The Wall Street Journal recently reported that some well-known home builders and lenders have offered home buyers incentives that make it difficult for consumers, Realtors, appraisers and lenders to know how much some home buyers actually paid for their houses.
If home builders are selling houses for less than they used to, it's not in their best interests to make this public knowledge. Public disclosure of reduced sale prices could anger buyers who recently paid higher prices, and it could also make it more difficult for the builder to unload his housing inventory. So while the recorded sale price may be the same as it would have been six months earlier, some builders may have offered incentives like cars, free upgrades and cash back to the buyer. These incentives conceal the fact that the cost to the buyer and the net to the seller were actually less than the sale price.
The article said giving cash back to buyers isn't illegal as long as it's disclosed to the lenders and any investors who may buy the mortgage. This was news to me, as I had always thought that cash rebates were just not allowed by lenders. It's obvious why the lender wouldn't approve a cash rebate or other kick backs to the buyer. If the lender loans $200,000 for a house, but the buyer wouldn't have bought the house without the free Mustang convertible or $30,000 cash rebate from the builder, the house is worth less than $200,000, and the lender is going to have trouble selling it if the buyer defaults.
This article also described a ruse that wasn't on my radar screen. A home builder may hire a company to find a buyer for its house. In the example given, KB Homes in Parker, Colorado sold a house for $196,000. That was the sale price recorded with the county clerk. However, KB paid a third party $27,600 for locating the buyer. Some of that payment to the third party may have been passed on the buyer. At any rate, the net to KB was $168,400. This is the actual value of the house, without the rebates. The buyer obtained two loans totaling $176,400, which is 5% more than the net to KB. So the buyer was already "upside down", owing more than the house was worth.
I don't know whether this sort of hocus pocus occurred in Tucson, and I don't know whether it's still going on anywhere. The sales described in the article occurred before the mortgage industry melt down in August 2007. Many of the lenders who made these Wild West maneuvers have gone out of business. But the damage is done. Buyers need to look very carefully at comparable sales when deciding how much to offer for a house, because the recorded sale price may not show all the terms of the sale. If there were hidden rebates and incentives, the actual value of the comparable sales is lower.
Occasionally, appraisers will call me to ask about the terms and conditions on a house I sold. Perhaps they are trying to find out whether there were any hidden rebates or incentives that aren't recorded in the public record. This Journal article stated that Realtors and builders are not required to disclose the terms of past sales to appraisers, so appraisers may not be able to determine the actual value of the houses they use as comparable sales.
Sunday, December 30, 2007
Loan Fraud
I have seen some strange property listings in the past year. They follow the pattern of a Central Tucson house that is currently in escrow. Here's the home's sale history:
March 2006, sold for $201,000.
May 2006, sold for $350,000.
August 2006, sold for $375,000.
In November 2007, the lender from the May 2006 sale purchased the house for $319,000. All these transaction occurred outside the Multiple Listing Service. Now it's listed for sale at $230,000.
What's going on? I went to see this house, expecting that it had been over-improved by some ill-advised investor, but that wasn't the case. Original kitchen, windowless dining room in the center of the house, mish mash of floor coverings, no landscaping. The carport was hastily enclosed with small windows and wall AC, and it still has the unfinished, sloping, concrete floor, but the carport enclosure is brazenly called a bedroom. Your typical Central Tucson do-it-to-yourself project.
I asked the listing agent why it was listed at $145,000 below last year's sale price, and she said she thought $230,000 was about what it was worth. She didn't know why someone paid $375,000 for a house that has such a bad floor plan and no upgrades. Her client (the current owner) is the lender who acquired it from the $375,000 purchaser. She thought loan fraud may have something to do with it.
That seems like a good guess to me, too. Before the lender bought it, the buyer who paid $375,000 received 100% financing, in the form of two loans, one for $300,000 and one for $75,000. There's no way a legitimate appraiser could say this house was ever worth $375,000.
The problem with these high jinks is they distort the comparable sale data that we Realtors use to evaluate property values. Any real estate agent familiar with Central Tucson would look at the $375,000 sale price and know something is fishy. Unfortunately, agents who are new to this business might not hear alarms, because they may not realize they should look at the sale history of any house they are selling.
Inflated sale prices may also skew the automated programs like Zillow.com, as well as the program that calculates our property taxes. Bogus sales give sellers unrealistic expectations of their home equity, and may cause unwary buyers to over pay for comparable houses.
March 2006, sold for $201,000.
May 2006, sold for $350,000.
August 2006, sold for $375,000.
In November 2007, the lender from the May 2006 sale purchased the house for $319,000. All these transaction occurred outside the Multiple Listing Service. Now it's listed for sale at $230,000.
What's going on? I went to see this house, expecting that it had been over-improved by some ill-advised investor, but that wasn't the case. Original kitchen, windowless dining room in the center of the house, mish mash of floor coverings, no landscaping. The carport was hastily enclosed with small windows and wall AC, and it still has the unfinished, sloping, concrete floor, but the carport enclosure is brazenly called a bedroom. Your typical Central Tucson do-it-to-yourself project.
I asked the listing agent why it was listed at $145,000 below last year's sale price, and she said she thought $230,000 was about what it was worth. She didn't know why someone paid $375,000 for a house that has such a bad floor plan and no upgrades. Her client (the current owner) is the lender who acquired it from the $375,000 purchaser. She thought loan fraud may have something to do with it.
That seems like a good guess to me, too. Before the lender bought it, the buyer who paid $375,000 received 100% financing, in the form of two loans, one for $300,000 and one for $75,000. There's no way a legitimate appraiser could say this house was ever worth $375,000.
The problem with these high jinks is they distort the comparable sale data that we Realtors use to evaluate property values. Any real estate agent familiar with Central Tucson would look at the $375,000 sale price and know something is fishy. Unfortunately, agents who are new to this business might not hear alarms, because they may not realize they should look at the sale history of any house they are selling.
Inflated sale prices may also skew the automated programs like Zillow.com, as well as the program that calculates our property taxes. Bogus sales give sellers unrealistic expectations of their home equity, and may cause unwary buyers to over pay for comparable houses.
Escrow Account Review
Those of us who have mortgages will receive an extra page with this month's statement. When you make your monthly mortgage payment, you're paying principal and interest, plus one-twelfth of your annual property tax and homeowner's insurance (PITI). The tax and insurance payments go into an escrow account and the mortgage lender pays your taxes and insurance when they are due.
Each year, your mortgage lender reviews the escrow account to determine whether your payments into the escrow account will be sufficient to pay the bills. This escrow account review is the extra page in your December statement.
The mortgage lender provides a list showing how much they expect to receive from you each month next year for your escrow account. They will also list anticipated payments they will make for tax and insurance. Half of your annual property tax will be paid in April, and half will be paid in October. One whole year's insurance premium will be paid on the anniversary of the month you received your home loan.
Most months, there will be money left in your escrow account. During the months when the property tax is paid, the escrow account balance may drop into the red. The lender, of course, doesn't like this, because they will have to pay part of your property tax with their own funds. They'd rather keep the balance comfortably above zero.
If the escrow account analysis shows the balance will fall below zero, the mortgage lender will divide the lowest projected negative balance by 12 and add that amount to your mortgage payment. Fair enough.
What I don't like is the reserve requirement, which, you will find, is not a requirement at all. My statement from my lender says "Federal law allows for the collection of a reserve amount to maintain a cushion for unexpected tax and/or insurance increases and other costs". To calculate the reserve amount, the lender first adds up the total payments they expect to receive from you next year for tax and insurance. These total payments are called the base amount.
The maximum amount of reserve amount the lender can collect is one-sixth or 16.6% of the base amount, equivalent to two months' of taxes and insurance.
Back when my mortgage lender was collecting the reserve amount on my loans, my escrow account always had at least a few hundred dollars in it. This is my money, and I decided I'd rather have it in my bank account than my lender's. A few years ago, I called my lender and told them my taxes and insurance have never increased 16% in one year, and I didn't want to pay this reserve amount.
I thought they would agree to make the reserve amount a smaller percentage of my base amount. To my great surprise, they agreed to reduce my reserve amount to zero. Even more surprising, they have permanently changed my reserve amount to zero. I don't have to call them every year to ask them to make this change.
So give it a try. Call your lender and tell them you don't want them charging you 16% of your base amount for the reserve amount. Let me know what they tell you. Good luck.
Each year, your mortgage lender reviews the escrow account to determine whether your payments into the escrow account will be sufficient to pay the bills. This escrow account review is the extra page in your December statement.
The mortgage lender provides a list showing how much they expect to receive from you each month next year for your escrow account. They will also list anticipated payments they will make for tax and insurance. Half of your annual property tax will be paid in April, and half will be paid in October. One whole year's insurance premium will be paid on the anniversary of the month you received your home loan.
Most months, there will be money left in your escrow account. During the months when the property tax is paid, the escrow account balance may drop into the red. The lender, of course, doesn't like this, because they will have to pay part of your property tax with their own funds. They'd rather keep the balance comfortably above zero.
If the escrow account analysis shows the balance will fall below zero, the mortgage lender will divide the lowest projected negative balance by 12 and add that amount to your mortgage payment. Fair enough.
What I don't like is the reserve requirement, which, you will find, is not a requirement at all. My statement from my lender says "Federal law allows for the collection of a reserve amount to maintain a cushion for unexpected tax and/or insurance increases and other costs". To calculate the reserve amount, the lender first adds up the total payments they expect to receive from you next year for tax and insurance. These total payments are called the base amount.
The maximum amount of reserve amount the lender can collect is one-sixth or 16.6% of the base amount, equivalent to two months' of taxes and insurance.
Back when my mortgage lender was collecting the reserve amount on my loans, my escrow account always had at least a few hundred dollars in it. This is my money, and I decided I'd rather have it in my bank account than my lender's. A few years ago, I called my lender and told them my taxes and insurance have never increased 16% in one year, and I didn't want to pay this reserve amount.
I thought they would agree to make the reserve amount a smaller percentage of my base amount. To my great surprise, they agreed to reduce my reserve amount to zero. Even more surprising, they have permanently changed my reserve amount to zero. I don't have to call them every year to ask them to make this change.
So give it a try. Call your lender and tell them you don't want them charging you 16% of your base amount for the reserve amount. Let me know what they tell you. Good luck.
Wednesday, December 19, 2007
Benjamin Plumbing
I am finally getting started again on renovating my Tucson Mountain house, after giving up in dismay for 18 months. The granite counters are being cut this week, the tile is going in Thursday, and I've bought my new kitchen sink and faucet.
I bought the last two items at Benjamin Plumbing Supply. This place is way more fun than Home Depot! A locally-owned business since 1950, it's located between Fourth Avenue and downtown.
The stuff they carry is absolutely delightful.
How about a purple glass vessel sink? Agate faucet handles?
A shocking orange and black sink and countertop combination?
My favorite is the bronze sink that looks like fabric draped over a bowl and spilling off the counter. Check it out.
November Residential Sale Statistics
The Tucson Association of Realtors has finally released the residential sales statistics for November.
759 properties sold last month. This is better than the low for the year, 683 in September, but it's 23% below November 2006.
The average sale price in November 2007 was $269,968, which is 2.9% higher than October 2007 and 0.9% higher that November 2006 (not 1.72% higher as stated in the Sales Snapshot on page 2).
The median sale price also remains stable.
November 2006: $218,000.
October 2007: $210,000.
November 2007: $213,000.
The problem of excessive listings continues.
November 2006: 9,238.
October 2007: 9,313.
November 2007: 9,234.
At least this is lower than 10,387, the all-time high number of listings reached in April 2007, so we're going in the right direction.
Like weather, the real estate market is local. Houses are selling if they are in good locations and have the features buyers want (garage, AC, open floor plan, big updated kitchen, closet space and landscaping). Of course, the seller has to be sure the house is priced right, easy to show and in excellent condition. It's a good time to buy a house.
759 properties sold last month. This is better than the low for the year, 683 in September, but it's 23% below November 2006.
The average sale price in November 2007 was $269,968, which is 2.9% higher than October 2007 and 0.9% higher that November 2006 (not 1.72% higher as stated in the Sales Snapshot on page 2).
The median sale price also remains stable.
November 2006: $218,000.
October 2007: $210,000.
November 2007: $213,000.
The problem of excessive listings continues.
November 2006: 9,238.
October 2007: 9,313.
November 2007: 9,234.
At least this is lower than 10,387, the all-time high number of listings reached in April 2007, so we're going in the right direction.
Like weather, the real estate market is local. Houses are selling if they are in good locations and have the features buyers want (garage, AC, open floor plan, big updated kitchen, closet space and landscaping). Of course, the seller has to be sure the house is priced right, easy to show and in excellent condition. It's a good time to buy a house.
Sunday, December 16, 2007
My Supervisor When I Was a Hydrologist
September 1, 2005
To Whom It May Concern:
I am writing to express my complete satisfaction with the services provided by Donna Moulton for representing me in the sale of my former residence in Tucson, Arizona. Donna first provided me with a fair and reasonable estimate of the market price for my residence. Because I had not personally occupied the residence for some time, she also took responsibility for coordinating and supervising minor repairs and improvements that substantially increased the selling price of the residence, at no additional commission. After the improvements, the house was listed for one week and I received two offers, both for more than the asking price. Without her honest recommendations and support, I am sure I would have received a reduced price for the residence.
I strongly recommend Donna as a real estate agent because she will provide an honest assessment of the market value of the property and has the marketing resources and know-how to promote the sale.
Sincerely,
Gary R. Walter, Ph.D.
San Antonio, Texas
To Whom It May Concern:
I am writing to express my complete satisfaction with the services provided by Donna Moulton for representing me in the sale of my former residence in Tucson, Arizona. Donna first provided me with a fair and reasonable estimate of the market price for my residence. Because I had not personally occupied the residence for some time, she also took responsibility for coordinating and supervising minor repairs and improvements that substantially increased the selling price of the residence, at no additional commission. After the improvements, the house was listed for one week and I received two offers, both for more than the asking price. Without her honest recommendations and support, I am sure I would have received a reduced price for the residence.
I strongly recommend Donna as a real estate agent because she will provide an honest assessment of the market value of the property and has the marketing resources and know-how to promote the sale.
Sincerely,
Gary R. Walter, Ph.D.
San Antonio, Texas
Friday, December 14, 2007
The Plan to Freeze ARM Rates
The Bush administration recently announced a plan that would allow the interest rate on some sub-prime adjustable rate mortgages (ARMs) to be refinanced or frozen for five years. Like so many things this administration does, the plan is based on unfounded hopes, and the consequences have not been thoroughly evaluated.
In the next two and a half years, the interest rate on as many as 1.8 million sub-prime owner-occupied ARMs will increase. The Bush administration estimates that nearly two-thirds of those borrowers were able make their payments with the low introductory interest rate, but will be unable to afford the increased rate.
Under the administration’s proposal, only borrowers with FICO scores under 660 who face an increase in monthly payments of greater than 10% will be eligible for the program. Borrowers who are behind on their payments, who have other mortgages that prevent renegotiation of the ARM, and borrowers with ARMs that have already increased from the initial “teaser” interest rate will not benefit.
The plan is supported by the American Securitization Forum, the companies that issue mortgage backed securities, as well as investors and loan servicers.
Consumer advocates and Standard and Poor’s rating agency are skeptical.
The administration estimates the program will provide debt relief for up to 1.2 million borrowers. The Center for Responsible Lending (CRL) states that perhaps only 145,000 borrowers will qualify. CRL notes that the plan is only a set of voluntary guidelines for mortgage servicers. If lenders decide that will be more advantageous to them to foreclose, they are under no obligation to renegotiate home loans.
In this market, I don’t think lenders will be eager to foreclose and take possession of houses with negative equity. However, lenders will be concerned about lawsuits from the investors who bought these mortgages with the expectation that the interest rate will increase to a profitable level within the next two years.
Standard and Poor’s stated that freezing interest rates on ARMs could discourage investment in mortgage backed securities, which will make the home loan credit crunch worse.
I think this idea is short-sighted grandstanding. It just delays the inevitable. Wage increases have not kept up with inflation, and it’s unlikely that trend will reverse within the next five years. If borrowers are unable to absorb a few hundred dollars increase in their mortgage payment now, it is unlikely they will be able to afford the increase five years from now.
The other big problem with this plan is that it is so unfair to the millions of people who don’t meet its very narrow guidelines.
In the next two and a half years, the interest rate on as many as 1.8 million sub-prime owner-occupied ARMs will increase. The Bush administration estimates that nearly two-thirds of those borrowers were able make their payments with the low introductory interest rate, but will be unable to afford the increased rate.
Under the administration’s proposal, only borrowers with FICO scores under 660 who face an increase in monthly payments of greater than 10% will be eligible for the program. Borrowers who are behind on their payments, who have other mortgages that prevent renegotiation of the ARM, and borrowers with ARMs that have already increased from the initial “teaser” interest rate will not benefit.
The plan is supported by the American Securitization Forum, the companies that issue mortgage backed securities, as well as investors and loan servicers.
Consumer advocates and Standard and Poor’s rating agency are skeptical.
The administration estimates the program will provide debt relief for up to 1.2 million borrowers. The Center for Responsible Lending (CRL) states that perhaps only 145,000 borrowers will qualify. CRL notes that the plan is only a set of voluntary guidelines for mortgage servicers. If lenders decide that will be more advantageous to them to foreclose, they are under no obligation to renegotiate home loans.
In this market, I don’t think lenders will be eager to foreclose and take possession of houses with negative equity. However, lenders will be concerned about lawsuits from the investors who bought these mortgages with the expectation that the interest rate will increase to a profitable level within the next two years.
Standard and Poor’s stated that freezing interest rates on ARMs could discourage investment in mortgage backed securities, which will make the home loan credit crunch worse.
I think this idea is short-sighted grandstanding. It just delays the inevitable. Wage increases have not kept up with inflation, and it’s unlikely that trend will reverse within the next five years. If borrowers are unable to absorb a few hundred dollars increase in their mortgage payment now, it is unlikely they will be able to afford the increase five years from now.
The other big problem with this plan is that it is so unfair to the millions of people who don’t meet its very narrow guidelines.
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