January 2008 Archives

I knew this was coming.

With holders of second mortgages not wanting to go above 90% Loan to Value Ratio, sellers of Private Mortgage Insurance, (PMI) have the "less than 10% equity" market all to themselves. The rates had gotten surprisingly low (less than 1% for 100% financing), but there are two factors that combined to make this boost happen:

1) With the risk of default rising, the actuaries at the insurance companies legitimately have increased costs to worry about. With equity being stagnant right now, the risk that mortgage insurance is going to have to pay a claim has risen dramatically in the last year or so. It is nothing except fiscal prudence to raise insurance rates when the probability and likely magnitude of a claim both increase as they have. Insurance companies are so strictly regulated as to reserves and margins and everything else that they probably had no other legal option. This explains some fraction of the increase.

2) "All The Traffic Will Bear" You don't think these companies are in the business of putting their money on the line for free, did you? Furthermore, not only is Private Mortgage Insurance a "wide moat" operation (a business that's hard to get into), you don't see any large number of companies who currently want to get into it. Profit margins are comparatively low, and there is, to their way of thinking, a significant risk the market could get even worse than this. With second mortgage holders no longer lending above 90% CLTV, PMI providers not only have the field to themselves, but they're in a very high demand situation. Increasing demand plus essentially constant supply equals higher prices.

Here's a sample of the rate boosts I was notified of today:

30 year fixed, credit score 620-659, 97- 100% LTV old rate 96 basis points (.96%) new rate 170 basis points.

15 and 20 in the same situation go from 85 to 163 basis points (although I can't remember the last time I saw a 15 year loan with PMI).

Given a 5.75 fixed rate mortgage without points today (rates will change by the time you're reading this), this substantially increases the effective interest rate, from about 6.7% to almost 7.5.

Payment on a $300,000 balance? Goes from roughly $1990 (principal and interest plus PMI) to approximately $2175. That $185 makes a difference of about $415 in the minimum monthly income to qualify for the same loan, in the case of 100% financing. People who may have been able to qualify last week could be rejected in the future. Rates would have to drop by about a full percent to offset this, and between you, me, and however many thousands of other people read this, I don't think that's going to happen. Fed cutting the overnight rates or not, the macroeconomic market pressures are all upwards. Matter of fact, even with the new cut the Fed made yesterday, rates today are higher than they were just a few days ago.

For those whose loans are already funded with PMI, don't lie awake nights wondering when they're going to hit you for more money. The rates on existing loans is already under contract, and they're not able to raise the rates on PMI, as the terms are specified in your loan note - a legal contract. The lender can't alter any of the other terms, either - why should they be able to suddenly boost PMI? It's only for loans that have yet to be funded that the rate increase applies.

For those looking to sell real estate, this puts current owners who are willing and able to "carry back" part of the purchase price into an even stronger position, negotiations-wise. If the prospective buyers can pay you more money for your property or not buy anything, some will pay more money. It's still a situation to be just as careful about as ever, but every bit of leverage helps in negotiations.

As I've said in the past, having a down payment for real estate is not mandatory, but is an excellent idea. That same $300,000 loan at 5.75% only has a payment of $1751 if you've got 20% equity. PMI hits every first trust deed above 80% of the value of the property. Period. It's in the federal banking regulations. Some lenders will hide it in the note rate, but you're still paying it if you're in this situation. Good Credit, excellent credit, perfect credit - the only difference it might make is the exact cost, not whether or not you're paying it. Wouldn't you really rather make the lower payment? The extra money you pay for PMI doesn't do anything towards paying your principal down, either. If you didn't have to pay it, you could invest that money, use it to pay down your principal faster, or just have a good time. You'd be done in 227 months if you made a payment of $2175 on a $300,000 loan at 5.75% - less than 19 years, instead of 30.

If you're looking for a new loan, whether purchase or refinance, don't waste your time calling around trying to find one lender who'll let you slide without PMI. It will be there if the situation requires it - any first trust deed over eighty percent of the value of the property. It can be priced into the loan or broken out as a separate charge, but it will be there when the loan funds. However, there is no requirement to disclose PMI at sign up, or to disclose that a certain amount of what you're paying is PMI, and many loan originators are quite deft at hiding it or deflecting questions about it. Which is likely to be the better loan in the final analysis: The one who hides the real cost of the loan and its nature, or the one who tells you the whole truth in the first place?

Caveat Emptor

The Best Loans Right NOW

5.5% 30 Year fixed rate loan, with one total point to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2271, APR 5.633! 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 5.00 percent!

Best 5/1 ARM: 5.125% with 1 total point and no prepayment penalty. Assuming $400,000 loan, payment $2178, APR 5.255. This is a loan where the rate is fixed for five years, and the payment pays your balance down! With rates on hybrid ARMs having dropped of late, they are once again something for people to consider. 5/1 ARMs as low as 4.25 percent!

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

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

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

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

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

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

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

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

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

Now at the end of the process, the lender has all the power. You need or want this loan, and they're the ones with it ready to go. In the case of a purchase, you've got a deposit you're going to lose and a home you wanted that you won't get if you don't sign the loan documents. If you sign the documents, you are stuck with the loan, that probably isn't on the terms you were originally told about. I pointedly did not say "promised" because the earlier forms are not promises unless somehow guaranteed, and very few loan providers guarantee their quotes. Chances are, if they won't guarantee their quotes, they are not telling the entire truth about the loan they are telling you about.

The most important question on this page of Questions You Should Ask Prospective Loan Providers is "If I say I want this right now, will you personally guarantee this rate with those closing costs, and will you cover the difference (if any) between the quote and the actual final cost?" You won't get a flat "Yes." If you do get a flat "yes", they're making a promise on something that is not under their control, and I wouldn't trust it as far as I can throw an aircraft carrier. What you're hoping for is something like "Subject to full underwriting approval, yes we will guarantee this quote as to rate, type of loan, and total cost." This is a simple sentence that makes a specific guarantee subject to a reasonable condition, as loan officers never know if a prospective borrower is intentionally hiding or shading something at loan sign up. If you get a response full of nonsense about how long they have been in business, how they honor their commitments, or any such equivalent claptrap, then they are trying to buffalo you. None of the stuff when you initially inquire about the loan is a loan commitment in any way, shape or form. I'd rather have a higher quote that was guaranteed than a lower one that wasn't, and I strongly suggest you adopt that attitude as well. For an illustration as to why: If the quote is guaranteed, there's no incentive to stick you with a rate an eighth of a percent higher so they can make a little more money - they're going to have to make it good. There's no incentive to pad the closing costs with junk, because they've got to turn right around and give it back to you. If I offered you a choice between two envelopes, one transparent where you can see the $100 bill (guaranteed), and the other one opaque where I told you there might be anywere up to $110 in it (not guaranteed), which envelope would you choose? The same thing applies to whether the loan is at 6.5 percent with no points and no more than $3400 of closing costs guaranteed, or 6.375% with no points and no more than $3000 of closing cost, but not guaranteed. From my experience, the first quote intends to deliver a better loan than the second quote.

So (if you can't find someone who guarantees their quotes) how do you force the loan provider to deliver the loan they told you about in the first place? You can't. But you can give them a better reason to do so, if you have more than one loan ready to go. This gives you a third option. Your options are not limited to signing the first set of loan documents they put in front of you. You can sign the others. More to the point, because there is another loan ready to go, you can use that fact to negotiate a better deal - one that more closely adheres to what you were told about in the first place. If provider A won't do it, provider B will. If one of the two providers won't move, then the other one is likely to get your business. If the other provider gets your business, the first provider makes nothing. If they will give you the better loan, that's what you want, right? Keep in mind that if either provider actually provides the loan they talked about in the first place, you are miles ahead of the game. But this puts the power to control the transaction where it belongs, with you.

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

Now expect to spend a little bit extra (about a $100 retyping fee, if you're the one who orders the appraisal and therefore controls it) on the second loan. That $100, together with the extra time you spend getting the other loan through, is the best, cheapest, most cost-effective insurance policy you can buy anywhere for any financial purpose. It will not indemnify you for your losses, but the odds are overwhelming that it will certainly keep you from losing several times as much, by giving the loan providers a concrete incentive to deliver the best loan they really can deliver. From my experience, and that of my clients who have brought me more horror stories than most folks believe, I would judge it unlikely that either loan quote will be as good as the loan the loan provider originally talked about, unless one company or the other guaranteed their quote, but with another loan ready to go, chances are you'll get something a lot closer to what they talked about in the first place. Even if you can find a loan provider who will guarantee their quote, a backup loan is a really good idea, because going to court to force them to deliver is costly and time consuming, and you need that loan now. The existence of the other loan is an excellent reason to actually produce that loan they talked about way back on day one, with the initial Good Faith Estimate or Mortgage Loan Disclosure Statement.

Caveat Emptor

Last week, I got a call from a hard money lender, asking what I could to to "rescue" one of his clients by refinancing. He was being about as altruistic as a drowning man. What he really wanted was for me to get someone else (i.e. another lender) to voluntarily hold the bag on his money losing loan.

Unfortunately, this guy already had a Notice of Default filed on that loan. When it comes to new loans, I can still get subprime lenders to sign off on 30, 60, and 90 day lates - but drop a notice of default on the property and even the worst subprime lenders won't touch it any more. Had he just held off on the Notice of Default - or even called me earlier, I could have taken care of it. Nonetheless, I have a method of dealing with even Notices of Default. Unfortunately, the one undeniable requirement for "rescuing" someone in this situation currently is a Loan to Value Ratio below 70 percent. That hard money lender had a loan amount about $350,000, and represented it to me as a $550,000 plus property. Therefore, initial indications were that it could be worked with, and we set up a meeting with the owners.

At that meeting, I found out the address and characteristics of that property. That wasn't a $500,000 property. In fact, it might have been worth $370,000, absolute maximum, in the current market. Three words about the likelihood of any new loan: Absolutely none whatsoever. A paper, Alt A and A minus are certainly not going to touch that loan - even if the Default were to suddenly vanish, the effects on the credit score would have driven the borrowers below their minimums. Even with the ability to document enough income, subprime isn't going to touch a defaulting borrower at 95 percent loan to value ratio in the current market - and that's without rolling one penny of costs or penalty into the new loan. That leaves only other hard money lenders, and if there's one great constant about hard money, it's that they absolutely will not go over 75% loan to value ratio, ever. In fact, their limits are usually 65 to 70.

These folks could not refinance with any lender out there. They can't afford their mortgage - no way. Even had they protested to the contrary (they didn't), they wouldn't have been in foreclosure if they could have come up with the money. Unless they've got a wealthy relative who will save them, they're going to lose the property, and if they had that kind of benefactor, why hasn't he appeared before now? The only mystery about the entire situation is the precise mechanism whereby they're going to lose the property, and precisely how badly they will be hurt.

Now from some of the code phrases that the hard money lender they're already with dropped, I am pretty sure he knows this - he's just hoping for another sucker to volunteer to take his loss by refinancing his loan out. Well, I'm not going to knowingly commit that sort of blunder. Nobody sane is. Do you think even brokers haven't figured out they're going to be liable for bad loans by now?

Furthermore, San Diego is a special case. Because we've been on the leading edge of all of this, we've mostly worked through the worst of it already. There are no longer quite as many foreclosures and defaults for sale. If this clown can hold off foreclosing for a few more months, there's a good chance he might get his money in a sale.

But when I asked him about it, he represented that "I need my money now." Well, that's fine and that is his right. However, if he needs it now, he's not going to get all of it. What he was really trying to do of course, is build a path of least resistance where I hose myself, the new lender, and the owner so that he can walk away with every penny that's technically "his." Like any sane loan officer, I'm going to decline to do that - the money I might make no in no way compensates for what's going to happen later. Questions of ethics and whether the loan should have been made in the first place aside, he willingly undertook that risk when he made that loan, and he was richly rewarded for doing so by an interest rate well into double digits. Even the stock market doesn't return that kind of money over time, and it definitely doesn't do so without risk. But evidently nobody covered that in "Loan sharking 101."

So when I did the logical thing and started talking to the owners about minimizing damage, he freaked out. He said I'd lured him there "under false pretenses," and that was before I had said one word about short sales. Nothing could be further from the truth; he was the one who led me to believe the situation was other than it was, and everything I had said was explicitly predicated upon the representations he made to me over the phone. But he saw his carefully constructed scenario collapsing in front of his eyes, and he didn't want to accept that collapse. Unfortunately, the consumers involved were Spanish speakers, and he spoke much better Spanish than I do. I've written about sharks marketing to a given ethnic group in the past, and this appears to be a prime example. He hustled them out of the room, no doubt intending to look for some other sucker. Unfortunately for him but fortunately for everyone else, the loan officers who were willing to do that in my area have long since been forced out of business, and even the ones who may have gotten away with it in the past are not eager to take new chances in this environment, and I think that's a very good thing.

For several years, the real estate and loan market was not much short of an ATM feeding cash out as quickly as it could. That has now changed, and we're back to something resembling traditional lending standards. Many people who became used to the way the market was working in the last few years still don't understand that it has changed, why it has changed, and why it's not going back to the way things were the last several years. They're still in denial that, having bought all the rope necessary to hang themselves, they're now struggling with that rope around their necks some distance above the ground. It doesn't much matter if that distance is half an inch or several miles - they're in just as much trouble in either case.

The sooner you get out of denial and accept the damage that has already been done, the sooner you will be able to limit future damage - and the damage does keep getting worse, There are alternatives that don't hurt as bad as foreclosure. Furthermore, there are those out there who will claim they can perform miracles, but they are almost always setting you up for a scam.

Here's the bottom line: If you don't make enough money to make your payments and pay your real cost of interest, the best thing that can be said for you is that you're circling the drain. But if you'll make up your mind to get it over with, and deal with the situation based upon the facts, you'll come out with less long term damage. Not to mention more life still in front of you than would be the case otherwise. There really aren't any good reasons not to get past an unsustainable situation as fast as you can.

Caveat Emptor

With Rates having dropped again, many people are looking at refinancing their properties.

With the state of financial education in this country, many people will shop for loans by payment, figuring the lowest payment is the best loan. As counter-evidence to that idea, let us consider the negative amortization loan. I've seen them with minimum payments computed based upon a nominal rate of zero point five percent on forty year amortization. This gives a minimum payment of $1150 for a $500,000 loan - but the actual rate on that loan is eight point two percent, meaning if you were just going to pay the interest, that would be $3417 per month. If you made that minimum payment, you'd owe over $2200 more next month - and you'd be paying interest on it as well. By comparison, principal and interest on a six percent thirty year fixed rate jumbo loan is only $2998 - and there's no prepayment penalty either.

Don't get distracted by payment. Look at the real cost of the money - what you're paying now in interest, versus what any new loan will cost, plus what you'll be paying in interest on it. You do have to be able to make the payment, but once that's covered, look at the real cost of any new loan, both in up-front costs and in interest paid per month. Those are the important numbers.

Let's suppose you were one of those folks who had to settle for a subprime loan a couple of years ago. You had something bad happen, but now you're past it. You've been diligent and careful with your credit these last couple years, so you're now able to qualify "A paper". On the other hand, your current loan has now adjusted to nine percent, and your prepayment penalty has expired, while there are now thirty year fixed rate loans in the mid five percent range. I'm writing this on a Sunday, but as of Friday I could have moved you or anyone else able to qualify A paper into a thirty year fixed rate loan at about 6% for literally zero cost, meaning there is no possible (financial) reason not to do such refinance.

The only real question in such a situation is this: "Is it worth the extra money it takes to get a better rate?", because there is always a tradeoff between rate and cost. For instance, to look at the differences for someone who currently has a $300,000 loan, on Friday two of the choices were six percent for zero cost or five point five for about half a point. Both are thirty year fixed rate loans.

The six percent loan has a balance of $300,000, same as your old balance, and payments of $1798.65. The five point five percent loan carries an initial balance of $304,325, and payments of $1727.90. Lest you not understand, that 5.5% loan cost you $4325 to get done, as opposed to literally zero for the six percent loan. This isn't a matter of "keep searching for the provider who gives you the lower rate for the same cost", as this tradeoff is built into the entire financial structure. Some providers may have higher or lower tradeoffs, but the concept of the tradeoff isn't changing for anything less than a complete and radical rebuild of the financial markets. Not. Gonna. Happen.

However, for spending that money all in a lump sum, you get a lowered cost of interest. You save $105.19 that first month in interest, and this number actually increases for the first few years of the loan. In month 21, you've theoretically broken even, even though your loan balance is still almost $3600 higher, you've gotten the extra money you've paid to get the lower rate back. However, because you still owe $3600 more, if you refinance at this point, you're still going to end up behind as that $3600 you still owe translates to $216 per year at 6%, assuming that's the interest rate on your next loan. Maybe you sold the property and bought something else, maybe you refinanced for cash out. In either case. you owe $3600 more than you would have, which means you're paying interest on it when you get your next loan. But something like thirty percent of all borrowers have sold or refinanced by this point, and when they do, those benefits you paid for stop. Nor do you get any of the money you paid in the first place back.

It isn't until you've kept the loan 124 months - over ten years into the loan - before you are unambiguously better off with the lower rate but more expensive loan. That's how long it takes until the balances are even on the two loans. Of course, by then you have saved about $13,000 in interest - if you actually keep the loan that long. Less than one borrower in 200 does.

Real break-even is likely to be somewhere in year four in this case. After three years, you've saved about $3800 in interest, and if your balance is still that almost much higher with the expensive loan than the cheap one, we're getting to the point where time value of money will keep things in favor of the more expensive upfront costs. Of course, last time I checked Statistical Abstract, decidedly less than half of all borrowers kept their new loans this long. Something to think about, because you don't get the money you spent to get the loan in the first place back. By the end of year four, assuming we keep the loan that long, we've saved $5000 in interest, while the balance is only $2600 higher for the 5.5% loan than for the 6% loan. Even without time value of money and with a ten percent assumed rate of return, that's additional twenty years before the costs of the higher balance catches up with the benefits you've already gotten through lower interest. Considering time value of money, it's really never going to catch up.

So when you're looking at refinancing, don't just consider rate and payment. Consider what it's going to cost you in order to get that new loan, and remember what the costs are of doing nothing (i.e. you've already paid for the costs of that loan). Many people refinance every two years, spending much more than $3400 every time they do, because they'll spend two or three points to get the lowest rate. This, as you can see now, is a recipe for disaster.

Caveat Emptor

Got a question asking if zero cost loans really exist. They do. I've done several dozen myself, for clients who listened to me about the nature of the market.

Let me define what a zero cost loan is. It is a loan with a higher rate deliberately chosen so as to get a high enough rebate, or Yield Spread, to cover not only the loan provider's margin, but all closing costs you would normally have had to pay as well. Prepaid interest is not a cost; it's paying money that you would have owed anyway in a slightly different manner. Ditto an impound account. That is your money, not a cost of the loan. We are talking zero cost here, which is an entirely different thing from paying out some money that you would have had to pay anyway. But no money gets added to your loan balance. You pay the appraisal (if required) when the appraiser comes out, but you get the cost refunded upon funding for a net zero out of pocket. True zero cost. This does entail accepting a higher rate, and therefore higher payments than you might otherwise have gotten, but if you only intend to keep the loan a relatively short period of time, you start ahead by doing this and there is not enough time for the lower payments to break even. For instance, a while back I had a par rate of 6.25% on a thirty year fixed loan, but providing your balance was at least a couple hundred thousand, I could do 6.625% for literally zero cost. If you were planning to sell in two years but your current rate was eight percent, as many people have nowadays, but their credit has improved now to where they qualify A paper, this saves them a lot of money for literally zero cost, so there are no "sunk costs" to "recover"; it's pure profit from day one. I happen to think that with rates as volatile as they have been the last few years, it makes a lot of sense to choose a zero cost loan. If rates go down half a percent six months or a year from now, you can go get a rate that much lower for zero cost then. If you paid two points to get the rate, it's going to cost you the same two points again to benefit by as much. Since it's not likely to get the average person two points of benefit over the average loan holding period, those two points are at least partially wasted.

Now this is not to say that you shouldn't be on your guard when someone talks about a zero cost refinance. What most lenders mean when they say "zero cost" is "No money out of your pocket." But thousands of dollars can still get added to your loan balance, where you not only pay them, you pay interest on them. Many lenders will talk about putting money in your pocket, when what they are doing is adding not only that money but all the costs and all the points to your loan balance, and people who have been doing this every two years wonder why their loan balance is ten times their original purchase price. I call these Stealth Cash Out Loans. There is no such thing as a free lunch. You paid for the cash out; you're going to be paying for the cash out for many years, just the same as you paid for your closing costs in the previous paragraph with a higher rate than you would otherwise have gotten. The difference is that money added to your balance tends to stick around for as long as you own property, whereas a higher rate is over as soon as you sell or refinance that particular property. If you choose a zero cost loan, your balance should transfer straight across; you are continuing to pay it down as soon as you write the first check on the new loan. Whereas if you chose a loan that adds thousands of dollars in closing costs etcetera to your balance, it's going to be years of payments before you're back where you started.

A true zero cost loan not only has no net "out of pocket" expenses, it has literally zero added to your mortgage balance. They do exist, mostly for well-qualified A paper borrowers, despite what certain skeptics might say, and for most people, they are something you should strongly consider, whether you're planning a purchase or a refinance.

Caveat Emptor

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

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

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

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

Pitfall number two: The cosigners are overextended also. Sure, they make $10,000 per month, but they have payments of $5000 per month already. There's nothing left over where the bank sees them as having enough money left over to help you out. They may, in fact, have money to spare, particularly if they make a lot of money, but according to the standard ratios, they do not. You can't have the cosigners be stated income or NINA if the main borrowers are full documentation. If you have to downgrade to stated income in order to qualify, that is going to cost a lot of money through higher rate/cost trade-off. Obviously, better that you qualify for a lesser loan than that you don't qualify at all, but you don't want to downgrade if you don't have to.

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

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

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

Caveat Emptor

Got a search for "mortgage closing documents do not sign changes."

Unfortunately for this person, the documents you get at closing are what legal folks call a contract of adhesion. This means you can either accept it, sign, and adhere to all the terms as presented, or you can walk away. Basically your choice is to take it or leave it, in exactly the form presented.

Now on those rare occasions someone actually has the intelligence and good sense to walk away from a situation where the terms have been changed, the prospective loan provider does have the option of offering you a better deal as incentive to do business with them. Like, say, the loan they originally talked about to get you to sign up with them. Mind you, they don't have to, and the costs of that other loan may mean that they would rather do no loan than that loan.

Now I'm not a lawyer, but the way contracts of adhesion were explained to me is that if there is any legal ambiguity, it will be interpreted in your favor. This doesn't mean you can claim you thought it meant something different than the average person would understand; this means that if there is a legally ambiguous wording that could legitimately be interpreted two different ways, and you and your lender disagree as to the meaning, the courts will generally rule in your favor. Once again, the law is different from place to place and the courts have the final say; check with your lawyer.

Now in the loan world, it is much more common than not to be offered a loan contract at final signing which differs in some material form from the loan terms that were described to you in the beginning. The loan provider will generally offer you a loan of the same type, and usually at the same rate, but most often the costs to get that rate will be significantly higher than were listed on the Mortgage Loan Disclosure Statement (Equivalent to the Good Faith Estimate for the other 49 states). Neither one of these forms is in any way, shape or form a legal commitment, nor are any of the other forms you get at the beginning of the loan process, such as the Truth In Lending Advisory.

The only thing that means anything is the loan contract, or Note, that you are offered at the end of the process, together with the HUD-1 form, which is the only accounting of the loan required to be correct and complete.

Now the difference between the initial teaser loan they talked about and loan contract they actually got approved is one of the reasons why the less than ethical providers out there often want a cash deposit for the loan, particularly if their rates are not particularly competitive and they know it. If they're nervous someone will come along behind them and offer you a better deal, they want a cash deposit so that they still get something if you pull out, and many folks obsess about the cash deposit to the point where I could offer them a deal that saves them several times the cash deposit, and they still wouldn't switch. This isn't to say not to pay the twenty dollars or whatever it costs them for the credit report, this is to say don't deposit the appraisal fee (several hundred dollars, which should be paid at point of service) or even part of a point "to be refunded if the loan funds" within a certain amount of time. Chances are the loan isn't that great, particularly not the real loan they are really going to offer, and that's why they want to lock you in by having something to hold over you if you don't sign on the dotted line at the end of the process.

Caveat Emptor

Cleanest Lender-Owned Property I've Ever Seen!

General: La Mesa, 3 Bedroom, 1.75 Bathroom

Con:

What's Wrong With It: Not wrong, but there is a shingle facade obscuring the stucco, so I can't see whether there are structural issues underneath.

Why It Hasn't Sold: It's listed a little above most other similar size properties in the neighborhood.

Who it's Not Appropriate For: Very large families is about it - not that anyone with six kids is looking for a 3 bedroom.

Pro:

Selling Points: Quiet street, served by excellent to top notch schools. Polished hardwood floors in most of the house, with modern tile in the kitchen and dining room. The kitchen and dining room are quite large, clean, and remodeled fairly recently. The master suite gets great light, and appears to be pretty new. The back yard is private and reasonably large, with concrete block walls and a covered patio with grill. RV parking is available, and a one car garage.

Who Should be Interested: People with a family looking for a place to raise kids, anybody looking for a clean, quiet place to live.

Why it's a Bargain: The lender may have listed it a little too high, but it's worth at least what the surrounding properties are.

Financial:

What I think I can get it for: $415,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.25% for less than one total point.

With no down payment: Fully Amortized Payment $2627 including financing insurance (APR 6.635), dropping to $2292 when you have 20% equity (APR 5.361)

With 20% down: Fully amortized payment of $1833 (APR 5.371).

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 $415,000 the property would be worth approximately $675,000. If you held it those ten years before selling, you would net about $325,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2200 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $250,000 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

Somebody sent me this story via e-mail: Feeling Misled on Home Price, Buyers Sue Agent

Marty Ummel feels she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.

Knowing only this, I would have no sympathy. This is part of the risk you undertake with any investment - that it may decline in value. There are no guarantees that any investment is a good one. I worked hard to inform potential buyer clients about the state of the market when it was in the danger zone, and it cost me a lot of money. Quarter million dollars, absolute minimum. Most of them just went over to other agents who pretended that we could continue to gain 20 percent plus per year indefinitely, or were too ignorant to know better. Not precisely the most ringing endorsement possible, but it was hard to get people to hold off when the market was going crazy. Fear and Greed.

The situation now in my local market (San Diego) is 180 degrees reversed from that. This is the best buying opportunity in at least fifteen years, and probably the best we'll ever have from this point forward. I've done everything except promise free beer to try and get buyers off the sidelines now, but they're looking back at what the market has done, not where it is going. Fear and Greed has another side.

Getting back to the subject at hand, however, here's the deadly piece of information:

Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.

The question I want to ask is did the buyer's agent actively hide it or was he unaware of it? Not that being unaware is any excuse. If you have a fiduciary duty to someone who's buying a property, how can you not check out what sales there have been in the immediate area in the last few months, at least on MLS? This was a million dollar property, for crying out loud, but it would apply just as strongly to a "cheap" condo. If you're not willing to do the work, you shouldn't take the client. If you're never willing to do the work, why are you in the business?

If the agent was aware of these sales but actively hid them, that leaves the realm of negligence and into the realm of active malfeasance. He deserves to lose his license as well as the case, and this would be the wedge that might do it.

Now we get to the crux of the matter:

"We have seen so much misrepresentation over the last five years," he said. "So I appreciate where these buyers might be coming from: 'I'm a lowly consumer, you're certified by the state of California, you didn't do X, you didn't do Y, and I got hurt.' "

This is exactly what an agent is agreeing to when they accept the task of agency, real estate or otherwise. This isn't some pick-up game of softball where you pick your friends. Buyer or seller, you're not just picking someone who's going to get a check for thousands of dollars. If that were the case, real estate agency would have died by now. You're picking someone whom you believe is both capable of everything necessary to guard your interests, and willing to speak up even though it may cost them a commission. I get at least one e-email a week complaining about what a rotten job one agent or another did. When I respond back and ask them how and why they chose that agent, the response is always something along the lines of, "I met him and thought he was a good guy."

This isn't about who you're going to have a good time with at the football game this afternoon, which that means of choosing might suffice for. You're not choosing a date for the ball, you're picking an alleged professional who's supposed to competently guard your interests on a transaction that's probably several years worth of your earnings. Whether you pay for the property with cash or with a loan, it's still the same number of dollars, and you're still going to have to pay that loan off if something goes wrong. Treat buying real estate like what it is: putting enough money on the line to quite literally beggar you for life if you make a mistake.

I wrote an article a few weeks ago titled Which Makes More Difference - Buyer's Agent or Listing Agent? The answer was and is resoundingly that a buyer's agent makes more difference. Yet many people who would never pick a listing agent in such a casual manner will choose somebody they meet at an open house or go without representation, trusting the listing agent to look after their interests. But the listing agent has a contractual obligation to get the seller the highest possible price - not to negotiate it as low as possible. If something is in the seller's interest but against yours, you can bet the seller's interests are going to win. It's a win for listing agents if the buyer doesn't have an agent of their own - for perhaps an hour of extra work, they get paid double, and without taking on any new liability if they're even moderately intelligent.

Picking someone you meet at an open house is nearly as bad. HELLO! Earth to prospective buyer! They're a LISTING AGENT with a contractual obligation on behalf of that seller and who knows how many others. If they're not trying their best to sell you that property, they're violating their contract with the seller - but you want an agent who's not only going to tell you about the problems, but also about what it really means to you. There is an irreconcilable conflict of interest there. A good - by which I mean competent as well as ethical - agent will not put themselves or their clients into that kind of situation. I write it into every contract that I will not represent both sides in the same transaction, and make it clear to prospective listings exactly where the line is. If I bring someone I've contracted to represent as a buyer to one of my own listings, I am breaking that fiduciary duty to one or the other of them - perhaps both. It's one thing if someone calls me out of the blue asking to see a property I have listed. It's something completely different to bring someone I already have a buyer's representation agreement with to that listing with an eye towards possibly buying. The same objection applies if I try and get that prospective buyer who called out of the blue to agree to let me represent them in buying. Who gets less than my best efforts, and is that something you want as a consumer with hundreds of thousands of dollars on the line? That's what you're volunteering for when you pick a buyer's agent in either one of these fashions.

It goes back to the illusion of comity. Agents are salespersons, and it's much easier to get a sale, and particularly a better price, if you pretend everybody here is everybody else's friend. In fact, that's pretty much the only way to make Dual Agency fly. Give someone an obvious path of least resistance. But let's consider the nature of the item at issue: A middle of the line detached single family residence is $500,000. How many people would you trust not to try to finagle an extra 2%, when it means they make an extra $10,000 - two months gross wages - whether they are buyer or seller? To very politely and non-confrontationally slip away with an extra ten percent that means $50,000? I've seen people finagled out of forty percent of the purchase price by a sharp or lucky listing agent, and they never did figure it out. I went out and interviewed a few on purpose not too long ago on the subject of their recent purchases. Whether out of ego defense or just sheer ignorance, every single one of them was very happy with the purchase, and they told me they would do the same thing again.

Agents fall into the trap of "go along to get along" as well. It's one thing to be collegial. Two boxers each out to pummel the other into senselessness can be polite. The formality of the old code duello, governing two gentlemen so angry at each other that they're going to shed blood to settle the matter, was faultlessly polite. Often, though, agents go too far and get into you scratch my back and I'll scratch yours mode "You don't beat me up with your buyer, I don't beat you up with mine, and only the buyers get hosed, which we'll make good when they want to sell it with a whole new set of suckers buyers." The whole thing turns into a repeating cycle of suckers who don't know any better.

Well pardon me for not believing that just because you were taken advantage of in the purchase of the property does not entitle you to take advantage of someone else when you sell. Two wrongs still don't make a right, and they never have. The property is only worth what a buyer is willing to pay - if you don't like what is offered, you need to persuade me and them it's worth more - and to do that, you have to risk that I will persuade you it's worth less, because that's what negotiation is. Neither side gets to bully the other, and there are always other properties on the market. The other alternative for the seller is to find a buyer willing to offer more, which brings us back to the illusion of comity again. In this market, that's the real trick, isn't it? It's no coincidence that people find out about issues like this primarily during buyer's markets. When fear and greed are driving prices crazy, a bigger fool is very likely to materialize. When it takes something on the order of a divine command to get someone to be willing to buy, those who are willing to buy have thing much more to their liking.

To give the mass media credit where credit is due, they have managed to cover the basic point that listing agents represent sellers, and have a responsibility to the sellers, not the buyers. Thirty years ago, it's my understanding that Dual Agency was far more common, and the illusion of comity less likely to be dispelled, where now, roughly two-thirds of all transactions at least do have a buyer's agent involved.

But what if that buyer's agent doesn't understand the difference between comity and collegiality? That seems to be the most likely explanation for the situation illustrated in the NY Times article I linked at the beginning of this piece. To be fair, many agents on the listing side suffer this fault as well. The illusion seems to be essentially that as long as we keep it all in the family, nothing will go wrong. Furthermore, the buyers in the article were in exactly the same situation as the ones I interviewed on their overpriced purchases. Fat, dumb, happy - and ignorant, until something went obviously wrong. When prices fell, they went looking for someone else to fix their bad situation upon. And if prices falling was the only concern, neither I nor anyone else should have any sympathy whatsoever for them. But it wasn't just the bad luck of a down market, forseeable or not. This agent not only did a horrible job of discharging his fiduciary duty, he didn't tell his victims about relevant facts which would have made that failure obvious before the transaction was consummated. It's interesting to note that had he admitted his failure, he probably still would have gotten paid, because even if the buyers had moved on, they probably would have kept him - people do the silliest things. However, this was a real estate transaction, where pretty much everything is a matter of public records that are kept forever. The buyers or their lawyer did the work and dug into the records, and predictably, hit paydirt. The agent undertook the duty, should have understood the duty, and basically decided to act like a minimum wage worker with a fax machine despite the fact he was paid $30,000 to guard the buyer's interest. Hello! That commission check is not a reward for a winning personality! Well, I suppose in a market rising 20% per year where it's hard to do anyone lasting damage, it can be, much to the eventual distress of their client. Because no market can sustain that kind of increase over time unless the income of those able to buy the property keeps pace. I don't need to ask for a judge's ruling on that one.

People want their daily routine to be without confrontation, violence, or real argument. It's a temptation to just go along. The little stuff - a dime missing out of your change, having to sit through an extra cycle of the traffic signal - just isn't worth making a big deal out of. It's a path of least resistance thing. But when you accept the responsibility for someone else's interests, it's not your call to make, and we're usually talking months worth of wages, occasionally years. I may advise someone that the deal is about as good as I think we're going to get, but I still have to spell it all out. That's why I make the money I do for the work I do when I'm working on a full service basis - it really is reliably worth several times what I make to my buyer clients. And that's why the agent that just sits in the office with a fax machine can rebate half or two-thirds of that co-operating broker's percentage, and why I am perfectly happy to work on that basis if that's what a particular buyer wants - if my only liability is passing along faxes, I'm making ten times more per hour for less liability. I've written about this before, but pay attention to what you're getting in services as well as what you're spending for them.

The divine only knows how many other people bought property and are now in this situation, and how many lawsuits we're going to see because of it. I have zero sympathy for the agents and brokerages involved. They have richly earned whatever judgments are rendered against them and any license action under taken by the Department of Real Estate. But the consumers involved assisted their own downfall for just taking the obvious, apparently easy path to a transaction, by not taking the time to shop for a good buyer's agent in the first place. If you were getting ready to buy a property, which situation would you rather be in this time next year? Find a dedicated buyer's agent who will guard your interests while explaining what you need to know, or just take the path of least resistance? As of this moment, the folks the New York Times wrote about are out $75,000 in legal fees, and who knows how much in property value, their own time, and the quality of their lives, because they chose the latter path. Nor does anyone know at this point how much of that they're going to get back. But speaking as someone who knows intimately the endpoints and results of both paths, I know which path I'd choose.

Caveat Emptor

The Best Loans Right NOW

5.25% 30 Year fixed rate loan, with 8/10ths of a point (total) to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2209, APR 5.363! 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 4.75 percent!

Best 5/1 ARM: 5.00% with 1 total point and no prepayment penalty. Assuming $400,000 loan, payment $2147, APR 5.129. This is a loan where the rate is fixed for five years, and the payment pays your balance down! With rates on hybrid ARMs having dropped of late, they are once again something for people to consider. 5/1 ARMs as low as four percent!

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

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

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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.

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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

Lender Owned Cosmetic Fixer in Quiet Neighborhood!

General: Santee, 3 Bedroom, 1.75 Bathroom

Con:

What's Wrong With It: Needs all kinds of minor cosmetic touches, from carpet to paint to fixing a sliding glass door. The living room is a bit on the small side. Former owners put a few large holes in the wall.

Why It Hasn't Sold: Nobody else has found it yet? I spent quite a while looking for a gotcha! and didn't find one.

Who it's Not Appropriate For: People who insist their purchase be beautiful before they see it.

Pro:

Selling Points: Quiet cul-de-sac in good neighborhood, nice private backyard, solid house with plenty of room for a family. Schools in the area are well above average.

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

Why it's a Bargain: The need to do a bit of work is making it unattractive to most potential buyers.

Financial:

What I think I can get it for: $320,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.25% for one total point.

With no down payment: Fully Amortized Payment $2034 including financing insurance (APR 6.705), dropping to $1767 when you have 20% equity (APR 5.391)

With 20% down: Fully amortized payment of $1413 (APR 5.404).

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 $320,000 the property would be worth approximately $520,000. If you held it those ten years before selling, you would net about $290,000 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 $240,000 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

The first piece of advice I have for buyers who want to get a fantastic bargain is to find a good buyer's agent (this guy is one of the best in San Diego County). Nothing else will make as much difference as a good buyer's agent who is dedicated to the idea of getting buyers a bargain. They spot problems before you're stuck with them, keep you from wasting time, bargain hard on your behalf, debunk all the nonsense that sellers and listing agents throw your way, and most importantly, know when and under what conditions it's a good idea to walk away.

The second piece of advice I have for buyers who want to get fantastic bargains is to be willing to zig when everyone else is zagging. The gorgeous property in a high demand area of town, the award winning new development that's selling like hotcakes, and the freshly remodeled high end property are not where you're going to find bargains. Timing is as important as location and condition. It's much harder to find a bargain in the spring and summer, when everyone else is looking to buy, than it is to find a bargain around Christmas, when nobody wants to move that tree. You find bargains by being willing to consider what relatively few others will. A buyer's market is where the buyers have all the power simply because there are so few buyers in proportion to the number of sellers. Seller's markets are the exact opposite, but it's pretty easy to get people to want to buy during seller's markets, and difficult to get people to buy in buyer's markets. The psychology of increasing prices motivates greed on the behalf of buyers, but if you want to make a large profit, buy when nobody else wants to.

This isn't to say that every property or every situation that everybody else is avoiding is a ripe bargain. That is not the case. Sometimes the reason why a given property isn't selling is a sane, rational reason. If it's next to an explosives factory or a maximum security prison, there's a good reason why people are giving it a wide berth. There is a reason to do due diligence on every property.

The third piece of advice I have for bargain hunters is that the beautiful, turn key property where you sign the papers, move your furniture in, and you immediately become the envy of your neighbors is not bargain priced. Those properties don't need to be bargain priced, because they appeal to everyone, and people will line up to pay top dollar for those properties. The owners don't have to negotiate much, because everyone's making offers on these. You find real bargains by being willing and able to consider what other buyers can't or won't. I just found a wonderful potential bargain, but the person who buys is going to need a lot of cash to make it happen. The prospective buyer who cannot or will not sink cash into the property can't touch it. The person who isn't willing to work - or pay to have work done - won't be interested..

This segues into the subject for the fourth piece of advice: Being on solid financial footing is worth gold to buyers - lots of gold. Not being on a solid financial footing may or may not be worth waiting until you can fix it, depending upon your market. That's a question that can only be answered on an individual basis. But people with low credit score, low to zero down payment, and insufficient ability to document income will have substantially fewer properties to choose from, and a lot less bargaining power to boot. These challenges become much more difficult if you've got more than one of them. Any one of these issues can be dealt with easily. 100% financing is very available to those with a credit score not horribly below average and the ability to document enough income. People who can't document enough income can still get good loans provided they can put in a down payment and have a quasi-decent credit score. People with bad credit can still get loans if they can document income and provide a down payment - or even if they can't document income with a larger down payment. But put these items together, and you're very constrained as to which properties you have the opportunity to buy, that is, the ones where the owners are willing and able to "carry back" part of the purchase price. Since sellers want cash, not promissory notes, this means the ones who are able to do so have a huge lever to hold on you. You're likely to end up paying full asking price, if not a little extra.

You have cash, or at least the ability to pay the seller in cash via a loan. The sellers have property and they want cash. Every property is not appropriate for every buyer, and I've yet to find a property that's an exception to this rule - but cash is appropriate for every seller. Your cash, my cash, Uncle Sam's cash - sellers are complete agnostics when it comes to whose cash. That dollar from your pocket is worth exactly the same as the dollar from mine. It all spends, and any seller with any pretense to rationality is going to be the ultimate agnostic about who that cash comes from. So long as they get it, it all spends. Cash is always king - but it never produces more cash just sitting there.

But you have needs and wants for the property, and unless you've got a license to run your own private printing press, you don't have an unlimited budget. You have to know what that budget is, and blowing your budget is the mistake most likely to cause a disastrous failure in the home buying process. One of the things I do that my buyer clients absolutely hate is I force them to sit down with me and have a talk about what's important to them in a property, how important it is, and what's not important. Furthermore, I always want to cover alternatives. If they can have two or three features of lesser importance, are they willing to give up one item that may be highly desirable but extremely expensive? People hate this because they hate any indication that they might have to "settle" for anything less than a dream home, but dream homes turn to nightmares very quickly if you don't stay within a budget you can afford. You can always move up again later, but if you can't really afford it now, you will be better off not buying it. A good buyer's agent should give you a very good idea how well your budget and your desires match up before you look at a single property. Furthermore, when looking at properties, always shop by purchase price, not payment. Never never NEVER choose a house or a loan based upon payment!

All of this reduces to one word: Planning. People hate to plan. A good working definition for human beings is, "an otherwise sentient species known for its unwillingness to plan." Me, too, except where there's something important on the line, and getting my clients a better properties at lower prices is a large part of how I feed my family. Effectively planning your purchase will save you many thousands of dollars. Several tens of thousands, around here; perhaps hundreds of thousands in places like Manhattan. I plan everything about my client's purchases except whether they'll like a particular property. There is no way in the known universe to predict that. I've found people exactly what they told me they wanted, at a price within their budget, only to be told "Show us something else." I've had people immediately fall in love with something that I almost didn't show them. I've had people insist they wanted a property even though I gave them a dozen good reasons not to. They're the boss. I'm just the expert. Push comes to shove, people will buy what they like - it's my job to make certain they know about the warts and have a chance to avoid them. People marry people with warts all the time. Most properties, just like most people, have their warts. It's my job to make sure my clients know about them - not to prevent them from exercising adult judgment on whether it's something they can live with.

About warts: If you're one of those people that cannot accept the fact that everything in real estate is a trade-off, you're not going to do well. If you're only willing to buy a perfect property in the perfect situation at a perfect price, there are three possibilities. One: you pay a lot more than the property is worth. Two: You don't buy anything, either because nothing satisfies you or because someone else gets into escrow first. Three: You are the victim of a con where they pretend to have the perfect property in the perfect situation at a perfect price.

There are properties without metaphorical warts of any kind. They all command a premium in any market. If you want a bargain, there are going to be warts. There's going to be a reason why buyers didn't line up to outbid each other, because that's what happens with premium properties in any market. Location, surroundings, condition, size, floor plan, orientation, structure, commute, missing something it needs or has something it shouldn't. Usually, more than one of these. Some things that are a big deal to most prospective buyers are cheap and easy to fix, while other things that don't seem important at first are expensive or impossible. Some things make a large difference on resale, others don't. Some things are impossible to live with, some things trivial. A good buyer's agent will make all the difference in the property you choose, and it's not just knowledge, but attitude as well.

Penultimate item: Sometimes, there are things that are more important to the seller than some amount of cash, and if they are less important to you than that amount of cash, this is a good way to get a bargain. Sometimes there will be clues in the listing that a good buyer's agent can spot. Sometimes, a seller who wants it all their way will give away this crucial information in negotiations, usually by asking for something other than the way things are normally done in your area. Once again, it's the buyer's agent who is going to spot that and know what it's really worth in the way of other concessions. Everything that's unusual, out of place or out of the ordinary is a possible flag here. This works both ways, so if you don't have a sharp buyer's agent and the seller has a sharp listing agent, you can very easily put your foot in your mouth to the tune of thousands of dollars or even blowing the purchase altogether. Get with your agent and plan how you're going to craft your offer to get from where you are to where you want to be.

The final item, and one of the most important: Always negotiate honestly and in good faith. Never make an offer you're not prepared to have accepted. Never represent yourself as being happy when you're not, or being unhappy when you're trying not to chortle with glee. It's amazing how many people simply do not understand how likely this is to bite you. The purchase contract is not the end of negotiations - even the consummated sale may not always be the end of negotiations, but that's the way to plan. It takes two willing parties, a buyer and a seller, to get from the purchase contract to the consummated sale. One side gets too greedy or too demanding, the other side gets disgruntled and walks out. The net result is no transaction, and you're right back where you started from, except you're out the time and probably a not inconsiderable amount of money. Lose-lose, where a viable transaction is always at least commensal, and symbiotic is better.

None of this is "Buying below market." There is no such thing as "buying below market". Market is whatever the price a willing buyer and a willing seller agree the property is worth. End of discussion. If you don't understand this, don't get involved in buying and selling real estate. You would only get hurt. But it is a collection of ideas and principles that enable savvy buyers to get the real bargains - the sort where you look back in amazed satisfaction at how well you did, and if you don't know any better, you'll think it was dumb luck. And luck does happen, but fortune in real estate favors those who are prepared, who get good advice, and who are prepared to undertake reasonable risks when the probability and magnitude of a payoff more than compensate. Real estate is always a competition, and like every competition, you want to practice, you want to prepare, you want to have the best coach and the best strategy, and you have to be willing to take calculated risks. The prize isn't a gold medal - it's a property where you can be happier than in the property you didn't spend tens of thousands of dollars more for, and resell when the time comes faster and for a higher profit.

Caveat Emptor

Lender Owned Diamond in the Very Rough

General: La Mesa, 4 bedroom, 2.75 bathroom

Con:

What's Wrong With It: All torn up on the inside, not inhabitable as it sits. Parking is awful. Lot needs landscaping. Residential Lenders won't touch it without a working bathroom. It will cost about $100,000 to fix all of his.

Why It Hasn't Sold: See the above.

Who it's Not Appropriate For: People without cash for a down payment and fixing it up.

Pro:

Selling Points: Nice layout, and the person who was working on it had some good ideas. Plenty of room in living room and den, huge kitchen. Master bedroom separated from other bedrooms. Huge lot, over a quarter acre - plenty of room to do just about anything you want in the back yard.

Who Should be Interested: People with some cash looking for a place to move up. People with the ambition to create their own dream home.

Why it's a Bargain: The place is ugly right now. With about $20,000, you can get it inhabitable and then make it your dream home at your leisure. Most buyers can't qualify to buy it because they haven't got the cash.

Financial:

What I think I can get it for: $240,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.25% for one total point., but you're going to need a commercial loan in order to buy it.

With no down payment: not applicable

With 20% down: Purchase money loan would depend heavily upon credit score. Once it's inhabitable, fully amortized payment of $1061 (APR 5.425), assuming the same rates as today.

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 $240,000 the property would be worth approximately $390,000. If you held it those ten years before selling, you would net about $230,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2200 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $340,000 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

With rates having dropped in recent weeks, it seemed a good idea to go over the thought process behind a successful refinance. Other than the two issues, of loan to value and whether you're really able to qualify for a traditional mortgage loan, things are pretty similar to other refinancing mini-booms. I've seen some people claiming that you should go up to forty-five day rate locks instead of thirty, but I must disagree. With underwriting times at five days, you should not need longer than a thirty day rate lock (or purchase escrow) if you and your loan officer have your act together. Purchase loans go through different underwriters at most lenders, and they have no right of rescission. Even in summer 2003, when refinance underwriting was at 33 days, purchase loans were still getting turned in no more than four, and funded in two to two and a half weeks. Even refinance loans can still be done in under 30 days - if your loan officer submits a complete clean package to begin with, something there's no reason not to do in the case of a refinance. Furthermore, if you make a habit of submitting nice clean complete packages, underwriters will start cherry-picking yours out of the pile when they don't have enough work time left for a piece of garbage. You can't really control this or count on it, but it sure was nice to have the loans come back approved in three or four days, when the competition was taking four weeks. My median last year was seventeen calendar days from lock to fund - adding five days of underwriting only brings us to twenty-four (Don't forget the weekend), and that's forgetting that underwriting was talking a day or two even then. Longer rate locks are more expensive, so you don't want to pay for what you're not going to need. But you do have to have your ducks in a row from the beginning to make it happen.

There are two component costs of getting a loan done. The first is closing costs. This is what is necessary to pay all of those people that work on your loan. Appraisal, escrow, title, notary, processor - not to mention things like credit report charges and recording fees, and in some states, taxes levied upon mortgages. I knew things were getting cheaper with virtual escrow and flat rate title insurance upon refinances, but it was just a few days ago I really looked at how much this was. It's now running much lower than the $3400 rule of thumb I've been using. I quoted two yesterday, and the higher added up to just over $2800. Of these, the only ones that usually need to be paid in cash are the appraisal and the credit report. There are certainly lenders who offer to pay for the appraisal, but I've gone over the traps there before. The others can be rolled into your loan balance. Unfortunately, you'll be paying interest on it there so it's not something I like to recommend, but it can be done, and if you need to do it, it's part of the calculations on whether you should refinance. Actually, it's a part of that, either way.

The second part of the costs are in the points. Actually, this separates into origination and discount, where origination is more properly a closing cost, but most providers (including me!) quote origination and discount together in points verbally, but points of origination is computed exactly the same as points of discount, and when they're disclosed in writing on the paperwork, they add up to the number quoted, at least for the more ethical providers. Note that unless that quote is backed up with something like a Loan Quote Guarantee, these numbers don't mean anything you can hold the lender accountable for, so signing up for a backup loan is a really good idea.

If you choose a higher rate, the lender might not only not charge points, they might cover part or all of your closing costs.

There are other potential costs as well. If your current loan has a prepayment penalty, you can figure you're going to end up paying it in order to refinance. There are only four ways to get out of paying a prepayment penalty, and the two best are not having one or waiting for it to expire. The standard pre-payment penalty is six months interest, so if you've got a $200,000 loan at 6%, you can figure paying that penalty is going to cost $6000. Some penalties are only 80% of that amount, but either way this can entirely change the computation as to whether it's worthwhile to re-finance, and I can think of half a dozen instances off the top of my head where the client swore that they didn't have a pre-payment penalty - but they did. Sometimes this is a rude awakening as to whether the loan officer who got you that loan however long ago really did as good a job as you thought they did. In the illustrated case, it also adds $6000 to the cost of refinancing until it expires. This isn't the fault of your new loan officer - unless they're also the one who did your current loan, they had nothing to do with it. People have gotten angry at me to no good purpose any number of times on this point, when that pre-payment penalty had nothing to do with me. I didn't put them into that loan, I didn't put the loan contract with a pre-payment penalty in front of them, I didn't sign the contract without understanding it, and I certainly didn't get paid for doing that loan. Kind of like trying to blame your neighbor for the crimes of Attila the Hun.

There are other things that need or might need to get paid. Every refinance loan has thirty days interest attached to it. But this isn't a cost; it's only money you would have paid anyway. Some lenders will roll it into the loan and tell you that you "skip" a payment. This may be technically true, but is nonetheless incredibly dishonest. It's much more correct to say "you made one mortgage payment a little earlier." You never really skipped a payment, you only keep the money in your checking account because you added the amount of the payment to your balance. And of course, there's the impound account if you want one, to pay your taxes and homeowner's insurance. Avoid rolling this into your balance if you can.

Just because rates are lower now doesn't mean it's necessarily worthwhile to refinance. Let's work with an example. Let's say the property is valued at four hundred thousand - that's what the current appraisal will come in at. Current loans sum to $260,000, at six percent. No pre-payment penalty, the clients don't want an impound account (be thankful for the one thing the California legislature has done right in the last twenty years). Total closing costs, $2800. Plus whatever cost in points or minus whatever rebate you can get.

Here are some options available a couple days ago (Rates actually dropped again today), all retail rates for thirty year fixed rate loans:

at 6.125, a rebate of 7/10ths of a point or $1820, cutting closing costs to about $1000. But there's no benefit whatsoever to doing that. Not only does the cost of interest go up if they get this loan, they've spent $1000, and the cost of interest goes up to $1332.19 per month from $1300 even, assuming you roll it that $1000 into your balance, but even if you don't, you're not cutting your cost of interest. Unless you're in some kind of loan that's going to somehow get worse, like if the current loan is adjustable, there's no reason to do that. There's no benefit whatsoever, even though the overall tradeoff between rate and costs is now lower.

5.875% was retail par, no rebate but no points to get it either. Total cost $2800. Let's assume you pay it out of pocket, so your balance stays the same and you actually cut your cost of interest by $27.08 per month. Would you pay $2800 in order to save $27.08 per month on your mortgage? I wouldn't. Even without considering the time value of money, it takes 103 months - over 8.5 years - to break even. Most folks don't keep their loans three years, let alone eight, and if you haven't broken even by the time you sell or refinance, you're just out the money.

at 5.625%, you would have paid half a point. Assuming you pay it out of pocket, that's $1300. Added to $2800, that's $4100. You cut your cost of interest to $1218.75, so you're saving $81.25 per month, but when you divide it out into $4100, that works out to 50 months, not counting time value of money. I probably wouldn't invest $4100 for that, but some rational people with a long record of keeping loans ten years or longer might think it was a good investment.

At 5.375%, you would have paid 1.5 points - roughly $3900. Added to $2800, that's $5700. If paid out of pocket, it cuts your cost of interest per month by $135.42, which divides out to a breakeven of 42 months - three and a half years. It's not that good if you roll it into your balance - cutting your monthly interest savings to slightly less that $110, and your breakeven is moved back to essentially 52 months, still not considering time value of money. I wouldn't do that, but it doesn't mean there aren't rational people who would.

Notice that all of these rates but one are lower that what these people have now, but in no case have I been enthusiastic about the refinance from the client point of view.

You may have noticed I haven't used payment to compute any of this. That's because payment is much less important than most people seem to believe. Yes, you need to be able to make the payment, but with that said, You should never choose a loan based upon payment. Even if you were paying off other debt with payments of hundreds of dollars per month, you shouldn't choose your new loan based upon payment. Focus on the real costs of money - what money you need to spend to make the change, the difference it makes to the monthly interest. Even if you have a real cash flow problem you need to solve because you are barely able to make your current payments, you'll go a lot less wrong by focusing on cost of interest.

However, let's see what happens if these folks have forty-five thousand dollars at an average of eleven percent in consumer debt they want to pay off. True that the monthly payments are $800 and it's really crimping them. They're just barely making all the payments every month, and if anything happens like, say, a car repair bill, they'd be completely hosed. That is another reason for doing something, but it's not a reason to focus on payment, but only to make certain that the new payment falls within the range of what they can really pay. As it sits, their real ongoing cost of that money is $1300 plus $412.50, or $1712.50 per month. Many people will tell them that consolidating that debt moves it from non-deductible to deductible, but a strict reading of the tax code says that is not the case (deductible interest is based upon purchase price, normally amortized). I'm not going to tell you that people haven't gotten away with this deduction, but the IRS has had their eye on enforcing it of late, so I'm not going to assume you're getting a deduction out of it, and in fact, I'm going to assume the deductibility issue is a wash.

We haven't changed the basic rates, which are the sum up to the conforming loan limit (currently $417,000). Paying off consumer debt makes it into a "cash out" loan, and a balance that includes paying $305,000 of debts puts you over a seventy percent Loan to Value Ratio, possibly over eighty if you choose a high cost loan and or roll impound accounts into your balance as well. The lender whose sheet I got this from has a
adjustment - an additional charge for risk - of half a point for cash out loans between seventy and eighty percent of value, 3/4 of a point for 80% and over. So all of the above rates have their costs increased by half a point.

So 6.125% now only carries a rebate of two tenths of a point. The moderately good news is that this is on a larger amount of money, and the closing costs are the same (I deliberately picked these numbers so that the cost for the lender's policy of title insurance stayed the same on a refinance, but it usually won't) But I'm also going to presume that you don't have the money to pay these cash out of pocket - you have no choice but to roll loan costs into your balance. After all, if you had thousands of dollars sitting around cash why do you have all of these consumer debts? I'll still have you paying prepaid interest out of your pocket instead pf pretending to "skip" a payment, and no impound account, but you don't have the cash to pay everything out of pocket.

At 6.125, your closing costs are still $2800, and the slightly over $600 rebate you got means that the balance only increased to about $307,185. Total cost, of refinancing to you, $2185. Monthly interest charge is now about $1567.93 - so you're saving $144.57 in real money per month, never mind that the payment is going to have a much larger difference. Would you spend $2185 to make $145 per month, potentially for thirty years? I sure would! Your breakeven is just over fifteen months, and most folks keep the loan significantly longer than that! Every month you keep the loan over 15, you're $144.57 further ahead of where you would have been without refinancing.

At 5.875%, the loan costs half a point now. Your new loan balance would be $309,346.73 and change, which in the real world gets rounded to $309,350 and putting the difference of $3 plus loose change back into your pocket somehow, but I'm going to deal with the non-rounded number. You paid $4346.73 to get that loan done, and your monthly cost of interest goes to $1514.51. You're saving $197.99 per month, but you spent about twice as much to make it happen. Breakeven is not quite 22 months as opposed to your current situation, but longer than that as opposed to the competing loan, which is over $1000 to the good by the time this loan breaks even. Indeed, this loan won't catch its 6.125 competitor for 44 months or thereabouts. In the absence of other choices, I'd be willing to spend this money for this benefit for myself, but over three and a half years is a longer than median time to refinance. I'd rather have the 6.125 loan in this instance. You will get more benefit out of this loan in the long term if you keep it, but most people won't keep it long enough.

At 5.625%, this loan now costs one full point, and your new balance would be $310,909.09. Like it or not, you spent $5909 to get that loan. Your monthly cost of interest drops to $1457.39, saving you $255.11 per month. Breakeven: A little over 23 months. Everything that I said before about the 5.875% loan is also true for this one, except that because the monthly benefit is larger, it catches the 6.125 loan that is your best alternative thus far faster - a little over another ten months, or between 33 and 34 months until it's the best alternative thus far, and once it's in first place, it pulls away from the others quickly.

At 5.375%, this loan now costs two full points, and your new balance would be $314,081.63 if you chose it. You spent $9081.63 to get it, while your monthly cost of interest drops to $1406.82, saving you $305.68 per month. You break even after 29.7 months. If it were the only alternative other than "do nothing", I'd still be willing to do this for myself, but since it takes longer to catch up to some of its competitors, it wouldn't be my first choice from among the presented options. Mind you, if you kept it for the full 30 years, it would be the best possible alternative, but most folks don't keep their loan even three years, let along thirty. By the time this has broken even, the 5.625% loan is about seventeen hundred dollars to the good, and at $50.57 per month lower interest, you're looking at over 32 more months until this is the best alternative. 62 months is over five years. I'd rather do 5.625 for me in most circumstances, thank you very much.

Circumstances alter cases. If you have some knowledge about the future of the situation, any of these can be the best possible loan. For instance, if you know you're going to have to move and sell in two years, or if you're retiring (but staying put!) and it's going to be difficult to get loans from here on out, those would each alter which decision I'd recommend. If loan rates are expected to continue declining or even to be volatile in about this range, I'd choose a cheaper alternative trying to get as close to a True zero cost loan, while if all the top analysts are saying that rates aren't going to be this low for another ten years, I'd strongly consider paying the points to get the low rate.

There is more to the decision of refinancing than just rates, and choosing a mortgage loan by payment is one of the best ways I know of to waste large amounts of money. Unless rates nose-dive even further than this, like they did in 2003 (It sure was nice telling people I could get them 5.375% for literally zero cost when most of them were around 7%), for most people there probably isn't a choice that both saves you money and has you ahead of the game right away - and even so, that may not be the best choice in your situation. Calling loan officers to demand "What's your lowest rate?" isn't going to help anyone - especially not you. You need to have some good conversations with several loan officers

Caveat Emptor

With rates having nose-dived in recent weeks, we're experiencing a refinancing mini-boom. Now that rates have fallen by about a full percent from where they were most of the last year, people are waking up to the fact that refinancing now can save them some serious money. Things finally got low enough a couple days ago that I sent out individual e-mails to most of my clients for the past two years. Underwriting times are up to five business days - a full week. Mind you, refinancing booms are not going to save the lenders' who are in trouble, and 90 percent plus of the refinance dollars are just lenders feeding off each other. But the choice for any available lender is to offer the lower rates and compete for clients, or don't and lose them. It's not like people are settling for free toasters any more.

Unlike all of the recent refinancing booms, this time a lot more people have a couple extra issues.

The lesser one, measured by number of people who have this issue, is being able to qualify for a loan. A year ago, while make believe loans were still happening. people were being qualified for loans on the basis of being able to detectably fog a mirror. Loans for 100% of the value of the property were being done on a Stated Income basis by even A paper lenders. Forty and Fifty Year Loans, interest only, and even negative amortization loans - unsustainable loans were over half of all purchase loans locally. Anything to make it look like the payment was affordable, even if it wasn't. But if that's the only way the people were going to qualify for a loan, what happens when they're not available any longer? That's right - they're stuck with what they've got until they can qualify for something more traditional. Lower rates may help a few around the margins, but most of these folks who signed up for Make Believe loans are going to have to sell before they're going to get their lives back on track.

The other issue, that loan officers mostly haven't really had to deal with for years, is impacted Loan to Value ratios. When prices fall, as they have locally, that's a problem. Locally, the average properties are down about 25%, but that's an average only. So properties that people bought at the peak of the market might be 75% of the value they paid, and unless they put at least a 25% down payment into the property, they're "upside down", and owe more than the property is currently worth. Being upside-down is no big deal if you have a sustainable loan. You keep on keeping on, and eventually things will go back to normal. You pay the balance down, values will go back to at least where they were, and all will be right with the world. But if rates drop while you're upside down, you're not really in a position to take advantage of them. I've written an article on how you might be able to refinance if you're upside down, but those steps are not going to get you the great rates people who have more traditional loan situations will get. Even people who have been in their properties for much longer are finding out that they don't have anything like the amount of equity they had two years ago. Even if they bought a decade ago, if they've taken cash out, they may quite likely be in a situation where don't have twenty percent equity. When this happens, people are going to either split their new loan into two pieces or pay PMI. Since holders of second trust deeds are not currently willing to go above ninety percent of the value of the property, if you're above that threshold, it's PMI or no loan. I've talked to any number of people in the past week who don't want to pay PMI, and that's fine, if they don't mind not getting the loan. It's not like you're shopping for produce at the market, and can pick and choose what you want. PMI goes with all first mortgages over eighty percent of value - it's banking regulations. Regulated lenders cannot lend on those conditions without it. Some lenders may camouflage it with