Category Archives: General

Recent Mortgage Fraud Developments and Future Outlook

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Before we use to rely on automated underwriting systems and credit scores we had humans who would carefully underwrite mortgage loan files. During the caveman human underwriter days, loan originators and loan processors knew that underwriters could make or break a file. An underwriter had god-like power to grant or deny the American dream. They had minds like a detective and long-term memory capabilities of an autistic child who can recount the entire screenplay of The Incredible Journey along with all the background noises. Underwriters knew which loan originators had a history of submitting fake gift downpayment letters because they would all sit and chainsmoke together in an un-vented room for 9 hour straight comparing sob stories from loan originators whose files were denied. After work, they would saunter off to network with other underwriters from other banks at a local bar or Mortgage Banker’s Association meeting, same/same. Any fraud that a loan originator tried to pull off was easily sniffed out, with the LO retreating for a while and eventually leaving the company due to the ice cold group shun effect. There were no stated income loans. Two years of tax returns, a P&L and a balance sheet were brought in to underwriting and a few days later, an underwriter would hand the LO a sheet of paper telling the LO what number to use as income for qualifying purposes. If the newly self-employed could not qualify, that person found a co-signer, usually a parent.

Yes, I was an underwriter back in the mid 1980s, and I was the youngest underwriter on staff. I was recruited from processing because I use to submit my files already underwritten along with the conditions for loan approval. What was apparent to me even as a 23 year old was that if my boss had to report to the same person that was in charge of sales and production, every file would have been approved. But she reported to someone else. It was that person’s job to make sure we were making good credit decisions. The goals of production and risk are in harmony, if you take a long-term look at the possible consequences of making credit decisions that are too far out of balance either way. Each part of a mortgage company needs the other part to maximize good consequences for all.

[photopress:stated_income_1.jpg,thumb,alignleft]Recent Mortgage Fraud Developments

The outlook for mortgage fraud across the United States is grim. I started this series at the end of October with background research conducted by the FBI that concluded that the most damaging mortgage fraud consisted of many people in the industry working together; fraud for profit.

As of today, I am no longer convinced that fraud for profit is the most damaging kind of mortgage fraud.

Today I believe if we put all the out-of-work underwriters back to work and opened up all the loan files in the defaulting tranches of subprime, Alt-A, and prime loans, we would find the same kind of problems that Fitch, the ratings agency, found when they re-undewrote a small sample of 45 early default loans from the 2006 vintage. Now granted, this is a small sample. However, after working within corporations most of my adult life, I also know that the public really never hears how bad things are. The name of the report is “The Impact of Poor Underwriting Practices and Fraud in Subprime Residential Mortgage Backed Securities

Lower Cost Options for Buyers & Sellers of Real Estate

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As I get ready for 2008, I reflect back on the progress, and lack thereof, of an industry flailing with the challenge of providing more and varied options for people buying and selling homes.  Seems to me that the answer is in each and every agent being their own business within the company, and offering options to consumers, vs. the company as a whole trying to provide the more and many options consumers need.

How does a company survive?  How does an agent become one who stays vs. one who quits?  How do you accomplish these two objectives AND nurture the environment of better cost options for consumers all at the same time?

I’m throwing my thoughts out here, not necessarily in order of importance, to spark some discussion that may help us all in 2008 and beyond.

First let’s look at the agent specific issue.  It is that time of year when many real estate licenses go back to the DOL.  Not because the license is due for renewal, but because it is time to pay both MLS dues AND REALTOR dues.  Many who have held on to a license just in case they want to buy or sell a house, or to help their friends and family buy homes, are opting to turn those licenses in vs. paying the dues.

Brokers should step aside and even encourage agents to get out of the business of selling a house or two a year.  That is not to say that every agent who only sold a house or two last year should quit.  But if your goal isn’t to become excellent at what you do, and sell at least 10 to 12 houses in 2008, maybe it’s time to sign out altogether.  OR agents should (and their broker’s should let them) develop a model that provides a lower cost option to consumers indicative of the agent’s lack of expertise in the meantime.  Be honest with consumers about your credentials and price your services accordingly.  This way you will have assisted many in achieving their objective of lower cost, and at the same time increased your experience level by participating in more home sales and purchases.  Seems like it could be a win-win strategy, as long as the consumers are happy with a decreased experience level at a decreased price.

How does a company survive?  If the company has to charge the agent more and more to survive, causing the agent to charge consumers more and more to survive, well then maybe the company should quit.  OR brokers should charge agents less, so they can be free to price their services more fairly, and maybe all will become stronger as a result.

While consumers seem to want the transparency of a NEON SIGN heralding a cheap price for real estate services, seems the answer lies somewhere else.  The answer lies not in the smaller quantity of companies trying to configure into more and varied options.  The answer lies in the vast number of individual licensees each being free to offer varied prices.  More options for consumers would be greatly expanded if each and every licensee could negotiate freely with consumers and develop varied options, vs. simply the companies that house the licensees.

If an agent gets to keep most of the commission, vs as low as half of the commission, then the agent can negotiate better deals for consumer as a result.

My thougts are this.  I’d much rather have 60% of agents be excellent at what they do than the typical 10% to 20% of agents.  I’d rather have more agents paying less per sale, and paying the smaller cap rate, than lots of agents selling one house and paying 50% of the commission to the company.  I’d rather have all agents free to negotiate with consumers, than one set price  or small range of pricing, dictated by a company policy.  By giving each agent the freedom to create their own business model, consumers will have more choices than any number of companies can provide.

To Brokers, take your cap rate of say $30,000 per agent and reduce it to $20,000 or less.  Instead of taking half the commission from ANY agent, try to have double the amount of agents paying you the lesser cap of $20,000, than paid you the higher rate last year.  Now you will have more money, agents will pay less and hopefully charge consumers less as a result, and each agent will have more freedom to capture more money for themselves via better priced options for consumers.

At year end double check to make sure that the agents passed some of the savings that you gave to THEM, on to the consumers.  Don’t reward greed and don’t charge less simply so the agent can make even more.  Make sure they are honoring the spirit of the change by passing forward the benefit in a meaningful way.

Sounds a bit like a fairy tale, I know.  But it’s the time of year to dream and plan and strategize based on your highest hopes for all.  Peace On Earth…Good Will Toward “Men” is not just a quote from on high.  It’s a way of life, or it’s just a bunch of words.  Do your best in 2008 to create a better way for as many as possible, yourself included.

There Are Still a Few Days to Do Tax Planning

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Don’t forget to set up your new solo401K by December 31.  You can set one up at ThinkorSwim.com in just a matter of hours.  Probably take a lot longer than that if you’re using your solo401K to invest in real estate, but you’ll be glad you did.[photopress:fat_cat.jpg,thumb,alignright]

Check with your CPA or Attorney. PenscoTrust or Guidantfinancial have excellent educational sites for good strategies for self directed retirement planning.  It’s well worth learning and understanding if good tax planning is your goal.

This week according to 4realz…

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I can tell from the comments that many regular readers of RCG have been checking out the what I’ve been doing on 4realz.net. It’s been fun to try out something a bit different as I do my best to summarize the news and gossip of the real estate technology and RE.net communities.

However, besides blogging on 4realz, I’m also committed to sending out a weekly email that summarizes the news and gossip that I think the typical real estate executive should know. Interestingly, I did something like this at Move and I know from feedback I got that the email was definitely appreciated since most executives don’t have the time to follow all the blogs and news sites that they wish they could. However, I do say “executive” pretty broadly since there are a lot of people who would appreciate a weekly summary of news and gossip from the online real estate community.

I’m extremely hesitant to republish the email on 4realz as a blog post each week (despite requests) because it feels like it would be repeating the same stories that would have already been covered on the blog earlier in the week. I still haven’t figured what I will do each week, but this week I thought I would post the email here on RCG!

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While I expected it to be a slow week thanks to the holiday season, there was more than enough action to keep a blogger busy with all the big names making news week:

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By the way, if you want to subscribe to my weekly email (similar to notes above), it is 100% free and 100% opt-in. To get on the list email me at thisweek@4realz.net with a request (a simple “please include me on your weekly emails

To Whom it May Concern :)

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[photopress:finger_pointing_796415.jpg,thumb,alignright]I am not sure who or where this letter should be directed.  I am not even sure if I am angry.  Perhaps I am just confused?  Here is my dilemma.  I was born and raised in the Northwest and I guess you can say I bleed rain. purple and gold, lattes and the Seahawks :).  I typically don’t get involved in the political game, however the past couple of years have gotten me to question my NW beliefs.

In my opinion, NW locals take pride in their liberal political beliefs.  In recent years, this liberalism has elected Gov. Chris Gregoire (no comments from the Rossi camp please), King County Executive Ron Sims and Seattle Mayor Greg Nickels.  As I mentioned in my blog almost a year ago, What the Viaduct Vote means (even to those outside of Seattle), it looks as though things are progressing… or aren’t they… there in lies my confusion!

A week ago today, the trifecta of indecision finally joined forces and announced a major step forward in replacing the Alaskan Way Viaduct along Seattle’s central waterfront.  If you read this report you will see that once again, this is another futile attempt by our elected officials to make good on a promise while at the same time creating even more red tape to getting a final decision. “The central waterfront project will be decided through a collaborative process managed by the State of Washington, King County, and the City of Seattle.

A lesson in the dangers of distressed property purchases…

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A friend of mine contacted me the other day about a property investment opportunity that her brother-in-law (BIL) was placing in front of her and her husband. The property in question is located in the city and state where the BIL lives – and it’s far from the Seattle area at roughly halfway across the country. The house reportedly, and confirmed in the report I read, has a major mold issue that has attacked even the underlayment of the floors. (if you want to see some gross mold photos, check out this site) The buyer’s agent and BIL (who agent represents) are attempting to state that the water damage was caused by the former owner having a drug problem and not cleaning up after himself or perhaps because of a water leak in the bathrooms and from a leaking dishwasher. Hmmmmm…..

The house is supposedly being offered off-market at a lowball price of $400k for this tony neighborhood where $550k-800k is the common price points for various sized homes. Even the listing agent is nervous about selling the house with the mold issue but the owner is now deceased and the family can’t afford the home or to fix the home. This tells me that there is likely no insurance money to fix the problem especially if the insurance company deemed it to be failure of the owner to maintain the property. BTW – did most of you know that this is a common disclaimer in most insurance policies? If an insurer can point to an owner’s failure to maintain (ie. ignoring a leak) they can deny coverage. Also, as I’m learning, this particular state has had a rash of insurance companies choosing to deny the option of mold coverage in their policies at all… period because of prior mold problems that required huge insurance payouts.

Now, the price point initially sounds good but my personal concerns surround the mold issue, the fact that it has not been specifically identified in the mold specialist/inspection results, and the amount of work that actually needs to be done to get this house back in to the condition that this neighborhood typically expects. We are getting conflicting reports about the source of the mold and no one has sent my friend photos of the subject property to review. Also, there is the stigma associated with trying to sell a house that has HAD mold – and note I say “HAD” mold because frequently the average consumer can’t get past… well, the past. Agents are required to disclose known material defects, and so are homeowners (at least in WA State), so you’d have to tell a prospective buyer about the issue, even if it was fixed.

The BIL is a contractor and thinks he can replace the floors for about $20k and the only other item he thinks he needs to fix is a broken bathtub. Again, hmmmmmm……. Somehow I don’t think that this will be all that needs to be done.

His (BIL) expectation is that someone else will come in with the money to buy the property and he’ll do the labor and then they’ll split profits. I’m telling my friend/client that there is a lot more that needs to be sorted out and specified in a contract between the parties of the financial investor and the contractor (BIL). Thankfully, she agrees. On top of this issue there are questions of whether or not the house can be purchased with financing (likely not), what type of financing (preferably a renovation loan) is available, can it get insured, will it require oversight (it seems so based on the mold report) and by which entities (city, inspector, insurance, bank? most likely all of the above) and what it will cost to have re-testing done (what if it doesn’t pass?).

After even more phone calls today to the agent I have now learned that the listing agent is actually his secretary who has just gotten her license 2 months ago and that this is her first deal – ever. On top of this news, I also ferret out that the house is in foreclosure so we’re in a short sale position IF the $400k is even accepted. Wait, let’s recount the issues in a quick rundown….

1. mold problems that may or may not have had the water issue fixed.

2. foreclosure with short sale with proposed sale price at 80% of owed amount.

3. estate sale with unknown additional liens, taxes, etc. owed or owing. If the guy was truly a cocaine addict as desribed to us then there could be a lot more outstanding. Also unknown is who is actually selling the house: the widow, the attorney, the lender? Since it’s not yet foreclosed it’s likely the widow or attorney.

4. listing agent that works for the guy trying to be the buyer’s agent (MAJOR conflict of interest and not initially disclosed)

5. 1st time listing agent that has no other sales or negotiating experience working with a guy who has little, if no, experience in short sales.

6. unknown actual costs of repairs

7. no current photos available for review by prospective buyer (yet)

8. unknown lending environment for a distressed and damaged property

9. unknown insurance liability and potential to be an uninsurable property

I know what I think about this deal (a potential disaster) but I’d be curious to hear from others. What are your opinions? Would you go for it, and why? If you wouldn’t touch it, I’d love to hear your comments too.

What it's like to be a mortgage originator today

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As a Correspondent Lender, it’s difficult for me to call myself a mortgage broker or a mortgage banker since I’m an odd [photopress:scrooged.jpg,thumb,alignright]mix of both.  I’m sure my sister-in-law who happens to be the President of our company would prefer to say the “best of both worlds” and she could be right.   This is not what this is post is about.  As a correspondent, we work with about 70 or so different lenders and all of their guidelines; the main difference between us and a broker is that we close in our credit line (more like a bank).   Although we process, underwrite and draw loan docs at our office, we still get to react to what our lenders send us as far as ever changing guidelines.   Here is one example.

At 4:45 p.m. today I received a memo from one of our lenders dated today stating important changes effective tomorrow.  I’m honestly not sure if this lender operates based on west or east coast times.   The memo states:

[Major Lender] is deeply committed to achieving two extremely important short-term goals: 

1) Responding to the current market turmoil in a manner that ensures continued strength and prosperity. 

2) Communicating these changes in a manner that reduces confusion and allows you to focus more time and energy on your customers. 

As new information is processed regarding loan credit performance, we all must be prepared to react quickly and decisively to eliminate the problem areas….This announcement is the result of feedback received from our investors and has our own analysis of the guideline characteristics that are driving under-performance of some loans, and an exhaustive project involving all areas of [Lender] to find opportunities to preserve the intended value proposition of our products while solving the specific credit problem. 

We have new memos constantly being issued per each individual lender we work with regarding what loans they’re wanting and not (what their new guidelines are).   We’re going through another “tightening” with underwriting.   Here are a few samples of what I’m witnessing from various lenders:

  • Credit based pricing all ready in effect for Fannie/Freddie (conforming) loans.  (Some banks are taking advantage of the circumstances and are increasing the rate now.  Possibly to re-coup current or future losses).
  • Non-conforming mortgages topped out at a 90% total loan to value.
  • Stated income and no-income verified mortgages are the ghost of Christmas past. 
  • 45% debt to income ratios for non-conforming no matter what your AUS (computer response) says.
  • Second mortgages are less available (we’ve gone from several lenders offering them to just a couple).
  • Bridge loans are less available.

Not all lenders (banks) have the same guidelines so as a Loan Originator who has many lenders to work with, you need to know you client and put on your dancing shoes!   As a potential home buyer or someone considering a refinance, the more time you have to work with a Mortgage Professional to get yourself in the best postion to have a mortgage, the better off you will be.

A D-I-Y Don't: Divorce

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Legal disclosure:  I am not an attorney, nor do I play one on TV.  Please do seek legal council if you are considering a divorce and before DIY legal documents relating to your marriage or mortgage or real estate.  🙂

I recently met with newlyweds who wanted to start developing a plan to purchase a home together.   The bride was previously married and terminated that union with a do-it-yourself divorce decree and saved money (or thought she did) by not utilizing an attorney.  When they did this several years ago, it made sense to them.  They were amicable and agreed to how they would divvy up their debts and what assets they had acquired at that time.   He would keep the house and the mortgage.   She would sign and record a quit claim deed.    This is where the trouble begins.

A quit claim deed does not remove borrowers from the mortgage and a divorce decree does not remove one’s liability from a mortgage (or other joint debts).

In my clients case, she is now liable for a mortgage on a property she has no interest in except for the debt. 

You would think a borrower could contact the lender and ask to have the mortgage modified by removing one of the ex’s assuming the person retaining the property qualifies for the debt on their own.    This is just not the case.

My client’s ex-husband decided to no longer pay the mortgage.   Foreclosure proceedings are scheduled to begin next month.   Her credit score has plummeted and the mortgage company couldn’t care less about her situation.   She is being sucked into the foreclosure on a property she has not lived in for years.    And she will not be able to qualify for a mortgage at this time.  It is emotionally and financially devastating.

Unfortunately, the only way to safely remove someone’s responsibility to the mortgage is by paying it off.   This can by accomplished by:

  1. Cash (paying off the mortgage)
  2. Selling the property
  3. Refinancing the mortgage

In addition, an ex’s debts from a divorce are factored into the debt-to-income ratio unless the ex has made the payments on time for the past 12 months and the debts are clearly listed in the divorce decree.   If the ex has been late once on an account over the past 12 months, that monthly payment is factored into the debt to income ratios of other ex trying to qualify for a new home.    This isn’t limited to mortgages; it can be joint credit cards, car payments…any joint debts. 

If you own mortgaged property with someone (married or not) and are considering dissolving your relationship, please do not “do it yourself

… And down comes the rain

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After being pummeled by relentless raindrops a couple weeks ago, and as the rain becomes more intermittent, I’ve grown to focus more on embracing Seattle’s warmer temperatures. Luckily, our home was impervious to the floods that left much of Seattle and Southwestern Washington residents feeling like drowned rats. Much of our office, like many, was forced to remain home to cope with the raging floods by siphoning sewage and filthy waters from their soaked basements. And although our townhome (with no basement) escaped the treacherous floods unscathed, the excess water and the damage it wreaked left me feeling rueful for others in our neighborhood who weren’t so fortunate. But in spite of the crippling floods, I must say Seattle’s weather (replete with ample sun breaks) overall is a cakewalk compared with the winter storms that wallop the Midwest.

As I experience my first holiday season in Seattle and with Thanksgiving behind us, I can finally empathize with others who do not have their families nearby during the most cherished of seasons. My Thanksgiving holiday was stung by vapidity, though I cannot say it never has been before, since I have predominantly worked several past turkey days. Though I did take comfort that with my family sprinkled throughout the United States, it was not as if they were hovered around lush, porous cranberries flanked by dark meat poking fun at my absence. However, I am heading back to Chicago (a.k.a. the frozen tundra) for the holidays on Thursday, so although it will be cumbersome dealing with the bitter cold, I am extremely excited to see friends and family that I haven’t seen in some time. Much of the past month my focus has been confined to work and wrapping projects for my class at Seattle University, so it will be invigorating to enjoy a respite from the daily grind, to spend time in the Midwest again, and see so many people I care about again.

Despite the distance from so many loved ones, I am enjoying Seattle and the eye-opening culture that comes with it. Interestingly enough, my roommate said how markedly different I am than I first arrived. My foot-on-the-pedal, fast paced tendencies that I toted with me seem to have abated and it seems my former scales of distress and anxiety have been shed, likely because I have somewhat adapted to the more laid back environment on the West Coast and I’m not tangled in a daily routine I’ve known for too long. Even I have noticed the changes within myself, and I’m not sure if it is just the change of scenery or Seattle, but I am much less prone to panic attacks and much of my stiffness and anxiety has melted when dealing with rough patches lately.

But although I am enjoying my new home, nothing will ever beat going home to Chicago for the holidays!

Kirkland Extreme Makeover – Tonight at 8

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[photopress:070926_kirkand_emhe.jpg,thumb,alignright]I call this “The Little Yellow House That Couldn’t”.  It’s my understanding that the “Makeover” turned into a “Teardown”. 

The show airs tonight, and I will be watching it at The Kirkland Performance Center with a start time of 7:45 P.M. to make sure everyone is in their seats before the show starts.  Sure, I could sit at home and watch it for free instead of $15 (with proceeds to Hopelink), but I want to get a centrally located seat so I can hear the audience reaction.

Will be interesting to see how the show justifies the Teardown vs. Makeover, and hear people’s reaction to what was done over there at The Little Yellow House in Kirkland.  I don’t watch the show, so maybe they always tear them down in order to “make them over”.  Any insight on that from RCG readers would be appreciated.