The truth about tomorrow!

The only people that get hurt on a roller coaster ride jump off in the middle. Most folks are watching the perils of Wall Street, listening to Jim Kramer rail against the attitude of the Federal Reserve and being bombarded with newscasts that predict the end of the world as we know it.

It just isn't true.

The truth is - many lenders chose to go the expedient route of desktop underwriting on mortgage loans. The underwriting process factored in data such as income, employment and your FICO score. The internet became the "deadbeats" best friend. There were some people that did not have a good job history. There were some people that did not have verifiable income. There were some people that had low FICO scores.

No problem.

You could go on line and pay a company to verify whatever job you chose to claim. You could just tell the loan officer how much money you made and if it made sense with the job you created, you could just state your income. That would work as long as your FICO score was high enough. But you don't have a good FICO score...?

No problem.

There was this nifty loop hole in the FICO system that allowed you to be added as an authorized user to someone with good credit. That's right, you could just pay a fee and have your name added and BINGO ...up goes your credit rating.

All of the sudden, anyone with a pulse (and access to nefarious firms on line) could get a mortgage. The smiling loan officer would just ask...how much do you want to say you can pay each month. Lies were told, paperwork was signed and loans were quickly resold. The valuble loan officer was the one that could close loans that would last 3 or 4 months before defaulting. (If the loan was sold and payments were made for a few months, the purchasor could not demand that the loan be sold back).

BIG PROBLEM.

First it was the sub-prime loans that began to go bad. The larger lenders sat back and smugly shared sound bites "We don't make those kinds of loans." The lenders that did make them are now pretty much history. Any reputable lender that did have some on their books, stopped underwriting them. The fall out was the demise of the sub prime business. Eye brows were raised and investors were stunned to see they were not going to get that big return. The question was raised...how could this happen?

Very old axiom....if you lend money to people that do not have the ability or inclination to repay it...you will lose your money!

The dust had barely cleared when larger lenders began to run into what they called "liquidity problems". If everyday terms, the investors began to feel the pinch and they reduced how much they were willing to pay. American Home Mortgage was the largest recent victim(?).

Now, rumors run rampant that Countrywide will fall. They did run into a problem. It is significant to note that the other big banks lent them the money to continue operations. They have announced some changes. Those changes portend tomorrow.

The TRUTH ABOUT TOMMOROW!

The situation has no relationship to chicken little or a fallng sky. Lenders have tightened their requirements. Jumbo loans (those over $417,000) are more expensive to get. There is still money for mortgages. The lenders are just beginning to focus on those loans that are guaranteed by Freddie Mac, Ginnie Mae and Fannie Mae. They need to make sure that the loans they make will be purchased.

It would seem to me that if the money pool remains the same, and companies are focusing on conforming loans, the housing market is in better shape than most understand. If the pool of money used to fund Jumbo loans is not being used, that money will have to be lent to someone. The amount of money that will be available to the conforming folks will increase. Remember, the lenders only have a chance at making money when the actually lend money.

In case you haven't noticed, buyers at the lower end of the scale have not been knocking down doors to get loans lately. There are several things that have spooked them. The media with it's continuing gloom and doom soundbites has tempered enthusiasm. The month after month increase of the interest rates when the Feds meet has created the illusion that interest rates are high. The increase in the cost of living on day to day things like gasoline, dairy products and basic entertainment (like a family nite at the ball park) has them worried about the future.

Lenders will have to take a long look at the potential pool of borrowers and come up with a way to entice them back into the housing market. The federal government will have to come up with a way to stave off the recessionary possibilities that now exist. One answer will solve both problems. Interest rates will come down a bit. It won't take much. A quarter point drop on Sept 18th or before will resonate across the market place with the power of the started at the Indy 500 intoning "gentlemen, start your engines".

Real estate has always been a bottom up industry. The people that buy the $200,000 home enable the seller of that home to become the buyer of the $300,000 home and so on. It is sort of a trickle up effect. We will have more money available to the first time buyer or the buyer purchasing property at the lower end of pricing. Those sales will trickle up and we will see a return to housing sales.

This is not to say that we will return to the days of escalating prices and homes sellng for 10% or more over the asking price. Those days were fueled by lies and those lies have seen the light of day. Prices will probably go up in accordance with other costs in the economy...no more and no less.

Realtors will once again pre-qualify buyers and listing agents will take a longer look at the ability of buyers to purchase their listings. It used to be that way.

You see, real estate agents got lazy too. They opted for the "talk to your lender and bring me a pre-approval letter and then we can go look for homes". They passed the buck and responsibility onto the lender. The lender passed the buck to the desk top underwriting system and various documents that were not verified. Folks selling homes were willing to accept offers as long as the money got to the settlement table. Everyone turned a blind eye to reality.

As I have shared...those chickens have come home to roost. The absolute truth about tomorrow is that everyone will be more careful. Loan applicants will actually have to be credit worthy. The housing market will improve.

Tomorrow.

County Fair Diary ...Day Six

So in the Bible, on the seventh day, God rested. Those shoes are too big to fill for me. I had to take a break on day six. I planned to visit a BNI group for a breakfast meeting (I was subbing for a fellow agent and that meant the breakfast was free!) and then drive over to Needwood Golf Course and play a round of golf.

It was overcast and reasonably cool and I was able to join a threesome on the first tee. My drive was perfect, splitting the fairway and coming to rest about 90 yards out. I used a wedge to hit my approach shot to within 15 feet of the flag. My birdie putt was just a few inches from the mark and I settled for a solid par to start my day.

Then........the rains came. The thunderstorm scheduled for late afternoon erupted six hours early. I returned to my car and put my rain soaked clubs in the back and drove to the office. I spent the rest of my day off dealing with various transactions. All was not lost. In the evening, my wife and I enjoyed the ballgame at RFK. A good friend had tickets that they could not use and dropped them off at the office for me. Great seats!



So even a day off that gets turned upside down can end swell. County fairs and baseball....great American pastimes it is a priviledge to share.

County Fair Diary ...Day Five

Well, it is wednesday night and I have to share....my feet hurt. I had the afternoon shift today. I got there a little early figuring that the person working the morning shift might want to scoot sooner than later (I seem to be the only one in the fair crew that loves the opportunity). Well, much to my surprise, I replaced no one. The early person left around lunch time and the booth had been empty for awhile.

Within minutes of my arrival, a very nice young woman stopped by and wanted to discuss the sale of her home. She has been going back and forth between her house and the home her mom left her two years ago. She had stopped by a bit earlier but no one was in the booth and she was taking one more chance on her way home.

I shared what appeared to be her options and she asked the I come by next week and tell her what has to be done to sell. She also asked that I bring the paperwork necessary to list the house.

It wasn't an hour later that another homeowner came by and asked about selling their home. We talked about pricing and the market. After a conversation and answering questions, we made an appointment to have me come by and list the home this weekend.

The rest of my tour was spent blowing up balloons, chatting with folks that came by for general information and taking a break to partake in the most wonderful funnel cake.

My shift ended at around six and I was able to go across the way and enjoy the finest fried chicken dinner on the lot. After eating, I figured..why sit in rush hour traffic and went over and watched the monster truck show. Just another day in paradise.

County Fair Diary ...Day Four

All is fair in love and war. The same holds true for working the booth at the fair. I had to actually do work related activities during the day. My shift began at six. Once again I enjoyed the private delight of driving through the special vendor entrance, guiding my jeep past horses, the cow barns, stopping at the pedestrian cross walk and continuing to the on-site parking for vendors. It really is nice when such small priviledges bring such joy to my heart. It was extra special tonight...my lovely wife was with me and she got to enjoy the treat as well.

On to the evening. There was a lot more traffic in the vendor area. Apparently, local fair goers suffer from "fair fatigue" early in the week of our fair. It follows on the heels of a nearby counties events and those that enjoy visiting the fair circuit need a little time between visits to recharge their batteries.

I was in the middle of explaining the highly technical job of blowing up balloons when a young couple stopped and exclaimed, "Hey, we know you, you helped us buy our house!" I looked up to see Rob and Melissa (apparently on her way to being great with child). They were very happy to see us and began to relate the story of how they got their first home.

It was a couple years ago, about mid-January, when they first began their search. Rob laughed as we talked about the superbowl sunday when I met them to tour an open house. We got there around noon for a one o'clock open house and found a crowd of about 50 other people waiting to get in. Parking was at a premium. I was walking from my car to theirs and took an awkward step on ice. Apparently, they were in tears as they watched me, my briefcase and their paperwork go flying through the air.

The house was not quite for them and they decided not to join the other six offers that were being submitted that afternoon. The following weekend, one of the homes chosen for viewing had been on the market 2 days and was available for viewing during an open house. The listing agent was one of those folks that put a sign in the yard and tell the seller to hold the open house. Rob and Melissa walked through and loved it. The owner was hosting the open house. We went outside and "we want to submit and offer on this house." I pointed out the large numbers of buyers that were coming and going and told them, "OK, let's write the offer right here on the hood of my car. You will then walk back into that house with me and tell the owner that youi will pay him full price for the house if he accepts the offer right now." I wrote it up and Rob and Melissa went back in and cornered the owner in the kitchen. Rob made his pitch and the owner stammered "I think I need to talk to my wife, she won't be home for thirty minutes." I could have kissed Rob when he smiled and said "We'll wait." The owner turned to me and asked, "Can I accept an offer now?" I told him that I was not his agent but it was my understanding of Maryland law that he had the right to accept or reject any offer.

Cut to the chase. His wife came home. They accepted. Later in the evening, his agent called to say that it was underhanded and he had three more offers to present. I told him to hold onto them, my clients might not like the ocndo docs but as it stood, they had a ratified contract. Rob and Melissa are going to need a bigger place once the baby arrives. They asked if I had time to sell their home and help them find a new one. It is nice being at the fair. Would I have been involved if I had not seen them at the fair...maybe. They did mention that they do receive my monthly market reports, but I didn't know she was expecting and I believe that I may have missed the boat if I had not been here at the fair.

The rest of the evening was spent chatting with folks. Most were concerned about the mortgage industry implosion. I shared that the dust will settle. The feds will cut rates and the market will improve as it always does ...from the bottom up.

County Fair Diary....Day Three (Bus man's holiday)

Well Monday is children's day at the Fair. I did not sign up to work in the booth on this day. I have to share that one of the great fair attendance joy's is to see the wonder in children's eyes as they wander from one livestock area to another. Grownups usually have forgotten the thrill of standing right NEXT to a real cow! The biggest thing wandering the suburbs in today's world is the neighbors dog (that is unless you live in the western suburbs that occasionally receive a visit from a wayward black bear).

I spent my day off from the fair at the fair. I went from booth to booth rediscovering the longing for a hot tub that I thought was quite removed from my psychie. I sampled assorted flavored pretzels from Pennsylvania. I tried my luck hurling darts and unbreakable balloons. I test my free throw skills with basketballs that had more bounce than the original super balls. I plunked down my dollar and spent some time with the worlds largest horse. I have to confess, I even spent the money to see the two header raccoon and five legged goat.

The time spent on the midway always seems to tire me out. As luck would have it, when the heat and walking finally hit me, I was standing in front of yet another pizza vendor that was situated adjacent to the Bingo tent.

Those of you that passed by in mid-afternoon may not have noticed, but that content looking fellow wiping the pizza off his t-shirt really did say BINGO. The magic continues.

County Fair.....Diary Day Two

I had the early shift Saturday arriving at the fair grounds a little before 9 a.m. There is something special about directions that include "turn right at the goat barn, go to the end and then turn into the vendor lot next to the livestock exhibitor parking".

The gates opened and the first visitors began their search for giveaways and as much free stuff as their plastic bag would hold. I was ready. I had a full helium tank and a 4 boxes of balloons prepped with ribbon and a nifty little filling cap. Soon the midway was adorned with small children holding on to red, yellow and blue Long and Foster balloons.

There was an occassional break in the action which afforded me the chance to slip next door to the Cheese booth and purchase a delightful grilled cheese sandwich. Later in the morning, I headed north to avail myself of a couple free samples of italian ice.

About mid-morning, I actually had the chance to chat about real estate. Two women came up and explained that their mom had recently passed and wanted to know if I could explain how they could sell the house when they both didn't live in the area. I went over the process as best I could, got the information and made an appointment to visit the home after the fair and list the property.

Then came the pleasant surprise. The real estate editor of our local paper dropped by to chat me up about the market and what folks were saying when they visited the booth. We talked for a while and she made sure to fill out a form to enter her name in the drawing for one of my paintings.

As my shift came to a close, the sweetest little bundle of joy on the fairgrounds rolled up in the stroller her mom was pushing. She squealed with delight when I tied the bright red (just like Elmo) balloon to her little wrist. It was her first visit to the fair. Rather than pack and go, I offered to walk the grounds with her and her mom.

I made sure to point out McDonalds farm and enjoyed the wonder in her eyes as she stroked a bunny rabbit. Our last stop was at the ice cream booth manned by the Lions Club. We ordered and sat back in the corner so this little princess could watch people come and go. She actually has acquired the talent to bite an ice cream cone and soon her smile had a sticky chocolate ring around it.

I walked them to the exit and gave her mom a hug and thanked her for letting me pass on the tradition. Can life get any sweeter than having your daughter bring your first grandchild to the fair so that you can share a family tradition? I think not.

>

My beautiful granddaughter Rylee

Daily Fair Diary... Day One

Well, my first day at the fair has come to an end. I have a feeling that the people that stopped by to chat and ask questions represent many of you that haven't had the chance to stop by. I thought I would share a little of the information requested.

Bob T. came by and shared that he and his wife had recently sold and were now renting a condo. He said that they got less than they thought they would get for the house and decided it would be better to rent for a year before buying another home. He and his wife saw a couple homes they liked. They figure with all the turmoil in the market, the prices will drop and they will get a better deal next spring.

I just happened to have my laptop with me (had to use the battery, the fair did not include an electrical outlet in the package). I pulled up the two homes that he mentioned to see if the price had come down. He and his wife just stared blankly at the screen when both listings came up as sold. Not only that, one of them sold for a bit more than the asking and the other sold for full list price.

I told Bob, prices may come down a bit. No one has a crystal ball. The downside of waiting is that someone else may like the property you want and they may not be willing to wait. There may be another house just like the one you didn't buy. No one has a crystal ball. All we can do is act on the facts before us.

If you buy the home you want today, and a similar home sells next spring for less money, you still own the home you want. Next springs prices have nothing to do with today's prices. In the long term, home values go up. You are buying a home, not investing in real estate. Tomorrow will always have the possibility of being better or being worse. Today you can make decisions based on facts...not possibilities.

So......that was the most involved question of the day. Two steak sandwiches and one ice cream cone later...my day was done (now if I only get them to call B7, I will have Bingo 2 ways on one card and a four corner on another).

If it is 100 degrees and August....it is time for the fair

Folks are sitting around pools and the temps are reaching triple digits. The Redskins are in training camp. Commercials are heralding back to school specials. These occurences can only mean one thing. It is time for the Montgomery County Fair.

Now, I have been going to the fair since Gaithersburg was the outer fringe of Montgomery County. Directions to the fair included things like...go on out the Washington Frederick Road past Agnew Inn about 10 miles, once you go over the bridge the fairgrounds will be on your left. Today folks will use 270 and exit right into the fairground area or drive over to Lake Forest Mall and take the shuttle.

There is more information at www.mcagfair.com/

I will be working in the commercial building during the fair. My personal schedule is:
10th 3-6
11th 10-2
14th 6-10
15th 2-6
17th 10-2
17th 6-10
18th 2-6

If you can stop by, I will gladly answer any questions you have about real estate and I may even throw in a hot tip on the "pig races". If you come by at times that are not on my schedule, check the BINGO booth. The old guy eating cotton candy, playing three cards at once .... that will be me.

Enjoy...it remains Montgomery Countys finest tradition.

Mortgage chickens coming to deny your roost

While you've been away.....the mortgage industry has been imploding. Over the past few years, it has been mentioned here and in many other places that the amount of money being offered to anyone with a pulse would erode the foundation of the mortgage market. If you follow financial news, it is occuring before your very eyes.

The most recent casualty is American Home Mortgage. Their demise has caught the attention of those of us in the real estate profession. They were not making their living off of questionable practices. They did not lend money to anyone that applied. A lot of their money was lent to borrowers with very good credit scores. A lot of their money was lent to people that borrowed more than the $417,000 conforming amount.

The $417,000 figure is important to note. $417,000 is the threshold for loans that can be funded by Fannie Mae, Ginnie Mae and Freddie Mac. Those three institutions regulate government backed loans. If a loan is greater than $417,000, it is refered to as a non-conforming loan and must be funded by private investors. These private investors are usually found on Wall Street.

Here is a basic overview of how loans are funded. There are two ways of funding - public funds or private funds. A mortgage broker or lender sits down with an applicant and takes an application. Information is checked, a credit report is reviewed and the information is entered into a desktop underwriting program which will direct the lender towards the best solution for their customer. They may and often qualify for more than one program. The solutions are presented and program is selected. If the amount needed for the first trust is $417,000 or less and all other necessary criteria can be met....the loan is most likely funded in concert with one of the aforementioned agencies. If the amount needed is greater than $417,000 and/or other criteria can not be met....the loan will be privately funded.

If the lender has its own resources, they may choose to fund the loan and sell it off to an investor. If the lender does not have their own resources, they shop the loan to the investors on Wall Street.

Someone once said "If you want to get to the bottom of anything, follow the money." Mortgage lending is no different. It gets tricky when you involve investors and the stock market. It becomes a little more clear when we follow the money. No one is doing this altruistically, everyone wants to get paid.

For example purposes, I will use a $500,000 loan. The mortgage company offers the loan to a customer at a 6.75% rate and goes to Wall Street to seek funding of the loan. The investors on Wall Street figure that loan is worth $505,000 to them. The 6.75% return is a good one compared to what other investments are yielding and they will be receiving payments for a long enough period of time that they will show a profit on their $505,000 investment.

In this scenario, the lender can make the loan without having to charge any extra money. The lender is making 1% ($5,000) for processing the loan.

If a lower rate was offered, the investor would most likely pay less for the loan. An example might be the same $500,000 loan at 6.625% could only result in $502,500 and a 6.5% loan could only result in $500,000.

The lender has to make money in the process, so the lower rates must be paid for by the borrower. These are usually deemed "origination points". In order to maintain the same revenue...the lender would probably charge 1/2 point on the 6.625% loan and a full point on the 6.5% loan.

If the borrower wants an even lower rate, we get into "discount points". For instance, they borrower wants the loan at 6.25%. The investor may only offer $495,000 for that loan. The borrower would have to pay the additional $5,000 (one full discount point) as well as the origination point which in our scenario would be another $5,000. The borrower would have to pay $10,000 at closing to get the half point reduction in his rate, rather than take the market figure of 6.75%.

Everyone was fine with this system as long as mortgages were being paid on time.

Well, as we all know, that has stopped happening. Defaults on loans are increasing at an alarming rate. The investors on Wall Street have always measured the risk against the potential gain on any investment. The investors are constantly revising data and reviewing the current risk against historical analysis. The recent increase in mortgage default has increased their perceived risk. The increase in their risk has either lowered what they will pay for a mortgage or in some cases they have decided to not fund any mortgages.

Those that have continued funding mortgages have drastically reduced what they will pay. The $500,000 loan at market rate that was purchased last year for $505,000 may only bring $475,000 now. In order to make money, the lender would have to ask their borrower to bring $30,000 at closing (that's 6 points and none of them discount the rate - they are all origination fee). The other choice is to ask for a point and lose the other $25,000.

Unfortunately, the lender is in a no-win situation. The majority of borrowers would balk at this request on the lenders part. Recently, the news of these cost came at the last minute. Investors do not lock in rates. Lenders lock in rates for a short period using their best guess as to what they will be able to sell the loan for at the end of the lock in period.

So last week, the good folks at American discovered that the loans that they had to close at the end of July were going to cost them considerably more than they could recoup. I will not get into the spiralling behind the scenes cost that all lenders and investors are seeing daily. American could not fund the loans. Closing their doors was their only viable option. Other lenders face the same predicament.

Lenders have billions of dollars of unsold loans on their books. These loans have been funded. They were funded by loans the Lenders took out from their banks. You see banks will loan money to lenders based on the revenue the lender anticipates receiving once they sell the loans. This revenue is the value of the loans that have not been sold. When the investors reduce the amount of money that they are willing to pay for loans, the value of the loans decreases. The lenders can only borrow a percentage of the value. When the value goes down, they have to immediately pay down the loan so that the amount due the bank is a percentage of the new value. It sounds a bit confusing to the layman, but it is very devasting to the lender. If they can not pay down the loan, they are in default and that usually triggers a series of events that culminates with the doors being closed.

It also begins the ugly cycle because now a bankruptcy judge has to sell the loans that were funded and not purchased. Investors usually do not pay top dollar for assets sold at bankruptcy. The value of the loans is decreased and the overall impact is yet another increase in risk assignation and the possible reduction of what investors will pay for new loans.

I don't pretend to be an expert, this is just a general overview. I wanted to try and explain how the mortgage market is reacting and what causes a big company to go under.

The safest route for borrowers is to keep their loan a conforming loan and to provide all the documentation your lender requires. The statement "We fund all of our loans" does not guarantee that origination points will not be charged nor does it eliminate to possibility of discount points being charged. Consumers have to understand that almost all mortgages will be sold and the cost of that sale may be included at loan origination.