Professor X's Blog

Get HELP, before you lose your home!

Professor X (NONE) — Wed, 21 Mar 2007 10:37:58 -0700

I usually try not to add fuel to the pessimistic fire that has engulfed the housing market over the last year and a half, but some stories need to be told. According to a February 13 article in the Detroit News, by Louis Aguilar, Wayne County posted the highest rate of home foreclosures among major metro areas in the nation during the month of January. The foreclosure rate was so high in fact, that it was 7 times more than the national average. Oakland and Macomb Counties have been hit pretty badly as well, and when you combine the foreclosure rates of Michigan's three major metropolitan areas, it is enough to push Michigan to 2^nd Place among foreclosure rates for all 50 States. This apparently represents an increase of 147% over last years numbers, and the stagnant Michigan economy isn't helping matters either as every day we hear more and more discouraging news from the dying heart of Michigan's economy...the Big 3.

The Banking and Insurance Industries are scrambling to cover their um...losses and every day we are hearing new policies regarding Michigan loans...Some investors have decided to pull out of the Michigan market all together, and I've even been told informally and off the record of course by some local account executives that their companies are looking for anyway they can to deny loans with Detroit zip codes.

As Banks are deciding how they are going to deal with this problem, consumers are just trying to figure out a way to pay their mortgage payments. To help combat rising foreclosure rates across the country and to help keep people from losing their homes, the non-profit group ACORN, is introducing a new program called Home Equity Loss Prevention, or HELP. The ACORN website explains that "if you fall behind on your mortgage, a housing counselor may be able to intervene on your behalf with your lender in order to come to a resolution that will ultimately bring your loan current." Last year they helped 4,800 families across the country save their homes. Click here to view a list of lenders that participate in the program, or to get more information about ACORN Housing's HELP Program.

The Rebirth Of Cool: Detroit Real Estate - GAR Building Next To Be Rennovated

Professor X (NONE) — Sun, 18 Feb 2007 09:27:48 -0800

Olympia Development has been selected to refurbish and renovate the long-mothballed Grand Army of the Republic building in downtown Detroit.

In 1866 Benjamin Franklin Stephenson and The Rev. W.J. Rutledge founded the first chapter of the Grand Army of the Republic in Decatur, Ill., with 13 fellow soldiers. At its height in the 1890s the organization boasted more than 400,000 members. Detroit was home to several flourishing and colorful Posts of the GAR. The GAR was a wonderful organization where Union Veterans of the Civil War could not only socialize with their fellow veterans, but also could perpetuate the memory of their fallen comrades, aid fellow soldiers who had fallen on hard times, and extend help to widows and orphans of the war, similar to the modern VFW or the American Legion.

The Grand Army of the Republic is responsible for among other things, the creation of Memorial Day as a national holiday and The Grand Army also fought hard to win pensions first for disabled veterans and eventually for all veterans.

Detroit was home to the Grand Army of the Republic's F.U. Farquhar Post, Fairbanks Post, John Brown Post, O.M. Poe Post, and The Detroit Post. The GAR built its own building in 1898, the castle-like structure, bounded by Cass, Grand River and West Adams, was completed in 1901 and it sits on land that had been willed to the city by General Lewis Cass. The cost of the building was $44,000, $38,000 of which was given by the city and $6,000 by public subscription. The building still stands, though it has fallen on hard times.

Since the demise of the GAR it served as offices of the WPA during the thirties and at some point as a police lockup. The GAR Building was used to house city offices until 1982. The next year, the city gave the property to one developer but reclaimed the parcel in 1993 after no progress had been made. Since then, the city has tried unsuccessfully to find someone to rehabilitate the building.

Until now that is...like many of Detroit's once crumbling old jewels, the GAR building is the next to be reborn. A recent Detroit News article explained that "In the plan the company submitted to city officials, Olympia said it would build a memorial honoring Civil War veterans on the first floor of the building as well as create public space that would showcase other Olympia Development projects; the second and third floors would have office space; and the fourth floor could have a club or cafe." As part of that deal, the city required that Olympia must maintain its architectural details, such as a mosaic that illustrates its history.

This is the kind of news we love to hear. The city of Detroit is one of the greatest cities in this country's history. From Motown to the auto industry Detroit defined cool and we can't wait to see it restored to its former glory.

True Lies: Stated Income Loan Gets Originator Indicted

Professor X (NONE) — Wed, 24 Jan 2007 12:23:06 -0800

Stated Income Loans Gets Originator Indicted - That was the eye catching title of a December 20^th 2006 article by a staff writer at the Originator Times. Was I shocked, or I was appalled, and sick to my stomach... and just a little bit curious.

While the few kindred spirits of Active Rain who know me, and actually take valuable time out of their day to read some of my long and exhausting blog posts probably already know my feelings about the mortgage industry's growing problem that is stated income loans, I was still slightly shocked, and a little bit frightened, to find out somebody in my industry, has been indicted and charged with a crime for doing something that thousands of loan originators do every day, knowingly lying about a borrowers income in order to get them approved for a mortgage.

The Originator Times article was brief and to the point, and read like a eulogy. "Kourosh Partow, a former originator and branch manager for American Home Mortgage and Countrywide Home Loans was indicted last week for allegedly inflating incomes of borrowers that applied through him for financing."

I'll say it again...I was frightened, and I wasn't the only one. Headlines like this one were jumping around the message boards over at the Broker Outpost: "Disturbing!!! Are banks setting up loan officers?" Even though I don't use these loans very often, I do still use them for the reasons they were intended; self employed borrowers, borrowers who are in predominantly cash businesses, like waitresses or bartenders, or maybe the occasional married couple where a spouse works, but has poor credit and can't qualify on the loan. I ran into my co-worker Mario Rea's office and screamed..."did you read this?" "How can they arrest one of us for doing something that many of us do on a regular basis...something that is basically encouraged by our industry?" The article gave me no answers, and I think it was written in as deliberate a method as to not offer any. So I started doing one of my favorite things...researching the TRUTH.

It didn't take me this long to find this article in the Anchorage Alaska Daily News, from a week earlier by Richard Richtmyer entitled: A seventh linked to mortgage fraud ring. It seems Mr. Partow wasn't indicted for simply originating "stated income loans" as the previous articled explained so simply, but in fact Kourosh Partow was part of a 7 person "mortgage fraud ring," To be more specific, "Prosecutors allege that Partow overstated income and assets on the mortgage applications of 6 co-conspirators, and also for falsifying documents." A June of 2006 article at JuneauEmpire.com written well before the indictment shed even more light on the situation by explaining according to public records Partow had his license revoked in Wisconsin 4 years ago for forging loan documents as well, but found a job again in Alaska which is the only state to not regulate the lending industry.

And so it appears for now the mortgage industry is still safe, There isn't a stated income witch hunt going on and I won't be arrested anytime soon for originating a "stated income loan," but this might be a taste of what is coming down the pipeline and I can say I'm not frightened anymore, not even a little bit, because when used properly, these are an excellent tool to help people by houses, but I still strongly feel that until lenders severely scrutinize and limit the process of stated income loans, then we are still light years away from fixing the growing mortgage problem in this country.

Private Mortgage Insurance to become Tax Deductable...for next year at least

Professor X (NONE) — Thu, 18 Jan 2007 21:54:13 -0800

Who doesn't hate private mortgage insurance? For years lenders have charged PMI fees to borrowers who couldn't afford to put 20% down when purchasing their home, and why not? Private Mortgage Insurance or PMI makes complete sense from a lenders perspective. When they agree to lend money to borrowers with little or nothing down, they are assuming all the risk on a loan, and when a borrower doesn't put any of their own money into a transaction, that risk can be great. Enter Private Mortgage Insurance. Companies like Radian and Genworth Financial offer Private Mortgage Insurance Policies to banks that cover the lender's loss in the event of foreclosure. The Lender of course graciously passes this cost on to the borrower. Unfortunately from a Borrower's perspective, PMI doesn't make a whole lot of sense, because the cost of putting less than 20% down when you buy a house can mean hundreds of dollars per month in private mortgage insurance premiums.

Creative mortgage professionals, who actually care about their client's best interests, figured out early on that there were a lot of very creative ways to save borrowers thousands of dollars by utilizing mortgage options that don't require a borrower to pay PMI. The most common of these options is to split your total mortgage into 2 separate mortgages, called an 80/20 or an 80/15/5 Piggy Back Loan, but there are dozens of other creative ways to avoid PMI. Even though the piggyback options often came with higher interest rates on the second mortgage, the benefit of choosing one of these creative options were great. First in almost every situation, the total monthly mortgage payment of the 80/20 or piggyback option is less than the total payment of a traditional mortgage with private mortgage insurance. But more importantly, the interest you pay on the piggyback's second mortgage is entirely tax deductible, while the monthly private mortgage insurance premiums are not. The tax savings made the choice a no-brainer!

As always, recent changes to the status quo are promising to turn conventional wisdom on its head. Recently, congress has passed tax legislation that would renew for two years a host of expired business tax credits and popular individual tax breaks, and introduce a new, one-year itemized deduction for mortgage insurance premiums. A CNN Money article explained: "The legislation allows taxpayers who itemize their deductions to deduct premiums paid for mortgage insurance - which typically is required when home buyers purchase their homes with less than 20 percent down. Currently, only the interest paid on one's mortgage is deductible if the taxpayer itemizes deductions. The new insurance premiums deduction will only apply to mortgage insurance contracts issued in 2007 and is only available to taxpayers whose adjusted gross incomes do not exceed $110,000 ($55,000 for married taxpayers filing separately)."

It's still too early to think paying PMI is the better bet though, and I would consult your mortgage professional and tax accountant about what is the best option for your situation. As of right now, the new deduction only applies to mortgages that close in 2007 and for right now, that's it. It's a one shot, one year deal. Congress may chose to extend it, but right now I think they are testing it out. Also there are income limits, so if you make more than $100,000 per year, this won't even apply to you. Finally if you usually take a standard deduction, you would have to have a pretty decent size mortgage to even make itemizing worth your while. According to a Bankrate.com article, quoting the chief economist of a large internet mortgage company ( I won't use their name because I used to work there and won't add fuel their SEO machine) this particular chief economist said: "You need to have a mortgage of about $130,000 or so to even pay enough interest to hurdle the standard deduction. In practice, he says, this means that the deduction is available to households with incomes between $50,000 and $100,000."

The Rebirth of Cool: The 2007 Detroit Auto Show (NAIAS)

Professor X (NONE) — Tue, 16 Jan 2007 22:43:21 -0800

Well it's that time of year again and if you grew up in the Motor City, then you should already know what I'm talking about. Saturday marked the public opening of the 2007 North American International Auto Show at Cobo Hall in downtown Detroit, Michigan. The auto show is the premier annual event for the city. This is a post I really wanted to get out earlier considering I have been lucky enough to have a sneak peak at the 2007 NAIAS for the past 2 weeks but I have been so busy it just didn't happen until today.

Some of my best friends in the world own and operate Viviano Flower Shop Inc, in St. Clair Shores, Michigan. Viviano Flower Shop is one of the largest florists in the country and their reputation as one of the best florists has helped them work with corporate accounts all over the country, including many of the auto accounts for the Detroit Auto Show. I of course volunteer to help my friends build and set up the displays every year so I can get an early look at the show, and not to mention tickets to the infamous Charity Preview Party.

The rich history of the North American International Auto Show is as much a part of the history of Detroit as the automobile itself. The Detroit Auto Dealers Association (DADA) was founded in 1907 by a group of five Detroit-area auto dealers after they hosted the very first Detroit Auto Show in the same year. Since then, the show has grown from a regional event with 17 exhibitors to a world-class showcase featuring more than 60 exhibitors. As the years passed, the show became increasingly popular as the demand and interest for automobiles grew. The show grew and moved to several new locations, including the Light Guard Armory on Eight Mile, the Wayne Gardens Pavilion and the Michigan State Fairgrounds, to name a few. In 1965 The Detroit Auto Show moved to its present location at Cobo Conference/Exhibition Center in downtown Detroit.

This year's show was an excellent as usual, you can view my complete collection of photos of this years NAIAS at http://good-times.webshots.com/album/557056876nlLNhN. If you haven't checked the actual show out yet, I suggest you do. If you want to beat the traffic, try parking in the Greek Town Casino Parking Garage and getting your parking validated for free. You can ride the people mover to Cobo Hall from Greektown and avoid the parking rush. Admission is $12 for adults and the show runs from now until Sunday January 21, 2007. Click here for more information.

Click Here for Detroit News Coverage of the 2007 Detroit Auto Show

The Rebirth of Cool: Special Edition To Commemorate The Martin Luther King Jr. Holiday

Professor X (NONE) — Mon, 15 Jan 2007 14:11:43 -0800

Martin Luther King, Jr., an African-American clergyman, is considered a great American because of his tireless efforts to win civil rights for all people through nonviolent means. Since his assassination in 1968, memorial services have marked his birthday on January 15. In 1986, that day was replaced by the third Monday of January, which was declared a national holiday. --

From the Speech at the Great March On Detroit: June 23, 1963

"And so I go back to the South not in despair. I go back to the South not with a feeling that we are caught in a dark dungeon that will never lead to a way out. I go back believing that the new day is coming. And so this afternoon, I have a dream. (Go ahead) It is a dream deeply rooted in the American dream.

I have a dream that one day, right down in Georgia and Mississippi and Alabama, the sons of former slaves and the sons of former slave owners will be able to live together as brothers.

I have a dream this afternoon (I have a dream) that one day, [Applause] one day little white children and little Negro children will be able to join hands as brothers and sisters.

I have a dream this afternoon that one day, [Applause] that one day men will no longer burn down houses and the church of God simply because people want to be free.

I have a dream this afternoon (I have a dream) that there will be a day that we will no longer face the atrocities that Emmett Till had to face or Medgar Evers had to face, that all men can live with dignity.

I have a dream this afternoon (Yeah) that my four little children, that my four little children will not come up in the same young days that I came up within, but they will be judged on the basis of the content of their character, not the color of their skin. [Applause]

I have a dream this afternoon that one day right here in Detroit, Negroes will be able to buy a house or rent a house anywhere that their money will carry them and they will be able to get a job. [Applause] (That's right)

Yes, I have a dream this afternoon that one day in this land the words of Amos will become real and "justice will roll down like waters, and righteousness like a mighty stream."

I have a dream this evening that one day we will recognize the words of Jefferson 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." I have a dream this afternoon. [Applause]

I have a dream that one day every valley shall be exalted, and "every valley shall be exalted, and every hill shall be made low; the crooked places shall be made straight, and the rough places plain; and the glory of the Lord shall be revealed, and all flesh shall see it together." [Applause]

I have a dream this afternoon that the brotherhood of man will become a reality in this day.

And with this faith I will go out and carve a tunnel of hope through the mountain of despair. With this faith, I will go out with you and transform dark yesterdays into bright tomorrows. With this faith, we will be able to achieve this new day when all of God's children, black men and white men, Jews and Gentiles, Protestants and Catholics, will be able to join hands and sing with the Negroes in the spiritual of old:

Free at last! Free at last!

Thank God almighty, we are free at last!"

Just Ask Josh: Is it really possible to get a no cost loan? Isn't there no such thing as a free lunch

Professor X (NONE) — Mon, 15 Jan 2007 13:58:54 -0800

This weeks question for Just Ask Josh comes to us from Maureen Francis, Birmingham Michigan's leading Realtor and author of the mioaklandcounty blog. We've been hanging onto this question for a while, waiting for a good week to post it.

"Our mortgage bank just sent a letter that they will give us a refi loan
with no fees and no closing costs. Is that really possible, or am I
just paying through a higher interest rate or something? Isn't there "no
such thing as a free lunch?"

Maureen,

This is a very good question, because in this situation, like many others, there are some instances where this makes sense and other instances where it makes no sense at all. To understand how an offer like this works, you must first understand how mortgage originators and brokers are paid. This is an industry trade secret, so if I disappear after sharing this with you, then you should know why.

Mortgage brokers are paid by whatever bank they originate your loan through. In order to encourage mortgage brokers and bankers to originate loans with their institution, banks offer brokers compensation in return for the business. This compensation is known as basis points or Yield Spread Premium. The yield spread premium that a broker earns for originating a loan is usually a certain percentage of your entire loan amount. The higher the rate the more money the broker makes on your loan. Because Yield Spread Premium is a percentage of your total loan amount, it also stands to reason that the larger your loan amount, the more money a broker will make on your loan. (1% of 300,000 is a lot more than 1% of 80,000.)

Whenever a lender or broker offers to "pay your closing costs" or offers a "no closing cost loan" they are simply taking their yield spread premium and using it to cover the costs associated with your loan. While some lenders are willing to make less money on your loan in order to offer you a no-cost loan option, others may offer you a higher interest rate in return for this option. In order to tell if a no-cost loan really makes sense for you, you must know how to compare it to a traditional loan where you pay the closing costs.

Most people refinance their mortgages in order to save money. If you are considering refinancing to save money, you must always remember that there are costs associated with a mortgage. This means if it costs you money in order to save money, you have to compare the cost with the savings in a sort of cost/savings analysis to determine when you will break even and to see if the refinance actually makes sense. While I suggest you see a professional mortgage banker or financial planner to determine an accurate "break even point," you can do a simple calculation yourself to get a basic idea. Simply take the cost and divide it by how much money you are saving per month by refinancing. This will tell you how many months it will take you to "break even." Now all you need to do is compare it to how long you think you will stay in the house and if the break even is less than the amount of time you plan to stay in the house, then the refi makes sense. It is obvious reasoning that if you do a "no cost" loan then the "break even" point is immediate and it usually starts making sense much quicker than a loan that costs money. I usually recommend a no cost loan if at all possible, even if the rate is slightly higher. If you want to be really accurate, you must also compare how much interest you will pay by refinancing if you are resetting your loan back at day one when you may have already paid 2, 5 or 10 years off of your current loan, but for the purposes of this discussion, that is irrelevant.

Usually, (but not always) a no cost loan comes with a slightly higher interest rate than one with a cost. Let's look at an example. Let's say you currently have a $100,000 mortgage at 7% and you pay $665 per month for this loan, but you are considering refinancing it. You can get 6.25% and roll $1500 in closing costs into your loan, or you can get 6.5% and get a no-cost loan. If you take the 6.5%, your new monthly mortgage payment would be $632 per month, but if you take the lower rate 6.25% your payment would be a lower $624 per month. Your savings on the loan is marked by how much less interest you are paying. The difference in the interest between these two loan amounts is about $12 per month. But if you have to pay $1500 in order to save $12 per month, it will take you 125 months or almost 10.5 years before you break even. This "break even" point is drawn out even farther if you have recently refinanced and you paid closing costs last time as well. While over the life of the loan, the $12 per month could amount to a savings of $4,320, if you don't keep the loan for longer than 10.5 years (most people keep a loan an average of 5-7 years) or if you sell the home before your 10.5 year period is up, (think about this if you are in your "starter home" or if you are planning on growing your family, or if your job moves you often.) then it might not always make sense to take the lowest rate.

I usually recommend no-cost loans whenever they are available. Especially in the following situations:

You only plan on keeping the home a short time, or you are unsure how long you will stay in the house.

You have recently refinanced and paid closing costs recently,

You are only lowering your interest rate a very small percentage from your current rate.

You have a pre-payment penalty on your current loan

You owe as much as your house is worth, or very close to it.

While some mortgage companies may give you a higher rate in order to offer you a no cost loan, if you remember to check your break even point and compare it with how long you plan on keeping your home, a no cost loan is often your best option!

Are First Time Homebuyers Being Left Out Of The Current Housing Market?

Professor X (NONE) — Tue, 19 Dec 2006 21:57:36 -0800

I came across an article by the associated press in the MSNBC Real Estate Section, back in October entitled "First-time homebuyers being left out." The article went on to quote a poll stating that "Eighty percent of Americans believe it is difficult for most first-time buyers to afford a home, according to an AP-AOL Real Estate poll. Many people - 59 percent - believe the situation is worse now than five years ago." Even in the Midwest, the real estate market in my own backyard, over 50 percent of those first time homebuyers surveyed feel it is more difficult for first-time buyers to afford a home than it was five years ago. As I read this article, I chewed it, and swirled it around in my mouth, but I just couldn't swallow it, and I will tell you why.

I personally feel you will never find a better time to purchase a new home than right now, and I want to bold and underline the fact that first-time-homebuyers can especially benefit from the current real estate market. Sometimes first time homebuyers just need a little bit of help finding their way through all of the junk and misinformation out there about mortgages.

First of all NAR Statistics have been saying, that "The share of first-time home buyers dropped earlier this year to its lowest level since 1987," but now a Wall Street Journal Article by Rush Simon is saying "First-Timers are looking at homes again!" It's a lot of confusion if you ask me, especially for first time homebuyers who are already intimidated by a confusing process they have never experienced before, but the truth is simple.

Interest rates are still at historically low levels. As of the time I am writing this post, they are hovering right around 6.00% for a 30 year fixed mortgage. According to Freddie Mac the average 30 year mortgage rate in July 1976 was 8.93%, in July 1986 it was 10.51%, and in July 1996 the average 30 year fixed mortgage rate was 8.25%. So what if they are a little bit higher than they were last year or the year before, they are still lower than they have been in 30 years! To be fair though, the article claims that many first time homebuyers feel it is more difficult to afford a home than it was just 5 years ago.

According to Freddie Mac, the average 30 year mortgage rate in 2000 was about 8.05% so the mortgage on a $113,900 loan in 2000 (the median home price) would be about $835 per month. Even though median house prices are about 32% higher today than they were in the year 2000, interest rates are about 2% lower. This means a $113,900 home in the year 2000 would cost about $167,500 today. (Current median home value) So a $167,500 loan would have a 2% lower interest rate today, and a monthly mortgage payment of only about $1004 per month! A whole $169 more than 5 years ago! According to Census Bureau statistics, the median household makes about $4,336 more in 2005 than they did in 2000. Now I am no economist and I don't want to get into a statistical debate about inflation, but I think it is safe to say that the cost of every other durable good and service didn't rise at the same rate as median housing prices. In fact the Consumer Price Index or CPI which measures the cost of several goods and services, among them the cost of housing (rent, mortgage payments, utilities, and furniture) only increased by about 13% over the same time period. This is much more in line with the roughly 10% increase in median household income over the same time period. To make a long story short, even though the median price of a new home has increased, low interest rates and relatively low inflation has kept housing prices extremely affordable. This is before we even take into consideration the introduction of all the new mortgage programs that were either not available or not widely used in 2000. Options like the 40 and 50 year term mortgages, interest only options and low minimum payment "option arms."

Which brings us to the next reason; There are thousands of new mortgage products introduced every day that help make home loans more affordable for first time homebuyers. We are in the generation of 40 and even 50 year mortgages, Interest only, and negatively amortizing "pay-option arms." These programs make affording a mortgage payment very cheap in many cases. Not to mention the myriad of zero down loans available have all but eliminated the need for a large down-payment.

First time homebuyers also find themselves with a lot of options not previously available to 1^st time homebuyers in the past. They can get into a home with little or zero money out of their pocket. Zero down loans are very easy to qualify for these days, and FHA, Fannie Mae, and Freddie Mac offer affordable loan solutions that allow homeowners to buy a home with little or zero down. There are also a number grants available, like the American Dream Down-payment Initiative that offer qualified first time homebuyers up to $10,000 in down-payment and closing cost assistance to cover their out-of-pocket expenses on the loan. Finally in this market, with housing inventories growing and growing, many sellers are desperate and will often agree to pay for all of a buyer's closing costs, or other costs in order to entice them to purchase a home.

Homes are actually more affordable than you think in some markets. While median home prices have risen sharply in the last 5 years, we are now starting to see a cooling in many markets, and in some areas even depreciation in home values. Certain areas of the country are already very affordable. Houses in my market in Michigan are some of the most affordable in the country. According to the National Association of Homebuilders/Wells Fargo Opportunity Index, Michigan cities lead the nation in housing affordability. It seems like a contradiction to for 51% of people in the Midwest to feel that housing is not affordable, but to have the Midwest lead the nation in affordably priced housing.

Finally if everything above isn't enough to show that a first time homebuyer will never find a better time than right now to purchase a home, consider these last two pieces of information in parting. A mortgage on a decent size "starter-home" in most real estate markets, not only is often just as affordable as paying rent, but you can deduct mortgage interest you pay toward your home loan on your income taxes at the end of the year. The tax savings alone is enough for most people to consider owning vs. renting.

Do Not Pass Go...Do Not Collect $200

Professor X (NONE) — Wed, 13 Dec 2006 22:23:52 -0800

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages."

Adam Smith

The Wealth of Nations

I have been so busy in the last few weeks that I haven't been browsing the Active Rain Blogs as religiously as I used to. Because of my hiatus, I am not really sure if anybody has addressed this yet, there may have been somebody brave enough to touch it, but then again, this might be something a lot of people in the Real Estate industry might prefer gets swept under the rug. I know the media has been ultra-quiet about it. Because of the length, a lot of people will never read this, and I hope they won't because it will save me time from all the people who take everything I say as some kind of a personal assault all the time. All I ever really aim to do is create intense and intelligent debate. You all know me though...I never was afraid to put myself out there.

On October 16, 2006 I read a very interesting article in the Wall Street Journal's online Real Estate Section, entitled "Real Estate Services Face FTC complaint on Web Policy." Now I am sure most Realtors are far more up-to date on info like this than I am, because of the NAR and other local trade groups keep them in-the-know about these kinds of things. In fact I think my favorite Realtor Maureen Francis at the mioaklandcountyblog gets regular updates as most of you probably do. Maureen has even posted about it on her blog, but the average consumer really should know more about what is going on in our business. When I read this article I have to say I wasn't the least bit shocked, and being from the Metro-Detroit area and working in the Real Estate Industry I was interested to say the least.

It seems The Federal Trade Commission accused two local Detroit area (MLS) multiple listing services of restraining competition by discriminating against a type of service commonly known as "discount real-estate brokers." The two Michigan MLS operators charged by the FTC are Realcomp II Ltd. and MIRealSource Inc. Since I started writing this monstrosity of a post, one of the two MLS providers, MIRealSource has already settled with the FTC, but the fall-out from this new movement isn't going away anytime soon. The FTC has already reached consent agreements with MLS services operating in other states, including Colorado, New Hampshire, New Jersey, Virginia, and Wisconsin, to discontinue use of the policies in question. The FTC claims that the various MLS services owned and operated by the Real Estate Brokers are intended to block the listings of certain homes for sale from being displayed on Realtor.com and other web sites often used by consumers to search for homes. The listings that are blocked from reaching consumers are typically the listings of homes for sale that are being offered by certain "discount real-estate brokers."

The far reaching implications of these proceedings in the real estate industry are everywhere and promise not to be going away anytime soon. Just look at the Law suit the government has brought against the standard oil company, I mean the National Association of Realtors. Peter Coy over at Business Week's Hot Property Blog, posted back on November 30^th that: "There was big news this week in the government's antitrust case against the National Association of Realtors, but the press missed it. The news is that a federal court in Chicago on Nov. 27 allowed the Department of Justice's antitrust suit against the Realtors to proceed. The DOJ argues that the Realtors' rules illegally limit competition from brokers who use the Internet." "Consumers who work with brokers that operate Discounted Real Estate Service Brokerages are better able to educate themselves about available properties that may meet their requirements. By working with a discount broker, customers can search the database of local property listings on their own, using their home computers to obtain the same information other brokers provide by less convenient means, such as by hand at their office or via fax, mail or e-mail. Because these alternative service providers enable consumers to research and learn about the marketplace at their own pace and on their own time, brokers who provide this service can, in turn, lower their costs by reducing the time that their agents spend searching the Multiple Listing Service (MLS) database or showing homes the customer dislikes, the Department alleged. Because the Internet can be used to deliver brokerage services more efficiently resulting in better service and lower prices to consumers brokers who utilize the Internet represent a competitive challenge to traditional brokers, the Department said."

What has been the NAR's response to this festering, expanding mess? A revised policy. The policy, approved by directors of the NAR at the convention in New Orleans, involves information about homes that real-estate brokers get from their local MLS for their individual websites. "The revised policy states that brokers must use "objective criteria" if they screen out some listings. The criteria could include location, type of property, compensation offered for agents who find a buyer, or the level of service provided by the listing company. Thus, listings from brokers providing limited service for lower fees could be excluded from other brokers' sites...By contrast; the policy now states that multiple-listing services must make all types of listings available to the Web sites of participating brokers. It would be up to brokers -- not the MLS -- to decide which listings are used on individual brokers' sites." This is the NAR's response, to take a step back and tell the justice department and the FTC," hey. As a group we no-longer are encouraging unfair trade practices, we are now leaving it up to our individual members, and if they want to restrict competition and ultimately hurt the American consumer, well that is up to them on an individual level.

It is a widely documented fact that the majority of consumers begin their search for a new home on the internet. (Estimates indicate that something like 80% of new-homebuyers start looking online) By limiting or restricting what houses can actually be found on the internet, they can control what houses consumers see and therefore what houses they ultimately buy. Since the Real Estate Industry controls the primary means by which this information is shared, but then restricts any listings that are offered with a "discounted" commission, then we could have a major problem. A reasonable person might agree that the Real Estate industry is engaging in anything from a kind of ex-post-facto price fixing or other violations of the Sherman and Clayton Anti-Trust Acts. I am not quite sure that I agree with the FTC entirely, but more on that later.

The various multiple listing services are owned and operated by the local area Real Estate Brokerages. While these MLS systems claim to have a right to set up rules that are favorable to the interests of the brokers who operate and own the systems, The FTC maintains that restrictions on certain listings deprive consumers of the right to save money by using limited-service brokers. While I agree that as privately owned and operate service, MLS providers do have the right to make rules that are favorable to the interests of the brokers who operate and own the systems, They need to understand that even though Craig's List and Google and Yahoo Real Estate, and other internet portals are tapping into the real estate realm, the majority of internet listings still come from the same place: Industry operated sites like Realtor.Com or the individual broker and Realtor sites in the smaller geographic areas. They therefore control the market, and have a responsibility to the consumer to not only make available all the listings within their databases, regardless of compensation offered, but to also make all listings available to all paying members of the MLS, regardless of what these members decide to charge for their own real estate services.

I think that with the NAR's new policies, in full swing, it will be much more difficult for the government to pin any anti-trust conspiracy on them, either illicit or tacit, but even though in my opinion their new policies mean they technically no longer will be violating any rules, I am not so sure the consumer will ultimately benefit. In my own industry, the mortgage industry, the bank I work for severely limits the amount of compensation I can make on a given loan, but there are still many brokerages nationwide that can make as much or as little as they want, provided the cost is disclosed. My industry has been turned-upside down though in the last 10 years with all of the "Internet based lenders" who offer the lowest rates around, discounted services, and flat fees for mortgages. Many clients decide to go there, and many still come back for my services, after they have a poor experience with a discount or online lender. They are usually unhappy, because the discounted fee is not worth the poor service they received. Every Realtor I know is an expert in their field and I would never work with them if they weren't. They are worth every penny they charge and I would never think twice about recommending them to any of my friends, family or clients. I guess what I am trying to say is this: There is room for many, many different business models in our market. Supply and demand and competition ultimately bring out the best of all possible outcomes for consumers...the best service possible for the best price, determined by the market, not by the individuals providing the goods and service. There is no reason to fear competition, if the demand for your service is that great, and you are worth the price you charge, then the consumer will forgo all other options and pay any price for it. I don't fear my competition, I am confident in the product and service I provide, and you shouldn't fear your's either.

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings by any law which either could be executed, or would be consistent with liberty and justice."

--Adam Smith

The Wealth of Nations

The Rebirth of Cool: Detroit Real Estate

Professor X (NONE) — Thu, 07 Dec 2006 12:19:50 -0800

Designed in 1923 by architect Louis Kamper, the Book Cadillac Hotel is one of the most famous buildings in the city of Detroit. The history of the Book Cadillac Hotel is almost as significant as its list of past guests. Baseball greats like Joe DiMaggio and Babe Ruth have stayed in the hotel, as well as Katherine Hepburn and Martin Luther King. It is a place where President John F. Kennedy spoke and "generations of Detroiters celebrated weddings, bar-mitzvahs, retirements, and other milestones."

The continuing economic destabilization and deterioration of Detroit following World War II and leading into the 1980s took its toll on the hotel as it changed names and owners through the years before closing in 1984. Unlike many famous Detroit landmarks, the Book Cadillac has escaped the wrecking ball on several occasions. It is truly sad how many once great and historically significant buildings have been raped, ravaged, pillaged, neglected and ultimately destroyed in the city of Detroit over the past 50 years.

Previous efforts at renovating the hotel have failed, and prevailing racist and negative attitudes about the city of Detroit have kept many in-state developers away from the city, but Detroit's current rebirth is attracting young professionals and empty-nesters alike back to the city and new groups of out-of-state investors are taking notice. In June of 2006 the Ferchill Group, a Cleveland based developer announced plans for a 176 million dollar renovation of the hotel. Barring any future problems, the hotel will re-open as the Westin Book Cadillac by summer or fall of 2008. The property will feature 455 hotel rooms and 67 luxury condominiums.

People are already lined up to purchase a piece of the landmark. The great news is the Luxury Condos are almost sold out already. Jon Grabowski, president of Esquire properties recently announced that 40 of the 67 units were sold on Saturday October 14^th, during the first exclusive, invitation only sales event at the Detroit Athletic Club, and even more were purchased recently at the December 2 Public Sales Event. Prices range from about $280,000 to $1.5 million, with most of the remaining condos between $300,000 and $450,000.

Active Rain Success Stories

Professor X (NONE) — Mon, 16 Oct 2006 20:12:19 -0700

Here is another reason why AR is a great website...I have been getting a lot of attention from possible consumers who have been coming across my blogs on cyberspace. This is an excellent tool to reach our audiences and provide information to consumers. Here is a question I received online via active rain.

My name is M and wanted to ask you a couple questions. I came across your name on the Internet.

My husband and I lost our house to foreclosure in 6/2005. We tried everything from borrowing money to filing Bankruptcy. Things got too hard with deaths in the family and personal medical problems. We have been renting a house since 12/2005 and have never missed a payment and are now ready to start over. My husband and I both have full time jobs and wish to but the house we are in. The owner wants $150,000.

What do you think? Will we be able to get a mortgage? Do you have anyone you can refer us to or maybe you can help.

Thanks for your time,

In order to understand your situation, first you must understand what you are up against. Whenever you apply for a mortgage, no matter what bank you go through, they are going to look at the same 4 things to determine whether you can get approved for a loan. These 4 things are: your credit, your down payment, your Income, and your savings.

Based on what you have told me in your email, it appears that you might have a problem with your credit. When a bank examines your credit, they don't just look at your credit score, but also at your credit history. Any derogatory items and public records, count as strikes against you. Based on your email, it looks like you have a foreclosure, so this will be your major obstacle against homeownership.

No matter what bank you go to, there are 3 basic types of loans that you may or may not qualify for: A Conventional Loan, An FHA Loan, or a Sub-prime loan.

Conventional Loans: These are the most common types of loans around. They have the lowest interest rates and best programs. If you have ever heard of Fannie Mae or Freddie Mac, These loans are backed by Fannie and Freddie. The rules for these loans say that after a Foreclosure, you have to wait 4 years before you can get a new loan, and have to have re-established credit after. If you can show the credit problem was "isolated" or "non-recurring" and can prove that the foreclosure was the result of "extenuating circumstances" like significantly reduced income or unexpected increased expenses then you can get a loan in 2 years. In order to re-establish credit, you need 4 credit lines and 12 months perfect rental history...cancelled checks are the best way to prove this, so if you aren't currently already paying you rent with checks, you need to start.

FHA Loans: FHA or the Federal Housing Administration also offer loans that you can get. These loans are insured by the department of housing and urban development. They require only a 3 percent down payment that can come from any source even gifts and grants. These loans are just as good as a conventional loan, and their rates are just as low as conventional loans but they are a little easier to get approved for. FHA only requires that 3 years have passed since the date of foreclosure.

Sub-Prime Loans: sub prime or alternative loans are the easiest to get approved for they are the loans that individual banks offer, and insure themselves. They keep them on their own books, and therefore make their own rules for each loan. They are very lenient in regards to credit but because these loans are much more risk for the bank, they come with much higher interest rates and not very favorable terms. While every alternative lender is different, (some won't do a loan after a foreclosure, some want 2 years or 3 years, some will do it one day after your foreclosure but you need to put some money down.)

Not only are there a lot of different options with a lot of different requirements for your situation, but there are also lots of individual things on your own personal credit report and financial history that can help or hurt your chances. In order to find out for sure, you really need to sit down with somebody and talk about your options. Even if you can't get a house right now, if you make a plan, you should be able to get a loan in 6-12 months.

True Lies

Professor X (NONE) — Wed, 11 Oct 2006 20:36:16 -0700

In case you missed it, Ken Harney had a great article in the Washington Post at the end of September and anybody in the Real Estate Industry, especially mortgage professionals need to take note of what is coming down the pipe.

Starting last week, it just got a lot more difficult for borrowers to lie about their income on their mortgage applications. The Internal Revenue Service has announced that it is overhauling a key income verification tool used by lenders. It is now going to be much easier to pull up electronically a borrower’s confidential income tax information. This new process will revolutionize and replace the current process that most lenders use to verify income, the IRS Form 4506-T.

Most Lenders currently require a borrower to sign a form 4506-T at application and at closing. This form allows the lender to request a copy of an applicant’s Income Tax Transcripts, in order to compare them to what is submitted at application. In practice though, this process takes so long that most lenders don’t use it for anything more than auditing and quality control on their inventory of closed loans.

The new electronic process though will be quick, easy and affordable for lenders to get borrower’s income information from the IRS. What used to take weeks, can now be obtained in as little as 2 days.

In the past the biggest problem facing the mortgage industry might have been predatory lending, but currently rampant mortgage fraud has dwarfed any other issues in the industry. You can’t even open a newspaper or turn on the television without hearing about another case of fraud, and these are only the few that get crooks who get caught. It is a problem from the top of the industry to the bottom. Earlier this week, the Detroit News reported about a multi-million dollar fraud scheme that rocked Fifth Third Bank in some of Michigan’s priciest neighborhoods. Banks are constantly changing their processes to help curb fraudulent behavior before it happens.

One of the most popular mortgage products these days is a loan known as a “stated income loan.” When used properly, these loans can help a self-employed borrower or borrower with another unique situation qualify for a loan, but when used improperly, these loans encourage low or moderate income borrowers who live on a fixed hourly or salary wage to “lie” about their income in-order to afford a loan. Many industry critics (I count myself in this group) have long urged that these “liars-loans” are the most significant factor to the current rise in foreclosures.

The FBI warns that mortgage application fraud is a multi-billion-dollar-a-year problem and falsified income tax filing, W-2s and pay stubs are a contributing factor. The new electronic verification system could be huge in spotting and preventing mortgage fraud up-front. But until lenders end or severely limit the process of stated income loans (read blatantly lying in order to get a loan) then we are still far away from fixing the growing mortgage problem in this country.

Zillow...It is what it is, so why does it inspire such hatred?

Professor X (NONE) — Wed, 20 Sep 2006 22:49:16 -0700

I like that Matt Heaton, He put up a great post today in his Active Rain Addiction Blog about the little website that inspires so much ire and rage in so many real estate professionals…and that website is Zillow. It remains to be seen whether he made this post for pleasure or to stimulate scientific debate, but never the less, he informed Rainers that; this morning Zillow announced on their blog that they now allow homeowners to modify data about their home as well as make comments and provide their own estimate of value. Matt seems to think this will be a great addition for the value estimation website, but he also put it out there that “It will be interesting to see the reaction from the real estate community, but I'm sure the consumers are going to love it...”

These are just a couple of the responses this post has already inspired:

“Example - Home listed this spring for $60,000 more than Zillow said it was worth. Sold full price. 2 months later this home was still off base. Now the same home Zillow says is worth $20,000 more than it actually is!!” “Zillow has helped me! After someone checked the value of their home they called me and I told them it was worth more and got the listing which sold quickly. Thanks for the inaccuracies zillow! Keep it Up!”

Everybody is talking about Zillow these days. Greg Swann over at the Bloodhound blog has a great post today that basically describes the Zillow experience as “in preference to telling one simple truth, it will propagate thousands of tiny lies”

It is my humble opinion that everybody really needs to take a step back and look at this from an objective and rational standpoint. Not from the view that as real estate professionals, who believes that we alone are omniscient and omnipotent.

Everyone is quick to point out that Zillow’s estimates (or zestimates) are inaccurate. Well first of all the name says it all…It is of course an estimate. They state right in their terms of use that “ZILLOW.COM PROVIDES THE SERVICES "AS IS," "WITH ALL FAULTS" AND "AS AVAILABLE," AND THE ENTIRE RISK AS TO SATISFACTORY QUALITY, PERFORMANCE, ACCURACY, AND EFFORT IS WITH YOU.”

Real estate agents complain that dealing with clients is very difficult if they have used zillow or a similar website, because they have unrealistic opinions of the value of their home. I ask this: How many clients that you meet for a listing appointment don’t already have unrealistic opinions of the value of their homes?

As a Realtor, when you sit down for a listing appointment, how do you determine the value of the seller’s home? Most Realtors I know start by pulling comps and putting together a CMA. This comparable market analysis usually shows all homes sold (in the MLS) within a given amount of time and what their sale price was. It usually gives the seller a range marked by a low price, a highest price, and a of course a median price to use as a measuring stick. You then set a sale price based on what you “think” the home is worth and then buyers come and negotiate with you for the sale. If you set a price closer to the high end of the scale because you “thought” the house had more to offer, but the house ended up selling for closer to the median price for the area, does that mean your price was wrong or inaccurate, or would you consider yourself accurate because you priced it within a correct range? The higher the sale price, the more variance there will be between the low end and the high end of the spectrum. In one example above, the Realtor is complaining about Zillow because they sold a house for $60,000 more than Zillow said it was worth. Does that make the Zillow Estimate inaccurate, or is their some other spurious reasoning for this sale price? Depending on how big the home is, $60,000 may not be that big of a difference. You can’t base accuracy or inaccuracy on one isolated sale in an area. I think you would be better off comparing the Zestimate to the Median value or average value to determine how accurate or inaccurate the data is. There will always be a desperate seller who dumps their home or an emotional buyer who overpays, but since supply and demand is king, the majority of sales should fall right around the middle and the median will tell this statistical tale. Was the Zestimate still $60,000 less than the median home value for that area? If not, then Zillow achieves its goal, it is a good "estimate" of the houses value. A Realtors services are still needed to determine the "best" (not most accurate" but the best price to list the house at, that will give it the best chance to be sold. The true value is determined by the buyer, What are they willing to pay for it, and if it is priced accordingly.

Real Estate Agents aren’t always accurate either. I had a realtor call me today and tell me (not in so many words) “Hey you stupid mortgage guy, make sure you tell your appraiser about all the upgrades my client has done to the house before they inspect it, or it won’t appraise out.” I had to tell them as politely as possible that the bank does not really care if they have golden toilet seats and diamond studded stucco in the family room, if 4 other similar houses on the same street are selling for less. Then your house will appraise for less too!” (this is after she counter offered my client with a price above what they were already listing at)

To make things worse, currently the accepted standard of determining the correct value of a home is by getting an appraisal done by a “certified” appraiser. appraisers of course are human and the values they determine are totally subjective, and compounded by the fact that they are hired by and have a relationship with the mortgage loan officer in most cases. They determine the value of the home by comparing it to 3 other “similar” homes in the “area” and add or subtract value to or from the subject based on the existence of things like square footage, lot size, bathrooms, fireplace, pools, decks, fences, or lack thereof. This method of valuation is completely subjective. Have you ever looked at an appraisal closely, it is merely the appraiser’s estimate of value. Unless you are working with a newly constructed development, you will rarely see 3 exact comps and 3 exact sale prices, they all have variation. 9 times out of 10 the appraiser is merely looking for comps to support the sale price anyway, rarely is he looking to objectively valuate the property. How else can you explain that almost every appraisal I order for a purchase comes back at exactly the same value as the sales price? Is it because every Realtor and Seller are super-accurate in pricing and every buyer offers only what the asking price is? I doubt it. This is made 100% worse of course, by fraud, silent seller second mortgages, and seller concessions all of which mask the true value of houses. Why is an appraisers “estimate” of a house’s value any more accurate than Zillows? If appraisals are the “true” and “accurate” method to determine the value of a house, then why are most lenders in the country moving away from this model and toward AVM or Automated Valuation Models that encompass and utilize median housing values to determine more fair and accurate housing values? Right now on any rate and term refinance for a Freddie or Fannie backed loan, you don’t even need an appraisal if the value of the home falls within Fannie and Freddie’s accepted variances for home values in a given area. They are already tracking this data and putting it to use. In 10 years the appraiser may be a dinosaur and the Zillow model the accepted tool for home valuation.

Now with all that said, the question is this...would I base the decision on the value of a house on what I found on Zillow? No, but would I use it for a quick idea on ballpark value before taking a cash out refinance application…maybe.

Do I think Zillow’s latest stunt is a good idea? For them yes, it is more interactive for their customers who will like the idea I am sure. Do I think it is the cataclysmic event that many of you are claiming? No, I don’t if you read it completely, they are going to post the homeowners opinions of their home’s value next to the Zillow Zestimate, and therefore you can still determine what is influenced by the owner and what the opinion of Zillow is.

Zillow is merely another tool, use it however you see fit, maybe print some of their graphically pleasing maps to awe your clients, but in the end, you are the professional, and you have the knowledge of the market, A house won’t sell for more than it is worth and it takes a Realtor’s knowledge and expertise to explain that. Maybe you should look at the glass as half full instead. For every person who looks at Zillow and finds the value of their home (accurate or not) that is another potential buyer who might be inclined to list and sell because of the information he or she found. It is up to you how you are going to capture that client and how you are going to convince them of the more “accurate” value of their home. Think about what is really bothering you about Zillow, They aren’t the first company of this nature and won’t be the last. Are you mad about the accuracy of Zillow, or are you mad about another company providing free information that has been traditionally controlled by Realtors? There is plenty of room in the real estate market for all types of business models, your own success is a direct result of your own skill and knowledge, not a result of what some other company is doing.

It’s 5 O’clock Somewhere

Professor X (NONE) — Tue, 19 Sep 2006 22:49:47 -0700

This one goes out to Brian Brady.

Active Rain is great. It is an unbelievable community, and I get a lot out of posting, reading, absorbing the best practices of others, and meeting new friends. But as great as this community and every new trend of the minute is in the real estate industry, we must always remember that Real Estate is a “Sales Job,” and sales jobs involve people, and are usually done best by Salesmen who understand how to relate to other people. I recall a post by Brian Brady a few months ago entitled Doesn’t Anyone “meet for drinks” anymore? It stuck with me, because I couldn’t agree with him more. I’m relatively young by industry standards, but most of my mentors are “Old School” and I consider myself and “Old School” meets “New School” kind of guy. Whether it is taking my Realtors out for happy hour immediately following afternoon closings, or the lunch I had last week with an investor that turned into me calling my processor and cancelling my afternoon appointments, (this turned into 2 referrals this week already) I have been known to put business aside and talk about family, friends and outrageous tales over a glass of vanilla stoli and coke, or Johnny walker on the rocks. Some of you might be surprised by this, but I rarely ask people in my network for referrals, but I still get them. I have found people actually enjoy doing business with their friends. I just simply happen to have a lot of friends in the Real Estate Business. J

In light of this school of thought, I thought I would share with you a recent article I came across in the LA Times that made me picture Brian Brady with a glass of Johnny Walker on the rocks, highball beading with perspiration, dripping onto a bar napkin and a Cohiba clenched between his teeth, talking about the Dodgers falling off the face of MLBA with a bunch of people who wouldn’t dream of sending their business to anyone else. The Article entitled; “toasting the benefits of social drinking” finds… “in a study to be released today, that social drinkers tend to have more charisma, a fatter Rolodex and more friends than those who abstain or drink alone. That garrulousness, they say, translates into higher income — 10% more for men and 14% more for women.” It goes on to suggest that “Those who raise a glass with their office pals tend to network more and add more contacts to their Blackberries, which can lead to new job opportunities and bigger paychecks.” So I propose a Toast….To Brian Brady. Eat, drink, and be merry, for tomorrow they may cancel your VISA. -- Anonymous

Sometimes it takes a bigger man to turn and walk away...

Professor X (NONE) — Mon, 18 Sep 2006 00:20:55 -0700

I am in the mortgage business to make money...as a general rule of thumb, but I know the reason why I am successful, but not incredibly rich, is because I have a problem doing things for the pure motivation of money. I still am motivated every day to be the best mortgage professional I can be, I am motivated to create a good name for myself and to actually help people. I am motivated to provide a service, but to actually help my customers. Maybe I will never be rich because of it, but at least I can sleep at night. A fellow blogger on AR has once accused me of being unethical (although I think this was a ploy to sell poorly written books) but I like to think I have my customers' best interests in mind.

I mention this only because of something that happened to me this week. A client came to me, it was a referral from a new realtor that I just met and have just started working with. As in all new relationships, I want to shine, I want to show how good I am at my job and help this Realtor understand that working with me is like flying first class, but...as in many instances, things never go smoothly when you want them to.

This client had a decent credit score, but a little on the low side. She has a bankruptcy in her not so distant past, and while she has re-established credit, has not fully recovered from it. She has a good job, but with her debts, would only qualify only for a mortgage with about a $200 monthly payment. I don't know about the markets in your area, but around here that won't cover rent in many apartments. To make things worse, she is living with her parents, and wants to buy the house in order to rent it back to her ex-boyfriend. It appears the owner wants to sell, and the x is worried about a place to live.

I spend a few hours explaining all the reasons why she should not do this, but she has her mind set, and wants to consider a "stated income loan." I have heard stated income loans referred to as "liars loans" and with good reason. Now there are plenty of good reasons to use these loans, a self employed borrower who doesn't show much income is one good reason, a buyer with a husband who provides income, but can't qualify to be on the loan, even in some cases to stretch monthly income by a few percentage points to help qualify for a loan, but to straight out lie about it and furthermore to put yourself in a dangerous financial position is a horrible idea. I told her I couldn't help her and I actually turned down her business. While I could easily have gotten her approved for a "stated income loan" I knew in my heart it was a horrible idea for her. I found out within days that somebody was willing to do the loan for her and it made me sick.

We have heard a lot of flack and gripes lately about zero down mortgages and option arms, explaining that these might be a sign of impending doom and sky rocketing foreclosures, but when used properly, there is nothing wrong with those programs. It is my personal opinion that the single largest factor leading up to rising foreclosure rates, now and in the near future is the incredible amount of lying that is going on in order to obtain mortgages. Lying that is done in the form of a stated income loan. We as mortgage and Real Estate professionals have to put our clients well being, and the stability of our housing markets (and therefore our livelihoods) ahead of greed and immediate gratification. As the gatekeepers, we have a responsibility to do so.

ARM youself: Understanding Adjustable Rate Mortgages

Professor X (NONE) — Thu, 14 Sep 2006 20:34:14 -0700

Throughout the last couple years, adjustable rate mortgages have become a very popular option for American consumers. It has been suggested by some analysts that adjustable rate mortgages currently make up close to a trillion dollars of the country's outstanding mortgage debt. A large portion of these loans were originated in 2003 and 2004 during the height of the last refinance boom and are set to adjust or reset in the coming year. (if they haven't already) A recent article by Mark Davis of the Kansas City Star explains; "some estimates suggest when this occurs, a borrower's potential house payments will go up 5 percent, 15 percent, or even 25 percent in some cases." As property values across the country continue to decrease, some homeowners will be stuck with rising payments, but unable to refinance because of their home's depreciating value.

If you have an adjustable rate mortgage, or ARM there is no need to panic, but you need to learn what your options are. The most important thing is to understand how adjustable rate mortgages or ARM loans work.

First of all, every ARM loan has the same basic components: a start rate, a term, an index, a margin, a change date, and a cap (if you are lucky). The start rate is easy to explain, this is the rate your loan "starts" at when your mortgage begins. The start rate is usually fixed for a certain introductory period of time known as the term. While most ARM or adjustable rate mortgages are amortized over a 30 year period, the introductory period or term varies widely depending on the program. Typical ARM terms are 1, 3, or 5 years, but some introductory periods last as long as 10 years or as little as 1 month before they adjust. After the term of your start rate is complete, the ARM will adjust at the same time (often once per year) for the life of the loan...usually the duration of the 30 year period.

Now Things get a little more complicated for the average home owner. The interest rate of every adjustable rate mortgage is based on a financial index of some kind. Two of the most common indexes are the 1 year CMT and the 6 month LIBOR. The 1 year CMT or the constant maturity treasury index tracks weekly or monthly yields on U.S. treasury securities, and the LIBOR or London Interbank Offering Rate Index tracks the average interest rate on Euro-dollar deposits traded between London banks. The margin is how much money the bank is making on your loan. Typical margins range between 2-3%. Your interest rate is determined by adding the index and the margin together. So when your ARM adjusts on your change date, on the first year following your introductory period, you would calculate your new interest rate for the coming year by looking up the current index rate, and then adding your margin rate to it.

For example, if your loan was adjusting today, and was based on the CMT, you would look up the CMT in today's Wall Street Journal (about 5% currently) then you would add your margin to this number. (assume about 2.00%) This means your new rate today would be about 7% for the remainder of the year and the process would repeat itself at the same time next year. Your ARM loan may have a cap if you are lucky. A cap is a limit placed on an ARM loan that determines how much it can adjust from one year to the next and it also limits how far an ARM can adjust over the life of the loan as well. If you are lucky enough to have a cap on your loan, it usually means it can't adjust more than about 2% from year to year and no more than 5% or 6% over the entire life of the loan. Some adjustable rate mortgages have no cap at all.

According to the Mortgage Banker's Association application survey, for the week ending September 8, 2006, the current average contract rate for 30 year fixed mortgages is about 6.375%. As you can see from the example above consumers with adjustable rate mortgages can expect an interest rate around 7% as their ARM loans start to adjust and even higher in the coming years as rates continue their trend upward. Most experts are recommending, and we agree, that as rates continue to rise, so will prospective mortgage payments for consumers with adjustable rate mortgages. If you have an ARM, now is the time to consider refinancing it to a fixed rate mortgage.

The Rebirth of Cool: Detroit Real Estate

Professor X (NONE) — Mon, 11 Sep 2006 21:26:46 -0700

I don’t read W magazine, but when this month’s issue hit news stands, I was eager to get a look inside. The overly thick edition of the magazine features a glam cover shot of actress Christina Ricci. What’s so big about Christina Ricci you might ask? Sorry to disappoint, but nothing. The real treasure of this month’s issue is what’s inside. A 54-page fashion spread featuring Kate Moss shot in Detroit by famed photographer Bruce Weber. The spread shows Moss at many historic Motor City spots: from Belle Isle to Kronk Gym to the Diego Rivera mural at the Detroit Institute of Arts. The spread titled "Welcome to the Motor City," remarks, "Detroit is coming back to life, reborn as one of the most vibrant cities in the world." How did this showcase of Detroit come about? W creative director Dennis Freedman says he became enamored with the city about a year ago when he attended a Cranbrook fundraiser at the invitation of Metro-Detroit philanthropist Julie Taubman, and toured Detroit.

Have you taken a look at what is going on in the city of Detroit lately? Far too many people still look upon this urban gem with skeptical and prejudiced eyes. This fact is evident in how slow the revitalization of this beautiful and historic city has gone and that so much of the money being invested in the city right now can only be found with out-of-state investors. Have you taken a look at what is going on in the city of Detroit lately? When you do, I promise you won’t be disappointed.

Joshua Plummer is a Senior Mortgage Consultant with Flagstar Bank in Detroit, Michigan. If you have any questions regarding Detroit real estate please feel free to email him at joshua.w.plummer@flagstar.com or call him directly at 586-246-4673. You can also click here to submit an online request for a pre-approval or to request additional mortgage info.

Study Warns of Pending "Rate Shock" for Homeowners

Professor X (NONE) — Fri, 08 Sep 2006 16:13:23 -0700

STUDY WARNS OF PENDING "RATE SHOCK" FOR HOMEOWNERS

Predatory Lending has been a major concern lately, but law makers and watch groups have mostly concentrated their attention on predatory practices such as pre-payment penalties, excessive fees, high interest rates, flipping, excessive yield spread premiums and balloon payments. Until this year their has been very little recognition of the prevalence of adjustable rate mortgages in the subprime market. I consider the following very interesting: According to the ACORN study, "while ARM loans account for about 24 percent of all home loans nationwide...in 2005 ARMs made up 75 percent of all subprime loans, a huge increase from 1999 when only 50 percent of all mortgages were ARMs."

Why is this interesting? Well, many borrowers are forced into these sub-prime loans, often they are not even given the option of a conventional loan, or even a fixed rate sub-prime loan. The Acorn study suggests that "borrowers in the subprime market are often steered into ARMs without being given a choice and have little knowledge of how ARMs work or the risks associated with these loans...furthermore, Fannie Mae
and Freddie Mac have estimated that between one third and one half of all borrowers in subprime loans could have qualified for a lower cost mortgage." Many of these borrowers could have also qualified for an FHA
loan, since FHA has no minimum credit score requirement, but since many mortgage brokers aren't licensed to originate FHA loans, they rarely offer them to their borrowers.

Usually these sub-prime loans are zero-down mortgages and as stated earlier come standard with a pre-payment penalty. What this means for consumers is when their already high-interest ARM starts adjusting,(usually after a 2 year introductory period)their payments skyrocket, and they are unable to sell or refinance because they have little or no equity and the pre-payment penalty will cost them even more. Since they are only required to qualify for the mortgage based on the introductory payment, not the max payment, they often can't afford the higher mortgage, and with no way to sell, often are forced to lose
their home to foreclosure.

If this problem isn't bad enough by itself, the study, which surveyed data from 130 Metropolitan areas determined that in the 10 areas at greatest risk, including Detroit, MI Memphis, TN, Jackson, MS, McAllen,
TX, El Paso, TX, Laredo, TX, Brownsville, TX, Flint, MI, Springfield, IL, and Birmingham, AL, high-cost, Subprime Loans, represented more than two out of every five home purchase and refinance loans. Does anybody
notice a similarity about these communities...you don't have to be a rocket scientist, or a statistics geek to realize these are all predominantly minority communities. "Even when controlling for income,
minority borrowers were at a greater risk to receive a high cost loan than white borrowers."

The study concludes that "in far too many cases alternative mortgages are being sold to consumers who can only afford the initial lower-payments but will not be able to afford the higher payments that will come when the initial teaser rate period ends...Borrowers will have failed to build equity at this point meaning they won't be able to
refinance or sell...The result is damaged consumer credit, possible loss of home, increase defaults for lenders and in communities with large concentrations of these loans -more vacant homes." Why is it that many
metropolitan areas, minority neighborhoods are at a greater risk of rate shock and predatory lending practices? I used to think it had something to do with education, but education usually correlates with income in
these studies, and this study shows that "upper-income African Americans were at least 3 times more likely than upper-income whites to receive a high-cost refinance loan in 12 major metropolitan areas surveyed." In
the meantime, the only thing I can suggest is more education, and more community programs sponsored by banks to make sure that consumers are aware of the problem. Food for thought anyway.

The Rumors of My Demise Have Been Greatly Exaggerated

Professor X (NONE) — Tue, 05 Sep 2006 13:04:04 -0700

Was it a ploy for sympathy...perhaps, a moment of weakness, maybe? It may even be part of some larger secret plan for me to solidify the number 3 spot in Michigan with a surprise guerrilla assault. Personally I think the whole thing was fabricated by Birmingham area Realtor Sara Lipnitz to paint me in a negative light and rally more support for her cause. (I suspect she might really not even care about winning. Much Like Screech from Saved by the Bell, this whole sad charade may just be a ploy for her and fellow Birmingham Area Realtor Maureen Francis to sell T-Shirts and go on vacation in Cabo.)

I have no intention of conceding this race. I may not be as pretty as Sara Lipnitz, but if you had told us one year ago that we were going to come in third in Michigan, we would have given anything for that....And when we are done here, we are going to South Carolina and Oklahoma and Arizona and North Dakota and New Mexico! We're going to California and Texas and New York! And then we're going to South Dakota and Oregon and Washington and Iowa! And then we're going to Washington D.C. to take back the White House!"

We will not give up!

Whoa, sorry about that...I don't know what came over me.

Thanks for the votes of confidence...*Sob* I mean you like me, you really like me! *Sob*

Saturday is Tour Day in Detroit

Professor X (NONE) — Mon, 04 Sep 2006 22:30:35 -0700

Saturday is tour day in Detroit! City Living Detroit, Preservation Wayne and the Tourism Economic Development Council have partnered to provide unique and distinct tours occurring every Saturday of the month. These great tours depart from the "Point of Origin" in Campus Martius Park throughout May, June, July, August and September.

Every Saturday Leaving from Campus Martius Park at 10 A.M. and 1P.M. Click Here For More Details!

Free Mortgage Loan Calculator

Professor X (NONE) — Mon, 04 Sep 2006 22:23:24 -0700

I just thought I would test this out. I have been scouring the Internet for a free HTML or Java code for a Mortgage Payment Calculator that I can display in the Margin of my blog that can be used as a resource for all of our readers. I have yet to find one that is small enough to fit neatly in the margins. I came across a great one at the Sierra Vista Website, so feel free to utilize it on your own website if need be. However, since I am only slightly technologically-savvy, I can't figure out how to format it down to a smaller size by myself, but at least the title will archive it and it should show up as a link if anyone needs it, and as always If you need more detailed calculators, you can always check my complete list on my corporate website at Flagstar's Homepage.

What is PMI

Professor X (NONE) — Thu, 24 Aug 2006 21:53:25 -0700

What is PMI?

PMI or Private Mortgage Insurance is an insurance policy that banks require a home buyer to pay when they own less than 20% of the house or make a down payment smaller than 20% of the home's value. FHA loans have a similar insurance called FHA mortgage insurance or MI.

1. Lenders make all decisions based on risk. A client with no equity has no interest in making their loan payment and can easier give up on the whole loan. The less you put down or the less equity you have the higher your PMI payment.

2. PMI is paid to an independent insurance agency and it protects the lender in case the borrower defaults on their high LTV loan. It is good because it helps encourage lenders to lend money to potential buyers who don't have a lot of money to put down.

Time To Dis-Arm To Beat Rising Rates

Professor X (NONE) — Wed, 23 Aug 2006 00:28:04 -0700

In a recent study Christopher L. Cagan, the director of research and analytics for First American Real Estate Solutions wrote: "Are American homeowners as irresponsible as they are made out to be?" "It is now common to warn of a horrendous future...where homeowners of America are confronted with plummeting home values, rendering both refinancing and sale impossible because residences are burdened with mortgage debt far above their market value. To make matters worse, these households are faced with huge increases in their mortgage payments as their loans adjust from introductory to normal terms...unable to make such larger payments, unable to refinance or sell, homeowners will have no choice but to default on their loans, and to abandon their homes to foreclosure." While this scenario makes for fascinating conversation, the real question is this; is the future for the American homeowner scary or safe?

Traditionally, the mortgage of choice has been a fixed-rate loan, usually of 30 years or 15 years in duration, but over the last few years, adjustable-rate mortgages, and interest only mortgages have become more popular.

Back in 2003 when the refinance boom started picking up steam, I was working for the largest mortgage company in Michigan. I won't mention any names, but you can't go anywhere in Michigan without hearing their name. This company actually encouraged me and all of my colleagues to push borrowers toward Adjustable Rate Mortgages and Interest only loans because by doing so it would create guaranteed business when the recipients of these loans had to come back and refinance in 3-5 years. While this sounds great for said mortgage company, I started thinking, how can this really benefit my clients. In fact that's the main reason why I left that company and am now with Flagstar Bank. That might be an extreme example, but many unscrupulous lenders and banks pushed ARM loans onto consumers because of how easy it was to sell a 3-4% interest rate and the accompanying low mortgage payment that came with it. Companies have been known to sometimes give these loans a clever name like Option ARM and SMART ARM, but these loans are often anything but.

The truth of the matter is this. ARM loans are good loans in some instances, but not in every situation. ARM rates are based on short term market indexes and they are good for only that: the short term. In fact probably the worst thing you can do is opt for a low payment ARM Loan in order to qualify for a larger house than you can afford. Because if you are planning on keeping the house long term, what do you do in 5 years when your income is the same, your expenses are higher as your family grows, kids go to college, etc and now your adjustable rate mortgage payment is about to double? Unless you are planning to keep your home for only 3-5 years, or you are a savvy investor who needs to free up cash flow and understands how to follow the market, an adjustable rate mortgage is probably not the best option for you.

Let's take a minute and look at how adjustable rate mortgages work. All ARM loans have the same basic components: A start rate, a term, a change date, an index, a margin, and a cap if you are lucky. The start rate is easy; this is the rate your loan starts with. The term is how many years you will enjoy your low starting rate for. Your change date is the date that your start rate ends, and your ARM starts adjusting. Typical ARM terms are 1 year, 3 years, or 5 years, but sometimes as long as 7 or 10 years or as little as 6 months before they adjust. After the term of your start rate is over, your ARM will adjust at the same time every year for the life of the loan...usually the duration of 30 years. Now it gets a little complicated for the average homeowner. Every ARM loan is based on a short term financial index of some kind. Two of the most typical ARM indexes are the 1 year CMT and the 6 month LIBOR index. The 1 year CMT or constant maturity treasury index tracks weekly or monthly yields on U.S. Treasury securities and the LIBOR or London Interbank Offering Rate Index tracks the average interest rate on Euro-dollar deposits traded between London Banks. The Margin is how much money the bank makes on your loan. Typical margins are between 2%-3%. When your ARM loan adjusts on the change date every year, your new annual interest rate is calculated by adding the current Index Rate to your Margin Rate. For example if your loan was adjusting today, and was based on the CMT, you would look up the current CMT rate in the Wall street Journal (about 4.5%) and then you would add your Margin to the number to calculate your new rate. (Assume 2.00%) That means your new rate today would be 6.5% for the remainder of the year and the process would repeat at this time next year to determine your rate for 2007. If you are lucky enough to have a cap on your ARM, this means that your loan most likely can't adjust more than 2% per year higher or lower than the previous year and usually can't adjust more than 5% or 6% above or below the start rate over the life of the loan. Some Adjustable rate mortgages have no cap at all.

When the refinance boom began back in 2003-2005; an increasing number of Americans settled for adjustable rate mortgages with introductory rates anywhere between 2-5% and to make matters worse some of these loans are interest only loans and most of these loans are set to adjust anywhere from 3-5 years after originated. This means the first group of loans is starting to adjust right now, and the last group will begin adjusting anywhere in between the years 2008-2010.

Picture this: if you owe $200,000 on your home and have a 3 year adjustable rate mortgage you obtained back in 2004 at 4.5%, you are probably paying about $1,000 per month for your current house payment. Based on Current CMT and LIBOR indexes, Inflation and a flattening yield curve, your rate could be as high as 6.5% or even higher when it first adjusts in 2007 and then anywhere between 7.5%-9.5% as it adjusts each year for the rest of the 27 years you keep that loan. At 8.00% your same $200,000 mortgage payment is now pushing $1,500 per month, almost $500 more per month than when it started.

The historical average annual rate for 30 year fixed rate loans throughout the 1990's was about 8.00%, and that was in a decade with very low inflation. If you take into account the 1980's the average annual rate for a 30 year fixed rate loan was about 12.70% and if you take inflation-ridden October 1981 into consideration, rates reached as high as 18.45% so that is what most homeowners with ARM loans have to look forward to if they wait for their ARMs to adjust. If you were to refinance your ARM loan at today's 30-year fixed rates, somewhere in the low 6% range, you would expect a payment of about $1,200 on your same $200,000 loan.

The question then becomes this. Does it make sense to pay about $200 more per month over the next 1-2 years to avoid paying $500 or more over the remaining 27 years of the loan? And the answer is resoundingly YES! It's a difference of $50,000 or more over the life of the loan and more importantly a difference of $500 or more per month out of your pocket in cash flow. Quicken Loans chief economist Bob Walters offers this advice: "Seriously consider refinancing to a fixed rate. This way you'll avoid higher payments down the road." Daniel Jester, an analyst with Economy.com feels that "Right now we're seeing upward momentum in long-term rates, especially with new inflation worries." The experts agree, as rates rise, so will prospective monthly mortgage loan payments.