Mortgage Marketing Associates Blog

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

2007-04-15T19:26:00.000-05:00

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

2007-03-08T16:48:00.000-06:00

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

2007-02-09T18:45:00.000-06:00

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

2007-01-06T03:09:00.000-06:00

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?

2006-12-06T03:02:00.000-06:00

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

2006-11-06T02:45:00.000-06:00

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

2006-10-06T02:23:00.000-05:00

"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

2006-09-05T05:13:00.000-05:00

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

2006-08-21T18:01:00.000-05:00

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
How to Sell Your Home for Top Dollar

Real Estate Vultures Circling

2006-08-10T17:25:00.000-05:00

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
Bank Demands 94-year-old Widow Sell Home

Mortgage Points Make a Comeback

2006-08-05T20:23:00.000-05:00

Rising interest rates may soon revive the practice of paying points to lower monthly mortgage payments, an option not as readily offered by lenders in recent years.

A weekly survey of lenders by the Mortgage Bankers Association on Wednesday reported a 15 percent drop in demand from a year ago for loans to buy homes and mortgage refinancing.

At the same time, another survey by HSH Associates, which tracks the mortgage industry, found that more lenders are quoting points along with mortgage rates. As recently as this summer, lenders surveyed by HSH were quoting mortgage rates at zero points because there was no need to pay points when mortgage rates were low.

In some cases, lowering the mortgage rate by paying points can actually help a borrower qualify for a home loan. That is because much of the lender's qualification process hinges on determining a borrower's ability to make the monthly loan payments.

Points are typically a fee equal to 1 percent of the mortgage loan. By paying this fee, home buyers lower mortgage rates and monthly home-loan payments.

Rates for the most common mortgage, the 30-year home loan, have risen above 6 percent in recent weeks, increasing borrowing costs for home buyers. Thirty-year mortgage rates have been below that psychologically important level for much of the year, but they climbed during the latest in a series of Federal Reserve interest rate increases and heightened concerns about inflation in financial markets.

According to Keith Gumbinger of HSH Associates, each point paid can bring down a mortgage interest rate by one-eighth of a percentage point to one-quarter of a percentage point. Typically, he said, lenders do not quote mortgage rates with more than three points.

"As rates creep higher, we're likely to see more [loan] prices being put out into the marketplace which feature points as part of the equation," said Gumbinger, adding that "points are coming back into the lending lexicon."

James B. Nutter Jr., president of James B. Nutter & Co., a Kansas City, Mo., mortgage lender, said the practice of selling points typically gains popularity as rates rise. "It happens like this whenever it gets slow and anytime builders overbuild," he said.

The pace of home sales has slowed in recent months, which may prompt some sellers to lower prices. In the future, sellers may even offer to pay points for a buyer to ensure a property gets sold.

"I would definitely expect more of it. Buyers may not pay for it. The seller or builder may pay for it to get a house sold," Gumbinger said.

While 30-year mortgage rates are at 6.2 percent to 6.3 percent, relatively low by historic standards, consumers willing to pay points can bring down that rate to less than 6 percent.

Meanwhile, some lenders may not want their borrowers to deplete their savings by paying down points because this could make them more of a risk, said Douglas Duncan, chief economist at the Mortgage Bankers Association. For lenders, the main issues are whether the borrower can make monthly mortgage payments and how the payment of the points affects the borrower's overall finances, he said.

"A lot depends on what the goals are for the borrower. Will they live in the house more than three years?" said Deborah McNaughton, president of Professional Credit Counselors of Brea, Calif. "If they hang on to the home, they should go for the lower rate and pay points. The difference between the cost of the point will be paid out in the first three years."

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Is a “No Cost” Mortgage a Good Deal?

Housing: Which Way Now?

2006-07-31T10:57:00.000-05:00

David Berson, chief economist for mortgage giant Fannie Mae, put it this way: One of the few immutable laws of economics is that "unsustainable trends eventually come to an end." And the end of the trend is pretty much where we are right now in housing.

Ben S. Bernanke, chairman of the Federal Reserve, was more opaque. In congressional testimony last week, Bernanke said, "The downturn in the housing market so far appears to be orderly." In classic Fed speak, Bernanke managed to simultaneously soothe -- and unsettle -- his rapt listeners. An "orderly" real estate downturn sounds okay, right? But what about "so far"? What does that mean in practical terms for people who need to sell a house in the coming months? Could things unravel? And what about buyers -- could the property they buy be worth less a year from now?

Part of Bernanke's job description is to avoid specific predictions at all costs, so you won't get answers out of him any time soon. But top housing economists such as Berson are paid to make specific projections; he offered some on July 20 in a mid-year forecast teleconference with Wall Street analysts.

Here is part of what he said, followed by some thoughts on what it all might mean for prospective sellers and buyers, or those already in the marketplace.

Berson thinks the Federal Reserve "is not done tightening" the ratchet on interest rates, and that it will raise short-term rates again in August. After that, rates are likely to stabilize, bringing at least a temporary cessation to rising home mortgage rates.

He expects average home price appreciation, which had been running at a double-digit annual clip nationally for the past year, to drop to 3 percent or below by the end of the year. (On this point Berson is more bearish than most of his housing and mortgage industry colleagues, who project average appreciation in the 4 percent to 6 percent range.) If speculative investors dump rental houses and second homes purchased during the boom years onto the market in larger-than-expected numbers, Berson thinks price appreciation could drop to a 1 percent or 1.5 percent annual rate -- a level not seen since the recession years of the early 1990s.

In a handful of markets where investors accounted for large shares of boom-time property purchases and where price increases soared for years, Berson believes "there is a good chance of declines" in average home values. Though he avoided naming all the markets that Fannie Mae worries about, he did identify San Diego and parts of California -- "though not all" -- plus large swaths of Florida "but not Orlando."

Like many analysts, Berson says the weakest link in the housing market -- and the most vulnerable to price declines and investor dumping -- is the condominium sector. Many markets are glutted with unsold inventories of new and converted condo units, and Berson is concerned that significant price corrections could be just over the horizon.

What to make of such sobering projections? Here are a few thoughts:

· Neither Berson nor Bernanke foresees widespread property value declines as part of the current down cycle. Only in those markets where speculation was rampant in 2003-2005, and where job and population growth are anemic, are there risks of price declines.

· Neither anticipates mortgage rates to rise significantly higher than today's rates, which are still on the low side by historical standards. As long as financing is available and affordable, buyers will find ways to purchase houses.

· For all-weather real estate players, a flattening market means changing one's tactics, not burrowing away to hibernate until the market warms up. For sellers, it means getting acquainted (or reacquainted) with the toolbox of techniques developed during the down periods of the 1970s, '80s and '90s to move houses. Those include seller financing, where you take back a second note on concessionary terms to push the sale, take back a first note if you can afford to, or "buy down" your purchaser's interest rate to lower monthly payments.

Experienced real estate brokers can fill you in on these strategies, with their pros and cons. They can also guide you on how to price realistically to sell now, not five months from now.

For buyers, down markets often offer exceptional opportunities to acquire real estate at prices and on terms that were unthinkable just a few years earlier. Again, the message is: Don't go to sleep. To the contrary, get off your duff and scour the market for properties that may never be cheaper, or even available.

You've simply got to adapt to the changed market conditions -- and probably work a little harder.

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

Should Realtors Police Themselves?

2006-07-23T13:06:00.000-05:00

When it comes to protecting consumers in the real estate market, are the foxes guarding the henhouse?

That's the conclusion of new research by the Consumer Federation of America into the relatively obscure state regulatory commissions that oversee residential real estate. Whereas other key industries regulated at the state level -- utility and insurance commissions, for example -- typically are run by professionals independent of the industries they oversee, real estate commissions are dominated and essentially run by active real estate agents and brokers.

That, according to the Consumer Federation, makes them slow to act on consumer complaints and slow to introduce needed consumer protections. It also prejudices them against "nontraditional" approaches such as limited-service, limited-cost options that can save consumers money. Sometimes the industry-dominated commissions are the primary authors of state regulations or laws that directly harm home sellers and buyers, including statewide bans against real estate fee rebates to customers, the group said.

The Consumer Federation examined the structure and membership of regulatory commissions in 47 states. As of April, 79 percent of the real estate commissioners were either "real estate agents, brokers or licensees" or individuals who otherwise "earn a living through real estate transactions," such as closing lawyers and title agents.

Four states -- Idaho, Louisiana, Mississippi and Nevada -- require that all commissioners be real estate brokers or salespeople. Another 11 states -- Colorado, Kentucky, New Mexico, Ohio, Utah, West Virginia, Georgia, Indiana, Missouri, Oklahoma and Washington -- "require at least four-fifths of commissioners to hold real estate licenses." Only two states -- Rhode Island and Pennsylvania -- prohibit licensed real estate agents from constituting a majority of commissioners.

Illinois, California and Minnesota are the only states examined that appoint "professional regulators who work full-time to oversee the real estate brokerage marketplace."

One out of four real estate commissioners nationwide, according to the consumer group, works for one of the four largest national real estate firms -- Re/Max, Prudential, GMAC or one of NRT's several networks (Coldwell Banker, Century 21, ERA and Sotheby's). Even when state law requires the appointment of "public" commissioners, one in four is either a real estate lawyer or a title agent.

"Realtors basically have the regulatory function sewn up and controlled by themselves, and the inherent conflicts are endless," said Stephen Brobeck, the Consumer Federation's executive director and a co-author of the research project.

The heavy weighting of real estate commissions with industry members "stacks the deck" in the industry's favor, he said, while harming consumers whenever the traditional brokerage industry's interests diverge from those of the public.

Not surprisingly, the real estate industry disputes the report's conclusions. Though he had not yet seen the study, Malcolm Young, chief executive of the Louisiana Realtors Association, said the state legislature -- not the industry -- mandated that all nine commissioners be real estate brokers or agents "because more than anybody else, [licensed agents] understand the complex issues" involved in real property transactions. Having industry representatives on the commission, he said, is analogous to oversight in other fields such as "nursing, cosmetology, engineering, property inspections" and the like.

Thomas M. Stevens, a Fairfax County broker who is president of the National Association of Realtors, praised the services rendered to the public by the dozens of active agents who serve on state-appointed regulatory commissions, "just like doctors, lawyers and other professionals."

Real estate commissions often do not widely publicize their complaint-handling services, and when they do get complaints, the resolution process can be glacial, according to the Consumer Federation. In Texas in 2005, for example, "more than a half-million homes were sold, yet the Real Estate Commission reported [receiving] only 86 complaints that year." Other states provide minimal resources to handle consumer complaints, leading to long waits, such as California's backlog of 3,663 unresolved cases as of 2004.

State commissioners also have allowed real estate agents to ignore legislative requirements such as early, formal disclosure to consumers about who the agent represents in a transaction. The National Association of Realtors cited agents' noncompliance with state disclosure rules as a growing problem in the industry earlier this year.

State commissions dominated by real estate agents have actively opposed the growth of money-saving nontraditional brokerage approaches, especially those involving Internet-based firms, according to the Consumer Federation. In several states this year, real estate commissions have sought to retain or enact bans against rebates to home buyers and have supported "minimum service" regulations that discourage the growth of discount-brokerage concepts in which consumers assume greater responsibility in the sale of their homes while paying brokers lower commissions or flat fees.

Last year, the Justice Department filed suit against the Kentucky Real Estate Commission for prohibiting all forms of rebates of agent commissions to consumers. The commission later rescinded its ban. The same regulatory commission also ran radio advertisements "suggesting that using non-full-service brokers would [lower] the sales prices" home sellers could obtain in the market, according to the Consumer Federation.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
How to Pick a Realtor

Homes Sales Slow

2006-07-02T10:27:00.000-05:00

Home sales in the San Francisco Bay area, one of the priciest U.S. housing markets, sank just under 20 percent in May from a year earlier to mark the 14th consecutive month of sagging sales, according to a report released Wednesday.

With mortgage interest rates on the rise and local home prices at record levels, the pace of home sales in the region, which includes Silicon Valley, has slowed considerably after several boom years.

The local homes market is "rebalancing itself," said Marshall Prentice, president of DataQuick Information Systems, which published the report.

"What we're seeing is stable core demand and a decline in speculative and discretionary buying. These trends should continue through the summer buying season. There is uncertainty about the market after that, tied to broader economic trends," Prentice said.

A total of 9,064 new and resale houses and condos sold last month in the nine-county region, up 8.4 percent from April and down 19.8 percent from a year earlier, according to DataQuick, a La Jolla, California-based real estate information service.

It noted last month was the slowest May for home sales in the San Francisco Bay area since 2001, reflecting how many prospective home buyers are being sidelined by the combined effect of high home prices, more expensive mortgages and stubborn sellers.

"As interest rates have gone up homes have become less affordable, and we're at a point where people are not yet willing to cut asking prices, so there are fewer sales going on," said Cynthia Kroll, a senior regional economist with the University of California, Berkeley's Fisher Center for Real Estate and Urban Economics.

The median price paid for a home last month in the San Francisco Bay area rose to a record $631,000, marking a 0.5 percent increase from April.

Last month's median home price was up 6.1 percent from a year earlier, marking the third consecutive month the region has posted single-digit year-over-year price gains and the slowest such rate of increase for any month in three years.

The UCLA Anderson Forecast said Wednesday that California's economy will experience slower growth through 2008 as its housing market runs out of steam. The economic forecasting unit said the state may lose up to 10 percent of its construction jobs and many home financing jobs.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
www.namethatvalue.com

Risky Mortgages Worry Regulators

2006-06-15T18:22:00.000-05:00

They are the new breed of mortgages, and home buyers in high-cost real estate markets can't get enough of them: interest-only and payment-option plans that cut monthly payments sharply in the early years of a loan.

Lenders have marketed both types of mortgages aggressively -- often to people who need to stretch their incomes to afford homes -- but have said often that their borrowers have solid credit histories and excellent credit scores and that they fully understand the risks once payments reset in a few years. In some parts of the country, the share of buyers using interest-only and payment-option loans has soared from the single digits two years ago to more than 50 percent in 2005.

But federal regulators worry that all is not well. Too few borrowers, they say, really understand the risks involved and have a solid grasp of how the loans work. Within weeks, a team of regulators led by the Federal Reserve and the comptroller of the currency is expected to issue new guidelines for mortgage lenders that could reduce the number of interest-only and payment-option loans being offered.

A new statistical study challenges some of the mortgage industry's claims about borrowers' sterling credit qualities. The Consumer Federation of America examined the case files of more than 100,000 mortgages closed from January to October 2005. The files contained detailed information on household income, credit scores, down-payment amounts, and racial and ethnic characteristics.

Among the findings: Home buyers who take out payment-option loans tend to have below-average credit scores. Nearly 54 percent of payment-option users in the sample had FICO scores below 700. Fair Isaac Corp., developer of the FICO scoring system widely used to gauge credit risk by the home mortgage industry, says the median FICO score is 723. That means that half of people have scores above 723 and half below.

Sub-par FICOs "are not what you really want to see" in connection with payment-option mortgages, said Patrick Woodall, senior researcher for the Consumer Federation and co-author of the study.

Most payment-option mortgages permit borrowers to choose what they want to pay per month for a preset period, ranging from a fully amortizing standard payment to an interest-only payment to a rock-bottom minimum payment even lower than the interest-only option.

Some mortgage securities industry experts estimate that up to 70 percent of payment-option borrowers go with the minimum payment. That, in turn, causes them to increase their principal debt through a process known as negative amortization. Borrowers often are allowed to increase their original loan balance by 10 percent to 25 percent before they must begin paying down the principal with significantly higher monthly payments.

If home price appreciation stagnates, some of those buyers could face rising debt burdens and minimal -- or even negative -- equity. Such a scenario would be tough enough for borrowers with excellent credit histories and debt-management skills. But it would be disastrous for borrowers with below-average scores and higher-than-average predispositions to miss payments.

The Consumer Federation study also examined the household incomes of interest-only and payment-option borrowers. More than three in five payment-option plan borrowers and 47 percent of interest-only borrowers had annual household earnings of at least $72,000, seemingly a good sign. But Woodall noted in an interview that many of those households still had incomes well below the median for their metropolitan areas, which often are high-income, high-cost markets such as Washington, San Diego, Los Angeles and San Francisco.

More troubling, he said, was the finding that many borrowers using interest-only and payment-option loans have modest incomes and could already be stretched financially. One in eight payment-option borrowers and one in six interest-only borrowers earned less than $48,000.

Woodall said that "all sorts of events could trigger problems for these people" that could lead to defaults, foreclosures and loss of houses -- unexpected medical bills, a loss of income by one earner, divorce -- along with the 30 percent to 80 percent monthly payment increases built into the loans as they mature.

The study also found that minority groups appear to be disproportionately targeted for certain of the loans. Latinos "are nearly twice as likely as non-Latinos to receive payment-option mortgages." African Americans are 30 percent more likely than non-African Americans to have payment-option plans.

Though the jury is still out on the risks of payment-option and interest-only mortgages, the Consumer Federation's findings suggest that lenders are hardly reserving them for high-income, high-credit-score applicants. In an economic squeeze, some of the loans could prove highly toxic -- a prospect almost certain to weigh heavily in the financial regulators' forthcoming new guidelines.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
www.namethatvalue.com

Bank Demands 94-year-old Widow Sell Home

2006-05-21T23:55:00.000-05:00

The following article is by Kenneth Harney and was run in the Washington Post.

If you want to understand just how toxic a home mortgage can get, consider this real-life, ongoing saga:

Katherine Stephens is a 94-year-old widow, now living in a nursing home in southern New Jersey. According to her nephew, William Finch, she has $38 in her bank account. Monthly Social Security checks pay only a small portion of her nursing home bills.

In 1988, Stephens and her husband, Harold, signed up for what they thought was a great concept for seniors: A "reverse mortgage'' that would pay them $312 a month virtually in perpetuity -- until they died or moved out of their house in Brigantine, N.J., near Atlantic City. At the time, Katherine was 76 and Harold was 78. Harold later died, leaving Katherine alone in the house. The $312 checks came in like clockwork every month, until early this year when she moved to the nursing home.

The interest rate on the Stephenses' mortgage wasn't cheap -- 11 1/2 percent. When all the fees associated with the loan were rolled into the financing charges, the annual percentage rate (APR) came to 13.43 percent. But those costs were hardly the worst features of their reverse mortgage. Buried away in the block print was something called "additional interest.''

The "additional interest'' provision gave the lender the right to 100 percent of all gains in the market value of the property from the date of settlement to the date of final payoff. At the time of the loan settlement in 1988, the appraised value of the Stephenses' house was $83,500, according to the mortgage documents. Two recent appraisals put its current market value at roughly $500,000.

From 1988 through January of this year, Katherine Stephens received a total of $67,586.01 in monthly payments -- first from the original reverse mortgage lender, the now-defunct American Homestead Mortgage Corp., and later from Wilmington Savings Fund Society (WSFS), a Delaware bank that purchased American Homestead's portfolio of reverse mortgages in 1994.

WSFS, a $2.2 billion federally regulated bank, now is demanding that Katherine Stephens pay it:

• the $67,586.01 advanced in monthly payouts, plus

• $158,218.19 in compounded interest at the 11 1/2 percent rate, plus

• the 100 percent of house appreciation since 1988 it is entitled to as "additional interest'' under the loan contract.

All this comes to $416,500, but the contract puts a "cap'' on total potential payouts to the lender at 100 percent of the current appraised value of the house, i.e. $500,000, less selling expenses. Without the cap, she could have owed WSFS more than $642,000.

Bottom line: WSFS wants nearly half a million dollars in compensation for total loan advances of $67,586.01, dribbled out at $312 a month over 18 years.

WSFS is adamant that it receive full payment despite the fact that the debtor is a frail, virtually penniless 94-year-old widow who simply wants to use some of her appreciation proceeds to pay her $4,000-per-month nursing home bills.

"I think it is absolutely disgusting,'' said nephew Finch, who is 70 and lives in Clermont, Fla. "They (the Stephenses) signed something they didn't really understand. Now the bank wants everything she's got.''

Finch, who has power-of-attorney for his aunt, said all discussions with WSFS "went nowhere. They took a totally hardball approach.'' After I contacted WSFS and asked for an explanation, company representative Joan H. Sullivan said in an e-mail reply that the bank's reverse mortgage loans comply "fully with federal and state laws, and WSFS understands that at the time of these early reverse mortgage originations -- approximately 15 to 20 years ago -- all of the terms and conditions of those loans were fully disclosed to borrowers.''

Absent "special circumstances,'' wrote Sullivan, WSFS has always "sought to collect all amounts due to the lender under the contractual terms of the loan, which we believe the lender (is) entitled to given the benefits provided and the risks assumed.''

Benefits provided? You mean the $67,500 in advances vs. the $500,000 now demanded? Risks assumed? How big were they with $67,500 in advances on a $83,500 house that soared to $500,000 in market value?

Finch has now listed the house for sale. At the moment, virtually all of the proceeds appear to be headed to the coffers of a $2.2 billion bank.

The reverse mortgage industry no longer makes equity-grab loans. Major institutions such as Fannie Mae no longer collect interests based on appreciation sharing on reverse mortgages, even when loan contract language entitles them to do so.

But that's of no consolation to Katherine Stephens, is it?

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota

Mortgage Mistakes

How to Spend Your Home Equity Loan

2006-04-29T08:41:00.000-05:00

Q.: I've been having a debate with my wonderful wife. We owe $10,000 on a home equity line of credit and we have a car loan with a balance of about $16,000. I would like to borrow more from the home equity line to pay off the car loan since interest on the home equity loan interest is tax deductible. My wife would rather use some cash we have to pay off the home equity line and continue paying the car loan. She's uneasy about having a second mortgage on our home. We almost always see eye to eye on things financial, but here we disagree. What do you think is the best course?

- Adam, West Chester, Pennsylvania

A.: Normally, taking sides in a spousal dispute over finances (even if one of the parties is a "wonderful wife") is not a prudent course of action. But in this case it should be pretty easy to accommodate the needs of both parties.

First, it makes sense to effectively move the car-loan balance onto the home equity line of credit. You don't say what the respective rates on those loans are, but recent rates show that the rate on home equity lines of credit are as much as six-tenths of a percentage point lower than rates on new-car loans.

And that's before taking taxes into account. Most likely, you can deduct the interest on the home equity line, although there are some restrictions on deducting that interest.

Granted, home equity lines are typically tied to the prime rate, which means if interest rates rise, so will the rate on your loan. But unless rates really move up, it’s unlikely that the car loan will end up being less costly after taxes than the home equity line of credit.

Consider your overall debt load

Now that you've got what you want, let's move on to your better half's concerns. It's admirable that your wife is wary about loading up the old homestead with debt. Too many people today view their homes as money machines to fund a lifestyle they can't afford.

To assuage her apprehensions, you can always take some of that cash you mentioned you have available and use it to pay off part of your home equity loan. In fact, if you followed your wife's original plan to pay off the original $10,000 balance with that cash, you would be left with home equity line balance of $16,000.

Yes, that would be $6,000 more in home equity debt than you had before. But the amount you owe overall would have declined from $26,000 to $16,000 - and the savings on that $16,000 would be fairly substantial given the home equity line's lower rate and the tax write-off.

In fact, maybe you could offer your wife this further concession: In addition to making regular payments to pay the home equity line, how about if you increase the payments to reflect the tax savings? This way, you'll get rid of the home equity debt even quicker.

One caution, however. Some people pay off auto or credit-card loans by moving them to a home equity line, and then go right back and take out another auto loan or run up their credit-card debt again. In short, the whole "transferring the debt to save interest expense" premise turns out to be nothing more than a rationale to do more borrowing.

But it doesn’t appear that is going to happen in your case. Why? Well, you seem like a pretty sensible guy. And besides, your wonderful wife wouldn’t allow it.

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

Housing Headlines Mislead Public

2006-04-17T08:30:00.000-05:00

On Jan. 20, 2005, a headline in the San Francisco Chronicle stated that Bay Area home sales were down and that prices slid. If you, like many readers, scanned only the headlines, you might have thought home prices in the area had plummeted. Actually, they rose 14.3 percent between December 2004 and December 2005, according to DataQuick Information Systems.

Sensational headlines sell newspapers. Who wants to read about a real estate market that's not as robust as it was a year ago--one in which home prices aren't going up as fast as they were this time last year? Ho-hum news doesn't do much for newspaper sales.

Behind the scenes of the Bay Area home sale market, the real story is not that home prices "slid" from one month to the next. It's that the market is doing surprisingly well despite the negative press. In a nutshell, well-priced homes that are properly prepared for sale are selling for good prices and within a reasonable period of time.

While this is not the case in all markets, it certainly holds true for markets that are low on inventory. Recently, a home in a moderately priced neighborhood in Los Angeles sold with 10 offers. This miraculous event occurred in February of 2006, not February of 2005.

Areas that are flush to overflowing with unsold listings are a different story. These are areas that were overbuilt during the last five years. New home builders in these areas are offering concessions, like free landscaping and other upgrades, to encourage sales. Sellers of resale homes in over-built areas are forced to cut their prices in order to compete.

HOUSE HUNTING TIP: Regardless of where you live, there are two factors to keep in mind when evaluating news reports on current market conditions. One is that you need to evaluate what's happening now in relationship to what came before. We've recently experienced several of the best years for home sales on record. If the market were to continue to escalate, we'd have a serious problem.

Already, we have affordability issues, given the recent rise in home prices. If home prices were to continue to rise unchecked, first-time buyers would eventually be shut out of the market. With no entry-level buyers, the move-up market would grind to a halt. Rather than a curse, the slow-down in the housing market is a blessing.

The other factor to keep in mind when you're trying to make sense of changes in home prices is that, in most cases, the changes quoted in the press are changes in the median price of homes sold during a given period of time. The median price is the price that is halfway between the highest-priced and lowest-priced home sold in that period.

Changes in median price from one period to the next do not necessarily reflect changes in absolute home values. When the median price rises, it means that the number of more expensive homes sold during that period increased. Likewise, when the median price of homes sold declines, this means that the volume of lower priced homes sold increased relative to the number of more expensive properties.

Following the dot-com bust in 2000, the median home price in the San Francisco Bay Area dropped. This was due to the fact that the market for more expensive properties dried up. However, the market for properties priced under $1 million remained strong.

THE CLOSING: Before drawing conclusions about the strength of the home sale market in your area, you need to collect data at your local level. Regional, statewide and national statistics can be misleading.

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

Fixed Rate Mortgage or ARM? Which is Better?

2006-04-06T03:51:00.000-05:00

The fixed rate mortgage offers the certainty of a constant monthly payment, but an adjustable may seduce you with its lower payment. Security or affordability? Which do you choose? Just what is a home buyer to do?

Which loan you eventually choose may depend more upon your personality than a careful analysis of each loan’s advantages and disadvantages. People who generally seek security in other areas of their lives, such as occupations and relationships, will often opt for the security of a fixed rate mortgage. Those who are more adventurous will sometimes respond to the lure of an adjustable.

The attractions of a fixed rate mortgage are a principal and interest payment and an interest rate that remain the same for the entire length of the loan. That stable predictability is what entices so many people to choose it, and its safety and reliability will afford the homeowner peace of mind. You get your fixed rate mortgage and you forget about it. What could be easier?

An adjustable rate mortgage or ARM, on the other hand, is generally the opposite. An ARM usually has an interest rate and a monthly payment that are fixed only for a specific period of time, after which both rate and payment will adjust periodically.

The ARM's initial low rate and monthly payment are its appeal, and it can offer that because its rate is based on the short term bond market while a fixed rate mortgage is pegged to long term bonds. The short term bond market generally features lower rates than the long term market. If you believe that interest rates will decrease by the time your mortgage rate begins adjusting, then the lure of an even lower rate and payment down the road may tempt you even further.

The foreboding most people have with the ARM involves its uncertainty. An element of fear is introduced because your rate and payment might increase once the rate starts to adjust. If interest rates in the bond market are higher once adjustment does begin, then your rate and payment will increase. None of us wants payments higher than they need to be, but some of us shrink from the risk more than others do.

But much of that risk aversion is needless hand wringing. Here’s why.

By deciding which ARM you prefer, you are also choosing the initial time period you want the rate and monthly payment to remain fixed. ARMs generally offer the following initial fixed time periods: one month, three months, six months, one year, two years, three years, five years, seven years and ten years. The shortest time periods will offer the lowest initial rates. A one month ARM may provide for a rate and payment guarantee of just one month before adjustment begins. A one year ARM is fixed for one year and then the adjustments start. A three year ARM is fixed for three years, and so on.

By picking a time period that best fits you and your situation in life, you can take advantage of the lower rate and monthly payment that an ARM provides at a substantially diminished risk. If you are a first time home buyer, for example, then a three year ARM might make the most sense because first time home buyers often stay in their home for only three or four years. Why get a 30 year mortgage if you won’t be in the home that long?

If you are middle age and your children are at the point in life where they go off to college or trade school, statistics suggest that they will soon move out and you will become an empty nester. Empty nesters frequently downsize to a smaller home once their kids depart, which means a different home and yet another mortgage.

The point is that our lives change frequently and predictably. We get married, have babies, relocate, get divorced, remarry, get sick, grow old, retire and die. All of these chapters in our lives will often occur in a span of only 30 to 40 years. When these joyous and not so joyous events arise, sometimes without warning, our housing and mortgage needs will oftentimes shift just as suddenly. Yet most homeowners rarely take such life events into account when choosing their mortgage.

The average mortgage lasts only about five years, sometimes because a major life event sprouts up inducing the homeowner either to move or refinance. Other times economic change may cause mortgage rates to drop, which, in turn, may influence people to enact changes themselves. They either refinance or perhaps decide that it’s an affordable time to invest in other housing. Despite all of this, people predictably embrace the 30 year fixed rate mortgage rather than an ARM because of the warm and fuzzy sense of safety that a fixed exudes.

The choice is yours to make. An informed decision will include considering all of the alternatives with the knowledge that your personality traits may be influencing your decision making process. While statistical analysis will often favor choosing the ARM, there is nothing wrong with selecting a fixed rate loan.

Copyright 2006. Bob Roscoe. All rights reserved.

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

Minorities Hit by Foreclosures

2006-03-21T23:27:00.000-06:00

Home foreclosures are rising, especially for minority homeowners, according to a published report.

The New York Times reports that the rate of black home ownership fell slightly in 2005, to 48.8 percent, from 49.7 percent in 2004, and that some studies suggest that an increase in home foreclosures for minority borrowers could be a reason.

It also reported that home foreclosures among minority homeowners could rise further in coming years due to rising interest rates and the greater use of so-called subprime loans, which charge a higher interest rate, by those borrowers.

The newspaper said the race of borrowers is not available on foreclosure documents, but studies that compare foreclosure rates to the racial makeup of the neighborhoods where the foreclosures are taking place suggest that the rate is rising higher for minority homeowners.

For example, the newspaper reports that a study by Cleveland State University researchers found that in Cuyahoga County, Ohio, which includes Cleveland, the ratio of auctions to regular sales was 23 per 100 last year in the eastern portion of the county, which is 52 percent black and 7 percent Hispanic. That's up from nine foreclosures per 100 regular sales in that area in 1995. By comparison in the western portion of the county, which is 82 percent white, the ratio was 11 foreclosures per 100 homes sold, up from 2.5, according to the Times report.

The newspaper also reports that in Chicago the number of foreclosures has tripled since 1993, and that neighborhoods where the population is more than 80 percent non-white account for 65 percent of all cases, up from 61 percent in 1993.

The newspaper reports that the Mortgage Bankers Association plays down the severity of foreclosures, noting that most new minority homeowners are doing well and some other statistics show foreclosure are becoming less of a problem, not more. The trade group estimates that fewer than 1 percent of all loans were in foreclosure in the three months that ended last September, down from 1.5 percent in 2002. For subprime loans, the foreclosure rate was 3.3 percent, down from 8 percent in 2002, the newspaper reports.

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

Apply for a Mortgage & Everybody Knows

2006-03-12T08:32:00.000-06:00

When you get a mortgage rate quote or preapproval, you probably assume that your dealings with the lender are confidential, right?

Wrong. Your loan officer may not be aware of it, but behind his back, key financial details about you and your mortgage needs are being offered to competing lenders within 24 hours of your credit bureau inquiry. Firms such as Mortgage Inquiry Data Inc. of Coral Springs, Fla., offer lenders nationwide "access to everyone in your city who applied for a mortgage loan within the past 24 hours."

"You can contact these people the next day and offer them a preapproval for a better loan with your company, Mortgage Inquiry Data says.

Intellidyn Corp., based in Hingham, Mass., touts its overnight "IntelliAlert" program this way: "Imagine the value of knowing which prospects have inquired or submitted a live application with your competition" within hours. For "platinum" customers -- those who commit to a monthly minimum purchase of $31,395 worth of hot leads -- Intellidyn promises to keep them on top of any mortgage inquiry, anywhere, anytime they want.

So what, you say? Aren't our most intimate financial and credit affairs sliced, diced and served up to the highest bidders regularly anyway? Sure, but consider the experience of Pat Barney, who lives outside Minneapolis. Barney recently applied for a home equity credit line from a large national bank. Shortly after he applied, he got a phone call from a competing lender trying to persuade him to switch to an equity line from her firm.

Then he got another call, from a competitor who began the conversation by saying, "I've been notified by your lender that you're looking for a loan." Barney, who manages a branch office of Summit Mortgage Corp. in Edina, Minn., knew that was a lie.

"Why would [my lender] want to let anybody else know about my application?"

He was also suspicious that lenders calling him that way -- especially those who were dishonest upfront -- would be highly likely to lowball their estimates on rates and fees to steal him away.

"This is a setup for a bait and switch," he said. Worse, he said, "here I am in the mortgage business and now I see that my customers' credit information may be marketed and sold within hours to my competitors."

The information can be highly detailed and sensitive. Mortgage Inquiry Data's Web site offers loan inquirers' credit scores, open mortgage balances, loan-to-value ratios, monthly mortgage payments, revolving debt balances and other personal financial data.

"Where is the line here?" said Virginia Ferguson, co-owner of Heritage Valley Mortgage Inc. in Pleasanton, Calif. "When do you begin to violate individuals' privacy rights?" Ferguson is past chairman of the National Association of Mortgage Brokers' credit score committee and said her group plans to look into possible violations of federal credit or privacy regulations by intermediary firms selling 24-hour mortgage inquiry and contact information provided by the national credit bureaus.

In promotional material sent to lenders, Jesse Leeds, sales director for Mortgage Inquiry Data, said his business is "compliant with all privacy and do-not-call laws." The promotion also claimed that the firm is "able to provide [its services] by working in conjunction with the three major credit bureaus." However, in an interview, Leeds said the firm gets its credit data from just one bureau, Equifax, not Experian or TransUnion.

Spokesmen for Equifax and Experian confirmed that their firms do offer 24-hour "trigger" lists of applicants for mortgage credit. TransUnion did not comment on whether it provides overnight contact data. Equifax and Experian said their marketing of overnight mortgage inquiry leads violated no federal or state rules and is merely a speedier version of their routine sales of lists for other preapproved offers of credit.

What's the takeaway here for you? That probably depends on whether you believe that your mortgage inquiry should be a private matter and not trigger dissemination of your credit score, debt levels and other sensitive information overnight to people who plan to pester you with calls or junk mail.

On the other hand, you might appreciate hearing offers that may -- or may not -- be superior to the one you've got. However, before signing up with a lender that bought your name from an overnight "lead" mill, make sure you check that lender out thoroughly. Ask for multiple consumer references in your area. Check with financial regulators to make sure the company has a clean record. Never deal with people who claim that your local lender suggested they get in touch.

Otherwise, as Barney suggested, you could be opening yourself to one of the oldest con games going: bait and switch.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Name That Value Xanga Blog

FHA: Risk Based Mortgages Coming Soon to a Home Near You

2006-02-20T08:39:00.000-06:00

Should home buyers with solid credit histories subsidize borrowers who pay their bills late? Should loan applicants be separated into categories according to how likely they are to default, with the lowest-risk borrowers charged the lowest rates and fees?

For decades the mortgage industry followed the plain vanilla, one-price-fits-all approach. If you qualified for a 30-year loan, the rate was the same for you as for the next applicant, regardless of your credit history. In effect, interest rates were cross-subsidized. People with the best credit paid a little more to cover the costs of defaults by borrowers with shakier credit.

That traditional approach went out the window in the mid-1990s for most lenders, as "risk-based pricing" technology hit the market. Nearly all lenders now feed applicants' credit scores, raw credit-file data and other information into online assessment systems, and quote rates and fees according to applicants' perceived risk of nonpayment.

Only one major player in the mortgage market has never shifted to risk-based pricing -- the Federal Housing Administration's mortgage program for first-time and minority buyers. That may be about to change.

The Bush administration's fiscal 2007 budget asks Congress to authorize risk-based pricing for FHA's mortgage insurance for the first time in its 72-year history. It also asks Congress to permit FHA to modify its rules to allow qualified home buyers to forgo down payments altogether -- a "zero down" option including closing costs -- and to offer 1 percent to 2 percent down payments depending on borrowers' specific needs and risk profiles.

"We need to get out of the one-size-fits-all approach because one size no longer fits," Brian D. Montgomery, the federal housing commissioner, said in an interview. "We need to spread out our risk and price differently."

Montgomery, who has been trying to streamline FHA's programs and rules since taking his post last spring, said the agency's lack of flexibility on pricing has cost it huge amounts of business. First-time purchasers with good credit histories have been drawn away from the FHA by private "subprime" lenders that promise favorable risk-based price quotes. The White House budget estimates that the FHA has lost 70 percent of its traditional business in the past three years alone -- much of it low-risk borrowers cherry-picked by the booming subprime industry.

The shift away from the FHA hasn't always been in consumers' best financial interests. Some ended up with mortgages that sounded good at the application stage but turned out to have unexpected costs. For example, subprime loans frequently carry hefty prepayment penalties -- thousands of dollars owed to the lender if the borrower refinances during the first two or three years. FHA-insured mortgages do not include prepayment fees.

FHA loans usually are assumable -- a qualified person can buy your house and take over your FHA loan at minimal cost -- but private subprime loans typically are not. Some subprime lenders have been targets of high-profile investigations and settlements over allegedly shoddy treatment of borrowers. Ameriquest Mortgage Co., the largest subprime lender, recently agreed to a $325 million settlement involving as many as 725,000 customers in 49 states and the District. The allegations included nondisclosure or misrepresentation of loan fees and prepayment penalties and inflated appraisals. Ameriquest admitted no wrongdoing in the settlement. Other subprime lenders are under investigation by the federal government for alleged predatory pricing and deceptive marketing.

Montgomery said the FHA often offers better protection to borrowers than subprime competitors, particularly for first-time purchasers. The move to lower down payments and lower mortgage-insurance premiums for applicants with better credit, if approved by Congress, should help the FHA "get back some of our core customers" who have strayed to subprime lenders, Montgomery said.

At the same time, risk-based pricing should also allow the FHA "to reach even deeper" into the pool of borrowers with damaged credit. Such buyers may pay slightly higher premiums than they do today, but those premiums would be set according to the borrowers' documented risk profiles. The budget proposes that Congress also allow the FHA to lower those elevated premiums for borrowers who pay on time for extended periods.

In effect, FHA applicants with better credit no longer will be asked to pay for the extra financial risk posed by other loan applicants who have worse credit. That sounds fair enough. Equally important, that's the way business is done by private lenders.

The FHA may be playing catch-up, but at least it's back in the game and trying to get better.

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
www.namethatvalue.com

The Mortgage Encyclopedia: An Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls

Home Price Forecasts

2006-02-04T00:04:00.000-06:00

If you've recently gambled that Las Vegas housing prices would continue to rise this year, you may be on the losing side of the bet.

According to the latest housing price forecasts from Fiserv Lending Solutions, a provider of mortgage and consumer lending services, Las Vegas real estate will tumble a whopping 8.2 percent in 2006, the largest predicted fall among the 379 metro areas studied.

Fiserv forecasts a significant stagnation in housing prices for the United States in 2006 -- median home prices overall will inch up only 1.5 percent this year. And many metro areas will experience drops, including some of the largest, and most expensive, ones such as New York (down 2.43 percent), Los Angeles (down 3 percent) and Washington (down 1.9 percent).

Phoenix, one of the fastest-growing areas the past couple of years, is another town too hot not to cool down. Fiserv predicts an increase of just 3.3 percent.

Some of the metro areas that have lagged over the past few years, however, may play a bit of catch-up. Fiserv forecasts Houston, where the median home price stands at a modest $145,000, to grow by 6.1 percent. San Antonio (median price is $138,000) should do even better, rising 8.3 percent. Memphis, where prices average $129,000, should see a rise of 7.8 percent.

Some of the recently cooler markets in the Northeast are also expected to be among the winners this year. Rochester, New York, where median homes average only $120,000, should see prices rise 8 percent. Neighboring Syracuse will rise 7.8 percent and Scranton, Pennsylvania will increase 7.6 percent.

For a table that gives forecasts for 379 metro areas, ranked by median home price, click For More...

Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Buyer Don'ts

Good House Cheap House: Adventures in Creating an Extraordinary Home at an Ordinary Price

FHA Wants Your Mortgage

2006-01-21T20:00:00.000-06:00

The federal government's biggest home mortgage program streamlined itself at the end of December, and that could be good news for buyers, sellers, realty agents and builders in 2006.

In fact, the Federal Housing Administration's decision to eliminate or soften many of its onerous rules about property conditions and mandatory repairs should be a stimulant to the entire housing market this year. It could help open low-down-payment mortgages with no prepayment penalties to thousands of first-time, moderate-income purchasers who might have turned to higher-fee ''subprime'' alternatives instead.

Those new buyers, in turn, could provide sellers of lower-cost dwellings the cash to move up to more costly properties -- prompting more sales at successive levels up the housing price ladder.

The FHA once dominated the lower-cost segment of the national housing market, and was a crucial entry point for young, minority and lower-income purchasers. But in recent years it has been heavily criticized for enforcing decades-old, overly paternal requirements about property condition and repairs of resale houses. In the boom markets of 2004-05, realty agents often advised sellers to reject purchase offers that came with FHA mortgage financing contingencies.

Whereas buyers using other forms of financing could buy houses ''as is,'' FHA rules required painting, patching, repairs and inspections before the mortgage could be closed -- even if the defects were minor and did not affect health or safety. FHA-contingent offers were viewed as too troublesome to bother with, and realty agents, lenders and sellers in some urban areas effectively boycotted the program. Meanwhile, FHA's share of the overall market plummeted to a record-low 3 percent, down from 11 percent less than a decade earlier.

Thanks to a clean sweep of its rules last year, capped by revised repair and inspection standards outlined to lenders last month, realty agents and home sellers might begin to take a fresh look at FHA as an alternative. Buying a house with FHA financing no longer will put bidders at a competitive disadvantage.

In a Dec. 19 letter to hundreds of lenders across the country, FHA Commissioner Brian D. Montgomery announced that his agency ``has shifted from its historical emphasis on the repair of minor property deficiencies and now only requires repairs for those property conditions that rise above the level of cosmetic defects, minor defects, or normal wear and tear.''

Before the policy overhaul, FHA required advance repairs on resale homes for defects such as:

Cracked windowpane glass.
Leaky faucets.
Soiled or poorly installed carpeting.
Missing handrails on stairways.
Cracked or buckled sheetrock or plaster in walls or ceilings.
Crawl spaces that contained any type of ''debris'' or ``trash.''
Flooring finishes that were worn or deteriorated.
Cracked sidewalks.

Though the agency considered its strict standards to be a valuable consumer protection measure, almost everybody else in the market considered them to be needlessly nit-picky. Under the agency's more tolerant standards, minor defects no longer will have to be repaired in advance of the mortgage closing.

More serious defects on resale houses, such as structural problems, foundation damage, bad roofing and electrical hazards that pose more serious risks to buyers still will be subject to a mandatory repair rule.

FHA announced that previously mandatory inspections for a number of property conditions have also been waived. These include:

Termite and other insect damage problems, unless there is ''evidence of active infestation'' or local real estate regulations require inspections
Septic systems where there is no evidence of malfunction
Wells that are functioning normally and show no signs of contamination.

FHA's streamlining of property rules is part of a much broader effort within the agency to regain its previous role in the national real estate marketplace. Last year Montgomery and federal Housing Secretary Alphonso Jackson said they now agreed with critics who said FHA rules and procedures were out of date. More important, said Jackson, FHA had an important traditional mission to uphold to ease the way for lower-income and minority renters into homeownership through low down payments and generous credit and debt ratio standards.

Jackson argued that in comparison with most subprime loans, FHA ''offers a better deal. We've got a superior product'' -- lower interest rates, lower fees, no prepayment penalties and mortgage limits up to $362,790 in high-cost urban areas and $200,160 in others.

For More...

The Mortgage Encyclopedia: An Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls

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

Surge in no-money down loans could bite

2006-01-18T18:19:00.000-06:00

More than four out of ten first-time home buyers opted for no-money-down loans last year, a move that could prove disastrous for those buyers if the housing market cools, according to a report published Wednesday.

Citing a report by the National Association of Realtors, USA Today said that 43 percent of first-time buyers put no money down last year.

The median new buyer only put 2 percent down on a $150,000 home in 2005, the report said. Half of all new buyers put down more than the median and half less.

The possibility of a cooling housing market coupled with rising rates on adjustable-rate loans could leave many of the new home owners owing more than their homes are worth, the newspaper said.

PMI Mortgage Insurance, which rates risk in different housing markets, told the paper that there is a 50 percent chance that home prices, particularly on the coasts, will decline in the next two years.

Economists have expressed concern about many of these no-down payment loans as well as other creative but high-risk mortgages, which have helped many Americans afford homes, according to the paper.

While the 30-year fixed rate mortgage still remains the most popular option with home buyers, the Mortgage Bankers Association told the paper that roughly one-third of homeowners take out these higher risk loans, which include no money down, interest only or minimum payment mortgages.

Thomas Stevens, the president of the National Association of Realtors, told USA Today that he was watching the percentage of homeowners opting for no-down payment loans.

"If the number was higher than that, I'd be concerned," he told the paper.

For More...
Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Credit Info

Exotic Mortgages Harder to Get

2006-01-09T07:36:00.000-06:00

Reprinted from CNN/Money.com

Attention homebuyers: getting approved for those popular non-traditional mortgages may be a lot more difficult in the near future.

Federal banking regulators recently proposed guidance to mortgage providers that urges lenders to assess a borrower's ability to repay interest-only and option adjustable rate mortgages -- products that have increasingly been used by homebuyers as a means of affording homes that may otherwise be out of reach.

Of the different payment options for homeowners each month, two options have raised the most concern. Those who opt for interest-only loans just pay the monthly minimum, but those payments aren't applied towards their principal. Another option is to pay less interest than what accrues on the loan which results in a lower monthly payment too but can lead to homeowners owing more than they originally borrowed, also known as negative amortization.

An affordability tool

Regulators worry that the popularity of these exotic mortgages may result in consumers defaulting on their loans once the typical three to five-year honeymoon period is over for borrowers, and mortgage payments can double to reflect a rise in interest rates. And they hold the lenders responsible for marketing these products to those that may not be able to afford them.

"Increasingly, they are being mass marketed as affordability products to borrowers," John Dugan, the head of the Office of the Comptroller of Currency, which regulates financial institutions, said in a recent speech before the Consumer Federation of America. "The fundamental problem with payment option ARMs, other than the growing principal balance due to negative amortization, is payment shock."

According to the new Option ARM standards, banks should make it clear to consumers that although certain loans offer small monthly payments, they may result in negative amortization after the introductory period. And that loan balance could be subject to higher interest rates after the introductory period in their loan.

Banks also must make it clear in their own accounting that certain nontraditional mortgage loans are untested and could require them to boost capital reserves to protect against loan losses. Boosting capital reserves could restrict total lending, resulting in more limited availability of these mortgages.

Letting the air out of the bubble

If banks can't lend to as many people as they now do analysts expect this will contribute to a slowdown in the housing market.

"Right now these loans are ubiquitous but if banks are going to have to tighten their standards, the loans will become a smaller share of the market," said Andy Laperriere, managing director at ISI Group, a research firm. "It will have a meaningful impact on the housing market."

Laperriere said over 40 percent of the homes purchased in 2005 were financed by either option ARMs or interest-only loans as an increasing number of homebuyers found themselves priced out of the marketplace.

According to data from the Office of Federal Housing Enterprise Oversight, the average U.S. home price rose 12.2 percent year-over-year as of Sept. 30 and prices climbed 2.86 percent from the second quarter.

Laperriere said the housing market, which is already showing some signs of cooling, may be further impacted if consumers are unable to use exotic mortgages to finance their homes.

Barbara Ryan, associate director at the division of insurance and research at the FDIC, however, was cautious about making the leap. She said if a large percentage of mortgage lenders were underwriting mortgages in a careless manner, then the new guidance could reduce interest in these loans.

But if real estate prices slow down or soften -- due in part to the new regulation -- that could also have a negative financial impact on those consumers that already used these products to purchase a home and were banking on selling their property or refinancing it before the end of their honeymoon period, experts said.

"These borrowers could face the bleak prospect of loan balances that exceed the value of the underlying properties," said the OCC's Dugan said in his speech. "In that case, selling the property or refinancing the loan would not be a viable escape valve for avoiding huge payment shocks."

Waiting for comment

The banking industry has 60-days to comment on the proposed standards.

But Washington Mutual, one of the largest providers of exotic mortgage products, had already taken steps to tighten its standards before the guidance was proposed.

The company raised its starter rate for option ARMs to 1.375 percent from 1.25 percent in October and said it will continue to evaluate changes to the initial rate., said company spokeswoman Sara Gaugl.

"Detailed disclosures are made to customers to ensure an understanding of the payment options at the inception of the loan and potential adjustments throughout the life of the loan," she said. "The option ARM product is not the right mortgage product for every customer. It can, however, provide financial flexibility for the right customers."

Until a few years ago, interest-only loans were primarily offered to consumers who purchased homes as investments and wanted to preserve their cash flow, or for people who earned most of their income from one-time bonuses.

In the last two years, with mortgage lenders offering low teaser rates and so-called "no-doc" loans that don't require an income check, the market for these loans has shifted from affluent homebuyers to the middle-class buyer seeking more affordable payment options.

"We're glad to see the agencies address this issue because the switch to higher risk mortgage lending has been quite dramatic," said Allen Fishbein, director of housing and credit policy at Consumer Federation of America. "A mortgage is not just about consumers being able to buy a home but being able to actually stay in the home that they purchased."

Fishbein said he was surprised that regulators had issued a 60-day comment period before enforcing the guidance and he was interested in hearing what the banking industry will say.

"The challenge is to balance more prudent policies but not be so restrictive that consumers that understand the risk and benefits can't still obtain these loans," he said.

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Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
www.namethatvalue.com

Foreclosure Is Often Avoidable

2005-12-26T07:39:00.000-06:00

Though the possibility might seem remote, what would happen if you got sick or suffered a drastic loss of household income in 2006, and then fell seriously behind on your home mortgage payments?

Think about that -- even for just a moment -- because none of us is immune from patches of rough luck. After two months of missed mortgage payments, your house could be well along on the icy slope to foreclosure. Do you have any idea how you would pull yourself out of that nightmare spiral?

Before answering, consider this: New consumer research reveals that a shocking 61 percent of homeowners who fall behind on their payments have no clue about the array of foreclosure-avoidance options available to them. I'm not talking about hiring lawyers, filing for bankruptcy or turning over their mortgage to con artists who claim they'll solve all the problems if you'll just give them the title to the house. I'm talking about the first and foremost go-to source for home loan delinquency relief: the mortgage company that services your account every month.

The servicer earns its money by collecting your payments, maintaining the records on your account, and staying in touch with you on behalf of the lender or investor who owns your note. More importantly, in recent years the giants of the mortgage industry -- congressionally chartered investors Freddie Mac and Fannie Mae and the government's largest home loan insurer, the Federal Housing Administration (FHA) -- all have begun encouraging or requiring servicers to bend over backward to avoid foreclosures.

They've done this in large part for self-interested business reasons -- they lose tens of thousands of dollars on average with every foreclosure. But they've done it for social policy reasons as well. They recognize the disastrous personal and financial consequences that often accompany the loss of a home to foreclosure. If they can help homeowners keep a roof over their heads, they win and the homeowners win.

How are servicers prepared to bend over backward? Their main techniques include:

• ``Forbearance'' arrangements where the mortgage company allows a borrower to pay less than the full amount owed per month, or even pay nothing, depending upon the situation.

• ``Reinstatements'' that permit delinquent homeowners to balance out their accounts with the mortgage company at some specified date in the future, typically by paying a lump sum.

• ``Repayment'' plans that allow partial contributions of arrears over an extended period of time, often as add-ons to the regular monthly payment.

• ``Loan modifications'' that change the basic terms of a mortgage account. Typically these involve conversion of adjustable-rate mortgages into more affordable fixed-rate loans, rolling all missed payments onto the existing loan balance, or lengthening the term of the mortgage itself, giving the borrower more years to pay off the debt.

All these techniques have the same effect: Once a delinquent homeowner agrees to get involved, the foreclosure clock stops ticking. Freddie Mac says that between 2000 and 2004, more than 176,000 financially distressed homeowners managed to avoid foreclosure by signing up for one or another of these plans. Fannie Mae and the FHA confirm that thousands of their customers have done the same.

Yet new survey research conducted by Freddie Mac and polling firm Roper Public Affairs has found that the widespread availability of foreclosure-avoidance measures through servicers is a secret to most homeowners, whether they've faced financial problems or not. In a sample of 2,031 homeowners, the study found that many of them see no reason to expect help from the mortgage company when they miss payments.

Others say they wouldn't talk to the servicer because they're too embarrassed or scared to do so. Nearly one out of five delinquent borrowers said they didn't contact their servicers because they figured they could solve their problems on their own. And 7 percent didn't get in touch because they didn't have the money on hand to make up the arrears.

Hello? Lack of cash is precisely the reason to contact the mortgage company to see if things can be worked out. Otherwise this month's missed payment morphs into next month's missed payment and pretty soon you're so far behind you might never catch up.

In light of Freddie Mac's surprising poll results, spread the word in 2006: Foreclosure is no longer inevitable when a homeowner gets into financial distress. It's only inevitable in cases where income loss is so severe and so long-term that no amount of workout, forbearance or rejiggering the note can save the house.

For all lesser financial jams, pick up the phone. Call the servicer. Explain the problem and work out a win-win solution.

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

High Housing Costs Driving Residents from some Markets

2005-12-18T12:25:00.000-06:00

Home prices in many American metro areas have soared, and many residents are either pulling up stakes and moving to lower priced regions or are thinking about it.

Sometimes, these migrants are simply desperate to break into the housing market -- they're moving so they can stop renting and buy an affordable home of their own.

For those who own already, high-prices enable them to tap windfall profits -- they can trade in expensive houses for comparable spaces at a much lower price and pocket the difference.

In either case, "Affordability is a factor driving mobility," says Mark Zandi, chief economist for Economy.com. The trend is most pronounced in California, New York City and environs, the Boston metro area and northern Virginia.

Artistic license

Take New York City. It's not just New Yorkers retiring and moving to Florida, anymore, or buying a tract home in the suburbs.

One example: For decades the city's vibrant art scene was made possible by the presence of low-priced space that starving artists could afford to live and work in. In Bohemian days, it was Greenwich Village. In the 1960s, artists moved into the East Village, Soho and Tribeca. Later on artists found cheap loft spaces in Williamsburg and Long Island City.

All those locales are now out of the price ranges of most artists just starting out.

The result: "Philadelphia is the new Williamsburg" has become the hot, hip saying around artistic circles.

The numbers bear it out: in 2004 there was a net outflow of 11,490 people -- of course they weren't all artists -- from New York to Philadelphia, according to data provided by Economy.com. That is, 11,490 more people moved from New York to Philadelphia than vice versa, an astounding number for one year.

California scheming

California movements have been even more spectacular. The incredible gains made in home prices in California have also resulted in mass exoduses from the main coastal cities to other California towns and to Las Vegas and Phoenix, where houses are much more affordable (although gaining fast).

Nearly 70,000 residents of the Los Angeles area moved inland to the Riverside/San Bernardino area in 2004. That was added to by a net outflow from San Diego to Riverside of 16,751.

The difference in the price of the median LA home ($553,200) and Riverside ($387,300) helps explain the direction of the flow. And the flow is accelerating. In 1999, the net difference was only about 33,000.

The migration has bolstered Riverside prices. They've more than doubled in the past three years. And, in turn, Riverside residents are starting to take their leave for places like Phoenix, where 1,499 more Riverside residents moved to than from in 2004 and where, despite the hottest housing market in the country, a median priced house still sells for just $268,000.

Californians are even looking further afield. There is anecdotal information that Californians have departed for inexpensive areas in Missouri, Kansas, Iowa, and other Midwestern states.

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Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Name That Value

How to Sell Your Home in a Market that's Winding Down

2005-11-27T09:15:00.000-06:00

Pretty much everybody in real estate knows what's up: The hot air is hissing out of what David Lereah, chief economist for the National Association of Realtors, once enthusiastically called the "Great Real Estate Boom of the 21st Century." Now even Lereah agrees the boom is well past its peak. It's now "winding down into an expansion," he says.

The real estate boom is dead! Long live the real estate "expansion!"

Instead of double-digit appreciation rates, look for 4 or 5 percent appreciation in 2006. Instead of mortgage rates at historic lows, look for conventional 30-year rates in the 7 to 8 percent range and a couple of points higher for subprime borrowers. Plan for slower-moving sales, more unsold housing inventory sitting on the market and scaled-back listing prices.

This is the "soft landing" scenario that many, but hardly all, economists expect to be the final phase of the current cycle. Others forecast harder landings if interest rates get out of hand in the frothiest cities of the West and East coasts.

Who knows for sure where your local real estate market will be next Thanksgiving? Nobody. But this much seems certain: Sellers and buyers in the coming months will need to change their assumptions and strategies from what they've been for the past three heady years.

How? Here are a few thoughts, based on observations of what happened -- and what worked -- in earlier cyclical downturns during the 1970s, 1980s and 1990s.

Prospective sellers and buyers in 2006 will need to be much closer students of the dynamics and psychology of their local markets than they had to be during 2003 and 2004, when sellers held most of the cards and buyers begged them to take their money. If you are seriously thinking about selling your primary home or an investment property next year, first you've got to comprehend precisely where your real estate is positioned inside its own sub-segment of the overall market.

Even in a broad down cycle, there may be counter-currents affecting property such as yours. For example, if you've got a relatively modest house to sell, it might have a deeper pool of potential buyers than you would imagine in a market that is trending downward overall. That's because qualified prospects who would otherwise prefer to buy a bigger, better-located house than yours may find themselves locked out of contention for costlier properties made less affordable by higher mortgage rates.

On the other hand, you may find that the moderately priced investment condo you bought -- and planned to flip for a profit in 2006 -- is part of a glut of similar properties now sitting on the market competing with one another. There may not be enough buyers to cut the glut for years. So if you absolutely have to sell, prepare to take a bath. If you don't have to sell, keep it off the market. And keep looking for tenants who will reduce your red ink during the down cycle.

What about the buyer's perspective? Down cycles can produce your best opportunities in a decade. But bear in mind that many sellers you encounter will be in denial about pricing. They will refuse to believe that they cannot get what their neighbors got for their less-attractive house across the street in the spring of 2005.

Walk away from everything but the most soberly priced deals. After all, you can't know for sure when the cycle will hit bottom.

Some techniques and tools for down cycles that can work for both sides of the table:

Seller takebacks. If rising financing costs get in the way of a sale, consider taking back a note secured by the house. If the buyer lacks the 10 to 15 percent of the price you're asking to qualify for a conventional mortgage, consider taking back a second mortgage or deed of trust that will fill the gap. Alternatively, you could take back a first mortgage at a concessionary rate. An entire industry exists in the financial markets that will purchase your properly drafted takeback note for cash. A competent local real estate attorney can help.

Closing costs and other concessions. Some sellers can set their house apart from the pack by offering to pay portions of what would normally be their buyer's settlement fees. Home builders in tough markets may pay all closing costs, plus throw in some upgrades, to move the property.

The bottom line: Intelligent sellers and buyers in softening markets are, first and foremost, resourceful. They bring to the table whatever is necessary to get the deal done. They are well informed. They talk to the top-producing realty agents, lenders and appraisers regularly to get insights on pricing, strategy and timing.

They are all-weather players, prepared to profit in every phase of the cycle.

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Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
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