Education or Experience...pick your poison

I have been reading different blogs and articles regarding the importance of education. I have also read various opinions on the value of experience. When you are evaluating the capabilities of an individual, both can be used as a yardstick. If you come across someone that has both, you may discover the best of both worlds.

Education is fundamental in learning the basic framework of a profession. Experience is the result of actually performing the tasks of a profession and learning how the knowledge gained through education is practically applied.

You can usually decide your educational pursuits; experience is often garnered by chance. In a perfect world, you acquire the education and then step into the professional role. In that professional role, you apply your knowledge while experiencing the events that occur in the course of you performing your job.

There are times, when life throws you experiences before you have had the time to acquire the education necessary to deal with them. In those times, you have to call on prior experience and the cumulative knowledge you have garnered in life. There will be times when you make the correct decision and there will be times when you make the incorrect decision. The event will become another learning experience.

Is there a difference? When I was a younger man, I believed that you could study and read and acquire the knowledge necessary to do just about anything. I have learned that belief was flawed. Reading a textbook, taking part in a classroom exercise, watching film or listening to a lecture never replicates real life experience.

Soldiers tested in the field of battle have a much greater understanding of the perils of war than those that have read “The Red Badge of Courage”. There is something distinctly deeper about knowledge gained through practice.

Lessons learned in classroom settings usually occur in controlled environments. An individual may learn how to perform all aspects of their profession. Lessons learned in real life situations are filled with ancillary activity that is going on at the same time. You may read how to perform each function. Experience will teach you how to perform many functions simultaneously. Lessons are learned in a sequential order. Experience occurs in a multifaceted fashion which requires you to handle several functions at one time. Classroom experience is generally one sided whereas experience occurs with the interaction of others.

When weighing education and experience during the evaluation of potential real estate agents, it would behoove the public to consider what may be needed to accomplish the task at hand. If your need can be met by one that has more knowledge than experience, that is the route you should take. If your need requires the skills acquired through years of experience, that is the individual you should hire.
How do you know which type of agent you need? The question is not easily answered. If you were to ask the agent that is educated but lacking in transaction experience, they will surely attempt to sway you with the value of education. If you ask the agent that has been working for several years, they will surely point out the advantage of “real life” experience garnered through many transactions. The truth is probably somewhere in between the two and it will depend on the market at that point in time.

If housing is active, there are advantages to both sets of individuals. If the market is slow, you may be better advised to seek out an agent that has dealt with a slow market. You see you can read about the slow markets of years past. Agents can study how others dealt with those markets. Agents that have been through those markets will be in a better position to guide you through a transaction without needing to check a guidebook.

Glib statements like “interest rates remain at an all time low” carry a great deal more impact coming from an agent that was involved in transactions in the 80’s when rates were 14%.

The final thought on the difference of the two types…..education or experience involves the one thing that separates those that are successful. Focus. I truly believe that the ability to focus is the strongest asset in any professional’s bag of tricks. Focus can only be fine tuned through the understanding that comes from day to day experiences. Although, it is in a different venue, I look at the difference between Tiger Woods and the hundreds of golfers that come through the PGA schools. He is a champion, because of his ability to focus on the task at hand. His focus is fine tuned from the experiences he has experienced. There are several components to a fine round of golf. It is necessary to understand which component has the highest priority at various stages of the round. (It does not good to focus on the though process needed to make a long putt when you are getting ready to hit a shot from the fairway.)

So there you have it. Education or experience? I am an old guy now, so I will have to fall on the experience side of the equation. As a side note, to you young folks coming out of the universities, I can remember walking 10 miles, up hill, both ways in snow that was knee deep …………

Hold that line ......

I suppose this will irritate some agents in this area. The market has slowed to a crawl. We do have more houses, townhomes and condos for sale that at anytime most of us can remember. Prices have to come down.

I know those of you that bought in 2003, 2004 and 2005 faced a rediculous market. Many of you are living in a home that was actually your second, third, fourth or maybe more choice. Homes went on the market and if you placed an offer, many times it would be one of many offers on that property. You sat nervously by the phone hoping you would get the call "you've got the house." Only one person could receive the call, the rest of you returned to the market, hoping to get lucky. Prices were going up. If you got caught up in the groundswell, your target price began to creep up as well.

In those days, financing began to change. You could finance 100% percent of the purchase (in some cases, you could finance more than 100% and cover your closing costs too!). Interest rates bottomed out at around 4.5%. It was possible to get a lower rate on the enticing loan products being offered.

How could you lose? Prices were going up, but that meant you would move in and your home would be more valuble than when you placed the offer on it. It had to be true, your lender had the home appraised before you settled and amazingly enough...........it appraised for just a bit more than your loan amount. Fancy that.

Everyone heard rumors of bubbles and froth from the then Chairman Greenspan, but things kept moving at the same frantic pace. Dozens of people at every open house and contracts being written on the hood of cars seemed to be the norm.

Then it stopped.

In the fall of 2005 pace of consumption ran smack dab into actual affordability. Prices had reached a point that put homes out of reach. All of the sudden, it did not matter what sort of fancy loan product was being offered. It cost too much to buy a home and the market came screeching to a halt.

The NAR used whatever manipulation of statistics was necessary to deny there had been any change. Major real estate firms across the country began preaching "everything is ok, it is a wonderful market". They too denied that there was a fundamental shift in consumer behavior. After several years of riding the runaway train of unwarranted price increases, everyone got off at the same stop. It was easy to miss the mass exodus. It occured about the same time that we as a nation watched the victims of Katrina and their suffering on t.v.. We were becoming more entrenched in the war in Iraq and the media was focused on Valerie Plame and Jack Abramoff.

Very quietly, a nation of buyers stopped reading the classifieds. A nation of buyers stopped visiting open houses. A nation of buyers stopped seeking the counsel of a real estate agent. A nation of buyers sent in their ballots by staying home and refusing to pay the higher prices. Our industry looked in every corner to find the culprit behind lagging sales.

The NAR pointed to the fact that things may be slow, but the average sale price was going up. They failed to elaborate and reveal that the average price going up in a market that is slowing down only indicates that the homes that are selling are higher priced and the lower priced homes are sitting on the market. If the lower priced homes are not selling, that should have been the first big clue that there was a problem. First time homebuyers buy the lower priced homes and they are necessary for the entire system to work.

Then came the sub-prime loan fiasco. When the industry was bustling, many people took advantage of the opportunity to make money. Money was a commodity and it was cheap and with the frenzy of buyers, people could start up mortgage companies and make a lot of money quickly. The system was overwhelmed. Loans were made, sold, bundled, sold and so on. Some of the sub-prime loans went bad. Sub-prime lenders began to go belly up and many people in the industry began to point at these failures as a reason that the market was slower. No one mentioned that sub-prime loans were nothing new. They failed to point out that anyone with a average credit score could still qualify for a conforming loan and buy a property in the mid to lower price range.

Prices were still too high and homes continued to sit on the market.

We have now seen prices in this area drop as much as 10% and the activity is still non-existent. Prices are still too high. Interest rates are around 6% and they will not go much lower regardless of any action by the Fed. The buyers are doing the math. Home prices remain above what they can afford to pay.

It is not about sub-prime loans. It is not about bad media. It is not about interest rates.

There are buyers out there. There are people that have to move. There are people that have to sell. The components of a normal market are in place. The prices are too high. If someone asks me "Is this a good time to buy?", how can I tell them yes? If you have to buy, you have to buy. If you are asking "should I buy now or wait?", I would have to say - wait. Prices have not bottomed out yet. All of the indications I see are that home prices will continue to fall.....maybe as much as 5% more.

Now there are those that will say - If you plan on living in the home for more than 5 years, you will be able to absorb the "on paper loss" and over that period of time the value of the home should increase. There may or may not be truth in that statement. Historically it seems to hold up, but, if you wait until spring, you can ease the "on paper loss" by quite possibly paying less for the home. The danger? If you find a home you love and decide to wait.........someone else may buy your dream house. Right now, dreams are more expensive than they will be next spring.

If you are in the process of selling or you think you have to sell, knock 10-20% off what you think your home is worth before you put the first sign in the yard. If you ask for an opinion of your homes worth, make sure that you are given two years of data to analyze. Look at the trends and understand that the last sale is probably more than you can expect right now.

There is a key word to paste on the refrigerator door - PATIENCE.

Do not be swayed by stories placing the blame on lenders or types of borrowers or the Fed. Prices went up faster than incomes could accomodate. They will have to return to substainable levels before the "for sale" signs begin disappearing from every third or fourth house in your neighborhood.

As always, I welcome your questions and/or comments. Feel free to write me an email if you have specific issues that you would like me to address.

Artificial sweetener? Sugar cane please!

It would be nice, if lenders realized that they have been a large player in our current housing market. Sounds rather simple, one would imagine that they are aware of their position. Maybe I should phrase that; it would be nice if lenders accepted responsibility for their role in our current housing situation and actually offered some solutions. If you merely circle the wagons until the dust settles, you will have made no progress. You will be going in circles and never reaching a destination.

There are several factors at work today.

There are some bad loans that will have to be dealt with. Lenders can either reconstruct loans for credit worthy consumers or they can foreclose on property. At some point, someone in power will have to admit - those holding bad mortgages are not going to get all the money back. It is not going to happen. You are going to lose money. In the interest of everyone involved, will someone please understand the magnitude of your losses and act to minimize them.

Reconstructing loans for credit worthy consumers seems on the surface to make practical sense. If the loans are in danger of going into default, debt reconstruction should take place. It does no one, not the borrower, not the lender, not the community and surely not the economy any good to wait until someone is three or four months past due before addressing the problem. Lenders waiting for the final shoe to fall in hopes of garnering a few extra dollars are risking losing thousands. Does the phrase "pennywise and pound foolish" ring any bells? Some lenders are actively seeking to re-finance some loans. Some is not enough. A comprehensive review of all new loans made in the past five years should take place. If lenders are pro-active it may put to rest the mud slinging that is occurring regarding predatory lending. Most people understand that there were some cases of bad loan officers but their number is dwarfed by the large number of honest professional lenders all across America.

It is high time that our elected officials addressed each problem facing the housing industry separately. There is a crisis created by the implosion of sub-prime loans. There is also a crisis created by the 100% financing. There is also the issue of competition within the real estate industry.

The sub-prime loan crisis is the result of many people involved in transactions seeking to garner their personal piece of the transaction pie. This chain of folks begins with those that sought the loans, travels through real estate agents, those taking loan applications, those appraising houses, those underwriting loans, those packaging loans for sale and those purchasing investments that included the loans. Everyone had a hand out. The majority of them were following the rules that existed at that time. Yes, there were cases of loan fraud. There have always been cases of loan fraud. The issue here is greed, not fraud.

In my humble opinion, it is not the responsibility of the government to bale out those that made bad investments. The chance for great reward in investments usually includes the risk of great loss. We have seen the losses. We have seen companies fold. None of it (beyond the investigation of any loan fraud) requires the intervention of our government.

People, whether at the beginning of the chain or at the end of the chain, should be allowed to live with the results of their decisions. Those that have chosen more prudent behavior should not be indirectly compelled to pay the price to offset others losses. The role of the government should be focused on controlling inflation and reducing the risk of a deeper recession.

It has been shared in many places that the National Association of Realtors has lost their way. In the course of growing into the large lobbying organization it has become, it has lost the support of the rank and file members. Realtors across the country are members only because it is required to be a member to have access to the multiple listing service and it is also required if one is to refer to themselves as a Realtor. Access to listings (which could be blown up if anyone comes up with a national plan that includes all listings) and the use of a trademark are the main reasons they can claim 1,000,000 and growing. Their inaccurate remarks and press releases have created a situation where agents everywhere are left trying to explain what they have shared. The bottom line, each member has the responsibility to become more active and attempt to correct the course this ship has taken before it joins the Titanic at the bottom of the sea.

The news industry has changed. There will be no in depth analysis of any industry because in depth analysis is boring. Sensationalism draws listeners, viewers and readers. If a full explanation of the housing market is going to be shared, it will have to be printed on the backside of O.J.'s next confession. The best source of information about the market continues to be the agents that work in it every day. If you have a conversation with an agent and everything they share is in direct conflict with what you perceive around you, find another agent to speak with on the subject.

In a nutshell ......

It is not a time for despair. The market will adjust. Those selling will have to accept the new market value of their home. As housing costs recede, their will be a positive impact on the cost of living in any area. As housing becomes more affordable, the path to the "American Dream" will re-open. There is a better tomorrow....we have just to wait and accept tomorrow will not happen today. That is not an artificially sweet statement.

Tomorrow will be better and that is as sweet as the purest sugar cane growing in Cuba.

Reality is like a beignet without the powdered sugar

The current housing market is being described in extreme measures. The media seizes every word shared in a press conference and attempts to put the most dramatic spin on what was spoken. The lenders are scrambling to cover current losses and mitigate future losses. They advise us that the situation is returning to normal. Of course, they do not point out that over 100 lenders have ceased operating. Interest rates are historically very low and lending guidelines have been shored up to prevent future abuses.
(note: The fox is advising the hen’s that it is safe to return to the henhouse.)

The House and Senate are wringing their collective hands over the situation. They are having the members of their staff develop legislation language that will read well and offer dramatic sound bites in the upcoming elections. Any potential bills are being vetted to assure that the special interests groups will be protected by any new laws. Statements are being shared indicating that the housing crisis is serious and it will be dealt with quickly.
(note: The pied piper is playing his song and the lemmings are headed for the cliff.)

The National Association of Realtors is convinced that this is a wonderful time to buy. They have spent a great deal of money advertising the importance of using a Realtor in a real estate transaction. Their spokesperson has managed to skew every report regarding the housing market and blindly step before cameras proclaiming that the “market is fine”. When challenged by the stock market entertainer, Jim Cramer, that if you buy a home today, you will lose money – the President elect of the NAR retorted that the housing market in Indiana was just fine.
(note: Alice through the looking glass had a more accurate picture of the world around her.)

It is no wonder that the housing market has stalled. The media proclaims that housing prices are going down. The local Realtors offer statistics that sold prices are actually going up in some markets. You have a better chance at finding the pea in the thimble game on the streets of New York than you do of making sense of the statistics used to convince you the market is up or the market is down.

The Federal Government offers that we are in danger of a recession but we also have to guard against inflation. The existence of one does not preclude the existence of the other. We do face both and housing is a large factor in both.

In a nutshell ……

Housing prices have risen to levels that are out of proportion to the salaries in any given area. This occurred, mainly, because the instruments used to finance homes were expanded to reduce the out of pocket money necessary to purchase a home. The easy availability of mortgage money allowed all borrowers the opportunity to buy. This easy access also supported the “eBay” mentality that led to multiple offers on homes and increased demand for a limited supply at that time.

As homes sold, others saw opportunity for large gains and they also placed their home on the market. The money sources were hit by losses on loans that went into default. These defaults did not begin occurring in large numbers until recently. The mortgage products used to “give away” the easy money were unique in that the payments would not go up for a few years. Those years have passed the payments are beginning to increase.

Qualifying for a loan has become a bit more difficult. The bigger change is that the programs that allowed borrowers to make purchases with no money out of pocket have been significantly modified. It is much harder today to get the creative financing of yesterday.

Therein lays the root of the problem.

It does not matter what the media says. It does not matter what bills are passed. It does not matter which dream world the NAR is operating. If first time buyers can not enter the system in sufficient numbers, the rest of the market will remain stagnant.

It appears that we have shot ourselves in the foot. There was a time when people saved money so they would have at least 5% cash to put down on a home. We wiped out that entire population with the no money down needed loans. They spent the money. Those that followed, stopped saving….you did not have to save anymore! Programs were created and homes were sold and prices kept going up.

The 100%+ financing changed the landscape. There is no money in savings accounts. If we are to understand the impact, we must understand that the market can not recover until those that want to buy a home have the opportunity to save the 3-5% cash needed. That will take time. That may take longer than the pundits are sharing. That most likely will not occur in the spring of 2008. It may not occur until the spring of 2009 or later.

The government is right. Inflation is a problem. A recession does appear to be in its early stages. Neither of those events makes it easy to save money.

Prices are coming down. Prices will continue to come down until they reach a level which is more closely related to the income of the area in which homes are located. It would not surprise me if homes that went from $200,000 to $400,000 over the last few years to find their value return to much closer to the $200,000 level. We will not see a 20% decline; we may see a 50% decline before the market becomes relatively active again.

Those that purchased in the last 3-5 years will find that they will have to stay in the home 10-15 years before they realize equity gains that were thought to be commonplace just a few years ago. The days of purchasing and moving up and making money in a few years are gone!

The only people that should be selling their home are people that need to sell their home. Just as investors have sought the greener pastures of the stock market roller coaster, those that purchased real estate hoping to cash in on the frenzy need to re-evaluate their business plan. The glut of homes on the market only indicates that all prices are too high and breaking even on recent investments may be impossible.

We all see the “for sale” signs in our neighborhoods. Many streets have three, four or more within a few blocks. The signs may have gone up last spring. The houses may be vacant. They remain for sale and no one is looking. The signs and homes are sitting there gathering dust.

No one is making offers on homes for sale. Nothing can happen until an offer is made. It doesn’t matter the price point, there can be no negotiation until someone says something. If the price is too high, a buyer can make an offer. That used to happen. It is not happening now. It is not happening on inexpensive condos, it is not happening on mid-priced town homes, it is not happening on single family homes. It is not happening.

It does not seem to matter what the price is for homes now. There is no activity among first time buyers and without that upward pressure, no one else is in a position to move.

The dust you see being blown off the for sale signs is really just the sugar on a powdered beignet. All that is left is a rather bland dough ball and that is just not happening.

A note to my competitors (?)

I know and you know that you drop in here every now and again. This is to you in hopes that you will...........Give the public a BREAK!!!!!

I just got my mail. Just like every few days there were postcards from real estate agents telling me of home values in my area, telling me they were number one, telling me this is the ideal time to put my house on the market(?), telling me of the homes they have sold recently (? - a quick check of the mls indicates none of the homes has sold in the last 6 months), and advising me that they are the "neighborhood expert". I have been getting these cards for years. The names and faces change, but the mailbox overload continues.

At some point, somebody has to spread the word. This sort of marketing has a minimal return on investment. Do the real estate guru's really believe that if you inundate a market with these sort of cards, you will land that listing? Of course, they will tell stories of agents that have had success. The majority of the agents that have invested money in these programs are not agents anymore. They went broke marketing. They took their toll on the tree population, they kept printers in business and they are now selling cars at CarMax.

New agents need to take a long look at how they have treated "junk" mail in their personal lives. Most people will respond to coupons that offer buy one and get one free meals. Real estate agents don't offer to sell your home for half price if you get the neighbor to list at full price. Brokers across the nation extoll the virtue of farming with postcards. Some firms will even offset your expense with credit for the postage. You still pay the bulk of the bill.

You can show your family and friends the wonderful card. You can sit back and know that 500 people saw your picture. You can enjoy your 15 seconds of fame as your card is glanced at and dropped into the trash.

Of course, if the mail arrives just as a homeowner has decided to sell and the homeowner does not know an agent and the homeowner doesn't have any friends he can get a referral from and the homeowner has no co-workers he can get a referral from...........he may call the number on the next card he receives. You just have to hope that yours is the one that hits at that moment under those conditions.

Last night, my wife and I were eating dinner when we were interupted by the phone. I am not on the do no call list. It was an agent with a local firm that very politely told me that his company had a listing in the neighborhood and they had a great deal of interest at the open house and was wondering if I was thinking of selling or if I knew of any of my neighbors that might be interested in selling. Sounded good, but the agent works in my office and the home they were referring to was my listing and I sat in the open house they were referring to and there were no visitors. Bad luck for the agent.

The lie bothered me, but I knew they were reading from a script, so I let that go. I was more annoyed that they had chosen to "cold call" a neighborhood at the dinner hour. Of course calling at that time will catch more people at home. Common sense would indicate that interupting a meal will not endear you to anyone. The fact that some of us have not chosen to be on the "do not call" list does not automatically indicate that we are hoping to hear from telemarketers. The list came into existence to stop annoying calls.

Rather than take the hint that this method of marketing is neanderthalish, brokers and trainers alike have encouraged "boiler room calling" mentality. They all promise that it is a numbers game and if you call enough folks you will get an appointment and if you go on enough appointments you will get a listing. The public at large is hoping that you stop making the vast majority that just say no your stepping stone to possible success. The general public, whether they are on a list or not, really does have the feeling "don't call me, I will call you."

This brings up the last but not the least annoying marketing that I and others have to suffer. Walking the neighborhood may bring your face some prominance. You may get to know a few people. You will also be intruding on a very precious commodity - the free time at home your neighbors cherish. The demands on our lifestyle as we move through the 2000's are tenuous. Americans cherish the free time they have. Many of them truly don't want their weekend interrupted by a stranger at the door with a printout of recent market activity or packet of flower seeds. They want peace and quiet and privacy.

There are ways to market yourself effectively. You won't need to invade homes via the mail, phone or personal appearance. You won't have to spend yourself out of a career. You won't have to attend seminars and leave with an annual coaching contract. You won't have to buy every gimmick thrust on you at weekly sales meetings.

You can do it being yourself, working with your sphere of influence and focusing on being a real estate agent. If you don't believe it can happen, take the time to read posts on Active Rain by folks like Jennifer Allan. You can be yourself and allow the public a long deserved break. You can do it now. You can do it if you are a new agent. You can do it if you have been an agent for years.
A strong dose of common sense will carry you farther than all the cheerleading and direction of those that earn a sizeable chunk of the revenue you create. It is your decision how to practice your craft. I only ask...give the public a break.

Move over Willie Sutton...you've got company

Many years ago, there was a chap that robbed banks. He would commit the crime, get caught, and do the time. Upon release, he would wait a bit and then plan and rob another bank. He would be caught again and the cycle would continue. The gentleman was Willie Sutton. He was interviewed at one point and the reporter asked, "Why do you keep robbing banks?"

His answer was short and sweet and quite revealing. "That's where the money was."

Philosophically, Willie Sutton has lots of company today.

If you live anywhere in or close to Montgomery County, you must have noticed that there are homes for sale. There are homes for sale on the main roads, side roads, back roads and dirt roads. There are homes for sale in condo buildings (pick a floor and you will find a unit for sale in one of the buildings). There are homes for sale by every type of agent ( big names, little names and boutique companies). There are homes for sale by owner and homes for sale by banks.

You get the picture...........there are homes for sale.

There are more homes for sale now, than at anytime most people can remember. Did I mention there is pre-construction, new construction and re-sale homes in this mix. The amount of new homes for sale dwarfs the number of potential buyers that are looking for a new home.

Just like every industry that discovers a long running slowdown is occuring, the real estate industry has started using a new term - "the absorbtion rate". It sure sounds pretty impressive but it really only means - how long will it take to sell all these houses? Any agent worth his or her salt has been aware of this figure for a long time. We used to just say "how many months inventory is on the market". I guess that was too simple and as others have done, agents have determined that if we change the spin, maybe no one will notice how bad it has become.

"If you buy a house today, you will lose money!" was Jim Cramers most recent pontification. It was heard on the Today Show and has been heatedly debated in many quarters. (For the record, he was right and he was wrong. It depends on the total picture. For investment purposes, he is dead on...for awhile. For those that need a home ... he has missed the boat.)

Everyone has an opinion on what in the world happened. Fingers are being pointed at lenders and real estate agents. People are convinced that there is a relationship with illegal immigrants. Others think it must be "those" people that used sub-prime loans.

There were some bad lenders that failed to make sure that their customers understood the loan they were accepting. There were some really bad apples that did not care how accurate the application was as long as they could get the loan made. There were cases of loan fraud.

There were some real estate agents that were not concerned with their clients ability to pay for the home that they were seeking. There were agents that affiliated with lenders that would "get the loan done" and home inspectors "that would not pooch the deal." There were cases of failed fiduciary.

The immigration status of anyone that bought a home has no relationship to any default. You do not have to be a legal resident of the United States to purchase property in the United States.

Sub-prime loans were available and remain available for some borrowers. The product is not at fault. The problems created by sub-prime loans did not occur with the majority of people that borrowed money using that product.

All these fingers being pointed, and there is a "gorilla in our midst" that few will acknowledge, that is probably statistically the biggest offender. There is a group being overlooked in the equation and few fingers are pointed their way.

Homebuyers and home owners, this finger is for you. You were the consumer and most of you had every opportunity to make a better decision. You signed disclosure after disclosure. You knew what you could consistently afford to pay. You allowed the possibility of financial gain or the desire for things you really could not afford to cloud your vision. Yes, in most cases, you created the quagmire that you are attempting to escape.

The consumers, that purchased homes that they could not afford, will ultimately have to accept responsibility for their actions. The consumer that used one or more cash out refi's to increase their buying power will ultimately have to accept responsibility for their actions.

Not only accept responsibility but they will have to live with the consequences of their actions.

Before you get angry and stop reading.... play along with me here. Let's do a short version
of.......IF THE SHOE FITS......

• Did you ask your lender for a loan that would give you the smallest monthly payment?
• Did you ignore the fact that the payment might increase because you were sure that prices were going up and you could refinance before the rate went up?
• Did you succumb to the desire to own a home you could not afford because creative financing allowed you to get in the door?
• Did you tell your real estate agent the total amount of money you wanted to spend on a home?
• Did you think, in the back of your mind, well if I can't afford it, I can sell it for more than I am paying today?
• Did you think that the multiple disclosures that you signed, agreeing that you understood every aspect of the purchase, were just meaningless window dressing?
  
  
  For a short period, people were buying and selling homes like cheap jewelry on E-Bay. The market was very hot. People got caught up in the rush. There was money to be made in the kitchen, the extra bathroom, the finished basement, etc.
  
  People began viewing their home as a liquid asset. They dipped into their equity and bought cars, vacations, paid off credit cards and many things like that. They did not change their lifestyle. Now the car is old, they need a vacation and the credit cards are maxed out again.
  
  The milk cow has run dry.
  
  People can not afford to stay and they can not afford to go. Homes are on the market and no one is willing to pay the asking price. Buyers are not willing to subsidize the largess of the homeowners. The once perceived value does not exist anymore. Sellers will either reduce their price to an acceptable level or they will have to remain in the home. If they cannot afford to repay the money they have knowingly borrowed, they will have to accept foreclosure. In this area, short sales remain terribly overpriced. The stalemate has continued.
  
  Sellers have been asked, "why would you mortgage yourself to the hilt?"
  
  They all have the same type of reply...."That's where the money was."

Cramer vs. Cramer........in a war of words NAR sent an unarmed man

I would hope by now you have had the opportunity to either hear or read Jim Cramer's statements about the condition of the real estate market. He was on the Today show the other morning. (NBC is pimping Cramer and his Mad Money, so get used to his visage during morning coffee.)

In his appearance earlier in the week, Cramer told Meridith Viera - and I paraphrase - "Do NOT buy a house now, you will lose money!" I have to admit, I listen to Cramer sometimes and he speaks from experience. His experience is in a world that I don't have much expertise. He deals in money matters. There are a lot of people that listen to him. His statement went unchallenged by Meridith "what in the world are you thinking" Viera.

Apparently, someone at the NAR was flipping channels that same morning. Their search for the cartoon network was interrrupted by Cramer's Crash Cramming Course in the housing market. I can only imagine that they sent Lawerence Yun (sic) a memo and asked him to research what Cramer said and craft a response. They sent NBC a note saying that it was not fair that no one was there to rebut what Cramer shared.

If you think Cramer was piling on.....you will hate what happened next.

The Today Show, (really pimping their new program pick up - Mad Money) invited Jimbo back and offered a point-counter point spot to the NAR. In their typical wisdom, the NAR had the president elect for 2008, Charles McMillan get out of bed and appear opposite Cramer.

What the hell were they thinking?

I was available. There must have been other agents available. I accept that maybe some verbose, quick thinking people must not have been available......but Charles "do I have to get up that early after key noting the Indianapolis state convention" McMillan. (And you wonder why the effectiveness of the NAR is in a faster free fall than housing prices?)

Cramer made his statement again. Your turn McMillan "that's not true, real estate is local. It is different everywhere." Cramer " Only three zip codes in the country are a value, Seattle, mumbled numbers and maybe Montgomery County, MD. That's it" Over to you McMillan - I must have misheard, I think he stammered something about the mid-west and included Indiana. It was hard to tell because although his image was stationary, our president elect (duck out of water already) was back pedalling quickly.

Cramer 'Indiana???? Indiana is one of the worst!!!!" Our man on the spot McMillan "That isn't true. I was just the key note speaker at their convention and they are positive about their market"

Memo to Charlie......you just got through blowing hurricane force smoke up their rear end. you are the president elect of their national group. you only chatted with groupies that were hoping for a photo op and other leaders that over time have learned to say when asked "hows the market"..........respond "incredible".

To McMillan's credit....I have to say something nice (I don't want my supra key cut off). He did try to mention that people live in houses. It may just be me. I actually expect the head of my association to be able to speak about the market we work and live in. I do not expect a "deer in head light" vacouous stare and nothing of substance offered to refute Cramer.

It would have been nice to hear -

• People that buy homes as a residence and plan to live in them for 3-5 years have rarely lost money.
• The only investment that people can purchase and use for housing is a co-op.
• There is not one stock that receives the favorable capital gains treatment that home ownership is afforded.
• You can not directly finance the purchase of stock and write off the interest related to that financing.
• Shelter is one of the basic needs (according to Maslov), no investment is on the scale.
  

I didn't hear it. I just watched McMillan fumble through his side. There was nothing offered that would refute Cramer's statement - If you buy a house today, you will lose money. Well, I can promise you that if you watch a replay of the point-counter point late this afternoon.....you will lose your lunch.

Why are Realtors paying dues to the NAR?????

Required disclosure and disclaimer: I am only parapharsing this event after but one cup of coffee. Even though I only have Cafe Dumond coffee in the house, The chickory does not provide me with photographic memory. The view expressed here are mine and I reserve the right to change my mind if questioned by anyone from Homeland Security that asks to speak with me privately.

Ask the question.....you might get an answer

It wasn't so long ago that I was having a conversation with my wife over dinner. We were talking about how quickly things had changed in the real estate market. I shared a few ideas and told her, "I think I will write a blog entry about it."

She looked at me and said, "You have been writing about it. You sit down at the computer and decide what you want to focus on and thirty minutes later you hit the enter key and voila....another epistle from Dippy."

"Instead of telling them what you think they need to hear, why don't you ask them what they want to know?"

That night, I formulated a little questionaire and sent it out to about 500 people. I waited a day or so and questions began to trickle in. This will be the first of series of sharing the questions and offering an answer.

I keep hearing that real estate is in the tank, yet, it seems there are more agents than ever in my area. I would have thought with the market collapsing, a lot of them would try something else. Why are there so many still in your business?"

That is an excellent question. At first, I thought the same thing would occur. After receiving your quetion, I did a little digging and asking around.

A lot of the agents in this area got into real estate in the last few years. Prices were going up and inventory could not keep pace with the buyers. If you were an agent and listed a house, it sold quickly and usually for more than the asking price. Listing agents were making a tidy income. Buyer's agents were spending about a day or so with clients, writing offers and usually finding success quickly. They too were making a tidy income.

When sales were so fast and frenzied, new agents saw no need in learning the profession. They were making more money than they ever dreamed of because they were there.

Those days are behind us. The memory of the reward for making just one sale lingers on. Agents that are without business today hang around the office hoping that lightning in a bottle will strike one more time. They have researched other jobs. There is not one job like real estate. In this market, one deal will carry a lot of agents for two or three months. In this market, faced with no income and the prospects of a long cold winter, one deal is all you need to get to spring.

So they stay and wait. It is survival of the patient and long suffering. It is not survival of the fittest. The quality of an agent can not be measured by the fact that they have remained in the business. It is still very important to interview two or three agents and make sure you have aligned yourself with one that is here because it is their career and not because they have no other choice.

"I keep seeing offers to get a CMA. Just what is that?"

A CMA (short for comparitive market analysis) is generally regarded as a document that shows homes that have sold similar to yours and uses that information to give you a general estimate regarding your home's value. It is not to be confused with an appraisal. It is not factual, it is a "best guess" about market value based on current market data.

Agents routinely offer these as a way to get into your living room in hopes of being the one that will list your home. If you are thinking about selling, you really should speak to more than one agent and I would recommend you spend the money on an appraisal before you put the home up for sale.

"If prices are falling, but the average sale is going up and total sales are going down....just what is market value?"

There are many opinions about market value. Some will tell you it can be determined by recent sales of similar homes. Some will tell you that it is the ultimate price someone will pay for your home. I fall somewhere between the two. I think you have to determine a reasonable starting point for pricing your home. The actual market value should be your final price. Your choice of an agent and how extensive their marketing plan it will either increase or decrease your market value.

Prices are falling and there are less sales, so determining a starting point is becoming much more difficult. The average sale is going up because there are fewer sales and the average price of what is selling is higher. Entry level homes (condo's etc.) are remaining on the market longer. Statistics you see must be analyzed seperately. Each figure is only an indicator of that segment of the market.

"Is this a buyers market?"

No. It is not a sellers market either. This is the most unusual market we have ever experienced. It is the mirror image of the frenzied market of three and four years ago. If you remember, there were more buyers than there were homes for sale. Sellers were receiving multiple offers for much more than they were asking. Now we have more homes than buyers. Sellers are receiving no offers or they are receiving offers for much less than they are asking. The market did a flip. In days gone by, it was like a pendulum swinging back and forth. We now are seeing it flip. It changes quickly, but right now.............we have no market.

That being said, everyone understands it is a great time to buy. Interest rates remain historically low. (If you thought the Fed cutting the rate would get you down to 5.5% again....you were wrong. Right now the Fed rate is close to 5%. When mortgage rates were down around 5%, the Fed rate was 1%. Don't expect those days to return for a long time.) There is a lot of inventory and there are many sellers that have to sell. Talk to your agent about the market. It may be time to buy for you.

Well, I think that is enough for now. Please continue to send me questions and I will answer them privately right away. I will put together another batch to share here as well.

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.

Steps from Metro, Minutes from Downtown

Solitude minutes from the maddening rush

The State of The Union

There are issues of wars being fought on foreign soil, there are issues of a growing illegal immigrant population, there are issues of mankind's impact on his environment. Nothing paints a clearer picture of who we are than the ongoing plight of our fellow countryman still suffering the effects and after effects of Hurricaine Katrina. Until we as a nation, collectively extend a helping hand to those in need, we will continue to exist as self indulged nuclear families living a life stimulated by ongoing sound bites about celebrity dramas and "would-a, could-a, should-a" remarks from candidates running for office.

Please consider your personal ability to help. The links below offer opportunities to assist those still suffering.

Family to Family.Org

Emergency Communities.Org