Redfin Sweet Digs, The Chron, Bankrate and me

I do a lot of daily reading. Yesterday I was reading the Redfin Blog. In it they referenced an article that appeared in the San Francisco Chronicle last Thursday.

Mortgage crunch hits Bay Area hard because of jumbo loans

The article covered most of the basics, got most of the info correct, and overall was a well written article. Good job, Carolyn Said and Kelly Zito!

But then I got down to the bottom...

Do you know that sound Sitcoms use? The old needle on the phonograph record being dragged sideways? That's what I heard inside my head. Why?

Bankrate.

What you can do

With the mortgage situation changing day by day, it's hard to say what's best for consumers. One thing all experts agree on: If you don't have to be in the market right now, it might be best to wait this crisis out. If that's not an option for you, there are still places to get advice. For instance:

-- Bankrate.com: A free, online source of personal finance information that includes an entire section on mortgages, including local rate comparisons.

-- FDIC: The Federal Deposit Insurance Corp. provides comprehensive consumer advice on mortgages and home lending. Check its "Looking for the Best Mortgage" page for starters. You can find it at links.sfgate.com/ZOL.

-- The Federal Reserve: The Fed offers a great consumer overview of lending issues, particularly focusing on settlement charges. Check it at links.sfgate.com/ZOM.

-- The FTC: The Federal Trade Commission also offers an advice site for consumers navigating the mortgage market. Here's a shortcut to the site: links.sfgate.com/ZON.

Remember Sesame Street's "Three of these things belong together..."?

Three of these things belong together, one of these things just doesn't belong. three of these things are government agencies, one of these things is a capitalistic business who's primary function is generating income by selling leads, advertisements and banner ads. They also are knee deep in a Bait and Switch Lawsuit brought on by a former Advertiser / Lender dating back to 2002.

Bankrate is much like LendingTree. Both disguise themselves as friends of consumer. LendingTree is a lead generation business (who also was caught in a lawsuit of their own. See: The Truth About Lending Tree). Both are in the business to generate income. Both advertise massively and tout that they are there for the consumer.

There is nothing "Americanly" wrong with the business model. They are in the business of making money and do so by attracting clients in what some might say is a deceptive manner - the truth is, that's advertising!

My issue is with the Chron article including and referencing Bankrate as a real resource. I'd have the same problem if they had said, "Go to Mike - He's the Man!" Yes, I am. But I too am a capitalistic business who's primary function is generating income, albeit with a slightly different advertising pitch.

Integrity.

Keeping You In

I read an article in the WSJ that was about how banks are working to keep you.

Customer Retention's the name of the game.

For some reason I cannot link to it so here's a cut and paste.

Best part is at the bottom (isn't it always), LendingTree is promoting a $500 price guarantee.

That sounds great. Then you read the fine print...

• It's only for fixed rate mortgages
• It's only for Conforming Loans ($417,000 max)
• Oh yeah and you as a borrower have to document that you received a better offer from another source on the same day as the application was submitted to LendingTree.
• And you have to close on that offer.

This is such great fodder for another day but...
You have to understand Lending Tree's business model.

They are a referral generating lead source.
They advertise, advertise, advertise.
Then if they did a good enough job on their commercials,
they'll get a stream of applications coming in.

But "Oh - Oh" you say, "Lending Tree doesn't do loans".
That's part right! They are in the Lead Selling business.
They will then sell your good name to no fewer than 4 brokers or lenders.
Typically they'll sell you for around $500 to each one.

The other part, the part that's wrong, is that they do indeed do loans.
See: : LINK

Now let's see here...
If I just spent $500 to get your name, address, and credit scores, how accurate do you think my Good Faith Estimate is going to be to you?

Not sure? - Shame on you!

Go back and read "What is a GFE and why should I care?"

Go on, we can wait...

This is important stuff.

Got it yet?

Good!

So if I'm buying leads from Lending Tree, and I'm quoting rates that are "not so realistic" just to get you to bite on my hook, how in the world is anyone going to beat my offer?
How can LT lose?

That's right, they can't.
And even if they did, it's such a good marketing gimmick that they just don't care.

They mention that one guy did submit a claim.
His loan was only for $100,000 - which is pretty petty,
meaning chances are none of the Lending Tree lead buyers really cared too much about winning that one.

Oh, and anytime LT wants to crank up the profits, all they have to do is start selling your name to 5 or 6 lenders instead of the 4.

Of course they'll paint that as a positive, "Now you'll get up to 6 offers from banks, because when banks compete, you win!" - NOT!

Just remember, in anything you do...
Know who's selling you what, and where they're coming from.
You have to know their angle.

Note to self: You now have 3 or more days of topics here, LT, Ditech and E-Loan, oh and Listing Agents too.

Ok, Off the soapbox!
Here's the article:


Get a mortgage from another lender and we will pay you $250.

That is the latest marketing twist from Bank of America Corp. With competition for home loans increasing, the Charlotte, N.C., lender is encouraging its customers to apply for a mortgage with the bank and then shop around. If they decide to get their home loan elsewhere, Bank of America will write a $250 check to cover a portion of their closing costs.

The Bank of America offering is the latest sign some lenders are beginning to emphasize price, service and stronger customer relationships in the face of slowing loan volume. Mortgage originations fell 29% in the third quarter compared with the same period last year, according to the Mortgage Bankers Association, as the housing market cooled and rising interest rates made it less attractive for borrowers to refinance.

Last week, Charles Schwab Corp. said it would give most of its bank and brokerage customers a 0.25 percentage point discount on the rate for a new adjustable-rate mortgage or home-equity loan and a 0.125 percentage point discount on the rate for a fixed-rate mortgage. Until now, the discounts were available only to clients who had combined bank and brokerage account balances of more than $250,000.

In August, E*Trade Financial Corp.'s mortgage unit began offering $500 off mortgage closing costs to the company's banking and brokerage customers who have less than $100,000 in total assets at E*Trade. E*Trade customers with assets of $100,000 or more get a 0.125 percentage point mortgage-rate discount.

Other lenders are using rewards programs to try to boost customer loyalty. National City Corp. (my old company, - mm) gives customers enrolled in its rewards program 50,000 bonus points when they take out a mortgage with the bank. Customers also earn bonus points for tapping a new home-equity line of credit. Citigroup Inc. offers special reward points to customers with a Citibank mortgage or home-equity loan, provided they also have a Citibank checking account and debit card. The points can be redeemed for a variety of rewards, from gift cards to plane tickets.

The offers represent a new tactic for lenders, which for years vied for customers by rolling out mortgage products that allowed borrowers to lower their monthly payments. These include interest-only mortgages that allow borrowers to pay interest and no principal in the loan's early years, option adjustable-rate mortgages that let borrowers make a minimum payment but can lead to a rising loan balance, and mortgages with 40-year terms. But the flow of new products has slowed and bank regulators have raised questions about the risks some nontraditional mortgages may pose to borrowers and lenders.

Some lenders are wooing customers with pricing guarantees. LendingTree.com, a unit of IAC/InterActiveCorp, is offering a $500 price guarantee to certain borrowers who use its loan network to shop for a home mortgage. The offer, which runs through year end, applies only to borrowers taking out standard fixed-rate mortgages for $417,000 or less. To qualify, borrowers must document they received a better offer from another source on the same day an application was submitted to LendingTree, an online service that matches borrowers with lenders. LendingTree will pay the $500 if it can't get one of its partners to meet or beat the offer. So far, only one customer has put in a request for the $500 payment, but the request was declined because the loan was for less than $100,000, the company said.

Bank of America's "Best Value Guarantee" program is designed to attract borrowers who think they would get a better deal from a mortgage broker or another competitor. To qualify for the payment, customers must have a checking, savings or other account with the bank, apply for a mortgage and then provide proof they obtained the home loan elsewhere. During the pilot tests, only a handful of bank customers claimed the payment, said Senior Vice President Eric Telljohann. The offer is being rolled out in a number of East and West Coast markets and should be available nationwide by January, the bank said.

Note from Mike: Report after report from the Mortgage Brokers and the mortgage bankers groups have repeatedly shown that the borrower will generally save more money by going through a broker than by going directly to the source. While BofA's "Best Value" is once again a wonderful marketing slogan, it doesn't hold water to the facts.

Real Estate Investor?

This is Part One in a Three Part series

The System

Have you ever seen one of those signs and wondered?

"We Pay CASH for Homes!"

or the latest incarnation...


"Real Estate Investor Apprentice Wanted"

Wonder how all these people could pay cash for all those homes?

Wonder why the same looking signs have popped up everywhere?

Wonder why if they have so much money, they can't afford better signs or advertising?

Wonder why if they are seeking an Apprentice - why are they driving a beat up Pinto?

I have too.

So a little over a year ago I paid good money to go to this big Real Estate shin dig in Moscone Center. It was put together by the Learning Annex. It had keynote speakers like Anthony Robbins, Robert Kiyosaki, and even The Donald.
I certainly wanted to "Learn" and why not learn from guys like that?

For three days, for twelve hours a day, I attended "class" after "class". If I remember right there were over 80 different "classes" offered. Not by the Keynote guys above, but by True Professional Real Estate Investors. These people were some of the most successful people on the planet. They had spent the early years of their life learning how to strike it rich with real estate and now wanted to give something back.

I know they were truly successful because of the expensive silk suits they wore. And then I couldn't help but notice their flashy watches. Oh and the way they talked about their last vacation. And then to verify what I already knew, they also told me they were (extremely wealthy). Each and every one of them did.

Amazingly, they were all willing to share vital information, the very same information it took them years of hard work to learn, with anyone!
Almost.

Just as long as you were one of the first 500 people to make their way to the back table and give their wonderful helpers a credit card.

Don't think of the $1,800 charge as a high price to pay for 12 CDs and a booklet. It's an investment in your future!

Time and time again, in each and every "class", with the very same speech pattern, the rush to the back was on. People of all walks of life were suddenly running for their financial lives.
Not for the door (as I might have hoped) but for the back table!
These good people would literally inundate the 20 or so wonderful helpers.


"NO... Take my Platinum Card first, I was here first!"

At times it reminded me of glorious holiday times past.
Cabbage Patch Kids, Tickle Me Elmo, and Beanie Babies have nothing on this spectacle.





Continued soon...

DO NOT FALL FOR THIS!

Remember the Bruce Cockburn song entitled "If I had a Rocket Launcher"

Not being a violent person, I can't really identify.
But sometimes...

Hey, here's a little know Mueller Factoid:
Did you know I have never actually touched a gun? I've been very very close to some really big guns. See this: LINK

Back to my Rant
I work in a large office building. In our building there is a mortgage company that hires extremely un-qualified loan officers, as many as they can. They do not have desks, they are outside sales people.They get them in, they hype them up, they give them scripts, and then they unleash them to the world like a swarm of bad door to door salesmen.

They train them on two, and only two loan programs.
Want to guess which ones?
That's right! The Payment Option Arm and this new thing they call the Mortgage Accelerator Program.

They are trained on what to say and how to say it.
They are NOT trained and do not understand the features of the loan, or how to be a LO in the first place.
They are really birdogging - that's all.

They'll start conversations with everyone. In the elevators, in the cafe, in the lobby.
The conversations all start the same, "Have you heard about this new loan program, OOOH, I'm sooooo excited!..."

I can't tell you how many people in the building really shun them.
They also all say that they have signed up all their Friends, Family and Co-workers!
If everyone's doing it, it must be a good thing, eh?

Right now I can imagine my grandmother would have then pinched my cheek and said,
"If everyone jumped off a cliff would you jump off a cliff as well?"
What, yours too?

But hey that's sales - and if that's the business model the company chooses to use - so be it.I won't go into the how when I ask insightful questions of this new program - they don't have a clue what I'm asking.

My problem is in the facts.
No matter what this loan is titled, "The Super-De-Duper Payoff Your Mortgage in 8 Years Program" or whatever they want to call it;

This loan is an ARM, this loan is a HELOC, this loan is a Hybrid.
I've seen it reported as a HELOC on Steroids.
Come on, give me a break!
And besides look what they did to Pro Athletes! (the steroids - not this loan)

So tell me what caps are there?
What's the Index? The Margin?
Does this loan have to be paid off in 30 years?
Does it recast? Does it reset?

This loan is quickly becoming one of the new HOT marketing products in the business.
Will it be the POA of 2007? Too soon to tell.

The charts and figures rely on the fact that the consumer will continue consuming in the same manner or less.
Yet we all know that as a group, consumers will, when given access to money at reasonable rates, tend to use that money.
So the loan balance may go up not down.
That's just human nature.
Knowing that's human nature, are they not lying with their projections?

Looking at POA people as an example.
It's true that if you took the extra cash you might have spent on a traditional 30 year fixed and invested in stocks, bonds and the like you will be light years ahead down the road (net worth wise).

Some people who have POA's were sold on that premise.
Others were sold on the minimum payment.
Virtually none were shown what happens when the loan recasts.
None were shown that their loan may recast in as soon as 3 years or less.
None were shown how their minimum payment would double or even triple!
Here's the truth: http://www.patagoniafinance.com/poa

Industry figures maintain that a full 75% of those people with a POA (Neg-Am loan) consistently make only the minimum payment.
Now with all those Neg Am payments out there and all that extra cash floating around you might expect to see savings and investment rates at all time highs.
Conversely, those savings rates are at all time lows!

Put everyone in this glorified HELOC program, let them spend what they want, or paydown what they want and you tell me what's going to happen when the loan needs to re-amortize.

This program isn't all that new, I did a quick search and found an article in my paper from back in May 2005 warning of it's pitfalls.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/05/26/BUG95CULR51.DTL&type=business

From the Article:
People who continuously spend more than they earn will keep adding to the principal and their mortgage will end up like a negative amortization loan.

Joyce Franklin, a financial planner with JLFranklin Wealth Planning, says "a borrower with financial discipline who wanted to pay down principal could do so on her own, without a fancy product" that charges a premium rate.

Any good financial planner will tell you to keep a mortgage on your primary residence for as long as you can.
Additionally, paying off your mortgage early is dead money.
I'd explain further on that thought but it's another posts worth.

The Truth About Lending Tree

In anything like this I find it best to start with the business model.

What is a business model?
Simple, it's what the company does, or plans to do, on a regular basis to make money.

DO NOT forget, every business is in business to make money.
Even Non - Profit's must have a business model, a plan to bring in money, or they will soon cease to function.

Lending Tree (hereafter to be referred to as the tree) portrays itself as the best and easiest vehicle for you to use to compare different lenders.
And you know very well that "When banks compete..."

But there's a couple of things you don't know.
The tree's business model is all about selling referrals, almost.

Fill out the application on their site and in 4 hours you'll receive up to 4 offers from competing lenders!

Hey that's pretty cool.
One stop shopping!

But how do those lenders know to send me their "best" rates?
Could it be because the tree sold your name and info to them for around $500?
True story!

So they advertise on TV, radio, ballparks, bus stops, and so on.
Meanwhile they bombard us with offers to sell us "red hot financing leads".
Four lenders pay $500 each for your name.
They know they have to beat the other guy so it quickly becomes a contest of who can bait and switch the other guys better.

You, the consumer, buys into what you believe is the best sounding one and commit to a loan.
You, the consumer then find out later, you can't get the rate they offered, or at the fees they originally offered but it's too late now. You've swallowed the hook.

The lender closes another loan, makes money, buys more leads.
The tree collected $750 on selling your name - so it made money.

This is the lead generation business and make no mistake, this is a big business.
I get lead sales offers everyday, not one - many!
It's not just the tree either.
Have a high traffic website? - You can collect names of people who want to refi and sell them!
Got a blog like this? - same thing.
Buy an Autodialer and download the names and numbers of people with sub-prime loans into it.
Let it run each and every day. Collect all those people that "Press 2 now" for more info.
Sell them, not just once but over and over again!

See those banner ads, pop up ads, or that long column of ads on a website - that's all about lead generation!

What's that you say?
How come the tree collected only $750 when it sold 4 lenders at $500 a pop?
Smart cookie you are!

You see, the tree also owns it's own mortgage company called The Home Loan Center.
OOOOPS!

Chances are the first quote and probably the best was from them!
Nothing like faking the public into believing they were getting an honest deal while drive applications to your own people, all the while still making money off from 3 other lenders.

Too bad they couldn't keep it a secret. Now they are involved in a class action suit.

Also related: BankRate - same animal, same tactics, same problems - class action lawsuit.
This one not brought on by consumers but by the advertisers themselves.

In anything you do, anything you buy, ask yourself the simple question -- what is the business model working here?

Oh here's a mini bibliography of sorts:

http://www.bizjournals.com/charlotte/stories/2006/10/09/daily31.html

http://www.consumeraffairs.com/finance/lending_tree.html

http://inkblots.markwoodman.com/2005/05/24/cutting-down-the-lending-tree/

http://inkblots.markwoodman.com/2006/05/23/stump-grinding-the-lending-tree/

http://www.epinions.com/content_17983901316/show_~allcom

http://thesqueakywheel.com/complaints/2006/FEB/complaint8288.cfm

http://thesqueakywheel.com/complaints/2006/SEP/complaint9941.cfm

http://realtytimes.com/rtapages/20030909_lendingtree.htm

"I contacted LendingTree.com regarding a refinance loan and was told by the representative Mr. Daniel Lete that I would have to give him a $400.00 deposit to secure the lock-in interest rate on the loan and receive additional information regarding the Mortgage lending process. I stated that I was concerned about providing my credit card information without getting any information in writing first. Mr. Lete assured me that my deposit could be refunded. However, after giving my credit card information I was sent an e-mail from Mr. Leta which included detailed information on the loan and the very limited circumstances which I would be entitled to a refund of my deposit. Mr. Lete was quite misleading.

The matter resulted in my not getting my deposit back after the loan agreement was never signed or processed. After getting the lock-in interest rate, I needed to change my refinancing amount. I was advised by Mr. Lete to get a home equity rate because of the low amount I was requesting. I declined to proceed with the process after I was quoted a very high interest rate."

Investment or Flip?

Two items seemed to dominate my inbox this weekend.

1. Growing concern on the housing market due to "Flippers".
2. Growing concern on the housing market due to "Sub Prime Lenders".

I'll deal with Flipping today - Sub Prime tomorrow.

We all know what a flipper is right?
One who buys a house and turns it around for a quick sale for profit.

Let me make this perfectly clear.
There is nothing wrong with flipping.
Stock traders do it all day long, people flip cars, horses, and even baseball cards.
Flipping the right house is OK too.
It is a real and viable way for the right person to make money in the real estate market.

Did you catch the caveat?
(It has to be the right house and the right person)

The problem with flipping is that so often it's all wrong.
It's the wrong neighborhood, wrong style, wrong kitchen, wrong price and so on.
Match that with the wrong person, who doesn't know the market, who gets the wrong loan, wrong expected ROI, with the wrong assets and reserves.

Flipping involves buying a selling a house, that should be simple enough.
Anyone can do it right?

All you need to do to become a millionaire overnight is have the right system.
Lucky for you they just happen to be advertising one on TV!
And look! All those other people are independently wealthy - if they can do it - so can I!

No wonder why flipping is the approach used by all those late night infomercial get rich schemes.

"We Pay Cash For Houses!"
"Real Estate Investor Apprentice Wanted"
"Buy a Home for Pennies on the Dollar"
"Buy Foreclosures, Buy Tax Liens"
and so on.

To be a real flipper there's a couple of things you have to have:
You must have capital (that means mucho pesos sitting in the bank).
You must know the neighborhood well.
You must know the market well.
Short Term interest rates are your friend.
Credit is your friend.
Speaking of friends; you'll need a Realtor, a Mortgage Person, a Contractor, a Painter, a Drywall expert, an Electrician, and a Plumber as best friends or business partners.
You'll need a well thought out business plan for each and every flip.
You'll need proper cash flow analysis.
You'll need to buy right, upgrade right, and sell right.
You'll also need a truckload of luck to make it all work.

Sometimes you need to buy and hold for a while.
That seems to be contra to flipping thoughts.
Get any of the above wrong and you could end up in trouble quick.

In the Bay Area, the Sacramento area has always offered up less expensive housing options.
Buying any house in the Bay Area is going to be expensive.
When looking at the vast expanses of the central valley, they can build as many houses as we want to buy. Supply and demand keeps the values down (more supply than demand).

It's the lower price that attracts the uneducated flipper to the area.
It's been described as a hotbed of flipping.
It's been this way for many years, nothing new.

But here is something that is new!
It's a blog detailing Sacramento area flippers who messed up.
Appropriately titled too! flippersintrouble.blogspot.com

I don't know who Max is but he has access to the MLS and is tracking some pretty interesting properties. There's some good information here!

I've detailed another flipping blog in the Sacramento area before.
Casey Serin's ongoing personal nosedive into financial ruin, http://iamfacingforeclosure.com

I even found a list of other "Flippers in Trouble" blogs
HERE

Payoff Your Mortgage...

In Record Time!

That's the way the story goes...

I had a call from a client who was asking about this new way to own your home faster the other day. "It's a radically simple idea. I don't know why I didn't do this before!", she said ever so enthusiastically.

To tell the truth, I had no idea what it was she was referring to.
Then it hit me.
There is an office in our building that hires new loan officers.
They put them through a sales pitch training and then unleash them to the world.
I happened to be riding down the elevator one day when one of their wide eyed Stepford zombies spotted my Patagonia embroidered oxford.
She said, "Hey! You do mortgages!"
"I work for Blah, Blah Lending and we have the most exciting new loan that allows you to payoff your mortgage in almost half the time! I'm so excited about this I'm going to enroll my Mother, My Brother, and my best friend!""

I started asking her questions until it became clear she had no idea what she was talking about.
It wasn't just clear, it was crystal clear!
The only thing she could spout back was what they had just told her in her sales training seminar.
When I started asking her specific details, things any decent loan officer should know, it was also clear she knew nothing about mortgages in general.
So I blew her off much like I would have for someone who had just cornered me into an Amway presentation.

So when my client asked, I did some research, I made some calls, and I found some answers.

Here's the details:

They want to do a refi for you, that part may be pretty evident.
They want to refi you into a Home Equity Line of Credit.
But it doesn't stop there.

To do this, they want you to deposit all your money into their bank account!
Let me just stop right there and say "This is never a good idea!"

Oh, they'll give you free bill pay, free checks and a debit card but they want you to have automatic deposit of all your income.

They'll hold your money till you need it.
This will lower your average daily balance.
As long as you don't spend more than you make, the difference over the life of the loan this reduces your interest accrued.

Notice I said, "As long as you don't spend more than you make..."
Go the other way and you'll end up worse than if you did a Payment Option ARM.
But really, how many people spend more than they make?

Simple, eh?

But it's not.
The HELOC is not going to be at 6.0% like your fixed rate might be.
It'll probably be at something like 7+%.
It's also an ARM - that means adjustable.

According to the article attached:

Problem is, the marketing literature is often misleading, comparing apples and oranges and enticing the homeowner to refinance by taking on a home-equity line of credit that provides for the unlimited checking, bill-paying, and ATM access. By sleight-of-hand, this line of credit, with a higher interest rate than the mortgage, is made out to be a savings move.

For example, one of these programs boasts that a homeowner paying 6.5 percent interest on a 30-year, $300,000 mortgage could have the mortgage paid off in 15 1/2 years by using a cash-flow management account tied to a variable-rate home equity line of credit charging 7.72 percent to start. To realize the same interest savings made possible by the early payoff, the homeowner would have to find a 30-year mortgage charging a mere 3.83 percent, the marketing claims.

In reality, what makes the early mortgage payoff possible is not the line of credit but the assumption that this homeowner would save $800 a month into the cash flow management account. So, why not simply keep the existing mortgage at 6.5 percent and send an extra $800 into the principal each month?

Then, "the result would be paying off the mortgage in 14 years and three months," or 15 months earlier, said David B. Jacobs, a fee-only certified financial planner in Kailua, Hawaii. And the homeowner would save an additional $45,000 in interest over the life of the loan, compared to the line of credit, Jacobs said.

Besides the line-of-credit costs, a one-time fee for setting up and managing these cash-flow accounts can run as high as 1 percent of the loan balance. If you were to apply to the mortgage principal the fees saved by not using one of these services you could reduce your mortgage payoff time by another year, Jacobs said.

And yet, "people whom I would normally consider fairly financially savvy are falling under the spell of this marketing blitz," he said. "These schemes take the simple idea of making extra payments toward your principal and make it look more complicated so they can charge for what you could simply accomplish on your own."

Be careful out there.