MORTGAGE RATES REPORT

Tales From the San Diego Foreclosure Crypt

What do foreclosures, code violations and stories around the campfire have in common? They’re all frightening of course! But what if you combined them into one big, scary tale? We’ll need a monster, of course - but that part’s easy. We’ll use the most powerful, most evil monster known to man. A creature so singularly alarming that every time it is involved, no matter what the story, the scary title remains the same:

“If We Weren’t the Government, We’d Be Arrested For This.”

Once upon a time, the local government stumbled upon a great way to increase revenue: heap hidden, onerous fees onto some of the people buying foreclosures, virtually guaranteeing their failure. Sound frightening? Good, then you’re in for a treat. Booooooooo…

 

Here’s how it goes: Mr. & Mrs. Homeowner incur a number of code/zoning violations which they dispute with the local authority. During this time, hardship befalls them (or maybe it’s a bad loan, or a big, bad wolf - either way the result is the same) and the foreclosure process starts its evil dance around their hearth. “To heck with you, city power brokers,” they scream, “we’ll not pay a dime of your fees or your penalties. We’re losing the home to foreclosure and you can go pound sand.”  The city/county sees that the house has gone into foreclosure and gets scared. Why? Because now those code/zoning violations will prevent the next owner from selling the house… and the next seller is the only thing more hair-raising than the government: Banks! These are dire straits for the henchmen of the local authority; what to do?

 

But you, gentle reader, should know by now to never underestimate the creativity of evil. In the middle of the night, these men and women of authority sneak into the recording office. Moving with the ease and confidence of the protected, they move through the records and with nauseating glee they PULL all the red tags off the books! “The horror… the horror.”

 

That’s right, now if anyone like… oh, say an REO agent or a title company or even a buyers’ agent researches the property, it’s free and clear and ready to go. Hey, that sounds pretty generous on their part, doesn’t it? Yes, maybe too generous? Good on you for paying attention because the other shoe is about to drop (actually, it’s more of a swift kick than a drop…) Soon thereafter, a nice young couple buys the foreclosure and makes it their home. With dreams of white picket fences and evenings by the fire, they never see it coming. They never checked under the bed or inspected the closet for monsters. Suddenly it happens: they get a visit from the code enforcement people. Somehow, mysteriously, all those red flags reappeared on the property.  “Hi, Mr. & Mrs. Naïvete.  Congratulations on buying your new home. You owe us $100,000 in fines and penalties. Have a pleasant day and a better tomorrow.” Ahhhhhhh!

Sound far-fetched? I spoke this week with the managing broker for one of the biggest “big-name franchises” here in San Diego. He currently has TWO of these in his office, both levied by the City of San Diego and each totaling nearly $100,000. I also spoke with two agents from two different offices who had each dealt with a client that received almost $200,000 in fines and penalties in their Welcome Basket from the County of San Diego. In each of these cases the title company had no idea nor did the agents involved. It’s not covered by homeowner’s nor E&O. In the very best-case scenario, the new homeowners are going to spend thousands of dollars paying lawyers to defend themselves. In the worst case scenario, they’ll lose the house. Oh, and for you real estate agents joining us tonight by the campfire… there’s a good chance you’ll be sued too.

Let’s all stand back in awe of the monster’s never-ending creativity and moral equivalency. I guess if you run your own financial house into the ground far enough, you can rationalize just about anything. Sweet dreams…

How Important Are First Time Home Buyers To the California Real Estate Market?

I asked my LinkedIn community how important first time home buyers were to their (local) real estate market. 

Rosemary Joles of San Diego said:

Many of the San Diego first time home buyers thought they had been priced out of the market at the top of the real estate boom. They now are beginning to realize they can fulfill the dream of home ownership again here in San Diego. 50% of my business is first time home buyers, so they are extremely important to me. In addition they are very important to the revitalization of the housing market as a whole. Especially since they make up 41% of the current market share.

I agree, Rosemary.  Two years ago, I warned of the impending collapse of the under $500,000 market in San Diego County.  Last year, I thought that market would be robust this year and that the $500,000- $1,000,000 market would suffer due to lack of available financing.  As it turns out, I was right both years.  I think we'll continue to see "bargains" in the under $500,000 market, well into 2010 and increasing value in the mid-priced homes, as its prices collapse.

Will Handley, a Los Angeles home inspector said:

First time buyers are the industries life blood. My business expands and or contracts based on the healthy in-flow of new first time buyers into the market. With employment numbers in decline, the corporate transfer client base is shrinking as well. Thank goodness for the exceptionally robust REO market.

Amen, Will.  The REO market (foreclosed homes being offered by the bank) isn't just healthy for the real estate industry, its healthy for the economy if we intend to battle back from this recession. 

John Pucciano, a REALTOR in the DC-area, remarked:

At this stage, particularly with the $8,000 stimulus credit for first time buyers, low interest rates and affordable housing, first timers make up more than 40% of my business. This appears to be more than a local market experience (see resources below). While they do require additional effort, it is very satisfying to help the first timers progress to home ownership. I have been making a concerted effort to reach out to them.

John's correct.  The $8,000 tax credit, for people who have not owned a home in the past three years, is akin to federal bribery.  Simply put, the Government is willing to give you eight grand if you'll buy a home between now and December 1.  I think the problem is that many first time home buyers either:

(a) don't know that the program expires December 1, 2009
(b) don't believe the Government will stop the program.

I can't intelligently speculate about the unpredictable actions of our Government but I do know that its prone to do whatever will garner them votes.  Unemployed, unhappy people don't vote for the party in power so take that into account.

Don't Fret About Foreclosure. You Can Make A Comeback.

Can’t afford your mortgage?  Call your lender and ask them to modify the loan to a payment you can afford.  The lender representative will ask you for a stack of paperwork and try to get you to keep paying “something…as a sign of good faith”.  After three or four months, you may receive an offer to reduce your rate to 2-3%, for a five year period, to “get you over the hump”.

You still owe the money you borrowed, though.

The house is worth less than what you borrowed?  Ask for a principal reduction.  I tried helping distressed borrowers with the Hope For Homeowners Program; my efforts failed miserably.  Andrew Adams told me it would flop and it did.  We did SOME good (without the H4H program)…for about half the borrowers but the program was a flop.  Now, President Obama is trying to “entice” lenders to refinance your loan to 105% of its current value and empower bankruptcy judges to “cram a reduced loan amount” down the lenders’ throats.

I’m not so certain that will work, either.

The social ramifications of what Greg Swann calls middle class welfare are far reaching.  An angry cauldron, fueled by the resentment of the folks who are current on their mortgage, is bubbling over today.  Let me give you an example:

Two houses, on the same street in Santee, CA, were bought for $500,000, in the summer of 2006.  Eileen was a move-up buyer who plunked $150,000 down on her home.  Lou bought the home with zero-down financing.  Eileen refinanced her home loan to 4.75% last month, bringing about $35,000 to the closing.  Lou hasn’t made a payment in three months, has had his foreclosure stalled, and is hoping that March 4 will bestow a bailout upon him.

Eileen is pissed off and she ain’t alone.  What worries me isn’t whether or not the Obama mortgage plan is fair, it’s that the implementation of it could result in civil unrest.  Don’t get me wrong, the bailouts of the stupid banks who financed you are perhaps the greatest evil foisted upon our economy but now we’re pitting neighbor against neighbor.

Let me recap the “bailout” for you; not the banks but YOU.  The government tried to mitigate with a program that offered hope; FLOP.  Now, you can get your mortgage refinanced….maybe…IF, you can demonstrate that you can’t make your payment and miss a few of them.  If the lenders won’t play ball with this plan, you can voluntarily file bankruptcy and hold your breath that you get a compassionate judge to force the banks to give give you another shot.

There is another option. Let me show you an example of what I see in the same street:

Lou is paying $3,500/month for those mortgages (which he can’t afford).  Tanya is renting the house next door for $1,500/month.

Here’s the solution, Lou; walk from the mortgage.  Mail your keys to the bank and rent the house down the street. If the “teaser” payment was $2,500 (and you could afford that), save the $1,000 each month, for the next three years, and buy back your old house in 2012.  The FHA 203-b loan program allows borrowers, who have a foreclosure that is older than 36 months and have re-established credit , to obtain an approval.

Walk today and buy that same house back in 2012. Do you really think it’s going to cost a whole lot more than it’s worth today?

Consider a comeback if you will. It’s a great American tradition.

National Licensing of Mortgage Originators: STOOPID

Mortgage originators do not have a national licensing program and THAT has to change!

I propose that the House Financial Services Committee get cracking on legislation that would increase the minimum standards of loan originators.  Here is what I think would be appropriate:

1- A minimum of a Bachelor's degree in a business discipline.  If originators are going to be advising people on the largest financial decision of their life, they need to have a basic understanding of finance.  Graduates of non-business disciplines can go back to college for a year to take the requisite business courses.

2- A two year practice program where an originator works under the direct supervision of a "Certified Mortgage Originator".  This program is much like the one for a CPA and is long overdue.  Only after originators perform slave labor will we grant them the license.

3- A 16 hour test that encompasses the financial disciplines of real estate law, taxation, financial planning, and ethics.  It should be so prohibitive that only half the test-takers pass.

4- Continuing education requirements of a minimum of 16 hours each year. That sounds good.

5- A national registry of loan originators like the NASD.  Why not? 

There are 250,000 loan originators in this country today.  This licensing should drop the number of qualified professionals by over 75%.  We can expect about 50-60,000 loan originators after the licensing is enacted.   This is what we can expect:

1- Consumers will feel confident that the originator has passed a rigorous licensing discipline.  They will stop shopping and star trusting the "Certified Mortgage Originator' to give them the best deal.  Consumers will no longer have to perform due diligence and credibility checks. Furthermore, millions of dollars will be saved on advertising. No more spam in your inbox.

2- Fees for arranging loans can skyrocket! Those high fees will prohibit consumers from refinancing their loans or taking equity out of their home.  The economy will slow down and real estate prices will come back to 2001 levels- much more realistic.

3- Licensing will slow down the loan process which is great.  Consumers make too many hasty decisions and use the equity in their home improperly.  Now, the licensed loan originators will be required to make sure that cash borrowed against the equity in their home is suitable.  Sure, Lexus and Mercedes sales will drop but the consumer will be protected from himself.  Many consumers also buy homes that are far too expensive for them.  Making the Certified Mortgage Originator ask the client the hard questions is good. 

Do I sound a bit cynical here?  I should because occupational licensing is all about making the licensees fat, rich, and lazy.  Greg Swan calls it Rotarian Socialism.  And, I'm all for it...I'm sick of working hard for my money.

The Chargers Will Win the SuperBowl

Okay, how stupid is that remark?

The San Diego Chargers are the absolute best team in the NFL. They had the best record, had the best offense, and had a top-ranked defense; all the statistics say that they are the best team.

The Chargers lost in the first round of the playoffs.  Thus, they are ineligible to play in the Super Bowl. 

The Chargers would have been the best team if they stuck to their game plan against the Patriots.

Allright.  Let's stop this inane conversation right here.

The Center For Responsible Lending says that one in five homes with a non-prime loan, obtained in the past five years, will end up in foreclosure.  They released the report "Losing Ground" in December. 

Gosh, that sounds more unrealistic than the Chargers winning the Superbowl.

They say that real estate prices are plummeting, people got risky loans where they didn't have to prove their income, and subprime borrowers are deadbeats that never get ahead in life.

Hmmm...what about the fact that over 90% of non-prime loans DO prove the ability to repay the loan?

Yes...but...

How about the fact that California is predicted to have a severe housing shortage by 2010?  Prices rise when supply can't keep up with demand.

Okay...but those deadbeats...

...who bought their home in 2004 with a non-prime loan (because they had no downpayment) in Northeast Los Angeles are some $200,000 richer. That's one RICH deadbeat.

But the Center for Responsible Lending says that the equity will just evaporate!...so Ha!

Okay, okay...you win...want to bet the Chargers don't win the Superbowl this year?

MORAL:  Anyone can call themselves a "Center" and spook you with funny numbers; don't believe the hype.

                                                                                            

Okay, how stupid is that remark?

The San Diego Chargers are the absolute best team in the NFL. They had the best record, had the best offense, and had a top-ranked defense; all the statistics say that they are the best team.

The Chargers lost in the first round of the playoffs.  Thus, they are ineligible to play in the Super Bowl. 

The Chargers would have been the best team if they stuck to their game plan against the Patriots.

Allright.  Let's stop this inane conversation right here.

The Center For Responsible Lending says that one in five homes with a non-prime loan, obtained in the past five years, will end up in foreclosure.  They released the report "Losing Ground" in December. 

Gosh, that sounds more unrealistic than the Chargers winning the Superbowl.

They say that real estate prices are plummeting, people got risky loans where they didn't have to prove their income, and subprime borrowers are deadbeats that never get ahead in life.

Hmmm...what about the fact that over 90% of non-prime loans DO prove the ability to repay the loan?

Yes...but...

How about the fact that California is predicted to have a severe housing shortage by 2010?  Prices rise when supply can't keep up with demand.

Okay...but those deadbeats...

...who bought their home in 2004 with a non-prime loan (because they had no downpayment) in Northeast Los Angeles are some $200,000 richer. That's one RICH deadbeat.

But the Center for Responsible Lending says that the equity will just evaporate!...so Ha!

Okay, okay...you win...want to bet the Chargers don't win the Superbowl this year?

MORAL:  Anyone can call themselves a "Center" and spook you with funny numbers; don't believe the hype.

Predatory Lending Legislation Penalizes the Responsible Borrower

Predatory lending laws get proposed by ambitious Attorneys General (like Lori Swanson of Minnesota)and I come off sounding like one of two things:  an industry apologist or a libertarian whacko.  I suppose  I’m much more of the latter than the former but I’d ask you to see past  both my industry and political afflictions and read why legislated loan guidelines just don’t make sense.

Predatory lending legislation, while well-meaning, ends up penalizing the very people whom it was meant to protect.  Banks and lenders simply refuse to lend in areas where the government legislates loan guidelines.  Ask a Cleveland Realtor about the exodus of sub-prime lenders from their fair city some 3-4 years ago.  Georgians will tell you that some lenders simply stopped lending in Georgia until the state addressed their predatory lending legislation.  North Carolina celebrates it’s sixth year of “success” of its benchmark predatory lending bill with a rising foreclosure rate and few lenders prepared to give borrowers a second chance.

I posted Predatory Lending Legislation Can Prey Upon the Responsible over on  Bloodhound Blog today.  Here I suggest that proposed predatory lending legislation penalizes the 96% of the consumers who borrow money and are not in in trouble.  If you outlaw negative amortization loans  (as North Carolina did for high-cost borrowers) or prepayment penalties (as many states have done),  lenders just won’t lend in your state.  That is patently unfair to the consumer who does know how to manage her affairs.

Dan Green, fellow former Philadelphian, (like me) and author The Mortgage Reports  points out how the IL HB 4050 failed the consumer. A down-on-his-luck borrower may lose over $100,000 in equity, equity he spent a long time building, because the government decided that he needed protection from those big, bad banks.  Sad, indeed.

Should state governments take the stance that if lender’s won’t play by their rules they should just get the hell out of their state?  They will, which reduces a consumer’s options, lowers liquidity in an already illiquid market, and ultimately drives home values lower.  That, hurts responsible homeowners.

I applaud new Minnestoa Attorney General, Lori Swanson for her zeal to flush out the despicable practice of predatory lending.  I implore her commission members to focus on penalization of the rogue originators rather than legislated loan guidelines.  Minnesotans can’t afford the latter.

READ: Lies, Lies and More Affordability Indexes (sic)  by Sean Purcell.

         

(Un) Fair Lending Acts and Your Loss of Rights by Ken Cook

It's Just A Little Skin

How do you criticize this?

From an e-mail:

  My name is Gina Elise and I am a 24-year old UCLA grad–spent my first two years at UCSD. I have just completed producing the 2007 “Pin-Ups For Vets” calendar fundraiser which brings in funds for hospitalized Veterans’ programs and also provides a fun pin-up calendar to hosptialized Veterans. I am hand-delivering calendars from donors to the Veterans in the hospital—and I also am sending calendars ordered for deployed military in care packages to Iraq and Afghanistan. Each donor who purchases a calendar receives an acknowledgement from a VA Hospital staff member.

I guess I'm capitalizing on the prurient nature of an attractive young lady in undergarments but her cause is just and I like the 1940's style pinup gals.  If your wife forbids you from hanging this in your workshop, you can do your thing for the brave men overseas and buy a calendar for one of them.

Now I'm an equal opportunity kind of guy.  If I find one that would inspire the brave women serving overseas, I'll post it.  I'd consider the cause myself but the results of that annual New Year's resolution haven't come to fruition, yet.  Come to think of it, neither has the execution of said resolution.

Thanks, Gina.  I know you're getting a boatload of personal promotion from this project but  your website  offers other ways to help out.   

You are a great American, doll !  (it's a 40's term, PC cops)

There Ain't No Such Thing as a Free Lunch

The title of this blog pretty much says that everything costs SOMETHING, even if it is not a monetary cost.  It's a saying by one of my late heroes.

Thanksgiving wasn't all fun and games for me; it was no free lunch.  Nobel Prize Winner, Milton Friedman, died on Thanksgiving day in San Francisco at age 94.  He is survived by his wife and co-author, Rose Friedman, of 68 years.

I don't think I can put all of the information needed to cover this great man's life so I'll try to give you some of my lifelong observations:

I read "Free to Choose" in 1982 as a junior in high school and watched the subsequent series on PBS (I was a bit of a weird kid).  It absolutely changed my life.  I was raised in a traditional Democrat family.  My grandmother had three pictures framed on the wall:  Pope John Paul 2 , JFK, and FDR.  At this particular point, I was really starting to understand what Ronald Reagan was doing and that Milton Friedman was the theorist behind much of the grand master plan. The beauty of the message the Friedmans' wrote about was personal choice.  The radical thoughts designed to overthrow the oppression of government intervention delighted my passionate teenage mind.  Milton and Rose Friedman caused me to join the Revolution, well, the Reagan Revolution (I told you I was a weird kid).

I read Price Theory,  Bright Promises, Dismal Performance: An Economist's Protest, and There is No Such Thing As A Free Lunch while in college.  They inspired me to take on my Macroeconomics teacher, Dr. Rita Keintz, an avowed Keynesian and fan of John Kenneth Galbraith.  I had so much fun picking apart her theories that I chose her for Microeconomics just to needle her.  I thought I drove her nuts but she loved it.  She used to call me the little Friedman disciple.

His rapier sharp wit and civility is the model I try so hard to emulate in my writing.  There will NEVER be one as good as he.  This is the the guy that counseled Nixon against implementation of wage & price controls (which Nixon ignored) and then joked about it,  in his self-effacing manner,  in his Playboy interview.

I offer my condolences to his widow and colleague, Rose Friedman, the only economist that won an argument with him.  I know that you are sad that you lost your best friend.  Know that a generation of economists grieves also. 

The family has asked that in lieu of flowers or gifts, contributions be made in his honor to the Milton and Rose D. Friedman Foundation.