Lower Interest Rate – Escrow Timeframe

Posted on July 13, 2009 by ARDELL

1) How long is Escrow?

The correct answer is it can be as long or short as the buyer and seller want it to be. However a long escrow timeframe can cause an escrow to fail, because it can create a situation where the buyer no longer qualifies for the mortgage. Just because the buyer qualified when the offer was submitted, doesn’t mean the buyer will continue to qualify on the day the lender is supposed to fund the loan so the escrow can close.

A lender assumes a given interest rate when they qualify the buyer. If that interest rate is different for the reasons detailed below, at time of close, the buyer may not qualify at that changed interest rate.

2) Why do most agents write a contract to close in 30 days or less?

Dan Green of The Mortgage Reports wrote a post today explaining why a shorter escrow timeframe equals a lower mortgage interest rate. His post explains that a 60 day lock “costs more” than a 30 day lock, often in terms of higher interest rate vs. higher cash costs to close.

In order for the buyer to get the rate they think they are getting, they have to be able to lock that rate for no longer than 30 days. While the buyer is not required to lock that rate, it should at least be a possibility. If a buyer looks at a rate quote of 5%, they often are not told that assumes a rate lock period of no more than 30 days. So if they sign a contract to close in 60 days, and then try to lock the rate in the first week of their contract, they will find the rate to do that is higher than the rate they were quoted the day they made the offer.

The rate can change in a few hours without the issues noted in this post. But even if the rate does not change at all, the rate will be higher if you try to lock it through a 60 day closing vs. a 30 day closing.

The honest lender who asks “what is your proposed closing date” and gives you a “60 day lock rate quote” will be higher than the lender who assumes a 30 day lock. Be sure the lenders are using the same parameters when quoting you a rate prior to making an offer, so that you are comparing apples to apples. In this scenario the most trustworthy lender could appear to have a higher rate, when they are being most honest about the potential for rate if you lock for 60 vs. 30 days.

3) How does the closing date timeframe, chosen at time of offer AND ACCEPTANCE, impact the buyer and seller in other ways?

Buyer A gets a pre-approval letter the day they are submitting an offer. The lender pre-approves the buyer for a $300,000 mortgage at 5%.

Seller B accepts the buyer’s offer BUT asks for a 90 day closing, as the home they are moving to is new construction, and won’t be completed for 90 days.

Buyer A accepts the seller’s counter-offer as to closing date.

30 days later the buyer sees interest rates rising and wants to lock the rate. The lender quotes the “lock rate” and the buyer is confused. “I see the rate on your website is 5%. Why are you quoting me 5.25%?” Lender explains that a 60 day lock vs. a 30 day lock adds 1/4 of a % point to the mortgage interest rate.

Here’s where it gets REALLY complicated…if the buyer doesn’t qualify to buy the house if the rate is 5.25% vs. 5%, he can’t lock it. If he chooses to wait until the closing is within 30 days before he locks the rate, the rate could be at 5.5% at that time. If the timeframe for the finance contingency protecting the buyer’s Earnest Money expires prior to that time (and almost all do), the buyer is painted into a corner by circumstance.

Moral of the story is often a buyer CAN let the seller have 90 days to close if they are renting month to month. But a buyer must consider the impact of the interest rate floating out for 60 of those 90 days and/or the cost of locking for more than 30 days at time of contract.

Today, it is near impossible for a seller to stay in the property for more than 60 days from time of offer and acceptance. You can close in 30 days and let the seller stay or rent back from the buyer. BUT the buyer’s lender will not allow that seller to rent bank for an extended period. If the buyer is qualifying at an “owner occupied” interest rate, they will impose a maximum number of days that the buyer can rent it to the seller. Beyond that time period the buyer’s lender will consider it an “investment” mortgage, and higher investor interest rate and higher downpayment requirements, vs. an “owner occupied” purchase money loan.

The “ifs, ands or buts” that happen in a split second during negotiations, can change the “assumptions” made at the time the buyer received their preapproval letter. The lender is often not “in the room” while these negotiations take place, or consulted for every tiny change in close date or rent back terms. They most often don’t see those “changes” until the buyer and seller both sign the contract as finally negotiated.

These small changes can put the buyer’s Earnest Money “at risk” of loss. The agent is the “protector of the buyer’s Earnest Money”, as related to changes in contract terms during negotiations. Yet how many realize the changed position the buyer is put in when the seller counters for a longer close date?

We see thousands of articles on “How to choose an agent?” Perhaps asking the agent “what happens if the seller wants to close in 90 days, or wants to rent back for 90 days?”, is a better question than “How many homes have you ‘sold’ this year?” The cost of closing is VERY important to the buyer. Not closing at all, due to changes no one played out to the likely eventual worst case scenario, affects both the buyer AND the seller.

Agents don’t “sell” houses. Agents represent the buyer OR the seller AND the transaction as a whole, as it appears at time of offer…AND as it changes during negotiations and escrow.

Handing a contract to escrow and waiting for a commission check is no longer an option. Changes in lending BACK TO the old tried and true rules of the game, requires agents to be on their toes all the way to the day escrow closes…or doesn’t close.

Why are so many escrows not closing these days? Everyone asks that question. Truth is the skills needed by an agent have changed dramatically back to old school…and agents still think “it’s the lender’s job” vs. theirs.

Notice of Trustee Sales v. Trustee Deeds

Posted on July 1, 2009 by Jillayne Schlicke

Each month, Alan from Seattle Bubble religiously posts the Notice of Trustee Sale (NTS) numbers for King County. I’m very appreciative of his work because it saves me time each month so thanks again, Alan. Cruising SB last night, I found Alan’s numbers alarming for June: 1615 NTS were filed. Here are more numbers from Alan:

King County Notice of Trustee Sales

6/2009 – 1615
6/2008 – 576
6/2007 – 304
6/2006 – 299

180% YOY (280% of last year)

The last few months:
6/2009 – 1615
5/2009 – 992
4/2009 – 938
3/2009: 1089
2/2009: 838
1/2009: 909
12/2008: 660
11/2008: 540
10/2008: 643
9/2008: 607
8/2008: 575
7/2008: 728

If we’re seeing 180% increase year over year with notice of trustee sale filings, then where are the REOs? Well as it turns out, if you compare the trustee deed filings for the same month, you’ll see that a low percentage of Notice of Trustee Sales actually go all the way through the auction process. Here’s comparison data courtesy of Jess and Julie Lyda, which gives us a visual comparing NTS v. Trustee Deeds, which means title changed hands from the owner in default to a new owner. That new owner could be the bank/lender or someone who was the high bidder at the trustee sale. Here’s a link to a larger image of the graph.

So what assumptions can we make given facts that we already know? We already know that banks and lenders are postponing the majority of trustee sales in King County. We don’t have any data as to how long postponements are lasting. If a homeowner is trying for a short sale or loan modification, we do know that the average wait time for banks to process these requests could easily be months based on nationwide reports from Realtors, home buyers and homeowners. We also know that there are many banks who have turned into zombies, waiting for their number to be called and the regulators to show up on a Friday afternoon. Postponing the losses from a foreclosure means the bankers can collect a paycheck for a few more months.

We also know that 50% of all loan modifications re-default by the 6 month mark. This pushes the foreclosure out longer and increases the overall losses to the bank/lender. Another assumption we can make comparing data from Alan and Julie is that hundreds of REOs will be coming back on the market each month, which will put further pressure on home values. Prime delinquencies are starting to surge and so are delinquencies in the upper home price ranges.

With what we know, home values will continue to feel pressure from many angles including higher inventory levels, continued tightening of underwriting guidelines, the lower prices of REO resales and short sales.

Is “fiduciary” level of care “old school”?

Posted on June 12, 2009 by ARDELL

I would not respect a doctor who would hand me three phone numbers of his/her patients, who just had a recent surgery, as “references”.

While it’s true that highest degree of confidentiality is a fiduciary duty, and WA has statutory vs. fiduciary duties, I just can’t honor the request of people who want me to “use” my past clients as “references”. Using your client for your own benefit is such an anti-fiduciary concept.

Some time ago I received an email from a total stranger seeking to hire me as his buyer’s agent. He asked for a complete list of all of my client’s names, addresses, email addresses and phone numbers prior to our meeting. I responded that he should think very hard about hiring anyone to represent him in a client relationship, who would acquiesce to that request. The issue has come up again, and while I fully appreciate a person’s need to “check references”, I still won’t give out personal info of my past or present clients.

Once I connected two of my clients by asking a former client to have lunch with a current client. The former client was a whiz at hunting down the absolute best loan available. They worked for the same Company. They were about the same age and neither had extensive local contacts, both having relocated here and away from their family and friends. I was careful to not give out any info of either party until they both agreed to the lunch, which I did not attend so as to be absolutely certain I would not reveal anything about one to the other. Asking one client to help another client is not the same as asking my clients to help me GET new clients. I just cannot get my brain around that concept.

I turned 55 the other day and Craig Blackmon’s recent remark that I am “an old war horse” is reverberating in my ears at high volume. I became “a fiduciary” for the first time back in 1974. We were constantly warned about never going out to lunch with a colleague and discussing a client by name in a restaurant. It was the blackest of mortal sins to use a client’s last name in public, and if they had an unusual first name like mine, no first names either. To this day even when my partner Kim and I speak of clients, we never use last names even to one another. Clearly my age is having an impact, as we seem to be treating all of our clients as if they are our children. “Honey, the kids are coming over to sign the papers in an hour!” [I yell up the stairs]

In many ways, people reveal more about their personal lives to me, than they do their doctor or lawyer. Regardless of whether or not the State views me as a “salesperson” or holds me to a fiduciary standard, I’ve just been a fiduciary for way too long to erase that concept from Who I Am. Fiduciary = “without regard to self interest”. So while it is perfectly acceptable and understandable for someone to “want references”, it is just not possible for me to accommodate that request. Many agents have argued with me that I am wrong, old school, old fashioned, etc… Well, maybe turning 55 comes with the convenience of being allowed to be “an old war horse”.

The First Time Home Buyer Tax Credit Advance May NOT Be Used Towards the 3.5% Down Payment…UNLESS…

Posted on June 9, 2009 by Rhonda Porter

Update 6/10/2009 11:20 am: Please read the comments 1-21 (especially Aubrey Cohen’s comments). Apparently according to a HUD representative, the tax credit can be used for down payment if it’s received through State Housing Finance Agencies. (I called the FHA help line twice this morning and both FHA representatives say this is not the case). The representative from HUD apologizes for the confusion and will make sure the Homeownership Centers understand… I apologize for the confusion too!

I feel like shouting “THE TAX CREDIT ADVANCE IS NOT DOWN PAYMENT ASSISTANCE!” up and down the streets of Seattle. Home buyers utilizing FHA loans still need to come up with a minimum of 3.5% for their downpayment (see the update above). Per HUD’s Mortgagee Letter 2009-15 dated May 29, 2009:

“The proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity tha tis reimbursed, directly or indirectly…may not be used to meet the 3.5% minimum down payment, but may be used as additional downpayment, buying down the interest rate, or other closing costs.”

Jane and John are buying a home using FHA for financing with a sales price of $300,000. FHA requires they invest a minimum of 3.5% of the sales price into the transaction. Jane and John need to have $10,500 of their own funds (which can be gifted or loaned from a family member) invested into this transaction. Assuming they qualify for the First Time Home Buyer Tax Credit and the IRS figures out how to resolve the issues of how to pay the FTHB Tax Credit Advances, they could use the $8000 towards closing costs, prepaids and any extra funds (after paying closing costs and prepaids AND after they invest $10,500) could go towards downpayment. (Unless…see the update above).

This is not a zero down program and this is not like the ol’ DPAs (Nehemiah, etc.). This is (if the details are ever worked out in time) an advance or loan against your tax credit.

Haaa… I feel a little better now. 🙂 One of the benefits of blogging… venting!

Good Faith Estimate – Protecting Your Earnest Money

Posted on June 1, 2009 by ARDELL

Protecting your Earnest Money Deposit starts before your offer is written. I highly suggest you do the following, before going out to look at homes for sale. It’s a little unorthodox, but very effective.

1) Ask your lender to base your pre-approval on the current interest rate PLUS. I’d say +.50% to +.75% at this time. Use the higher number if the going rate is 5% or less at the time of the pre-approval. If the going rate is 5% (rates move in 1/8ths) have the lender qualify you as if the rate is 5.75%. Give yourself a little breathing room for rates to fluctuate while you are looking at property and making offers. You don’t want the fact that rates are moving up, to stress you into making bad choices about other things, during the process.

Example: If you have salaried income of $95,000, you qualify for a payment of roughly $2,375 if the rate is 5%. Take the $375 off for taxes and insurance, and make sure you check that $375 a month against the taxes on the house you make an offer on later in the process, and the amount the lender assumed as the taxes when doing the pre-approval letter.

After deducting RE taxes and Insurance, we are looking at a monthly payment for Principal and Interest of $2,000 which gives you a loan of $372,500 at 5% and a loan of $342,700 at 5.75%. If you are planning to use an FHA loan, deduct $5,500 for the upfront MIP that you are likely going to finance, and that gives you a loan amount range of $337,200 to $367,000, depending on the interest rate at the time you lock it. Add the 3.5% downpayment, and you are looking at a sale price of about $355,000 to $385,000.

Remember that your approval is based on a % of your gross income and you qualify for a monthly payment, not for a sale price. So if you qualified for a house price of $385,000 (and the letter is absolute max within the lender’s assumptions), and they assumed taxes and insurance of $375 and the real taxes and insurance are $500, you no longer qualify for the sale price on your pre-approval letter. Likewise, if they used an interest rate of 4.875% and maxed out the price of home based on that rate, and rates are 5.125% when you lock, you won’t qualify at the sale price noted on your preapproval letter.

By asking the lender to use current rate PLUS X when issuing the preapproval, you can worry less about rates fluctuating while you are busy trying to find the right house, and making the best deal.

These days, the very best deal OFTEN has RE Taxes higher than the amount assumed when producing your preapproval letter, making this issue of importance moreso now than it has been in the last 10 years. Plus lending guidelines are stricter, so a slight variance out of the assumptions can clearly make the difference between loan approval and denial, moreso now than in the last 3-5 years.

Make sure your pre-approval is based on a higher interest rate than today’s “going rate” and higher annual real estate taxes. The reason this is MORE important today is many people are buying short sales and foreclosures. The better the “deal”, the more likely annual real estate taxes are going to be higher than a lender will estimate as an area average for that purchase price. So if you are Woo-Hooing about the fabulous price you just negotiated, it’s a good sign you need to check the ACTUAL RE Taxes against the lender’s original assumed monthly tax amount.

2) Get a Good Faith Estimate along with your pre-approval letter. Before you even begin to look at property, you want to be sure you have the total cash you will need to close escrow. While a Finance Contingency may protect you if Step 1) is done incorrectly, it will not protect you if you do not have the funds to close escrow. If your loan is approved, but you can’t close because you don’t have the amount of money escrow tells you to bring to closing, the Finance Contingency will not protect your Earnest Money.

Again, this is a little unorthodox, but I have found this method to be essentially foolproof. So much so, that I have been able to guarantee that there will be no surprises at closing, unless the buyer elects to buy down the interest rate for reasons other than needing to do so to qualify.

Don’t just look at the bottom line monthly payment, interest rate and cash to close on your Good Faith Estimate (GFE). Turn it into a “working” document by converting the format to the official HUD 1 you will see at closing. This gives you the added comfort of seeing BEFORE you start looking at homes, exactly the same Closing Statement you will be facing the day you go to sign your closing papers.

Find a blank HUD 1 and print it out. I always do these numbers by hand in blue ink, so I can clearly differentiate it from the forms that come later in the process. I have seen many and varied formats for Good Faith Estimates over the last 20 years, but the final closing statement, the HUD 1, has been virtually the same from year to year and even from State ot State.

I just printed one out directly from the HUD website. Always round the numbers up, and get the numbers directly from the source as much as possible. I expect lenders to be absolutely accurate when “estimating” their own charges, so the lender fees on the Good Faith Estimate should be accurate. BUT when they are estimating 3rd party costs on the Good Faith Estimate, such as Title and Escrow charges and even County recording fees, I often find those numbers to be underestimated. Remember to add the Home Inspection fee, which is almost never on a GFE.

Every time a sale closes, I double check the actual costs against my own original estimates. By getting your numbers directly from the source, and rounding up, you will not likely have any surprises at closing, in fact most often, the amount you need to bring should be less than you originally anticipated.

Always use worst case scenario when calculating your monthly payment and your Cash needed to Close BEFORE you go out looking for homes. This will insure that your real case scenario will always be brighter by comparison.

VERY IMPORTANT: If you do not have enough cash to close, that often means the agent needs to include a credit toward closing from seller to buyer IN THE OFFER. So doing this after you are in escrow…is too late.

Often there will be changes DURING the process that can throw these numbers off. By doing the numbers yourself, by hand, as I do, the little red flags will pop up as changes are proposed during the process.

EXAMPLE 1: Closing date is the 25th of the month, so the cash to close on your Good Faith Estimate has 6 days of interest at $55 a day = $330.00.

Two days before closing the seller asks you to extend close to the 11th of the next month instead. These discussions happen all the time WITHOUT the buyer knowing that the $330 for 6 days interest will increase to 20 days at $55 a day or $660. In reality it costs you less, but for practical purposes it costs you more with regard to “cash needed to close”. ALSO, often the lender doesn’t know the date was extended until they are sent the addedum changing the close date AFTER both the buyer and seller have signed agreeing to that change. If they only locked the rate to the day of closing or until the 3rd or 5th of the next month, you could end up with a different interest rate by signing the close date extension, and in this period of volatile rates they will likely hold you to the HIGHER of the two rates.

Again, if you are buying a short sale or bank owned property, the extension of close date may not be something within your control. You can’t MAKE the seller close on a given day, regardless of contract provisions. So being qualified from the beginning at a higher rate becomes a necessity vs. a preference, if you plan to close escrow.

EXAMPLE 2: You receive your Good Faith Estimate and it says you qualify for a sale price of $300,000. It says your total costs will be $13,000 of which $5,000 is up front MIP, which will be financed. Total cash needed to close is $18,500 and you have $15,000.

Two months later you make an offer on a property and it is accepted. No one told the agent that the approval assumed the seller would be paying $3,500 toward the closing costs, and it is now too late to rework the agreement with the seller. Escrow fails for insufficient funds to close, and seller keeps the Earnest Money which is more than the $3,500 you needed to complete the transaction. You don’t get the house AND you lose $5,000.

It is very important that you turn your Good Faith Estimate into a working document, and not just file it away as another piece of paper. THE AGENT WRITING YOUR OFFER DOES NOT GET THE GOOD FAITH ESTIMATE, unless you personally give it to them, or instruct your lender to send it to them. There are many assumptions made by the lender when producing a pre-approval letter. If the real facts don’t match those assumptions at time of offer and acceptance, it will likely be too late to turn back the clock, and that can put your Earnest Money at risk.

Let’s discover what “Lending with Expertise” means to Paramount Equity

Posted on May 15, 2009 by Jillayne Schlicke

Paramount Equity has settled their case with the Washington State Department of Financial Institutions. Read the Consent Order here. The Statement of Charges outlined many, many violations of state and federal law:

Using the term “mortgage bank

Foreclosure Rescue Scammer or AG Victim: You be the Judge

Posted on May 14, 2009 by Jillayne Schlicke

In order to go into the foreclosure rescue business, foreclosure rescuers must make themselves believe that they are helping the homeowner. This is done in a cognitive way, by attending many foreclosure seminars, reading lots of books and memorizing scripts that can be played back inside the foreclosure rescuer’s head over and over again until it becomes real and true to them.

Similar to how we fool ourselves over and over again when we say to ourselves “it’s only one drink,” “it’s only a cookie” and “it’s not really sex.” Self deception is very powerful and it appears to be working well with foreclosure rescuers. I hear many phrases over and over again such as, “it’s perfectly legal,” “homeowners want to stay in their homes,” and “if it wasn’t for me, then….” With the case of Joe Kaiser, we are starting to hear a different song. It’s the whine of the victim. You know the type of person I’m talking about who constantly complains about being victimized to the point where they transform into victim.

Joe Kaiser (doing business as PreFlop, LLC, G. Hobus Investments, LLC, Bobo Buys Real Estate, and Unclaimed Funds, Inc.) makes money selling foreclosure rescue sales courses and books (examples: ‘The Subterranean Marketplace in 2009″ for $997. “Learn How to Day Trade in Real Estate Online Using Craigslist for $667.) though not everyone has been a satisfied customer. Joe buys and sells homes in foreclosure but not just any kind of foreclosure: tax foreclosure. Some of you will remember fine movie, “The House of Sand and Fog” very well acted by Sir Ben Kingsley, Jennifer Connelly, and the beautiful Shohreh Aghdashloo. I assign this movie as extra credit for my college students because of all the possible title insurance issues surrounding the tax foreclosure plot. This movie should be required viewing for anyone thinking about entering the world of tax foreclosures.

In a very methodical way, described in his books, Joe locates homeowners who are delinquent on their real property taxes, and also have equity in their home. This is a bit like a needle in the haystack kind of work today but during the bubble run-up, as others swarmed the trustee sales, Joe focused on tax foreclosures. Interestingly, several of his victims have Hispanic surnames but I digress. Le’ts read the public records documents:

The Court found that Mr. Kaiser violated the Consumer Protection Act by soliciting homeowners with false promises to help them keep or save their home when partial interest deals do not actually result in the homeowner keeping or saving their home. The Court also found that, in the course of creating partial interest deals, Mr. Kaiser violated the Consumer Protection Act by falsifying real property excise tax affidavits and by acting as both trustee and co-beneficiary seeking a profit from the trust.

Kaiser solicits homeowners facing tax foreclosure and induces them to place their home in a trust, with Kaiser, through his business entities, as trustee and co-beneficiary. Mr. Kaiser does not pay the homeowner for their homes. Once title to the home is in Kaiser’s control, he pays the delinquent property taxes and stops the sale of the home.

The land trust…that Kaiser created give him complete title and control over the homes and leave the former owners with only two tenuous rights: 1) the right to some percentage of the sales proceeds if Mr. Kaiser chooses to sell the property, and 2) the right to occupy the property for one to three years, provided the former owner pays rent. These two rights are tenuous because the documents contain hair-trigger default provisions which void these rights if the former homeowner is even five days late on a rental payment or violates any of the other terms contained in the numerous documents Mr. Kaiser has them sign.

Mr. Kaiser testified that every partial interest deal he has created is actually in default…therefore, none of the former homeowners maintains their right to possession of the property or a percentage of the proceeds if Kaiser chooses to sell it. By virtue of the lease provisions and other contractual provisions for reimbursement of all of Mr. Kaisers expenses, his terms entitle him to receive either the entire home vacant or his share of the home’s equity without having ultimately paid any money….Homeowners who enter the transactions believing they are saving their homes are actually stripped of any ownership interest and are not even given a right of first refusal to buy back their home. No fully informed person, not acting under compulsion would enter a transaction with such onerous terms.

There is much more in the Findings of Fact and Conclusions of Law and if you want to learn how to “Negotiate Foreclosures Like a SWAT Team Leader” then by all means, meet Joe here.

There are some investors who feel sorry for Joe. Joe feels like he has been attacked by the AG’s office and is blogging about his new role as a victim. Let’s see if this logically works.

In the F&G M. transaction, Mr. Kaiser claimed he saved F&G’s home…What Kaiser actually did was purchase the home at the foreclosure sale and then had Mr. M. sign over his rights to the overage money from the foreclosure sale. As a result, Kaiser obtained both the house and the $45,428.47 in overage money he had paid at the auction. Kaiser never sold the house back to Mr. M. even when Mr. M. obtained a Realtor and made an offer. Kaiser then sent Mr. M. an eviction notice demanding Mr. M. immediately pay $2700 in rent or vacate the property.

I’m trying to work up some tears but they’re just not coming. Now it’s your turn: is Joe Kaiser a posterboy foreclosure rescue scammer, a victim, a sociopath, a combination thereof, or am I too justice oriented to become a real estate investor guru? I just can’t look at someone, flat-out lie to them, and steal their house and money. If that’s what it takes to be a real estate investor guru, count me out.

Why are Banks Setting the Opening Auction Bid Below The Principal Balance?

Posted on May 1, 2009 by Jillayne Schlicke

100

I attended a foreclosure auction in Bellevue, WA last week to discover if the rumor was true that banks are opening their bids below the amount owed. I received confirmation from three professional investors that yes, the banks have been doing that, it’s no secret, and there seems to be no discernable pattern. It’s not one particular bank or lender, it’s not particular types of property or in any specific area. It appears to be random.

In addition to the 92 active trustee sales scheduled for that day in Bellevue (auctions were also going on in other King County locations,) there were 81 postponements. Only a few of the trustee sales attracted bidders, and the rest were deeded back to the bank. Out of the 92 active sales, 25 had opening bids below the amount owed to the bank.

Why would a bank or lender set their opening bid below the amount owed?

Banks and lenders have duties to their shareholders and investors to maximize profits and miminize losses (well, at least they use to.) If opening bids are set LOWER than what’s owed, perhaps the banks have already tallied their losses, realized that if they had to take back the house, get it cleaned out and cleaned up for resale, pay a real estate agent their commission to sell it, pay for title, escrow, excise tax, utilities, and any other carrying costs, they might as well sell it at a discount at auction. But maybe there are other reasons. I wondered if the banks were trying to keep more REO inventory off the market in an attempt to prop up home values for their existing REO inventory. Maybe appraisers can ignore trustee sale prices in their reports. Not knowing the answer, I emailed three appraisers for help and here’s what I learned: Appraisers need to mention trustee sales in the neighborhood if these trustee sales make up a significant percentage of available comps because they are legitimate sales even though title is transferred using a trustee deed instead of a warranty deed. If an appraiser choses to ignore these, he/she will run the risk of having the appraisal run through an “enhanced review” process in order to catch trustee sale market activity. If a trustee sale is a significant comparable sale, it can be used. The requirement to use closely comparable trustee sales as comps can also vary based on the requirement of the lender and investor. It may not be absolutely required but it may be in the appraisers best interest to mention trustee sales. Thanks to Jonathan Miller, Shane Leady and Richard Hagar for teaching me something new today.

That still doesn’t explain the phenomenon of banks undercutting their own principal balances at the auction. My theory is that banks are relying on third party information such as a mini appraisal or Broker Price Opinion (BPO) prior to auction. If the BPO suggests that the outstanding principal balance is so high and out of range as to likely attract no bidders at auction, then the banks have nothing to lose by setting the opening bid closer to or significantly lower than the principal balance owed. If no one bids at auction, they’re still only out the money they would have been out anyways and on the upside, if the low opening bid attracts investors, then perhaps the bidding will rise closer to the payoff. If not, they have an immediate loss that could be significantly LESS than losses that would add up over time, having to carry the REO on its books for months of marketing time in addition to the other costs mentioned above.

If banks are undercutting their own payoffs, then why isn’t this phenomenon more widely publicized? Okay, so we know that bidding on a home at a trustee sale is too frightening for most first time homebuyers but still, if more people know about this, then maybe there would be more folks showing up at the trustee sales and bidding those homes UP, thereby reducing the banks losses. There certainly is NO shortage of tall, well-groomed, good looking, muscular investor gurus in shorts showing off tanned legs, even though it was only 63 degrees outside hanging out at foreclosure auctions with all kinds of downpayment solutions to offer newby real estate investors: “We have zero down financing available for the right investor!” and “We have private hard money financing available for your purchase and you can refinance out of that loan in 30 days….My mortgage broker is right here, let me introduce you to her.”

Maybe the banks aren’t publicizing their low bids because they don’t want to bring buyer attention away from purchasing their REOs or short sales, knowing that investors are the ones who typically show up at the auction anyways. The banks also have a vested interest in keeping traditional buyers focused on MLS listings.

If I owned stock in a bank or lender that was undercutting their own payoff at auction, I’d want to be darn sure that this practice was saving the bank money and not hiding something else such as higher losses to be pushed on into the next earnings report…or the next stress test.

Foreclosure Auction Video Part 1
April 24, 2009
Bellevue, WA
Here is the rest of the auction.
Special thanks to Phil Leng for introducing me to all the investor bidders.

Understanding the terminology of “loan docs”

Posted on April 17, 2009 by ARDELL

signing-docs Back in February of 2006 I took the time to type out an outline of everything that happens with a real estate transaction, and color coded it to reflect who does what. I called it Anatomy of a Real Estate Transaction, and I did it backwards from the end to the beginning. Many have found it helpful, but it may be time to re-write it, though I don’t think much has changed since then as to how an escrow starts and ends.

Recently with loan processing becoming a bit more difficult than it was back in 2006, I have noticed a lot of confusion regarding the terminology used by lenders and agents and escrow at the end of the transaction. In the 2006 post I said:

***This one little line is THE MOST IMPORTANT PART OF ANY REAL ESTATE TRANSACTION INVOLVING FINANCING! And yet, I purposely put it there as quietly as it happens, no fanfare, no bold lettering, no all caps, to notice to all parties. “Docs are in” – A quiet little event between the lender and escrow that is clearly THE BE-ALL-END-ALL OF EVERYTHING!***

There are actually three things that happen at the end of a real estate transaction where the buyer is using a mortgage to purchase.

1) Docs are ORDERED

2) Docs are SENT

3) Docs are IN

This is the nail biting stage of every real estate transacton.

Often the confusion regarding the last word in those three stages creates many phone calls back and forth due to a misunderstanding of the terminology. This happens often enough that I thought it would be helpful to those buying and selling homes to highlight the distinction in a separate blog post.

Often the buyer will say “lender said the loan documents are at escrow” when what the lender really said was the loan documents have been ordered. Sometimes the lender says the loan documents have been sent, which is not quite the same as their being in escrow.

If you are buying a home you want to make sure your lender is instructed to notify you TWICE.

You want to be notified when the docs have been ORDERED, as that pretty much means your loan is really fully approved and out of underwriting. It also tells you that you likely are pretty much “done” and on your way to closing. It also tells you to start preparing to go and sign your closing documents, as most escrow companies will not sechedule a signing appointment until they receive the loan documents.

You also want to be notified by the lender when the loan documents are SENT, especially if you need a little advance time to clean up your desk, or give your boss a little notice that you will likely be leaving work to go sign your closing papers. The closer the loan documents are ordered to the actual closing date, the less time you will have to give your boss notice that you need a little time off or a longer lunch to sign your closing papers. These two cues: Docs have been ordered and Docs have been sent, can be pretty important if you can’t just jump up and leave work without notice.

Unlike states that don’t have escrow, where people have 30 days or more notice as to what day they need to take off from work to go and sign their papers, escrow states require that the buyer sign at least a day before closing. In WA and CA, closing is a phone call, often between 4 and 5 p.m., so taking off from work “on closing day” is not usually needed. In fact, if you do take off on closing day, be prepared to be sitting around staring at the wall waiting for a phone call before you can get the keys and start moving into the house.

I am currently waiting for “docs” on two closings. In one “docs have been ordered”, on the other “docs have been sent” on neither have docs made it to escrow. As the agent, I wait impatiently for docs to be IN so I can review the closing numbers for my clients. One is a seller, so those numbers are not loan document sensitive and final numbers have already been reviewed and corrected at my end, and the seller has already signed their closing papers.

On the other, I can’t review the final numbers for my buyer client until the loan docs are IN, as escrow prepares the Buyer Closing Statement after receiving those loan documents. We are pretty sure what the numbers should be…but given the documents are “late”, I vigilantly watch my email and phone so I can review the numbers immediately. I don’t want to be part of the delay on a closing, by not being available to review the final numbers within 15 minutes of receiving them.

“docs have been ordered” is the breathe a little easier cue. That usually converts IF it will close to WHEN it will close. So asking your lender to notify you when docs have been ordered, is a very good idea.

Top 3 Mistakes Home Buyers Make

Posted on April 16, 2009 by ARDELL

If every agent would post the Top 3 Mistakes they actually see home buyers make in the real world, we would have an excellent list for people to use.

Yesterday I gave my $.02 on the Top Ten List of mistakes “first time buyers” make that’s been floating around the internet. But I can’t honestly say I saw the real mistakes people make in that list. I also don’t like the idea that “first time buyers” make more mistakes than 2nd time buyers. Not necessarily so. In fact 1st time buyers are more likely to spend lots of time making sure they aren’t making mistakes. 4th time buyers may not be paying enough attention to changes that took place since they bought their last home. So being careful not to make “mistakes” is not only for “first time” buyers.

Here’s my view of The Top 3 mistakes I see buyers (almost) make:

1) Starting out with the wrong attitude.

The Appropriate Attitude

It’s a big decision. Starting out with the right attitude for “home shopping” is very important. Knowing your own strengths and weaknesses will help you select an agent who complements you best. Sometimes finding an agent you disagree with more often than not, will give you the right balance.

Ms. Happy Face often likes everything and never likes to say anything bad about anyone or anything. If you can’t change to Ms. Objective and Discerning, find an agent who looks for all the bad stuff for you. Biggest mistake Ms. Happy Face can make is having an agent who is always happy, happy with her. We all like our “YAY-Days”, but best to save YAY Day for “loan docs are at escrow” day, and not every house you go to see.

Mr. Sad Face is often too sure that the house he buys isn’t going to make him happy. The fact that nothing is perfect is too embedded in his psyche. Biggest mistake Mr. Sad Face makes is he often ends up sucking up defects as “oh well, they all have defects” and doesn’t make the right list of priorities as to acceptable vs. unacceptable defects. Mr. Sad Face is best served by an agent who will list all the pros and cons of the home he selects, both before and after home inspection, and separates “normal” defects from “abnormal” defects. Otherwise they tend to get all lumped together and overlooked in their entirety.

Mr. Angry hates the process. He hates that he has to use an agent. He hates agents. He hates that the process isn’t more simple so that he can proceed without an agent. He hates it if the agent is stupid. He hates it if the agent doesn’t know more than he does. He hates it if the agent thinks they do know more than he does. He hates having to talk to so many different people during escrow. Mr. Angry isn’t happy until it’s all over and behind him and he can sit down and watch his TIVO in his new home. Mr. Angry would be best served by delegating everything except choosing the house to someone he trusts. Finding someone he trusts is the hard part 🙂

Mr. and Ms. Objective and Discerning are of course the model for Right Attitude. Their glass is not half full or half empty. They empty their glass before each home, and look at each home’s particular strengths and weaknesses each time anew. They narrow their choices down to the top two or three, and then they compare those one to another. In the hot market, these nice people were pressured by the “quick sales” and not having enough time to apply their best judgment. But in this market, Mr. and Ms. Objective and Discerning will thrive and be successful and happy with their choices.

The alternative to BEING Mr. and/or Ms. Objective and Discerning, is to hire Mr. or Ms. Agent who is Objective and Discerning.

2) Spending too much time on WHAT and not enough time on WHERE.

Everyone knows someone who moved fairly quickly after they bought their home. Now go ask them why they were unhappy. Chances are they were unhappy with WHERE vs. WHAT. Before going to Open Houses or talking with a lender or an agent, spend lots and lots of time finding the “Where of Happiness” for you. Buying where you are currently renting and happy, is good. Renting at another where before you buy there, is good. Renting in your percieved best where before you buy there, is the best advice I can give on this one.

3) Not being selfish enough.

This problem is more about couples that are buying than single people. The Red Flag that you may be in this category is if you say to the agent “We always agree on everything”. No one always agrees on everything. BE SELFISH! Don’t factor in what you think your spouse may or may not like, when you are evaluating homes. Make your own separate list of pros and cons, and make sure they are All About YOU.

If you aren’t selfish enough, one day you may wake up to find that neither one of you really liked the house in the first place 🙂

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Category Archives: Ethics