Once again, I can say the Banks continue to rob homeowners blind with all the blather about “negative impact” of walking away.

Here is yet another article from first tuesday…

“Fair Issac Company (FICO) researchers have developed new analytics to predict a borrower’s likelihood of walking away from a mortgage – a strategic default – whether or not he is delinquent on his payments. The rise in strategic defaults over the past year is of concern to mortgage lenders. Thus, FICO consulted with them (not underwater homeowners) to develop the analytics with the purpose of preventing strategic defaults and their costly impact on lenders, investors, homeowners and the housing market.

35% of mortgage defaults in September 2010 were strategic, an increase from the 26% more than a year earlier in March 2009 according to a University of Chicago Booth School of Business study. 22.5% of residential mortgage defaults nationwide were strategic in the third quarter of 2010. This number increased to 23.1% in the fourth quarter of the same year.

In negative-equity-laden California, strategic defaults are also widespread (more so than the nation as a whole since California is a nonrecourse state and lenders cannot viably threaten to sue for their losses). There were 45,380 strategic defaults in 2009 – 80 times the number in 2005.

FICO researchers found borrowers who walked away from their mortgages had common traits including:

higher FICO scores;
better credit management (understood financial statements);
less retail balance (did not need credit to buy);
shorter length of residence on the property and thus greater likelihood of a negative equity; and more open credit in the past six months with which to purchase items.

The study concluded the degree of difference in the loan-to-value (LTV) ratio between the current market price for a home and the mortgage owed on the home (home price depreciation) is not as strong of an indicator for predicting a homeowner’s ability or willingness to strategically default. However, the study did conclude a borrower with a stronger history of good money management and a higher credit score tended to strategically default at a higher rate than other borrowers.

FICO and mortgage servicers are alarmed of the increasing frequency of strategic defaulters and warn homeowners of the consequences of walking away from their mortgage payments. Not only will homeowners suffer a 150+ point hit to their credit scores, but they may also face higher rates, tighter terms for other types of credit and a bump in insurance premiums. FICO goes on to implicitly threaten the homeowner who reverts to renting after walking away by saying landlords will be more unwilling to accept them as a tenant when they see a strategic default on the tenant’s credit record.

This is a fabrication of the worst type. FICO and the lenders they consulted with (who incidentally are the ones who pay FICO for the use of their algorithms) have an economic interest in keeping California’s population of negative equity homeowners imprisoned in their underwater homes. The truth is, any landlord fully understands that a strategic defaulter is going to make a very fine, long-term tenant if they have a job and otherwise pay their bills – and most all do since they made the sound decision to strategically default.

Walking away is for smart people, and lenders know it.

Several studies over the past years have already observed strategic defaulters tend to hail from a more financially savvy crop of people. The recent FICO study repeats this conclusion of which many of us are familiar.

What it also advertises — to the endorsement of lenders — are the detrimental effects of walking away from a mortgage. Agents and brokers must construct the bigger picture, especially in California where underwater homeowners collectively hold over 2,000,000 negative equity mortgages.

California negative equity homeowners have the short end of the stick with black-hole assets on their hands, so the question they should be answering is not whether a strategic default would be a in the best interest of their lenders. Rather, they should be considering whether a strategic default would be a prudent choice for their personal financial situation.

It’s true, homeowners will see a hit to their credit scores from a strategic default — and of course FICO will highlight this since the media often overstates this figure — but homeowners must not be inveigled into staying in negative equity properties by the vague economic threat of a lower FICO score. It’s not about the FICO score alone, but the costs versus benefits analysis of the homeowner’s individual situation.

Either a homeowner can continue to siphon his money into a dead-end loan, or he can save that money and invest it into a much more lively investment — improving his family’s standard of living.

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians.

A strategic default when the LTV is above 125% is not a dishonest financial bailout – it is prudent business decision. It may temporarily hurt the pride and credit scores of California homeowners, but these things are soon remedied.

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians. If they aren’t going to get any cramdowns in bankruptcy courts, they need to exercise their legal right to strategically default — that “put option” in every trust deed. Besides, it’s what all the smart people are doing anyway, right?

Copyright © 2011 by first tuesday Realty Publications, Inc. Readers are encouraged to reprint or distribute this information with credit given to the first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.”

As you know, I have been preaching that “Strategic Defaults” are – often – a good thing for a borrower.

first tuesday agrees.
“If mortgage lenders will not lend homeowners a hand, then homeowners can force lenders’ hands by exercising their right to default, made imperative by a loan-to-value ratio (LTV) above 125%. Waiting for a modification that isn’t available just isn’t the best bet for a homeowner or for California’s economy. And don’t listen to the preaching on the effect on how a strategic default is better or worse for Fair Isaac Corporation (FICO) credit scores – a short sale delivers the same amount of adverse credit scoring as does a foreclosure. ”

Couldn’t have said it better myself.

Calling a Bank about a loan is THE most frustrating experience … even more so than sending in a loan mod request package — for the 15th time.

From a legal perspective, it gets worse, especially when “Joy” or “Nancy” tells you one thing (like, “You’re approved for our internal Loan Modification Program…”) but refuses to put it in writing. Or the letter you get says something different than the Bank’s representative said on the phone.

What do you do to protect yourself?

Try this:

When someone from the Bank calls, tell them: “I am recording this call for LEGAL purposes. Please state your full name and your birthdate – for identification purposes.”

How much you wanna bet the call will end – right there?

It will. And that’s OK.

If the Bank representative won’t agree to be recorded – END THE CALL. Nothing that is said in it will will matter anyway. The Bank will change its position. And you won’t be able to prove a thing. (And having the Bank’s representative refuse to be recorded, can work to your advantage later in court…)

Oh, and when Joy or Nancy balks, remind her that the Bank is recording the call already. For “training purposes.”

 Last month I wrote about the new law requiring the installation of carbon monoxide (CO) detectors and its impact on the TDS as of 1/1/11.  This month I want to clarify what the new law does and does not require.  To begin I will repeat the opening paragraph of last month’s article.

Effective July 1, 2011 all single family residences in the State of California must have at least one CO detector installed as required by California Health and Safety Code Section 17926, et seq. Multiple dwelling units have until January 1, 2013 but a prudent landlord would get the property in compliance as quickly as possible. The only exceptions are for dwellings that are not designed to burn fossil fuels and do not have an attached garage.

The law seems relatively straight forward and might be more so if it were not inconsistent with other laws we have learned to comply with over the years.  For many years we have dealt with smoke detectors and water heaters and the certifications sellers must make to buyers.  In those two instances the seller must certify the property will be in compliance at close of escrow.

This new law is different.  It only requires that the seller disclose if the property has a CO detector installed.  Although the law requires the detectors be installed in all SFR by 7/1/11 there is no requirement that the property be in compliance at close of escrow any more than there is a requirement that properties be up to other code requirements at close of escrow. If the seller does not state there is a CO detector installed and the buyer proceeds to close escrow no violation has occurred based upon the sale transaction.  The only the violation of the law that at least one be installed in the property has now become the buyer’s violation.

Does that mean the seller can ignore the law?  Not necessarily.  We are hearing that lenders have been requiring appraisers to confirm that the CO detector is installed as an appraisal condition.  If one is not installed at the time of the initial appraisal there may well be an additional fee for the appraiser to come back and confirm that the detector has been installed before the loan can fund.  It would be in the buyer’s best interest to insure the CO detector is present before the appraiser sees the property.

If you are taking a new listing on an SFR it would be best practice to suggest to the seller that they get the CO detector installed before the home is listed if the seller has not already complied with the law. If you are the selling broker it would be best practice to place a provision in the purchase agreement that an operable CO detector will be installed within ten days of acceptance, or some other period, so it will be present at the time of the appraisal,  .  It may save arguments and/or delays later on over a less than $30 item.

Holmes v. Summer. The Listing Agent’s doom.

In October of 2010 the California Court of Appeal came out with a ruling that says the Listing Agent is liable to a non-client buyer (read that carefully!) For failure to disclose material facts effecting value or desirability of a residential property.

Now, how the hell will a Listing Agent know what a non-client Buyer thinks is “material” or will effect value or desirability? Will you have the Buyer’s Agent set up a meeting so you can take the Buyer out to dinner and discuss it?

I didn’t think so.

But, the Listing Agent still has liability. (WHAT was the Court thinking?!) So, what to do?

Use the BMI. Treat it as your BFF.

Don’t know what a BFF is? Ask your teenager.

Don’t know what a BMI is? Look at WinForms. It’s been a C.A.R. Form for, what, 10 years.
It’s a “Buyer’s Material Issues” form.

Require the Buyer to fill it out at the time they remove contingencies. That way, if he Buyer doesn’t say something, I can use it in defending the Agents. After all, how are you supposed to know, if the Buyer didn’t tell you?

Sellers (and listing brokers?) of residential real estate seem stuck in the ‘olden days’ of value. They are stuck with the old price. It’s the “sticky price” problem. They seem to ignore a reality: Value is based on CASH PRICING.

Yup. Those REO speculator investor buyers are setting the new market value of EVERYTHING.

And why not?

Isn’t “value” what a willing buyer will pay a willing seller – absent outside influences? And isn’t financing an outside influence? We only need to look at what the ability to get easy money (i.e. stated income loans with teaser initial rates and optional payment plans) did to values in the last 10 years. Now that governmental influence in lending money has reversed itself – making it feel nearly impossible to get a loan – even for a well qualified, fully documented loan applicant – prices are still ‘in the gutter.’ How come?

Because that’s where they belong.

Take a look at any chart that goes back, say 30 years. You can see the line of price increase is a relatively shallow one. If you take out the last 10 – 15 years, the place where today’s prices hits is just about in line with the historical norm. This ‘market adjustment’ has ben huge – no doubt about it. But is adjusted to where it ought to have been in the first place – absent government interference.

So, cash is king. It always has been. And a cash price value is THE value. That a borrower might be able to borrow dollars to buy at the cash price just gives that borrower leverage. What a nice thing. If you can get it.

Senator Dodd and Congressman Frank, the people who were key players in allowing the financial collapse, have brought us legislation to “fix the problem”.

 The Dodd-Frank Act is 2,314 pages of disjointed and wide spread enabling legislation that will impact all areas of the financial structure.  To see the briefest summary I have been able to locate, 16 pages, go to http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf.

Among other things the Act creates a new federal agency, the Consumer Financial Protection Bureau (CPF), funded by the Federal Reserve system.  The CPF, which comes into existence on July 21, 2011 unless delayed for up to one year, will have broad sweeping enforcement powers in all areas of consumer finance including home loans, car loans, student loans, payday loans, credit cards, all mortgage related businesses and credit reports. It will also oversee banks and credit unions with assets in excess of $10 billion.  And the CFP has the authority to write its own regulations and then enforce them.

It is the most far reaching intrusion of government into the financial lives of its citizens in the history of the world. Many of the regulations they will be charged with enforcing have not even been written or finalized yet so the true scope of the CPF is not known, and it comes into existence in a few days.

In the area of real estate CPF will take over the power of enforcing RESPA from HUD. To bring about this transfer HUD has withdrawn all previously issued informal opinion letters. If your business is pursuing a business model in reliance on an informal opinion letter from HUD that it does not violate their rules you will need to be looking at the rules from the new Bureau to see if you are still ok.

CPF will take over enforcement of MARS from the FTC.  The FTC had been working with NAR to fine tune the regulation to remove real estate brokers from most of the regulatory requirements.  In early May the FTC advised NAR that they will not be revising the rule as promised, presumably because the CPF will now be responsible for the rule.

Part of the Act creates the Qualified Residential Mortgage (QRM) standards which generally will require that all buyers put 20% or more down for a conventional loan and meet fairly conservative qualifying ratios. And the lender will need to insure that the borrower has the ability to repay the loan.  Will non-QRM loans be available?  Potentially.  But if the borrower gets a non-QRM loan and then runs into trouble making the payments the borrower will have the ability to prevent foreclosure at any time during the life of the loan by claiming that the lender had no reasonable belief that the borrower could repay the loan at the time it was made.  Do you think you will see many of those loans?

What risk does Dodd-Frank bring to a real estate professional?  Any violation of CFP regulations can result in a fine of $5,000 per day.  A reckless violation can result in a fine of $25,000 per day.  A knowing or willful violation can result in a flat fee fine of $1 million.

So why have you not heard more about this in the industry or in the media? As I mentioned earlier, the regulations to implement much of this are still under development. No one is sure yet what the rules will be in order to advise you accordingly. In the future you will need to be diligent in watching for any news about Dodd-Frank and determining how it may impact you personally or professionally.

2 to 1, agents to brokers. That’s the current ratio. “Back to normal,” says first tuesday. You betcha. The 5 to 1 ratio – from the “good old days” (?) when you could get a real estate license if you were breathing, are long LONG gone. Thank the gods.

“When you compare the number of newly-licensed real estate brokers to the number of newly-licensed agents, the data show that for every two newly-licensed sales agents there will be approximately one newly-licensed broker. Newly licensed brokers come, in approximately equal numbers, from the ranks of current agents and from unlicensed professionals. Approximately 25 percent of newly-licensed agents will become brokers, and they are most likely to do so between 12 and 18 months after getting their agent’s license. Those who are not initially sales agents may also qualify to become brokers by virtue of their education or profession.

The current ratio of two agents for each broker is a recent shift back to historic norms, from the abnormally high number of agents in the boom years. Through most of the 2000s, until the real estate market crash in October 2007, a ratio of 5 agents to every 1 broker was the temporary expectation. This unsustainably high ratio was fueled by high home sales, high home prices, and rampant speculation. In the absence of these distorting factors, the real estate profession now reflects a more natural balance between brokers and their sales agents.

From: first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.

In a recent ‘first tuesday‘ article about the “American Dream” ft wrote: “California’s response to the relationship between homeownership and the health of a community differed from national results, which is not surprising since the state has been hit much worse by the housing crisis than the rest of the country. Seventy-seven percent of Californians report their homes have decreased in value (fact: all have decreased), compared to the 41% nationwide, and 40% say their homes are underwater, compared to the 18% nationwide.”

Only 77% think it true. I wonder where the 23% live that have not had a housing value decrease?

That thinking (the 23% that is) is more prevalent than you might guess. There are still sellers out there that have an over-inflated sense of their house’s value.

If you come across one of them – send that seller to a real estate agent down the street. Don’t waste your time. And since you only have so much time on this planet, make sure you spend it on clients that are ready to sell – and ready to buy. (The flip side of the unrealistic seller, is the buyer looking to pick up the bargain of the century – rather than just the bargain of the decade. Send that buyer down the street too.)

Desperate Times, Lead People to Desperate Measures. Or so it seems. In the last few weeks, we’ve been contacted by three different brokerages who have been the subject of lawsuits against them because of – embezzlement. Embezzlement by agents working for the brokerages – taking client’s money! One case involved property management trust accounts, the other two arose from agents “borrowing” money from their clients for “real estate deals” the agent was going to invest in for the client.

The brokers knew nothing about it. In any of the cases.

With so much turmoil in the market, with so much revenue loss impacting so many agents – will we see more of this? I’d bet so.