New Release! (and last chance at a sale)

I have a new release tomorrow, Bubbles Of Creation. It’s part of a many-worlds fantasy series named Connected Realms, and will be the last in this series. It is available to pre-order in e-book, and the paperback and hardcover versions go live tomorrow morning. They won’t allow me to do audiobook until the e-book is delivering, but I will do so ASAP.

Amazon link: https://www.amazon.com/dp/B0F4NW9LFF (alas, the hardcover is Amazon only)

Books2Read link: https://books2read.com/u/bpxJ5E (includes B&N, Apple, Kobo, etc, including 4 library services)

In advance of the release, The Fountains Of Aescalon (first in the series) is available for 99 cents in e-book form – but today is the last day!

Amazon link: https://www.amazon.com/dp/B07C5H3Z4Q

Books2Read link: https://www.books2read.com/u/bwWMgY

If you’re a completeist, the middle book is The Monad Trap

Amazon link: https://www.amazon.com/dp/B086D3XGR7

Books2Read link: https://books2read.com/b/meg8Qg

For Sale By Owner – Working Directly With a Loan Officer

Just got a search on “state of california fsbo questions to work directly with loan officers without a agent”

This isn’t a problem. Whereas it is the same license, it is two entirely separate job functions. The fact that you are or are not working with an agent has absolutely nothing to do with whether you can get a loan.

This is not to say that some folks who do both might not attempt to trick or pressure you into signing an agency agreement. The way to deal with that is to contact these folks (the link is for California, but the principle applies elsewhere).

This is not to say you should be looking for real estate agent responsibilities from someone acting solely as your loan officer. This happens quite a bit; If they’re not getting an agent’s commission, you should not ask them to do an agent’s work or assume an agent’s responsibility. Asking you to sign a form that says they are acting purely as a loan officer and are not responsible for anything except the loan is reasonable. Loan officer legal responsibility is minimal to non-existent anyway; it’s one of the reasons the loan business is so messed up and out of control. But asking a loan officer to do both jobs for the pay of the lesser fee is unacceptable. You don’t do extra work for free, you don’t assume extra responsibility for free. Why should you expect someone else to do so?

Now in California, we changed the law a couple of years ago so that in certain circumstances where the firm is licensed with the Department of Corporations, the loan officers do not have to be individually licensed. I’ve seen a lot of abuses out of such situations; the loan officer who isn’t individually licensed isn’t risking their individual ability to work in the profession, no matter how egregious the violation. Indeed, many firms licensed with the Department of Corporations instead of the Department of Real Estate have made a point of recruiting people new to the profession who don’t know any better, and no one will tell them until they go work for a company with better practices, which most of them never do. These folks also don’t know how much the company makes per loan, so they don’t have to pay them as much. Best of all possible worlds from the company’s view!

But so long as you only ask a loan officer to do the loan officer’s job, there should be no problem with doing a loan on a For Sale By Owner property. After all, you don’t need a real estate agent to refinance, do you?

Caveat Emptor

Disclosure Issues and Failure to Disclose

One of the most important things for the buyer in any transaction is confidence that the seller has disclosed all known problems. One of the things most people don’t realize, or act like they don’t realize, is that it’s at least as important to the seller.


The California Association of Realtors (CAR) has a program called Winforms that lets me ask all of the little niggling questions about the home. Very convenient, very nice, and I’ve done my duty when I fill it out with a listing client.

This does not mean that I or the seller can ignore any metaphorical elephant in the room not covered by the form. If there’s something that’s obvious, I have a duty to ask about it and record the answer, even if it isn’t on the form. The seller has a legal duty to disclose anything they are aware of that might cause a reasonable buyer to change their minds or their offering price. A cracked light switch protector plate is not a big problem and you’re going to either fix it or agree with the seller that you won’t. But past termite damage, whether someone has died in the home recently, soil subsidence (even on the far side of the property), and any number of other factors can be reasons why prudent buyers may no longer be interested, or may wish to re-evaluate their offer. The rule for smart people is “disclose everything and let the buyer decide if it’s important.” A certain percentage of sellers, however, just want to get through the transaction without the buyer changing their mind. For Sale By Owner (FSBO) sellers seem to be significantly worse about it, by the way, which is one of several major reasons I’m always leery of FSBO properties with my buyer clients. These sellers either don’t realize how strongly omissions can come back to bite them, or are hoping they will be gone by the time it comes to light.

First off, unless you’re planning on dying, you can be found. I know a lawyer that makes a good living at it. Furthermore, failure to disclose frequently makes your liability worse, in that you had a duty to disclose and you did not. It is possible that failure to disclose means a judgment for punitive damages in addition to increased economic damages is in your future, whether you are seller or agent or even buyer’s agent if it was bad enough. Furthermore, you can count on the damages being larger because the problem has had time to get worse, paying the costs incurred in order to find you, and so on, when if you had simply disclosed in the first place you would have been off the hook.

Now, your real estate agent is not (generally) a building inspector, tax records expert, or any of those kinds of specialist. I recommend an inspector for every purchase, because I’m certainly not qualified to do that job. But if I spot something that may not be right, I have a duty to disclose it to my principal, and find out if it really means anything from a real expert. Sometimes there’s a tax assessment that has passed or pending that doesn’t have numbers associated with it yet. If it’s passed, the title report should have the information, but they’ve been known to miss one occasionally. If it’s pending (e.g. bond measure on the next ballot), it’s a good idea to tell the buyer, or at least tell the buyer about where to find out.

For an agent, failure to disclose may mean that your professional insurance won’t cover it. The professional insurance is for errors (honest mistakes) and omissions (errors of ignorance), not intentionally hiding something. This liability can easily run to several times any commission you made, so it’s a really bad idea to hide anything. Agent or seller, if they buyer can prove you knew, or that you should have known, you’re basically up the creek.

Caveat Emptor (and Vendor)

Tax Treatment of Annuity Withdrawals

Asymmetrical Information has a good article about the political and budget problems faced by pensions everywhere. It touches upon the treatment of annuities, one of the most popular investment vehicles there is. Most defined contribution pensions (e.g. 401k, among others) in the United States are actually funded by variable annuities.

Annuities currently have in interesting tax status, and there are several kinds. They are certainly popular instruments and their tax deferred status gives them appeal to many investors. For this purpose however, I am going to restrict myself to the question of whether or not they have been annuitized, which is the actual process of exchanging a pool of dollars that you control for a stream of income.

Annuities are tax deferred, which means while the money is inside the annuity, it is not subject to taxation. Therefore, it compounds with the entire amount of earnings the investments made (less expenses of course). If your marginal tax rate is 20%, and your investments make 8% per year, you’ll earn about 86 percent over a ten year period taxed, 116% if tax deferred. Even after taxes, you’ll have earned a little under 93% net. Annuities are also a life insurance product – they pass outside your estate to a named beneficiary immediately on death.

If the annuity has not been annuitized, it is taxed on a “Last In First Out” or LIFO basis. What this means is that the dollars that come out are presumed to be from the most recent that went in. In other words, insofar as possible, it is the original principal that is untouched and the earned income you are using. So if you put $100,000 in (assuming the money is “after tax” as many people have annuities with “before tax” money involved), as long as the balance remains over $100,000 you are assumed to be withdrawing earnings and every penny is taxable. Only after you have depleted the annuity account below $100,000 are you presumed to be using your contributed money. Note that every dollar of contributed money you use lowers this threshold, or “basis” in the account. If you take $20,000 of the original money, your basis is now $80,000, and this is the new threshold value. Note that basis can also be increased by subsequent contributions.

If you annuitize the pool of dollars by exchanging it for a stream of income, there are implications brought on by the fact that you no longer own the pool. The first of these is that the exchange is irrevocable. It doesn’t go backwards. You can certainly exchange the stream of income for another pool of dollars now, but expect the pool to be smaller than it was as both exchanges have made the insurance company offering them a profit.

But because the exchange is irrevocable, the IRS will treat it somewhat more favorably. What they will do is take an actuarial treatment of how long you are expected to live, and then make a determination based upon that of how much of each month’s payment is interest and therefore taxable, and how much is a return of principal, and therefore not taxable in most cases. If you outlive your actuarial expectation the whole thing becomes taxable. If you annuitized a before tax account like a traditional IRA or 401k, the whole computation is moot, of course.

The implications are fairly obvious. In general, an annuity is not an account you should “protect” by drawing down other accounts instead. Indeed, annuities should probably be near the head of the list of accounts that you should should draw down and/or use to exchange value for something else that is largely tax free, like cash value life insurance or Roth accounts, lest there be a large tax liability upon your death. It also takes about fifteen years, plus or minus, for a variable annuity’s tax deferred status to pay for itself as opposed to other investments which are not inherently tax deferred, such as mutual funds. There are very strong arguments for placing even tax deferred accounts in variable annuities, but this article is not the place for them, and you should understand both sides before making a decision.

Nonetheless, thanks to Asymmetrical Information for giving me the idea for an article.

Caveat Emptor

Signing Off Loan Conditions

what is a underwriter final “sign off” on the conditions

First off, it needs to be mentioned that a good loan officer gathers information and puts a full package, with all of the information an underwriter should need, before submitting the package to the underwriter. That’s how you get loans through quick and clean. Give the underwriters all of the information you know they’re going to need right up front.

Some clients don’t understand this. They want to hang back and see if the basic loan will be approved before they do “all of this work.” This is a good way to have to work much harder on the loan. Give it all to them in one shot, and they only look at your file once. You get a nice clean approval. The issue is that every time that underwriter looks at your file, there is a chance they will find something else that they want documented, some little piece of the picture they are uncomfortable with. The underwriter can always add more conditions. The cleaner the package, however, the less likely it is that they will.

There are some matters it’s okay and routine to bring in later. Appraisal is probably the most universal of these. Title commitment (aka Preliminary Report) is probably second most common. These are completely independent of borrower qualification, and when they come in later, will generally not cause the underwriter to re-examine the whole file. But you want to submit the borrower’s package as complete as possible, right up front. If the borrowers pay stubs show up later, the underwriter will look at the file, and if the income they document is even one penny less than the initial survey of the file, they will underwrite the whole thing again. A good loan officer submits complete packages, so the file only gets looked at once.

But every loan officer gets asked for additional conditions from time to time. With the best will in the world, sometimes they are going to miss something that the underwriter is going to want to see in this particular instance.

Loan conditions fall into two kinds: “Prior to documents” and “prior to funding”. “Prior to docs” conditions are related to “Do you qualify for the loan” type stuff. Income documentation, property taxes, existing insurance for refinances, verification of mortgage, rents, employment, deposits, all of that good sort of stuff. Also appraisal, title commitment, etcetera. If there’s something missing in the loan package, it should be a “prior to docs” condition. These conditions should be taken care of between the loan officer and the underwriter. The underwriter tells the loan officer what needs to be produced in order to approve the loan, and the loan officer goes and gets it. If the loan officer can’t produce it, there is no loan.

This is not to say that a good loan officer can’t necessarily think of another way to get the loan approved. Indeed, that’s a significant part of being a good loan officer, almost as big as knowing what loans won’t be approved, and not submitting a loan that won’t be approved. This is a big game with many loan providers, by the way. They get you to sign up with quotes they know you won’t qualify for, but when the loan is turned down (or, more commonly, the conditional commitment asks for something that the situation can’t qualify for), they then tell you about the loan they should have told you about in the first place. Pretty sneaky, huh?

Getting back to the underwriter’s conditions, a good loan officer knows how to work with alternatives. But at the bottom line, the loan officer has to come up with something that the underwriter will approve. It is the underwriter who has final authority. They write the loan commitment, which is the only thing that commits the money. In fact, most loan commitments are conditional upon additional requirements. The only universal to getting these conditions signed off is that the underwriter has to agree they have been met. As the underwriter agrees that the conditions have been met, one by one, the loan gets closer to final approval.

When the last prior to docs condition is satisfied, the loan officer orders loan documents. This is also when many of the less ethical of them actually lock the loan quote in with the lender. An ironclad rule is that if it isn’t locked with the lender, it’s not real, but that doesn’t stop many loan officers from letting the rate float in hopes of the rates going down so they make more money for the same loan. Of course, if the rates go up, guess who gets stuck with the increase? It’s not likely to be the loan provider.

When the loan documents arrive, the borrowers sign them with a notary and that’s when the rescission clock begins. There is no federal right of rescission on investment property, and none on purchases, but on owner occupied refinancing, there is (Some states may expand on the federal minimums).

Now there will be “prior to funding” conditions to deal with. “Prior to funding” should be reserved almost exclusively for procedural matters, and should be taken care of primarily between the escrow officer and loan funder. There are always going to be procedural conditions here, but many lenders are now moving more and more conditions to “prior to funding” as opposed to “prior to docs”. Why? Because once you sign documents, you’re more heavily committed. Psychologically, once most people sign loan documents they think they’re all done. This is not, in fact, the case. Legally, once the right of rescission, if any, expires, you are locked in with that lender unless/until they decide your loan cannot be funded. Once rescission expires, you no longer have the ability to call the whole thing off. You are stuck.

This is not to say that an occasional condition can’t be moved to “prior to funding.” Especially on subordinations. I’ve saved my clients a lot of money by getting subordinaation conditions moved to prior to funding so the rescission clock will expire in a timely fashion to fund the loan within the lock period.

This is all well and good if the lender told you about everything and actually deliver the loan they said they would, without snags. On the other hand, I have stories. One guy I used to work with had the capper, and the reason he got into the business was he was certain he could do better. He signed documents on a purchase, and a week later they called and told him he had to come up with $10,000 additional money within twenty-four hours, or lose the loan, the property, and the deposit, and be liable for all of the fees. His father had to overnight him cash, which he then took into the bank for a cashier’s check.

He is only the most extreme example. The loan is not done until the documents are recorded with the county. Until that happens, the money does not have to come, and even if it does, the lender can pull it back. One procedural thing that happens with literally every loan is a last minute credit check and last minute call to the employer to be certain you still work there. If the borrower has been fired, quit, or has retired, no loan. If the borrower’s credit score dropped below underwriting standards, no loan. If the borrower has taken out more credit, the lender will then send the file back to the underwriter to see if they still qualify for the loan with the increased payments. So like I tell folks, until those documents are recorded, don’t change anything about your life.

The many less than ethical loan officers don’t help matters any. I was selling a property a while back, and the buyer signed documents on Tuesday. If I had been doing the loan, the loan would have funded and the documents recorded the next day. Unfortunately, I wasn’t doing the loan. This guy’s loan officer had quoted him a loan he couldn’t qualify for, and ten days after he signed documents, I got a call saying he could only qualify if I knocked $20,000 off the purchase price. I kept the deposit and went looking for another buyer. This guy learned an expensive lesson. When you sign loan documents, require your loan officer to produce a copy of all outstanding loan conditions. Don’t sign until and unless you get it. This guy had signed, and was now locked in with a lender who couldn’t fund the loan on conditions he could meet. I had even warned his agent (I accepted the offer because I was willing to sell at that price, so I wanted the transaction to go through), but hadn’t been believed. So both of us ended up unhappy.

If they give you a copy of all outstanding loan conditions, you should know if you can meet them. If you can’t meet them or aren’t certain, don’t sign. Don’t hesitate to ask for explanations. Some of this stuff gets pretty technical, but a good explanation should be easily understandable in plain English. It may be complicated, but there just isn’t anything that can’t be explained in plain English. If the explanation you get is gobbledygook, you’ve probably been lied to all along.

Caveat Emptor

Removing Private Mortgage Insurance (PMI)

“How do I remove PMI?”

First off, a definition. Private Mortgage Insurance, often abbreviated PMI, is an insurance policy that the bank may make you buy in order to get the loan. It is a monthly surcharge based upon a percentage of your entire principal balance. You pay for it, but the bank is the beneficiary. It doesn’t make your mortgage payments if you can’t, it doesn’t keep your credit from being screwed up, and it doesn’t even keep you from getting a 1099 for income from loan forgiveness. Net benefit to you: it gets you the loan, and nothing more, ever again.

You can trivially avoid PMI by splitting your loan into two pieces, a first loan for 80% of the value and a second for any remainder. Yes, the rate on the second will be higher, but it will likely save you money starting immediately, not to mention that it’s likely to be deductible, whereas PMI is not, in general, deductible. I do not believe that with all the loans I’ve ever done, I’ve ever seen one where PMI was preferable to splitting the loan in two, from the client’s point of view.

“With all this against mortgage insurance, why does it still happen?” you ask. This is the critical question. Lenders usually pay yield spread to brokers or commission to their own loan officers based upon the amount of the first loan. Pay for a second is typically (not always) a small flat amount or zero. Your loan provider makes more money by doing it all as one loan. The loan provider wants to make more money and sticks you with the bill. Doesn’t that make your heart glow with gratitude? Didn’t think so.

There are two ways PMI is collected. One is as a separate charge, supplemental to your loan. The second is as an addition to the rate.

The separate charge is never deductible, but is easier to remove. Most states, including California, have laws requiring the bank to remove it when a Price Opinion or appraisal say that the Loan to Value Ratio goes below 78 percent (or something similar). Depending upon your state, you may or may not be required to pay for an appraisal, a cost of approximately $400, in order to have it removed. Some states require only a price opinion, others, like California, permit the bank to require an appraisal.

Just because the law says that that the bank can require an appraisal doesn’t mean that the bank will require an appraisal. If the loan to value is obviously there, they might just have someone drive by to make certain the house is still basically sound. On the other hand, if loan to value ratio is close to the line, the bank has a responsibility to its owners not to increase their exposure to loss unreasonably. So if you just wake up one morning and realize property values have doubled, the bank will likely waive the appraisal. If your market is gradually increasing in value and you’re watching it like a hawk and make your request the instant you think the value is there, be prepared to pay for the appraisal. Around here, with PMI on a 90 percent loan being a surcharge of about one and a quarter percent per year on a $500,000 loan, you pay for your appraisal by not having PMI in one month – if you’re right. If you’re wrong and the appraisal comes in lower, you’re just out the money.

Suppose, instead that instead of choosing the surcharge option, you choose to have PMI built into the rate. So instead of a 6.25 percent loan rate, you have a 7.00 percent loan rate. Advantage: it’s usually deductible, because it’s actual interest on a home loan. Disadvantage: You have to refinance (or sell!) to get out of PMI, because the pricing is built into the loan itself as part of the contract you signed. It is to be noted that by itself, this method is usually cheaper than the monthly surcharge for precisely this reason, because in order to get rid of it you have to pay to refinance, and if there’s a prepayment penalty in effect you’re likely going to pay that also, and so on and so forth.

So if your loan is more than eighty percent of the value of your property, you can expect to pay PMI, although it is easily avoidable by splitting the loan into an 80 percent first and a second for the remainder, and you’re likely much better off for doing so. If you’re already stuck with it, contact your lender for steps to remove it providing you think the value has increased enough. If you suspect the lender is not abiding by the law, contact your state’s Department of Real Estate, although lenders not abiding by the law in this case is both stupid and, in my experience, rare. It’s usually the consumer that doesn’t understand the law.

Caveat Emptor

Real Estate Purchase Negotiability

What’s negotiable on a purchase?

The short answer is everything.

There may be standards and traditions in your area, the same as there are in mine. That doesn’t mean they are not subject to amendment by specific negotiation. Once you get outside legal requirements, anything is subject to negotiation. As long as both (or all) parties concerned agree to it, that’s the way it’s going to be.

This is not to say that some things aren’t better left alone. For example, if I was buying a property and the seller didn’t want to pay for the policy of title insurance, as is traditional, I’d certainly think long and hard before continuing with the transaction. Furthermore, such behavior would certainly cause the price I’d be willing to pay to drop dramatically. If I’m helping clients, the same applies even more strongly. I’m going to tell them that this may mean the seller may not be able to deliver clear title.

This is also not to say that there may not be consequences as the result. For example, if I or my client is selling the property, and someone asks for a $10,000 credit towards closing costs, the lowest offer I’d accept would be at least $10,000 higher, probably $11,000, maybe more. Why? Because commissions and transaction costs are based upon the official sales price, not the sales price less that rebate to the buyer. The bottom line is that it costs at least $10,000 to rebate $10,000 thusly. A $400,000 offer that requires $10,000 in rebates isn’t a $400,000 offer. It’s a $390,000 offer at best.

In order for it to be a valid contract, the two parties have to agree in every particular. If there is not complete, total, 100 percent written agreement as to what is going to happen, there is no contract. Two parties haggling over whether one light bulb gets replaced do not have a valid contract any more than two parties haggling over whether the price will be $200,000 or $500,000.

Nonetheless, except for those very few things mandated in law, it’s all negotiable. Specific negotiation can change anything that’s not legally mandated, and most things with defaults specified in law. If you’ve got a gold bathroom faucet that you want to keep, a normal sales contract says that it stays by implication (it’s a furnishing attached to the property and required for the property to function normally). But you can change this by specifying that you have the right to remove it in the contract. Now if they buyer is only buying the home because of that gold faucet, they can walk away or counter offer that it stays. Let’s say you eventually agree that it will be replaced by another gold faucet. That’s specific negotiation. The replacement will be required to be installed, equal in functionality and free of defects – unless you change this by more specific negotiation.

I’ve seen negotiation for personal property to remain, furnishings to leave, the disposition of existing tenants, allowing leasebacks to the prior owners, and just about everything else under the sun. If there’s something about the standard contract you don’t like, or something specific to this situation or this property, specific negotiation is how you deal with the issue. Furthermore, even if you don’t want to change anything, the other side might. Indeed, probably more properties have further negotiations due to problems or issues raised by inspections than don’t. Something is revealed to be not quite right, and the seller either has to make it right or negotiate with the buyer for acceptance in the current state.

This is not to say that as long as the transaction records the seller is golden, by the way. If the buyer can show reasonable evidence that the seller knew of the issue but failed to disclose it, that’s a bone for the lawyers to fight over when it’s discovered. Some sellers fight a losing battle over issues like this for years – and it ends up costing them far more money in the longer term. The buyer finds out something you should have told them after the transaction, that’s a bad situation for a seller to be in. Better to disclose right away and be done with it. When the seller can prove the buyer knew the full extent of the issue and bought anyway, that’s much better protection.

So make sure that if there’s some issue you want resolved, the purchase contract resolves it completely and unambiguously. That contract is how the transaction is going to happen. If it’s not there, you’re at the mercy of the other party. They might see it your way. Then again, they might not.

Caveat Emptor

Probate Without Money

legal information on going through probate without money


That was a search hit I got.

The problem with this question is that you can’t go through probate without money. The deceased’s creditors want cash. The probate court wants cash. Attorneys and anybody else your executor has to hire want cash. Federal Estate tax may be on the way out, but while it’s still here, that final tax form and the cash are due nine months after death. State estate tax is still here in most states, nor is it likely to go away, and the state wants cash, not promissory notes.

Your estate is going to have to get this money from somewhere, and I’ll enumerate the classical alternatives, assuming that the point is not moot. If you die owing more than you have, settling your estate becomes a matter of purely academic interest, because your heirs aren’t getting anything substantial.

Most obvious is to pay for it with money on hand, already in the estate. If you could afford this, you wouldn’t have been running that search.

Also obvious is to have the executor (or other heir) loan the money out of their own pocket. This sometimes happens in the case of someone who’s inheriting a house or other major assets. Sometimes executors take out short term loans for this purpose, also. Be careful – one thing most state laws require is that when you pay a debt for an estate, you must get written proof that you paid it out of your own funds for the settlement of the debts of the estate. On the other hand, if you could do this you probably wouldn’t be running this search.

The next option is sale of assets to pay the debts, taxes, and anything else. This happens disturbingly often, mostly as a result of people who persist in believing that they’re going to live forever. The notable drawbacks of this are two. The minor one is that maybe your heirs didn’t want to sell, and the major one is that they’re not likely to get anything like full price in such a situation. When you have to sell, the ones with the cash drive fire sale-like bargains. Also, the executor has to have the court approve this, which costs money in and of itself.

The next option is to do nothing. If this is what your heirs opt for, the vast majority of the time the court will order any assets there may be sold in order to pay the existing creditors and new assessments caused by your death. Your heirs are likely to get even less money here than the previous paragraph, and the court itself certainly won’t cost any less.

The final option, and likely the best one, is to do what folks who plan ahead do, and have a policy of life insurance in effect. This is one of the reasons why Variable Life, and particularly Variable Universal Life Insurance, beats term life insurance like a red-headed stepchild when you consider the lifelong implications. The proceeds are all leveraged, tax free money, coming to pay your estate’s bills as soon as your executor sends the insurance company your notice of death. Unfortunately, at the time your heirs are running that search, it’s too late for this option. Like most really wonderful financial windfalls, you’ve got to plan ahead to make this work for your heirs.

Caveat Emptor

Mortgage Closing Costs: What is Real and What is Junk?

The easy, general rule is that legitimate expenses all have easily understood explanations in plain English, they are all for specific services, and if they are performed by third parties, there are associated invoices or receipts that you can see.

Let’s haul out the Mortgage Loan Disclosure Statement (California) or Good Faith Estimate (elsewhere), and go right down them line by line. Now, to be certain, it’s the HUD 1 form that’s really definitive, but if it’s not on the earlier form it shouldn’t be on the HUD 1.

Origination is not a junk fee. It can be excessive, but it is a real fee to pay a real service. Relating to this is Yield Spread on the HUD 1, which is what the lender will pay the broker for a loan on given terms. Origination plus yield spread plus line 808 (Mortgage Broker Commission) is what the loan provider makes if they are a broker. If they’re a lender, they make a lot more, and they can hide it more easily. Yield Spread and Origination and Broker’s Commission are disclosed on the HUD 1, while the price on the secondary market is not disclosed anywhere, and if you’re talking to a direct lender, they don’t have to disclose Origination or Yield Spread because there (usually) isn’t any; they are paid directly off the premium the loan sells for in the secondary market. This is why I keep telling people to shop for loans based upon the terms to you. If you evaluate it on the basis of loan provider’s compensation, a broker who has to disclose compensation of $4000 is going to look like a worse bargain that the direct lender who does not apparently make anything but turns around and sells your loan for a $25,000 premium. In this example, the broker’s loan is likely to be about a point and a half to two points cheaper to you, but if you evaluate it on the basis of who has to tell you how much they make, you lose.

Loan Discount Fee is the fee you pay in order to get an interest rate lower than you would otherwise be offered. It is not junk, but you probably don’t want to pay it, as most folks never recover the money they pay to get the lower rate via the lower payments and interest rate charges. I never pay discount points for anything except a 30 year fixed rate loan that I’m going to keep at least ten years. However, without this, your rate would be higher.

Appraisal Fee is not junk. There is an appraiser who needs to get paid for doing the appraisal. Many times this gets marked PFC on the MLDS/GFE, to make it look like a given loan provider is cheaper than they are. Make no mistake, there’s going to be a figure in the range of $400 associated with it eventually, but because it’s performed by a third party, the loan provider can (and often does) pretend it doesn’t exist as part of the charges until you have to pay it.

Credit Report is not junk. It’s not free to run credit, you know.

Lender’s Inspection Fee is usually (not always) junk. You’re paying the appraiser. If you’re smart, you’re paying a building inspector before you buy, and the lender usually makes you do it even if you don’t want to. Every once in a while, there’s a home with a documented pest or structural problem that the owner wants to refinance, and that’s where this comes in as non-junk.

Mortgage Broker Commission/Fee: Is all a part of how the broker gets paid. Around here it’s origination and yield spread, but this could be part of what a broker gets paid. Origination plus Yield Spread plus this line is the total of what they get paid. If these are larger at closing than when you signed up, that’s par for the course most places, unless they guaranteed their fees up front in writing. I do it. I know one other company that does it. Those who are members of Upfront Mortgage Brokers guarantee the total of the items that are their fees, but not the rest of the form. For anyone else, they can and most will change the numbers on these forms within very broad limits (and to illustrate with an example someone recently brought into my office, the difference between one quarter of a point and three points on a $450,000 loan is over $12,000).

Tax Service Fee is not junk, unfortunately.

Processing fee is not junk but it may be negotiable. When it’s imposed by the lender, it’s not. When it’s imposed by the broker, it’s to pay the loan processor, which may be negotiated sometimes. It is a real fee, however.

Underwriting fee is real. Lenders charge it to cover paying the underwriters.

Wire Transfer Fee is real, because it costs money to wire money. If you don’t need it, don’t get it.

Prepaid Interest (line 901) is definitely not junk. This is interest, exactly the same as you’re going to pay every month of your loan.

Mortgage Insurance Premium is not junk but is avoidable.

Hazard Insurance premiums are not junk, either. This money is to put a policy of homeowner’s insurance (or renew an existing policy) on the property.

County property taxes are not junk, either. (Rats.) If you buy during certain periods of the year (e.g. April through June in California), you’ll need to reimburse your seller for property taxes they already paid.

VA Funding fee is charged by the VA on VA loans only. Not junk, but if it’s not VA, it doesn’t have this. As I remember, if you’re 10% or more disabled this can get waived.

Reserves deposited with lender are not junk, either. They will be used to pay your fees as they become due.

Title charges: Settlement or Closing Escrow Fee is a real charge to pay the escrow company. Like Appraisal fee, this is often marked PFC, but something like $500 plus $1 per thousand dollars is common.

Document Preparation Fee is mostly real, and actually the lenders do most of it these days. When the title or escrow company need to do it, they will charge fairly steep rates (I’ve seen $200 for a single sheet document), but you are kind of a captive audience unless you discuss it beforehand.

Notary Fee is to pay the Notary. It’s real. It often falls into the PFC trap, previously discussed for Appraisals and Escrow, but you really do need this stuff notarized. Sometimes you can save some money by finding a less expensive notary, but this can bring up other issues, like getting everyone to the same place at the same time.

Title Insurance is real. If it’s a purchase, there will actually be two policies of title insurance purchased, one for the new owner and one for the lender. This insures against unknown defects in the title of your property, and yes, title claims happen every day. Lenders won’t lend without one. Title insurance is another one of those third party fees that gets marked PFC so that less scrupulous loan officers can appear to be less expensive than their competition.

I’m going to mention subescrow fees here, even though they aren’t preset onto the form, and are not only junk but also avoidable if your agent did their job. The title company charges them because they are usually asked to do work that is, properly speaking, the realm of the escrow company. But if you choose a title company and escrow firm with common ownership, they will likely be waived.

Government Recording and Transfer Charges are not junk. They are charged by the county, and they are not avoidable, nor should you want to. Recording fees and tax stamps (if applicable) are just part of the cost of doing business. Beware of one provider pretending it doesn’t exist while another honestly discloses it.

Additional Settlement Charges. Pest Inspection is the only one on the form, and it is not junk. You want a pest inspection.

Now, you’ll notice that of the permanently etched items on the form, there’s not a lot of junk, but everybody keeps talking about high junk fees. What are these, and where are they?

Well, some of the things that people talk about as junk fees aren’t junk fees. These are fees like Appraisal fee, escrow, credit report, notary, etcetera. These are, incidentally, half or more of the closing costs for most loans. They may have been hidden from you on the initial form, but they’re not junk. They are essential parts of the process, and if you don’t see explicit dollar values associated with them, somebody is trying to lie about their fees by not telling you about all of them.

Nonetheless things that really are junk fees are a real problem, but the reason they’re not among those listed on the form is that the items listed on the form are mostly real. It’s the extra stuff that gets written into the extra lines that you’ve got to watch out for. It is fine and legitimate for a loan officer to write “Total of lenders fees $995” or whatever it is. On the HUD 1, these should be broken out into separate charges, but this way the loan officer only has to remember one number. As long as they add up correctly, no harm and no foul, and it doesn’t make any difference to you whether it’s underwriting or spa visits for the CEO, it’s part of doing business with that lender. What is probably not legitimate is to start writing all kinds of other fees. Miscellaneous fees. Packaging fees. Marketing fees. Legitimate Messenger fees should be something you know about because you need them at the time they happen. But the majority of messenger fees are the title/escrow company trying to get you to pay for daily courier runs that happen anyway. If you choose the right title/escrow combination, you should be able to avoid them in most cases.

It is also a common misconception that all junk fees are lenders junk fees. I don’t impose junk fees on my clients, but even coming into situations other loan officers have left behind, title companies and escrow companies, in general, appear to impose about an equal amount in junk fees with most loan providers.

Caveat Emptor

Looking Beyond The Bubble: What’s Next For Highly Appreciated Markets

(This was originally published in March 2006)

Doing my workout this morning I asked myself what’s next for the real estate market.

The state of the market here locally is that prices are and have been in decline. There is no longer any mystery about whether they will decline, only how much and for how long. One of these days, the Association of Realtors and those pollyannas who preach that you always make money on real estate will admit it.

What comes next? Obviously increased defaults, as short term loans come up for adjustment and people are unable to make the payments, as I’ve said any number of times, and unable to refinance because they owe more than the property is worth. Short sales also increase, as people try to just get out. More Notices of Default means more trustee sales, as well. If the property sells at auction, somebody probably got a bargain. If it doesn’t, the lienholder owns it (subject to senior liens) and that may be even better.

All of these are happening already. Daily foreclosure lists have more than doubled locally from a year ago. Trustee Sales are up, and so are REO’s (Real Estate Owned by those who were originally lienholders). Check, check, and check. All about as surprising as gravity. What I’m trying for here is at least one prediction that has not already come true.

Rates have been rising of late, but there is a limit as to how far they are likely to go, if only because Bernanke and company are very shortly going to have irrefutable evidence of all of the above stuff nationwide. A nationwide economy has a lot of something analogous to inertia. Takes a while to move things in the direction you want them to go. More time, and more effort, than most folks, particularly bankers running our money supply, are likely to realize and sit still for without further pushing, which they have done a bit too much of, in my opinion, by about one full percent on the overnight funds rate. Once things get going in the direction that the Fed has been pushing them for the last two years, they are similarly going to have a lot of momentum built up. Bond investors are going to dry up at attractive rates, and Sarbanes Oxley or no, you’re going to see private companies going public again because it’s the only way they can raise capital at attractive prices, and the flow of public companies going private is likely to mostly stop. (Hard to think of Sarbanes-Oxley as a brake upon economic activity, but in the short term, that’s what it’s likely to prove. CEOs and CFOs are not used to the idea of personal responsibility for corporate activity, and while the cost of private capital is even vaguely competitive with public, private will be their choice. It’s going to take a while for countervailing forces to come into play).

When bond rates rise, so do mortgage rates. When mortgage rates rise, and people can only afford the same payments, prices fall, further exacerbating the price fall that’s already happening. Lenders are already between a rock and a hard place to a certain extent, but it’s going to get worse. Keep in mind also that aggregated mortgage bonds are an attractive investment because of their historical level of security, and even though that’s going to be compromised to a certain extent, rates are going to rise if for no other reason than that is what the money costs. I expect rates on A paper thirty year fixed rate home loans to stabilize somewhere around seven percent, at least for a while. Shorter term fixed rates will be cheaper once the yield curve normalizes. Given the prices things have sold at in highly appreciated markets, this is likely to permanently popularize medium term hybrid ARMs, as saving one percent in interest on $500,000 is well worth the cost of refinancing every few years, and people are refinancing every two years on average anyway. Two and three years fixed is really too short for most folks, but five is probably more than fine.

Here’s another newsflash. I’m not going out very far on a limb here, but a three bedroom single family residence in a reasonable neighborhood here locally is likely never to drop back into the sub $300,000 range again. I’d bet money it’s not going below $250,000. Yes, the market got badly overheated – but not that badly overheated. Furthermore, if past Southern California history is any guide, we’ll lose about 30 percent of peak value, and then start going back up again. No fun if you’re a semi-skilled worker trying to raise a family, but the most likely scenario nonetheless.

Now what’s going to happen to the people who have bought highly appreciated properties who can actually make the payments? Well, if prices fall, they can’t sell for what they bought for until they recover. They don’t want to do that. But they don’t want to be in a negative cash flow situation, where the rent they get from the property doesn’t cover their expenses, if they can avoid it. They definitely don’t want to be in that situation to a larger extent than they can avoid. A $500,000 purchase with a 6 percent first and 10 percent second yields principle and interest payments of $3276, plus property taxes of $520 and insurance costs of $120 per month, means that the owner is out $3916 per month without any repairs or management expense. A monthly rental of $1900 isn’t going to cover that. A monthly rental of $2500 isn’t going to cover that. This is going to put more upwards pressure on rental rates. $2500 is the entire gross monthly income of someone making $14.75 per hour, by the way. But the people feeding the mortgage alligator don’t really care, all they know is that they have to pay the bank so much per month, and set aside so much for the state and the insurance company. This is also going to put upwards pressure on wages, and therefore prices. Inflation kicks into higher gear, which puts more upwards pressure on interest rates. Vicious cycle.

And this phenomenon is going to be part of what eventually helps prices make a comeback. If somebody is feeding the landlord $3000 per month, they’re going to be more amenable to paying it to the bank instead. Especially since they get tax breaks, and most especially because when you buy the property you intend to live in, you take your monthly cost of housing out of the column that says “what the market will bear,” which is subject to changes – and usually increases – and put it into the column that says “this is under my control.” If you buy with a sustainable loan, your monthly payment is going to be under your control forever.

(It is to be noted that even if that $500,000 property loses $150,000 in value the day after you buy it, historical 7 percent per year increases will have you back in the black in about five years, and ahead of a market return on the rent you would have saved in about ten. Thirty years down the line, your net benefit from the purchase as opposed to invest the extra money over the cost of renting and investing the excess in the stock market, will be somewhere between $800,000 to $1,000,000. An almost irrefutable argument in favor of buying a home, if you plan to live there a while. Yeah, it’s no fun being upside down while it happens. But the eventual payoff isn’t exactly chump change, even by the projected standards of thirty years from now.)

Caveat Emptor