A brief history of the mortgage business: Well, a ten year history, anyway.

I began my career in the mortgage business in the later part of 1996, when interest rates were higher and there were fewer people in the mortgage industry. In 1996, 30-year fixed rates were hovering around nine percent and there were fewer types of loan programs available than there are today. Things have certainly changed sense then. Starting about seven years ago, rates for most types of loans dropped dramatically and banks began to make all kinds of new types of loans available that were simply not possible before the year 2000.

This combination lower rates and less stringent lending guidelines caused a wave of refinance and purchase business. Lower rates meant that borrowers could refinance to lower their monthly payments and buyers who thought they could not afford a house of their own found themselves able to purchase their first home. While that was great news for existing borrowers and new home buyers, it also attracted record numbers of people who wanted to work in as loan officers.

It was easy to be a loan officer then, and many professional “transients,” as I like to call them, got into the business in an attempt to make quick money. It seemed that there would be an endless supply of business for everyone.

Everything has it’s cycle, and the mortgage industry is no different. Many of the new loan officers that got into the business earlier in the decade were busy working on all the loans that seemingly fell into their laps, and not developing a sustainable business model for themselves, let alone a business model based on providing good customer service and becoming a valuable, trusted resource. When rates began to climb and demand for mortgages began to decline, many of these newcomers found themselves with little or no business. This led some mortgage brokers to resort to unscrupulous tactics in order to maintain the same level of business they had come to enjoy.

If it sounds too good to be true, …
There are many ways in which the less-than-professional mortgage companies will try to solicit your business. Most of these tactics exploit common misconceptions, the laypersons’ lack of knowledge of the loan process, or are simply underhanded.

Here are a few things to watch out for when applying for a mortgage:

We pay all of your closing costs!
Offers of no closing costs, low closing costs, or lender-paid closing costs exploit the borrowers ignorance of the loan process. They try to appeal to the bargain-shopper type of borrower who thinks that the loan officer can magically make the normal costs associated with a loan go away. Except in the rare cases of bank-originated second mortgages, all first mortgage and “purchase money” mortgages have closing costs, and a majority of those closing costs are not under the control of the loan officer. Most closing costs are dictated by the nature of the transaction, the type of property being purchased, the closing date, and many other factors that, again, the loan officer has no control over.

If a mortgage company is offering you a loan that has little or no closing cost, beware, as those closing costs are hidden or you are paying for it in the long run by agreeing to a higher-than-average interest rate. In the mid 1990s automobile manufacturers would try to entice truck buyers by offering up to $5,000 cash back on financed vehicles. You may have guessed by now that those trucks were over-priced by $5,000, and the overall interest rate for the financing was higher than the industry standards at the time. No company can stay in business very long by offering something for nothing.

Get a $500,000 loan for the amazingly low payment of $1,400 per month!
If a mortgage company is offering a mortgage that has a payment that seems unusually low then, again, beware. This type of mortgage is usually referred to as as option ARM. These types of loans go by many names, sometimes they are called option ARMs, pick-a-payment loans, smart loans, or negative amortization loans. Regardless of what they are called, these loans typically have a negative amortization feature where the difference between what you are required to pay every month and the actual fully-amortized payment is added to the balance of your loan, so your loan balance grows every month.

While these loans serve a purpose for some borrowers, they are definitely not for everyone. Unscrupulous mortgage companies that do not have their clients’ best interests in mind often sell these loans to unwary borrowers based on the low “required” monthly payments alone, and do not bother to explain the advantages and disadvantages of these types of loans with their clients.

We have special arrangements with our banks to offer you a super low interest rate that nobody else can!
Every mortgage company, funding company and mortgage broker all have access to the same lending sources. While it is true that a broker has a certain advantage over a bank in that a broker can shop around to different banks to find lower rates — no single mortgage company has access to cheaper money than anyone else does. This type of claim is simply false. The accompanying sensationalist advertising usually stresses the urgency of their “limited time offer,” pressuring you to “call right now so you don’t miss out!” A variation of this tactic is to stress that mortgage rates have hit an “all-time low” or a “forty-year low.”

Recently I listened to one Seattle-area mortgage company’s radio ads. Over the course of a week the owner of the company stressed that rates had dropped even lower than they had the previous day. He emphasized that rates were not going to say this low for long and that “smart” borrowers needed to “act now.” I tracked those so called “all-time low rates” and found that rates actually increased during the week of the ad campaign and had not gone down as he had claimed. I have always found that if a company has to attract attention via expensive radio advertising then someone has to pay for that advertising, and that “someone” is most likely their customers.

No one can control rates or even predict them with any real degree of accuracy, just as no one can predict what the stock market will do on any given day. The best any one can do if get a feel for an overall trend or market direction. Instead of focusing solely on rates, smart borrowers should pick a mortgage professional who is experienced, provides sound advice, is willing to advise you as to the best loan option for you, is always available to answer questions, and will be around to help you after your loan has been closed.

Staying off lender’s “Trigger Lists”
With the decline in both home purchases and refinancing due of rising interest rates, less- than-professional mortgage lenders have been resorting to bothersome tactics. Once you’ve officially applied for a loan, your credit report immediately reflects that recent activity. Some companies in the mortgage business purchase lists of people who have experienced such recent activity (called “trigger lists”) from lead-generation companies that get their information from the credit-reporting bureaus.

These unscrupulous lenders then contact these applicants, sometimes as quickly as 12-24 hours of their loan application, and offers them lower rates in an attempt to get them to switch lenders in the midst of processing their loan. While not strictly illegal, this practice is definitely irritating to home buyers and questionable when it comes to basic business ethics. It raises the question of why anyone would trust a company that has to resort to stealing business from someone else to remain in business during lean times.

To protect yourself from ending up on a trigger list, you can opt out of such lists through the credit reporting bureaus. To do this, visit http://www.optoutprescreen.com, or call (888) 567-8688. Another way to cut down on the number of solicitation calls you receive is to enroll in the National Do-not-call Registry online at http://www.donotcall.gov or by calling (888) 382-1222.


Providing experience, knowledge and service for ten years.
Instead of resorting to sensationalized advertisements, low rate come-ons, or bait-and-switch tactics, I have built my business on providing good service to my clients before, during and after the loan is closed.

In-home appointments
I always travel to meet my clients at their homes and offices at times that are convenient for them, and I never make my clients come to my office. I have been known to travel from Bellingham to Tacoma and from Fall City to Poulsbo.

About me
I always try to help my clients make a decision based upon rational, logical information rather than the high emotions that frequently accompany the purchase of real estate. If you have a friend, acquaintance or family member who is interested in receiving and honest explanation of currently-available lending options, please have then give me call.

I will be happy to sit down with them and discuss their particular needs. Every borrower is different, and every loan situation is different. I never assume that I can apply the same set of answers to each borrowers situation and still fully satisfy their mortgage needs. I am happy to spend the time to help you, your friends, and your acquaintances to determine the best course of action for each or their unique loan needs.

Providing education and information has become my specialty. I strive to make the mortgage process as comfortable and understandable as possible. I will meet my clients most any place they choose, and am always available by cell phone – even on nights and weekends.

A Win-Win-Win Offer!

This month Mike the Money Man is taking a break from the usual article writing and …well, I'm going to call it what it is… I'm appealing to you directly with an offer I hope you can't refuse.

You've heard me say that referrals are the lifeblood of my business. Well it's a no-brainer why referrals are so important. We all like to do business with people we know, like and trust. When a client, friend or trusted associate makes a referral, by association that referral becomes an extension of their trusted network. Suddenly you've joined the inner circle, and you've been stamped with a big fat seal of approval.

But the truth is, in any business, people seldom know you're looking for referrals unless you take the time to ask them.

So I'm asking you right now as a past client... Who do you know that I should know?

And here's my pitch to you…

Presenting Mike the Money Man’s End-of-Year Challenge –
A Win-Win-Win Offer!

A bit cheesy you say? Perhaps. But it truly is a Win-Win-Win for everyone.

I believe what goes around comes around, whether you call it karma or the golden rule. So I never ask for anything without giving in return. The people you refer to me save money, Mike the Money Man generates business and …drum roll please… you get a free lunch. What could be better?

How Can You Help Me Help You?

Here's what I'm asking.

Dig through that Rolodex, your shirt pockets and under the cushions of your couch! Do you have a friend, acquaintance or co-worker who is thinking about buying a house in the near future or who is actually making an offer on a property right now? Or maybe they're looking to refinance. Tell them what great service I gave you, and please refer them to me!

If that referral turns into legitimate business for Mike the Money Man between now and the end of 2009, I’ll take you to lunch at your favorite restaurant…No Joke! … Lunch on me just for referring business to me. What could be easier?

Here's the only catch. To be eligible for the bonus, your referral has to turn into legitimate business for me. And when it does, I will knock three hundred dollars off my normal fee for the people you referred.

You win, your friends win, I win—everybody wins!

Referring the Referral Source

Great referrals don't always come directly from friends and associates. Some people are in business or social networks that make them natural referral sources, so keep your eyes and ears peeled for these connectors you meet when you're out on your daily travels. Great referral sources include:

• CPAs, Accountants and Tax Professionals

CPAs, accountants and tax professionals are very much aware of their clients' dirty little money secrets. They are also aware which clients might be in need of a good cash infusion that a refinance might help with.

• HR Directors / Corporate Relocation Experts

Who do you know that deals with moving people into and out of the Seattle area? Perhaps someone who works directly in or for a large company ... oh, say, Starbucks, Microsoft, Boeing, Amazon or some other company. The people who hire employees for these companies meet people constantly who need to buy and sell homes. You guessed it! These would be great referral sources for Mike the Money Man!

• Real Estate Agents

You'd think that every real estate agent was already connected to a great mortgage broker. The sad reality is that not every one provides the kind of service that Mike the Money Man has become known for. Some mortgage brokers are simply lazy and unavailable. If you hear of a Realtor in your travels that is complaining about their lending source, hand them my card. Better yet, pass their number along to me, and I will give them the exquisite care they deserve.

• Divorce, Probate Lawyers or Marriage Counselors

Lets face it, life happens and sometimes people get divorced or a family member dies. When life-changing events do occur, people need to “deal” with the biggest asset they have—their homes. This usually means some form of refinancing has to take place. I understand their needs and love to assist people through these types of situations.

Now you know who to refer and how to do it. Just remember, the best form of advertising for me is simply conveying your enthusiasm and satisfaction for the service I have given you in the past.

So pass my name along, and if you need more cards, let me know. I thank you for being a part of Mike the Money Man's referral team. So let's get out there and win-win-win one for everyone!

Questions and answers on the confusing subject of the $8,000 first-time-home-buyers tax credit.

The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time-home-buyers purchasing a principle residence on or after January 1, 2009 and before December 1, 2009.

I have received so many questions about the first-time-home-buyers credit as of late that I am compelled to compile all of the questions into one article so everyone can benefit from the answers to the many questions. If I have not answered you specific question in this article please feel free to submit your question to me at the e-mail address listed below.

Please keep in mind that I am not a tax or legal expert. I strongly encourage you to seek the advise of a qualified tax advisor or legal professional regarding how the first-time-home-buyer tax credit will effect your unique situation.

mike@mikethemoneyman.com

Who is eligible to claim the tax credit?

First time home buyers purchasing any kind of home - new or resale - are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009, For the purposes of the tax credit, the purchase date is the date when the closing occurs and the property transfers to the new home owner. This date can generally be found at the top of the settlement statement that was provided to the new home owner by the escrow company handling the transaction.

What is the definition of a first-time-home-buyer?

By law a first time home buyer is defined as someone who has not owned a primary residence within the last three-year period. For married taxpayers, the law includes both the married couples. For example, if you have not owned a primary residence in the last three years but your spouse has owned a primary residence within the last three-year period neither of you will qualify for the tax credit. However joint, unmarried purchasers may allocate the tax credit to either of the buyer that may qualify for the tax credit. A very important distinction to keep in mind is that prior ownership of a vacation home or rental property does not disqualify buyers from the tax credit if they buy a primary residence within the tax credit period.

What is the definition of a primary or principle residence?

A primary or principle residence is one in which you intend to live in and not rent and where you spend at least 51 percent of your time.

How is the amount o the tax credit determined?

The tax credit is equal to 10% of the purchase price of the primary residence up to a maximum of $8,000.

Are there any income limitations for claiming the tax credit?

Yes, of course. There are always a few catches to these things. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing jointly. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 of a single taxpayer and $150,000 for married taxpayers filing jointly. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) of $170,000 (married) and is proportionally for taxpayers with MAGI between these amounts.

What is “modified adjusted gross income”?

Modified adjusted gross income or MAGI is defined by the IRS. To determine it, a tax payer must first determine “adjusted gross income” or AGI. Adjusted gross income is the total income minus certain deductions known as adjustments or above-the-line deductions but, before itemized deductions from Schedule A or personal exemptions are subtracted. On forms 1040 and 1040A adjusted gross income is the last number on page 1 and the first number on page 2 of the form. For form 1040EZ adjusted gross income appears on line 4. Please note that AGI includes all forms of income including wages, salaries, interest and divided income and capital gains.

To determine modified adjusted gross income or MAGI , add to adjusted gross income items like foreign incomes, foreign housing deduction student loan deductions, IRA contributions deductions and higher education deductions.

If my modified adjusted gross income is above the limit, will I qualify for any tax credit?

Possibility , it depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose modified adjusted gross income exceeds the phaseout limits.

Can you give an example of how the partial tax credit might be determined?

Lets look a one example, assume that a married couple \has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5, the result is $4,000.

How about another example? Assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds the $75,000 limit by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the results is 0.35. Multiplying $8,000 by 0.35 shows the buyer of this example is eligible for a partial tax credit of $2,800.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied for different situations. You should always seek the advise of a professionals for information relating to your specific circumstances.

How is this new $8,000 tax credit different from the tax credit Congress enacted on July of 2008?

The most significant difference is that the new $8,000 tax credit is not a tax free loan like the original first-time-home-buyer incentive and does not have to be repaid. This tax incentive is a true tax credit. However home buyers must use the residence as a principle residence for at least three years or face a recapture of the tax credit amount. Certain exceptions apply.

How can I claim the tax credit? Do I need to fill out an application or complete a form?

Participation in the tax credit is very easy. Home buyer ca claim the tax credit of their federal income tax return. Specifically, home buyers should complete IRS form number 5405 to determine their tax credit amount, then claim this amount on line 69 of their 1040 income tax return. No other applications or forms are required. However, you will want to be sure that you qualify for the credit under the income limits and first-time-home-buyer texts mentioned previously.

What type of homes can qualify for the tax credit?

Any homes that will be used as a principle residence will qualify for the credit. This includes single-family detached homes, Condominiums, Townhomes as well as manufactured homes and houseboats. The definition of a primary residence is identical to the one used to determine whether a buyer may qualify of the $250,000 to $500,000 capital gains tax exclusion for principle residences.

I have heard that the tax credit is refundable. What does that mean?

The tax credit is refundable which means that if the home buyer has no taxable income in a given year they will still receive a refund for the amount of the tax credit they are eligible for. This typically involved the government sending the home buyer a check for the portion of the tax credit they are eligible for.

For example, if a qualified home buyer expected a federal tax liability of $5,000 and had withholdings of $4,000 for the year in question, then without the tax credit the taxpayer would owe the IRS $1,000 in taxes for that year. If the home buyer is eligible for $8,000 of the tax credit they will receive from the IRS a refund of $7,000. ($8,000 worth of tax credit minus the $1,000 in taxes owed)

I bought a home in early 2009 and have filed to receive the $7,500 tax credit on my 2008 tax return. Can I still claim the $8,000 credit?

Homebuyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file the amendment properly and within enough time to make the December 1st deadline for the $8,000 tax credit.

Instead of buying a new home I have has a house built on a lot that I already own. Can I still qualify for the tax credit?

Yes, you can still qualify. For the purposes of the home buyer credit, a principle residence that is constructed by the home owner during the tax credit period is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of the first occupancy must be on or after January 1, 2009 and before December 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date found on the HUD statement.

Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond or a MRB mortgage program?

Yes, The tax credit can be combined with the MRB home buyer program only of 2009. First-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in a MRM Mortgage program.

I am not a U.S. citizen. Can I still claim the tax credit?

Maybe, Anyone who is not a nonresident alien (as defined by the IRS) who has not owned a principal residence in the previous three years and who meets the income limit test may claim the tax credit for a qualifying home purchase. You may find the definition of a “nonresident alien” in the IRS publication 519.

Is a tax credit the same as a tax deduction?

No, a tax credit is a dollar-for-dollar reduction in what a tax payer owes. That means that if a tax payer owes $8,000 in taxes during a given year and who qualifies for a $8,000 tax credit; they will owe nothing to the IRS.

A tax deduction on contrast is subtracted from the amount of taxable income the taxpayer makes. Using the same example, assume the tax payer is in the 15% tax bracket and owes $8,000 income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15% of $8,000) or lowered from $8,000 to $6,8000.

I bought a home in 2008. Do I qualify for the $8,000 tax credit?

No, but if you bought your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit.

Is there any way for a home buyer to access the money allocable to the credit sooner than waiting file their 2009 tax returns?

Yes and no, currently, there is now way to get the full $8,000 sum in your pocket today. Washington State legislators are working on a plan to allow buyers to “borrow” against a potential tax refund to be used for a down-payment for a first-time home buyer but as of yet that legislation has not been passed and it remains to be seen if legislators can get the measure past the make the December 1, 2009 deadline before the tax credit is no longer available for the IRS.

There is however a way for first-time buyers who believe they qualify for the tax credit to reduce their income tax withholdings to see some of the money now. Reducing the tax withholding (up to the amount of the tax credit) will able buyers to accumulate cash by raising his/her take home pay. This money can be then be applied to the down-payment. Buyers should adjust their withholding amount on their W-4 via their employer of through their quarterly estimated tax payment. IRS publication 919 contains rules and guidelines for income tax withholdings.

Prospective buyers should note that if income tax withholdings are reduced and a qualified home purchase does not occur within the tax credit period of at all then the taxpayer might be liable to repay the advances withholdings, possible penalties and interest to the IRS.

If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?

Yes, The law allows taxpayers to choose or “elect” to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know wether the income limit will reduce their credit amount. Taxpayers buying a home who wish to claim it on their 2008 tax returns, but who have already submitted their 2008 returns to the IRS, may file an amended 2008 return claiming the tax credit. Again please consult the services of a tax professional to determine how to amend your tax returns.

For a home purchase in 2009, can I choose whether to treat the purchase a occurring in 2008 or 2009 depending on which year my credit amount is largest?

Yes, If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

About Mike the Money Man

Mike Carpenter, also known as Mike the Money Man, is one of Seattle’s leading mortgage-industry and subject-matter experts. Staying true to his motto, “taking the mystery out of mortgages,” he offers reliable and accurate information on today’s credit crisis and the prevailing economic climate. Recognized for his competence and real-world experience, Mike is available to answer questions and counsel people who are uncertain and baffled by the existing financial market conditions. He is committed to sharing his knowledge and unmatched expertise with clients, educators, and the media.

© Copyright 2009, Mike Carpenter. All rights. No reproduction without express written permission.

For reprint permission, contract Mike Carpenter at (206) 465-5528 or mike@mikethemoneyman.com.

Why do we need appraisals?

An appraisal is an essential part of the home loan process. It is a requirement for all lenders on any real estate loan transaction for either purchases or refinancing. The purpose of an appraisal is to “approximate” the market value of a property at the time the money is borrowed. The appraisal is used to establish how much money can be lent on the property and to confirm that the property has enough value to act as collateral against the loan, as well as to prevent the fraudulent inflation of a property’s value.

Fraud? What fraud?

During any period of lax credit standard there is going to be a percentage of people who are going to find or invent ways to manipulate the system to make dubious profits or commit outright fraud. There is and always will be a segment of any otherwise reputable industry that will engage in disreputable acts and thereby give the entire industry a bad name. There can be no doubt that disreputable mortgage brokers, appraisers, and real estate agents who, during the height of the real estate boom, were engaged in fraudulent activity that led in some part to the mortgage crisis, even though that activity represented a relatively small portion of the overall lending market.

 The Intent of the Home Valuation Code of Conduct.

It will probably take years to ferret out all of the causes and complexities of the credit crunch and mortgage crisis. I personally think that fraud perpetrated by individual mortgage brokers, appraisers or real estate agents will prove to be only a very small contributor to the global credit crunch. The intent of the Home Valuation Code of Conduct is to eliminate the possibility of fraud in the valuation of real estate for loans and perhaps accurately value real estate, especially now that most real estate has suffered some decline in value.

The Mortgage Crisis And The Valuation Process.

Since the so called credit crunch or mortgage crisis began over two years ago, there have been many changes in the mortgage industry. One of the most significant ways if which the mortgage crisis has affected the loan consumer is in how their loans are processed. On May 1, 2009, the Home Valuation Code of Conduct (HVCC) bill that had been passed by Congress went in effect.

This new law is, supposedly, designed to put the appraisal valuation process in the hands of a disinterested party and thereby reduce the incidence of fraud and coercion in the appraisal processes.

To get a perspective on what changes are going into effect and how that is going to effect the consumer we need to look at the way the “old” system of ordering an appraisal worked.

 As a mortgage broker, I am approached by clients who are interested in buying or refinancing a house. One of the steps in this process is to call up my favorite appraiser and ask them what value would be reasonable for the particular house in question. I do this before the loan processing has even begun to ensure that the house has the value needed to make the loan work.

This trusted appraiser, who I have worked with for years, is capable of delivering a quality report in a timely manner. They enhances the loan process by delivering a valuable product needed to process the loan. The reason that I use one of my “favorite” appraisers is that through the process of elimination borne out of years or experience I know who I can rely upon to do a timely, quality job.

Under the HVCC system my appraisal will now be “managed” by a so-called disinterested third-party appraisal management company, who by lottery, picks an appraiser out of a pool of appraisers in my area. The appraisal is assigned to this random appraiser, who I most likely do not know, with whom I cannot have any contact, and who may have any amount of experience, skill level or commitment to his or her job.

This added layer of so-called security is a direct reaction to the mortgage crisis and is an attempt by politicians and banks to assign some sweeping fix in an attempt to eliminate the possibility of fraud and other problems related the mortgage crisis.

Generally, I am all for processes that help deliver quality loans to consumers, but, the adding of yet another intermediary to the process has quickly proven to deliver just the opposite of it’s intended effect.

The new HVCC system will add additional time and costs and a unique lack of accountability that will bog down the loan process — which is exactly the opposite of what is needed to get the housing market back on track.

An Ineffectual Model.

For many years a similar lottery system was in place that may well prove to have been a model for the new HVCC system (I know that all of the loan officers and realtors will cringe when they read these words): the Veteran’s Administration loan-appraisal process.

I am certain that the drafters of the bill used the VA appraisal process as their model for the new HVCC system, as the two systems are very similar.

Under the longstanding VA appraisal system, a VA-approved home appraiser is chosen at random and assigned a VA appraisal order that originated with the bank that would be processing the loan. In order to eliminate the possibility of coercion or fraud, the mortgage broker cannot know who the appraiser is, and the appraiser has up to three weeks to deliver the final appraisal. In the interim, the value that the appraiser will deliver is completely unknown. Mortgage brokers and realtors are then forces to wait for the appraiser to get around to delivering the appraisal, all the time biting their nails in hopes that the value will come in at a level that will actually support the loan application.

 This is why VA loans are the scourge of the real estate world; because of the additional work and lengthy uncertainty created by the VA’s processes, mortgage brokers and listing agents alike rank them among the least desirable of transactions.

Cracks In The System Have Already Begun To Appear.

The HVCC system has already begun to prove itself to be slow and ineffective. These days, lenders are justifiably very conscious of the importance of obtaining a given property’s accurate value, and will frequently require two appraisals or an appraisal review, in addition to the appraisal that a mortgage broker already orders through one of the so-called independent appraisal management companies.

That additional appraisal work is understandable now that housing values have been declining, and is just one of the additional steps that mortgage brokers and borrowers will have to deal with until values begin to recover. These new requirements are mostly being required when refinancing, but they are occasionally seen with purchases as well. It is these second appraisals and appraisal reviews are beginning to reveal the ineffectiveness of the HVCC system.

To fully understand why this new system will prove to be a stone around the neck of the recovery of the real estate market, we need to understand how the appraisal management companies choose there appraisers and how they assign the work to there chosen appraisers.

Firstly, we need to understand that the average self-employed appraiser used to charge around $400 to do a full appraisal, and that was part of the standard cost of closing a loan. Now that the appraisal management companies are managing the work, they have to pay their staff and much larger operating costs and presumably still make some degree of profit for their efforts.

So, these appraisal-management companies are adding $100 to the average appraisal fee, raising the overall costs of an appraisal to $500 but paying the appraiser only $200 (or less), keeping $300-plus of that fee that is paid by the borrower.

Most good appraisers have spent years building their businesses through experience, hard work and earned reputations, just like good mortgage brokers and good real-estate agents have done, and these long-time appraisers are rightfully upset that they now have to be forced into accepting half of what they used to make for doing the same amount of work.

Most of the good appraisers that I know have confided in me that they are protesting by rejecting all of the work the appraisal-management companies are sending to them. The result is that the appraisal-management companies are being forced to work with the least experienced, least-qualified appraisers who will work for the least amount of money — the bottom-of-the barrel appraisers.

It does not take a Harvard-educated MBA to deduce that the worst appraisers are very likely to produce an inferior product and be the slowest and be the least accountable. This, of course, has proven to be true, at least so far. My personal experience with this has shown that the second appraisals overseen by the appraisal-management companies have proven to be far inferior to the appraisals I ordered through the appraisers that I have done business with for years. In fact, some bank representative that I work with have told me that they are appalled by the lack of quality information contained in these new appraisals.

Under the old system, an appraisal could be completed in as little a three days if a real estate transaction called for a rapid turnaround. This rapidity is no longer possible under the new HVCC system, as the appraisal-management companies mandate a two- to three-week delivery time on all appraisal orders. It seems that most of those two or three week “processing” times are being taken up by the appraisal management companies' search for an appraiser who will work for a pittance so the management company can maximize its profits.

I feel that from the standpoint of the appraisal-management companies, the new system has become less about stemming fraud and producing quality products and more about squeezing more profit out of this newly-mandated system.

A Free-market System vs. A Controlled-market System.

 In a free-market system, the costs of products and services are dictated by forces such as completion time and supply and demand. The marketplace sets the prices of goods and services and when a willing and informed buyer and seller come together and agree on the price of those goods or services. The purchase of real estate is no exception. When a seller lists a property for $400,000, then a buyer makes an offer of $380,000, and they eventually settle on a price of $390,000, that is the free market in action.

Under the new HVCC system, that free-market system could be replaced by a system in which an appraiser who is unknown to all of the parties involved in the transaction could potentially set the value of the house in a given transaction, with the potential of that price coming in far off the market value one way or the other. This is an extreme scenario but may not be far from the truth.

In our aforementioned free-market transaction, if the buyer and seller agree on a price of $390,000 but the low-budget “managed” appraiser decides that the value of the property is only $350,000, then there will be plenty of problems. All of a sudden the buyer and seller are not setting the value of the real estate, rather, our the bottom-of-the barrel appraiser is setting the value, and setting it incorrectly based on lack of experience or care or some combination of both. Given enough of those sorts of errors we could see a definite dampening effect on the recovery of real estate prices.

What can be done?

If you have had trouble with the new HVCC system or you know of someone who has, or if you simply wish to express your concerns or complaints about the new valuation system, please contact your member of Congress via the link below:

http://capwiz.com/namb/dbq/officials/

The National Association of Mortgage Brokers is quite actively working to overturn this bill. You may also send your HVCC “horror story” to the NAMB at 

hvcc@namb.org

 More information about the HVCC can be found by following the following links:

http://www.namb.org/namb/NewsBot.aspMODE=VIEW&ID=257&SnID=992184185

http://www.appraisalinstitute.org/newsadvocacy/downloads/HVCC_myths.pdf

About Mike the Money Man

Mike Carpenter, also known as Mike the Money Man, is one of Seattle’s leading mortgage-industry and subject-matter experts. Staying true to his motto, “taking the mystery out of mortgages,” he offers reliable and accurate information on today’s credit crisis and the prevailing economic climate. Recognized for his competence and real-world experience, Mike is available to answer questions and counsel people who are uncertain and baffled by the existing financial market conditions. He is committed to sharing his knowledge and unmatched expertise with clients, educators, and the media.

© Copyright 2009, Mike Carpenter. All rights. No reproduction without express written permission.

For reprint permission, contract Mike Carpenter at (206) 465-5528 or mike@mikethemoneyman.com.

In five to ten years, when the financial crisis is just a memory and housing prices are up again, the current period in real estate history may well be marked as one of the greatest buying opportunities to date.

Locally housing prices have rolled back to what they were two years ago. In 2006, the median housing price in King County was $397,275. Since that time, the median price has fallen roughly 9 percent, to $365,000.

One of the beneficial differences between today and 2006 is that mortgage interest rates are substantially lower than in 2006. In July 2006, 30-year fixed conforming-rate mortgages peaked at a nationwide average of 6.88 percent.

As of this moment, conforming 30-year fixed rate loans can be had for 5.125 percent. Of course, rates change daily and are as unpredictable as the stock market, but these lower rates represent a huge opportunity for qualified home buyers.

There is some talk that the U.S. Treasury Department could try to entice Fannie Mae and Freddie Mac to lower rates even further to 4.5 percent in an attempt stimulate home buying and thus spark an upturn in the national economy. If this rate drop were to occur it, would mark an unprecedented lowering of rates.

Buyers need to look at current rates from a historical perspective to understand where we currently are and how cheap financing a home really is at today’s rates. In the last 25 years rates hit a high of 14.77 percent nationwide in July of 1984 and as high as 17 percent in 1978. We have only reached our current lows one time in that 25-year period.

To put a real perspective on the differences in rates on a 30-year fixed loan, check out this example: the principle and interest payment difference on a loan amount of $300,000 between a rate of 6.88 percent and 5,125 percent is $338 per month, and the difference between 5.125 percent and 4.5 percent is an additional $113.40 per month.

That difference of $338 in payment translates into an additional $62,000 in buying power.

Smart buyers are buying value, which means they are buying more house for their money these days. We have already discussed that we are better off by 9 percent from our 2006 highs in housing prices. The current rates are affording buyers an additional 17 percent off the payment they would have made in 2006. Essentially, buyers can buy homes at a discount of roughly 30 percent.

I have never seen rates as low as they are right now. With so many sellers willing to negotiate, there is no doubt that this is a genuine buyer’s market. All those yard signs should be reading not “For Sale,” but “On Sale.”

One for the history books?

How did we get here?
I started in the mortgage industry ten years ago, during what I might call a time of rationality where the typical borrower needed to prove their ability to service a mortgage with real income. Back then, a borrower had to put at least three percent down for an FHA loan, or five percent down for a conventional loan, and the borrower was required to pay mortgage insurance as part of their monthly payment.

In 2000, lenders recognized that not all borrowers fit into the prevailing rational lending guidelines, and seized the opportunity to open additional profit streams by offering so called ‘alternative financing’ options. One by one, lenders began to deviate from the established rational lending guidelines. Eventually those guidelines became more and more irrational and the old rules of income and down payment requirements were suspended. There was a time not so long ago when only 40% of the people I did loans for needed to provide a pay stub or proof of income and a full 60% of them were financing a hundred percent of the purchase.
One of the forces that fueled this period of irrational lending was the secondary market’s thirst for all types of mortgage-backed securities. Investors from around the world bought mortgage-backed investments that they thought were safe.

These irrational loans were bundled with all kinds of other loans and then were rated by bond insurance companies as “good” (or excellent?) investments.

Eventually these untested ‘alternative financing’ loans began to default at a much higher rate than was expected by the investing public, the bond insurance companies and lenders themselves. This caused the investing public to lose their taste for mortgage-backed securities, bringing this period of irrational lending to an end.

The unexpected effect to all of this has been to freeze liquidity in the real estate market. When money to finance real estate is easy to obtain, it attracts more buyers and speculators and that drives up the prices of homes. When money is tight, there are fewer people that can borrow money; fewer buyers reduce demand for real estate and drive down prices.

There is an old adage that says that we are all interconnected. With the emergence of the global financial markets nothing could be farther from the truth. We are now seeing how truly interconnected we all really are.

Money is the lifeblood of the vast ecosystem that is our economy and like any complex ecosystem, when one segment is disturbed it can affect the rest of the system in profound ways.
This is exactly what we are experiencing now. The defaults in the ‘alternative financing’ market led to fear of mortgage backed securities, which led to a tightening of money for real estate, which meant fewer buyers for real estate and a corresponding increase in foreclosures along with drops in housing prices. Fear of risk gripped the consuming public and the financial markets. Bank failures occurred, consumers stopped spending and all of this has led to one of the worst weeks in financial history and a downturn in all the global markets.

During periods of advanced financial euphoria, the normal level of rational prudence tends to be suspended; these periods are marked by the misplacement of risk, overuse of leverage and the assumption that assets such as houses and securities that secure debt, will always rise in value.
As John Kenneth Galbraith wrote in A Short History of Financial Euphoria, “All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means or payment”.

Where were the signs this was going to happen?
This is the question that everyone asks when something like this happens. Along with, “Why didn’t we see this coming?”

It was asked after the dot-com crash, the Savings & Loan meltdown, and in the 1930’s during the Great Depression. People have been asking themselves this very question back before the Dutch Tulip Mania of the 1630’s.

There are never clear or obvious signs to an impending end to a period of hyper-financial enthusiasm. It is even less clear when the public or the market place is entering into such a period. Signs only become obvious after the fact.

If we all could have seen the signs of what was going to happen we would have all known exactly when to buy and sell our houses and securities for maximum profit and the mystery would be removed from our so called “efficient market” system. Even the most astute investors never know exactly when to buy or sell.

Financial over-exuberance and asset hyper-inflation do not happen overnight. A market downturn either in stocks or real estate comes after a long and usually very slow build up and the correction is usually quite swift. The last run-up in housing prices in Seattle lasted from 1991 to 2007 - a full 16 years.

I personally started to see the end of the irrational lending — and the beginning of the economic downturn — in January of 2007. This was just two years ago, and I was working on a loan package for a client that would seem ludicrous today: $1.75 million, stated income, 100% financing; when I received a call from the lender telling me that the loan program had gone away. Soon after that, more and more irrational loan programs began disappearing at an astonishing rate.

I personally think that history will mark the beginning-of-the-end of this particular period of financial exuberance as the famous, and sparsely heeded, “Irrational Exuberance” speech by former Treasury Secretary Alan Greenspan in December, 1996.

Our former Treasury Secretary had ‘warnings” which were equally sparsely heeded;

"The housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures. The estimates of how much differ widely." - August 27, 2005

“The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increase in the prevalence of interest-only loans as well as the introduction of other, more-exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny." - September 26, 2005

There are those that say that the current problems in our financial markets are the legacy of Mr. Greenspan, and that his policies are to blame for our current situation. I am not equipped personally to judge the work of Mr. Greenspan but I can say the warning signs were obvious and undeniable.

IThere have been many recessionary periods like the one we are in throughout our history and they are a regular and necessary feature of our economic system and I personally believe that, just like the other periods of the past, we will all roll on with our lives and that this too, shall pass. If we are lucky we will live to experience yet another period of prolonged irrational exuberance.


Who is to blame for all of this?
History has shown that in the aftermath of these periods of financial dysphoria, the public and policy makers tend to want to find a simple, easy to understand scapegoat – someone or some group that can be blamed for the mess.

There is a need to determine some cause for the crash, however far-fetched, which is external to the market itself. But in reality, the construct that brought about the financial crisis is usually very complex: the players are many, varied and far-flung, and no one group can be blamed exclusively for the resulting state of affairs.

I propose that we are all to blame in some small way.

… from the homebuyer who chose to buy a property that they really could not afford, to the real estate agent who sold the buyer a property they knew the buyer could not afford.

…from the real estate speculator who sought quick profit and in doing so further drove up the price of homes, to the banks that loosened lending guidelines fueling further price speculation.

…from the mortgage brokers that did not have their clients’ best interests in mind, to the bond insurance companies that improperly rated the mortgage backed securities and sold them to the investing public.

The investing public is also in some way to blame for not taking the time to understand the risks underlying the purchase of mortgage-backed securities.

As a point of illustration, another excerpt from A Short History of Financial Euphoria, regarding the real estate crash of 1819, which bears a striking resemblance to our current headlines.

"In the years that followed the end of the war (of 1812). land and other property values rose wonderfully … the rising values attracted those who were persuaded that there would be even further increases and from this persuasion ensured that there would be yet further increases to come … bank(s) involved themselves enthusiastically in real estate loans. Then in 1819 the boom collapsed. Prices and property values fell drastically; loans were foreclosed; and the number of bankruptcies went up.”

Is it a good time to buy, sell or bury my head in the sand?
It is easy to quote wisdom from those who have survived the turmoil of the past financial markets.

Phrases such as …

“Buy when there's blood in the streets, even if the blood is your own” - Baron Rothschild

“Be greedy when others are fearful” - Warren E Buffett

... are easy to quote because the wisdom of those that have survived such times always seem to be a source of comfort to us in times of uncertainty, and this period in financial history is no exception.

History has proven that periods like this provide excellent buying opportunities and those that have the mettle to weather the storm historically do well in both the stock and real estate markets.

If you need proof, consider the wisdom of the late Sir John Templeton, who proved his mettle when he famously purchased 100 shares of 104 companies trading for $1 per share or less in 1939. If his name sounds familiar, it should, Mr. Templeton formed The Templeton Funds and became a billionaire philanthropist who made his fortune as the pioneer of global investing in the postwar boom.

I personally have a former client who bought a then-undervalued piece of commercial property during the last real estate downturn in 1991 in Mukilteo and sat on that property until 2006 and now is a millionaire because of it.

What message do I have that I want to convey to the public.
By all means, remain calm. The country will not fall into a Depression. 1929 was marked by an administration that chose to take the stance that it was not the government’s role to get involved in the financial markets. We now have an administration that is doing what it can to right the financial ship and despite my personal misgivings about the competency of our current administration, I do believe the government does have a history of fixing the economy when it is called upon to do so.

Lets hope the tough do get going when the going gets tough.

At worst, I believe we will see another year of economic retraction and then we will be poised for another active real estate market. Markets retract and then recover as they always have done in the past.

Take a long-term view and remain calm. Now is not the time for rash, emotion-driven decision making.

Educate yourself before acting. Talk to your mortgage, stock or real estate advisor before making a rash decision.