The Exception to the Rule
Awhile back, Steve posted a rant (which I agree with, by the way) on the invariable problems associated with agents acting as both a mortgage broker and a Buyer representative in transactions, particularly stemming from the obvious conflict of interest. While our experience has been that these situations generally result in nightmare transactions, I feel compelled to give credit where credit is due (in what, to the delight of many, may be my shortest post on record).
This week we closed an escrow that had all the warning signs and potential for disaster. An agent brought an offer on one of our listings in which she was both representing the Buyer and handling the loan. The offer specified a 30-day escrow and 100% financing plus a substantial Seller credit for the Buyer’s closing costs (the Buyer had no cash). The agent was affiliated with a “Who Are They?” company. While they had no courier service, documents were easily shared via email and through our web-based transaction system. She answered her phone personally EVERY time I called, got me documents within 24-hours of my request EACH time and met ALL contractual timeframes. Negotiations were constructive, swift and fair, we had complete file a week and a half prior to scheduled closing (nearly unheard of), and escrow closed three days early. To this agent (you know who you are), kudos! There is an exception to every rule.
August 31st, 2006 at 10:45 am
You got lucky. But congrats, amyway. It gives me confidence in humanity.
September 1st, 2006 at 10:31 pm
without getting into details about the home, can we at least have the approx price range of the home and the loan information, ie. option ARM vs. interest only, and were there teaser rates involved, interest rate of the loan.
September 3rd, 2006 at 7:12 am
Jack - I can give you the price range: Mid-$500,000’s. I don’t have the loan details, though, since I did not represent the buyer and wasn’t privy to the details of the loan. I know what you are getting at, however.
September 3rd, 2006 at 8:24 am
Thank you Kris, despite having my thunder stolen, I shall continue. =)
If you have no money at all, not even enough to cover the closing cost, what are you doing buying a half a million dollar home??? of course the agent you worked with was diligent and eager to comply with all of your needs to get the home closed. there’s a huge pay off for this agent at the end. I heard of stories of agents calming the trembling hand of the would be buyer getting cold feet at signing time, reassuring that they can refi a few months down the line (except there’s a huge pre-payment panelty that the agent/broker neglicted to tell her.)
I was just at Carmel Valley’s Pacific Highlands Ranch, and I saw a guy haggling with the sales person trying to get a 2% teaser rate for a $1 million dollar home. Sir, is that 2% going to last even a year into the loan?
Some say exotic loans in SD reached 70% of all loans last year, 35% are negative amorization loans. Just as these loans come out of their teaser period, property values are already lower this year compared to last. meaning as these guys are hit with a significantly higher payment, they are even more underwater.
At the height of the market I asked at realtor at an open house: “gosh, who’s buying these houses?” The reply was: “you have no idea how many rich people are out there!” Well, my front desk clerk a single mom with 2 kids with a high school education just bought another house for $600,000 while trying to sell her 2 year new $400,000 home. Those are the rich folks that realtor was talking about!!! Now I see the light!!!
September 5th, 2006 at 7:09 am
If I didn’t know better, I would say that Fred is writing under an alias!
Yes, there are a lot of scary loans out there, and we are seeing a lot of people now scrambling to get out of them. I had a loan broker correctly comment recently that if you can only afford the teaser rate, an interest only payment, or a combination of the two, you can’t afford the home. But, alas, far too many people are myopic (and many times not properly counseled) when it comes time to sign the loan docs. You suspect it, and I agree, we are going to see some significant fallout from these risky choices over the next couple of years. Unfortunately, it makes my job infinitely more difficult when the seller is upside-down, but we are already having to deal with these situations, situations which were all but unheard of a mere year ago.
And now, for my social comment of the morning. There are two categories of buyers: Need and greed. Please understand that I am not using “greed” as a dirty word, but just a mindset that our “generation” tends to hold. My parent’s generation purchased homes, not with the intent of amassing wealth, but with the intent of providing shelter for their family. I say my parent’s “generation”, because we personally were renters. But their generation saved for retirement, and considered investments in terms of stocks, bonds, cd’s and savings accounts (remember those?). At least when I was growing up, I would have considered a 3200 square foot home palatial, excessive for a family of four even when allocating room for the mandatory dog and cat. Now, 3200 square feet is considered modest by many (unfortunately, including my children). Now, home-ownership is too often considered a wealth-building vehicle and a divine right regardless of income or work ethic. We consider our homes our savings and retirement accounts, and when it is time to buy the Hummer, we simply get that equity line of credit or second loan. Unfortunately, too many in “our generation” never learned to live within our means, and this translates into the way we view our real estate purchases - Buy with little down and with the expectation that we will soon be flipping. (And, don’t get me wrong, my business would be much more lucrative if everyone moved once a month). Then there is the “need” group, and these are the people I feel for. These are the people that want to purchase a home because they want and expect to live in it. They look forward to making a life there and to the pride that home ownership brings, and they don’t view the purchase as an alternative to the 401K. Among this group, the first-time or first-time-move-up buyers have my greatest sympathy. These, Jack, are likely the largest consumers of the risky loans (your $1 million buyer excluded). You and I know how long it takes to save a 20% down payment for a modest home in our market. For many, the teaser rates and zero-down programs are the only way into that home.
September 5th, 2006 at 1:36 pm
Another perspective check is needed , I think. Both Jack and Kris make good points, but it is easy to forget that in most of the country, with a few hot (or formerly hot) markets excluded, people still buy homes for the reasons our parents did (Kris’ parents excluded). Annual appreciation rates of 0-3% has been and continues to be the norm for the vast majority of these markets.
September 5th, 2006 at 1:43 pm
Yeah, Mr. Always-Have-to-Have-the-Last-Word. You are right. I simply speaketh from the perspective of my San Diego reality.
September 6th, 2006 at 7:35 am
Steve, true, in most areas of the country you also don’t have folks buying 27 homes at one time all at zero down, 100% financing. When guys are out there buying 4 homes, 10 homes, and 27 homes at a time all without any hard-cash contribution, that creates an artificial “demand” for housing that ate up a huge portion of the inventory over the last 3 years. As these guys start foreclosing, what might actually happen is a return of those inventories all at once, an artificial “oversupply.” But just as the artificial demand can drive the price up 20-30% per year, so can the artificial oversupply drop it down just as easily. When this is all over we’ll be back to the baseline.
September 8th, 2006 at 10:18 am
Jack: Before it’s all over, you may be right. We (San Diego) seems to be ahead of the “softening” curve. NoCal (San Jose, Palo Alto, San Francisco) seems to be holding up well, but Reno, Vegas and Phoenix may see more pronounced fallout. I was in Phoenix 2 years ago and personally witnessed the scenario you describe (one investor buying an entire phase from the builder). There were many more similar stories as I visited numerous new home projects there.
September 8th, 2006 at 4:10 pm
Guys,
I’ve been in the business since the purchase agreements were one page fill-in-the-blanks. The debate over neg-am or interest only loans always leaves me chuckling, because the arguments never really look at those loans from an historical perspective.
Let’s take the last ‘horrible’ market we’ve had, (Early 90’s - S & L crisis) and use San Diego as an example since they were the hardest hit city in the country. They not only had the S & L fallout to deal with, but lost 2-3 major employers simultaneously. A huge economic hit. What happened?
Rents fell 10-25%; vacancy rates shot up the same; prices fell way more than they appear to be now. And yet we didn’t hear about the huge scandal revolving around neg-ams and interest only loans. Why?
Because there wasn’t a problem with them.
I’m in the investment side of the industry. If a client used a finite amount of capital to purchase two small income properties, say duplexes, using neg-am loans, with 10% down, they usually had a small positive cash flow. (Remember, this is over a decade ago.) Compare that to the guy across the street who used the same capital amount and bought just one duplex with 20% down and a traditional fixed rate loan. His was a breakeven situation from day one. But when the stuff hit the fan, he was almost immediately into a negative cash flow situation.
The neg-ams don’t ‘recast’ (the ones I use) until the loan balance gets to 125% of the original loan amount. (Or, five years generally) I’ve been using them as a tool for my investors since Reagan was in office and not one has been foreclosed on, or been recast. Not one.
They certainly aren’t for everyone or more specifically for every region. An historical annual appreciation rate over at least the last quarter century should be no less than 3% or so to make use of this loan. To do otherwise would be as stupid as some of the previous comments imply. But in the right market with the right property and armed with solid professional analysis, neg-am loans aren’t from Satan, no matter what anyone wants us to believe. It just ain’t so.
One last observation. Ask yourself if you think my example would more readily have resulted in the foreclosure of the fixed rate investor or the neg-am guy. Who would you rather of been? The guy with payments producing pre-crisis cash flow, or just a breakeven? And how ’bout after all the numbers turned agains landlords? If you were a breakeven to start, you were supporting those units for the next couple years. However, the neg-am guy was able to hang in there until things returned to normal.
I get the idea sometimes that the media is winning.
September 8th, 2006 at 11:18 pm
Jeff, the problem isn’t with the professional investors, which are truly few and far between. The problem is these negative am loans are pitched to and used by lots of regular folks or wannabes. neg am loans made up of 35% of SD’s loans last year, you mean to tell me these were all professional investors? interest only loans were 70% of the loans, certainly you do not have professional investors purchasing 70% of the properties out there. the neg am isn’t used to get cash flow positive, it is used to stretch into an overpriced home that would otherwise be completely beyond reach. that, my friend, is a problem.
September 9th, 2006 at 8:05 am
Arguably one of our best comments to date, Jeff. You make excellent points, but so does Jack. It comes back to perspective. From a thoroughly informed, investment perspective, you absolutely right, but the “thoroughly informed” part is key. From Jack’s perspective of end user where the primary residence as investment mindset can get some in trouble during down cycles, the neg am argument begins to lose steam. For my part, I’ll continue to covet my 15-year fixed loan and the security I have in knowing I can make my payments, I will continue to pay off my debt, and I will be building equity along the way for that day I need to or choose to sell. By the way, I think this is the kind of media from whence your “media is winning comment” stems: Nightmare Mortgages.
September 9th, 2006 at 10:09 am
Although I agree naive home buyers shouldn’t willy-nilly jump into homes they couldn’t otherwise afford by way of a neg-am, I am still at times flummoxed by other’s behavior. Let’s review what has to happen in order for the nation to have a huge foreclosure problem with neg-am home loans.
I’ll be assuming loan terms that are used by my lenders.
First, the loan balance either has to be more than 125% of the original balance, or five full years have passed since origination. Let’s talk about the time. In every down cycle or outright recession in which I’ve been licensed, beginning with the ‘69 recession, not one has lasted anywhere near five years. I guess the closest would be the Carter recession which began in ‘80 and ended around the summer/fall of ‘83. And back then there was no precipitous value crash as in the early ’90’s. Let’s revisit that period.
The first neg-am loans weren’t issued until about late ‘91 or so. If you bought a home in Summer of ‘92 using 20% down with a neg-am and got nervous around Spring of ‘97 because it’d been four years, what could you have done? Refinanced in about three weeks, that’s what. Your home’s value wouldn’t have gone down because of when you bought it. In fact, you would’ve gotten a reduced price by then. By ‘97 we’d already seen a full many months of appreciation since historically it has been shown we started to emerge in the last quarter of ‘95. Your home would have appreciated maybe a total of 10% by ‘97. A refinance would have been relatively simple, and your payments would have no doubt been significantly reduced.
By that example I don’t mean to imply most buyers should by their homes using neg-ams because they couldn’t otherwise afford it. However, ask yourselves this question: If my 22 year old daughter made a deal tomorrow on an El Cajon condo for $300K in a development that had comps this year of $350K, would you advise her to get a 30 year fixed rate with payments of over $1,600 or a neg-am with payments just under $700? Is SD going to tank forever? Is our market going to come back say, in the next 2-3 years? Or is it gone forever, never to appreciate again?
If over the next 60 months SD at some point recovers and begins again to slowly appreciate, she’ll be fine. I’d wager $100 to your $10 that over the next five years that condo will be worth at least the $350K it was six months before she bought it. She could refi at that point and probably lower her payments. If you think that’s an unrealistic scenario then you also believe SD has entered a prolonged recession-like era which will result in our real estate market crashing like a medicine ball in the pool. And if that’s the case we’re all going to be selling shoes at Nordstrom’s anyway.
I don’t believe that.
For the doomsday neg-am scenario to work at a huge level nationwide too many things have to converge for the ‘perfect storm’. Homeowners have to prove they’re as stupid as the media implies; this market correction has to be sustained longer than anything we’ve seen since the depression; and the last 60 years showing a nationwide historic annual appreciation of roughly 3% has to disappear. Not likely.
For those who used neg-am loans in East Toilet Seat Mississippi, they have a big problem.
September 9th, 2006 at 11:28 am
Jeff, I am off to get some work done today, and will read through your “brief” comment later.
In the meantime, I wanted to give you a plug. Along the lines of what we have drifted off to here, I found your blog podcast on negative am, and thought that readers (Jack among them) would find it of interest. Since you weren’t going to put in your own plug, I thought I would help out and do it for you.
September 10th, 2006 at 7:49 am
Jeff, the historic perspective is badly needed here and I’m glad you moved the convo to this regard. As a mortgage, investment professional, you can help us understand exactly where we stand. So here’s the question: back in 1990, how many folks had neg am loans? how many folks had zero down loans or 80/20 piggybacks? how many had 2/1, 3/1, or 5/1 ARMs? was the neg am also used by 35% of San Diegans that newly purchased or refi’d? did ARM account for even over 50% of all loans? If that was the case in 1990, then we are allowed to compare things apple to apple.
I agree with you real estate rides in cycles. five years up, and five years down, almost without fail. the prior boom ended in 1990, and bottomed out in 1995. rose up again to 2001, but instead of dropping in 2001, it just kept going up. So this time it is very different. Is this the new economics? Is this a paradigm shift? Did suddenly everybody want to move to SD?
No, suddenly in 2001 loose lending became in vogue, interest rate got slashed, to buy a home became almost patriotic. Jeff, you said you laughed at thse mass media stories, but seriously, back in the days these neg am’s were used almost exclusively by professional investors such as yourself and your clients, now they are used by almost everybody, doesn’t that difference alone make the worry somewhat justified?
Back to the example of your daughter buying a condo now using neg am. I’ll assume a 5/1 ARM, if this boom is really different, then thist bust will be very different too. we may be looking at 2006 as just the very beginning of the bust. carried out 5 years (in the best case senario as a typical 5 year bust), that’s exactly when your daughter’s ARM would adjust. I would hate to be in her shoes. But because this boom went for a 10 year cycle this time around, I wouldn’t be surprised if the bust lasts 10 years as well.
Someone already outed me in an earlier post. As a medical doctor pulling in at least $150,000, I got at least 10 other colleagues all renting and sitting on the sideline. I’ll take a listen to the podcast. But if you can convince me you are right, you may be looking at a lot of business here. So take it away!
September 10th, 2006 at 9:50 pm
Let me give it a try.
My examples weren’t meant to compare ‘apples to apples’ as you mentioned. you’re quite right to point out how few ARM’s there probably were back in the early 90’s. But that wasn’t my point. My point was simply that if you had a fixed rate vs. the ARM back then you lost. The ARM borrower had payments so much lower than fixed he was able to weather the crisis. You as a doctor would have been able to also with a fixed rate, but Joe Lunchbucket would’ve had a pretty hard time feeding his 2-4 unit $500 a month.
You also mentioned the five year cycles. I’ve never had an ARM recasted either due to time or the 125% rule. Never.
As for your collegues, allow me to insert them into my client list with those I sent out of state the last three years. My average client has made used of ARM’s in both Phoenix and Boise, the majority buying with only 10% down. An example would be “Diane” who took equity out of her SD home to invest in Phoenix.
She bought five homes with about $145K, all at 10% down. Being old school on the reserves front, I insisted she keep $40K in liquid cash reserves. We recently reevaluated her purchases and her homes, if sold today, even in Phoenix’s cooling market, would net her roughly$300-340K after all costs of sale.
She’ll be trading into Boise, and she literally can’t wait. Also, because she isn’t a big wage earner at all, the excess carry-over depreciation has allowed me to sell one of her homes there outright, (no exchange) because she can use the unused write-off against the capital gain, resulting in no taxes owed. Don’t think that didn’t put a smile on her face.
Seriously, if the market takes a longer pause than the usual, my clients will refi with whatever loans are available, (probably ARM’s) which will no doubt lower their payments to boot. At the worst they will simply replace the old loans with new ones, and ride the market until better times return.
For the nightmare scenario you think about Jack, not only would markets all over the country have to stay lifeless and over supplied for years, but the prices would have to fall like crazy. Even in the 90’s in SD with the S & L crisis and falling prices, not one ARM of anyone I deal with had to either be recast or be foreclosed. Not one.
You and your buddies would do well to enter a market like Boise where you can take advantage of a growing region that has superior job history and current and future job growth. I’m getting my clients 2-4 units that literally break even or better with 10% down - with professional managment. And in the last week or so homes have now come into play because their vacancy rate has sunk so low, that the quickly rising rents have made homes a possible investment too.
Anyway, that’s my two cents. Thanks Jack for the chance to sound off a little.
September 11th, 2006 at 7:09 am
Kris,
I was tied up all weekend in family matters but you are really holding your own in the obviously emotional discussion.
As long as there are “customers” willing to “risk” there equity or savings or investments, there will be financial vehicles available to oblige. “A fool and his/her money?” How many solicitations PER DAY do you (and I mean everyone on this string) get for better mortgage rates, more home equity loans, cheaper credit cards, sure fire oil and gas exploration investment, absolutely safe “biotech” investments (that one is MY personal favorite) or offers to turn sea water into gold.
The market is “crowded” since our society doesn’t make much anymore. That means people have to find other ways to make a living even if it selling you more house, more car, more stuff for more commission. We are back to accepting some responsibility for your own decisions and actions versus “lets regulate it” with more paper. I am and always have been for more “self” and less paper.
California is at the vanguard of these trends that either lead us up or lead us down since we have a lot of personal wealth out here. The same fools that invested in a dot.com centered around selling doggey toys are the ones that figured real estate can never go down. Look at your neighbors.
You pay for your ticket and you take your ride. To quote Suzie Ormond, “Your home is NOT an ATM machine.” If you are stupid enough to gamble the roof over your head by overextending yourself, you better plan on retiring to a double wide in Hemet.
September 11th, 2006 at 8:24 am
Thanks for stopping in with your 2 cents, Fred. Who knew such a lame little post on “thanks for the smooth escrow” would turn into a fist fight over option arms and neg ams?
By the way Jeff and Jack, you obviously have some very strong opinions on the subject. If you ever want to sent me your comments, I will set up a new post for you. Hate for all of the good dialogue to get lost under the comments section of another.
September 11th, 2006 at 8:33 am
I think the key with ‘Diane’ is IF she sells her 5 homes in Phoenix. I have a high school buddy that insists he made $100,000 with his investment property in Phoenix, he just hasn’t been able to cash out the $100,000 because no one has been willing to buy it in the 9 months he’s had it for sale. There’s currently a 10 month inventory of homes for sale in Greater Phoenix, 54,000 resale homes competing with countless other spec homes from builders. I think ‘Diane’ would be lucky to come out of Phoenix positive with her properties.
This is a rolling boom driven by the credit bubble and this will be a rolling bust. The boom started bicoastal and gradually moved inward, first from SoCal coastal to IE then to Vegas then to Phoenix. As Phoenix goes to bust investors flee to Texas and now to Idaho. The scary thing about the periphery is those are areas that boom last and go bust first. Idaho is as far and as out there as it can be, it caught on to the tail end of the boom. Now you mentioned folks can get in now break even, so sounds like we are looking at pure appreciation driven investment strategy. That would be extremely difficult to do in a periphery market like Idaho where the peak, ie when an investor can walk away positive, would be extremely short in duration before it bottoms.
September 11th, 2006 at 7:33 pm
Jack, since we are so clearly from differing schools of thought, it’s unlikely we’ll come to an agreement on what’s going to ultimatley happen here. I’ve heard this line of thinking since the median San Diego price hit 100K in ‘81 or so. The sky was falling according to the media and other ‘bear’ thinkers. It’s always been thus. When we hit 200, 300, and on up to today at 500K, the earth is about to spin out of its orbit.
These ‘crash’ predictions have been wrong in every single scenario since I was first licensed in the Fall of ‘69. In ‘79 when we all paid for Carter’s money printing they said prices would fall by half and they’d take an inordinate time coming back to where they’d been. The median had more than doubled by the mid-late ’80’s. In the ’90’s we were in a ‘dire’ time, and prices could fall to levels unseen for at least a decade. By the end of the 90’s they’d gone up so much, the purveyors of doom changed subjects I think.
They’re now saying we’re all going to die from global warming. Of course, as I’ve said so often, the main two ’scientists’ predicting the planet’s demise are the same two chuckleheads who wrote a so called best seller in the ’70’s about “The Coming New Ice Age”.
Jack, you heard it here first: The median price for a Phoenix home will be higher on Christmas day of 2007 than it is today. I think the rolling bust you see is he beer bust I’ll be attending with my Phoenix team the week before Christmas.
What’s your prediction for that day?
What do you think?
September 11th, 2006 at 9:06 pm
Congratulations, everyone! This silly little post on “pleasant escrows” now holds the record for most comments by far! Of course, in the “Comments On Topic” category, we have a long way to go.
Jeff, I’m going to continue to stay out of this and let you and Jack have at it!
September 12th, 2006 at 8:00 am
we are now officially 11 months in to negative sales y-o-y in Phoenix. August sales was a 47% drop off compared to last year. median price has been dropping since the June high, and appreciation this year stands at 1.5% compared to last year. if the above trend continues, you’re looking at negative median in the next couple of months.
It took SD roughly 24 months of sales decline to get the negative median, Phoenix will get there in roughly half that. that fits with my feeling that pheriphery markets boom late and bust early. As for how low? the first year I think you’ll see 10-15% reduction, followed by an additional 20-30% decline the 2-3 years after. overall yes, in decade terms, real estate will eventually all go up. but you agreed these things are cyclical and generally last 5 years up or down, so why not this time around? why should this time be different to the point that there will be no down?
October 27th, 2006 at 10:06 am
[…] Saturday (tomorrow) will mark our six month anniversary at the San Diego Home Blog. 96 posts and 415 comments later, we have written on topics ranging from (prepare for link overload) Presale Property Inspections to Termite Inspections, from New Business Models to Agent Licensing, and from Real Estate Fees to Good Escrows to Bad Agents. We’ve talked about Marketing, Technology, Financing and Market Trends. Did all of this silly talk provide value to our clients who follow our blog? I certainly hope so. Providing value through information dissemination is but one way our blogging serves our clients, however. Smart agents know the value of their professional network to their clients. The network, however, can no longer be limited to the guys at the water cooler, as there is a vast world out there thinking with a different perspective and approaching our business in different ways. Technology is providing access to information like never before, is changing the way we view our world, and is changing our industry by the minute. As agents, a broader perspective makes us more knowledgeable in our profession, and increased knowledge can only translate to improved service and value to our clients. So to mark our impending anniversary, I will offer my linkation love-fest to honor the bloggers in the industry who have most educated me and inspired me to think in larger terms. While this list represents the blogs I count among my favorites, it is by no means inclusive. (In other words, if I didn’t mention you, don’t put pins in the Kris voodoo doll). […]
December 30th, 2006 at 10:31 am
[…] Now, I am bracing myself for a dozen comments to this concering gift baskets. Funny how that goes. Back in September, I wrote a nice little piece thanking an agent/mortgage broker for a smooth transaction. The 23 resulting comments dealt with option ARM financing. Earlier this month, Steve had a moment of reflection in which he was enjoying the San Diego weather which generated 32 comments on the impending crash of the real estate market. And in November, I wrote about anticipated December market activity, which of course resulted in 12 comments all pertaining to… rabbits. […]