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Don't Invest in Texas...But Consider Moving There

It takes a mighty brave or nimble man to criticize Texas.  I'll admit that I'm one fast hopping coward so you'll pardon the lack of my usual jocularity while I get right to the point.

Californians shouldn't buy investment property in Texas because property taxes are just too high. Now I am an EXPERT on taxes.  So are the other 32 million people that live in the Golden State.  We're experts because  the only thing not taxed here is a day at the beach and we're pretty confident that Sacramento will screw that up soon.   California investors have bought (and sold) Vegas in 2004, bought (and held) Arizona in 2005, and have their hearts set on the Lone Star State in 2006 and 2007. Our rising home values have created equity and a false paradigm that a property under $200,000 just "has to have a huge upside".  That's juvenile thinking and here's why that is wrong:

Property taxes are heavily biased towards residents of the taxing authority.  The residents get the services, the taxpayers get screwed (especially if you're an out-of-state investor).  Now Texas has a light tax load when compared to other states (we'll get to that in the next paragraph) but the property tax burden in Texas is extremely high when compared to the other states.  One reason for high property tax rates is the shrinkage in the value of taxable property.  Taxable property values have only recently surpassed their 1985 peak because of the growth in tax exemptions over the past 20 years.

The other reason is that there is no personal income tax in Texas. And this is where the residents win and the out of state investors get shafted.  Now I'm familiar with the concept that the landlord can transfer that high property tax to the tenant but local incomes are going to set a local market for rents.  With no personal income tax, Texas employers can offer lower wages...wages drive rental markets. That transference of the high property taxes just won't happpen. Appreciation?  High property taxes are insidious to appreciation as they hamper the affordability factor of home ownership. Texas ranks 34th in all of the states in median income with a 9.9% drop in real wages this decade (adjusted for inflation).  That drop places them in the top five states in income declines.

Now, Allison in Galveston, Sweet Eilleen in Abilene, and Rosanna down in Texarkana...don't jump on me just yet. As you can see, I am a George Strait fan.  Californians should consider moving to Texas and should consider it really soon because there are some great opportunites unfolding there.  Texas is the fourth most affordable state in the country.  Houston is the least expensive large metropolitan area in the country.  Texas will be one of the huge population gainers over the next twenty years as the warm climate, friendly people, central location and affordability are appealing to baby boomers as a retirement haven. 

Austin is quickly emerging as the tech-center of the South.  Houston has always created wealth through energy.  San Antonio is the gateway to commerce with Mexico, and Dallas is an emerging money center in the international arena.  I doubt that you'd ever be out of work in Texas.

Texas is going to have to look long and hard at their tax revenue code these next 5-10 years; it's not very friendly to property owners. Californians are hardest hit in the nation by income taxes. It makes no sense to invest your after tax dollars in another heavily taxed investment.  Pull the equity out of the homestead in Anaheim for a 4-plex in Austin?  It doesn't pencil out.  Sell the condo in Danville for a palace (and great job) in Dallas?   Now you're making sense!

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. 

Daring to Be Different

   

Do you know what one of my favorite stories of personal branding is?  How Wendy Heath, a Realtor in Long Beach, CA, increased her daily website traffic from 2000 hits to over 20,000 hits last year. 

Wendy, a former personal trainer, dared to be different.  Wendy erected a personal billboard with the phrase "Got Real Estate?" .  It features Wendy by a dock, with her dog.  It is very California and if anything, it's so..., well, so...LA.

There is, however, a certain problem in they eyes of many South Bay Realtors (Los Angeles area); Wendy is featured in a bikini on the billboard. She has been accused of playing the blond bimbo card.  It turms out that Wendy has a bachelor's degree and was a former personal trainer.  She's married, and is a mother to six children.

In an article on the conservative WorldNetDaily (which I read avidly), Ms. Heath told Joe Scarborough of MSNBC:

"I wanted to set myself apart and kind of shock the shore, and, you know, drive people to my website and increase my business.  There are many, many real-estate agents in our area, and it's hard to break through and set yourself apart. ... I am absolutely amazed that one billboard could cause so much attention, but I am absolutely elated."

It turns out that Wendy's broker, First Team's Rick Rector, did not care for the enterprising Realtor.  He stated, "It is absolutely not something that First Team can be a party to. It is totally unprofessional. Would you look at this billboard, and ask, 'Is this the person you would want to represent you in the biggest purchase of your life?"  Wendy has since moved on and works at Long Beach Brokerage. She's been licensed as a real estate salesperson in California since 2002. 

Wendy received tons of calls from Realtors berating her for "unprofessionalism".  She also received just as many calls supporting her.  Her website traffic went up 10 times.

Now, THAT is an online presence.

You'll NEVER get the lowest rate on your mortgage.

I am continually amazed at the misrepresentations mortgage brokers use on their advertising:

Lender411.com uses terms like "best" and "lowest" rates for their mortgage shopping portal.
AAXA Discount Mortgage offers the "best rates possible" and tells us that if we're "searching for the best possible rate, our search ends right there"
LoanSnap is my personal favorite.  It tells me that the dispayed rates are "today's best mortgage rates"
Finally, in my home state. e-mortgages tells me that they have the "lowest rates in California"

So why am I so worked up about this ???    Here's the answer:  It  is absolutely impossible to advertise that you have the best rates or lowest rates, truthfully.

Let me give you an example:

1- Go to google and enter in quotes:  "lowest mortgage rates"- 519,000 hits
2- Now enter in quotes: "lowest mortgage rates"+california- only 243,000 hits...that's better.
3- Finally, enter in quotes: "lowest mortgage rates"+san diego down to 109,000 hits..wunderbar!

Now let's shop for the lowest rate and call every one of the 109,000 entries and verify the terms of the mortgage.  Each call should last 3 minutes and I'll be dialing straight for 10 hours a day.  I can talk to 200 mortgage companies in that time.  It will take me 545 days to get through all of the entries for "best mortgage rate"+san diego.  Do you think that the best rate might have changed in a year and a half?

So...advertising that you have the "best" or "lowest" rates gives you a 1 in 109,000 chance of being correct; the other 108,999 entries are published liars.  We all go to the same places for money; Wall Street.  It is absolutely impossible to "guarantee" or claim you have the lowest rates!

Can you understand why I am inclined to drink the occasional adult beverage?

Yo, Joe Homebuyer! Where ya been?

I am writing this to all of the home buyers out there.  I’m calling you Joe so if your name is Susan, Elijah, Maricela, or Bob, don’t be offended.  Joe is easy to remember and type.  Your last name may be different but for today your last name is Homebuyer.  So,  this letter is for you, Joe Homebuyer.

Anyway, how have you been ?  We’ve missed you a lot this year in the housing market, Joe.  I know that we’ve had a heckuva party the first five years of the decade and frankly, it might have gotten a little too crazy for you.  Sorry about that.  You know how it is when that cheap money keeps flowing like a keg at a frat party; nobody ever knows when to say when.  Some of us didn’t see you slip out the back door when that groovy band, The Speculators, came in and started selling homes to each other last year.  I’m sorry I didn’t get a chance to tell you good bye and get your phone number.  I really wanted to get together .

Joe, let me tell you the gossip.  The Speculators really weren’t that good; they only knew one or two songs.  A new guy named Ben Bernanke came and made us all straighten up and fly right.  He raised the price of money.  Fortunately, it looks like he stopped.   The sellers are all in a fog now.  They don’t know how the price of their homes isn’t logical to someone like you BUT…they’re starting to get the message. The builders?  Fuhgedaboutit.

I think we’re all in bit in a fog but we’ll be partying again soon.  I know that you’re hearing all kinds of bad things from those dudes at the newspapers, and the TV, and on blogs on the internet but you have to remember that they are spectators not players.  In the meantime, you have a pretty good chance to be first in line when the new band gets cranked up.  They’ve got kind of gloomy sound but you might like them.  They’re called “The Foreclosures”. I heard them back in the 90s and man they are even better than “The Speculators“.  I hear they’re back for their “Together Again Tour”.  I promise you that you won’t want to miss their show!

I’ll tell you what.  Why don’t you come on in and see me or another mortgage broker.  We’ve toned things down a lot since the last party.  We’re not letting the underage kids get into the party with those exotic loans anymore.  Dude, that was nuts!  Now we actually care if you can  make the payments.  We’ll get you pre-approved with some sane terms and find you a payment you can afford.  We’ll introduce you to some really cool Realtors who also learned a lesson from the last party.

These Realtors totally rock!  When “The Foreclosures” start playing, they’ll get you front row seats below face value.  All we have to do is ask them to low-ball the sellers.  Those sellers are in such a fog and are so scared of  “ The Foreclosures:  Together Again Tour” that they’ll bail and you’ll get a SWEET deal!

Joe, we really miss you.  We’ll make sure to listen to you.  You’ve been so good to us in the past and without you, there just isn’t any party! Call me or just leave your number here. I’m looking forward to seeing you again!

Brian Brady is a Managing Director of a mortgage banking firm and hasn’t been to a “frat party” in 20 years.  He is San Diego’s most opinionated mortgage broker and fancies himself a humorist.

Myspace to Market Real Estate?

I read a funny article about a few of my colleagues here in San Diego and the success they've had marketing to the MySpace generation. It was in the Voice of San Diego and this article featured an agent named Seth O'Byrne.  I have communicated with Seth a few times and can tell you that this is a young man that has his pulse on the 20 something market.

Nicolette Fontaine was featured in this article about her marketing on Myspace. Active Rain was also mentioned in this article by Jessica Diaz.

Business Week writes about how the MySpace Generation is used to receiving information instantaneously.  It's obvious that technology and speed will be quick to capture these teens and twenty-somethings when they start buying homes in 3-10 years.

Finally, although this site requires registration, this article called "Marketing to the MySpace Generation" discusses the phenomenon of social networking, the growth of myspace to over 120 milion users.  I logged onto Myspace in early 2005 and I was pretty much the oldest person there.  Today, it is common for a Realtor to use myspace.co as a way to promote their real estate practice.  I have found that the  groups are a great way to exchange information about loan programs.

My Group on MySpace, MLS on MySpace, has over 900 real estate professionals as members.  It is a place for professional Realtors to publish their listings. Please check it out and see how the MySpace Generation of Realtors is communicating with each other.  While you're there, check out my home page and request me as a friend. 

My summary of this article is this:

MySpace is not a flash in the pan nor is it a place for sexual predators.  With over 120 million users, the bulk of whom will be first-time homebuyers in five years, it is silly not to incorporate this site into your long-term online marketing strategy.  10 years ago, the buzz was "are you on the world wide web?"  Today, it's "what's your myspace?"

California Mortgage Pools

I am a private mortgage lender which means I make real estate loans (non-bank loans) to individuals or corporations that can't qualify for bank financing. In California, this is sometimes referred to as Trust Deed Investing because the security instrument (how you secure the collateral) we use is called a Deed of Trust. The loans can be risky of default and subsequent foreclosure.  This is why we don't make loans for more than 70% of the value of the property.  The returns, however, are very attractive.  It is not uncommon to earn 11-15% interest on trust deeds.  I think they are relatively safe because they are secured by Southern California real estate.

A mortgage pool is a generic term used for the financial instrument whose underlying assets are mortgages.  Most of the institutional mortgages originated today end up on Wall Street in a mortgage pool.  Many are underwritten according to Fannie Mae or Freddie Mac guidelines and are referred to as "conforming pools" because the underlying loans in the pool  conform to those guidelines set by Fannie Mae or Freddie Mac.

Lately, the financial instrument "mortgage pools" or "fund" has been advertised in California.  These financial instruments are offered to California residents as an investment vehicle.  They are exempt from securities registration if thet are offered to California residents only and loan on California properties only.  They advertise that they are diversified, less work than owning a trust deed, and have better returns.  Make no mistake about it, these "funds being offered do NOT invest in "conforming loans"; they invest in higher risk trust deeds.  More information about these pools should be researched at the California Department of Corporations website.

We believe that investing in an individual trust deed is superior to investing in a mortgage pool. Trust Deed investing is not easy. The analysis of risk is paramount to the success of your investment.  Working with an experienced trust deed broker can help you gain the knowledge required to invest your money in a double-digit return with the safety of Southern California real estate as the underlying collateral. Leaving it up to a company and relinquishing the investment analysis in an asset class like this is quite naive in my opinion. More information about trust deed investing can be found at the California Department of Real Estate website.

A Realtor's Guide to YSP (Yield Spread Premium)

There is a lot of good information about a pricing mechanism in the mortgage market called "rebate" or "yield spread premium".  Mortgage brokers will often refer to this term as YSP.  Bill Archambault, a former mortgage broker and Realtor from Nevada, has written a whole bunch of books aimed at consumer real estate education.  He runs The Real Estate Investment Institute and teaches people how to buy homes for profit.  Bill wrote an article entitled, A Consumer's Guide To Mortgage Brokers and The Evil Yield Spread Premium. Bill summarizes that the consumer should focus on rate and fees as a shopping mechanism.  I suggest it to borrowers now before they commit to a loan application with me.

Another good source for understanding how to understanding the concept of yield spread premium is from Jack Guttentag, a retired professor from the Wharton School of Business at the University of Pennsylvania (in my hometown of Philadelphia) .  Jack has a website called The Mortgage Professor.

I'm going to use Jack's example of points and negative points with you, the Realtor, acting as a fiduciary for your client.  I have heard many Realtors explain that they don't really understand the whole "YSP thingy".  I hope to make it easy to explain and simple for you, the Realtor, to check  your customer's loan application disclosure documents and the estimated and final HUD-1 Settlement Statement.

Discount Points are upfront interest to the borrower .  Along those lines, so are closing costs from third-party providers.  This means that we figure in those costs as the true COST of credit to the consumer and measure it as an annual percentage rate (APR). There are 2-3 good arguments about why APR is an antiquated measure but I'll leave them for another article.  Borrowers pay points to lower the rate.  A common term is to "buy down the rate".

Did you know that mortgage brokers get money at a wholesale cost?  It's how we make profit. Just like your local Nordstrom's, we buy at wholesale and sell at retail.  The only difference is that we, acting as a mortgage broker have to tell the customer three times what we expect to profit on their mortgage transaction:  First, within three days of an application on a good-faith estimate, at the bottom of the itemization (bottom of page 1 of the California MLDS), second, within three days of drawing loan documents (same disclosures), and finally, on the HUD-1 Settlement Statement as a paid outside of closing (POC) item. 

That profit, paid by the lender to the broker is called yield spread premium or YSP. You can understand it as "negative points".  if a consumer "pays points to lower the rate", why can't they "receive points to accept a higher rate".  Instead of paying upfront interest in the form of a discount point, they receive upfront interest in the form of a "YSP".  That receipt of upfront interest defers the mortgage broker's fee!

Let me give you a raw example.  If I wish to earn a mortgage brokerage fee of 1% of the loan amount plus $495 processing fee on a $400,000 loan, here are 3 ways I can do it for a customer who wants to take advantage of YSP (or negative points).  Let's assume that the third party (or HARD) costs of this loan are $4,000:

1-  The customer gets a rate of 5.875% with no YSP.  The customer-paid fees will be my $4,495 PLUS the $4,000 third party fees for a total of $8,495.

2- The customer gets a rate of 6.25% with 1% YSP.  The customer-paid fees will be my $495 PLUS the third party $4,000 for a total of $4,495.  The lender will pay me (the mortgage broker) the other $4,000 of my fee. the borrower really pays it in the form of a higher interest rate.

3- The customer gets a rate of 6.625% with a 2% YSP.  The customer-paid fees are only $495!  The lender pays me (the mortgage broker) my $4,495 and I credit the remaining $3505 from the YSP to the borrower for all of the third party fees.  That's enough to include the title premium, "lender junk fees", appraisal, etc .

Why would a customer want to pay a higher rate if he qualifies for a lower one? The answer is in paragraph six; they actually receive negative points! Hey!  What about their payment?  Isn't it going to be higher?  Of course it is!  In the difference between option one and three , it is $250/month in extra interest or $3,000 year.  They receive $8,000 upfront in negative points for that $250/month.  Then, it's a matter of simple math.  I ask the customer if they intend to keep this mortgage for more than 32 months (the breakeven point).  If they say, "No, we'll probably refinance to remodel", then they should take the negative points and higher rate.  If they say. "Yep.  We expect to be in this loan until we pay it off", then I advise them to pay the third party fees and my mortgage brokerage fee upfront and take the lower rate! Jeff Belonger does a nice job of explaining in this post about the Myth of Zero Point Mortgages.

If you are used to dealing with a direct lender, correspondent lender or bank, they do not have to disclose yield spread premium to the customer because they are making the credit decision, funding the loan, and reselling it on the secondary market (Wall Street).  if you want to be certain that your customer is getting a fair deal from a direct or correspondent lender (or bank) , ask a mortgage broker to furnish you with a good-faith estimate at identical rates and fees from the direct lender so you can see the "profit" the lender is making.

I hope this article better explains the whole "YSP thingy" and assists you as you help your client make the right loan decision!

How Mortgage Originators Lie to Borrowers

Mortgage originators constantly advertise that they will find "the perfect loan for you" and that they will "work hard to find you the absolute best terms".  You may find, after reading the compensation agreement, ....that is bunk.

It has been said that the "devil is in the details" and in mortgage origination disclosure documents, nothing could be more true. Contractual relationships mortgage originators have borrowers sign, hidden carefully in a stack of disclosures, clearly state that there is not a fiduciary relationship but an independent contractor relationship between the borrower and the mortgage originator. The National Association of Mortgage Brokers (NAMB) defines that relationship as one of an independent contractor in its widely used loan origination agreement.   Read the text in Section One of the Model Disclosure Agreement.

It kind of makes you realize that the relationship your originator has with you (the borrower) is akin to a Vegas taxi driver dropping a group of horny conventioneers off at a strip club; he charges a fare while collecting a "steering commission" from the strip club.

Let me explain by lumping origination companies into three categories:

1- Direct lenders originate loans for their own portfolio and/or securitization.  These companies are not limited to but include Wells Fargo Home Mortgage, Countrywide, IndyMac, Flagstar Bank, National City, Ameriquest Mortgage, Bank of America Mortgage, Chase Manhattan Mortgage, and Washington Mutual.  They do not guarantee a borrower that they will work to find them the best terms, only the terms they offer. In fact, these originators severly penalize (or prohibit) employees who "broker" a loan to another direct lender because the terms are better for the borrower. 

2- Correspondent Lenders are "Mortgage Brokers" on steroids.  They look and act like brokers inasmuch as they submit your loan package to various direct lenders but have the ability to hide the "steering fee" as profit from selling the loan. Correspondent lenders prepare the loan documents, fund the loan from a warehouse line (or giant credit card that the direct lenders provide for the correspondent), and sell the loan to the direct lender.  They generally use the NAMB disclosure form but can be persuaded to offer you a fee for services agreement.

3- Mortgage Brokers agree to arrange a loan for the borrower with direct lenders.  They offer the absolute best chance a borrower has to get a true fiduciary relationship. The way to establish that fiduciary relationship is through a carefully worded fee agreement that clearly defines the duties of the originator and the amount and form of compensation.  A sample of a contract defines how lender paid compensation can replace the borrower paid compensation or augment it to pay the mortgage brokerage fee.  The service offering agreement defines the contractual relationship between the originator and borrower.

Here is the truth about mortgage originators. We get paid by you (the borrower) AND the lender with whom we place the loan.  There is nothing evil or illegal about that; it just hampers our ability to get you the best terms and get paid for our services.  Yield Spread Premium or Lender Rebate is a form of compensation to your originator.  If you, the borrower, negotiate a fee for services with the originator at application, that acknowledges that the yield spread premium or rebate is applied to that fee, you're getting an originator that is clearly working to get you the best terms; she's going to make her fee no matter which loan program you choose. 

If you're a Vegas conventioneer, you will probably have a great time at the strip club the taxi driver recommended.  Just be sure to negotiate his "steering fee" as a credit to the fare before you get in the cab.