Metropolitan Rural

The Post-Dispatchis reporting today on a new bill being sent to Governor Blunt creating a specific crime and punishment for mortgage fraud.  Here are some excerpts and comments on the article:

The legislation defines mortgage fraud as making false statements or failing to disclose material facts. It creates fines and allows for the licenses of real estate brokers, agents and appraisers to be revoked. It also bars attempts to influence real estate appraisals through extortion or bribery.

Pearce’s bill allows for civil fines of up to $2,500 per violation for those who commit mortgage fraud. It also makes mortgage fraud a felony punishable by up to seven years in prison.

State appraisers and real estate commissions and the state finance division also would get more power to investigate allegations of mortgage fraud and the ability to levy even higher fines — up to $5,000 per violation.

That all seems fairly reasonable to me.  It should surely have an impact on the market and help keep some unscrupulous people out of the business during the next boom.  Of course, the extortion and bribery are already crimes, so I’m not sure why it was necessary to add that to the legislation.

Rep. Jeff Harris and Pearce had filed separate legislation that bars charging fees for early mortgage payments, directing consumers eligible for standard loans to subprime deals, and persuading borrowers to take out new loans unless there is a clear benefit.

That legislation also would require lenders to ensure consumers can afford monthly payments on variable rate mortgages when interest rates increase, create a legal responsibility to act in borrowers’ best interests and allow lawsuits from consumers for violations.

Harris, D-Columbia, said the bill approved Thursday “doesn’t do anywhere near what it should be doing” for lawmakers to claim that they have addressed problem mortgages.

Okay, Mr. Harris, I believe you are going a bit far there.  As consumers we still have some responsibility as well.  No one is telling us we shouldn’t buy that car because it will cost too much in 2 years when we lose a job.  No one tells us we shouldn’t buy that big TV on the credit card because the interest payments will be too much to handle when the economy slows down. 

If anything, maybe the legislation should include some provisions for consumers who knowingly sign false documents stating a much higher income.  Why do we only punish the business?  Where is the individual responsibility for their own actions.  Sure, the business shouldn’t do something to knowingly deceive the consumer, but the consumer shouldn’t do something to knowingly deceive the business either.  There’s two sides to this coin.

You can read the full text of House Bill 2188 here.  It’s only 12 pages, and it’s big print, but that doesn’t mean it’s easy to read!  If you aren’t confused by the end of page 3 you must be a lawyer!

It’s hard to turn on the news lately without hearing some sort of story about the housing market and mortgage debacle.  In addition to this blog, I also keep up to date with a number of Personal Finance blogs.    I thought I would share this story for those of you considering buying a house. 

How Much Mortgage Can You Realistically Afford?

I can’t tell you how much I agree with this story.  The fact of the matter is, if you are considering buying a house, your mortgage principle and interest (P&I), insurance and taxes (collectively known as PITI) will likely make up your single largest expenditure during the month outside of taxes.  With that being the case, don’t let someone else tell you how much you can afford. 

The bottom line is to do it yourself.  Don’t go in and ask a bank or mortgage broker how much house you can afford.  Know your monthly budget and what you are willing to pay in PITI each month.  Factor back out an estimate for property taxes and insurance to get your P&I number next.  Then you can finally talk to your mortgage person and tell them how much you are willing to pay in P&I, then talk about rates and what that equates to in a purchase price.

This whole subprime mess has happened when too many undereducated homebuyers talked with undereducated/unscrupulous mortgage brokers and got mortgages based on short term payments rather than what they could really afford long term.  It didn’t seem to matter if you could pay the mortgage 3 years from now, just that you could make the first one.    All Financial Matters gives a good example of this here (How the Heck Did This Woman Get a Mortgage?).  In summary of the story, a woman with a $34,000 income was allowed to get a mortgage for a $385,000 home.  Needless to say, she can’t afford the mortgage and is facing foreclosure 2 years later.

I had written a while back that I was considering making the transition into the real estate market.  At this point, I’m undergoing mental and financial preparation to make that leap.  Part of that involves reading and understanding what I will need to do in order to make a living, the other involves paring down debt and expenses while shoring up savings to deal with irregular income.   That process also got me to thinking.  If I really wanted a full-service real estate firm someday, with in-house mortgage brokers, wouldn’t it be great if you could find a mortgage broker with certification as a financial planner?  Offer customers up front for a small fee (refundable at mortgage closing) to help them with a financial plan to really afford buying a home.  It’s just too big a step in your life to put the details completely in the hands of someone who isn’t in your shoes.

I found this book on Amazon, was highly recommended, and borrowed it from the library. It’s called “Start Small, Profit Big in Real Estate.” I’m about halfway through the book by now and it’s vaguely interesting.

The author, Jay DeCima, instructs you to buy run down, ugly rental properties, fix them up some, and keep them rented for years. At first I thought it was refreshing to see a perspective that wasn’t about buy it cheap, pay nothing down, put paint on it and sell it for big profits. But then I got further into the book. He talks a lot about how to finance these deals and assuming mortgages and seller financing.

I’ve never noticed too many properties out there that have assumable mortgages or that many owners willing to finance (though that may be a little up now a days with the poor market). So, I have a few questions for my readers (hopefully a few of you will answer).

Are there really assumable mortgages out there any more?

Do you have any recommended reading on rehabbing and managing properties?

LINK

The link above from CNN Money shows the most recent report for Median Home values in the US. Now, before we go to far, let’s remember what median denotes. It means that 1/2 of all homes are more than this price and 1/2 are less. An average can be skewed by a few really expensive properties while the median is not affected.

The NAR is showing the median price has fallen 1.5% from the end of June last year (now down to $223,800). However, that represents 149 metropolitan areas around the country. St. Louis individually actually showed growth of 2.7%.

NAR is predicting the median price to begin rising again by next spring. I would tend to agree with them. The current mortgage market is starting to look better as Countrywide is getting some loans from Bank of America and even the Oracle of Omaha himself (Warren Buffet) is rumored to be considering an investment in Countrywide. All that adds up to a stronger footing for the mortgage companies and should lead to more decreases in mortgage rates within the next year. As rates go down, more people will borrow and buy a house, thus causing home prices to go back up. I tend to believe we are at or near the bottom of the pendulum.

For those of you who don’t know, I have been teaching part-time in addition to my full-time work as an IT Consultant. Hopefully all this extra work will allow my wife and I to get out of debt and start investing in real estate (my true love) and maybe start a small business of some kind.

Anyway, I’ve been teaching both Economics and Quantitative Analysis course at the undergraduate and graduate level. It has been a very interesting experience.

There has been an amazing amount of news over the past few weeks and months about the mortgage market here in the US. I go into more detail of how it got in it’s current state in a previous post, so I won’t do that here. The end effect of mortgage brokers getting rich has started to hit the financial markets as well.

Investors got worried a couple weeks ago about the large banks having trouble borrowing money to make more mortgage loans because their assets from current mortgages are difficult to value (no one knows how many of them will end up in default). Eventually the Fed stepped in and dumped another $38 Billion into the economy. Yes, that’s right Billion with a “B”. Oh, and that was just 1 day. That curbed investors for a while, but the Fed eventually came back and lowered the discount rate (interest rate that banks get when borrowing from the Fed itself) by 1/2%.

On one hand, that’s kind of nice. Hopefully it will help as I’m wanting to refinance our house by next summer to roll in the loan we took out for the central air. On the other, who said it’s the Fed’s job to bail out banks from making stupid mistakes and paying the price? Hopefully they will learn some lessons from this, but most likely they people who learned them will move on and we’ll be back in this same position in 8-10 years.

There is at least 1 investor who may not be worried. Rumors have it that the guru of Omaha himself, Warren Buffet of Berkshire Hathaway, may make a bid to purchase a considerable portion of Countrywide. Buffet is rarely wrong and Berkshire Hathaway stock has trumped the average market return to a pulp over the last 42 years. Maybe he realizes now is the time to get in on a lowering market, knowing that things are bound to pick up in the future.

Whatever happens, things are bound to be interesting.

Okay, so it’s not just people who don’t think, sometime businesses get so caught up in stuff they lose sight of reality too. The combination of these two things have lead to the huge mess we have in the mortgage industry.

People:
Got to caught up looking at that pot of gold at the end of the rainbow to realize they have bills to pay between now and then. If you spend all your gold before you get to the pot, you’re going to owe interest on it and end up owing in the end.

Take my advice, save yourself a heartache and do your own math before you apply for a mortgage. Know how much you are going to spend BEFORE you go see a bank. Don’t let them talk you into spending more!

Banks:
Or lenders/mortgage brokers to be more specific. These people saw a way to make a quick buck. The, “Heck, anyone can make money in real estate” attitude left them turning their heads and allowed multiple frauds to occur in giving people money they couldn’t afford. They were selling them off elsewhere and making a commission, so they didn’t have to worry about the long term risk of the mortgage. But, why worry, the market was going up so fast even if they defaulted the bank will still come out ahead… right?

Wrong! When people start defaulting that puts 1 more house on the market with 1 fewer buyers. If you look at the supply and demand curves from economics you would have an increase in supply (prices fall, quantity goes up) and a decrease in demand (prices fall and quantity goes down). Notice both of those lead to a decrease in price, and it’s hard to say what will happen with the quantity. Well, because prices don’t adjust downward very quickly (called sticky prices, no really!), they don’t come down fast enough to equal out the quantity and we are stuck with a huge amount of homes on the market.

All told, that means that in order to clear the current inventory, there has to be further depression of prices to induce buyers back into the market. That’s bad news for a lot of people who need to get out of their houses before they loose them. It’s good news for the real, smart investors. They will be poised to snatch things up as we continue down. They have the capital to hold and maintain property until things start to revive (which they eventually will).

So, what got me on this subject today? I read this blog by Dawn Griffin about Casey Serin and his “10 Flippin Mistakes.” The links to his stuff is on Dawn’s site. Basically, somehow, this young 20 something wannabe bought a bunch of houses with stated income loans (lying about his income mind you) and now has $140,000 in debt and 5 houses in foreclosure. The combination of the 2 mistakes above lead to his eminent demise.