Some Mortgage Applicants Turn to Adding 'Creative' Details to Credit Reports

This article is paraphrased from the Washington Post.

When your credit scores don't qualify you for the home mortgage you want, where do you turn? That's an especially timely question now, as it is well known that lenders are tightening underwriting standards for applicants with less than perfect credit. What is less well known it that underwriting standards are also being tightened for borrowers with excellent credit. The loan you easily qualified for last month may now be out of reach because of these new underwriting rules.

Now federal and state authorities fear that some borrowers are turning to a fast-growing business on the Internet: companies that claim to boost credit scores by transplanting the credit DNA of people with excellent payment histories into the credit files of people with sub-par histories, ostensibly without breaking any law.

The companies claim to raise FICO credit scores by 50 to 250 points, or more, by adding low-scoring borrowers as "authorized users" onto the credit card accounts of people with FICO scores higher than 700. The positive payment information from such cardholders then flows into the files of the people with sub-par credit.

Federal law permits authorized users to be added to credit card accounts. Typically, the users are relatives or friends of the primary cardholder. For example, a parent might add a son or daughter to a Visa card to provide access to credit for the child or for use in emergencies.

Federal law does not limit the number or dictate the type of authorized users permitted on any single account. Nor does it prohibit the rental or sale of authorized-user designations. Exploiting that loophole, numerous companies have popped up on the Internet offering to buy and rent out the credit card "trade lines," or accounts, of credit card holders with high limits and perfect payment histories.

Big bucks, and a strong potential for fraud on mortgage applications, are involved. Some Web site promoters say they can add 80 to 120 authorized users to a high-quality credit card account before banks or lenders get suspicious. Each account can rent for as much as $1,500 to $2,000 for 180 days. The primary credit card holder receives a cut of the rental fee, often hundreds of dollars for each authorized user added.

The person seeking a higher credit score does not obtain access to the credit card. Within 30 to 90 days of being added to the account, the national credit bureaus incorporate the primary cardholder's ongoing account information into the files of the authorized user. The score-raising attributes of the primary cardholder's stellar payment record then flow through to the new user.

A company in Tampa recently solicited mortgage brokers promising FICO score boosts of 150 to 205 points for applicants "in as little as 30 days" for the "discounted" price of $750.

That widely distributed pitch prompted Nevada regulators to issue a "fraud alert" warning that "consumers, brokers and lenders that complete, submit or participate in the completion and submission of an application for credit that contains misrepresentations or false information are subject to administrative actions and potential criminal penalties by the state."

The Nevada Mortgage Lending Division called the inflating of FICO scores through additions of authorized user accounts "deceptive" because it makes credit-impaired applicants appear to be more creditworthy than they actually are. Mortgage lenders might grant them lower interest rates and lower fees than they otherwise could obtain.

Some Web sites advertise and price high-quality credit card trade lines on the basis of their credit limits and time on the account. A site called AddaTradeline.com recently offered a card history with a $25,000 credit limit and 2 3/4 years of perfect payments for $1,025.

Adam Wheeler, who identified himself as the owner of AddaTradeline.com, based in Orange County, Calif., said his business "is legal, although some people might say it's unethical." He insisted that his firm does not approve of efforts by clients to mislead lenders. "If they are going to lie to lenders," he said, "that is not good."

Asked for comment on the rental of trade lines to artificially inflate mortgage applicants' FICO scores, Steven Baker, Midwest director for the Federal Trade Commission, said: "We are aware of it. We are concerned about it, and we are looking into it."

Donald Girard, spokesman for Experian, one of the three national credit repositories, said: "These are nothing more than new credit repair scams." However, he said, Experian "does support authorized user relationships such as . . . parents helping a son or daughter establish credit with their first credit card."

Fair Isaac, developer of the FICO score, said that the "inappropriate use" of trade lines is "an industry-wide issue" and that the company is in discussions with the FTC.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Mortgage Rate History

Realtors Sued for Steering Customers

This article is paraphrased from the Washington Post, where you can read the original article in full, however, that company requires you to register in order to read it

A recent class-action lawsuit has focused attention on a long-festering consumer issue in real estate: Alleged steering of home buyers to affiliated title, settlement and mortgage companies by real estate brokerage firms. This is a practice that could cost consumers hundreds of dollars, compared with fees and services offered by nonaffiliated competitors.

Two buyers in Minnesota filed suit Feb. 21 against Coldwell Banker Burnet Realty, one of the largest brokerage firms in the state, charging that it breached its fiduciary duties under state law when it steered the buyers to its own title and settlement affiliate, Burnet Title, despite knowing that the affiliate's fees were significantly higher than those available elsewhere.

A spokesperson for Coldwell Banker Burnet said the company had no comment on the allegations and does not discuss pending litigation as a matter of corporate policy.

The class action, filed by Kenneth and Dylet Grady in state district court, potentially has national significance because many real estate brokerage firms have financial relationships with one or more affiliates in the title, settlement and mortgage businesses. Properly structured, these affiliate relationships comply with federal anti-steering and anti-kickback rules, and have withstood numerous legal challenges.

Real estate brokerages increasingly rely on income from their affiliates, and often seek to maximize their "capture rates," which is the percentage of all home-sale transactions that use the affiliates' services. They also argue that even if the affiliates' fees or mortgage rates are not the lowest available, the quality and dependability of their services more than compensate for any price differences.

In the case of a broker-client relationship, fiduciary duty means that a real estate broker is bound to put a client's best interests ahead of the broker's, and must not profit from the relationship unless the client consents. A fiduciary is also supposed to disclose material facts that may affect the client's best interests.

The Gradys make claims in their suit that could be duplicated in other states: When real estate brokers or sales associates knowingly steer clients to higher-cost services that benefit the broker financially, they may violate the fiduciary responsibilities owed to those consumers. The Gradys also allege that Burnet Realty failed to disclose that its affiliated title company "retains at least 75 percent of each insurance premium," or that the title affiliate's fees "are among the highest, if not the highest, in Minnesota."

On a typical $250,000 home purchase, according to the suit, the title affiliate's fees "can be several hundred dollars more" than those of nonaffiliated competitors.

Among other alleged breaches of fiduciary duty, according to the suit, the real estate brokerage did not "disclose that it pressures its sales associates to direct their clients' closing and title insurance business" to the affiliate. Nor did the firm disclose that it offers financial incentives to sales associates who cooperate, including a "quick check" program that pays agents' commissions at closings, rather than at a later date, provided the closing occurs at Burnet Title.

The suit also claims that other incentives include a "partnership compensation plan," that pays for retirement plan contributions, marketing expenses and "bonus pools" that are "tied, in part, to the direction of clients' business" to the title affiliate.

The Gradys' class action, which asks for what lawyers estimate to be millions of dollars in refunds and damage awards to more than 10,000 clients, can be seen as part of a backlash in a number of states and in Congress against title insurance and real estate industry practices. In a congressional hearing last spring, Colorado's then-deputy insurance commissioner, Erin Toll, criticized "the pervasiveness of kickback schemes" involving real estate and title firms in her state.

An independent title insurance agent from Minneapolis, Douglas R. Miller, president and chief executive of Title One, testified that in Minnesota "the title insurance industry and the real estate industry have locked up almost the entire marketplace" through affiliated business relationships. The arrangements take multiple forms, Miller said, but they all add up to the same result: "steering real estate consumers into overpriced ancillary services for secret profits."

Miller told the hearing that his firm does not participate in affiliate relationships with real estate firms or lenders, and charges the lowest insurance premiums in the market. Miller's company still finds it difficult to attract business from home buyers because real estate agents won't send customers his way.

Putting aside the specifics of the Gradys' suit, what can consumers do? Remember that federal law guarantees you the right to shop for the lowest-cost title, closing and other services. Check out the competition to be sure you're getting the best possible deal.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
How to Stage your Home to Fetch a Higher Price

Appraisers Battling Computer Valuations

A bitter dispute has broken out in the property-appraisal industry that could affect how millions of houses are valued.

On one side are traditional appraisers, who render estimates based on interior and exterior inspections, market conditions and the recent selling prices of comparable properties.

On the other side are data companies that vacuum up vast quantities of publicly accessible property information and help create automated valuation models (AVMs) that many lenders use for home-equity loan transactions. Increasingly, lenders also consult them to make primary mortgages.

Traditional appraisals cost $300 to $500 and can take more than a week to complete. AVMs, in contrast, are available almost instantaneously online and may cost a lender $25 or less. AVMs power the estimates that anyone can obtain online free from Web sites that promise to tell you how much your house is worth.

Appraisers have resented encroachments by AVMs for years, in part because they have lost some of their business. They also have challenged the accuracy of AVMs, arguing that too often the estimates are inaccurate, especially when prices are changing rapidly.

But now many appraisers are upset about something they view as even more threatening. They claim that their appraisal reports are being systematically looted of key information without compensation or permission.

Appraisers say that one of the dominant electronic real property data companies, FNC of Oxford, Miss., is "extracting" proprietary data compiled by appraisers and reselling it to lenders and others who may load it into AVMs. To add insult to injury, appraisers say, they pay FNC $5 per report when they send valuations to lenders in electronic form using FNC's online platform, AppraisalPort.com.

"We are paying them and they are stripping out our work product without paying us a dime," said Patrick Turner, a Richmond appraiser.

Angela Atkins, a spokeswoman for FNC, said the firm is within its legal rights and extracts only property-description data from appraisal reports, not proprietary narrative analyses or value estimates. FNC is building a national property-data repository -- analogous to the three national credit bureaus -- for its lender customers, most of which are among the top 30 highest-volume mortgage companies in the country, Atkins said.

"We are not an AVM company, and we could not exist without appraisers," she said.

Turner said, however, that the physical descriptions that he and thousands of other appraisers include in their reports -- square footage of interior space, numbers of rooms, floors, bathrooms, bedrooms, lot dimensions and the like -- are proprietary because they often are more accurate and up to date than publicly accessible records.

He cited an appraisal he completed recently outside Richmond, where publicly recorded data indicated that a house had 1,100 square feet of habitable space. His measurements showed that it had 2,900 square feet above ground and a newly renovated basement of 1,200 square feet.

"Imagine the difference in [appraised value] between a 1,100-square-foot house and a 2,900-square-foot house," Turner said. Computerized valuations "can't be accurate when the public records they are relying on are out of date or wrong. That's why everybody wants to strip out our data -- it's valuable because it's accurate and current -- but they don't want to pay us for it."

Turner said he and other appraisers are discussing how to take better control of their data. Copyrighting appraisals is one possibility, legal or regulatory relief are others.

In the meantime, he said, consumers should pay closer attention to the appraisals used in their real estate transactions. Computerized valuations "can't smell, can't see, can't hear" and may be based on outdated information in fast-changing markets, he said. That, in turn, could cause buyers to overpay by thousands of dollars. It could also cause sellers to cut prices when a computer-assisted valuation comes in with an inaccurately low number, causing lenders or borrowers to balk at contract prices.

Turner also advised buyers to demand copies of full appraisals to make sure they are done by licensed professional appraisers and not an electronic black box. "Nobody should pay $400 for an appraisal that was done by a computer somewhere and cost $25," he said. Not only is that a violation of federal rules banning markups of real estate settlement services, he said, "it's just another form of stealing."

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Free Mortgage Rate Floatdown

Adjustable Rate Mortgages Losing Their Appeal

In Massachusetts, where home sales dropped 12 percent this spring, the housing and mortgage markets are on ice.

But keeping mortgage broker John Battaglia busy are calls from some homeowners whose mortgages are about to shoot up.

"These customers could have rate increases, maybe not only this change date, but maybe a year from now," he says.

Why? They have adjustable rate mortgages, also called ARMs. During the boom, the low adjustable rates made it easy for people to buy homes — some they couldn't afford otherwise — but now many of those rates are going up.

So Marc Anderson is switching to a fixed-rate mortgage for his Phoenix home.

"I want something that I know is going to be there five years from now," he says. "I don't want my interest rate or payments to change in anyway."

So how much could an increase hurt?

Let's look at a three-year ARM on a $200,000 mortgage. Taken out in 2003 at a rate of four percent, the monthly payment was $955. Now, the rate could jump as high as 7.6 percent, boosting the payment to $1,375, a 44 percent increase.

And it's not just mortgage rates. Homeowners are getting hit from all sides. Rising interest rates mean bigger credit card bills, higher energy prices mean increased costs to heat and cool your home, and the cost of gasoline makes it expensive to drive to and from it.

Rick Sharga tracks foreclosures. His firm saw a 25 percent increase this spring. He says this wave of resets is the wild card in housing.

"In a worse case scenario, you could have so many properties into foreclosure that it depresses the value of homes on the market," he says.

And that would put the once sizzling housing markets into a deep freeze.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Fixed Rate or ARM - Which is Better?

Real estate Seller: What Now?

Get used to it — the seller's market is closing up shop. The days of fat, fast home value increases are gone. Pack away those flipping fantasies.

"The boom is definitely over, there's no debate about that," said Mark Zandi, chief economist of West Chester, Pa.-based research firm Moody's Economy.com. "Now the question is more how hard is it going to land, if it lands at all."

The answer? Depends who you ask — and what location you're talking about. How to feel about it? Depends which side of the market you're on — and what location you're talking about.

Few, if any, economists are enthusiastic about current market conditions, thanks to a host of bleak figures recently released by home builders, federal agencies and the National Association of Realtors.

On Aug. 22, luxury home builder Toll Bros. announced that its net income fell 19 percent in the quarter ending July 31 from a year prior. Earlier in the month, the company said new orders had fallen 47 percent. According to NAR, the number of existing home sales plunged 4.1 percent in July to a seasonally adjusted annual rate of 6.3 million, the lowest since January 2004. Nationwide, the median sales price for an existing single-family home inched up a painfully small 0.9 percent compared to double-digits in 2005.

But that's just today's pain. What about six months from now? A year? Five years? Opinions about the future range from hopeful outlooks to doomsday predictions.

"One possibility is that you get a quick return to normal, which is what the economists for the realtor groups tend to hope for," said Edward Leamer, director of the UCLA Anderson Forecast. "But there's nothing in the historical record that suggests that we're going to get a return to normal anytime soon."

"It is a question of whether it is deep and quick or not so deep and much longer," Leamer added. His prediction: "Not so deep and rather long."

The way Zandi sees it, the market is going to weaken considerably more. "It has been correcting for about a year, and it's got another year to go," he said.

Not surprisingly, Lawrence Yun, a senior economist for NAR, is more optimistic. He claims that the market has returned to more earthly figures after a period of unsustainable growth. "Any decline will be very short-lived," he said. "By the spring of 2007, the market will begin to see increased sales and strengthening in home prices."

Others are less willing to prognosticate an end date for the slowdown, due to a host of unknowns, including future interest rates and job markets.

Whatever the future holds, the present doesn't look good. The number of unsold homes on the market rose another 3.2 percent in July to 3.9 million, a 13-year high, according to NAR. If the current selling rate held steady, it would take 7.3 months for all of those houses to move.

One reason for the holdup is a disconnect between buyers and sellers, said Anderson's Leamer.

Many property owners are reluctant to cut their prices. Unlike builders, who are so desperate to sell their properties that some are throwing in extras like upgraded countertops and one-week vacations, many sellers are willing to wait. Their logic is simple, Leamer explained: "A lot of owners figure, 'My idiot neighbor sold his home for $1 million, and I'm not taking a penny less.' "

On the other side of the equation are the buyers, equally strong-willed. Unwilling to fork over those sums in a wavering market, they are watching from the sidelines, waiting for prices to drop.

"Buyers are holding back currently to see how long and far this cooling will go," said NAR's Yun.

What's more, two key sources of housing demand are locked out of the market, explained Moody's Zandi. One is first-time home buyers, who can't afford to buy given the mix of rising interest rates and still-high home prices. The other is speculators, who can no longer benefit from dramatic appreciation by flipping real estate.

Of course, real estate is a highly fragmented market — what happens in Palm Beach, Fla., may be completely different from what is taking place in Cleveland or Phoenix. Not everyone benefited equally from the boom, and not everyone will suffer the same in a bust.

Areas that were once epicenters of the boom, like Phoenix, San Diego and Las Vegas, will be among the hardest hit, Leamer said. "Regions where a lot of the economic growth came directly from the real estate sector and where that was a huge plus, that's going to turn into a huge negative," he explained. "Wherever the party was the loudest, that's where the hangover is going to be the greatest."

To get a sense of how home prices will perform in various parts of the U.S., we turned to Moody's Economy.com for historic and predicted median home prices in 15 major metropolitan areas. We looked back ten years and forward another ten. The results show several cities, including Boston, New York and Washington, D.C., experiencing ups and downs (more precisely, downs and ups) in coming years — a boon for buyers, perhaps, but not for current owners. Other places, such as Houston and Minneapolis-St. Paul, may just keep chugging along.

The company bases its forecasts on an econometric model that looks at the relationship between prices and various factors that have historically driven supply and demand in these markets. The intricate formula was proved to work when compared with actual house-price performance through the early 1990s, a period when home prices rose and then fell sharply.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Tips to get your home noticed

Applying for a Mortgage? Your Phone Will Ring

Picture this: You apply for a loan from a local mortgage company on a Monday afternoon. By Tuesday morning, you're getting unsolicited phone pitches from out-of-state lenders who seem to know a lot about your personal finances:

· Your credit scores.

· Your outstanding credit card balances and other revolving credit accounts.

· The approximate market value of your home and how much you owe on it.

· Your home address and obviously, your phone number.

Thousands of loan applicants around the country are receiving uninvited pitches such as these, sometimes just 12 hours after getting a mortgage quote. But now a major mortgage industry group is planning a campaign to put a damper on the practice.

"There are very serious privacy, identity-theft and bait-and-switch issues involved here," said Roy DeLoach, executive vice president of the 27,000-member National Association of Mortgage Brokers. "It's outrageous that simply applying for a home loan should open up a person's sensitive personal information."

The practice targeted by the mortgage brokers is known in the industry as "trigger list" marketing -- a warp-speed version of the "pre-screened" credit card offers you get routinely. It works this way: When your local mortgage company checks your credit to provide you a rate quote, one or more of the national credit bureaus take that inquiry and essentially turn it into a marketing product.

So-called "lead generator" companies and some lenders themselves are eager to know the identities of people who are in the process of shopping for a mortgage -- and they pay the credit bureaus for those hot prospects.

Generally the prospects have to fit credit and geographic profiles that the lenders have set in advance. For example, one customer might want only the identities and contact information of people in the Los Angeles area with FICO credit scores above 700 who have applied or inquired about a jumbo home mortgage within the past 24 hours.

Another might want only the credit and contact information of Washington or Chicago residents who applied for a zero-down-payment loan no more than 12 hours ago. The fresher the information, the better, marketers say.

The credit bureaus defend their right to sell applicants' personal financial information, arguing that it is simply a zippier form of marketing pre-screened target prospect lists for credit offers -- something they have been doing for years.

Tim Summers, a vice president at Experian, one of the three dominant national credit bureaus, wrote in an e-mail that his company's "Prospect Triggers" program "provides consumers with choice and potentially significant cost savings by delivering relevant information at the decision-making point instead of weeks after a mortgage lending choice has been made."

Summers said the program meets "all requirements" under federal credit and privacy statutes.

The National Association of Mortgage Brokers disagrees. When credit bureaus sell overnight trigger lists to third-party lead generators, the brokers argue, they fail to comply with a key provision of the Fair Credit Reporting Act: that anyone receiving consumers' personal information must be in the position to make a "firm offer of credit" or have previously received permission from the consumer to obtain credit file data. Third-party lead generators obtain no permission and are in no position to make credit offers, firm or otherwise.

The brokers also contend that even lenders who obtain trigger lists may not be in the position to make the firm offers that the law requires. A firm offer for a mortgage is vastly different from a firm offer for, say, a credit card. The mortgage process is more complex, and rates and fees are more difficult to quote on the basis of a credit score alone.

To make a firm loan quote, DeLoach said, "you need to know a consumer's income, you need to have an appraisal" -- you need to know a lot more than telephone marketers have in hand.

The biggest problem, however, may be the confusion that overnight trigger marketing brings to the mortgage business. Your local lender or broker quotes you one rate and estimated fees. But now one or more outside lenders -- whose reputation for honesty or service you know nothing about, and who are in possession of your personal financial data without your permission -- intervene and offer a lower rate.

Are the rate quotes for real? Or will they morph into costly bait-and-switch deals weeks or months from now?

You really can't know. But what you can do is remove yourself from all potential trigger list come-ons by opting out. Much as with the federal Do Not Call program, you can opt out of pre-screened offers by going to http://www.optoutprescreen.com/ or by calling this toll-free number: 888-567-8688.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Real Estate News

Some Homeowners Waking Up to Danger of High Risk Mortgages

"Joe" is a homeowner who did not want to give his full name for this story because he’s ashamed to admit that he soon won’t be able to afford his monthly mortgage payments.

In order to get the $800,000 house he bought early last year in California’s Silicon Valley, Joe got an “option ARM,” an adjustable-rate loan that lets him choose from a variety of payments every month. The smallest payment included no principal and less than 100 percent of the interest due. The unpaid interest was tacked onto the principal, creating “negative amortization.”

This let Joe trade lower payments now for higher payments later. He initially thought his salary would rise along with his home’s value — he was a marketing executive for a small software firm he was confident would be successful. But when a lost deal closed the company and “For Sale” signs popped up — and stayed up — in his neighborhood, a now-unemployed Joe is wondering how he will afford those higher payments when his rates adjust.

Joe is not an atypical homebuyer in the Bay Area or other now-bursting bubble markets across the country. Nearly half of the homebuyers and thirty percent of people refinancing mortgages in California chose interest-only loans last year, according to research firm LoanPerformance. The nationwide numbers are not so high — 32 percent for homebuyers and 20 percent for refinancings — but they do reflect the country’s increasing reliance on these so-called “exotic” mortgages.

Payment shock
Now these cheap mortgages that fueled the real-estate boom are beginning to hurt the homeowners they once helped. Higher interest rates and the end of honeymoon periods for too-good-to-be-true teaser rates are increasingly causing payment shock for borrowers.

"Nationwide, approximately $400 billion of [home-purchase adjustable-rate mortgages] are scheduled to reset at some point in 2006," said Frank Nothaft, chief economist with Freddie Mac in McLean, Va. "A significant number of homeowners will face some adjustments." In fact, the ARMs with scheduled payment increases this year work out to about 5 percent of all single-family debt outstanding in the country now, he said.

Many of these mortgages carry negative amortization features that permit borrowers to pile on additional debt beyond their original balance, and make minimal payments for the first several years. Once the initial period is over, however, payments could shoot up by 100 percent or more as the loan resets.

Other programs allow interest-only payments with no reduction in the original loan balance until the reset point. Then payments can jump by 50 percent or more in order to amortize the debt balance over a compressed number of years.

Like Joe, more California homeowners are having difficulty making their mortgage payments, according to a report by DataQuick Information Systems. Banks and mortgage companies sent warning notices to more than 20,000 homeowners earlier this year, telling them they were in danger of foreclosure. That’s an increase of 67 percent, the biggest one-year jump on record. Though a notice of default doesn’t mean a homeowner will lose their house, it could be a key measure of financial distress.

Federal and state financial regulators are expected to issue mildly restrictive guidelines for lenders making new loans this fall, but these rules won't help homeowners who are heading for payment resets in the coming year, and may be unaware of the financial shocks they face.

To head off potential problems, Countrywide Loans, the largest mortgage originator in the U.S., has started sending out letters to thousands of its borrowers who have been making only the minimum payments on the company's pay-option ARMs. The letters are framed as “an early message” to alert homeowners that based on their current payment trends and potential future interest rate changes, they should prepare themselves for significant increases in monthly payments.

The letters contain hypothetical examples of what lay ahead. One is a California homeowner making only minimum payments on a $402,000 loan. The current full interest rate on the loan is 7.6 percent, but the borrower has been paying just $1,348.47, far less than what's needed to fully amortize the mortgage over its 30-year term. If the loan reset at today's rates, the full payment required would be $2,887.50 — more than double what the homeowner is currently paying.

Countrywide does offer advice to customers who want to prepare for resets in the coming year: They should either switch from the minimum and move to either a 15-year or 30-year standard amortization plan, switch to an interest-only option if full payments are not feasible to fend off still-higher principal debt balances, or explore alternative refinancing options sooner than later.

Don’t be an ostrich
But some financial experts don’t see a doomsday scenario and say that due to frequent turnover in the housing market, exotic mortgages are here to stay.

“The average life of a loan is less than five years, so why get a 30-year fixed-rate loan which locks you into higher payments?” says Teresa O'Dette, owner of O'Dette Mortgage Group in Tahoe City, Calif. “People are not buying homes to stay in them forever.”

O’Dette could afford a 30-year fixed mortgage on a home in the upscale Lake Tahoe area she lives in but instead chose a negative amortization loan with fixed monthly payments but an adjustable rate, currently at 7 percent. “So far, I’ve added $12,000 to my $900,000 loan, but the value on my home has gone up $300,000 since I took on the loan. If someone offered me $1.5 million on my house, that $12,000 extra is not much of an issue.”

Still, not all homeowners can expect to use rising house prices as a cushion these days.

Greg McBride, a senior financial analyst at Bankrate.com advises exotic-loan holders to consider where they’ll be a year before their rate changes. “If you’re thinking that you’ll stay in your house longer than the four of five years you originally expected to, it’s time to refinance for a more appropriate loan.”

Long-term dwellers who started out with an exotic interest-only or pay-option ARM should take a look at fixed-rate mortgages, which are now at four-month lows, he said. “You’ll see a big payment increase but at least you’ll be certain that the payment will not change.”

Another option is to downsize to a more affordable home, especially if the current home was purchased three to four years ago. “You’re sitting on a nice chunk of equity that can give you some latitude to avoid payment shock,” said McBride.

Any homeowner with a loan can determine when their rates will rise and by approximately how much. The lender will typically send notice six months in advance of when the rate will reset, and the indexing margin used to determine that rate is stated in the loan paperwork. Bankrate.com has a “Rate Watch” page that tracks the lenders’ benchmarks weekly.

“Maybe your loan doesn’t adjust until March, but now is a good time to think about this,” said McBride. “Knowing your adjusted rate is not a mystery nor should it be a surprise. Mortgage holders shouldn’t put their heads in the sand now only to wake up in a few months to see their payments shooting up by $500 or more. There is plenty of runway ahead of you to prepare for when that rate adjustment approaches.”

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
How Much House Can You Afford?

Garage Overhauls

You've already overhauled the kitchen and bathrooms, added a pool house with outdoor kitchen and bar, and organized the closets with modular storage systems. What's left to improve? Hint: Have you looked in your garage lately?

Once a cluttered repository for garden tools, miscellaneous junk, and maybe even your car, the humble garage is going designer. For many, it's the last frontier of the complete home makeover, a big open room that can be converted to a spacious showplace for a car collector or an activity center for the hobbyist.

You can go as far as your imagination and budget allow. Baton Rouge architect Kevin Harris is designing a $1 million, 4,000-square-foot, four-car garage for a client who wants walk-in storage closets, elevator access to the house, and pet condos for 10 dogs and cats (with videoconference facilities so the owners can keep in touch with their animals when they travel).

In part, garages have gotten bigger to accommodate such multiple roles. Today, 15% of new homes have a garage large enough for three cars or more, according to the National Association of Home Builders. In 1992, it was just 6%. Archway Press, a New York company that sells detailed blueprints for houses and garages, has been ramping up the size and complexity of its garage designs to meet demand. For example, one Archway blueprint gives plans for a free-standing, 10-car structure with a 2,700-square-foot apartment above it.

A garage's main purpose continues to be storing cars, but that doesn't mean it has to look like a garage. Driving into David Rodrigues' four-car garage is like entering your family room. The Pewaukee. Wis. builder spent $20,000 just on wood-paneled walls, red alder pantry-style cabinets, and a bronze stained floor. There are also wall-mounted racks for golf and ski gear, and a lift system to keep his Heritage Harley-Davidson motorcycle off the floor.

Lawyer Bob Wade spent about $275,000 to build an unassuming 2,400-square-foot cedar garage at the foot of his driveway in Northampton County in eastern Pennsylvania. But inside, it's more like a museum to house his collection of six classic cars, including a 1965 Porsche Cabriolet. The space features a 130-square-foot work area and a hydraulic car lift. It even has a shower so Wade can clean up when he's finished working on the cars.

Increasingly, though, owners are revamping their garages, or at least part of them, into livable spaces where they can spend time on everything from hobbies to hosting wine tastings. Zev Pomerance, who owns garage outfitter Potomac Garage in Gaithersburg, Md., says his clients want to spiff up the garage because it's the real gateway to the home. "Neighbors, friends, family — they all enter the house from the garage," he says.

A lot of people keep an extra refrigerator in the garage. Now, entire kitchens are sharing space with the Volvo and Harley. Dan Lajoie, who runs Gourmet Garages in Wallingford, Conn., says he's currently designing a garage for a doctor who loves to cook. It includes a butcher-block food prep area and storage for pots and pans.

In a few weeks, Michael Cardenas, who owns eight restaurants in Los Angeles and Las Vegas, will be moving his 2,000-bottle wine collection from a spare bedroom in his Malibu, Calif. home to a new temperature-controlled wine cellar in the garage he's having renovated. The project, which cost around $35,000, also includes cabinets for storing pans, plates, linens, and other catering supplies.

If you would like to create your own über-garage, start by checking out Bill West's Your Garagenous Zone: Innovative Ideas for the Garage. The book includes architectural layouts for garages that can "enhance the appearance of the home" without it being the first, biggest thing you see when you look at the house. There's also a section on garage-appropriate materials and accessories, such as flooring and shelves, with information on the companies that sell them.

Auto buffs should pick up Richard Newton's Ultimate Garage Handbook. Companies such as GarageTek, The Complete Garage, or Garage Envy specialize in refurbishing garages with cabinets and storage systems, lighting, and epoxy or tile flooring. You can buy the products and do it yourself, or the companies can arrange for installation. For the really big project, you may want to hire an architect and contractor.

It's one thing to equip your current garage with such showstoppers as marble countertops, skylights, and humidity controls. But if you want to build or expand a garage so it's more like an extension of your living space, be sure to check the local zoning laws. In older neighborhoods, you may be thwarted by rules that limit the amount of space structures can occupy to 50% or less of the lot size. If you want to build up instead of out — say, to add an in-law apartment above the garage — you may encounter limits on the number of residential units allowed in areas zoned for single-family dwellings. Another issue, warns John Connell, an architect in Warren, Vt., arises if your plans include a built-in automotive lift or pit. It will raise building inspectors' concerns about the disposal of oil or other hazardous substances that can cause environmental problems.

Of course, if everything you want to do in your garage adds up to more space than you can legally create, you always have an easy way to get better use from your existing garage. Just park your car in the driveway.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Mortgage Marketing Associates

Consumer Federation Takes on Realtors

A leading consumer rights group, the Consumer Federation of America (CFA), issued a report charging that real estate industry members act as a cartel to stifle competition, resulting in higher prices and poorer service for homebuyers.

It's the latest episode in the long-running soap opera that pits consumer groups and the government against the real estate industry. The dispute has become increasingly heated in recent years as soaring home prices have resulted in huge commissions for the industry. At the same time, the technology advances that have dramatically lowered costs in investment, travel and other industries have not had a great impact on real estate.

"Many traditional real estate brokerage firms, and their organizations, function as a cartel that tries to set prices and restrict service options," said Stephen Brobeck, CFA's executive director at a press conference in Washington D.C.

The CFA charges that consumers are harmed in three main ways:

• Traditional brokers charge high, uniform prices regardless of the quality of the broker involved. Even a newly licensed, inexperienced agent receives the same commission no matter what the level of service offered.
  

• Traditional brokers who work with both seller and buyer in a home sale almost always function as facilitators. Brokers try to make sure a sale is completed (and they get paid), rather than as fiduciary agents acting in the best interests of their clients, as the brokers claim to do.

• Brokers "double-dip," promoting their own listings or the listings of their firm over properties better suited for their clients.

For those who have not followed the controversy closely, the CFA explained how traditional real estate brokers are able to control the sales process:

By having sellers pay all commissions

Home sellers' 6-percent commissions are split between their broker (the listing agent) and the buyer's agent. That creates reluctance among sellers and their brokers to lower commissions: They depend on their homes being seen by potential buyers, and buyers agents will be more likely to show homes with full commissions than discounted ones.

According to the CFA, if sellers and buyers each negotiated compensation separately with brokers, brokerage services and prices would quickly become unbundled and clients would pay only for the services they need.

Discriminatory practices targeting non-traditional brokers

Brokers will sometimes offer rebates to buyers or sellers - cash back at closing - to attract their patronage. But many state commissions have banned rebates, prohibitions that the Department of Justice has gotten overturned in some cases.

State legislatures have also enacted minimum service regulations, which prohibit brokers from unbundling services and charging a fee for each. "We're asking states to end minimum service laws because we think they harm consumers," James Cooper of the Federal Trade Commission, noting, however that Washington can't dicate remedies to the states.

There are also more subtle forms of discrimination by traditional brokers. In one, "boycotting," discount brokers say that traditional brokers refuse to show their listings to clients.

Restricted listing services

The CFA says traditional brokers dominate the unregulated multiple listing services and restrict full access to broker clients, hide commission splits from consumers, and restrict non-traditional brokers from access or full information.

Lack of consumer knowledge

The CFA says homebuyers and sellers, especially first-time ones, are at a great disadvantage in that they know little about industry practices. Those selling one home and buying another tend to be preoccupied with matching these sales. Many consumers do not shop and negotiate for brokerage services as carefully as they would purchase a car or other much less expensive transactions.

Lobbying efforts

Many real estate brokers also sit on state real estate commissions; they make up the majority of all state boards, according to the CFA. They regulate themselves and make rules that disadvantage competing business models.

The National Association of Realtors released a comment on the CFA report calling the industry, "One of the most competitive business environments in the world, characterized by low barriers to entry, intense personal client service and a results-based compensation structure. Real estate consumers can choose from nearly 80,000 real estate brokerages and more than 2 million real estate licensees, more than 1.3 million of whom are Realtors. Competition is fierce. In fact, discount brokerages and many innovative business models are doing very well today and the average real estate commission, as computed by Real Trends, has fallen from 5.5% in 1998 to 5.1% in 2003."

Tom Stevens, president of NAR, says the real estate brokerage is "an intensely client-driven business and every client's needs are different. You can't compare it to buying an airline ticket or stocks."

Brobeck agrees that, despite the best efforts of the industry, the commission structure is eroding in some markets.

"Sellers with a $600,000 home are saying, 'I'm not going to pay a commission of $36,000,'" he says. But in some slower markets, commission rates can still hover at around 7 percent. Overall, commission rates probably average well about 5 percent. They are much lower in other countries and would drop in the United States except for anti-competitive practices.

"Prices should be left up to the marketplace," says Brobeck, "but the cartel still sets the prices."

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
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Real Estate Vultures Circling

As signs mount of a slowing real estate market, the "vultures" are beginning to circle. But home prices may still have to fall further to create the bargains they crave.

These savvy home buyers who "save their pennies, wait for bargains and then pounce" are already out and about in Manhattan, according to Leonard Steinberg, an executive vice president with Prudential Douglas Elliman.

There are so many circling Manhattan this summer that they may be canceling each other out. Any little price weakness attracts them and the competition they provide keeps prices from decreasing.

Steinberg tells of a listing that hasn't sold for several months at a price in the mid-$6 millions. A buyer finally stepped up and offered just $5 million flat - the offer was rejected.

Pam Liebman, CEO of the Corcoran Group, a brokerage that specializes in Manhattan, Eastern Long Island and Florida properties, says she has seen no price fall off to date in Florida. "Buyers may be negotiating more, but sellers are mostly holding firm," she says. "There's been a drop in sales volume but not in prices."

Jonas Lee, a co-founder of Redbrick Partners, makes his living by buying residential properties at the right price. Lee hasn't noticed any wholesale bargain hunting yet, though he says the general slowdown in markets nationally should create buying opportunities for vultures.

Lee says that there could be some bargains soon in some once bubbly markets, such as South Florida. Another market that Lee identifies as ripe for a fall is the condo segment in the District of Columbia and its upscale suburbs. And he's eyeing California's Central Valley cities, including Bakersfield, Stockton and Modesto.

Lee think prices in San Francisco will also hold up. "Everyone thinks it is overpriced," he says. "But it's a highly constrained market, difficult to build in and very wealthy."

Jim Gillespie, CEO of Coldwell Banker, says some real estate investors were able to grab bargains in the hurricane-devastated Gulf Coast this year, something he admits to feeling ambivalent about.

"I'm all for an investor going into a marketplace to fix up homes and put them up to code - something that the government hasn't been able to do," Gillespie says. "But if they're just going to try to steal a property, it's not the right thing to do."

"Besides," he says, "it's tricky. How do you know if you bought at the bottom? It's timing the market and, short-term, you can get burned."

As for vulture investing, Gillespie doesn't think that the once bubbly markets on both coasts offer much; prices are still just too high and rents, although strong, don't throw off enough cash to produce cash flow. Investors buying in most of these areas would have to rely on big price rises, something that may not be in the cards for a while.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
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