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Real Deal Guy sez Caveat Emptor- “Let the Buyer Beware”

If it sounds too good to be true, it probably is. Too many consumers have been taken in by unscrupulous mortgage loan originators who are in it just for the quick buck, and have no intention of making a career of this business, and providing a beneficial, consultative service. The mortgage loan origination business, like the Real Estate Sales business is just too easy to get into, with low barriers of entry. This ease of entry facilitates fast talkers whose intent is simply to get people to take a loan product that will generate the most income to the loan agent. Mortgage Brokers are most frequently singled out as the culprits, but there are plenty of these types who work at mortgage bankers, banks, finance companies, credit unions as well.

The Trust Issue

How does a consumer determine who is worthy of their trust? What questions should be asked? (HINT- what is your rate is just about the LAST question that you should ask). Everyone wants the lowest rate and the best deal. I have never met a person who didn’t!

But in our haste and greed to get “the best deal”, someone can fall into the trap of being told what they want to hear creating the environment of the “bait and switch”. Believe it or not, there are many loan people who purposely tell people what they want to hear, regardless if it is true or not, never intending to honor what they say. When the customers go to sign their loan docs, the deal is completely different than what they expected. Unfortunately, many people are in a bind, and actually end up taking the bad deal instead of walking out the door, thereby reinforcing and rewarding this outrageous fraudulent behavior. These guys actually base their business model expecting the majority of people to walk out, but count on that there will be a certain (profitable) percentage of people who will take it anyway, either because they are desperate, or don’t read the loan papers.

Another very popular scam is based upon the much maligned monthly adjustable ARM loan, which goes by many names- the Pick-A-Pay loan, the neg-am loan, etc. This is the loan with the very low start rate of 1%- 3%, and can have a negative amortization feature where the loan balance goes up, and can have a prepayment penalty up to 3 years. Many people sell this loan telling consumers that this is a 30 year fixed rate loan at 1%, which is flat out purposeful, fraudulent misrepresentation. The loan has a 30 year term, the interest rate is fixed for only one month, the minimum payment is fixed for one year at a time, and if the interest due every month is not paid, the difference is added to the loan balance. The loan can be had with no prepayment penalty,a one year prepay or a three year prepay. The prepayment penalty should be used as a tool by the loan originator to reduce the closing costs and monthly payment. With no prepay, the closing costs are higher, and the margin on the loan is higher, resulting in a higher fully indexed rate, and with the one year or three year prepays, they can be used to offset some or all of the closing costs to the benefit of the customer. But what happens is that the con artist will not disclose that there is a 3 year prepay, charge the maximum margin resulting in the maximum rebate, and still charge the client full points and closing costs on top of this.

This still happens all the time, and the naïve customer ends up thinking they have a 30 year fixed loan at 1% with no prepay. Hello!! Does a 30 year fixed rate loan at 1% sound too good to be true? Of course it does!!

This is clearly a Fraud, a crime, but sadly, these crimes are extremely difficult to prosecute, and are white collar crimes, not very sexy, consequently the fraudsters who do this are almost never prosecuted.

I also want to make the point that it is not the fault of the loan program, either. THERE ARE NO GOOD OR BAD LOAN PROGRAMS!! Whether the loan is good or bad or not is relative to the needs of the customer, and if they are given the right program for their specific circumstances, if the loan features are explained to the customer AND THEY UNDERSTAND IT!!

I can’t tell you how many people I have spoken with recently who were in trouble on their loans, who admitted they never bothered to even look at their loan papers they signed, and had no idea what they had. DIDN’T YOUR MOTHER TELL YOU TO NEVER SIGN ANYTHING UNLESS YOU READ IT?? LISTEN TO YOUR MOTHER!

Consumers have to be smart, and not engage in behaviors that will facilitate the fraudsters that are out there-

Consumer Tip-

Do some research on who you are dealing with-

Red Flags-

Fast talking telemarketers working out of “boiler rooms”

Selling the lowest payment, not specifically mentioning the rate

Internet websites with no corresponding “bricks and mortar” presence in your county or state

Not giving a good faith estimate of closing costs in writing, or an incomplete verbal low ball quote

Not asking you a lot of questions to determine your needs or goals

Quickly quoting a really low rate

QUESTIONS TO ASK:

Where are you located?

Are you a mortgage broker, mortgage banker, bank, credit union or finance company?

(Yes, it does make a difference)

How long have you and your company been in business?

Are you a member of the Chamber of Commerce and the Better Business Bureau?

Do you or your company have a license? What kind- from the Ca. Dept. of Real Estate, or Ca. Dept of Corporations? What is your license number? (Then go the DRE or DOC websites and look it up!)

Do you have any testimonials or references of local satisfied customers?

Are you a member of your state Mortgage Broker Association, or Association of Realtors?

Do you have any continuing education, higher education or special credentials in the mortgage or real estate field?

Have you or your company supported any local or national charities or non profit organizations or do any community services here in my town or county?

Ask your friends, relatives and co-workers if they have had any good experiences with their mortgage loan originator, and if so, would they refer them to you?

If your prospective loan person can answer these questions confidently and at least most of them in the affirmative, then you are probably dealing with a reputable company.

ONGOING FEATURE-

Play “Stump the Broker”

This is an ongoing opportunity to ask any real estate financing and general real estate related questions of THE REAL DEAL GUY, and try and stump him. He promises to answer every legitimate question, with no Bull Durham, hence the name REAL DEAL GUY. Are you ready to handle the Truth? No punches will be pulled, no wool pulled over your eyes either. If he is stumped, or if a question is outside his expertise, he will admit it.

Please no irrational or aimless ranting, but all issues are open for discussion-

Let’s have some fun with it-

THE REAL DEAL GUY

    A Speaker of the House of Representatives once said “all politics is local”. Well, Real Estate, like politics is local, too. We are located in the San Francisco Bay Area, the East Bay, specifically, and my comments on the Real Estate market apply to this specific geographic area.

    My statistics are taken directly from the Bay East Assn. of Realtors – the August 2007 median price for a home in Southern Alameda County was $681,755, an increase of 3 percent over the $660,000 median for August of 2006.

    Single family dwelling sales year to date declined 8.2% from the same period as last year. Sales were down from 4,218 in 2006 to 3,873 for the same period in 2007.

    Days on Market (DOM) continues to increase for existing homes in comparison to last year. The average year tio date DOM for a single family detached home in August 2007 was 68 days, an increase of 27 days from 2006. The Bay East Assn. offers downloadable reports and statistics in the Housing report section of bayeast.org.

    Ten percent of all homes sold were under $499,000, 50 percent of homes sold were in the $500,000-$749,999 price range, 26 percent of homes sold were in the $750,000-$999,000 price range, and 13 percent of the homes sold were more then $1,000,000.

The Latest on Mortgage Lending

    The Mortgage Meltdown (kind of rolls off the tongue, doesn’t it?) which reached its peak in August and September this year, is finally starting to stabilize. What happened? What does this mean to the average homeowner and borrower? Well, several types of loans are much harder, if not impossible to get. Those loans that have “stated income” or no income verification, have almost disappeared, unless a borrower has over a 720 credit score, and at least 10% down payment or equity in a property. If that borrower wants a cash out refinance, they had better have less than a 75% LTV (loan to value). If the loan amount is a Jumbo loan (over $417,000) this scenario is even more difficult, because many of the Jumbo investors ( companies that buy the loans) have exited this marketplace completely, seeking greener, safer, pastures for their investment money. An old rule of economics is that money will flow to where it will give the greatest return, with the least amount of perceived risk. Adjustable rate loans are also quite problematic, with the investors in these loans also running for the hills. At this time we are seeing that the fixed rates are priced better than the adjustable rates, meaning that the rates are the same or lower, especially in the Jumbo loans market segment.

Who does this affect?

    The people most affected by these developments are people who are self employed business owners, people on commissioned income, people with unusual or difficult to document sources of income, all of whom can afford a monthly payment for a mortgage, but their tax returns do not reflect sufficient income to qualify for a loan in the conventional sense. Others affected are first time homebuyers with not much money for down payment, homebuyers who bought a home in the last 2 or 3 years with little or no money down, and who haven’t built up much equity. This is a particular problem for them, because they may have adjustable rate loans (ARMs) that are adjusting, with payments going much higher. It may be very difficult for these people to refinance, because they may not have the equity to do so, and they may not have the new higher credit scores required. Another group of people who are very adversely affected are those with challenged credit, the “sub prime or nonprime” borrowers, with credit scores less than 640. The sub prime lenders in this marketplace have almost all disappeared, gone out of business, and the small handful that still exist require full documentation of income, and at least 20% down payment or equity in the property. This is a real problem for people who got a 2 or 3 year fixed loan,that is now adjusting with a rate increase of 3, 4, or more percent, over their current rate.

What can be done? Is there any hope?

    The answer to these questions lie in the Legislative process. Currently there are 2 bills in Congress, HR1427 “The Federal Housing Finance Reform Act of 2007”(Frank), which will reform the GSE’s (Fannie Mae and Freddie Mac); and HR 1852 “The Expanding Homeownership Act of 2007” (Waters/Frank), which will reform the FHA to be more usable for Californians in particular. Both of the bills have passed the House of Representatives, and are in the Senate Banking and Finance Committee, and have been fast-tracked by their authors. If these bills pass substantially unchanged, they will have a tremendous impact on the loans that are available to Californians, and will help alleviate the crisis that is gripping us now. If these bills pass after the holidays in the New Year, the California Real Estate market will definitely pick up in the spring of 2008.

Until next week…

George Duarte