Reuters reports that Deutche Bank projects that about half of all U.S. mortgages will exceed the value of the collateral - homes - securing those loans by 2011. Half.
That is a shocking projection that has some pretty terrible implications for our economy. First, if you think that there are a lot of foreclosures now, just wait until half of American homeowners wake up and realize that they owe more on their homes than their home is worth. Couple that with high unemployment and you have a recipe for a Super Tsunami of foreclosures.
Throw another news item in the mix - the current administration anounced that they want to break up FNMA and FHLMC - owners of well over half the mortgage paper in the country. Who will own that paper when that happens? Do you see where this is going?
I am not a conspiracy theorist. I believe, like Tolstoy (see the epilogue to War and Peace), that people will do what is in their own personal self interest. They will make decisions that make economic sense for themselves. If walking away from a home is in their best economic self interest, that is what will happen. If recent experience is any guide, it is already happening on a massive scale.
Between the large money center banks and the United States Treasury, most of the homes in the United States will end up in the hands of an institutional investor. They will control the flow of properties available to the market in an attempt to "support" home values. Do you remember the trial balloon last week the president floated of the federal government leasing foreclosed homes back to those who formerly owned them?
A good analogy would be farm subsidies. They work by taking productive farmland and other capital assets out of production to restrict supply. It is a command and control scheme. While it does achieve the goal of providing higher prices for agricultural producers (who, by the way are no longer small sole proprietorships, but huge corporations - thing Archer Daniel Midland), ask the millions of starving people in the world how that is working for them.
I believe that had the government done the right, legal, morally correct and constitutional thing and let foreclosures occur in their natural order, we would already be seeing a decline in foreclosures and a more robust uptick in home prices. Private investors would be buying those homes and renting them to families - reducing rents due to the supply of rental homes and allowing those same families to get their financial house in order. How well maintained will those "federally owned" homes be? Do you really think that having federally owned rental properties in your neighborhood is going to be good for property values?
By delaying foreclosure and picking "winners and losers," the government has rewarded economic failure and penalized people who lived up to their contractual obligations. These same people will now understand the folly of their ways, and will walk away from those obligations when they realize there is no economic reward to paying off mortgages on their homes when the home is not worth the principal balance remaining on their loan.
People will make interest payments if there is a reasonable amount of appreciation in their home over time. Without appreciation, there is little point to doing so. Implicit in Deutche Bank's projection is a continuing slide in home prices. It makes you wonder whether we really have hit the bottom of the hole. I hope that we have, but I don't really know - and no one else does either - where all of this will end. My - and your - livelihood depends on it.
All of this is completely predictable. There are so many reasons why attempts to prevent foreclosure won't work, are bad public policy and are frankly immoral.
First, why would any lender continue to loan money at low interest rates if they know that they would either (a) have to forfeit a portion of the principal they loaned if the borrower defaults or goes into bankruptcy or (b) won't be able to exercise their right to foreclose on the collateral to mitigate their loss on the loan? The answer is that it is inevitable in this environment that interest rates will rise - the risk analysis has shifted. Credit will become harder to get (already happening) and more expensive.
The moral hazard is that by helping people who have, for whatever reason, not fulfilled their contractual obligations by preventing foreclosure, it makes it more difficult for those who have a history of fulfilling their contractual obligations to obtain a mortgage loan. This means fewer home buyers in a buyers' market. That hurts home sellers and everyone whose livelihood depends on real estate transactions - from agents to appraisers and home inspectors and title examiners, closing attorneys - the list is endless. Government has chosen winners and losers - predictably making the wrong choice.
Foreclosure is sad for the families affected by it. However, by intervening in a private contract, the government has caused an unintended result that is worse than the "problem." Foreclosure is a REMEDY for the holder of a contract right. It is not a PROBLEM. When a foreclosure occurs, a lender is made whole, the borrower gets a fresh start free of the debt (yes - there are credit implications) and the sale creates a value for that asset. Are we experiencing "declining asset values" in real estate because of foreclosures? Yes - however, this problem is exacerbated by government policies that make private mortgage money harder to get by otherwise qualified home buyers.
Please send this to the rocket scientists on Capitol Hill and Pennsylvania Avenue. We need someone to inject some sanity into their policy.
Hmmm . . . Obama signed a measure allowing mortgage companies and banks to restructure loans for millions of American families facing foreclosure. This is like bandaid that won't stick to the wound! What good is this going to do?
I am so bumfuddled as to the lack of common knowledge of cause and effect within our government. Are they really this stupid?
Why? Why are MOST American's facing foreclosure today?
I keep hearing that people shouldn't have applied for mortgages they couldn't afford. Okay. But that is just the scum on the top of the pond of problems. Most people who lose their jobs can't afford ANY mortgage. How many of those people had income before they had a job? Is anyone paying attention?
How many of our jobs have gone over seas? How many manufacturing jobs? How many food processing plants? How many clothing and textile mills got handed over to foreign countries?
The people who fell for the "adjustable mortgage" play were fractional in comparison to those who are losing their homes. Banks got the bailout money, taxpayers got the shaft. We are still getting the shaft.
Maybe we can all get jobs in the Environmental Protection Agency, the unions or the military, because after the bailouts and the payoffs, there will be no other private sector jobs . . . unless you want to start investing in real estate in Taiwan.
I don't see the rescue package doing much good unless we can somehow materialize some 13 million jobs back to the U.S. of A.
I have been writing for some time that if the government DOES NOTHING then home sales will rebound on their own and that we are poised for a housing recovering beginning in June of 2009. Well, I was wrong. I was off by several months.
Existing home sales rose by the SECOND BIGGEST MONTHLY GAIN - ever (well, O.K. - since they began keeping records in 1999). The jump nationwide was 6.5% led by the west (up 14.5%) and the south (7.4%). Significantly, existing home inventories fell to 9.3 months.
In my last email, I wrote that it was inevitable that low interest rates and declining prices would eventually induce home purchases by consumers (be they investors or owner-occupied). The continued availability of these conditions will promote a long term recovery. Couple this with the staggering reduction in new home starts and permits, and you can see what is getting ready to happen.
The best thing that government can do is to let foreclosures happen. Let them happen. This will not be pleasant in the short term and is a heartbreaker for families who can't afford to keep their mortgages current. However, it will create a pool of renters for residential real estate investors. These investors do not want to own these homes forever. They want to sell them at a profit. In turn, a family renting a home for several years will have an opportunity to save money for a substantial down payment. It is not a coincidence that the largest downturn in residential real estate came right on the heels of lax lending standards including the lack of a 20% down payment requirement. All available because two securitizers of mortgages (Federal National Mortgage Association and Federal Home Loan Mortgage Corporation - you know them as Fannie Mae and Freddie Mac) made money available for loans to people who truly could not afford to own a home. Oh, did I mention that both of these companies were created by - yes, the Government of the United States?*
If government really wants to do something good, it will take the approach of Habitat for Humanity and require a "silent second" mortgage on homes where the purchaser puts down less than twenty percent. Allow the use of a down payment assistance plan with that second mortgage. The second mortgage would be reduced annually 20% per year for five years. If the buyer succeeds in keeping his or her home for five years, then they have "earned" that 20%. If not, when the home is sold, then the amount of the down payment assistance principal remaining goes to the government (or private down payment assistance company - my preference). There has to be an incentive and we just can't afford to watch equity evaporate into thin air.
Back to the story already in progress - whatever the trough idlers (my term for purveyors of pork - remember "Mr. Smith goes to Washington"?) in Washington D.C. do, it will be too late and totally ineffective. Worse, it will adversely impact natural market corrections in real estate. The only goal of "doing something" is a pathetic attempt to try to be relevant in the lives of the people who are America. - All the while, the fundraising goes on unabated. If you want to hear about outrages, have you heard that the President's family is going to use the same decorator that remodeled the executive suite of Merrill Lynch. I read it on the internet - it must be true! J
•· I just have to tell you that I noticed that homeownership in California is down to 50%. Saw that on Bloomberg this morning - down from 67% - before the Community Reinvestment Act. And we want to nationalize the banks? Really? I am sure that is all just a coincidence.
It has been a few weeks since my last blog posting. During that time, Christmas, and then inevitably New Year's has come and gone. While the stock market seems to have stabilized, business media types continue to latch on to all manner of bad news. It does strike me as completely ironic that I wake up and look out of my bedroom window to see that my neighbor's attractive "Five-Four and a Door East Cobb Georgian" home is still standing in spite of all the bad news.
Perusing my usual news outlets, I found three articles, and naturally, I wanted to give you my contrarian spin on them. The first comes from Bloomberg®. The headline reads, "No Recovery for Real Estate as Speculators Dominate Sales." Sounds pretty terrible. I might as well go fishing. Just remember though, we are all about transactions. We make money when there is a transaction.
The article is based on interviews with the now famous "Nobel laureate economist Joseph Stiglitz" and "Yale University Professor Robert Shiller" (Yale University being in bold typeface - of course!). The thrust of the article is that investors are responsible for the majority of residential real estate purchases right now and that is a bad thing. The proposition put forth is that investor buyers are bad because they are just renting the homes right now, but intend to sell them as soon as the market comes back. The article labels them, "speculators." Come again?
Let me see if I understand this. Nobel laureate[1] opines that, "We're creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve . . ." Yale Professor opines that, "You don't have it in strong hands, you have flippers . . ." These are not bad things. Would you rather have private individuals owning that asset and making productive use of it in this economy or would you rather have the asset sit, unutilized, as a drag on some struggling bank's balance sheet - or even worse, in some government owned inventory?
With all due respect, the fact is that people with capital are investing in an asset class they see as attractively priced AND that will give them cash flow during the time they are holding it. Then, they can sell it later. The beauty is that this "shadow inventory will do EXACTLY what the market needs it to do - dampen prices during a time of recovery in the housing market. This will go a long way to keeping inflation in check - and brothers and sisters, we will need that brake with the amount of "funny money" that Washington is pumping into the economy. Remember this too - while we have seen that real estate as an asset class is not immune from falling values, like all assets including securities and commodities - it is a good hedge against inflation. Unlike securities (basically contract rights which are nothing more than promises in writing - and I don't care who is making the promise, even if it is Uncle Sam) the dirt never disappears.[2] Just aks yourself, "What asset that I own lost the most value in the shortest period of time over the last two years?" Was it securities or was it your home? Even if the value of your home lost twenty percent in the last two years, I will bet that your 401(k) lost forty, fifty or even sixty percent in the last twelve months. That has to do with the illiquid nature of real estate as an asset class. Where we got in trouble is that we converted the value of our real estate assets into debt, and then spent it on all manner of non-income producing goods like MGBs.[3]
The important thing to see is this - people with money have determined that now is a good time to buy this asset class because they see room for appreciation. My University of Georgia and Wake Forest University School of Law and future Nobel Laureate Nominee (I swear that makes me so much more credible!) opinion is that this means we have hit the housing bottom. So, the real lesson we should be gleaning from the facts available in the press is that selling pressure will be with us for some time, dampening inflation in real estate. Now, that is bad exactly why? It's not - don't take leave of your common sense. THE FACT IS THAT THESE REAL ESTATE INVESTORS ARE DOING MORE TO PUT PEOPLE IN HOMES THAN ANY GOVERNMENT PROGRAM EVER WILL. Unlike government, investors cannot afford to hold assets if they are not producing income - or show promise of a reasonable capital return over the next twelve to thirty six months.
The next story comes from Housing Wire, "Mortgage App Volume Falls, But Household Apps Rise." "Lenders have been faced with a veritable refinancing boom in recent weeks, leading the MBA's [4] app index to soar as borrowers flooded the market with applications." People are making efforts to stay in their homes, even as the press tells them that the value of their homes is plummeting. PEOPLE UNDERSTAND THAT THEY CAN EITHER RENT OR OWN, AND IT IS BETTER TO OWN BECAUSE YOU ARE MINIMIZING YOUR HOUSING EXPENSE BY RECOUPING SOME OF THAT EXPENSE IN THE FUTURE WHEN THEY SELL THE HOUSE. They believe (correctly) that over the long term, real estate is a good investment - even with the interest cost of the mortgage. In addition, owning is tax favored under our current system. It is not rocket science. It is common sense.
Probably the most encouraging article, again from Housing Wire® is the following, "PennyMac Funds Buy Mortgage Portfolio From FDIC." Another story about PRIVATE money buying up mortgage assets. This particular deal involves $558 million in residential mortgage loans acquired by the FDIC through its acquisition of failed banks. I don't know if the FDIC managed to turn a profit for the American taxpayer, and frankly, I don't care. The bigger thing to notice is that private individuals with cash are investing in real estate assets. When Shiller tells us that he sees real estate values dropping another 20%, it just does not jibe with other facts we see in the vast forest that is the economy of the United States of America - still the best, safest place in the world to invest.[5] And besides, just the way "UNITED STATES OF AMERICA" looks in type is way cool![6]
Another quote, "More than a few huge hedge funds and distressed asset specialists are lining up captive servicing operations, of course, with the distinct goal of buying distressed mortgages and then actually keeping the borrower in their home." Huh? Are these the same bad greedy hedge funds and investors that "created"[7] the mortgage meltdown? Remember Gordon Gecko? Greed is good? It is a rather inarticulate way of saying that basic capitalist principles have a way of creating positive side effects for society. Basic human self-interest REQUIRES the good will of other members of society to work, and people make deals that provide mutual benefits for all parties. If you are truly greedy, then you are not a capitalist, but a crook. Remember that corny rule that goes, "Covet not thy neighbor's goods?" Just ask Bernie Madoff. I wonder how he will like wearing orange jump suits?
The point of these three stories is to please heed your common sense and look at the motivations of the "nattering nabobs of negativity"[8] Substantial private (productive) money is coming into residential real estate. Those people don't put money where they do not believe that there is opportunity for a return on investment. That signals a bottom and a climb out of this three-year correction. Smile and look to the future - oh - and save more next time. Me? I am buying up parts for my MG. ;-)
[1] I can nominate myself to be a Nobel prize winner - and then I can call myself a Nobel Laureate Nominee! I sort of like the way that sounds.
[2] O.K. - maybe in a catastrophic asteroid strike - but then remember E=MC2 - it doesn't disappear - it just changes form. Do stocks and bonds do that? Maybe they just go to another dimension.
[3] MGB - a little two seat British car produced from 1962 until 1980. In spite of the fact that they have bad electrics and lots of rust, people like me buy them (one is in a million pieces on my wife's side of the garage right now! Nothing makes one more popular with one's spouse!) and restore them. Trust me, this is definitely a way to take money and turn it into non-income producing expenditure. Think about buying a car one piece at a time!
[5] It has to do with that whole rule of law and private property thing. Crazy.
[6] Yes, my wife thinks that I am on the lunatic fringe too if that thought recently crossed your mind.
[7] PLEASE! O.K. - just for you conspiracy theorists, this is what happened. Hedge funds created the mortgage melt-down so they could siphon off exaggerated profits and then come in and buy artificially depreciated assets. It was the largest short sale in history.
One of the things that I get to do from time to time is to teach classes to real estate agents. It is an opportunity for me to provide the insight of one who does not actually negotiate or broker real estate sales to those who do (it's that old saw - those who can't - teach).
This class is my favorite - things that listing agents should do, but don't. I have to preface this post by saying that I have been practicing law for twenty years. Ten of those years as a litigator, and ten as a real estate transactional attorney. The perspective I have is legal - what happens when contracts don't close? This leads me to an investigation of why it did not close. The final part of the inquiry is what to do to prevent the issue from causing a contract failure again.
There are three general things that listing agents can and should do to prevent a contract from failing. This post will deal with one - demanding substantial earnest money.
Think about trying to sell real estate from the seller's perspective. The first thing is pretty obvious - the seller wants to obtain the most money he or she can for the property. Next, the seller needs to sell the property as quickly as they can. Third, the seller needs to conserve cash to buy the replacement property.
These three motivations are always in a state of flux. Sometimes a seller is willing to take a lower offer than he otherwise might in order to close the sale more quickly, or not to have to put cash into the property for repairs. A seller might demand a premium to accept a contract that has more contingencies for financing than one that does not. This list is not meant to be exhaustive, but rather to show that the decision whether to accept a particular offer is usually the product of weighing many conflicting factors.
The biggest thing that listing agents can do is to require more earnest money. Why do we have earnest money anyway? The common wisdom is that a real estate contract is not enforeceable without earnest money. However, this is not true. The mutual promises to buy and sell are sufficient, if in writing signed by those making the promise, to support enforcement of a real estate contract. Earnest money is just what the name implies - a show of good faith. Thus, in order for a buyer to show true intent to purchase and the financial ability to consummate the transaction, the buyer puts up a substantial sum of cash.
Something happened to earnest money though - it seems that with the advent of easy credit and 100% financing, the amount of earnest money got smaller and smaller. This was true even in a market where there was fairly strong demand for housing. Credit was so easy, sellers simply did not care about the amount of earnest money the buyer put down. It seemed that almost anyone or anything could get financing!
Which brings me to my first observation - if a listing agent wants to give her client confidence that the contract will close, demand significant earnest money. A good rule of thumb is to demand an amount of earnest money that will compensate the seller for his carrying charges (either rental value or interest payments, taxes, insurance and upkeep) for the property during the time it takes to close the contract.
This is important - if a property is off the market for a month and then the buyer defaults, $500.00 dollars will not come close to reimbursing the seller for what he had to pay to carry the property for that period of time. In addition, there is little or no security for the broker's commission if the deal does not close due to the breach by the purchaser.
The usual objection that I hear to my suggestion that listing agents demand more earnest money is that buyers won't pay it - they too need to conserve cash to close, and will simply move on to the next property. I would respond that if the buyer moves on, then you have done the seller a valuable service. You saved your seller from having to endure the emotional stress of waiting for a month and then not closing the deal. - Or worse, getting strung out through a series of missed closing dates while the buyer struggles to obtain financing.
The other big advantage of asking for substantial earnest money is that it filters out the people who won't be able to close the deal from those financially able to consumate the transaction. This is truly important because at the end of the day, while it is nice to be fairly compensated for the time value that the property has been off the market, the objective is to close the sale. Financial qualification of buyers is another whole topic of things listing agents should do - but earnest money is big part of that.
Finally, substantial earnest money gives the seller leverage to close the deal. It prevents buyers from making superficial contractual commitments to buy your clients' house. The amount of money involved should be an amount that the buyer won't walk away from on a whim. It also allows you some wiggle room in the negotiation. It is something to "give away" when the buyer asks for financial concessions in a counter.
Too conclude, be bold. Listing agents, ask for three month's mortgage payments as earnest money. You will make your clients happy, and frankly, in this day and age, it will be nice to know that the buyer has some skin in the game. But then, what do I know? I just close the deals!
Newsflash! The United States Department of Housing and Urban Development has released its new rules concerning the Good Faith Estimate - 341 PAGES! Good Gravy!
I have begun to read the rule. It is part of what I do for a living. Do we really need 341 pages of self serving justification to explain why we are changing the GFE from one page to three pages, correlating lines on the HUD-1 to lines on the GFE, and mandating another page to the HUD-1 explaining terms of the mortgage financing?
All this to promote competition and to protect consumers. In case some of you haven't noticed, when was the last time anyone was able to actually RAISE what they charged to make or close a loan? I know that competition (oh - right, a market term) in the settlement services business in my state has been driving down attorney's fees for years. The same can be said for origination fees and real estate commissions.
The really sad thing is that the new GFE and HUD-1 do little or nothing that the old forms did not do. They really aren't much of an improvement.
The galling part is that the government of the United States of America ("We hold these truths to be self evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.") presumes to tell business men and women what they can charge to provide a service and to allow a borrower to use the lender's money - a perfectly legal activity. What part of this am I missing? What responsibility does the consumer have to protect his own interest? People have been borrowing money foolishly since the dawn of recorded history - Does the government of the United States of America, by and through the agency of the Department of Housing and Urban Development presume to be able to magically solve that problem through the issuance of a 341 page manifesto?
This is all symptomatic of the larger issues we face as a democratic republic. Our representatives no longer serve We the People.
I know this is more rant than informative discourse. I do remain hopeful for the future of our country. However, I find that I have to pray a little harder each day to keep that hope alive.
"No State shall . . . pass any . . . ex post facto law, or Law impairing the Obligation of Contracts . . ."
Constitution of the United States, Article I, Section 10.
Mortgage loans are contracts between a borrower and a lender in which the borrower uses the proceeds of a loan and in exchange for the loan, giving an interest in real property to the lender to secure repayment of the loan. The contract usually provides that the lender has the right to use legal process to take the property if the borrower defaults on the loan.
This is the basic bargain. With all of the awful news we hear lately about the numbers of homes being foreclosed across the United States, there has been a lot of pressure on politicians to do something. One of the solutions proposed by those politicians has been to impose additional legal hurdles on the exercise of the contractual right to foreclose. Another has been to set up programs forcing lenders to modify the terms of the contract to accept less money in repayment of the loan than the actual loan itself (just follow me here).
Foreclosure is a terrible thing for anyone to go through. If a lender has to foreclose, more often than not it means that the borrower has suffered a financial setback. The causes of the setback are often heartbreaking. The consequences to the borrower are an added burden to an already emotional trauma. The lender has to take a property and then try to sell it, often at a loss.
There is an old saying in the legal profession, "Hard cases make bad law." This is an adage that basically means that if we let emotions get in the way of applying the law, then we don't have a system of laws, but of caprice. We don't have the rule of law, but the rule of men.
I quoted the passage from Article I, Section 10 to ask, rhetorically, how can any state impair a lender's right to exercise vested contract rights to foreclose on a loan in default?
The Founders inserted this language because at the time of the Constitution, commerce in and among the several states was severely impaired by a credit crisis brought on by massive loan defaults. The several states were issuing their own paper money and inflation was rampant. State legislatures were passing all kinds of laws favorable to debtors - many of whom were large, landowning legislators. Many of the debts were owed to citizens of England (whom we had just fought a long divorce battle with - you remember the American Revolution?). These laws destroyed contracts between private parties after the rights bargained for and memorialized in those contracts vested in the parties - meaning that the lender had already advanced the money to the borrower.
Which brings me back to the present - where we find ourselves in a situation where there is a perception among investors that securities based on the basic promise to repay real estate secured debt are not good investments - because the promise that forms the basis of the return on the securities is no good. Now bear in mind, we are talking about less than five percent (5%) of those promises.
Politicians see opportunity to advance their careers in the pain of foreclosure. Never mind that this pain was caused by government policies primarily pushed by Congress (alphabet soup time - CRA, FNMA, FHLMC, etc.) that coerced normally level headed mortgage lenders (gotta have 20 percent down and good credit to buy a house) to go crazy. These policies caused lenders to throw caution to the wind and give loans to anyone regardless of credit worthiness or the amount of equity they had in the transaction. While the intention of the policy is admirable (put everyone in a house they can all their own), it resulted in a slew of terrible unintended consequences.
Now, when those same lenders, after following government policies, try to recoup their losses, or at least mitigate them through the foreclosure process, the states impair those contract rights by passing laws designed to impede the exercise of foreclosure by lenders.
James Madison is turning in his grave. It is wrong and immoral to impede these contract rights. Not only because the government is not supposed to stick its nose into the perfectly legal affairs of private parties, but also because to do so in this case will prolong and exacerbate the current recession. By trying to protect the few, the government, state and federal, will hurt the many. Barney Frank, Chuck Shumer and Arnold Schwartzenegger should be ashamed.
These programs will not hurt people of means, it will devastate middle class America. Lenders, unable to rely on the contract rights they got when they lent money in the past, will either not lend at all or raise the cost of lending to compensate for the additional risk. Realtors, builders, construction laborers and trades of all kinds, suppliers, furniture and appliance manufacturers - the list goes on - are all damaged - because the government wants to give the few a soft landing.
We should heed the wisdom of those brilliant men of 1787. I guarantee you that they gave every word of the Constitution far more thought than any member of Congress ever gave that last act nationalizing the American banking system.
My livelihood depends of people buying and selling real estate. What our government is doing will only prolong current market conditions and adversely impact my ability to feed and clothe my family. So you see, by becoming involved in the tragedy of one family, and preventing foreclosure, the state and federal governments are hurting my family, and I suspect, yours too.
I have written in the past about real estate closings and the practice of law as defined in Georgia. The nutshell version is that in the state of Georgia, the practice of law includes real estate closings. Why? Because the Georgia Supreme Court says so. I have also lectured at continuing education courses on legal ethics for real estate attorneys. One of my favorite themes is whether closing attorneys owe a duty to anyone other than their client at the closing. For many and varied reasons, including because the Georgia Supreme Court says so, I believe that they do.
Now that we have the perspective of the last few years of hundreds of thousands of people being foreclosed because they borrowed money on terms they did not fully understand, the importance of the closing ceremony should be understood to be a critical event in the purchase or refinance of a home.
Parties to commercial real estate transactions certainly view it that way. Buyers, sellers, developers, investors, banks and insurance companies all spend a lot of money to retain their own counsel to make sure that their legal interests are protected at the closing and that they obtain the bargain they spent so much time negotiating in the contract.
Why then, is the purchaser of residential real estate, or the borrower in refinancing their residential real estate, hesitant to pay for meaningful legal services at their closing? The lender often charges between one half and one percent (sometimes more) of the loan amount as a fee to provide the loan - in addition to other fees for underwriting, document production and third party fees for tax and flood services. Real estate agents (I know that there many different models now for how an agent is compensated for brokering the deal) can make up to three and one half percent of the sales price as a commission (each agent - listing and selling).
Title, escrow and closing services generally compose less than .75% of the loan amount (and this includes lenders and owners title insurance in Georgia). For those fees, the closing attorney provides a neutral site for the closing (usually complete with chocolate, coffee and soft drinks), searches and clears the sellers' title, makes sure that the seller can provide the buyer marketable title, prepares the deed of conveyance, prepares forms for the buyer and seller to comply with state and federal capital gains and income tax laws, makes sure that the parties to the closing are not prohibited under federal law from engaging in the transaction, and underwrites the title insurance policy for the lender and the buyer.
Most importantly, the closing attorney is available as a resource at closing to the parties if they have questions concerning the transaction. This cannot be overstated. Can a notary really tell a borrower with any certainty whether the loan instrument contains a prepayment penalty? Can they explain the different ways to hold title to real property? Can they explain the Truth in Lending, Escrow, or Servicing Transfer Disclosures required in every consumer mortgage loan transaction? What about how costs are apportioned to the parties on the HUD-1 settlement statement? Probably not, unless that notary also happens to be an attorney licensed and in good standing in the jurisdiction where the property is located.
Closing attorneys in Georgia are available to the parties, and while generally representing the lender, have duties to the unrepresented parties at the closing under the Georgia Rules of Professional Conduct. In addition, lenders are consumer service businesses. While representing that lender, doesn't the closing attorney do their lender client a disservice if they fail to adequately explain the loan documents to the borrower? To the extent that the lender hires the closing attorney to make sure it has senior lien priority for its security instrument, the borrower has a commonality of interest with the lender in that the buyer wants to obtain title free of encumbrances with the exception of the lender's mortgage. The borrower also needs to be certain that the terms of the loan are what they negotiated with the lender.
This brings me back to my original point. All of this service costs money to provide. How many borrowers would be in the midst of foreclosure if someone had explained the effect of a "pick a payment" loan instrument, or how interest rates rising on an adjustable loan affect their payment? No one can really say (my crystal ball is still in the shop this week). Are we better served to just, "sign the papers" and move on to the next transaction, or take a little time to understand what we are really doing when we buy or refinance a house?
In my opinion, this is part of why the foreclosure numbers are so high. Has anyone seen what the numbers are on title claims? I would not be surprised to see that curve track the foreclosure numbers.
Anyway, the next time you are tempted to skimp on title services, title insurance or escrow and closing costs, just remember that you do get what you pay for at closing, and for years beyond. It is just like car insurance - you wonder why you pay for it until you have that accident.
Last week I wrote about the August pending contracts resale numbers. They were up year over year and month over month, with standing inventory going down to 10.1 months.
Well, NAR published the September numbers this morning. Go to http://www.bloomberg.com/apps/news?pid=20601087&sid=auh3iRzkjrUw&refer=home. September resales are up year over year and month over month. More importantly, Resale inventory numbers went down to 9.9 months. The percentage of resales that were REO or foreclosures was about a third of the total. Remember, we are trying to work down to about six months of resale inventory.
In my mind (an often scary place), it seems that we are seeing a market trend. Remember that what we see in the news is always a trailing indicator. However, since we have been in a bear market for about two and one half years (downward curves in both sales numbers and home prices), it seems like we should be seeing some absorbtion of lower priced homes. A recession won't help us, but the early signs of a "recovery" in residential resales should be fully apparent by the middle of next year.
That is my story, and I am sticking to it. When you get those contracts, send them to me for closing! :-)
Regardless of your political inclinations, this election is stirring very strong emotions for or against the candidates. I am no exception to this phenomenon.
It has been tough in our market. We have been challenged to find ways to earn an income. Whatever, happens, those challenges will continue with us for at least the next six months. Depending on which prognosticator you like, it could be another eighteen months.
The thing you have to keep in mind is that the sun will come up tomorrow, and your personal relationships and family will be close. Times like these are when you truly appreciate what you have and understand that you really want a lot less.
Turn off the news and ignore the fire warnings. Much of what you hear has to do with who news outlets like and the need to create drama to sell commercial airtime. The facts are there for you to interpret for yourself. August year over year and month over month pending contracts numbers were up, as were mortgage applications. The percentage of existing home sales that are REO properties was way up. Building permits are way down. What I have not heard are any numbers on vacant standing inventory.
I am not an economist, but I can connect the dots. The market is correcting for the increased inventory, which is driving prices down. Even if interest rates rise (which they are sure to do with all the new Treasury Debt being issued weekly), affordability will not be adversely affected. There are a lot of good reasons to buy homes now for people who are serious about buying.
Go back to basics - qualify your buyers - whether you are listing or co-oping. Don't waste your time with buyers that do not have the ability to close the deal. It is hard to resist in a tough market like this, but then we always have a hard time with the "bird in the hand" mentality. That makes it even more important to spend your time working on a deal that is likely to close. With fewer deals, we cannot afford to fritter away our time.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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