And the Philadelphia Phillies WIN the PENNANT!!!
34
Joe Sixpack and the Subprime Crisis
The Subprime Crisis is a broken promise to Joe “Sixpack”.
One Day in early 2006, Joe was feeling pretty darned good about himself. He was making $65,000 a year at a job he held for over 6 years. He had $30,000 saved up in the bank. He had no credit card debt. He owned his car free and clear. He looked at his pregnant wife and his 2 year old son about to outgrow the two bedroom apartment they were renting and said, heck…time for us to buy a house.
He didn’t need no granite counters or stainless steel appliances. He just wanted a decent neighborhood and decent schools for his kids. He needed a small yard for a dog and to throw a ball back & forth in with his son and to have a barbecue and a beer in with his buds once in a while. His American Dream seemed within reach. He read everywhere that mortgages were pretty easy to get, and interest rates were near all time lows at 5.5%.
Mrs. Joe picked the School District she wanted to live in, and Mr. and Mrs. Joe walked into a real estate office and said, “We’d like to buy a house in this School District”. Ms. Realtor pulled out a big questionnaire asking them to fill in all the things they wanted, while she left to figure out what they could afford. She did a quick qualification in the back room of the office. $65,000 a year divided by twelve times 33% equals a payment of $1,787.50 a month and at 5.5% interest rate that equaled a loan of $315,000. She added the $30,000 they had saved, and came to $345,000. She wondered if that was a little high, but it was certainly the lowest price she could hope to find, so she found them a little old rambler in Kenmore asking $350,000. They all went out to see it. It had an old kitchen and needed some work but the couple hugged and said, “We can make this ‘home’ with a little hard work and some paint and curtains”. Everyone smiled and went back to the real estate office to make an offer of $345,000, with the seller paying the closings costs.
The real estate agent called her favorite lender and put Joe on the phone with the lender while she typed the offer. The lender faxed over a pre-approval letter for a purchase price of $345,000 to submit with the offer. Joe’s agent called the Listing Agent of the little rambler who said, “We already have 3 offers, and we’re presenting offers at 7 o’clock tonight”. It was 4:30 p.m.
Joe’s agent called the lender who shot over a new pre-approval letter for $375,000. Joe’s agent added an Escalation Clause for $1,000 more than any one else’s offer up to $375,000. She took out the seller paying the Closing Costs explaining that with multiple offers, that wasn’t going to fly. She took out the home inspection clause explaining that would strenghten the offer. She told them to up their Earnest Money Deposit from $5,000 to $10,000 to make the offer really solid. Mr. and Mrs. Joe signed it, and the agent faxed the offer to the Listing Agent. That night Joe’s family got the call that they got the house for ONLY $364,000! WOO-HOOS and High Fives all around. They WON!
Joe went to the lender’s office a couple of days later and made a full loan application. He got a Good Faith Estimate saying his payment was going to be $2,646.47 a month. $1,937.36 on the first mortgage of $291,200 at 7% +$459.11 on the 15% second mortgage of $54,600 at 9.5% + $200 a month for real estate taxes and $50 a month for homeowner’s insurance. Total payment $2,646.47 a month. Joe started sweating profusely. He called his agent and said, can we cancel this? She said not without losing your $10,000 Earnest Money. There was no home inspection contingency and the Finance Contingency didn’t have a little blank space to put in a rate cap. There was no “legal out” for “OMG the payment is $1,000 more than I thought it was going to be”.
The agent called the lender and he switched the loan to an interest only on the first with a fully amortized 40 year second and added a two year pre-payment penalty. That brought the payment on the first mortgage down from $1,937.36 to $1,698.67. The fully amortized 2nd at 40 years vs. 30 years dropped that payment from $459.11 to $442.29. Total payment $1,698.67 + $442.29 + $200 + $50 is $2,390.96.
Joe scratched his head and asked, “Where’s the 5.5% lowest interest rate in years?”. The lender explained that rate was only for people with credit scores of 660 or better, and Joe’s score was 640. Also, that rate was for people whose ratios were 33/40 and Joe’s payment, even at the reduced rate of $2,390.96, was just over 44% of his gross income of $5,416.67 a month. His ratios were “out” which made him SUB-PRIME. BUT, here’s the good news! IF you can stick this out for 12 months…24 tops…and make your mortgage payment on time, you can RE-FI at the lower rates! The value of your house will grow so that the 5% you put down will be 20%, and you will have ONE mortgage at the low rate instead of TWO mortgages at SUB-PRIME rates.
Joe went home. He was feeling a little sick in the stomach and he had a massive headache. He looked at his pregnant wife. She was packing and making yellow curtains for her new kitchen. He kissed her on the forehead and went to the corner store and bought a sixpack. Two weeks later they closed escrow, moved into the house and he and his son went out and bought a new puppy.
Joe worked hard for a year. He put in overtime and drew down on the little savings he had left. He was able to make his mortgage payment on time for 12 months. He called the lender to get that RE-FI he was promised. The lender said…oh, well…you really should wait another year because of that 2 year pre-payment penalty. Joe said, I really can’t do this for another year. The lender said OK, but I’m going to have to add the costs of the re-fi and the pre-payment penalty to the principal of the mortgage. Joe asked how much the pre-payment penalty was and nearly fell off his chair. He said, OK…I’ll stick it out for another year. He went out in the yard where his son was playing with the dog and drank a couple of sixpacks.
6 months later Joe was told that he couldn’t get any overtime. They were cutting back on expenses. He opened his mail and there were those multiple offers for credit cards at ZERO INTEREST! He got himself three of them. He started charging stuff to make ends meet until he could get to 2 years and RE-FI his mortgage. He went out with one of his new credit cards, bought his wife a box of chocolates, his son a new football, the dog a new collar and a case of beer for himself.
Finally…TWO YEARS had passed. No pre-payment penalty! Time to RE-FI! He called his lender. Well Joe, I’ve got some bad news for you. You did improve your credit score with all those on time payments for two years from 640 to 680, but the best rates are now going to people with scores of 700 or better. The REALLY bad news is that because of your ratios, you were stated income-SUB-Prime…and those loans don’t exist anymore. There is no re-fi for people with your ratio of payment to income. Joe hung up the phone and went out in his yard and drank a couple of six-packs.
At first, Joe was only getting behind in his credit card payments. He opened his statement and the interest rate jumped to 30%! Joe called around and said “Isn’t charging 30% ILLEGAL?” Well Joe…it used to be…we used to have something called “Usury Laws”, but no more. Usury Laws were part of RICO to get rid of Loan Sharks but in 1980 Congress elected to “deregulate” and exempted Banks from Usury Laws for the most part. 30% only seems fair, since you breached your promise to pay on time. Joe wondered why breaching his promise demanded such a penalty, when those who breached their promise to him of getting a RE-FI and reasonable mortgage payments seemed not to matter. He put his head down, grabbed a couple of six packs and headed out to the garage trying hard not to turn the motor on in the car.
Joe started getting behind in his mortgage payments. He had the same job making $65,000 a year…in fact he got a raise to $69,000 a year. Still he was falling further and further behind. He called his real estate agent and said, I can’t do this anymore. I have to sell this place. The agent told him that prices were down, cost of sale was 8% or more, and there were those payments he was behind getting penalties and interest. He was “upside down” and the new distressed property law scared her and she couldn’t help him. Meanwhile the mortgage company was calling him every day, sometimes 4 times in one hour. They had no answers. They just asked if they could post date a check for the $4,000 he owed them to next week. He said “Do you really think if I can’t make my full payment again this month, that I can write you a fkn check for $4,000 today that is going to be good “next week” you fkn moron!” Joe slammed the phone down, turned the ringer off and headed out to the garage with his little TV and a couple of sixpacks.
Joe drank his six-packs and watched all the Presidential Debates and Campaign speeches. He heard someone talking about “Joe Sixpack” and wondered if she knew how “Joe Sixpack” got that nick-name, and what she was going to do about it. He watched as everyone fought over the $700 Billion Bailout and wondered if that would help him…and hoped it would. The Bailout passed, but his phone didn’t stop ringing. The Credit Card Company was still charging him 30%. The Mortgage Company still didn’t seem to have any answers. He called his agent and asked again about selling the house. She agreed to help him do a “short-sale”, but she didn’t quite know how that worked. He went out to see where he might rent if he sold his house “short”, but no one would give him a rental, because his credit was now fckd…
He went back to the garage, popped open another beer and stared at the car with the motor off.
Are Washington Consumers Safer Working with DFI Regulated Lenders?
I’ve always thought so and you may say I’m biased since I work for a company that is regulated by Washington State Department of Financial Institutions. At the very least, home owners who have been wronged by a loan originator under DFI’s watch can rest assured that the company has much higher odds of having actions taken. When a borrower contacts me because they want a second opinion or they have a complaint about their lender, the first step is trying to figure out what type of lender they are (mortgage broker, mortgage banker, correspondent lender…) and determine who regulates them. It’s a mess and there are no innocents. Bankers are not more ethical than brokers or vice versa.
Here’s an example, from the front page of this morning’s Seattle PI:
In a typical case in late 2002, state bank examiners believed that National City Mortgage was violating the state’s Consumer Loan Act by charging extra fees on mortgages…when asked to explain the costly “discount loan fees, underwriting fees, processing fees and marketing fees,” National City Mortgage sought intervention from federal regulators, records show.
The investigation was stopped by federal decree….the federal Office of the Comptroller of the Currency wrote National City a letter…saying the state had no right to examine or even visit its offices. Because National City’s parent bank…was chartered with the OCC, the federal agency preempted the state’s authority….
The federal agency didn’t go after the mortgage fee complaint because it had no authority to enforce state consumer protection laws…
Also from this article:
Banks are governed by a patchwork of federal and state laws, which are notably weak at the federal level in areas of predatory lending and consumer protection, according to to law professors, attorneys and other experts. Some states…have passed tougher predatory lending laws with provisions holding Wall Street liable for financing bad loans. But the two federal agencies in recent years have increasingly shielded their chartered banks…from state laws.
What really frustrates me is to hear the media and our elected officials wrongly use the term “mortgage brokers” when discussing the current mortgage crisis we are in. It’s clear that there was not enough regulation and enforcement for all mortgage originators (regardless of type of institution they are employed by).
The federal OCC took about a dozen formal enforcement actions against banks for “unfair and deceptive practices” in the current decade, agency spokesman Robert Garsson said. The other federal agency, OTS, took about half as many, in “the five to six range, OCC Cheif Operating Officer Scott Polakoff said. States…took 3,694 enforcement actions against mortgage lenders and brokers in 2006 alone…
The feds were set up as rivals. Bank oversight is “the only place I know where regulated entities get to pick their regulators,”said Kathleen Keest, with the Center for Responsible Lending.
Last year, in a case involving Wachovia, the Supreme Court ruled that “the OCC has the absolute right to insist on exclusive oversight without states intervening.
According to the Seattle PI article, Barney Frank has indicated he might try to overturn the current system…until then, it’s my opinion that consumers are more protected by selecting lenders who are regulated by DFI rather than relying on the Fed or the banks to look out for them. Our State’s system is not perfect but atleast a consumer can visit DFI’s site and verify on a local level if a loan originator or their company is licensed or has had actions taken against them.
With the recent passage of HR 3221, the SAFE ACT was passed to help protect our nation from unsavory mortgage originators. Once again there are different rules for originators who work for banks and those who work for state regulated institutions. On a comment at RCG, “DFI Examiner” confirmed that “LO’s with FDIC insured banks and credit unions need to register, but they don’t need to be licensed.” Ahh…but that’s a whole post on it’s own!
When your financing evaporates, do you lose your earnest money?
This is not legal advice. For legal advice, consult an attorney, not a blog.
In this challenging market, many buyers are discovering that their loan program is no longer available. This is a particular problem with new construction, whether condo or house. The buyer signed a purchase and sale agreement (PSA) several months or even years ago. Back then, in the “good ol’ days,” lenders offered a variety of financing options. Some buyers relied on some of the more “aggressive” options (e.g., an option ARM) in order to qualify for the new home. Today, that financing option is gone, gone, gone, and the buyer can no longer afford to buy the property. What happens then?
Well, the short answer is that the buyer loses the money. In almost every new construction contract, the builder’s addendum will note that the financing contingency, if any, is waived within several weeks of signing the PSA (and months or years before closing). Once the financing contingency is waived, then the risk of a failure of financing rests squarely on the buyer. At that point, if financing fails, it is the buyer’s problem, not the seller’s. Accordingly, if the buyer cannot close as a result, then the buyer will lose the earnest money as the buyer is in default of the PSA.
However, there may be more to the contract than what is seen by the untrained eye. There are a variety of state and even federal laws that apply to the sale of property, and in particular new construction. In many instances, these laws create “loopholes” in the contract that allow the buyer to at least arguably rescind the contract. Thus, depending on the terms of the PSA at issue, these laws can be used to exert negotiating pressure on the seller to at least return some of the earnest money.
Certainly, a buyer should not rely on these laws when signing the PSA originally. Every buyer should be aware of the risks and obligations created by a contract. But sometimes, the buyer’s situation changes (to put “America’s Money Crisis” mildly) and the buyer can no longer perform. Heck, sometimes the buyer may just decide that the purchase is actually a bad idea and not want to complete it. Under those circumstances, the buyer should consult an attorney to determine if there is a mechanism by which the buyer can get some or all of the earnest money back.
RCG's New Look!
So, it finally happened. After a few years of the same theme, I gave RCG a new look last night.
There are more than a few changes to the site, but the one that will probably stick out the most are:
- New theme. I based it on the Andreas theme by Andreas Viklund. It’s the same theme I’m using on 4realz.net, although I modified it a bit before launching it on 4realz and even more modifications before launching it on RCG.
- New header graphic. I switched out the photos. As part of the process, some of the contributors gave me some photos to use. Deborah Burns was extremely helpful and sent me dozens of photos of which I used both the farmers market and the space needle.
- Updated the color scheme! (If you’re curious, I based the color pattern on color combo 220)
- Author mini-bio at the bottom of ever post. I replaced the one photo that was at the top of every post with a “About the author” section at the bottom of each post. Not only will this make it easier than ever to learn more about the RCG contributors, but it will also mean we won’t have the funny formatting issues that sometimes came with having a photo at the top-right of ever post.
- Page navigation. By moving the page navigation from tabs at the top to the left side, we’ll be able to do a bunch more with page navigation in the near future on the site.
I’m sure there’s even more, but I just wanted to pop off a quick note to get everyone up to speed.
Interestingly, in the process of looking at photos for the new theme, I came across this screenshot of the original RCG site (back when we had only 2 posts!). My how times have changed! 😉
Rain City Guide's original theme
Update:
Just realized I should have added that if you have feedback of any kind, especially if something is not working as you’d expect it to work, I’d definitely appreciate hearing about it!
Update #2:
I also wanted to mention that we added “avatars” for all people leaving comments. If you want your own avatar, it’s as simple as signing up for a free one at gravatar.com (and explained in a bit more detail on 4realz).
Can't you be more positive?
…the Phillies won…
Will the U.S. Now Begin to Take Ownership Positions in Banks?
From the NY Times: U.S. May Take Ownership Stake in Banks
Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system …
Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.
Hat tip CR who says, “The proposal resembles one announced on Wednesday in Britain.”
Sounds like the Treasury is trying to work as fast as they can.
The Fed drops the Funds Rate to 1.5%
This morning, the FOMC cut the Fed Funds rate 0.5% to 1.5% in a globally coordinated move in advance of the scheduled FOMC meeting October 28-29, 2008. Another rate cut at the scheduled meeting is not out of the cards.
From the Press Release:
“Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.
Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions….
Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”
The FOMC does not directly control mortgage interest rates, which are based on mortgage backed securities (bonds). Actions of the Fed does influence mortgage interest ratesas traders/markets will react accordingly. HELOCs based on the Prime Rate (which follows the Fed Funds Rates) will enjoy a lower rate from this move (if the rate is unfixed).
Mortgage interest rates are for the most part unchanged…but the day is young! The markets continue to be very volatile. The DOW is currently down over 200. Treasury Secretary Paulson will be speaking later this afternoon…which may impact markets.
I’ll be posting a rate update tomorrow at Rain City Guide…if you can’t wait, then check out my live rate quotes.
2008 $7,500 1st Time Buyer "Credit" is a Loan
I’ve been seeing quite a few agents and lenders using the $7,500 1st Time Buyer “Credit” in their promotional materials aimed at first time buyers. Be careful out there as many people “explaining” this “credit” to first time buyers are not including the part where it has to be repaid. The first payment of $500 begins two years after you receive the “Credit” and continues for 15 years. If you sell the property at a profit before the $7,500 is paid back, the balance is due when you sell. On the bright side, it does appear that if you do not have enough “profit” to repay the interest free loan of $7,500…it is forgiven.
Excerpted from FAQ’s On the $7,500 1st Time Buyer “Credit”:
“ …Because the tax credit must be repaid, it operates like a zero-interest loan….The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.”
“…the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale…if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed.”
“…this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales.”
It’s not that I’m against a stimulus package for increasing homes sales, but you have to wonder how many people see CREDIT and understand LOAN? They really should call it a $7,500 1st Time Buyer Interest Free LOAN. And for all you mortage and real estate professionals, maybe we understand why the government has to call it a TAX CREDIT, but to be sure your clients know the amount has to be repaid, you should call it an interest free loan when explaining it to your clients.
Sunday Night Stats on Monday Morning
I’m repeating this graph because it’s all about the last quarter now. If you are watching the stock market today, (and who isn’t) you know that yesterday doesn’t matter anymore. Right now we’re waiting to see if a “Black Friday” or a “Black Monday” or both as we experienced many years ago, can turn into a Black Monday, Tuesday, Wednesday, Thursday and Friday.
The reason I started Sunday Night Stats back in early January of 2008 was to help people pinpoint a trend. Well if you haven’t gotten the picture as to the trend by now, Sunday Night Stats isn’t going to help you.
To buyers and sellers of real estate, and agents advising buyers and sellers of real estate, all you need to know today is that September performed as expected. If you take the brown line as to median price above and draw it equidistant from the 2006 or 2007 line, you will be exactly at where we are, $377,000. Who cares. What we care about is which way that line is going from here.
Look up at that chart and what happened to median prices from October through year end in all the previous years shown. Now look at the stock market. If the stock market is an indicator of consumer confidence, and I believe it is, then we will not see a repeat performance in the last quarter of 2008 as to median home values. Instead we will see the brown line trending down toward 2005 prices. In fact, if you have a house on market that you bought in 2005, and you can break even today, consider yourself to be very lucky indeed and DO IT!
Going back to my Prediction post “My price predictions are: $429,000 for the 2nd quarter of 2008 $400,000 for the 4th quarter of 2008”, I am right on target with the September median at $413,000 and the 3rd quarter at $425,000. The graph above is the median on a combined basis for Single Family and Condos, hence the variance between $377,000 this month as to the graph and $413,000 in the sentence before this one. At this point, and hitting my refresh button on the Dow as I write this post, I think we’ll be damned lucky to see the median fall to only $400,000 by year end, per my April prediction.
Usually I talk to buyers and sellers of real estate and to real estate agents. But the handwriting on the wall today is to the people who are planning to spend 2009 real estate taxes. DON’T EVEN THINK ABOUT IT! The market crisis is all about who didn’t see the handwriting on the wall, and who needed to see it. Today that message goes out to anyone who thinks the new assessment values are a means of increased revenue. The appeals are going to hit you so fast your heads are going to spin. In fact, save yourselves the expense of receiving and evaluating those appeals and revise your numbers before you solidify the 2009 real estate tax increases. If you come up with a budget for spending 2009 real estate taxes based on the valuations everyone received in the mail, you will have no one to blame but yourselves for doing that when the scream and shout hits the fan.
It’s too early to talk about YOY volume, we’ll do that next week. Today it’s all about expectations as to value, and I expect the 4th quarter to slide down toward that green line of 2005 vs. the trend of the last three years. I don’t think it will hit the green line by year end…but it’s going to get pretty darned close.
(Required disclosure: Stats in this post are not compiled, verified or posted by NWMLS…never are; never will be. I do my own stats and no one is responsible for them but me personally. Sorry to have to repeat this disclosure every freakin’ week…but unfortunately it’s required.)