The Creel Deal

In 1994 I was visiting friends in Orange County California and they were experiencing some real estate woes of their own. At the time Orange County was heading into bankruptcy, the real estate values were plunging much as they are now. Peoples position at the time was similar to that of so many I see today "If the property's not worth what I owe, why should I make the payments".

Two years prior to my visit, my friends were doing well for themselves financially. They owned a beautiful new home they had spent 800k building, and had purchased an enormous commercial building for 2 million for their furniture store (putting 50% cash down).

Now that the market had taken a dive, the commercial property was worth about 800k, which was more than they owed (his million dollar down payment was gone) and their home was also worth far less than they owed. Their strategy was exactly the same as so many are employing today, dump it on the bank. They rationalized that they could lease nicer properties for far less money, and after all, why pay for something that's worth less than what's owed?

They followed through on their idea and walked away from both properties, taking the loss and the hit to their credit. They indeed were able to lease a home and commercial building for thousands less than they were currently putting out in loan payments. In the little picture, they made money with their decision.

I haven't stayed in contact with those old friends from California since moving to the Northwest, but I couldn't help but wonder how they felt 10 years later when California's property values soared to insane heights, and those properties they dumped on the lender were worth millions. I was too polite to call and ask.

Now here we are again; prices dropping, and people walking. Obviously many homeowners simply don't have the funds to continue making the payments, so they have no choice but default. However, rest assured, there are undoubtedly those that can make the payments and will simply walk away because it seems like a sensible thing to do at the moment.

There will be a time in the not-so-distant future when prices soar again, and the people that will reap the rewards will be the farsighted investors grabbing up all the properties owners decided were worthless. If you think people are mad now, wait until the day they see the house they walked away from sell for 3 times the amount of debt they owed.

Someone will make a killing, but it won't be the walkers.

At times it seems we simply don't listen to the very people we pay to warn us. I recently ran across this article detailing an FBI report that essentially told us exactly what the future held for the mortgage industry, yet no one did much to prevent it. What could have been done? Did the governement fail us, or did we fail ourselves? Excerpts from the story are below:

FBI warns of mortgage fraud "epidemic" Seeks to head off  "next S&L crisis"

CNN Washington Bureau Friday, September 17, 2004

WASHINGTON (CNN) -- Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an "epidemic" of financial crimes which, if not curtailed, could become "the next S&L crisis."

Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions.

"It has the potential to be an epidemic," said Swecker, who heads the Criminal Division at FBI headquarters in Washington. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said.

In one operation, six individuals were arrested Thursday in Charlotte, charged with bank fraud for their roles in a multimillion-dollar mortgage fraud, officials said. The two-year investigation found fraudulent loans that exposed financial institutions and mortgage companies to $130 million in potential losses, they said.

The number of open FBI mortgage fraud investigations has increased more than five-fold in the past three years, from 102 probes in 2001 to 533 as of June 30 this year, the FBI said. The potential losses are staggering, and many financial institutions are cooperating with investigators.

Officials noted mortgage industry sources have reported more than 12,000 cases of suspicious activity in the past nine months, three times the number reported in all of 2001.

States identified as the top 10 "hot spots" for mortgage fraud are Georgia, South Carolina, Florida, Michigan, Illinois, Missouri, California, Nevada, Utah and Colorado.      END

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I recall being told by a highschool teacher that we study history because history repeats itself, and in doing so, we may prevent repeating previous mistakes. In theory, that sounds great, but is that what we actually do? Do we learn from our mistakes, or does money blind us as a society?

For years buyers have been told to have a home inspected and obtain a Homeowner Warranty Policy ("HOW"). That way the buyer would know the current condition of the property, and if certain things failed, there was a policy to cover them.

Some realtors use the homeowner warranty to help make the sale (by offering the warranty as part of the listing and sale package), and give the prospective buyers greater confidence that they aren't assuming any big risk with their purchase, much like having an extended warranty on a car. 

What is a Home Warranty: It's not an insurance policy and it's not actually even a warranty on the home. Instead, it's a service contract sold for certain systems within the home such as the heating and plumbing, and also sometimes appliances such as refrigerators and washing machines.

It's not a warranty on a home, in the sense that it doesn't cover the walls, floors, roof or foundation. And it's not like an extension of the product warranty the buyer of a new home receives from the builder, which most definitely would cover those items. In some states, it can't even be called a warranty. For instance, in Oklahoma it may be called "home service agreements" while in Virginia it's "home protection insurance."

Sometimes the coverage extends to the pump and motors installed on pools and spas or to an automatic garage door opener, but in most instances it extends just to what's located within the main foundation of the home. The pipes and wires that deliver water, energy, and telecom services are not covered outside the home, nor is the damage caused by broken pipes, blackouts, or power surges. Those are perils typically covered by a straight insurance policy; the difference between a home warranty and a homeowner's insurance policy comes down to a question of coverage. A home warranty doesn't cover damage due to fire or flood, for instance, and it doesn't cover the roof, walls, floors or foundation.

This is also a difference from the builder's warranty typically issued by a construction company to the buyer of a new home, which would typically cover items such as leaky basements, drafty windows, or warped walls. It's also different from a straight maintenance contract, which typically would be sold to cover routine and scheduled tasks such as the annual cleaning of an oil burner. A home warranty covers only failures due to normal wear and tear.

Inevitably, there will be overlaps in coverage between insurance and warranty, or between warranties. In cases where an appliance is covered by either a manufacturer's product warranty or a retailer's extended warranty. Most HOW's let those take precedence, But some warranties cover only parts after a period of time and not the labor, then the HOW would pick up the labor. Transferable warranties on appliances are less common, but in these situations there also might be an overlap with a home warranty.

If you desire a home warranty, investigate the viability of the issuing company before relying on its warranty. The company should be able to provide you with information regarding its ability to pay claims. Some companies are independent companies dealing in the secondary home market, while others are an extension or affiliate of the builder. There is no guarantee by the government or the REALTOR® assisting you that these companies will be there when you need them. Home warranties cover a limited list of items. Make sure that you understand the extent of the "guarantee" or "warranty" before you sign.There is no shortage of consumer complaints against companies offering such warranties, so it is as usual a "buyer beware" situation.

So that ARM's run it's course, and it's time to pay the Piper! That's the issue thousands of Americans face daily; to many, its a quagmire that leads to financial ruin and foreclosure. To others, refinancing is the solution they seek. Some will be qualified, and many will not.

Is refinancing your home the answer to your troubles?Often, it's not. Refinancing comes with a slurry of issues,... some old, some new. That burdensome old credit score seems to jump off the page these days like snake eyes at the craps table. Then of course there's those dreaded "points" your friendly mortgage Broker or Banker will charge you on the front and back-end of your loan (after all, they have to earn a living just like you).

Expenses Associated With Refinancing

Discount points fee: This fee represents additional money you can pay to the lender at closing. If you pay more points it will lower the interest rate. Usually, for each point you pay for a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point.

Origination Fee: Fee charged by the lender/broker for evaluating, preparing, and submitting a proposed mortgage loan. Origination fees are often expressed as a percentage. A one percent loan origination fee is equal to 1% of the loan amount. Some lenders add origination points into their quoted points while other lenders add an origination point in addition to their quoted points. Origination Points are equal to a percent of the loan amount. 1.75 points is equal to 1.75% of the loan amount. Often the loan agent writing the loan will make 1 to 3 points (%) on your loan.

Application Fee: covers the lender's cost to process the information on your loan. Usually, you must pay this charge at the time you file the application. Some lenders may apply the cost of the application fee to certain closing costs. Generally lenders do not refund this application fee if you are not approved for the loan or if you decide not to take it.

Appraisal Fee: This fee ($150 to $400 depending on the size/price of the property) pays for an independent appraisal of the home you want to purchase. The lender requires this estimate of the market value of the house for the loan. Factors to be considered in determining market value are: present cash value; use; location; replacement value of improvements; condition; income from property; net proceeds if the property is sold, etc. The appraisal is a critical factor in determining how much of a mortgage the bank or mortgage company will approve.

Credit Report Fee: Three major national credit bureaus (Equifax, TransUnion and Experian) supply lenders with the information on your credit behavior. Consumers typically pay $45 to $55 for this report.

Title Search Fee: A title search is a detailed examination of the historical records concerning a property. These records include deeds, court records, property and name indexes, and many other documents. The purpose of the search is to make sure there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title.

So how do you  maneuver around these barriers?

LOAN RESETTING

What many don't realize, that if they actually pick up a phone and call their lender, they can reset their existing loan and avoid thousands in closing cost associated with a loan broker or banker; and most often, the credit score isn't even pulled. Banks have a "Loan Retention" department that handle's this for existing loans, and the only real requirement is that you be current on your payments.

Now you may not get to enjoy those dirt cheap rates you keep reading about in the paper (not many do), but in most cases you can drop a rate that's creeped up to 8.9% down to around 6%, and believe me, that's a real savings. Best of all, it can be accomplished in a matter of days, handled over the phone, with a general fee of about five hundred dollars.

So even if your not on the brink of financial ruin, but your rates higher than you like, and you can't stomach the idea of paying thousands in closing fee's on a new loan (lowering your rate, but raising your debt) try picking-up that phone and speaking to your lender about resetting your current loan.

Come'on you can do it, don't be shy, no need to refi.