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

Condo Assessments

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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

"Contractor's Specials"

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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

New Family Member!

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



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



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



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



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



Put this into law, and watch the prices of available housing drop. We could even structure it into tiers, Tier A where the approval process is basic and automatic, Tier B with somewhat higher prices but more hoops and less certainty, and so on. I would love to be able to find young families affordable three or four bedroom condos - but three bedroom condos are like hens's teeth whether or not they are affordable, and four bedroom just doesn't exist, period, affordable or not.



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



Many of you reading this are thinking about money - dollars and cents. And you know, that's fine. I like it when clients make money on their property. It's part of my job to help them make money on their property. But there's a difference between a reasonable profit at 5% increase per year, and extortion because you happen to own a place to live and there isn't enough housing to go around because you're doing your best to get policies enacted to make certain that there isn't enough housing to go around.



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



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



At one percent homeownership rates, we're below what the homeownership rates were when we had tenements and slum lords, even if they are single family homes in older areas of town. And many people who have been engaged in "condo flipping" are themselves priced out of the market. There are damned few folks who cannot be priced out of the market if it gets bad enough, and if policies remain unchanged, who is to say that it will stop just before you become one of the victims, the permanent underclass? Even if you're one of that fortunate class who isn't priced out, when there are ninety-nine people who want housing for every one who can actually afford it, what do you think is going to happen at the ballot box, or in the streets if necessary? I'd rather start now, while we can plan it rationally, as opposed to later when any old low quality crackerbox will be thrown up in panic mode anywhere and anyway it can be just to keep people from rioting in the streets.



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



I also suspect that we would benefit from more limits on Section 1035 exchanges (and reverse exchanges), which has to do with not taxing profits from real estate when it's replaced within six months with other real estate. Don't get me wrong, it's a beneficial code section overall and I'll keep helping clients with them, but I have to question whether someone who makes an exchange and then refinances to strip equity is really doing something to earn all that tax free money, or just engaging in paper transactions that make it look like they contributed something. I don't blame the participants for taking advantage of what is in the code, but some of what I have seen, and much of what I have heard about, is of questionable economic benefit to the country.



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



I hope this article will start a certain amount of discussion about what's really going on, and whether it is of net benefit to the country, and the people in it.



Caveat Emptor

Working with a borrower all day today. Truly ugly situation because he doesn't have a long history of credit, and this is the major obstacle to getting the loan done. He actually makes the money, and has a sufficient history of making the money to justify the loan "full documentation". But: He only has one usable line of credit, and it is only 9 months old. Most lenders require a minimum of three tradelines, at least one of which must be open for 24 months.

On the other hand, there exists a method to help this person. What he is going to do is approach close relatives with long term stable, paid up lines of credit, and ask if he can be added to one of their revolving accounts as a co-user. He does not have to get a charge card, or actual access to the account, he just needs to be added to the account as a co-borrower, and he will get the benefit of however long the trade-line has been open. He doesn't even have to know the account number (and the credit report omits several digits, so he doesn't get it there, either).

This has two effects. First, he will get the benefit of the length of the trade lines, and second, he will get the benefit of the tradelines being paid promptly and on time for however long. Preferably, these are low limit and low to zero balance accounts, because he will be dinged for any necessary payments on his debt-to-income ratio. But it will likely raise his credit score significantly (I would guesstimate at least sixty points) by giving him a several year history of on-time payments, as well as giving him an adequate history of tradelines.

Nor is this fraudulent in any way, shape or form. This is being done in full consultation with the lender. The lender has been notified in writing and approved of this. It may seem like I'm always going off about fraud, but in this case something that may appear a little shady actually turns out to be something that both the bank and the regulators can live with. So if you're thinking that loans are always about NO NO NO, here's a very strong YES to go along with it.

Caveat Emptor

UPDATE: As articles like this illustrate, 'Piggybacking' Roils Credit Industry, this is starting to be seen as a problem. It certainly is not a silver bullet. Indeed, it's something to avoid if there are other alternatives. Two major drawbacks apply: First, the payments hit your debt to income ratio. Second, if your "benefactor" has a late payment, that hits your credit also. Since neither of these are under your control, this makes this trick something to avoid if there are better alternatives.

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



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



You are now intending to make money.



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



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



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



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



I am not a lawyer, and I am exaggerating a small amount for effect. Real Estate investments, handled correctly, can make you a humongous amount of money. The point I'm trying to make is that they can also lose the unwary a lot of money. The amount of loose money available in real estate for the picking is the lure for a large number of professional sharks.



Caveat Emptor


I will be giving this talk, which I expect to last approximately 45 minutes, depending upon questions.

Thursday, November 15, 2007 at 7pm

Action Realty, Inc
9143 Mission Gorge Road STE A
Santee CA

If you want to buy real estate, the best time historically has been when there are a large number of sellers and not many buyers. Furthermore, there are currently a large number of lender owned properties and properties in foreclosure on the market.

Come Learn the basic issues of foreclosures and buying properties without cash, and how to take advantage of the current state of the market!

Cost: FREE to the public.

No reservation required but space is limited. Reserve now to get guaranteed seating.

Action Realty
619-449-0723

(we're planning an entire series of seminars on the second Thursday of every month. Next month, I get to pick the topic)

Who is responsible for the sub-prime mortgage failures?

There's a lot of blame to go around.

Regulators for failing to police existing Federal Reserve regulations on the lenders. This includes both Clinton and Bush era regulators.

Bond rating agencies for failing to perform due diligence on the investment potential of these loans. This stuff should not have been rated investment grade. Most of it should have been in the speculative junk bond classes (Ds and Fs), not AA or even AAA.

Lenders get a double whammy: Offering unsustainable loans to consumers without adequate disclosure of future consequences, and the games they played with Wall Street investors they were selling the loans to in order to make them seem less risky than they were. Make an unsustainable loan that the consumer cannot really afford, manipulate the paperwork until it looks like the loans are good, and sell them off before they go bad! Great work if you can get it - provided you've had your senses of ethics and self-preservation surgically removed.

Loan originators (that's both brokers and direct lenders, making a third strike for the direct lenders) for failure to make certain their client understood what they were getting into early enough to not get into the situation in the first place, and for cooperating with agents who wanted to sell a more expensive property than the buyers could afford, lest that agent not send them future clients, or talk future clients away from them. In many cases, they did not understand the loan they were recommending for the client. I have yet to see any evidence that direct lenders were superior to brokers on this score.

Listing Agents and Developers who wanted to sell more expensive houses and make more money, and went three states beyond overboard in doing so, and Buyers Agents who failed to advise their client that that huge new beautiful house they had their hearts set upon appeared to be beyond their means.

(Lest anyone thing otherwise, all of these are indictments against INDIVIDUALS who failed to perform their job functions correctly. There were individuals at all levels above who tried to warn everyone they could of what was going on. Pretty much without exception, they suffered for it professionally)

Last and certainly not least, the consumers who fell for the easy, attractive sale because they wanted so badly for it to be true so they could get that huge new beautiful house, that they did no investigation of what was really going on in the largest transactions of their life. Or they wanted the $100,000 cash out for toys without understanding the consequences of the loan paperwork they signed. The information was out there, and available. If you're an adult, you are, in the final analysis, responsible for your own actions. If you're not, what are you doing buying real estate and signing promissory notes for hundreds of thousands of dollars?

Did I miss anyone? Appraisers, yes, but their role was comparatively minor and the result of pressure from without. Furthermore, there were more than enough appraisers participating to render the refusal of any particular one nothing more than an exercise in self-flagellation. Agents, loan originators and especially lenders bear a much larger burden of responsibility. Just because I didn't personally participate is no reason to excuse my profession.

So there's more than enough evidence to point fingers at every major player in the real estate business, as well as quite a few minor ones. The idea that any one group bears enough culpability to somehow sacrifice in the name of expiating the sins of all is garbage, nothing more than spin cooked up to distract the Short Attention Span Theater that is American Politics from the fact that it's the system as a whole which failed. Staking out any single group as a scapegoat is setting ourselves up for a repeat on an even larger scale in a decade or two. It's the entire system that needs an overhaul.

Caveat Emptor

Problems with Multiple Mortgages

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We have several rental properties that we own (more than 10). When we were younger, before we got married, we both moved around a lot and bought houses, moved, stayed a year or so and did it again. I of course don't have to mention why we did this (no money down, low fixed rates, etc.) However, now I am running into a dilemma. I am finding that no one wants to refi or do purchase money loans now that we have 10+ mortgages. I need good rates to make my cash flow work. I have recently herniated one of my discs and have been out of work for almost 3 months, so I need to take money out of our house that is paid for, but no one wants to do it. Any suggestions on how to get around that? My credit scores range from 763-805, so that is definately not the problem. Any advice would be greatly appreciated as I am down to crunch time in needing to get some money.

Bad situation.

The reason for this problem is that whereas nationally, vacancy rates are much lower, and here in high cost California they are only running about 2.5 percent, the bank will only allow 75 percent of rent to be used in the calculation of whether you qualify or do not. Furthermore, on the negative side they charge the full payment, taxes, and homeowner's insurance, as well as maintenance. Now, here in the high cost areas of California if there is a rental property bought within the last three years that's turning a profit, I'd like to know about it. But for properties purchased several years ago here, and nationally in many markets, there are people making money hand over fist on rental properties whom the bank believes must be cash destitute. There is no way they will qualify for a mortgage loan without tweaking something.

There are two main ways to solve the problem.

10 mortgages (assuming you still own the properties) gives one serious status as a real estate investor. The loan should then be able to be done. Not necessarily A paper, but subprime with that kind of a credit score and a prepayment penalty will give them comparable - perhaps even better rates. Furthermore, on investment properties, there's a minimum of about a 1.5 point to 2 point hit on the loan costs just due to the fact that it is investment property. So refinancing an investment property is not something you want to do often. If you can't go 10 years between refinances, something is probably wrong. Especially given the extremely narrow spread between long term loans like the 30 year fixed rate loan and shorter term fixed rate hybrids, for investment property a 30 year fixed rate loan is likely the way to go.

But the key part is "real estate investor."

This is a business. You're going to need an accountant to attest to the fact that you've been operating this business at least two years. But that gives you standing as at least partially self-employed as the operator of a real estate investment business.

Which gives you an out to do stated income, possibly even A paper. You're going to have to state that you earn more income than you do. Given the environment today, a good loan officer looking to cover themselves is going to want you to acknowledge that you can make whatever the payment is really going to be. I don't care if you need $6000 per month to qualify and you tell me that you make $12,000 per month, or $120,000. Any time you are looking at stated income, you're looking at a situation that is vulnerable to abuse, both from the point of view of a consumer being put into a loan they really cannot afford, and from the point of view of a bank lending money based upon a credit score and source of income that really may not be there. This one is especially vulnerable to the latter concern in the current market, and I would likely take a real careful look at any bank statements that pass through my hands to make certain it's not patently disprovable. If it makes a borrower uneasy, well half of the reason for qualification standards is to protect them. Stated Income may be colloquially called "liar's loans", but that is not what they are intended for, and in this case you are intentionally overstating income in order to qualify under unrealistic underwriting rules. Furthermore, not every lender will permit this.

The second approach is NINA - a No Income, No Asset loan, also known as "no ratio" - meaning no debt to income ratio. These are much easier to do for the loan officer, as they're completely driven off credit score, but carry higher rates and require larger amounts of equity, either via down payment or appreciation since purchase. Nor do you have to state a higher income than you make, as there is no debt to income ratio computation on these loans. On the other hand, especially if you're talking about your personal residence, as long as you're in a low loan to value situation, you may get a better rate from an A paper lender without a prepayment penalty, as opposed to doing a subprime loan with a pre-payment penalty.

There is serious potential for abuse in this situation, even if it is theoretically allowed under the rules. So be very upfront about what is going on with anyone you come into contact with. You, as a loan applicant, should never be dealing directly with the underwriter - as an anti-fraud measure, every lender I'm aware of prohibits it and cancels any loan in process if you to interact directly with the underwriter. But doing this is allowed by the nature of stated income and NINA loans. Self-employed people and commissioned salesfolk have to file taxes, also, and tax forms are the preferred method for documenting income. Nonetheless, because there are significant deductions that would not otherwise be allowed due to the fact that you're paying your bills with "before tax" money whereas most folks are paying with "after tax" money, it does make sense to do it this way. Provided you don't talk yourself into a loan that you cannot really afford.

Caveat Emptor.

Transaction Case Study

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I had been corresponding irregularly with this gentleman during his hunt. It happens he lives outside of California, and I only work inside California, so I wasn't professionally involved. However, when he sent me the email telling me how it all worked out, I thought it it would make a good case study to show how several things I write about actually happen, how to deal with them, and that even if you don't do everything I write about, you can still get quite a bit of benefit out of this. I obtained his permission to run it with identifying details removed. I'm going to break it up into more digestible blocks, and comment upon what he did right and what he could have done better, had he wanted to spend the effort.

Hello Dan,

Thought I'd drop you a note and complete the circle so to speak. We've corresponded a handful of times since about May. I'm in DELETED, sold my $200K townhouse and contracted to have a new house built. I used your site a lot to come up to speed on mortgage matters, I've only had 1 mortgage in my life which was for the townhouse 8 or 9 years ago. That one was an FHA ARM I assumed so this new one was a new deal entirely for me.

Research is always good. That puts him ahead of at least 90% of everybody, right there.

We signed the contract to build around May 1 and closed on a nice shiny new 3,100 square foot, 5 bedroom house on a .31 acre lot on October 1. It's been a wild month what with moving and all but we're now firmly in and very happy with the new digs. Mortgage wise we went with the builders affiliated lender, it's a moderately large regional builder not one of the publicly traded ones. I would have liked to have had the opportunity to shop around a lot but the way they write these contracts makes their lender pretty enticing with a $15K credit towards closing costs.


A $15k credit towards closing costs? On a $200,000 loan? Real is $3000-3500, plus whatever you decide to pay in points. That's about 6 points of buying the rate down. And 6.125, what he ended up with, is available in my neck of the woods for less than a point. Rates are down from where they were in the summer, but even then, I think 1.2 points was as high as I got for that rate. Real, effective savings for using the builder's lender: about $6000. Not exactly chicken feed, and at least it was a net savings. All too often, people let cash make them stupid about real estate, and this is one of the biggies. We didn't cover whether the builder's loan had a pre-payment penalty, but the builder's loan having a prepayment penalty would have eaten all those savings and more, besides.

A better way to handle it is as a direct credit on the sales price of the house. Of course, you need to have already negotiated your best bargain before you bite off on that, or they'll give you $15,000 with one hand, while taking $20,000 away with the other.

So here is how it all worked out. Initially we got a GFE from the lender which is of course worthless at the start since you can't lock a rate 4 months ahead of time. The initial GFE was for 5.875%, 30 year fixed with a single point origination fee. Then over the summer the whole subprime mess hit the mortgage market hard. My loan was never going to be a problem with a loan amount of $215K against a purchase price of $430K but we were sweating bullets over the rate for a while . I got my initial firm rate lock the last few days of July at 6.5% with the same 1 point and 30 year fixed term. That was just under 75 days from the initial closing date of 10/8, I believe (you'd know ;)) the 75 day locks are a little more expensive than the shorter term ones. This lender lets you lock at the first opportunity and for my loan type that was 75 days, then they'll let you re-lock once between then and closing at no extra charge. I watched the rates every day and I was subscribed to DELETED daily rate alert so I could see the daily trends as the bond market did all sorts of gyrations up and down .

The longer the lock is for, the more expensive it is, yes. That said, for A paper loans, it's not very difficult to lock for up to 270 days out. On the other hand, for longer locks, you're likely to make a non-refundable deposit.

This is describing the "float down" option that lenders have, and which may or may not be included with a lock at a direct lender - their way of luring in customers, and that's fine. Broker clients don't get this (at least I've never heard of a broker who could offer it), but brokers can pull the loan and resubmit elsewhere, no matter how much lenders try to stop the practice (It's so rare that ways they try don't do much good). What they're doing with the float down is getting people committed without having them feel committed. Unless you're working a back up loan that's going to be ready at the same time, you're committed. Here's the proof of that pudding: What happens if they completely hose you on the loan? Who else is going to parachute drop in with another loan ready to sign? Answer: Nobody. Therefore, you're committed to that lender.

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My closing date got moved up to 10/1 at some point and then we got to September. On 9/7 (I think this was the week) which was a Friday bonds had had a rally that week anticipating fed action. The DELETED rate had dropped from 6.5 to 6.375 to 6.25, I checked with my Broker and he offered 6 & 1/8. I held off till Monday since the bonds had rallied even more on Friday thinking it might drop a smidge more. No dice, Monday had the same 6.125 so I re-locked at that rate, 1 origination point and 30 year fixed - or so I thought.

If he's working for the broker, he wouldn't be working for the developer. He might be a loan officer, but he's not a broker. I've never made $15k on a single loan - ever. My company has never made half that amount, even on loans several times the size and apparent difficulty. That builder is not offering you $15k of incentives to use his lender if they're only making a couple thousand that a broker would from that loan. That builder is getting the direct lender's stroke from selling that loan on the secondary market.

That said, this is pretty good work on the lock.

Now, at every turn in this process I'd see other options. Initially he asked me if I had any interest in interest only, "certainly not" was my reply. Each time I receive a GFE there were blocks for the interest only option. I know in the past they've done A LOT of interest only 5 year fixed period loans. But I wanted a 30 year fixed, the rates are hardly any different these days and I do want to actually payoff my loan eventually! :-)

Oh, you will pay off your loan eventually. That's one feature all loans have. Lenders use interest only to make the payments seem a little more affordable. Of course, when the interest only period expires, your loan amortizes over a shorter period, and the payments are even less affordable than they would have been.

Unless you can afford the property with a fully amortized, you're well advised not to buy it with an interest only. They always bump the rate for interest only, and usually it's grounds for a loan originator to make a little more money, or at least try to. Even if you can afford the fully amortized payment when it does adjust, only go interest only if you have a plan that's going to make you more money than it costs you.

So closing day arrives. We trundle over to the brokers office and meet the person from the title company who is serving as the closer. She begins reviewing docs, might have been the first piece of paper of maybe the second - "and here is your note, 6.5% rate with interest only for 5 years" Wait, STOP - that isn't my loan, my loan is a 30 yr 6.125 rate!!! So she calls the broker and they look it over . Oh, so sorry, someone dropped the ball and drew up the papers incorrectly. It took them an hour to redraw the entire package up the way it should have been in the first place. The broker was very apologetic and did offer, without me asking, to waive their document processing fee which was a few hundred bucks. All's well that ends well but it makes you wonder. The loan they prepared in error had the slightly higher rate and no origination point so the costs were a couple thousand less for the higher rate. So I don't think they were trying to screw me totally but the fact remains it was a totally different loan from what we had discussed all along.

6.5%, even interest only, on a 5/1 would have made them something like 2.2 points of yield spread, had they been a broker. It makes a difference of something between 3 and 4% of the loan amount on the secondary market. That's why no origination on that loan. If you had signed those papers, they would have sent out for caviar! That and of course, the fact that they were giving you a $15,000 allowance which you weren't close to using all of. That said, always judge and compare loans by what is best for you. If someone can make more money while delivering me a loan with a better bottom line, they've earned every penny of whatever they make. Lender compensation is not something for consumers to worry about.

This is very good, that you caught the difference and stood your ground, however. Yes, your signing agent made it easy on you, but you still did it. People don't believe this really happens, but it happens all the time, and over fifty percent of all people it happens to do not notice, and of those, something like 85% won't stand their ground.

Caveat Emptor

Project Valour IT

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(This message will remain on top until Veteran's Day. Through November 12th Scroll Down for newer entries.)


UPDATE: Thus far, the drive is a miserable failure. I just got this email:


ValOUR-IT will run thru MONDAY @ midnight, 11/12/2007

We're still struggling to get to $100K overall, despite Mrs G's lurid
attempts at getting others to donate to the USAF.

It's time to sprint. Don't forget to push the auctions!

If 5% of my usual traffic over the next three days donates $5 each, that will be over $1500 - two and a half laptops. Come on! Show that you're one out of twenty!


Once per year, I engage in fundraising activities, but not for me.

Project Valour IT helps injured service people reconnect with the internet by furnishing voice activated laptops to wounded service folk who have lost the use of one or more limbs. This is critical because it allows them to do things everyone else has come to take for granted while they're going through treatment for their wounds, and afterwards.

These folks stepped up to the line to defend you, me, our friends, family, and even that jerk who runs this website that everyone hates, and it cost them one or more limbs. Seems an awfully small measure of appreciation to help them be able to surf the internet and send email while undergoing treatment and afterwards, because I've yet to meet any of them who really got their hands back.

Please, give what you can if you can. These men and women deserve a lot more than this, but this is what I'm asking you to help with. I know it's rough with the fires having just happened; I understand if you're not in a position to do so.

(PS the manufacturer sells them at cost or even a bit below. They don't make a penny)

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Here's the Soldier's Angels page that tracks the overall progress. (if you have a website, join there!)

Prevent this shame from happening to us:

The Last of the Light Brigade

There were thirty million English who talked of England's might,

There were twenty broken troopers who lacked a bed for the night.

They had neither food nor money, they had neither service nor trade;

They were only shiftless soldiers, the last of the Light Brigade.

They felt that life was fleeting; they knew not that art was long,

That though they were dying of famine, they lived in deathless song.

They asked for a little money to keep the wolf from the door;

And the thirty million English sent twenty pounds and four!

They laid their heads together that were scarred and lined and grey;

Keen were the Russian sabres, but want was keener than they;

And an old Troop-Sergeant muttered, "Let us go to the man who writes

The things on Balaclava the kiddies at school recites."

They went without bands or colours, a regiment ten-file strong,

To look for the Master-singer who had crowned them all in his song;

And, waiting his servant's order, by the garden gate they stayed,

A desolate little cluster, the last of the Light Brigade.

They strove to stand to attention, to straighten the toil-bowed back;

They drilled on an empty stomach, the loose-knit files fell slack;

With stooping of weary shoulders, in garments tattered and frayed,

They shambled into his presence, the last of the Light Brigade.

The old Troop-Sergeant was spokesman, and "Beggin' your pardon," he said,

"You wrote o' the Light Brigade, sir. Here's all that isn't dead.

An' it's all come true what you wrote, sir, regardin' the mouth of hell;

For we're all of us nigh to the workhouse, an, we thought we'd call an' tell.

"No, thank you, we don't want food, sir; but couldn't you take an' write

A sort of 'to be continued' and 'see next page' o' the fight?

We think that someone has blundered, an' couldn't you tell 'em how?

You wrote we were heroes once, sir. Please, write we are starving now."

The poor little army departed, limping and lean and forlorn.

And the heart of the Master-singer grew hot with "the scorn of scorn."

And he wrote for them wonderful verses that swept the land like flame,

Till the fatted souls of the English were scourged with the thing called Shame.

O thirty million English that babble of England's might,

Behold there are twenty heroes who lack their food to-night;

Our children's children are lisping to "honour the charge they made-"

And we leave to the streets and the workhouse the charge of the Light Brigade!

Rudyard Kipling

Please help if you can.

Older Home, Beautiful Inside, with a Large Lot!

General: La Mesa, 3 bedrooms plus 1 optional, 2 FULL bathrooms!

Con:

What's Wrong With It: The front yard and facade are not attractive.

Why It Hasn't Sold: No curb appeal as it sits.

Who it's Not Appropriate For: People who need a garage. There isn't one right now.

Pro:

Selling Points: Central to everything, two minutes to the freeway. Served by some great public schools. Once you get inside, it's nice. The kitchen is modern, as are both bathrooms. The yard is large enough for a garage and a pool, and you'd still have plenty of room for the kids to play.

Who Should be Interested: People looking for a place to raise a family.

Why it's a Bargain: It's been on the market quite a while, and it really is worth the money - but the front yard keeps scaring people away.

Financial:

What I think I can get it for: $370,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 6% for one total point.

With no down payment: fully amortized payment $2218 plus $299 temporary PMI based upon $370,000 loan. (APR 7.110 includes temporary PMI)

With 20% down: fully amortized payment of $1775 (APR 6.152)

Other financing options are available, potentially lowering the payments, but I'm quoting real loans that real people can get, that will stay exactly the same until you pay it off.

Investment potential: If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $370,000 the property would be worth approximately $600,000. If you held it those ten years before selling, you would net about $285,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2100 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $190,000 ahead of the renter, after the expenses of selling.

To learn more: Agree that you'll use me as a buyer's agent if you buy it. If you don't like it or don't buy it, no obligation is incurred. If you're not working with someone who will go out and find properties like this, maybe you should consider working with me instead!

Contact Information:

Dan Melson, Realtor
Action Realty Inc
9143 Mission Gorge Road, Suite A
Santee, CA 92071
619-449-0723 X 116

If you have three real estate companies sending you emails with multi-listings, if you want to see one of the properties, who gets the commission? There five properties that I want to see the inside of the houses. Company A, B, C, etc. One house is listed by one of the three people that have been sending me emails.Am I obligated to sign up with an agent if I want to see the inside of a house? Do I tell the other agents not to send me anymore multiple listings?

That depends upon you and upon the agent and upon what sort of agreement, if any, who have signed.

If you haven't signed any representation agreements, nobody has grounds to complain. I don't ask for any agreement just to have listings automatically e-mailed to a prospect (within limits), or even an automated site for them to manage those listings. I have to have MLS access anyway, and that comes as part of the package. I look at it as an opportunity: for a few minutes work, I'm likely to end up with a prospective buyer. If one in a hundred of these converts to a transaction, I'm ahead of the game. The ratio is much higher than that. I could use it as an opportunity to set up my toll booth, and many agents do, but although they may be "top producers" because they cut out other agents for having their receptionist take five minutes out of their day to set this up, they're not the sort of agent someone who compares agents in action will likely choose.

If you've signed a non-exclusive representation agreement, the one who is the primary motivating factor behind the sale should be the one paid. This may be the agent who introduces you to the property, or it can be the agent who answers all of your questions well enough that you're willing to make an offer. It can also be the one who fast talks or pressures you into making the offer, but that's the beauty of non-exclusive agreements. You can fire such agents by just not working with them any more, and they're out of your life and out of the transaction.

If you've signed an exclusive representation agreement, then the person you signed the exclusive agreement with is legally entitled to be paid. This is a problem if someone else really sold the property to you, or if you've signed two or more such agreements. Furthermore, you can't fire bad agents with an exclusive agreement except by waiting for it to expire. You sign a six month exclusive agreement in April, they're going to get paid for any transaction you start through October (and possibly longer) - even if you told them you never want to see their face again before April was over.

Many agents will ask you to sign an exclusive representation agreement before they do anything. You shouldn't sign one at all. Non-exclusive is plenty good to protect the agent while preserving your protections against a bad one. And there is no reason not to sign the standard non-exclusive agreement.

I have heard every rationalization under the sun as to why exclusive agreements are desirable. The only person they're desirable to is insecure or incompetent agents. There is no advantage for the consumer to sign one. Exclusivity prohibits real competition, where the consumer can observe your skills and your attitude in action. Anybody can look good in the office before you've seen a single property together. That's just sales patter. The proof is watching them in action when you're evaluating property together. That's where you can tell the best agents from the friendly idiots, the high pressure commission grabber, and all the other problem personalities around. And sometimes, that's where you find out that they're not so friendly after all. Unless it's showing one of my listings, I won't go out with someone who's signed an exclusive with someone else, and neither will any other agent I know of. I'm not going to show someone the bargain I spent twenty or thirty hours finding so that an agent who couldn't be bothered to get out of their swivel chair can get paid for the work I did, but you'd be disgusted at how often I get the request.

If all you're getting is a sit on their hands agent who never leaves their office to scout property for you, whether they're an explicit discounter or someone pretending to be full service, then the purchase contract itself has confirmation of the relationship and there is no need to sign an agreement in advance of this at all. The same is true anytime you approach an agent with a property you have already determined to make an offer on. The agency relationship is confirmed in the purchase contract, indeed, in the initial offer. There's absolutely no need to sign any kind of representation agreement with them outside of that. It's simply one more method by which rotten agents lock up business, because if you sign that exclusive agreement they ask for, they've got you for however long it lasts. I've been told - by clients - about listing agents who wouldn't communicate an offer until they had signed a representation agreement - a clear violation of fiduciary responsibility to that owner. I've heard every rationalization under the sun here, as well. "I'm putting my time into this! I deserve to get paid if it falls apart!" is the most common one. My response is to such agents is, "Then make sure it doesn't fall apart, and no, you don't." The reason agents get paid as much as they do is because their pay is contingent upon a successful, fully consummated transaction. It's right there in all of the standard WinForms contracts. If an agent can't make this transaction go, they haven't earned any kind of right to mess up another one also. If you, the client, want to stick around once you've seen them in action, that's great! If not, that should also be within your range of choices. An exclusive agreement removes that option.

Caveat Emptor

Lender Owned on Large Lot with Great View!

General: Santee, 2 Bedrooms + 2 optional, 1 bathroom.

Con:

What's Wrong With It: Lots of Stuff, starting with settling and foundation trouble. Truthfully, the value is in the land, less demolition and haul away.

Why It Hasn't Sold: It will take significant cash to fix it

Who it's Not Appropriate For: People who want a turn key property. This is definitely not that.

Pro:

Selling Points: Location has a great view, and the schools are pretty good also. Central to everything.

Who Should be Interested: Investors with the cash or people looking for a good lot for their dream home..

Why it's a Bargain: The lot is twice the size of most stuff built in the last few years, and the view will add a major chunk to the value of any livable property. Plus, you can get residential housing financing on it because the house isn't condemned.

Financial:

What I think I can get it for: $210,000 or maybe a bit less.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 6% for one total point.

With no down payment: fully amortized payment $1259 plus $170 temporary PMI based upon $210,000 loan. (APR 7.146 includes temporary PMI)

With 20% down: fully amortized payment of $1007 (APR 6.176)

Other financing options are available, potentially lowering the payments, but I'm quoting real loans that real people can get, that will stay exactly the same until you pay it off.

Investment potential: This is a great property if you're looking to build a new custom home or if you have the ability to get multiple unit housing approved.

To learn more: Agree that you'll use me as a buyer's agent if you buy it. If you don't like it or don't buy it, no obligation is incurred. If you're not working with someone who will go out and find properties like this, maybe you should consider working with me instead!

Contact Information:

Dan Melson, Realtor
Action Realty Inc
9143 Mission Gorge Road, Suite A
Santee, CA 92071
619-449-0723 X 116

Loans with Stealth "Cash Out"

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One of the things I hear a lot is that people are getting cash in their pocket from a refinance rate where there is no rebate. "I'm not paying any closing costs!" they proudly tell me, "The bank is putting money in my pocket."



Chances are that's not what's going on. In fact, when the client gives me the chance to investigate, I find out that they are paying huge fees, which are all being added to the balance of the mortgage. But what they remembered was that the lender was also going to give them $1200 or $1500 in cash and add that to the balance on top of everything else.



For "A Paper" loans, Fannie Mae and Freddie Mac define the difference between a cash out and rate/term refinance. On a rate/term refinance, a client can have all costs of the loan covered, both points if any and closing costs. A client can have an impound account set up to pay property taxes and homeowner's insurance out of the proceeds. They can have all due property taxes and insurance paid. The client can have all interest paid for 30 or 60 days. And the client can get up to one percent of the loan amount or $2000, whichever is less, in their pocket. In addition to this, if the old lender had an impound account, the client will receive the contents in about 30 days.



Let's say you have a $270,000 loan on a $300,000 home - small for most parts of California and some other places, but large for most places in the country.



Here in California, yearly property taxes would be about $3600 on that. Insurance is about $1000 per year, monthly interest is $1237.50. I'm writing this in September, so if you finish your refinance today, your first payment would be November 1. You'll make five payments before both halves of your property tax are due, and they want a two month reserve, so 12 months plus 2 months is fourteen months minus five months is nine months reserves they will want in property taxes. $3600 divided by twelve times nine months is $2700. Let's say Insurance is due in April, so they'll want eight months of that. $1000 divided by twelve times eight months is $666.67. Plus two points and $4500 in closing costs the lender charges, and they actually may have told you about it, but they emphasized the cash you are getting in your pocket so that is what a lot of people remember.



Even without the cash out, this works out to a new loan amount of $270,000 plus $2700 plus $666.67 plus $1237.50 plus $4500 plus two points which works out to $284,800 as your new balance without a penny in your pocket. If they gave you $1500, your new balance becomes $286,330 (remember the two points apply to the $1500 also!) which will probably be rounded to $286,350. Subtract $270,000, and they have added $16,350 to your mortgage balance but hey, you got to skip a month's payment and got $1500 in your pocket!



As I have said elsewhere, however, money added to your balance tends to stick around a long time, and you are paying interest on it the whole time. Furthermore, lenders love this because their compensation is based upon the loan amount. All because you allowed yourself to get distracted by the cash in your pocket. This is fine if it is what you want to do and you go in with your eyes open, but chances are if someone were to tell you "I'm going to add $16350 to your mortgage balance to put $1500 in your pocket and allow you to skip writing a check for one month!" you wouldn't agree to do it. Even if the rate is getting cut so your payment is $75 per month less.



For loans lower down the food chain (A minus, Alt A, subprime and hard money) the lenders set their own guidelines on what is and is not cash out, but Fannie and Freddie's definition is more strict than the vast majority.



So when somebody tells you they are going to put money in your pocket as part of the closing cost, ask them precisely how much is going to be added to your mortgage balance. Print out the list of questions in this, and ask every single one. Because chances are, they are trying to pull a fast one, and once you are signed up, they figure they have you.

Caveat Emptor

Solid Top Floor Condo in Great Neighborhood

General: La Mesa, 2 Bedroom 2 FULL bathrooms.

Con:

What's Wrong With It: Entryway is narrow.

Why It Hasn't Sold: Kitchens and bathrooms are original. Wall covering from the book of "What were they thinking?"

Who it's Not Appropriate For: People who have difficulty climbing stairs

Pro:

Selling Points: Location is a nice clean complex with a pool and clubhouse. Served by great schools. Central to everything. Larger than most 2 bedroom condos.

Who Should be Interested: Smaller families and single parents. People looking for great investments.

Why it's a Bargain: The unattractive surfaces tend to drive most folks off, and it's lender owned.

Financial:

What I think I can get it for: $160,000 or maybe a bit less.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 6% for one total point.

With no down payment: fully amortized payment $959 plus $129 temporary PMI based upon $160,000 loan. (APR 7.172 includes temporary PMI)

With 20% down: fully amortized payment of $784 (APR 6.202)

Other financing options are available, potentially lowering the payments, but I'm quoting real loans that real people can get, that will stay exactly the same until you pay it off.

Investment potential: If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $160,000 the property would be worth approximately $260,000. If you held it those ten years before selling, you would net about $120,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1200 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $90,000 ahead of the renter, after the expenses of selling.

To learn more: Agree that you'll use me as a buyer's agent if you buy it. If you don't like it or don't buy it, no obligation is incurred. If you're not working with someone who will go out and find properties like this, maybe you should consider working with me instead!

Contact Information:

Dan Melson, Realtor
Action Realty Inc
9143 Mission Gorge Road, Suite A
Santee, CA 92071
619-449-0723 X 116

Bridge Loans

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One of the things I'm seeing a lot of these days is blanket advice on bridge loans.



A bridge loan is a loan that you take out with the explicit intention of having it be short term. The most common situation is a loan against property A, which you own but plan to sell, so that you can put a down payment on property B right now.



The motivation for this comes from the fact that people get paid to do bridge loans, and they are typically very easy loans to do. Frankly, the people making the recommendation make more money by doing the bridge loan than by not doing it, and they are not motivated to do the calculations and legwork to see which is the better deal for the consumer.



When it comes to money, blanket recommendations of any sort are automatically suspect, and usually wrong. Every situation is different, and there can be factors that cause an ethical professional to recommend something in one case where they would recommend against in another superficially similar one.



Bridge loans are no exception. The advantage is that they make you a more qualified buyer, and can get you better rates on the loan for the new property. The disadvantage is that their closing costs are just as high as any other loan. So you're spending about $3500 extra plus points plus junk fees (if any). They are also, by definition, cash out refinances. The rate-cost tradeoff for cash-out refinances is less favorable, all things considered, than purchase money loans.



The next major issue that arises is that they can make it more difficult to qualify for the loan on the new property, which can often mean that you need to go stated income or NINA when you might otherwise have qualified full documentation, which means you got a higher rate on the new property anyway, and that you're going to want to refinance your new purchase as soon as Property A sells anyway, sending another set of loan costs down the drain. Don't get me wrong, I love to do loans, and my pocketbook loves for me to do loans, but it's a good loan officer's job to look after your interests first.



Finally, choosing a bridge loan can force a choice upon you: A good loan that puts you in the position of having a need to sell within a specified time frame, and a mediocre loan that may not. The best (lowest) rates are for short term loans. Always have been, always will be. However, if the market sours, this can cause you to either accept an offer you would not have otherwise considered, or flush another set of closing costs down the toilet, when if you had chosen the mediocre loan, you would have been okay indefinitely.



Let's crunch some numbers. Let's say you have a property currently worth $250,000 that you bought for $125,000 and have paid down to $100,000. You want to upgrade to a $400,000 property now that your promotion and raise have settled in.



The first thing you do is pull cash out to 80 percent. On a 30 day lock of a 30 year conforming fixed rate loan, assuming you've got good credit, this is about a 6.5 rate without points, and you'll actually get about $96,500 of that $100,000 you take out. I looked at shorter term fixed rate loans as well, but with the yield curve inverted right now since you're planning to sell, anything without a prepayment penalty is about the same, and a prepayment penalty is contra-indicated, as it means you'll have to pay thousands of dollars when you do sell.



You take and put that $96500 down on a new home purchase loan on a $400,000 home. It's over 20% down, so no PMI concerns, and no splitting into a second loan. But because you've got that $200k loan sitting over there, now you have to go stated income on the loan for the new home. This means your rate is about 6.75 without points. Soak off another $3500 in loan costs, plus purchase costs of maybe another $1000. You now have two loans, one for $200k at 6.5 and one for about $312,000 at 6.75. Now the original home sells. Let's say you got full value of $250,000. You pay 5% in real estate commission, and maybe 2% more in other costs. That's $17,500, so you get $32,500 in your pocket. You have three choices, two of them productive. You can 1) Spend the money, 2) Invest the money, or 3) Use it on the other mortgage. Now a paydown, where you just plop the money down and keep making your same old current payment is a good idea (Unless there's a "first dollar" prepayment penalty), but most folks are obsessed with lowering their payment. So they take that $32500, and of which $3500 is loan expenses, and (because now they can do full documentation), they end up with something like a $283,000 loan at 6.25 percent, assuming rates don't move. Total cost of loans: $10,500 assuming you pay no points for any of your loans. Perhaps possible for someone with above average credit. Not likely if your credit is below average.



Suppose instead, that you just leave that $100,000 loan sit on your original property. You're still going to have to do stated income on the new loan on the new property. But instead, you go with a 80 percent first, 15 percent second because you can come up with $25,000 until the first property sells. Same 6.75 rate on the first, and the second is an interest only at about 10.25, just to use the same lender whose sheet I happened to pull from the stack for the exercise. Loan costs, $4000 without points, which I priced the loan to avoid. First house sells, you get $132,500, replace the $25,000, and pay off that second, leaving you a $320,000 loan and about $47,500, holding cost assumptions constant ($1000 in non-loan costs). You could do a paydown, leaving $272,500 balance on a 6.75 loan, or you could take $3500 in closing costs and refinance to 6.25, just as above, leaving a balance of $276,000 if you don't pay any points. Total loan costs, $7500 and you only have to avoid paying points twice (once, as opposed to twice, if you take the paydown option. It takes a little under 37 months to break even on your interest savings). Furthermore, in less than hot markets, it gives you greater leverage with your seller to pay some part of your closing costs: "Do this, or I don't qualify". They have the home on the market for a reason, and they can help the buyer in hand or they can hope for another buyer to come along.



In this example, not doing a bridge loan saves you about $6500, less the additional interest (about $512/month) for the second mortgage until your first home sells, but plus approximately $541 per month interest every month between the time you initially refinance your original property and the time it finally sells, a longer period of time. Plus one set of possible mortgage points. So it's not difficult to construct scenarios where it's a good idea not to.



Let's look at a different scenario, however. Let's say instead of upgrading, you're already in the $400,000 home, and looking to downsize to a $100,000 condo. Furthermore, let's say you bought for $200,000 and are now down to $160,000 owed, just to keep the proportions consistent. You borrow out to $265,000 (paying $3500 in loan costs), which you qualify for full doc at 6.25. You then pay cash for the condo (including $1000 for purchase transaction costs, and you've still got $500 in your pocket). Furthermore, an all cash, no contingency transaction is a powerful negotiating tool for a seller to give you a good price. Then when your original property sells, costing you say 7%, or $28,000, in selling costs. You net $107,500 in your pocket. If you did no bridge loan, let's still assume you can come up with $25,000 on the short term, and you still qualify full documentation. Your rate on the condo is 6.375 without points, holding assumptions consistent. Then you sell the first property for the same $400k, paying the same 7% ($28,000) and paying off the $80,000 loan on the condo as well as replacing the $25,000. Net still $107,500 in your pocket, less additional interest charges for a little longer period, but you cut your stress level and put yourself in a stronger bargaining position, which is likely to be worth doing.



There are any number of reasons and factors to do a bridge loan or not to do a bridge loan. You may not have a minimum down payment without a bridge loan. That's probably the most common, as not all properties and purchases are eligible for 100 percent financing, and some require as much as a forty or even fifty percent down. The way a necessary transaction is structured. The presence or absence of 1035 exchange considerations is often a factor. Your credit score may limit you, or your ability to qualify full documentation may dictate the advantage lies in a different direction. Every situaton has the potential for factors that may dictate an answer other than that given by pure numerical computation, and there are therefore, no valid blanket answers to the question of whther or not to do a bridge loan.



Caveat Emptor.

Lender Owned With HUGE Bedrooms and Basement!

General: La Mesa, 3 Bedroom 2.25 bathroom.

Con:

What's Wrong With It: Floor needs resealing and a divider needs removing.

Why It Hasn't Sold: Kitchens and bathrooms are original from the 1950s.

Who it's Not Appropriate For: Flippers

Pro:

Selling Points: Location is on a quiet street close to a public park. Great schools in the area. Yard is good sized. 2 car detached garage with bonus room.

Who Should be Interested: Families with children who need room. People with home based businesses.

Why it's a Bargain: It's lender owned and the construction appears solid, if dated. The smallest bedroom is 13x14. You could be happy here for the rest of your life.

Financial:

What I think I can get it for: $400,000 or maybe a bit less.

Monthly Payment requirements and income requirements: I've currently got a thirty year fixed rate loan available for qualified buyers at 6% for one total point.

With no down payment: fully amortized payment $2722 based upon $400,000 loan. (APR 7.107 includes temporary PMI)

With 20% down: fully amortized payment of $1919 (APR 6.137)

Other financing options are available, potentially lowering the payments, but I'm quoting real loans that real people can get, that will stay exactly the same until you pay it off.

Investment potential: If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $400,000 the property would be worth approximately $650,000. If you held it those ten years before selling, you would net about $310,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2100 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $180,000 ahead of the renter, after the expenses of selling.

To learn more: Agree that you'll use me as a buyer's agent if you buy it. If you don't like it or don't buy it, no obligation is incurred. If you're not working with someone who will go out and find properties like this, maybe you should consider working with me instead!

Contact Information:

Dan Melson, Realtor
Action Realty Inc
9143 Mission Gorge Road, Suite A
Santee, CA 92071
619-449-0723 X 115

Most people tend to shop for a mortgage based upon the payment. They figure the lowest payment will be the cheapest loan.



This is the way most people make banks rich. Because they are looking for the loan with the lowest rate and the lowest payment, they choose the loan with two or three points that's going to take twelve years to pay for its costs, and then after they've sunk all those costs into the front end of the loan, refinance within two years and sink a whole new set of costs into the loan. The bank gets all this lovely money, and then the consumer lets them off the hook by refinancing, and the bank doesn't have to carry through on the full amount of their end of the bargain.



In point of fact, when shopping for a mortgage loan, there are at least four factors the consumer should consider. The best loan for a given consumer in a given situation at a given time is based upon all of these factors. Each varies in importance from loan to loan.



These factors are:



The monthly payment

The monthly interest charges

The costs that are sunk into the loan in order to get it

How long you're likely to keep the loan.



This is not to say that only these factors are of importance. For example, the possibility of "back end" costs when you refinance is likely to be a critical factor when considering a loan that has a prepayment penalty. If you know there's a good chance you're going to get hit with an $8000 charge for paying it off too early, that needs to be added into the likely costs of the loan.



The monthly payment is important for obvious reasons. If this is not something you're comfortable paying every month for month after month and year after year, then getting this loan is probably not something you should do. The costs of getting behind in your mortgage are significant, and the costs of going into default are enormous, and both may likely continue even after you have dealt with them. I talk with people all of the time who say, "We've got to buy something now, before it gets even worse!" Many agents and loan officers will happily put someone who says this into a home, with a loan payment that looks affordable on the surface, but isn't. If you don't examine the situation carefully, you're likely to be getting into something you cannot afford, and is likely to have huge costs and ramifications for years down the line. Neither of these people is your friend. They are each making thousands, often tens of thousands of dollars, by putting you into a situation that is not stable, and that you're going to have to deal with down the line, while they're long gone and putting some other trusting person who doesn't know any better into the same situation as you. If the situation is not both stable and affordable, pass it by.



With that said, the monthly payment is usually the LEAST important of these four factors. As long as it's something you can afford, do not charge straight ahead, distracted by the Big Red Cape of "Low Payment" while you are being bled to death by other things. Many of these Matadors (which means killers in Spanish) will bleed you to death while acting like your friend by distracting you with the "affordable low payment". Due to lack of a real financial education in the licensing process, a disturbingly large number do not realize they are bleeding people, but that doesn't help their victims. A loan payment that is higher but still affordable may be a better loan for you - and in fact this is more likely true than not.



The three other factors are each far more important than payment. Payment is important. People who are unable to make their payments are called insolvent. Many of them file bankruptcy, have liens placed upon them, wage garnishments, suffer for years because of bad credit ratings, etcetera. But just because the cash flow is better right now does not mean the situation is better - that way lies the Ponzi scheme, Enron, and many other famous wrecks in the financial graveyard.



There is no universal ranking of which of the remaining three is the most important. They must be compared as a group in the light of a given situation: YOUR situation.



The monthly interest charges are simple. Principle balance times interest rate. This starts at the amount of the new loan contract (with all the costs added in, of course) times the interest rate.



The costs sunk into the loan shouldn't be any more difficult to compute, but they are. As I have gone over elsewhere, it is an unfortunate fact that rarely does a mortgage provider tell the entire truth about the costs of the loan until it's too late to do anything about it. If you have an ethical loan provider, the amount on the Good Faith Estimate (or Mortgage Loan Disclosure Statement here in California) should match what shows on your HUD 1 at the end of the process. Please remember to note any prepayment penalty or other back end charges as a separate dollar amount.



The thing that is most difficult to determine is how long you intend to keep the loan. Most people have no reliable crystal ball to gaze into the future.



The obvious answer to this dilemma is to compute a break even point. This completely falls short with regards to higher costs incurred after disposing of the loan as a result of having a higher balance, but it's a start. If one loan has lower costs and a lower interest rate, there's no need to go through the computations. But if as is common, one loan has a higher sunk cost and the other has a higher monthly interest charge, divide the difference in sunk costs by the difference in interest charges per month. This gives a figure in months that is a break even point. Don't forget to add in any possibility of a prepayment penalty.



With this breakeven figure in months, you can calculate which is likely to be the better loan for you, using your own situation as a guide. If the breakeven is 54 months and you're being transferred in 36, the answer is obvious. If you've refinanced at intervals of twenty-four months your whole life, a 54 month breakeven is not likely to be beneficial. If you're going to need to sell in two and a half years when mom retires, that's a clue, too. And if you're a first time homebuyer starting out, remember that 50% of all homes are sold or refinanced within two years, so unless you have some reason to suspect that you are likely to be different, take that into account. Far too many people waste thousands of dollars regularly by paying the up-front costs for loans that they will not keep long enough to break even.



Caveat Emptor.

The Best Loans Right NOW

6.00% 30 Year fixed rate loan, with one point total and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2398, APR 6.134! This is a thirty year fixed rate loan. The payment and interest rate will stay the same on this loan until it is paid off! 30 year fixed rate loans as low as 5.25%!

Best 5/1 hybrid ARM: 5.25% with only two total points! Fixed for five years, paid off over thirty (if you want to keep it). This is a real loan with a real payment that reduces your loan balance every month, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2209, APR 5.473! 5/1 ARMs as low as 5.00%!

This is totally cool! Hybrid ARM rate cost tradeoffs have dropped significantly in the last week or so! If you're cramped for payment and looking to refinance and you need a loan that's going to be stable and guaranteed for up to five years, this is an excellent time to lock! That''s better than half a percent lower on the rate than the equivalent 30 year fixed, and it's been at least a year and a half since I've had a 5/1 that good!

10 and 15 year Interest only payments available on 30 year fixed rate loans!

Great Rates on jumbo and super-jumbo loans also available!

Zero closing costs loans also available!

Yes, I still have 100% financing and stated income loans!

Interest only, No points and zero cost loans also available!

These are actual retail rates at actual costs available to real people with average credit scores! I always guarantee the loan type, rate, and total cost as soon as I have enough information from you to lock the loan (subject to underwriting approval of the loan). I pay any difference, not you. If your loan provider doesn't do this, you need a new loan provider!

All of the above loans are on approved credit, not all borrowers will qualify, based upon an 80% loan to value and a median credit score on a full documentation loan. Rates subject to change until rate lock.

Interest only, stated income, bad credit and other options also available. If you need a mortgage, chances are I can do it faster and on better terms than you'll actually get from anyone else in the business.

100% financing a specialty.

Please ask me about first time buyer programs, including the Mortgage Credit Certificate, which gives you a tax credit for mortgage interest, and can be combined with any of the above loans!

Call me. EZ Home Loans at 619-449-0070, ask for Dan. Or email me: danmelson (at) danmelson (dot) com

It's not difficult to see how some of the weakest agents and loan officers I know make lots of money. They work for an office of a well advertised chain, and when they get the walk-in traffic, no matter what happens, it's "A great property," or "a great loan." Nice place, priced a hundred thousand above where it should be? "Great property!" Attractive on the surface, but has a cracked foundation that's going to cost a hundred thousand to replace? "Great Property!" A 2/28 a full percent above what you could have had with a thirty year fixed, and with a couple thousand dollars in extra closing costs? "Great Loan!"

It's like working with a cheerleader.

A lot of ex-cheerleaders make a very good living as real estate agents and loan officers. The personality types are a good fit for sales, whether it be real estate or loans. Enthusiastic about everything, no matter how messed up it is. Their answer is always, "We can do it!". The people who are don't understand what's really going on, and don't compare it seriously, they hear a putative expert going on like this, and all their warning reflexes get defused. It's human psychology, that when all the barriers should be going up in such situations, they go down instead.

Here's a cold hard fact: There's no such thing as a perfect situation in real estate. No matter what you're doing, buying, selling, or getting a loan, there are always trade-offs. Sometimes the trade-offs are obvious, as with loans, where there is an explicit tradeoff between rate and cost. Sometimes, they're not so obvious or direct, as when comparing between properties for sale. You can understand those trade-offs, and choose the one most advantageous to you, or you can choose in ignorance, metaphorically stamping "sucker!" on your forehead.

A stronger agent or loan officer will explain those choices, and put the consequences of each in context. "This one is $50,000 more, but has another bedroom, another bathroom, and is 300 square feet larger. This one is $40,000 less, but it's going to cost you $80,000 to fix the foundation. This one is $30,000 less, but it's going to cost you about $10,000 for carpet and paint." On the loan side, "You can have a thirty year fixed rate loan at 6.5% for a total cost of $1500, as yield spread will pay the rest, or you can have 6% for a total cost of $8000, or you can have a 5/1 ARM at 6% for $3000, or a true zero cost 5/1 ARM at 6.375%" . An informed choice requires knowledge of both reasons for and against a given option. I don't try and tell them which property to make an offer on or which loan to like more. I can present one in a better light than another, but making the choice is not my job. My job is explaining the consequences of the choices the clients make before they're stuck with them, because in real estate, like in real life, there are no "do overs".

People like to be told that everything is going to be easy. But that's not the way to get a good bargain in real estate. You shop for the best loan, force loan officers to compete, compare properties, force your agents to come up with bad things to say about every property, fire any listing agent who won't tell you hard truths from the first time they open their mouth. Real success in real estate is never easy.

Real estate transaction can be made easy - at the price of giving the other side what may be the best deal since the Dutch bought Manhattan. Real estate, particularly in high cost areas where the largest proportion of the population live, is valuable enough that just a few percent of the purchase price can be more than most people make in a year, and if you're not on your guard, you may never know you've been had. I talked with a guy recently who had no clue that there was an identical property four doors down being offered for $140,000 less than he paid, at the time he paid it (I didn't tell him. Not my client, and done is done. No use stirring up trouble or getting him aggravated over something that could no longer be remedied). Really pay attention to the things people will do to save much smaller amounts of money for a few weeks, and it will remove all doubt in your mind as to whether scams happen. To use another gratuitous example, the vast majority of all the negative amortization loans out there. What percentage of people do you think are going to sign off on, "pay interest two percent higher than you could get, compounding against you in the lender's favor, end up owing more than the property is worth and being unable to refinance or afford the payments in three to five years, thereby ruining your credit for life and losing the property as well," if everything is laid out with full disclosure? But millions of people did, and I'm still getting email most weeks from people who were lied to by their loan officers and agents and only figured it out at signing! Bobby McFerrin wrote a great song, but "Don't worry, be happy!" is not the key to a successful real estate transaction. In fact, it's the direct opposite. If you're not willing to be a diligent guardian on your own behalf, I'm willing to bet money that nobody else involved will, either.

Around here, even an average "small" transaction puts $300,000 or so onto the table. Ask yourself, "What would I do with $300,000 at stake?" Then ask yourself what the worst scoundrel you know would do with $300,000 at stake. I assure you that the world of real estate has people out there worse than any fictional villain - I've dealt with some of them. The fictional villain has to be believable; the real person only has to exist. Finally, ask yourself what somebody who's almost - but not quite - a saint might be willing to do with $300,000 on the table. The variations should give you a good idea as to the gamut of possibilities, but people are ingenious when it comes to ways to squeeze extra money out of someone else.

Now ask yourself: Do you really want to hire a cheerleader as the expert on your side in light of this? Or do you want a cold-hearted analyst who really understands everything that can go wrong, and is going to tell you the downsides as well as the upsides of everything? It may not be as complex as the game of celestial billiards NASA plays with probes like Voyager, Galileo, and Cassini-Huygens, but a constant between the two is that, like celestial mechanics, real estate transactions have critical moments where if you are just a little bit wrong in what you do, you end up heading in completely the wrong direction, if not splatted into the side of the waypoint at several miles per second. Nor can you usually fix it later if you get it wrong at the critical moment. If you doubt this, spend a little time on any of dozens of real estate forums, reading the stories of the people who got it wrong, and are now trying to fix it.

Buying real estate, or financing it, is a huge decision. So big, that the emotional hind brain with all the "flight or flight" stuff over-rides our rational decision-making process, which was layered on in our complex operating system we call a brain much later, and loses out any time there is a conflict between the two. Fear and suspicion are hardwired into the hind brain. If anything about the situation is uncomfortable, the primary reaction of the hind brain is to get out of that situation. In fact, in many cases, the only way some sales folk can move a lot of people off their hunkered down position in mental concrete is by pretending that there is no possible downside to the transaction. Not only is this cheerleading behavior a calculated lie (unless the sales person really is that clueless themselves), but it destroys any element there may be of the healthy response of evaluating the situation completely, from a rational viewpoint. There is no such thing as a real estate transaction without potential downsides, and the ones you don't know about or don't understand are generally much worse than the ones you do.

I don't know how many times I've heard people say things that reduced to "I can't be rational! This is far too important for that!" A good professional's most important job function boils down to keeping intellect in the process. I can't make Mrs. Lee (and women make the decisions when picking out the cave!) decide she emotionally likes the property enough to buy it (Even if I could, I wouldn't - that way lies professional disaster). That's Mrs. Lee's part of the process, and Mr. Lee will help. I can give them enough concrete reasons why or why not to get past that reptilian hind brain's emotional over-ride of the thought process.

I've got to admit that the thought of being able to buy real estate and get loans stress free appeals to me, too. Being a carefree adolescent or child is appealing on a certain emotional level. But it's also profoundly dangerous. One of the wisest and most profound things I've ever read, despite the mixed metaphors, was the following:

"'Let George do it ' is not just the lazy man's motto. It is also the credo of the slave. If you want to be taken care of and not have to worry, that's fine; you can join the rest of the cattle. Cattle are comfortable - that's how you recognize them. Just don't complain when they ship you off to the packing plant. They've bought and paid for the privilege, and YOU SOLD IT TO THEM"

So how about it? Do you want to be comfortable, or do you want to be involved and understand everything going on? Do you want to have it all easy, or would you prefer to plan it through? Do you want to work with a cheerleader, or with an analyst? Maybe you've been reading the news these past several months. Millions of people are in the process of losing their homes, having their credit ruined for years, and having the rest of their lives ruined, financially. Millions more have already been through it. I've yet to hear of one who was the client of an analyst who disclosed everything the client needed to know at the appropriate time.

There's always going to be a leap of faith somewhere in a transaction. Short of learning the jobs of three or four professionals on the same level of knowledge and practice as they possess, there is no way around this. But by going in with your eyes open, doing your own due diligence, and cross checking what you are told, you can make that leap into a short step, and give yourself confidence that your trust is not misplaced by verifying it isn't misplaced where you can check. Because most of the crooks out there are fundamentally lazy, and can not or will not do the work and preparation that will enable their little drama to withstand even small amounts of real scrutiny. Most of those desperate people I read or get email from, trying to recover from being royally taken advantage of, could have been saved by very small amounts of skepticism and research.

Caveat Emptor

Minorities get higher rates.



They add that the fact minorities are more likely to borrow from institutions specializing in high-priced loans could mean they are being steered to such lenders or that some lenders are unwilling or unable to serve minority neighborhoods.





What they describe is called redlining. It is illegal. HUD really gets their panties in a bunch over it, too. Mostly what actually happens is that the lenders simply aren't chasing certain kinds of business. If any comes to them, they deal with it like anyone else. This is standard marketing procedure. Figure out who you're trying hardest to serve, and really chase that segment. If anyone else wants to come to you, that's wonderful and you serve them the same as any other customer, but they're still not someone you're going out of your way to attract.



One thing that the article explicitly said: This does not include/compensate for credit scores. Working with people in the flesh, I have experienced the fact that there is a difference between how various groups handle credit. Often, the urban poor have some difficulty in meeting the requirements for open and existing lines of credit. They are more likely to have failed to make the connection between credit reporting and future qualifications for credit, having at some point made a decision not to pay a creditor. Often, they are more pooly educated about their options or think they're a tough loan when they're not. This extends into the general population, although it's less prevalent. I have a friend I went to high school with. He and his wife make over $160,000 per year between them in very secure jobs they have held for over a decade each. Their credit score is about 760. The loan officer they were originally working with told them they were a tough loan to try and scare them into not shopping with anyone else. The reality is that the only question is what loan is best for them because they easily qualify for anything reasonable. This is far more common than most people think. The current standard is that if you have two or three open lines of credit and your credit score is above 640 - sixty plus points below national average - I can get 100 percent financing, and the possibility doesn't disappear completely until you go below 560 (whether it's smart is a question for the individual situation, but I can get a loan done if it is). With increasing equity, I can usually get a loan done even for credit scores below 500 (two hundred points below national average!). Now, the better your situation, the better your loan (e.g. rate, terms, closing costs, etc.) will be, but the question is not usually "Can I do a loan for these folks?" but "Can I find them better terms than anyone else?" and "Should I do this loan or is it really putting them in a worse situation than they're in?"



Quite often, the loan provider that urban poor go to is the one who advertises where they see it - basically, the lender who chases their business, usually by advertising in that area or in that language. Every other lender is still available to them, but they go to the place whose advertising they see. They think "This guy wants my business. He does business with people like me all the time. He can get me the loan." The problem is that all too often, this loan provider has chosen to chase this market precisely because the people in it, most often urban poor, do not understand they've got other choices, and do not understand effective loan shopping, and so this loan provider makes six percent (the legal limit in California) on every loan plus kickbacks and arrangements under the table. They make more on one loan than I do on half a dozen for roughly the same amount of work, and the loan they do are not as good for their client as others that can easily be found.



Most people are better loan candidates than they think they are, and qualify for better loans than they think they do. It's more often the property they have chosen that creates an untouchable situation than the people themselves. Even then, there are usually options available.



(I got a ten minute lecture a while back from a nice young couple telling me they "deserved" a rate of four to five percent on a 100% loan for a manufactured home sitting on a rented space, because it was "the same rate everyone else is getting". Well, if it had been on a regular house sitting on owned land I could have gotten them that loan on very desirable terms, but nobody does 100 percent on manufactured homes, and if there's no ownership interest in the actual land involved then it's a loan secured by personal property, not real estate, and it becomes a personal loan, for which the rates are much higher.)



So keep this in mind if and when you're in the market for a real estate loan, and shop multiple lenders, and shop hard. Remember that all of the times your credit is run in a two week period for mortgage purposes only counts as one inquiry, whether it is just once or whether it's five dozen times. A loan provider does not have to run credit themselves to get a quote, but the information must be complete, accurate, and in a form they can use.



Keep in mind that the loan market changes constantly. A quote that's good today almost certainly will not be good tomorrow. If it's not locked, it's not real, and a thirty day lock is not valid unless extended on the thirty-first day, for which you will pay an extension fee if necessary. So shop hard, with a real sense of urgency, get it done quick, and make your loan provider get it done quick. Any additional stress will more than pay for itself (and the longer the loan takes, the greater the opportunity for stress, too). Apply for a back-up loan, and if it's ready first, it's probably a good idea to go with your backup. Sight unseen, I will bet money that a loan done in thirty days or less from the time you say that you want it is a better loan than the loan that takes sixty days or more.



Caveat Emptor.

what if i sign all the paper work for a house at a title agency, can i back off the house?

Depends upon the laws in your state. The Federal three day right of rescission only applies to refinancing your primary residence.

(here's an article about that in case this is a refinance, because refinancing your primary residence has a mandatory three day right of rescission.)

In most states, for purchases and purchase money loans, there is no right of rescission whatsoever - you have to go through the courts, and prove something actionable, to get out of the purchase. The person handling escrow could theoretically fund and record a purchase immediately upon signing, although in practice you can figure it happening next day, providing everything really is ready to go.

If the escrow officer has not yet funded and recorded, then by amending those escrow instructions, giving the escrow handler new instructions not to continue with the transaction, and making them aware of amending instructions, you can almost certainly get them to stop if they're not yet finished. However, there are likely to be legal consequences and cancellation fees and all of that stuff. Talk to a lawyer in your state if you want to know all about this dismal subject.

But once you sign the basic documents, there is no legal impediment to finishing a purchase transaction. So you want to be darned certain before you sign that all is as it should be. TAKE YOUR TIME. If the signing agent is in a hurry, that's their problem. Concentrate on three items for the loan: The Note, the Trust Deed, and the HUD-1. Any funny business with the loan has to show up on at least one of those, and usually two.

For the property, make certain they're not trying to slide any last minute disclosures that you weren't aware of ("You didn't know that they're building a chemical factory on one side and a stockyard on the other?" "You didn't know that the foundation is cracked and the roof leaks?"). It's disgusting how often I hear about things buyers should have known before they made an offer being presented to them at the final signing. That's not an agent who was looking out for your best interests - that was an agent who hosed you engaging in legal manouevers to cover their backside after the fact. An uncommonly large proportion of the ones I find out about are in Dual Agency situations

There's a blortload of paperwork at signing for a loan, just by itself, and adding a purchase at the same time doesn't exactly cut it down. Quite often, the less scrupulous will use that, trying to hide something that should kill the deal (at least as written) in amongst the blizzard of paperwork you're asked to sign. You need to understand everything you sign. If they tell you a given form doesn't apply to you, there is no reason why you should have to sign it. Set it aside in a separate stack under your control, so they can't ask again. If you don't understand it, read it until you do. Ask questions. If there's a problem, get it dealt with before you sign. Do not accept, "Just sign now, and we'll deal with it later." Once you have signed, you are stuck.

I always call the signing "The Moment of Truth," because if there's an issue you should be concerned about, whether it be property or loan based, it can be hidden until then, and often is, because at the signing your average person has their eyes on the prize, and they're thinking "all I have to do is sign all of this and we're done!" So many unscrupulous sellers and loan officers will hide things until then, knowing that industry statistics say something like half of all the people won't even notice changes at signing, and of the ones that do, eighty to ninety percent will sign anyway, not knowing enough to realize they shouldn't. But you shouldn't be discovering anything for the first time at signing. If you are, it's a sure sign that someone didn't do their job, and quite often, indicative that they actively hid things from you. I cannot tell you absolutely that you should cancel the entire transaction if you discover something you didn't know at signing, but you should always go to signing mentally prepared to cancel. You always need to keep a sense of perspective in real estate, but if you discover something you didn't know at signing, especially if you don't immediately understand all the consequences, chances are good that you should cancel.

A good agent or loan officer has absolutely nothing to fear from someone going into signing ready to cancel if something is not as they were led to expect. Oh, occasionally a loan officer you've never worked with before will bite a good agent, and vice versa. This is one reason I try very hard to get my buyer clients to at least apply for a back up loan with me, and why I really want my purchase money loan clients to work with me as a buyer's agent. That way, whatever happens is all my fault and I have nobody else to blame - but also I can make sure nothing goes wrong with either side by making sure my client knows everything well in advance. Nothing that my clients see at final signing should be a surprise. Ever.

Caveat Emptor

One of the hard things to get through to sellers is the characteristics of the sort of buyers they need in order to have a successful transaction. If a given set of prospective buyers can't afford the property, they might look anyway. They might even make an offer, and it's possible the offer might even be accepted. But in the current loan environment, the necessary loan won't fund, so the transaction isn't going to actually happen.

Furthermore, it's a good idea to know the income characteristics you're aiming at by the price you set. If you set a price of $400,000, what does someone who can afford a $400,000 loan make? You'll know better than I who makes and does not make that kind of money in your area, but you should know it. I know it for San Diego. This isn't the kind of knowledge that comes from 10 minutes on the internet. I know what professions do and do not make the required money, and what professions for which it's a matter of where a particular prospect falls on that profession's pay scale, but it's taken me years to learn, just for San Diego, and every city is different.

Most areas have their own character. Some neighborhoods have a working class character, while others attract highly paid professionals. Some have an artsy orientation, others are very matter of fact. Properties have their own characteristics. The one property in the neighborhood with a panoramic view of the area is not going to appeal to the buyer who's looking for any hole in the wall, so long as it's in that neighborhood so their kid can go to Super High. Put property character and neighborhood character and the price you want to obtain together, and if you're a listing agent, that had better give you an idea of exactly who you're hoping to attract to your property. Like all targeted marketing, you won't turn away someone from out of the targeted demographic, so long as they can actually get the transaction done, but you don't have to be in the business long to discover that you'll do better by appealing to the degreed professional who makes the money to qualify based on Debt to Income Ratio for an 80 to 100 percent Loan to Value Ratio loan, than you will targeting the fry cook who's saved and invested for twenty years and is all of a sudden ready to buy the property, now that he has a 70 percent down payment. That fry cook may show up on their own anyway, but how many people do you know who save that much over that long a period and then want to spend it all on real estate? As opposed to the newly married professional couple who've been in their careers a couple years each, have a little bit of money saved, and now they want to stretch their budget as far as they can?

As I type this, I can do a thirty year fixed rate loan at 6% with a total of one point. Since the equivalent rate for a 5/1 hybrid ARM is 5.75, I'm thinking most folks are going to want that thirty year fixed when I offer them the option. This is going to change a little bit every day, but in most cases, it's not going to be significant change. Things like interest only loans will stretch their qualification a little bit, but those are best approached with a trembling hand for purchases, and you're better off planning for the buyer being advised that the property may be too expensive for them in such an instance, and having a plan in place, than you are hoping that everything goes perfectly for you to sell to an unsuspecting buyer.

Not all loan amounts are the same. Once the loan amount goes over $417,000, the conforming loan limit in effect right now, the current loan environment is that 100% financing goes away for A paper borrowers. You might be able to get them 100% financing on a sub prime loan, but the rate/cost tradeoff will be even higher than the A paper rate of 6.625% for one point on non-conforming loan amounts. Subprime is kind of in never never land right now. If you read between the lines of what their reps are saying, they want A paper borrowers who don't know they can get an A paper loan. And nobody wants to touch 100% stated income loans, no matter how good the credit score. Fact. You can live with it and plan for it, or you can fight it and still lose.

So what I'm going to do is compute the monthly cost of housing on purchases of a given size, together with the income to qualify. I'm going to assume this is California, with California property tax rates. Furthermore, I'm just going to make a flat allowance for Homeowner's Insurance plus Association dues of $250 per month. It's not exact, but it'll put you in the right ballpark. With a specific property, you can get closer, of course.

Let's start with 100% financing, a 100% loan with PMI, because that's the only way to do it right now. This limits us to conforming loan amounts. Here's what it takes:



purch price
$200,000.00
$220,000.00
$240,000.00
$260,000.00
$280,000.00
$300,000.00
$320,000.00
$340,000.00
$360,000.00
$380,000.00
$400,000.00
Monthly COH
$1,788.94
$1,942.83
$2,096.73
$2,250.62
$2,404.51
$2,558.41
$2,712.30
$2,866.20
$3,020.09
$3,173.98
$3,327.88
mo income
$3,975.42
$4,317.40
$4,659.39
$5,001.38
$5,343.36
$5,685.35
$6,027.34
$6,369.32
$6,711.31
$7,053.30
$7,395.28
annual inc
$47,705.02
$51,808.86
$55,912.69
$60,016.53
$64,120.36
$68,224.20
$72,328.04
$76,431.87
$80,535.71
$84,639.54
$88,743.38

In other words, a family who wants to buy a $400,000 property without a down payment needs to be making almost $89,000 per year. Them's the facts, and that's not including any existing debt service they may have. Credit cards, car payments, student loans, etcetera. If other debt service is $500 per month, you raise the income to qualify by over $1100, and the yearly income by $13,000 plus change. San Diego's Area Median Income is a little over $64,000, and a family making that much money can afford a loan of about $280.000 - if they don't have any other debt. If they have a huge down payment, of course, it's easier, but how many people have you encountered recently with huge down payments?

Now, let's consider people who actually have a 20% down payment. Most likely, they bought a condo a few years ago and now they've sold it, but they had enough equity in the condo to account for that 20% down on the more expensive property. Or they sold the condo and bought a starter home, and now they've sold that and are looking to move up again. This is without PMI, and having some equity means that not only are the terms of the loan more favorable, but you don't have to borrow as much to buy a property that costs the same, and so a property of the same value is much more easily affordable.



purch price
$200,000.00
$220,000.00
$240,000.00
$260,000.00
$280,000.00
$300,000.00
$320,000.00
$340,000.00
$360,000.00
$380,000.00
$400,000.00
$420,000.00
$440,000.00
$460,000.00
$480,000.00
$500,000.00
$550,000.00
$600,000.00
$650,000.00
$700,000.00
$750,000.00
$800,000.00
$850,000.00
$900,000.00
$950,000.00
$1,000,000.00
MonthlyCOH
$1,417.61
$1,534.38
$1,651.14
$1,767.90
$1,884.66
$2,001.42
$2,118.18
$2,234.94
$2,351.71
$2,468.47
$2,585.23
$2,701.99
$2,818.75
$2,935.51
$3,052.27
$3,169.04
$3,640.28
$3,948.49
$4,256.70
$4,564.91
$4,873.12
$5,181.32
$5,489.53
$5,797.74
$6,105.95
$6,414.15
mo income
$3,150.25
$3,409.72
$3,669.19
$3,928.66
$4,188.13
$4,447.60
$4,707.07
$4,966.54
$5,226.01
$5,485.48
$5,744.95
$6,004.42
$6,263.89
$6,523.36
$6,782.83
$7,042.30
$8,089.52
$8,774.43
$9,459.33
$10,144.24
$10,829.15
$11,514.05
$12,198.96
$12,883.86
$13,568.77
$14,253.68
annual inc
$37,803.04
$40,916.68
$44,030.32
$47,143.96
$50,257.60
$53,371.23
$56,484.87
$59,598.51
$62,712.15
$65,825.78
$68,939.42
$72,053.06
$75,166.70
$78,280.34
$81,393.97
$84,507.61
$97,074.26
$105,293.14
$113,512.01
$121,730.88
$129,949.75
$138,168.63
$146,387.50
$154,606.37
$162,825.24
$171,044.12

Once again, this assumes there's no other debt service involved. But if you've got a home with a $700,000 price tag, you're still looking at trying to lure in a buyer family that makes at least $10,000 per month. These kinds of buyers are not going to go for old carpet and a carpet allowance. They want your seller to have already dealt with it. Even if it's the cheapest, most beat up property in Rancho Santa Fe, on the smallest lot, the sellers are still going to take a hit on the price for not dealing with it themselves.

For a successful listing, you need to know your target market. Some people do buy properties that are apparent mismatches between their lifestyle and the property, but not many. As listing agents, we not only need to understand what is and is not a match before setting off to attract a buyer, and recommending appropriate measures to the owner before it goes on the market, we are much better off concentrating our marketing efforts where they are most likely to succeed.

Caveat Emptor

Somebody asked me that.

A dachshund puppy (or two!) would be the first item. I miss Thing, and Mellon just isn't the companion he was. She's very sweet, and devoted in her own way, but the phrase "Canine American Princess" was invented for her. If she can't have 100% of your attention, she's not interested in just cuddling up while you read.

After that, invest some in the stock market for liquidity, and buy some rental properties, because within two years anything I buy now is going to be a lot more valuable. Leverage my money right, and we're talking at least two million, probably more.

Specifically, Condominiums, and Townhomes. High density housing.

Why? Well for an illustration as to the first part of that reason, look at my article from October 15, 2007, Economics of Home Ownership in High Density Areas. We're in a phase here in southern California where we're getting ready to switch, by economic necessity, away from the single family detached property on its own lot and towards the community interest lot. Land is just too expensive. The average person or family, making an average paycheck, can no longer afford single family detached housing unless they've got one heck of a down payment. The demand is too high, and the supply too limited, for everyone who wants one to have one. When that sort of situation happens, price goes up until enough people get priced out.

Here's the trip: When you're talking rent, half million dollar single family detached housing rents for maybe $1800 per month. But if you buy a $200,000 condo, it rents for $1000 to $1200. Put 20% down, and it's very possible to have a positive cash flow on such a unit - something it's not currently possible to have with the detached house. The fact that the spread is so small is temporary, of course, but in the meantime it's an opportunity for a sort of arbitrage.

Furthermore, the average family can afford a fairly nice condominium or townhome. It's just that during the era of make believe loans, they were told they didn't have to "settle." So they purchased properties far beyond their real means, because they were being told they could qualify for those ridiculously high dollar value loans.

(I call it the era of make believe loans because the agent made believe people could afford more expensive properties, the lender made believe that people could qualify, and the consumers made believe that there weren't deadly traps they were falling into on every single one of them. It was seductively easy for everyone. The agent didn't have to sell only the property the client could afford, or "settle" for the smaller commission. The lender and loan originators could make money hand over fist on paper. The consumers could pretend they could afford a property far beyond their means, and didn't have to "settle" for what they could really afford. And people are still making believe that the era of make believe loans is going to come back.)

But denial has a definite half life when it encounters pervasive economic reality. Once it's become accepted that the housing market has stabilized from its free fall of the last two years, people will be forced to look reality straight in the eye. We had the bubble, we had the pop, and now it's almost time to start going up again. Once it starts happening, families will be forced to confront the fact that they can't get the American Dream all in one easy step by essentially clicking their heels together and declaiming, "There's no place like Oz!" They will have three options: Stay a renter forever, move away to somewhere there is less demand or more supply, or settle for what they can afford, leveraging it to something better. When larger number of people realize that those are their choices, the demand for and price of condominiums is going to shoot up.

So, put $40,000 or $50,000 into a $200,000 condo, rent it for $1200 per month, and your cash flow is just about even. That's the second half; the situation right now, as it exists. I've predicted rents are heading up in the near future several times, and that was before the local fires. Rent goes up, I'm making a couple hundred dollars per month while values are climbing. In a few years, I've a property that has doubled in value while making me some small cash in the meantime. Multiply this by a dozen, and I've got two to three million dollars from an investment of six hundred thousand or so. Plus, of course, I'm going to pull all the old flipper's tricks just before I sell them. Yes, there's risk - risk that can be minimized and dealt with. That's why I wouldn't be sinking every last penny I had into it, a mistake way too many people have made in the last few years.

Of course, nobody's giving me a million dollars. But if you have $50,000 sitting around, you can make about 10% per year in the stock market with a reasonable amount of risk, Over ten years, that's turning your money into about $138,000. Or, if California real estate increases at an average rate of 5% per year for the next ten years (our forty year average is about 7%), that $200,000 condo turns into a $325,000 condo, while your loan has been paid down to $125,000 and you walk away with $200,000, not counting the cash in your pocket between now and then. If we should actually tie our long term average of 7% annualized increases, that's a $390,000 condo and you walk away with $265,000. Meanwhile, the cash flow picture gets better every year as rents increase. Your choice, of course, but I'm not the only one who sees an opportunity here.

Caveat Emptor

Most people don't stay in their first house their whole life. At some point, they want to move to a different home.



There are several ways to approach the transaction, but you have to decide which way fits you. You can approach it with an idea to maximizing profit, maximizing cash flow, maximizing speed, minimizing stress, or minimizing inconvenience. You really only get to choose one, but it's a good idea to rank them from most important to least important so that both you and your agent know where your priorities lie, and perhaps you can do some things from your lesser priorities.



Now, if this was a commercial site, looking to seduce you into listing with me, I'd probably have some corporate salespeak flack telling me to say you can have it all, but instead I'm going to tell you the blunt truth: You can't, not reliably, and any representation to the contrary is a lie, the words of a fool, or both. You can certainly do things in each of the categories (and others) but if you don't go into the transaction with a clear view of what is most important to you, chances are you won't get whatever it is that is important to you. Some people do luck out, especially in hot markets, but when the market is cooler, the fact is that you take what you can get, and the probability is better that you will get what is most important if you decide what is most important and stick to it.



If you choose to maximize profit, move out of the old property and into a rental unit, and make whatever cosmetic alterations you're planning before the property hits the market. Newly renovated vacant units show better, and therefore sell better, than anything else. Your time of highest interest is typically for the time period immediately after it hits the multiple listing service. Particularly if you have pets or children, who are both highly efficient entropy generators, you want to move out if you can afford to. Since this is very costly in terms of cash flow, many cannot afford it. Nonetheless, in most markets under most conditions, the return you will get will repay your investment, as there are few obstacles and conditions to your prospective buyer moving in as soon as they can consummate the sale. Furthermore, because the property is vacant, they can more easily picture themselves living in it. Ask any artist which is easier to work with - a blank canvas, or one that already has a painting on it? Then consider that the average buyer has the imagination of a rock, which is why properties with just a little more oomph are much easier to sell. The less of your family there is in the property, the more potential buyers can picture theirs in it.



Staying in the property causes not only stress from whether the property is clean enough to show every day, but also from prospective buyers and their agents having both a window of observation on your life and the potential opportunity to debark with some material piece. I imagine it happens, but not nearly so much as to warrant the stress sellers put themselves through on this point. As an agent, I'm always aware that my good name is on the line as well, and I'm always watching prospective buyers, even though I've never had anyone attempt to remove anything (that I'm aware of). Nonetheless, many sellers insist upon being physically present, which often has the effect of chasing people away that I, as the agent, could have sold the property to given a freer hand. Given real estate practicalities, your concern over a couple of $15 CDs that might have potentially wandered off could have just cost you tens of thousands. So if you're concerned, move anything valuable or irreplaceable like jewelry and heirlooms out, and resign yourself to replacing anything remaining. You'll likely come out ahead in the end.



If you're looking to maximize speed, moving out is a good idea also, but you're also going to want to price your property significantly lower. The higher the price, the harder it is to sell the property, the fewer people that can be expected to look at it, and the harder it will be for them to qualify. If you're priced 5 percent above anything comparable, the appraisal probably going to come in lower than the sale price, and not many people want to pay a premium for a property. It's going to take longer to sell. If you're priced a tad below the comparables, however, well everyone wants to buy homes with some built in equity, and the bank sees their loan as being less risky, so it's a little easier to qualify (They're still going to stick with the LCM principle, but from experience, they're less sticky about the little stuff if the appraisal is a little above the price).



If you're concerned about cash flow, on the other hand, moving out is not the way to go about things. For one thing, you don't have the money, or if you do, you're going into stress mode about whether some short deadline is going to be met, which can cause you to be forced to accept an awful deal that you would not otherwise have considered because you're running out of money to pay for all the extra stuff you weren't paying for before. If you think ahead, and make your agent aware of your concerns, you've got a better chance to come out ahead in the end.



Suppose your priority is to minimize stress? Then you typically stay put while researching other properties, and ask for a contingent sale, possibly with a leaseback that gives you a certain amount of time to find alternative lodgings. Alternatively, if cash flow isn't an issue, you might start looking right away, either with or without a "bridge loan" (cash out against your current property, as a down payment on the new one). Bridge loans are great, they are wonderful, they can do all sorts of things for you, but they are aren't cheap. Before you do one, consider whether there is a real need. If you have some cash and are a good credit risk, the better option may be to borrow more against the new property. Perhaps the better option is to split finance the new property and pay off the second loan on the new property when the current property sells. Because "bridge loans" are cash out refinances, then all things being equal, it's probably a better idea to get the money through a purchase money loan. It's even possible (albeit rare) that despite paying for two loans, the math may favor getting some money via a bridge loan, and borrowing the rest through the purchase loan on the new property.



If you want to minimize inconvenience, you probably want to stay in the property until it sells, and quite probably for a while thereafter, so you're going to want a short term leaseback as a condition of the sale. Many people do this to avoid moving the kids out of school in the middle of an academic year. If they're staying, it also gives them some time to find another property in the same district, or even that attends the same school. But here again, remember that you're limiting your buyer's options, which has the effect of possibly scaring off the ones who would otherwise have offered you the best price, or causing them to not be willing to pay so much for it ("Darn it, my kids are in the middle of a school year, too!") If it's a buyer's market, you're likely to pay a certain price - or rather, your buyers are likely to be willing to pay less - but if it's worth it to you, you also get what you pay for.



There are other potential factors, certainly, and other strategies to maximize the blend of "goods" that's best for you. But these are the ones that most people need to think about ahead of time, and these are the ones where failing to consider them ahead of time will reliably cost you the most.



Caveat Emptor.

A reader named Terri at Educating the Wheelers sent me an email giving me a heads up on the antics of the state of Illinois. here is the link. Here is the original article at blackprof. The link to the original source is broken, but here is the Illinois Department of Financial and Professional Regulation, here is the full text of HB4050, their new state law, here is a synopsis, among other things, and here are enforcement regulations.



Critical sections:



Based on information submitted to the Department by the originator, requires the Department to make a determination as to whether credit counseling is recommended to the borrower. Requires the Department to notify each borrower for which it recommends counseling of all HUD-certified counseling agencies located within the State and direct the borrower to interview with a counselor associated with one of those agencies. Requires the borrower to select an agency from the notice and to interview with a counselor associated with that agency within 10 days after receipt of the notice. Prohibits the borrower from waiving the recommended credit counseling. Requires the title insurance company or closing agent to record simultaneously with the mortgage a certificate of its compliance with database reporting requirements and, if it fails to do so, provides that the mortgage is not recordable



and



Changes the definition of "pilot program area" to all areas designated by the Department of Financial and Professional Regulation because of high foreclosure rates due to predatory lending practices. Deletes a requirement that a broker or originator provide each borrower with a notice disclosing the names of at least 3 lenders and comparing the rates and terms of those lenders (emphasis mine). Provides that nothing in the predatory lending database provisions is intended to prevent a borrower from making his or her own decision as to whether to proceed with a transaction.





blackprof's take:



Nevertheless, Tuesday was a key moment in African-American History. On Tuesday, in addition to Mrs. King's passing and Justice Alito's elevation, the State of Illinois enacted a law that requires all mortgage applications within nine Chicago zip codes to undergo a process of review by the state's Department of Financial and Professional Regulation. The department's review process determines whether mortgage applicants in these neighborhoods must undergo compulsory credit counseling. If they must, then the mortgage lender must pay the cost of the counseling.



Anyone familiar with Chicago geography and demography knows these nine zip codes. They are all neighborhoods on the South and Southwest side of Chicago. They are predominantly African-American neighborhoods. These neighborhoods are some of the most impoverished in the City of Chicago, and indeed, the nation. On Tuesday, they suddenly became much poorer.



Although the legislators responsible for the new law were motivated by good intentions, they failed to consider the inevitable consequences of their bill. They wanted to protect poor homeowners in certain neighborhoods from high interest rates and predatory lending practices. The new law, however, necessarily increases the costs, time and uncertainty associated with mortgage applications in these black neighborhoods. The cost of credit counseling will be born by and charged to mortgage applicants. This, in turn, will necessarily decrease the price that new home-buyers can afford to pay for homes in these neighborhoods. If they can choose to buy in other neighborhoods, where housing money is more affordable, they, on the margin, will. Furthermore, recent studies of credit counseling programs suggest that these programs have little effect on borrower behavior. The end result is that homeowners in these poor black neighborhoods suddenly have less equity in their homes than they had on Monday.



Legislation like this is often motivated by an unspoken belief that poor black people are incapable of making important decisions for themselves. We see this belief reflected in the protection of failed public schools, and now with respect to personal finances. But the very people for whom such a law was enacted were responsible and wise enough to save to make the down payments necessary to buy these homes in the first place. Suddenly, these same people must have their choices reviewed and second-guessed by state bureaucrats who have no stake in the outcome, or accountability for incorrect or unresponsive decisions. It is hard to imagine the fate of a similar but broader law imposing credit counseling upon all Illinois residents, including white professionals residing in the Chicago suburbs of Evanston, Winnetka, or Kennilworth. Would there have been enough votes in Springfield to impose these "benefits" on everyone, rather than just the residents of the Southwest side of Chicago?





I'm just a nuts and bolts guy. I see some issues here:



First, by increasing the cost of doing business in the relevant zip codes, the law is increasing the lender's cost of doing business. It is not plain how the lenders will pass this on to the consumers, but pass it on they will. This has the effect of making loans more expensive. I can see two methods: either requiring everyone on the state of Illinois to pay more, or requiring only those owners actually within the area to pay it. If they require only those within the area to pay, an excellent case can be made that higher loan costs makes for functional redlining, and the federal courts can intervene, and almost certainly will, possibly invalidating the law. If they require that everyone pay the extra costs, this functionally raises the cost of doing business everywhere in Illinois. This will also make it harder to qualify for loans in the requisite areas, as lenders will have incentive to throw roadblocks in the way of potential clients from those areas. Due to redlining regulations, I'm not certain how far that lenders will go, but it certainly won't make loans easier to get or cheaper.



Second issue: no matter the intent, no matter who pays, this will cause loans to take longer and cost more, in addition to previously discussed costs of the program. For previous work as to why, see my essay on Mortgage Loan Rate Locks. The point, however, is that the State of Illinois is going to take some unknown period of time to consider the case. Then the client is potentially going to have to go to a credit counselor, who is going to have to get paid before providing the necessary legal blessing to the transaction. Furthermore, if the credit counselor wants more work at the expense of delaying the transaction, they can apparently make it happen by my reading of the law. All rate locks are for a specified period of time. Given this, there are three alternatives. One, float the rate (don't lock) and hope that rates don't rise. Second, lock for a longer period, which costs more. Third, pay an extension. Since the outcome when you don't lock for long enough or don't pay extensions is pretty much universally "worst case pricing" (i.e. the worse of rates when you locked or current rates), this means significantly higher loan costs, loan rate, or (most likely) both.



Third, as I said before, since this is going to motivate lenders to not want to do business there, and makes it harder to get loans in the effected areas, and quite likely increase the rates and costs of loans in the area as a consequence. This directly restricts how much of a house, price-wise, people in the area can qualify for, which in turn will have the net effect of decreasing sales prices in the area, further hurting current residents.



There are probably further detrimental aspects to new requirements, but the Illinois legislature deleted an existing requirement that, while apparently weak and subject to abuse in that a prospective loan provider was free to provide a prospective client with information only on loans that are worse than the first proposal, at the very least gave the client some further information as to alternative loans.



In short, the actions of the Illinois Legislature in this instance could, according to my understanding, basically be taken from a manual on "How To Hurt Poor People Even More".



Caveat Emptor (and Caveat Voter).

What is a good interest rate for a house that is for someone with low income?


Well, if you make enough to afford the property, your income isn't a factor on the interest rate you get! You either qualify or you don't. Banks may charge a fee for low loan amounts, but your income is not the issue, except as to whether or not you qualify for the loan as it is submitted. The lender does not care if you just barely scrape through, or if you have a hundred times the minimum income to qualify. Kind of like there's no such thing as "a little bit pregnant." You either are or you aren't. Same thing with loans: You either qualify or you don't. It's possible you might qualify for a better program than you got, or that you might qualify with another program where you don't qualify with this one, but those aren't questions that the underwriter or the underwriting process are going to address. They're questions your loan officer needs to get right before the loan is submitted.

There may be programs you are eligible for, such as Mortgage Credit Certificate or a locally based first time buyer assistance program. These programs can make it easier to qualify, in that they effectively raise your take home pay, they keep you from having to borrow so much, or even that the save you from the choice of PMI or splitting your loan. However, be aware that every single one of these programs requires full documentation qualification for a loan that's fixed for at least three years and fully amortized, or fixed and interest only for at least five years. Stated Income and negative amortization loans are not permitted with any of these programs that I am aware of. The idea is that you buy a property you can afford and stay in it for a long time, not a property you cannot afford, and get foreclosed upon. These programs also have income limits that many people might not consider "low." Up to $96,000 per year here locally can still qualify, and the big concern is whether there's money still left in the budget for these programs.

There is no special magic wand that enables low income people to stretch beyond their normal means in purchasing a home. There's a lot of unscrupulous people who have gotten paid a lot of money pretending that there is, but there isn't. Nobody is really going to give you money at a lower interest rate than someone else, just because your income is lower. If this means you have to settle for a condo when you want a single family detached property, or a less expensive home than you would like, well, that's what everyone else has to do.

Caveat Emptor

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Forward, Reverse, or Partial
I Get It Done!
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Should I Buy Now?
Should I Sell Now?
Would It Help Me to Refinance?
I'll tell you if the answer is "No"
I'll help you if the answer is "Yes"
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Contact me:
My Office

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