and sellers, can look at this and see something that really tells them whether or not these people are going to qualify for this lean. No stringing other people along for two months before they find out the loan isn't possible!

My point is this: Both consumers and those who are honest loan providers will benefit from moving the moment of truth forward from final loan documents. The only people that will be hurt are those who make a habit of low-balling their estimates - telling people about loans that there's really no way they can deliver. The current situation, where consumers are likely to sign up with the person that tells them the best fairy tale, even if they shouldn't get a loan at all. The current situation encourages telling fairy tales in order to get people signed up. I don't think anyone will argue that's a good thing. The replacement should encourage people to understand how loans really work.

I've discussed disclosure and transparency. Now let's consider responsibility. The best laws do no good unless they're enforced, and enforcement has to start getting tough for real. Furthermore, for many years a lot of large companies have gotten away with saying they train their people to follow the law, when in fact they let it be known they'll wink at violations so long as you bring in a little more business because of it, if not actively encouraging violations when the regulators backs are turned. They'll make their people sign off on a piece of paper that says the company told them about violating the "do not call" list, or that soliciting other agent's listings is illegal, or any of dozens of other violations, while letting it be known that the company will wink at violations if not actively encourage them. And I'm just talking about things that are flatly illegal here, never mind things that may be unethical but not illegal, such as telling people they have a $400,000 loan for $1287, encouraging people who already have loans at 5% to exchange them for negative amortization loans at 8%, where the minimum payment may be less for a while, but the real cost of the money is $2700 per month, as opposed to the under $1700 of their current loan. Just forgetting to mention little things like that.

Nor can the hunt for responsibility stop at the first broker supervisor up the chain. Companies that make it clear they want you to follow the law don't have nearly as many difficulties. If more than a very small percentage of loan officers or agents working for a given chain do something they shouldn't have, it wasn't likely to have been spontaneous disregard of the rules. The big chains know that under the current set up, they'll lose the occasional low level victim to the regulators, but nobody important will ever be prosecuted. That needs to change. At one point in time, I was waiting to interview at a loan place which shall remain nameless, and heard someone described as a "national vice president" giving a class that was not only incorrec