Sacramento Real Estate Blog

How bad does the Treasury Secretary’s plan have to be before Congress approves it?

Well, don’t worry, Chris Dodd’s probably already written something close to what Congress will approve, but if you aren’t depressed enough yet, you may be happy to know that a real estate broker with no direct banking experience was able to come up with a better (albeit still hugely dumb) plan in a few days.

I believe you could put twenty smart guys in a room for a morning and come up with a better plan.  The problem with having Congress do it is that not that they’re not smart, but that they’re owned by the wrong people.

Meantime, here’s my dumb but not as dumb as Paulson’s plan. 

Spoiler alert:  I manage to pay back the American people in eight years while making 13 million low-risk home loans to the American people.

If you enjoy it, please don’t forget to hit the Digg button while you’re there.

Hard on the heels of taking over Freddie Mac and Fannie Mae, and the bailouts of Bear Stearns and now AIG, this week the Federal Government announced that it would try to bail out the entire economy — adding some (big) number in the hundreds of billions of dollars to what’s probably a half trillion or so commitment already.  The total price total price tag a half billion to a trillion dollars (or more).

Basically the idea here is that the Federal Government is going to buy up a lot of "bad debt", i.e., things like worthless mortgage backed securities, but details of the plan are still sketchy, and I certainly don’t pretend to understand how it’s all likely to unfold, other than to say I know people will lie about it.  Take the United Press International, which included this ridiculous assessment:

Obviously, conservative Republicans do not like using this amount of public money to bail out private companies: They understandably ask why the U.S. taxpayer should pick up the tab for others’ bad choices.

No, obviously conservative Republicans like to say they don’t like to use public money to bail out private companies, but it was conservative Republicans along with the Democrats who rolled over ten years ago, repealing the New Deal legislation that has protected us from just such a fiasco since the Great Depression.

How will this affect the housing market?

As I mentioned, details of the plan are still sketchy, but to me, this is the least well understood aspect of the unfolding story.  Will the government get into directly writing down the principle for people in foreclosure?  Will they be auctioning off foreclosures directly?

I don’t even want to hazard a guess at this point, but I suspect the government’s actions will do more to simply keep more banks from folding in the short term and make Wall Street happy.  I’m less convinced that it will significantly shorten the time to home price recovery, but that won’t stop politicians from hinting that it will to deflect public outrage.

Freddie Mac’s latest Mortgage Market Survey reported that interest fell again last week.  After reaching a high of 6.63% (with the borrower paying .6 points) on July 24th, the national average for a 30 year fixed mortgage, for example, has fallen to last Thursday’s average number of 6.4% at .6 points.

Freddie Mac also reported some good overall news about that strangest of abstractions, the "national" housing market.

The housing front is providing some encouraging signs. The pace of home price declines slowed down for the fourth straight month in June and the number of metro areas exhibiting monthly gains rose from seven to nine, according to the S&P/Case-Shiller® 20-city composite index. There are also signs more buyers may be getting ready to return to the market. The Conference Board says the share of households planning to buy a home within six months is now at its highest level since March. At the same time, the supply for unsold new homes is down to 10.1 months, the lowest since February, as single-family existing homes (excluding condos and co-ops) start to sell more quickly. Although, when condos and co-ops are included, the resale inventory did edge up."

Here in Sacramento, the big news over the last several months has not been a slowing of price declines (although it looks like we’ll have a slight price increase from July-August), but a huge increase in buyer demand.  We’ve been writing about this for several months now, and in a few days we will publish our August report on Sacramento County’s real estate statistics.

Background:  The Foreclosure Prevention Act

On July 30th, President Bush signed H.R. 3221, also known as the Foreclosure Prevention Act of 2008, into law.   There are a ton of provisions in this legislation.  Before we get into the tax credit, let’s briefly look at some of the less buyer friendly aspects.  The bill eliminates down payment assistance programs like Nehemiah effective October 1, 2008.  (Though as I wrote about earlier, Nehemiah was something of a mixed blessing even when it was around, since often buyers getting the down payment assistance were competing for  low-priced, bank-owned homes with other buyers who were financing less than 100% or paying all cash).  Another bill, H.R. 6694, seeks to undo these provisions and restore down payment assistance programs like Nehemiah and AmeriDream.

In addition to eliminating third party down payment assistance programs, the bill raises the down payment for FHA loans from 3% to 3.5%, but (fortunately), allows the down payment to be gifted or borrowed from a relative.  (If it’s borrowed and secured against the home, it has to be in subordinate position to the FHA loan, and the total amount secured cannot exceed 100% of the value of the home).

The Tax Credit — An Interest Free Loan From The IRS

While on the one hand taking steps that make home ownership somewhat more difficult, on the other hand H.R. 3221 had at least one provision that’s great news if you’re a first time buyer buying between April 9, 2008 and June 30th, 2009.   First time buyers who buy during this period will be eligible for a tax credit of 10% of the value of their home (up to $7,500).  Since almost all single family homes and many condos in our area cost more than $75,000, most buyers will be eligible for the full $7,500 credit.  The credit must be paid back over 15 years, but since you only have to pay back the amount of the credit, what this means in effect is that you get a 15-year, interest-free loan from the IRS.

The National Association of Realtors® has put together an excellent FAQ that goes into the first time buyer tax credit in detail.  I think this FAQ will answer most questions you may have about this credit, but if you need additional information, please call us.

Can You Use This as a Down Payment?

One of our web site visitors inquired the other day whether there’s any way to use the tax credit as a down payment.

One answer to this is no, not really.  However, those of you who are buying the way my wife and I did — with help from the First National Bank of Mom and Dad — may note that a tax credit of $7,500 next year is pretty close to the amount of a 3.5% down payment on a median priced Sacramento County home this year.  In other words, if mom and dad will give you the interest free loan for year one, the IRS will give you an interest free tax credit the following year to pay them back with, and then you can pay the IRS back over the next 15 years.

For additional reading on H.R. 3221, see the following links:

Key Provisions of H.R. 3221

H.R. 3221 Overview (With Links to Summaries and Full Text)

As prices in greater Sacramento (you know, the whole USA) continue to fall, naturally everyone wants to know where the bottom is.

I’ve been saying for some time now that we’ll reach the  bottom of the real estate market on May 20th, 2009 at 10:20 AM.  Actually, I’m not exactly sure.  It might be 10:15 if all goes well.

I am the eyes of Johnstradamus, and all your ways are known to me.

No, but seriously, we’re all curious.  Purva Brown posted a very interesting article to The Sacramento Real Estate Gal recently discussing Alan Greenspan’s recent prediction that the real estate market will begin to rebound in 2009.  (Hey look, Alan agrees with me!)  In discussing the article, Purva made the point that anecdotally we’re seeing some increases in demand.

I would go one step further to say that depending on the area, the pent up demand is not anecdotal at all, it’s quite real and measurable.  The unit volume numbers tell the story.  Elk Grove unit volume is up about 100% in April.  In East Florin, 95828 and 95829, unit volume is up 172% from last year.  Even in Roseville, where the price declines have been less precipitous, volume is up some 40% from April to April.

I believe we’ll continue to see increased demand as time goes on, as long as interest remains reasonably low.  In one respect this is a simple manifestation of the demand curve in action.  As price goes down, demand goes up.  Another way to look at the potential for real estate prices to reach equilibrium was one that Sean O’Toole recently reminded us of in his excellent post Death Spiral?  How to Find the Bottom in Your Market.  Sean’s point is one that I’ve believed for many months, that as more and more properties begin to offer positive cash flow, we’ll reach an equilibrium point.  This will be true even if Option ARMs continue to reset and cause additional foreclosures, and and there’s no shortage of articles on the bear side are predicting that they will.  See for example this article in Slate and this evaluation of the ARM Reset Problem.   Of course as Sean points out, you still have to predict what cap rate is reasonable for a given area to reach equilibrium.  With this in mind, those of you who may want to argue for a different recovery date than Johnstradamus predicts may easily be able to prove it using no more than a keyboard and a slide rule. 

Don’t get your fingers caught.

I admit I was pretty shaken when I first saw the ARM resets and Option ARM recasts lasting into 2011, but one thing that’s different about these resets will be that this “second wave” is not composed primarily of sub-prime borrowers, as I understand it.  So although it’s cause for concern, let’s remember that sub-prime borrowers by definition should have a higher default rate.  I wouldn’t be surprised to see more foreclosures in El Dorado and Placer County relative to Sacramento County as this unfolds, but that’s strictly a hunch.

What’s really encouraging to me is to see such an increase in demand in Sacramento County already, even though the numbers for rentals in areas like 95828 and 95829 still didn’t impress me as all that wonderful.  I suspect that most of these buyers are not investors, but first time buyers who are feeling like a home is now within their grasp.  Beyond that, however, I believe that if we ever get to the point where you can routinely get $200 per month on a single family with reasonable assumptions about expenses and vacancies, we’re going to get to a point where it won’t matter how many foreclosures get dumped on the market — enough investors will scoop them up that prices will reach an equilibrium.

A lot of people have heard of Nehemiah, and think that it’s a down payment assistance program.  I’ve come to view it more as a down payment prevention program.  The beauty of Nehemiah is that you can save $200,000 on your home, because after one of my hard working agents has invested a couple of hundred dollars in gas money on you, you won’t open escrow, so then you won’t close escrow or have a mortgage to pay.  Total cost to you:  zero.

Nehemiah’s one of those ideas that looks great on paper, like web site banner ads or the Republican Party or showing your boobs off at Mardis Gras.

Here’s how it works.  You don’t have a down payment, so somebody (you or the seller) pays a $499 fee to Nehemiah corporation.  Then the seller pays your down payment.  In return for the fee, Nehemiah in effect launders the seller’s money by turning it into private funds for the Nehemiah Corporation.  Some other private funds then come out of the Nehemiah Corporation to become your down payment.

Well, John, What’s Wrong With That?

Good question.  I’m glad I wrote it for you.  I’ll tell you what’s wrong with that.

Most importantly, what’s wrong with Nehemiah is that although the funds the seller’s putting in to Nehemiah may equal the funds that are applied to your down payment (not counting that $499 someone’s paying to make this work), they’re not the same funds.  Depending on gosh-knows-what, Nehemiah funds may or may not be available when it comes time to close.

So a Nehemiah transaction is one of those “maybe it’ll work” transactions.  In that respect it’s like an offer that’s contingent on the sale of someone’s house. 

Now there’s nothing wrong with a “maybe it’ll work” transaction in principle.  We have a seller or two who probably wouldn’t mind a “maybe it’ll work” transaction, because they’re competing with bank foreclosures.

But now let’s look at a bank that owns a foreclosure.  They want to get the home off the books, and they know that if they list it at 20% or more below comparable sales, they’ll have more offers than they can use.  These will be real offers, with less than 100% financing, where the buyer’s preapproved and there’s an excellent chance of closing.  These aren’t “maybe it’ll work” offers. 

Keep in mind that the bank owns this house to begin with because they loaned money to a “maybe-it’ll work” borrower.

Now along comes Norbert Nehemiah-Buyer, who has his heart set on the cheapest house on the far left of the bell curve, and asks the seller to accept a maybe-it’ll-work Nehemiah offer.

Thank you, Nehemiah Corporation.  Another down payment has successfully been prevented!

The Moral Of the Story?

This probably isn’t a moral some people will like, but here’s the moral. Bring a down payment.  It doesn’t have to be huge.  FHA offers excellent programs with 3% down payments, and the 3% can be gifted.

Related Articles:

I Love FHA

Short answer for the median priced home in Sacramento County:  $8,150 up front, plus $1,835 per month.

Read on for the longer answer.

If you’re buying a home (in Sacramento or anywhere — even, God help you, Boise), naturally you want to know what it’s going to cost.

In this article, I’ve taken the median priced Sacramento home and worked out how much it would cost you to buy it, and when you’d be paying what.  We’re going to be buying a $255,000 home, which as of a few weeks ago was our median selling price.

What I’ve tried to do in this article is put together a scenario that is:

• Accurate given current rates and information.
• Doable.  By doable I mean you won’t have to pitch lowballs all day in the hope that someone will bat your home out of the park, or write an offer using a program that wouldn’t work on a bank foreclosure.  (Most of our buyers are interested in foreclosures because of the savings).  In other words, I’m presenting you with what I believe is a reasonable scenario for an offer that stands a fair chance of getting accepted and that will actually close.

I’ve also tried to estimate high on some of these costs such as inspections, which may be $25.00 or so cheaper in some instances than I’m quoting here.  In any case all numbers are estimates, so actual numbers may differ.

For our scenario, I’ve assumed you’re going to get the seller to pay  your closing costs, but you’re going to be bringing in a 3% deposit for an 30-year, fixed rate, FHA loan at 5.875%.  Actual rates and APRs vary, but that’s approximately what we’ve been seeing lately.*  The 3% can be gifted, so if you don’t have savings, you can purchase a home using that perennial favorite — the same program my wife and I used — PDPMAP.  (Parental Down Payment Mooching Assistance Program).

OK, so what will you need in the way of cash, and when?

When you write your offer:   First, you’ll usually need $1,000 for a good faith deposit.  This amount is not set by law, but rather by local tradition.  Some bank owned properties require a 1% deposit (i.e. $2,550), but unless that’s the case, I usually recommend a $1,000 deposit.  Whatever the amount, you’re going to write a check to the title company when you write your offer and give it to your Realtor® — we send a photocopy of the check to the listing agent when we submit your offer.  The check itself is held in the file uncashed until your offer is accepted, then it is cashed by the escrow company.  When you close escrow, it’s credited toward either your down payment or closing costs.  If you cancel the escrow during your inspection period, you get your deposit back. 

While you’re in escrow:  Once your offer is accepted, there are a few more costs, including an appraisal ($400), a pest inspection ($100), and a whole house inspection ($400).  For all of these, you’ll typically need a check up front, but the cost of the appraisal will be credited back to you in escrow.

Closing Escrow:  Remember our scenario. There are a number of closing costs, but we’ve asked the seller to pay those.  We need a 3% down payment, but we’re getting a credit for the good faith deposit and the appraisal that we’ve already paid.  Three per cent of $255,000 is $7,650, but with the $1,400 credit, our remaining cash to close is $6,250. 

In other words, between the point when you wrote your offer and when you got the keys to your house, your total cost was your $7,650 down payment plus your pest inspection and whole house, for a total of $8,150.

Monthly Payment:   

Because you’re financing a fairly high percentage of the cost of the home, your lender is going to want you to use an impound account to pay your tax and insurance.  You’ll also be paying principle and interest, plus MIP.  MIP, or Mortgage Insurance Premium, is the FHA equivalent of PMI — it’s insurance you pay because you’re borrowing a large percentage of the cost of your home.  (Once you’ve paid down your mortgage to 78%, the MIP is canceled).  Your total estimated monthly payment for all of these (Principle, Interest, Tax, Insurance, and MIP) will be $1,835.

So there’s how we got to our answer.  The median priced home in Sacramento costs $8,150 up front and $1,835 per month.

For those of you who would like a bit more detail on what we mean by closing costs, the following is a somewhat more detailed version of what we just went over:

* This is an estimate from a Realtor — not an offer to lend.  We use independent lenders.  Please consult a lender for accurate APR information.

Related links:

I LOVE FHA.  I’m thinking of buying FHA some flowers and candy taking FHA to the movies.  If things work out I’m leaving my wife and moving in and having FHA’s babies.

I have several buyers I’m working with now in various stages from “looking” to “in escrow” who’ve been approved for FHA loans by my lender, Linda Spafford.

I have to admit, I haven’t been this excited about helping people own homes in awhile, and my buyers are loving the world, too.  One of them called me the other day and left me a voicemail that said, “I just wanted to call to thank you and tell you how excited I am.” 

That’s not bad.  At the end I also get paid.  But that’s not bad!

What’s even better is what she’s thanking me for.  See if this scenario would work for you:

• She’s buying a bank-owned home down in the same neighborhood as the home she’s renting now, and it’s comparable in size and age.
• Her monthly mortgage payment (principle / interest / tax / insurance) is going to be less than what she’s paying now in rent.
• She put 3% down, which she got from a relative (gift money).
• The seller paid most of her closing costs, so she only needs to bring in about $600.00 more to close.
• The interest rate we don’t know precisely yet because it isn’t locked, but there’s a good chance it will be under 6%.  Linda could get you a current APR estimate.
• 30 year fixed loan.  No pick-a-foreclosure option-ARM nonsense.

Now what’s really slicker than frog hair about that is not so much that we did that once.  That might have been a fluke.   But Linda just got some other buyers I’m working with approved for the same program.  Their rent is about $700 higher, in a different neighborhood.  But I talked to them tonight and sure enough, there are some bank-owned homes in their neighborhood that are priced well enough that they too have the opportunity to buy a home in their neighborhood for about what they’re paying in rent — maybe even less!

Anyone want to guess who I have to go meet on Sunday?

I’ve been thinking about all the news about foreclosures.  I work here in the greater Sacramento area.  Though I live in El Dorado County, which (along with Placer County) has experienced relatively few foreclosures, Sacramento County currently has more than fifty per-cent short sales and foreclosures in inventory.  Now granted, that’s not necessarily a huge number compared to all the homes in the area, since obviously being in financial trouble triggers a sale — most folks who own homes aren’t in foreclosure, and aren’t selling at any given time.  Still, it’s enough to get my attention.

A caricature of Realtors® is that we’re always pushing home ownership on unsuspecting victims.  I think the general consensus lies somewhere between the idea that we have hypnotic powers of persuasion to lure our victims into contracts they don’t want (much like the famous Hypnotoad, shown at right) or — less charitably — that we hit people over the head with shovels to get them into our cars, then take it from there.

Those Educated Internet Buyers - What’s a Poor Hypnotoad to Do?

Unfortunately, your standard Jedi / Hypnotoad mind tricks only work on the weak minded.  Most people I meet here on the Internet have too many information resources at their disposal to be an easy mark for these unscrupulous amphibians.  That’s probably why none of my buyers has (to my knowledge) ended up in foreclosure yet. 

Still, there may be some of you out there who are just itching to do it, so for those of you with a real hankering to financially self destruct, here are . . .

Ten Easy Steps to Foreclosure

1. State your income. 
   You may have heard that stated income loans are for the self-employed.  Don’t you believe it!  Full doc loans are harder to do so your lender doesn’t like them, and I know you want things to go smoothly for your lender out of gratitude for the wonderful loan he’s getting you, right?  And you don’t mind paying the extra half point or so to go stated, do you?  While you’re at it, forget about the fact that overstating your income is loan fraud, a federal crime.  A smart buyer like you isn’t afraid of some wimps at the FBI, are you?  The more you say you make, the nicer house you can get.  That’s why they call them “liars’ loans”, after all.
2. Don’t Pay To Run Your Own Credit - Your Lender Will Do It FREE!
   Here’s the thing.  If you run your own credit, you might conceivably talk one or more loan officers into checking into different loan programs for you.  That’s not good.  This might educate you as a consumer, and you might find eventually bump into a lender who’ll explain things to you.  Learning is the first step on the road to making stupid loan payments on a conservative loan package.  How are you going to get foreclosed on if you make loan payments?  Huh?  Plus, running your own credit doesn’t count as an inquiry, and your loan officer is counting on you worrying about making multiple inquiries, so letting them do it free for you locks you in quite nicely, doesn’t it?  So stay away from sites like MyFico.com.  I’m not even going to link to them because you’ll only end up running your credit and getting confused.
3. If your lender tells you you can afford the house, you can afford the house.
   Although most knowledgeable foreclosure-philes generally frown on talking to more than one lender because one or more of them might turn out to be ethical, one thing you should do is get as many opinions as you can about how much house you can afford, and go with the highest amount.  You’ll get a much nicer house that way.  If someone in your family has a calculator or spreadsheet or other budgeting tool and suggests a lower amount, you should argue with her until you get the most house that that nice lender said you could.  In fact, you should probably be looking at homes that cost more than that, because you can always talk the seller down.   And maybe you’ll see something you like even better that way.
4. Always remember:  your lender can refinance you later.
   Remember, the market’s going up! Up!  Up!  Sure, it’s going down now, but it’s going up in a few minutes.  (I think I heard it’ll be fine by Wednesday.)  The reason you don’t need to figure out a conservative loan that you can live with is that the market’s going up, and if you refinance later you can buy more house now!  Wasn’t it nice of that nice lender to tell you that you could refinance later?  He must really be trying to help you by offering to do that extra loan for you.  That stupid lender who said you could afford less house was only going to do one loan, and didn’t even offer to refinance you later.  He must just be lazy.
5. Refinance early, refinance often.
   Now that you have a really killer house, do you really still want to be seen driving that old broken down car of yours?  You have this great big garage, and all you’ve got to show for it is a five year old import.  You have some equity now.  Don’t you deserve a Hummer?  Besides, your equity’s not doing you any good unless you put it to use.  You’ve already by now picked out a hard working lender who generously doesn’t mind refinancing you, so go for the gusto!  You only live once.
6. Remember, the market will go UP!
   And of course, it’ll go up just in time!  So you don’t need a conservative loan.  In fact, come to think of it, hopefully you bought when the market was going up.  You don’t want to buy when prices are low, because good heavens, they may get lower (and what would your friends say to that).  Plus, if the market’s going down, the best way to pay for your house is with some kind of boring loan, and you won’t be able to refinance or get yourself a Hummer.  If you learn how to get foreclosed on, you can buy high when homes are popular, and then you won’t have to sell low, because the nice people at the bank will sell it for you.
7. If you can afford the lowest payment, you can afford the house.
   One of the great financial instruments of the twentieth century was the Option Arm, or “Pick-a-Pay” loan.  You may have heard that they’re appropriate for the self employed too, or for people whose cash flow varies.  But you’re not going to believe that either, are you?  (See “State Your Income”).  With a pick-a-pay loan, you get to pay either a lot of money on the loan, or just a little bit of money on the loan.  You’re not going to be a chump and pick the fully amortized 15 or 30-year fixed payment, are you?  That payment will be huge!  You won’t be able to buy as much house that way!  You might have to settle for a lousy older home or condo or rent for a few more years while you save.  Through the miracle of Negative Amortization, you can own the big brand new mansion you really want now!
8. Never mind what negative amortization means.
   You don’t need to know what negative amortization means.  “Negative” and “mort” — anything that sounds THAT depressing isn’t something an upbeat mansion-owner like you should spend time on.  You shouldn’t worry about it anyway, because the amount of negative amortization on the loan is limited, and you’ll still have the loan when you hit the limit.  I want you all to stop worrying about negative amortization right now, and never, ever, ever, look it up.  Also while you’re not looking things up, don’t look up what happens when you hit the limit.
9. The best thing to do with a document you don’t understand is sign it.
   The quicker you sign, the quicker you’ll get the keys to your new house!  Do you want to move in and throw a party for your friends, or do you want to waste your life reading and asking philosophical questions?
10. While we’re on the subject of reading…
    There are books on Amazon.com and lots of great consumer web sites that talk about loan programs, managing money, etc., but hopefully by now you’ve learned enough about ruining your credit to avoid all that highbrow academic stuff and get down to the real fun of shopping for the absolute most house you can afford, with a big garage for your new SUV!  Besides, reading makes you sleepy.

(This shouldn’t be necessary, but here it is:  You should be afraid of the FBI, and loan fraud is a serious crime.  This article is meant to be humorous and tongue in cheek only, and instructive only in a reverse-psychology sort of way).

If you’re going to be a part time mortgage blog junkie (and believe me, it’s very part time, because I have too much going to turn it into a full time hobby), you’re going to need a few good blogs to get you started. That’s why I’ve compiled this list, and in the wild-eyed, over-the-top enthusiastic tradition of the blogging world, I make bold to declare these blogs the Top Ten Mortgage Blogs in the Entire Galaxy.

It sounds a lot more impressive that Ten Blogs that John Lockwood likes — but it’s that, too!

Mortgage News Daily
This is an excellent mortgage news blog, one of my favorites. As with so many of these mortgage blogs, I wish I knew who the authors were, but that’s probably my only quibble. The quality of my blog makes up for a lot. I just hope they’re not from Tralfamador.

Calculated Risk
Described by its authors as a “hobby blog”, Calculated Risk is written by two anonymous authors who have an unfortunate habit of picking on “relitters” (I think they may need a spell checker). Be that as it may, this blog is an entertaining, opinionated review of recent mortgage and finance news.

LoanWorkout.org
This is a blog that favors and reports on the efforts of borrowers and lenders to come together to work out troubled loans when appropriate. There’s a lot of advocacy here that can sometimes get a bit heated, but this is also a good source of consumer tips for what to do if you’re having trouble making the payments on your loan and are facing foreclosure.

LendingClarity.com
Marc Brinitzer is a local Sacramento area lender who has regular reporting on rate changes and industry news of interest to both borrowers and Realtors®.

Illinois Mortgage Rates and News
In my other life as a web site developer, I helped Peter get his start on his blog, covering rates, industry news, and Illinois specific topics. A lender with many years in the business, Peter does an outstanding job of explaining topics like what factors influence your rate and commenting on the Internet “rate-race”.

Mike’s Mortgage Minute
I highlighted Mike’s blog once before. It’s good stuff. Check it out.

The Great Loan Blog
An anonymous Mortgage Banker in Los Angeles writes about these interesting times.

Blown Mortgage
This blog is written by a team of contributors led by a mortgage broker and direct lender who considers himself an “outsider” because he’s sick of seeing people get ripped off by bad mortgages.

Mortgage Lender Implode-O-Meter
This blog’s stated purpose is “tracking the housing finance breakdown: a saga of corruption, hypocrisy, and government complicity.” This blog consists of only short summaries of other articles, but what’s fun about this blog is that it publishes ten or so article links every day, so if you’re an absolute mortgage news junkie, this blog’s for you.

The Mortgage Fraud Blog
Run by an attorney specializing in mortgage fraud litigation, and highlighting mortgage fraud cases nationwide, the scams on this blog reads like a sort of Real Estate “Darwin Awards”.

I’ve been doing a lot more mortgage reading this week than usual, so I thought I’d share.

Countrywide Watching - The New Gladiator Sport
A lot of the news this week has been about Countrywide.  On Wednesday I was mesmerized on and off by watching its stock explore the depths below $5.00 per share on rumors of bankruptcy and accusations that they forged documents in a bankruptcy case involving one of their borrowers.  By Friday the news was that Bank of America was in talks to purchase Countrywide, so naturally it was time to make up a new rumor, this time that the Fed was behind the deal and the Federal Government is guaranteeing BofA against Countrywide-related losses.  Next week no doubt we’ll be watching “Countrywide, The Movie”, directed by Oliver Stone.

Mortgage Stocks In Trouble
To see how your other favorite lenders and mortgage related companies are doing, “Mortgage Cicerone” Tony Gallegos recently published this article showing about thirty-five troubled mortgage stocks. 

California is Up in ARMs
BusinessWeek recently published this map of the most prevalent Option Arm areas.  Looks like Sacramento’s fairly “light by California standards” — which is another way of saying we have more even in Sacramento than the state averages in other parts of the country.

But With All That BAD News…

Borrowers, Now Is a Good Time To Buy (And Not Just Because I Say So)
For borrowers who might be able to take advantage of a (generally lower cost) conforming loan, Daily Mortgage Reports had this article discussing changes afoot in loan fees, minimum down payment requirements, and credit based based pricing that will go into effect on March 1st, 2008 at Fannie Mae, with Freddie Mac to follow suit soon. 

The net result is that there may be more and better options available now than after March 1st.  However Huck Ferrill recently emailed in to tell us how FHA may fill in the gaps for 100% financing for some borrowers — Maybe we can prevail upon Huck to work that up into a future post.

Yesterday I had the pleasure of meeting Marc Brinitzer, author of the Sacramento mortgage blog, LendingClarity.com. Marc is a Mortgage Consultant and the leader of Big Valley Mortgage’s Team One.

Real estate blogs have been around for some time. Mine was one of the first in this area, but recently a handful of competitors have started blogging about the Sacramento area, and there has been an explosion of new blogs being launched by other Realtors® in other areas. Mortgage blogs are fewer in number. Google returns 12 million results for “Real Estate Blog”, but just under 2 million for “Mortgage Blog”. So you might say with some justice that Realtors are six times more verbose.

I came across Marc’s blog lately and thought it had some really good work — so we’re fortunate that the first mortgage blog I stumbled on for our area is a real keeper. For example, his most recent discussion of Risk Based Pricing talks about how as lenders tighten their underwriting guidelines more and more, it’s more important than ever to keep your payments timely and your credit pristine, since even in A paper world will start to stratify. To paraphrase Orwell, all A paper borrowers will still get the best rates, but some A paper borrowers are more A paper than others.

Marc also drew my attention over coffee to a great article he wrote about these Countrywide Shenanigans (and I’ll let you follow his links from there to learn how to avoid selling your soul to the Devil).

Marc and I may be doing an article swap or two in the near future. I may be doing some more Mortgage reporting of my own going forward, since I am taking a very serious look into creating an in-house lending solution for those buyers who would feel they’d benefit from it. Be that as it may I do think that Marc’s blog has a lot to offer and you should check it out.

OK, help me out. When gas prices go up, that’s bad. When the price of healthcare goes up, that’s bad. When the price of groceries goes up, that’s bad. Yet when the prices of homes go down, that’s bad?

Well, it is if you’re using the equity in your house to pay for your groceries, your healthcare, and your gasoline, I suppose.

But if you’re looking to get out from under your landlord, that’s good! (Unless the prediction about rising interest turns out to be true. So far I’ve been wrong about that issue myself, and expected it to rise more and sooner than it has).

Here’s some more crystal ball stuff.

I thought I’d be contrarian today, just because. Hope Christmas was good for everyone and if you’re considering buying a home, read this article and projection for 2008 and see why this is the best time in years to do so.

While you’re reading that, it might also be a good idea to head over to Yahoo Finance and read this one which suggests that you skip the 20% down payment, which has become so common today as advice to everyone.

I’ve always said you should read all sources and then make up your mind.

First-time buyers have traditionally bought with zero down, or the help of a gift from a relative for a down payment. However, this traditional method of buying a home might be in trouble. According to my mortgage sources, at least two mortgage insurance companies will limit mortgage insurance to 95% loan to value by the middle of January in California. Chances are the others will follow.

This means that mortgages might have to be reduced to 95% of the value of the home. Therefore, no 100% financing.

First-time buyers, if you have a house in mind, now is still a good time to get in before the loan available to you is gone. Escrows are typically thirty days, so there might still be time to get in before this rule changes, as so many others have in lending lately.

Beyond the middle of January, be prepared to have at least 5% down to buy a home. Gifts from relatives however can count toward that 5%.

One of the things I love about my job is that skipping out of a business meeting with John by saying, “I have to go watch Oprah” is a perfectly legitimate excuse.

But only if Suze Orman is on. So I can write about it the next day.

The financial guru was on yesterday and unlike her own show, which I don’t watch any more, she spent most of the time answering questions. Although the platitudes in the first half of the show got to me a little, here was some concrete advice for homebuyers, which I thought was pretty well-grounded.

1. Expect to add 40% more expenses per month to your rent if you wish to buy a home.

2. Have 20% down. If you don’t, buy PMI (Private Mortgage Insurance) upfront.

3. Unless you know what you’re doing and have a plan for it or you are a sophisticated investor, stick with a fixed rate loan.

4. If you can’t afford your home, you must sell it and buy something you can afford.

5. Sellers must drop the price of their homes to the point where they sell and lose all attachment to any numbers they may have in their heads.

And lastly,

6. After saving six months of reserves for emergencies, the best investment is to save 20% for a home. It’s the best tax advantage a person will have in the years to come.

There’s definitely been a shift in the market and while all the inventory available will take a while to dry up and regain “normalcy,” I’ve begun to notice foreclosed homes being priced more competitively than six months ago. And that’s definitely having an effect. I was out with a buyer yesterday looking at homes in Natomas and of the four homes we had been considering two weeks ago, two were pending. All four were bank-owned properties.

Six months ago, the situation was different. Foreclosures were priced at 2005 values. Today, foreclosures are where the bargains are.

Banks are finally getting it right!

Breaking news… there had been a lot of talk about this lately. And it’s finally happened.

Read about it here.

A number of social justice activists and others have pointed out the relationship between race and poverty and predatory lending practices. For example, the Center for Responsible Lending has published a study on Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages, documenting that African-American and Latino borrowers receive sub-prime loans more often than white borrowers, even when their credit history and other lending qualifications may qualify them for a more inexpensive loan.

Unfortunately, the geographical pattern of REO (Real Estate Owned, or “Bank Repo”) sales in the greater Sacramento area tends to support the idea that the link between predatory lending and race may be a very real one indeed. I recently examined the percentage of sales that were foreclosures (REOs) for the period January 1st, 2007 to August 21, 2007. Aside from a few statistical oddities, overall the pattern was pretty clearly one in which the most foreclosures occurred in the poorest neighborhoods.

Of course, just based on such a study, it’s impossible to say how much predatory lending is the culprit, and how much can be attributed to the rather banal idea that living in poverty may make the choice between food and the mortgage more of a common one than it is for rich people.

Back in the early stages of the nationwide and Sacramento real estate market correction (or, depending on your point of view:  “downturn”, “collapse”, or “debacle”), a few of the folks who read the bubble blogs chided me for being too bullish on the market.  At the time I argued with some success that I wasn’t being bullish, I just wasn’t joining them in the bubble-bear’s picnic (much as I enjoyed the song of a similar name).

What I did at the time, and what I still do, is publish the numbers.  When the numbers drop, I said they dropped (whereas a real dedicated bull would say they “adjusted”).

Nevertheless, I suppose in some sense I always tried to overcome my innate pessimism by retaining a certain optimism about the state of the industry that does, after all, feed me.

I must admit however that in the last couple of days I was pretty shaken by two things, one in the press and the other in my practice, with the one in the press shaking me a bit more.

The article in the press was the Sacramento Bee’s article reporting on Countrywide was tapping a relatively high-interest credit line for cash.  The article also reported that the Moody’s credit rating agency has downgraded Countrywide to their lowest investment grade, one step above their highest rated junk bonds.  Although on the plus side a Moody’s analyst was quoted as saying that Countrywide was probably liquid throughout 2008, the very possibility of a major player like Countrywide being in trouble was enough to shake my confidence in the wider economic outlook, and certainly give me concerns over the money supply and the outlook for rising interest rates.

The second thing that shook my confidence somewhat and made me question “how low is down” were what seemed to me to be some fairly rapid increases in the decline in prices on condos.  One offer I’ll be working on today for an investor is for a condo in a subdivision and size that a month or two ago I was showing to another investor for 18% more!  Of course, that’s a single data point, so by itself it’s not a cause to go jump off a bridge if you own a condo in Sacramento, but it was nevertheless surprising.  At the same time I found some other condos that were selling around the peak for $180,000, now being offered in a couple of instances (as is, distressed sales) for about $120,000 to $125,000.  Granted, we’re comparing “best of breed” to “distressed sales”, so to some extent this comparison is unfair, but you might say the drop is on the order of $165,000 to $120,000, which is still about a 37.5% drop over two years. 

As is conventional wisdom, condos are “the last to rise, and the first to fall.”

Until now, when publishing the real estate numbers, I’ve always maintained that we’ve been dropping, but falling at a rate that’s been mild compared to the rate of increase.  Though this is pretty anecdotal evidence, it seems clear to me from the last couple of days of showing that the rate is accelerating, at least for condos.

My recommendations based on the above?

• If you’ve despaired in the past of getting positive cash flow in Sacramento with a reasonable down payment, we’re at the point where that may well be turning around for many properties.
• If you believe Countrywide is on the verge of collapse, don’t buy unless you plan to hold for ten years or more.
• If you don’t believe Countrywide is on the verge of collapse, don’t buy unless you plan to hold for five years or more.
• Try to time the bottom if you have cash.
• If you’re in a position like my investor where the exchange rate makes now a favorable time, or if you’re depending on financing, buy now, especially if you’re in the market for a condo.

The first item is probably most important, because it’s a lot easier to hang in there waiting for the upturn when you’re creating cash every month than when you’re investing it.

Of course, these are (in the language of stock market disclaimers) forward looking statements.  You should base your buying decisions on your own research and considerations of the economy, cash flow, and other factors.

Today Purva’s journey to the bright side of the force was complete, as we went over to the El Dorado County Association or Realtors® to get her signed up with the local board.  This is symbolic move more than anything, really, since we all in the Metrolist MLS area and therefore cover the whole greater Sacramento (Yolo / Placer / El Dorado) area.  After the usual Realtor® ritual (”the sharing of the paperwork”), we went over to Colina de Oro (which translates, by the way, as “Hills of Gold”).

There I had the pleasure of meeting Huck Ferrill, a mortgage banker with First Security Loan who comes highly recommended by Purva, and who impressed me as a highly competent and knowledgeable lender who’s very thorough with his borrowers.  I expect to hear more from Huck in the future because Purva recommends him so highly.

One of the things I think about when I talk to other Realtors® in the company about the good people they use to get things done for our clients is that at some point we really should have a recommended vendor list.   Even though we can’t guarantee the performance of another, we always think it’s helpful when we can give referrals to folks who do an excellent job, whether it’s lenders, title people, contractors and tradespeople of various types, etc.  So that’s something to add to my big list of things to do.

So if you’re shopping for a loan, I am confident that Huck can do a superior job for you, and it’s at least very much worth your while to get a quote from him.  Huck can be reached at 916-788-9802, or visit him online at http://www.huckferrill.com.

This is a by the way post, but I believe it is an important by the way post. After the recent wildfire in Tahoe which I have written about http://www.sacramentohomeshopper.com/blog/2007/06/26/tahoe-fire-and-this-realtors-realization/ I realized most people are not prepared for the worst if it happens. Most people have home insurance, but what about replacing all the things we have in our houses? Here are some tips:

1. Do check your home insurance regularly to see if you’re fully protected. Do not assume you are.
2. Do not let your home insurance lapse. If your mortgage company is paying the bill through an impound account, make sure they have paid it each year.
3. Real estate is one of the best investments precisely because you can insure it. Can you imagine insuring the value of your stock portfolio? If you do move from your primary residence and turn it into a rental property, do not forget to change your insurance to “tenant-occupied investment property.” Your homeowner’s insurance will not protect you in this case.
4. Take a home inventory. Most home insurance will cover articles in your home, but it helps to have a list of everything in your house. There are quite a few internet sites that will let you do just that - upload pics for every room and list inventory. I use A Safe Spot at www.asafespot.com but there are others. Google “home inventory” and pick the one you like.
5. Lastly, do not use your home insurance unless you really need it. If you do, be sure to save receipts of what you fixed. When it comes time to sell your home, the buyers might run into trouble getting home insurance if there’s been a claim in the last three years on the property unless you can prove that there has been work performed. After a 45 day escrow, you don’t want something like this to hold you back from the sale!

I just ran across a really good mortgage blog that I hadn’t seen before,  Mike’s Mortgage Minute.  Mike really shows his strong sense of human decency (in marketspeak, we say “consumer oriented focus”) in  his post, No Sersiously.  Thinking one great post might be a fluke, I scrolled down to The System and found the same compelling prose and a man with a very well developed BS dectector indeed. 

Apropos nothing, he’s also worked with the same software I use all the time to blog with, Windows Live Writer.

He’s worth a read.  Go check him out.

I attended a seminar put on by the folks at Strategic Credit Coach on Friday. Their seminar was a lot better than their web site (http://www.strategiccreditcoach.com), on which I don’t have permission to access /.No, and I shouldn’t need permission to access /. That’s what index.html is for. Or whatever else is specified in httpd.conf. Trust me on this one.

The seminar was a mixed bag. On the one hand, there was a lot of good information about the importance of good credit, and how to go about improving one’s credit score. It gave me a strong desire to check out, begin monitoring, and improving my own credit scores, and to think about how I might help clients in a similar situation. However, it left me somewhat skeptical about the credit coaching business. On the negative side, the biggest thing that caught my eyes were the fees involved, which are probably reasonable given the level of coaching and effort provided, but still problematic, I thought. For six months of credit coaching and repair efforts, this company charges $995 for an individual, or $1495 for an individual with spouse. The first thing I thought of when I saw that was than anyone with a real need for the program probably didn’t have that kind of money. In retrospect I wish I’d ask them when they charge those fees, in light of the fact that they’re not supposed to do it up front. (See Title IV of the Consumer Credit Protection Act regarding Credit Repair Organizations).

I would urge anyone who’s looking to improve their credit to make this FTC article “Credit Repair: Self Help May Be Best” your first stop. I know in my case, my financial situation always tends to improve markedly whenever I pay enough attention to it. In looking over the wealth of other materials on other web sites (and even a few articles on this one), I feel a separate article on Credit Improvement Resources beginning to gel. Stay tuned.

A seller of mine received an offer recently with the following clause in it:

Seller to contribute 10,000 referral fee to [deleted] Financial at close of escrow.

Where do I begin? According to the attorney I spoke to (disclaimer: I am not a lawyer), believe it or not this may not be a RESPA violation according to the letter of the law, inasmuch as it’s not one settlement provider providing a kickback to another settlement provider, but one of the parties to the transaction doing the kickback. However, this certainly violates the spirit of RESPA, the intent of which was to lower consumers’ settlement costs.

As it turns out, however, the purpose of this “referral fee”, was to refund cash to the buyer. As the lawyer was nice enough to confirm for me, that pretty much unambiguously constitutes loan fraud, since money in the settlement statement going to some third party lender was actually being returned to the buyer. That’s a no-no, as you can read about here, or in even more detail here.

There’s also a possible code of ethics violation here, inasmuch as section 16.16 of the Realtor® code of ethics prevents the buyer’s agent from using the purchase agreement to negotiate a commission, which this offer effectively does. But let’s leave that aside for a moment, because the agent in this transaction was writing up the offer the buyer asked her to write. (Actually, the agent in this case struck me as pretty much an honest albeit newer agent who was being asked to do dishonest things — not as the one leading the charge over the cliff).

So, back to the loan fraud issue. Naturally, I advised the seller to counter out this part of the agreement, and we did so. This is when things really got entertaining. Through her agent, the buyer sent me a letter telling me that this “referral fee” must be included. When his agent educated him that doing business this way was illegal, the buyer’s response was — as you may have guessed from the title — “everybody does it”. We suggested a few different ways we might legally put the transaction together, but the buyer was adamant.

“Everybody does it.” Try that on the IRS when you evade your taxes. Or even better, try it on the policeman next time you’re caught doing 90 in a 65 mile per hour zone. Well, gee, officer, everybody does it.

When the agent discussed the issue with the buyer’s mortgage broker, the mortgage broker’s proposed “solution” was to have the seller just kick back the money to the buyer outside of escrow, without writing anything up. No doubt this approach was informed by the age-old ethical principle: “Murder is not a crime if you bury the bodies deeply enough so you don’t get caught.”

Interestingly, California’s Department of Real Estate, which lists for public use the license history and disciplinary actions against any licensee you may want to look up, shows for “[deleted] Financial” that one of the corporate officers had a suspension of his real estate license at one point.

Consumers, a good starting point when you’re selecting a real estate company or mortgage broker is to check the Department of Real Estate’s license information. Anyone who was crooked enough, often enough, to get the DRE’s attention probably is a bit shadier than you might feel comfortable with. Yet there are literally thousands of licensees in there who don’t have any disciplinary remarks in there.

And the reason? Everybody doesn’t do it.

Well, what do you know! It’s time for another transaction to close (at least, that’s what the contract says), and once again the dog has eaten the loan processor’s homework.

I’m not the number one producer of North America or anything, so this definitely isn’t meant to brag, but in the time I’ve been in business, it’s fair to say I’ve closed a few transactions. Some day I should get out a scratch pad and try to review the percentage of times that the escrow didn’t close on time because loan docs didn’t come in. There is a crisis in veterinary medicine, as our hapless canine companions seem to have acquired a taste for loan docs, and are breaking into banks and loan offices around the nation to stuff these delicious morsels into their maws.

Over the course of the years I’ve heard lots of different valid reasons (and lame excuses) for why we didn’t get our loan docs, including:

• This was a hard loan to do.
• The buyer didn’t send their paperwork in on time.
• The title company fouled up.
• The Realtor® fouled up. (Attention loan officers: don’t try that one on me unless I really did foul up or unless you don’t like referrals).
• A power failure corrupted our data.

Now that I’ve been in the business for some time, I’ve begun to recognize an unfortunate duty to tell my buyers at the beginning of escrow that we’ll do everything we can to close their escrow, but there are a lot of people to coordinate, and if anyone’s late we may be a few days late. My buyers are generally understanding, but I hate telling them — it’s like apologizing for inevitable defeat on behalf of the industry. “Yes, I know moving is stressful and needs to be precisely coordinated, but underwriters have these dogs, see, and these dogs…”.

There’s no way to put it correctly and politely, because it isn’t right. Attention underwriters and loan processors: grow up and do your job.

FOR THE FIRST TIME HOMEBUYER:
START PLANNING AHEAD!

I have found that most first time homebuyers decide that they want to buy a home on a whim. However, this makes it harder to qualify to purchase a home. Here are some steps to prepare to buy a home:

• Build your credit. The CalHFA (California First Time Homebuyers program) requirement is a 620 FICO score. Many first time homebuyers don’t understand how to build up their credit. Here are some tips:
  • Have at least three revolving accounts. For example, a car payment and two credit cards.
  • Keep the balances of your credit cards at about 30% of the maximum limit. (I.e. if your credit card has a $500.00 limit, then keep your balance around $150.00 and continue using it and making payments.) This shows consistency in repaying your credit.
  • Keep your accounts open. Many people close their accounts after they pay them off, but it is much more beneficial to leave them open. The credit bureaus consider the length of credit history. If you continue to close all of your credit cards after you pay them off, you will have no lengthy credit history. So hold on to those store credit cards and maybe just use them every Christmas and pay them off before the next holiday season. Also, the more available credit you have, the better your score will be!
  • Make your payments on time. Collection accounts will stay on your report even after you pay off the balances! Avoid these derogatory accounts at all costs. Should you get them, pay them off as soon as possible. If you are thinking about purchasing a home, either wait to pay these collections off until after you purchase or a year before you are planning on buying a home. The reason for this is that it will make them active when you pay them off and will actually lower your score. So if you wait a year after paying off your collections and let them be closed and seasoned, they will no longer hurt your score. Make sure you rebuild your credit after having collections by making new active accounts.