November 2007 Archives

do your property taxes go up in California when you refinance your property

This is one of those urban legends. People are concerned that because the house is appraised by the lender, the assessor is somehow going to find out that their property is worth more and send their tax bill soaring.

However, thanks to Proposition 13 in California, the formula for property taxes has little to do with what the home is really worth. The formula is based upon the purchase price plus two percent per year, compounded. If you can document that your home is worth less than this amount, contact your county assessor's office. But if it's worth more, they cannot increase it beyond this number.

Indeed, certain family transfers can preserve this lower tax basis. Mom and dad deed it to the kids, and the kids keep paying taxes on it based upon a purchase price of perhaps $60,000 (Plus thirty-odd years of compounding at two percent, so maybe $115,000) when comparable homes may be selling for $600,000.

There are two major exceptions. First, a sale. If you sell it to someone else, then repurchase, you don't get the old tax basis back. Second, improvements. If you take out a building permit, the assessor will add the current value of your improvements to your tax bill. This can, in situations like the previous paragraph, result in a tax bill that literally doubles if you add a room. Indeed, this is one of the main reasons for the growth of the unlicensed contractor industry, because licensed ones have to make certain the permits are in order, and homeowners are trying to sneak one over on the county. This is why a very large proportion of properties in MLS have the notation that "this addition may not have been permitted." They know good and well that the addition wasn't permitted, and quite likely isn't to code, either. If it's built to code, subsequent owners can get forgiveness as innocent beneficiaries who bought the house like that, and so the purchase price included the value of that room (and occasionally, the state finds it worth its while to go after the previous owner for back taxes and possible penalties, and I believe that the incidence of this will likely increase dramatically in the next couple of years). If it's not built to code, however (an offense unlicensed contractors often commit), the subsequent owner can be looking at a large mandatory repair bill, or perhaps even demolishing the addition they paid for if the county inspector deems it unsound. You want to be very careful about properties with the "addition may not have been permitted" disclosure.

Other states, by and large, still follow the assessment model California used to follow, pre-Proposition 13. They have county records of the property characteristics, and evaluate the home based upon those characteristics, whence comes your assessment, and hence, your property tax bill. This still encourages unlicensed contractors and working without required permits, with effects much the same as the previous paragraph, which is definitely not good, but in this case subsequent owners have nothing but incentive to keep improvements off the county books, where in California, subsequent owners have motivation to want improvements updated into county records. I am not aware of any state which follows a model whereby refinancing will alter your tax bill.

Caveat Emptor

I bought a condo in DELETED, CA. Zero down. For 7 months I paid every bill on time - mortgages, HOA and taxes until... The Homeowner's Association told us that we MUST pay a $20.500 special assessment.

My realtor had told me nothing about possible coming special assessment. I lived from paycheck to paycheck and had to leave the property.

I didn't pay ANY bills until my property was foreclosed. Today, AFTER ONE YEAR it was foreclosed, I received a letter. They say that I owe "prior the date when the property was foreclosed... delinquent in payment of the assessments, late charges..." $24.773.08

I can agree that I owe HOA monthly payments until the property was foreclosed but special assessment?

With a delay of seven months, I consider it unlikely (although possible) that the assessment was proposed prior to your purchase. It's usually no more than three months from proposal to assessment.

Usually, special assessments of that magnitude are not required to be paid immediately in one lump sum, but rather eligible for payments of so much per month over so many months. However the condo association has the right to levy assessments for repairs and required maintenance. This is part of owning communal or common interest property. Your assessment was larger than most, but the Association does have that right to make those assessments. It's in the CC&Rs, which you had to accept in buying the property - the former owner did not have the right of severing the unit from the association, and neither does the current owner. Usually assessments are recommended to the board by the management company, approved by the board (itself elected by the owners) and confirmed by vote of the owners. You most likely got a ballot in the mail. Whatever you did with yours, a majority of a quorum of owners in your complex voted in favor of the assessment. They need to keep records of all of this - board minutes, ballots mailed, ballots returned and how they voted. My guess is there were pretty good reasons the other homeowners voted for such a large assessment, and unless there's something wrong with how it was conducted, it's a valid lien on your property. If something was concealed from you, it would be in the records of the association.

I doubt you were bamboozled by an already approved assessment. In California, you're required to receive what's called a "condo certification," from the HOA within seven days of the accepted offer. Among other things, that condo certification will show special assessments, whether under consideration or already approved. Furthermore, every single regulated lender in the known world is going to require that condo cert in order to fund the loan, and if there are special assessments known, they will require that you qualify at the increased rate of payment. So I'm betting you got one.

This was a buried problem, and the only way to ferret it out for certain is asking members of the board point blank about any deferred maintenance issues, but sometimes things like this can take an association by surprise. For example: fires, burst pipes, etcetera. A condo inspection only looks at your unit, not all of the others. Alternatively, you've got to walk the entire property looking for problems, and hope it's not hidden inside a something where there's no way to know it's there. One final way that might spot problems is in looking at the level of association reserves in the condo cert. it takes a good buyer's agent to ferret it out before a sale, and an even better one to tell you about it. Most of this stuff isn't part of basic due diligence, and telling you about it is a noteworthy example of "no good deed goes unpunished," because it's going to mess up the transaction, and most clients will kill the messenger by not working with you on their next offer. If you didn't have a buyer's agent, you were all on your own, because that listing agent certainly isn't going to investigate in the first place and get their client angry. There's a reason why Dual Agency is a sucker's game from the buyer's perspective. Well, actually there are hundreds of reasons why, but this is one of them.

It appears that you were the owner of record at the time the assessment was made. It may be payable in payments, but the full amount is due from the owner of record as of the day of the assessment. It's an all or nothing thing. It wouldn't matter if you were two days from buying it - the seller would have to pay it in order to deliver clear title, while you would not be obligated, although if the owner didn't pay it and clear the title, it's unlikely the transaction would proceed. If you were two days from selling it, same story. You would have to pay in order to deliver clear title, as required by the purchase contract, and the buyer would have the right to expect that you would do so, and the title company would refuse to insure the property until you did so, so the transaction would not happen without that assessment being paid. If you had bought it the day before the assessment became effective, well, you would have been informed by the condo certification, but it would be attached to you. You owe this money. The fact that you are no longer the owner as of this moment is irrelevant. Nor does default wipe it out, in general.

The homeowner's association has the right to assess the individual owners for needed repairs and maintenance. Indeed, they have a duty to do so in order to preserve the value and marketability of the property. What this person did was pretty darned silly, but done is done and there are no do-overs in real life. The board and owners don't make assessments gratuitously, because they're also assessing themselves, and every last one of them had to pay that $20,500, the same money this guy would have paid. Twice that, if they own two units. I may wonder what caused a large assessment unforseeably, and consider it likely that a good buyer's agent would have caught some deferred maintenance issues, but the cold hard fact is that he owned the property on the date of the assessment, and he therefore owes the association that money. He needs to talk to a lawyer if he wants to get out of it, but I don't know anything except bankruptcy that might do the trick, and that's only likely to reduce the damage, not wipe it out, and bankruptcy on top of a foreclosure is very bad juju for your credit rating. It could cost him five times as much as the actual money he'd save by not having to pay off the debt in full.

Caveat Emptor

I was looking through some real estate listings and saw one property described as: "Contractor's special, first time buyers and investors. House needs TLC." Does contractor's special mean u better be a contractor if you wanna buy this place?

It means it needs some serious rehab work, but it's priced too high for you to make a profit paying to have it done, so the people they're trying to attract are people who are inexperienced home repair folk who don't realize what their time is worth, and won't realize how much time and money and dirt and sweat and just plain hassle that living with the problem and getting it fixed is going to entail.

In point of fact, it's an uncommon "contractor's special" that isn't overpriced. We're not talking about just carpet and paint here. We're talking some major league repairs. Foundation breaks. Significant settling damage. Plumbing that's broken and leaking water. Mold in the framing (which will usually spread). Wiring that's a fire hazard. The list goes on, but they've all got one thing in common: You're dealing with stuff that adversely influences the habitability of the property. Without those repairs, you're not going to get reasonable enjoyment out of the property. It fails the most essential test of inhabitability for a property: The ability to live the same kind of lifestyle in that property, as the rest of the country does in theirs, and to do so for the foreseeable future.

Martha Stewart notwithstanding, you can live with stained carpet. Whatever you read in Better Homes and Gardens, you can live with spots on your walls, or even holes in the drywall. It's possible to live with both old and ugly, if you get get electricity and hot and cold running water when you need them, and the house isn't falling to pieces around you. You can't really live if every time you plug something in or turn something on, there's a significant chance your property will burn down around your family's ears. You can't live if hot water is leaking out and eroding your foundation support, as well as keeping you from taking hot showers. You're not going to live indefinitely with a foundation break - sooner or later, it'll either rip the house apart or tear it apart.

Such properties aren't a residence at all, when you really think about it. I'd sooner put your average family of four into a one bedroom apartment than a "contractor's special." Sure you got a low price - on a property you can't use. Kind of like getting a deal on dog vomit. It begs the question not only of why you'd pay for it, but why you'd want dog vomit at all. Me, on those rare occasions when one or another of my best four-legged friends has lost their dinner, I'd willingly pay someone who offered a certain amount of money to get rid of it for me.

This kind of property can be an opportunity, IF you really know what you're doing, and IF it's priced correctly so that you can do the work and make a profit, and that includes some significant cash for being the one to deal with it. But it's no coincidence that the serial decorators who line up to replace bad carpet and paint ugly walls give "contractor's specials" a wide berth. The work that needs doing is far too expensive to be "worth it" - at least at the levels "contractor's specials" are usually priced. The most recent one I was in, a four bedroom place not very far from my office, was priced about $20,000 below what would have been appropriate for a turn-key property in the area - and it needed roughly $60,000 worth of work that I saw. For a forty year old 1600 square foot house, with position issues, floor plan issues, and not a single surface in the entire property that presents well. A more appropriate price would have been land less demolition and haul away. Which is about what it's going to go for - once the owners price it somewhere in the appropriate ballpark. Oh, I can fight the battle and often even win a signed purchase contract for the correct amount - but it's a lot more effort that finding someone who at least is willing to admit the realities of the situation up front. Sometimes, I'll see if I can get a client the property is appropriate for to make a test offer, just to see if the sellers and their agents are willing to admit the obvious truth. If not, we move on.

What the owners are really hoping for, of course, is someone who only sees only the relatively cheap price, but not the cost, in all senses of the word, of the work that's necessary to have a useful property once they own it. But this kind of cheap is no bargain. I've said it in the past, but Know What Can Be Fixed and What Can't, What's Profitable and What Isn't, which is only one of hundreds of reasons why You need a buyer's agent, whose job is to bring up all of these not so minor concerns that owners and listing agents would rather buyers didn't understand, because it means they get more of that buyer's money.

Caveat Emptor

That was a question I was asked via email.

The answer is "No." You don't have to lose your home in bankruptcy. I've done loans for many clients who kept their homes through bankruptcy. But they kept their mortgage payments current, or close enough to current.

The condition that causes you to lose your property is called foreclosure. The specifics vary from state to state, but here in California, the lender has the option of marking you in default when you are 120 days in arrears on your mortgage.

Default causes you to lose some rights, and the lender to gain some. Since properties can go into arrears literally for years before they go into default, this seems appropriate. You could theoretically stay at 90 days behind throughout the whole term of your mortgage (except the first 90 days), and the lender can't really do too much about it except hit your credit. Please, don't try this at home. This is for purposes of hyperbolic illustration only. It really does kill your credit rating. Refinancing (or getting another loan after you sell) will be extremely difficult, and the rates will be sky high if you can get it.

But at the point you enter into default, your lender can require that you bring the loan completely current in order to get them to rescind the default. A Notice of Default, or NOD, is a matter of public record, and if one is recorded against your property, you can count on getting hundreds of solicitations from bankruptcy attorneys, hard money lenders, real estate agents, and just plain sharks. Additionally, the lender is going to hit you with thousands of dollars in fees when they put you into default. These go into what you owe.

Here in California, if you don't bring the loan current within sixty days, the lender has the option of dropping a Notice of Trustee's Sale on you. This publicly recorded document basically says "Bring it current now, or we're going to sell it at auction." Actually, at this point they can require you to pay them off in entirety to make them go away, and I don't know anyone except hard money lenders that will refinance you out of default. They can do this because you signed a Deed of Trust when you got the loan. Things are different in states that still use the mortgage system - there, the lenders have to go through the courts, which you're also going to end up paying for. The Notice of Trustee's Sale will tell the owner to be out at least five days prior to the auction. You also lose the legal right to redeem the loan at that point, although most lenders will keep working with you until the gavel falls. There must be a minimum of 17 days between Notice of Trustee's Sale and the actual auction. This is called foreclosure.

Bankruptcy is a different process entirely, and has to do with solvency, the ability to make required contractual payments on all of your debts. Within limits, you can choose to enter or not enter bankruptcy, and which creditors are and are not included in the bankruptcy. It's usually better not to include everything in the bankruptcy, because post bankruptcy credit history is critical re-establishing your credit. No matter what else, if you can stay current on the loan against your personal residence, that has more rights of preservation against other creditors than anything else (usually). Please consult an attorney in your state - there may be differences in the rules, or you may fall into one of the exceptions, and there are all kinds of relevant details I'm not going into here.

If you can hang onto your personal residence, and keep the loan current through bankruptcy, you not only (usually) get to keep your property, but you have a ready made mechanism to rebuild your credit. Those monthly payments you keep making to your mortgage lender? They count for credit re-establishment. In fact, if you have zero balance credit cards or revolving lines of credit, you can often choose not to include them in the bankruptcy, get to keep them, and all that nice jazz having to do with duration of credit, etcetera. You might want to read my article Credit Reports: What They Are and How They Work for more.

Foreclosure and bankruptcy are two different issues that often go together - but not necessarily. The law gives consumers a lot of protections on their primary residence, even through bankruptcy, but if you go into default on your mortgage, it's very hard to keep your home if you're in bankruptcy also.

I have seen people fresh out of Chapter 7 bankruptcy qualify for an A paper loan. It's unusual, but it does happen. What usually causes it to happen is that they have one or two lines of credit, often business related, and they file bankruptcy promptly, rather than spending months getting their credit dinged because they're in denial, and they keep everything else is current.

But if you keep your mortgage payments current, whatever else happens, frequently you will emerge from bankruptcy with your property.

Caveat Emptor

I just got a google search where the question asked was "What if the mortgage is recorded in the wrong county?"

I've never actually seen this (and San Diego County, once upon a time, included what is now Riverside, Imperial and San Bernardino counties), but if it's the mortgage on your loan, no big deal. You should get a copy of the recorded trust deed, and the county recorder's stamp should tell you the county it was recorded in. You probably want to record it in your own county, as when the document is scanned in both recorder's stamps will appear, thus making it obvious that these two documents are one and the same. There may be better ways to deal with it. Since the error was (everywhere I've ever worked) your title company's, they should be willing to repair it to eliminate the cloud on your title. If and when you refinance this loan or sell the property, make sure that the Reconveyance is recorded in both counties, and references both recordings.

More dangerous is the issue of what if it's the previous owner's loan that was wrongly recorded. The previous owner is obviously no longer making payments on the property. The lender may or may not have been paid off properly; if they were there may not be any difficulties. It could just disappear into some metaphorical black hole of things that weren't done right and were never corrected, but just don't matter because everybody's happy and nobody does anything to rock the boat. However, unlike black holes in astronomy, things do come back out of these sorts of black holes.

However, if the previous lender was not paid off correctly, or if they were paid but something causes it to not process correctly, they've got a claim on your property, and because the usual title search that is done is county-based, it won't show up in a regular title search. Let's face it, property in County A usually stays right where it's always been, in County A. There is no reason except error for it to be recorded in County B. Therefore, the title company almost certainly would not catch it when they did a search for documents affecting the property in County A; it would be a rare and lucky title examiner who caught it.

In some states, they still don't use title insurance, merely attorneys examining the state of title. When the previous owner's lender sues you, you're going to have to turn around and sue that attorney who did your title examination for negligence, who is then going to have to turn around and sue whoever recorded the documents wrong. If it's a small attorney's office and they've since gone out of business, best of luck and let me know how it all turns out, but the sharks are going to be circling for years on this one, and the only sure winners are the lawyers.

In most states, however, the concept of title insurance has become de rigeur. Here in California, lenders don't lend the money without a valid policy of title insurance involved.

Let's stop here for a moment and clarify a few things. When we're talking about title insurance, there are, in general, two separate title insurance policies in effect. When you bought the property, you required the previous owner to buy you a policy of title insurance as an assurance that they were the actual owners. By and large, it can only be purchased at the same time you purchase your property. This policy remains in effect as long as you or your heirs own the property. The first Title Company, which became Commonwealth Land Title (now part of LandAmerica), was started in 1876, and there are likely insured properties from the 19th century still covered. If you don't know who your title insurance company is, you should. Most places, the company and the order of title insurance are on the grant deed.

The other policy of title insurance is a lender's policy of title insurance. This insures your lender against loss on that particular loan due to title defects, and when the loan is paid off (either because the property is sold, refinanced, or that rare property where the people now own it free and clear), it's over and done with. Let's face it, most people are not going to continue to make payments if they lose the property. If you take out a new loan, your new lender will require a new policy of title insurance. You pay but they are the ones insured by the policy.

To get back to the situation, what happens when you order title insurance is that a searcher and/or an examiner go out and find all of the documents they can find that are relevant to the title of the property. These days, they typically perform an automated search, and sometimes documents are indexed and cross referenced incorrectly and therefore they do not show up when they should. Nonetheless, the title company takes this list of documents and tells you about known issues with the title, and then basically says "We will sell you a policy of title insurance that covers everything else." This document is variously known as a Preliminary Report, PR, or Commitment.

Now it shouldn't take a genius to figure out why you want a policy of title insurance. Around here, the average single family residence goes for somewhere on the high side of $500,000. You're committing a half million dollars of your money on the representation that Joe Blow owns the property and that if you give him half a million, he'll give you valid title. I would never consider buying property without an owner's policy of title insurance. Even with the best will in the world and my best friend whose family has owned it since the stone age, all kinds of issues really do crop up (Another agent in the office has a client right now who bought a property via an uninsured transfer - and there was an unrecorded tax lien. Ouch. Say bye-bye to your investment). The lenders are the same way. No lender's policy, no loan.

So what happens when this old mortgage document is uncovered? Well, that's one of the hundreds of thousands of reasons why you have that policy of title insurance. You go to your title company and say, "I have a claim." Since they missed that document in their search, they usually pay off the loan (there are other possibilities). After all, if they hadn't missed it, it would have been taken care of before the Joe Blow got paid for the property and split to the Bahamas.

None of this considers the possibility of fraud, among many other possibilities, but those are all beyond the scope of this article.

So when buying, insist that your seller provide you with a policy of title insurance. When selling, it really isn't out of line for your buyer to require it - it shows that you have a serious buyer. Some places may have the buyer purchasing his own policy, but most places that use title insurance, the seller pays for the owner's policy out of the proceeds. Of course, anytime there is a loan done on the property, the lender is going to require you pay for a lender's policy. If the quotes you are given do not include this, be certain to ask why.

Caveat Emptor

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

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

The second form that often become the issue is form 4506. This is the one that says your lender has a right to look at your tax returns. Many people think that this means they are violating the terms of a so-called "Stated Income" loan whereby they say what their income is, and the bank agrees not to verify the amount, but only the fact of the source of income. Well, the lender always has the right to insist on tax forms for documentation of income, and sometimes they do. But they don't often use this form for it, and it isn't to your advantage to force them to use it. As the form states, the IRS typically takes 60 days to respond to this request, and loans need to be done within 30. You want it done within 30 days if you have a rate lock, and if you don't have a rate lock, whatever you were quoted isn't real because it's gone now - the rates have changed. If the lender wants your information, they're going to require it whether you've signed this form or not. In either case, if they want the information, it's better for you to furnish it directly and immediately.

What they really use this form for is when they get ready to sell the loan. Since all lenders want to able to do this whether or not they make a habit of it, and they get a better price for the loan if they can verify that your income qualifies, they want you to sign the form. If they pull it and you qualify, they get a better price for the loan. If they pull it and you don't, they tried. If you refuse to sign the form, they are well within their rights to deny the loan. So they are going to require you to sign the form as a condition of getting the loan. I can commiserate with you all you want, but it wouldn't make any difference. Options to get around this are basically the same as for the Loan Application: Friends, family, or Lenny the Loan Shark.

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

Don't want to do it? The title company will tell you they don't want your business. No policy of title insurance, either owners or lenders. That's your choice if you don't need a loan on the property and you're willing to take the seller's word that they really do own it and that there are no title issues. I wouldn't be. I've dealt with too many properties where there were known title issues. Nor are lenders nearly so glib about it. In order to get the loan, they require a lender's policy of title insurance, and whether it's a purchase or a refinance, you need a lender's policy of title insurance. If you're dealing with Lenny the Loan Shark, he doesn't care that you've lost the property to the forgotten first wife (via a three day marriage) of Mr. Jones, three owners before you, whose brother apparently inherited and sold the property in 1976 but then the former Mrs. Jones just found out about it and sued for possession. If she (or her heirs) can prove her claim, she's going to be awarded the property. So you want title insurance.

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

Caveat Emptor

I need to show her off to someone!

My wife and I had decided to hold off on a puppy due to some peripheral concerns, but she approached me earlier in the week and said, "Hilda needs a dog." So we decided to get a new puppy.

I visited four places today, including a fairly big breeder. Truthfully, I was pretty certain driving up that that breeder was not where I was getting a dog. Yes, they seemed very competent and very ethical (not puppy mill iif that's what you were thinking), but they just had too many dogs to properly socialize them to humans correctly.

My criteria were:

1) Must be miniature shorthair. Dachshund, of course! We're a dachshund family!

2) A dog that was hand raised by a family, not in a cage with other dogs or (worst of horrors!) alone! Dogs are social creatures, and the more and the earlier the human contact, the better!

3) The younger the better, subject to being completely ready to leave mom and the law. I understand there's an eight weeks law now. Well, you've got to comply with the law, but when I brought Thing home at a little under 7 weeks, the fact that I had to get up and feed him every two hours that first week helped us bond.

4) The only one that couldn't be checked over the phone: Personality had to be compatible with sharing a residence with a 7 year old and a 3 year old. Found one that was a possibility at this nice lady's house in Lakeside, but managed to say not yet, and I'm glad I did, because I found a two even better at the last stop of the day in Escondido. I gave serious consideration to a sweet little dilute red with a lot of spunk, but her sister was even better. She's not quite ready to come home with me yet, but we'll be able to pick her up after Wednesday, so we're planning Friday the 30th, so she'll have an entire weekend at home with the family before she's left with only Mellon for company.

After I chose, I took a few pictures, and here's the best one!

View image

Hilda doesn't know she's getting a puppy. We intend to surprise her Friday evening. I'll leave work early, and go pick up the puppy, getting home (I hope) before my wife. We've let the grandparents know, so they can be here if they like to see what happens when Hilda sees the puppy.

Hilda's first real pet! I'm excited, and Ramona is even more excited than I am! And it's going to be a surprise!

(Nobody could believe that coat color just wasn't on my list. But truthfully, I didn't care. I was prepared to search from now until Christmas or longer, because the personality part was that important. Disney notwithstanding, there's no such thing as an Ugly Dashshund)

I found this article by Ken Harney in the paper.

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



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



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

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



Most loans should not require a large amount of assets - A paper loans, the best loans of all, want one to two months Principal, Interest, Taxes, and Insurance (PITI) for full documentation (and I can usually get it reduced), or six months PITI for stated income loans. Neither of these is a large number if you're really making the money, and they can be in a variety of places.



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



But wait! It gets better!

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



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



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



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

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



but it gets better yet!

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



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

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



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



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



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



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



Caveat Emptor

One of the things I've heard and read other agents complaining about is that they can't find qualified buyers to represent.

Welcome to Unintended Consequences 101.

The way that the market had been working is this: Young, often unmarried, buyers buy a starter place, usually a condominium of some description. A few years later, once they're married and have a couple kids, they trade up, using their equity for the down payment and (usually) increased income in order to make the payments. They may do this a second time when the kids are teenagers, or when they get another rise in income. This is all simple demographics.

However, we all know that most buyers want to stretch to their maximum, and even a bit beyond, not understanding that there is no magic wand to make borrowing money more affordable. The absolute hardest thing for a buyer's agent who's trying to to their job correctly, is persuading buyers with property lust in their hearts to limit themselves to properties they really can afford. Traditionally, the penalty for failing to do this was a failed transaction, and a ticked off client who had already spent hundreds of dollars on appraisal, inspection etcetera, and quite often, multiple trips to the decorating store planning and a month or more fantasizing about the decorating they're going to do. When that all comes crashing down, it's kind of difficult to hold onto the client.

During the era of make believe loans, however, the immediate downside disappeared, and by the time people figured out that they couldn't really afford the property, those agents were long gone, with their commissions, leaving those buyers high and dry. With easy loan qualification, and initial payments way below a sustainable level, there was no immediate need to restrict themselves to selling what a client could afford. Since given one client or set of clients, most agents would rather make more money than less, they sold higher end properties than clients could really afford. The clients, for their part, were happy that there was no apparent need to spend years living in the lesser property, building equity.

However, by skipping over those starter properties, those agents greatly exacerbated their future problems. When the condominiums and other starter properties don't sell, the owners are stuck with them, and they cannot afford a larger, more expensive property until those properties do sell. These folks are the largest single source for buyers of archetypical three and four bedroom detached housing. If you bought a condo for $90,000 and sold it for $200,000, you have roughly $100,000 down payment for a $500,000 home. This lowers the payments from about $3415 (assuming PMI) to $2398, total cost of housing from roughly $4045 per month to $3030, and the income to qualify from $9000 per month to about $6730, a full 25% less, assuming no other debts. Considering the median family income is approximately $5500 per month in San Diego, this makes a major difference to how many people can qualify - far more than a proportional difference. Assuming a standard normal distribution, you're going from about 3.5 standard deviations over area median income to about one and a quarter. This increases the number of people who qualify from 233 in a million to 110,000 in a million (via Hyperstat). Now, you have 470 times as many people in your target group! But in order for this to happen, the condominiums and other starters have to sell.

The temptation is always there for agents want to hunt the big game, but now that the make-believe loans that enabled it are gone, we've got a situation. We've conditioned the public to believe that everyone can afford the property of their dreams, right off, and that's just not the case. This makes it much harder to sell them starter properties that fit within their budget. Their friend John or Jen was able to get that dream property, why can't they? The fact that John and Jen are fighting a losing battle against foreclosure doesn't enter their thought process. The people that already own the starter properties, having bought five or ten years ago and gotten to a position where they're ready to move up, can't. Not until the starter sells. This makes the crimp in the market far worse.

If condos and other starter properties don't sell, you don't have the usual influx of buyers with a down payment that enables them to afford more expensive properties. When you're essentially putting contact superglue on the bottom-most rung off the property ladder, you can't be too surprised when the higher rungs are vacant. So if you want buyers for higher end properties, and you want your higher end properties to sell, sell a few starters.

Caveat Emptor

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



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



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



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



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



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



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



This is the point of the particular package. It's an anti-fraud measure. And it has just worked.

I received 9 entries which might have read the the guidelines for this carnival. One was a duplicate, and so we have 8 entries here.

This carnival, we have a clear winner of the Editor's Choice for Most Useful Information!

Digerati Life Presents Why Your House Won't Sell And What To Do About It

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Other articles of above average quality were:

SLC Real Estate Blog submits Real Estate Marketing Must Comply to Regulation Z, talking about the necessity for compliant and truthful advertising. As one additional note on false advertising, every government first time buyer program I've ever worked with prohibits buydowns.

Real Answers answers the question How many back up contracts can you have?

Mortgage Blog sends us an article from across the pond in the UK: UK House Prices to fall in 2008?

Your host explains Working with Multiple Agents for a Purchase

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The rest of the submissions that met guidelines:

American Consumer News sends us Worried About the Real Estate Slump? Don't Panic.

Millionaire Mommy Next Door presents Renting beats owning, even in retirement; even if your mortgage is paid off. Here's why. I have minor quibbles about her assumptions, but they might be valid for her area. But the one issue relating to the major thrust of her article is that, far from being optimal for the purchase, "even if your mortgage is paid off" is actually the optimal case for renting and investing the difference.

Shop Smart Loans submits Loan and Debt Elimination Scams

Consumer Focused Carnival of Real Estate will return in two weeks, back at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be December 3rd.

If I am buying a foreclosed home for 220k of which 200k is being financed, and the home comes back at being valued at 285k from my mortgage company, am I still required to pay PMI? If so, how in the future would I be able to eliminate it?

At purchase, the lender treats the value as being the lesser of cost (i.e. purchase price) or market (i.e. appraisal value).

So if your purchase price is $220k, that's the most the lender will consider the property to be worth at purchase. You will be required to pay PMI for any single loan amount over $176,000, or eighty percent of this. Since second mortgage lenders don't want to loan over ninety percent of the value of the property right now, you can either come up with a couple thousand dollars more, or accept PMI.

A couple years ago the wisdom was just to refinance in a few months. Lots of luck with that in the current market. In the current market, lenders are reverting to their standards of several years ago, which is that unless you spend some major sum upgrading it, the most a lender will believe within one year of purchase is 10%. Were I in your shoes, I'd plan on waiting a year, then doing whatever your state law says is necessary to remove PMI. This might be pay for an appraisal, this might be get a broker's price opinion based upon recent comps, but there have just been too many people over-evaluating property in return for some special compensation (i.e. accepting bribes to return a higher number on the value). They want to see some time to season the transaction between purchase and evaluation. Scam artists don't want to hang onto the property for a year.

Private Mortgage Insurance (PMI) is not a good thing, but it may be the only way to get the loan in the current environment, as I discuss here.

You do have the option with a lot of lenders of converting to LPMI, or lender paid mortgage insurance. This folds PMI right into the basic rate of your loan, so (unlike regular PMI), it usually becomes tax deductible. On the other hand, because it's written into the basic Note rate, it has a disadvantage that unlike regular PMI, you need to actually refinance to get rid of it. Since most people spend thousands of dollars to refinance, this isn't a good bargain unless you figure the rates to go down. I don't, or at least not much. Were somebody to put a gun to my head and force me to make a bet right now, in November 2007, I'd bet they were going up over the next twelve months. If I were to decide to accept LPMI, I'd almost certainly want a true zero cost loan now, with the loan I'm getting for the purchase. I would accept the higher rate that comes with it, and quite likely a hybrid ARM as well instead of a thirty year fixed rate loan. The reason for this is that I'm never going to recover closing costs through lowered cost of interest in only one year. In other words, accepting LPMI means I've made up my mind to refinance in a year, or sooner if I can find a lender that will do it, and that I'm not going to willingly pay any loan costs that take longer than a year to recover. Furthermore, if I can get even a slightly lower rate by accepting a shorter term hybrid ARM, that's worth a good idea under these circumstances. As I said, If I'm accepting that I'm going to refinance in a few months, I'm going to want a loan with costs as low as I can get it, and it just isn't important to me to have a thirty year fixed rate loan in such circumstances. Makes no sense to worry about having it be fixed for the entire duration if the loan you're getting will go away in a few months regardless.

If I was getting a loan for the purchase where I'm paying closing costs and points to buy it down, regular PMI is the way to go. That can be removed without a full refinance. If I have to refinance in a year to remove LPMI, the vast majority of those loan costs will be wasted, because I need to refinance to get rid of LPMI, and when I do, I'm letting the lender off the hook for the rest of that loan period, and if I haven't yet recovered the closing costs, I certainly won't get any additional benefit from my current rate after I refinance!

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 Mortgage Loan Disclosure Statement, 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 incorrect as to the facts of the matter, but intentionally misleading in such a was as to make it easier for the loan officers he was instructing to rationalize putting a client into a bad loan. But if the only penalty such companies face is a slightly higher turnover of underlings, while they're permitted to keep the increased level of business that results, that is not the way to encourage good, ethical, responsible behavior. Nor is it sufficient to train the people you're allegedly responsible for in legal CYA maneuvers and declare training complete.

Let's consider advertising for a minute. Currently, it over-promises the moon, just in order to get people to call. "$400,000 loan for $1287 per month!" to use the example of one web advertiser I've seen way too much of. The cost of that loan isn't $1287 per month. That's just the minimum payment. The real cost of that loan is $2700 per month, and increasing if the borrower makes that minimum payment. Net result: Millions of people who gave up good loans for lies, and have now lost their homes, or are in the process of losing their homes, because of it. Advertising needs to be required to focus on the real cost of the money. The interest rate, and how much in dollars it will cost to get that loan done. If they had to advertise a rate of 8.2%, they wouldn't get nearly so many gullible people signing up. If those people who make a habit of advertising a loan with a low rate instead of a low payment, then they're going to need to explain that that $400,000 loan at 5.5% will cost $24,000 to get it done. There's always a Tradeoff between rate and cost, except when they can sucker someone into applying for a loan that has a high rate and high costs.

Enforcement needs to be faster. There is no reason why every HUD 1 that gets filed cannot be checked for compliance by a computer program, and flag for human evaluation those that fall outside of set parameters. It needs to be compared to the earlier paperwork the client was given, and checked for compliance with the law, not wait until someone actually loses their property before the government starts to act. Swifter, more certain punishment will deter more of the unethical and illegal acts before they happen. Elementary psychology. Sadly, there are those that can only be deterred by confiscating their license permanently and sending them to Club Fed for several years, but the rest of us are better off without them in the business, but the sooner we confiscate that license, ban them from the industry, and put them away, the fewer people that will get hurt as the result of their actions.

Another thing: For as long as real estate agents and loan originators are the same license, it's time to stop pretending that one doesn't need to know the basic job functions of the other. Professionals who deal with real estate every day are much better equipped to recognize malfeasance, and stop if before it gets to the point where their client is getting hurt. If you don't warn your client of any issues you see, you have violated fiduciary duty, and nearly as deserving of punishment as those who commit it. No, you can't recognize everything that happens before it does. But there's no excuse not to have an affirmative requirement to investigate, not to turn someone in to state regulators, but to inform their client that all may not be as it seems. This may meet resistance from loan officers and agents who want the other to continue to share business, but who is really entitled to more protection: The person who leaves you open to charges that you failed your client, or that client, who really does directly and measurably put money in your pocket?

There can only be one answer to that question.

Caveat Emptor

HT to Unrepentant Individual, who also has some good information on what it means.



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



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



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



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



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



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



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



This is where it comes down to you and me. We're making it tougher for the developer to get those permits. When developers offer to buy property with the intent of building, neighbors come out in force to protest. Oh, we use all of the high-sounding names like "open space" and "habitat protection" and "quality of life" and even the mostly honest "No higher taxes to pay developers costs!" They come out and throw obstacles in the way of the project and



But the real issue, the elephant in the room that everyone desperately wants to ignore, is scarcity. We all want housing to be scarce. Why? Because we're already owners, that's why. If there's not enough of something, the price goes up and people wanting to buy have to pay the people who already have more money in order to buy. Whether people who obstruct developers will admit it to themselves or not, they are trying to vote themselves a profit at other's expense. The cashiers who work at the stores in the strip mall where you buy groceries need to live somewhere, and the lower on the socioeconomic scale they are, the closer that they have to live. It has almost nothing to do with the "Eeevil!" developers or any other corporate alleged malefactor. If they have to charge two million dollars per house to make a profit, they will build two million dollar houses. Or three. It's the buyers that pay for it, and these buyers are real people just like you are, who need a place to live just like you do, and if they can't get one in a sustainable way, will do it in an unsustainable way, as too many people have.



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



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



Recently, the City of San Diego made a rational attempt to plan for housing affordability, lessened commutes, etcetera. Called the "City of Villages" concept, it envisioned more decentralized and distributed services, employment, and shopping, and in particular, a lot more high density housing with neighborhood parks and social centers. It may still come about, but over the objections of suburbia which sees their future increase in property value drying up. Over the objections of members of my profession who have tried everything they can to obstruct it. Let's face it, when everybody who has a job in a county of about three million people is trying to get to one of three places, and then out of those same three zones where everyone works, all at the same time, it's a recipe for a traffic jam. Add in the fact that the median commute is something over twenty miles, and many people drive well into the next county over (80-120 miles) and it's a recipe for an extended traffic jam. We have three full-blown interstates and at least a dozen spur and connecting freeways, and they're all jammed solid at least ten miles and two hours one way every morning, and the other way at night.



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



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



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



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



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



How do you accomplish that? Allow more high density housing, but force them to plan the impact correctly. Enough parking, water capacity, sewage. Give the developers the parameters up front, so they know whether or not they can meet it, and enact a "must issue if standards met" law. Let the community get involved in setting the standards, if they want, but make them univer