The standard Settlement Statement, the HUD-1, just got a makeover this December.  The extra page is an extra burden on lenders to get the Good Faith Estimate right the first time.

Last week at the closing for our new house, we got a small bonus courtesy of the new requirements.  The expenses are broken down into three categories based on how closely the actual charges have to agree with those on the Good Faith Estimate:

• Charges that cannot increase at all - the loan origination charge, the cost of points for the chosen interest rate, adjusted origination charges, and transfer taxes
• Charges that cannot increase by more than 10% - government recording charges, appraisal fees, cost of credit reports, cost of tax services, cost of flood certification, and cost of pest inspection
• Charges that are allowed to change – initial escrow deposit, daily interest charges, homeowner’s insurance, title services, lender’s title insurance, owner’s title insurance, and home buyer’s warranty

In our case, the lender underestimated our transfer taxes by $41.85, so we got that as a credit at closing.  What kind of sucked for the lender was that they overestimated the cost of the credit report by $26.67, and overestimated the cost of the appraisal by $50.00, but couldn’t use either of these to offset the underestimate of the transfer taxes.

The new page of the HUD-1 was the result of a November, 2008, rule change to the Real Estate Settlement Procedures Act (RESPA), and went into effect at the beginning of 2010.  Though the little bonus at closing was nice, these extra regulations just slow the whole process down and mean extra costs for everyone in the long run.  The background research to get the better estimates is an additional cost.  Filling out the third page is an additional cost all the way up the chain.  The loan still goes through, I still end up owing lots of money, and the lender still has my first-born in escrow the whole time — in essence, the same kind of lender-borrower relationship that existed before — but it’s not as efficient as it was before.

For the meantime, though, lenders now have to pay for some of their bad guesses.

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I’ve been talking about some things related to the home purchase we’re doing now.  One of the conditions of purchasing our new home was ability to get financing.  Since I couldn’t buy with cash, I needed to apply for a mortgage.  What I couldn’t do was make the purchase contingent on the sale of my current home (the property we were interested in was a foreclosure), so I needed to be able to qualify for the new loan without settling my current mortgage.

This seemed to be a bit harder of a condition to meet since it would mean carrying a higher debt load.  I was a little concerned that I wouldn’t qualify, especially now that lenders weren’t writing loans for anyone who happened to have a pulse anymore.

Back before I knew what I could qualify for, I asked around over at Cash Commons to see what kind of mortgage qualification criteria lenders were using to determine a maximum loan amount.  Reduce Debt Faster gave an insightful answer which included things like:

• Housing expense ratio (ratio of principal, interest, taxes, and insurance to monthly gross income)
• Debt to income ratio (ratio of total debt service to monthly gross income)
• Credit score (now they’re looking for 750-ish for prime rates)
• Income level (the higher, the better)
• Job stability (the more, the better)
• Down payment (the more, the better)
• Loan-to-value ratio (the smaller, the better)

After I applied and got my pre-qualification letter, my jaw dropped at how much they approved me for. Now, I did have a great credit score (even better than FCN’s before it dropped) and the only debt I carried was my current mortgage.  The credit union used the 40% debt to income ratio to determine what they could lend me.  But what got me was that the 40% was based on gross income, not net income.  This would have allowed us to purchase nearly twice the house we were interested in.  If I was worried about qualifying, those worries were blown out of the water.

My take on it is that if you’re the right candidate for a loan then they’ll let you borrow up to your eyeballs — even today.  That doesn’t mean you have to, of course, and you shouldn’t.  Banks are happy to lend you as much as they can if they have excellent assurance that they’ll get paid back.  They’re not nearly as interested in what you have to do in the rest of your budget to make those payments back to them.  You’ll give up a lot of things before you give up your house.

So, it may be tougher to qualify for a mortgage today than it was a few years ago, but it is possible.

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Makes me wonder:  If I were to ask a New Yorker about the real estate collapse, they might tell me, “Real estate what?”

Tough Money Love commented on Zaarath and Christopher Prokop’s postage-stamp real estate purchase: a 175-square-foot “microstudio” apartment, secured for the cool price of $150,000 plus a $700+/month maintenance fee.  He didn’t really know what to make of it.  Is it sad, stupid, or genius?

I’m not from the City, but this is still stupid.  Why, of all places to live, do people choose the most expensive city in the US, and the 8th most expensive city in the world, to call home?  Where is the advantage of paying off a home in two years (as the Prokops expect to do), if there’s still a $700/month maintenance fee tacked on?  That’s $4 per square foot, per month, after the mortgage is paid off!

What’s more, they don’t cook.  Their clothes are stored in the kitchen cabinets.  Now, I can see the appeal of dejunking a bit, but no pantry?  That’s a very expensive, and likely unhealthy, way to nourish themselves, and it makes them terribly vulnerable to anything that could disrupt their ability to eat out.  In sacrificing their space, they also sacrifice their ability to be independent and self-sufficient.

There have to be better ways to live than this.

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It’s no secret that there are federal tax credits available for many people who are looking to buy a home.  Both first-time and non-first-time homebuyers now can play the game.

The people who are among most aware of the credits, of course, are people wanting to sell a home.  It’s not difficult at all to find For Sale signs also advertising the $8,000 tax credit, and, as I may find out soon, it will probably enter the conversation at the negotiation table.

Especially if the initial offer is a lowball offer:

“Why, Mr. M.B. Hunter, that offer is awfully low. Perhaps you aren’t aware of the $6,500 tax credit you and your lovely wife are eligible for, as qualifying second-time homebuyers?”

To which I can reply:

“Ahh, yes, Ms. Realtor®, that’s very true!  But if my job takes me away from the area and I have to move within three years, then we have to pay that $6,500 back!”

(I’d like to claim credit for thinking of this, but it was actually from a financial planner I know.)

Actually, as of right now, I’m just assuming that I’ll have to pay it back under that circumstance.  The law is new enough that IRS Form 5405 doesn’t reflect the situations of the long-time homeowner.  But if I were a first-time homebuyer (taking advantage of the $8,000 tax credit) then I’d definitely need to be paying that back if I moved within three years of the purchase.

Just as it’s a bad idea to mention your trade-in when you’re buying a car, it’s a bad idea to let tax credits enter real estate negotiations.  Why?  Because the tax credits only enter the equation after the sale, not before. It’s a red herring.  Additionally, it’s unlikely that the bank will take potential tax credits into account when they underwrite the mortgage, because it’s a bit of a financial wild card.

Happy lowballing!

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The real estate mess is hurting not only homeowners, but businesses as well.  Bad things happen at both ends when the mortgage payments stop coming in.  The homeowner of course loses his house and his good credit rating, but the businesses that were involved in lending the money lose out as well.  Banks may get the house back but this is an expensive procedure, and house prices are falling across the country.  Home equity lines of credit get sacked, too.

Private mortgage insurers have to pay as well.  These are the companies that underwrite insurance, usually purchased by the homeowner for the benefit of the lender, on mortgages for which the down payment was less than 20%.  Although insurance companies do have to pay out claims as part of the course of business, they don’t make money paying out a lot of claims.  (No insurance company does.)  So that’s why some private mortgage insurers are helping certain homeowners keep their payments current.

Businesses are in business to make money, and if paying $2,000 per month for six months while one of their clients looks for a job saves them from losing their home — which means they don’t have to pay tens of thousands of dollars to the lender — then they win.  This is loss mitigation, and it’s a happy and healthy way for businesses to take care of themselves.  They’ll do what they need to do in order to stay in business.

The more I see of all of the mortgage fallout, foreclosures, whatever, the more I’m in favor of seeing the involved parties work things out to their benefit, by themselves, without subsidies, regulations, kickbacks, rate controls, etc.  It will hurt more, but it will be over with that much sooner, and everyone comes out ahead in the long run.  Try to subsidize and it will last longer and cost everyone more.

So if you’re behind on your mortgage payments, talk with those people who stand to lose if you default or are foreclosed on. They may just listen to you.

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Say you live in a subdivision.  You bought your brand-spanking-new house only a couple of years ago.  Today, you cannot afford to carry the house for whatever reason (job loss, move, can’t refinance, etc.)

“No problem,” you think to yourself.  “I’ll just find a renter for it until the market turns around enough so that I can sell.”

Not so fast:  Your homeowners’ association, or maybe your city, won’t let you rent it.

In the wake of lots of homes quickly becoming unaffordable by their owners, cities and HOAs have tightened no-rental rules, forcing homeowners either to occupy their home, or leave it vacant until it’s sold.  Rules in some communities may have changed after observing a correlation between increased renter occupancy and disturbances, deterioration, and crime.  Meanwhile, the mortgage payments for the strapped homeowners still come out each month, unabated,  until they don’t.  Then the home is foreclosed on.  Joy.

I generally think HOAs have very little purpose in life except to provide an outlet for busybodies.  Yet, if I support being able to work to my best interest, I have to let them do likewise.  If the purpose of an HOA is to maintain common property, and hold up the valuations of the properties under its watch, then promoting owner occupancy rather than tenancy is what it should do.  The fact that this is a reaction to large numbers of tenants coming in is a separate issue.

Banning rentals in this environment is a community’s way of buying time. The hope is that the curb appeal of the community can be salvaged, or even maintained, by sticking it to the homeowners who got caught with an upside-down house.  (”You may get foreclosed on, but at least our subdivision won’t be degraded to a row of rentals.”)  I can see that once a subdivision gets a lot of rentals in it, it’s hard to turn it around.  So this is a legitimate concern for the people who don’t intend to move.

Nonetheless, I think this will backfire on communities. There’s only so much time that can be bought this way.  There are still many, many adjustable-rate mortgages that will reset.  The foreclosure bailout is a drop in the bucket.  Holding a homeowner’s feet to the fire and preventing her from renting out her house will increase the likelihood that she’ll be foreclosed on.  Some would-be buyers are investors, and they’ll be reluctant to buy if they can’t use the property as easily to produce income.  Though rentals aren’t desirable, vacant houses are less desirable, and more attractive still to vandalism and squatting.  Insurance against loss on these houses is prohibitively expensive, if it can be gotten at all.

This may turn out to be a huge, horrific game of musical chairs.  Make it difficult for homeowners to stay afloat, and you (a community or a subdivision)  may either get more foreclosures and more vacant properties, or fewer foreclosures and more owner-occupants.  It all depends on when the music stops: strapped homeowners run out of money.  Or, you might opt out of this game, and accept renters into your community.  The cost of doing this is knocking down the desirability of your community a notch or two.

In any case, it will be exciting how it plays out.  (”Exciting” doesn’t always mean “fun,” unfortunately.  A rollar coaster is exciting, until it derails, and then it gets really exciting.)

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Flexo takes issue with Robert Kiyosaki’s definitions of asset and liability:

An asset is something that puts money in my pocket.

A liability is something that takes money out of my pocket.

I can see Flexo’s point in that Kiyosaki is recasting the definition of the words.  The proper financial terminology would say that:

An asset is something that is owned, while

a liability is something that is owed.

I live in a house which has a mortgage against it.  I don’t really own the house yet, because I still owe tens of thousands of dollars on my mortgage.  (Even after that, I can readily find out who the real owner is if I fail to pay my property taxes.)  The home itself has some value.  I can sell it to someone for money.  It’s an asset in the financial sense of the word.  The mortgage loan is owed to the bank.  It’s a liability in the financial sense.

At the same time, though, I can see the merit in Kiyosaki’s definitions, as they’re more practical.  The financial definitions deal with cash value, while Kiyosaki’s deal with cash flow.

In terms of cash flow, my mortgage is of course still a liability for me.  But, my house itself is also a liability.  Maintaining it, removing mold, keeping it warm, keeping it clean, keeping it looking pretty, keeping it dry, etc., take a lot of money.  A house deteriorates just like anything else if it’s left alone.

Going back to the financial definition for a second, I can rephrase this statement by saying that the value of my asset, my house, will go down if I don’t take care of it.  It costs me each month so that the value of the asset isn’t affected by my carelessness.

In the cash flow sense, the house would be an asset only if I were renting it out for more than it cost me to maintain it.  That is, only if it put money in my pocket.

I’m not sure that clears things up at all.  If anything, it makes things more confusing.  If so, then I’ve accomplished something.   Seriously, though, I do like Kiyosaki’s definitions because they bring the focus to the cash flow.  If you buy a boat, you have an asset, but while you own it it’s a huge liability — unless you get the credentials to boat people around for hire, in which case it becomes an asset.  Thinking about purchases this way brings the spotlight to the lifetime cost (or lifetime earning potential) of an item.  Maybe fewer people would buy boats if they knew that BOAT stands for “bring on another thousand.”

Anyway, what are your thoughts?

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My wife has wanted to move into town for quite some time so that she can be a little closer to friends and to our other activities.  I’ve been reluctant to move for a few reasons.  First, I think if we bought now, it would be like trying to catch a falling knife.  Second, it would be a longer drive to work for me.  Third, I don’t like change.  (None of these are her fault. )

And just as much as I feel pressured when my wife tells me about a good house that’s come up for sale, she probably feels frustrated by my reluctance to take any serious action on it because “this is just the beginning of the downturn” and “there will be more, and better, deals later.”

Actually, regardless of how far I feel the housing market is going to go down, I don’t really know.  I can get warm fuzzies that it’s getting to be more of a buyer’s market, but I won’t really know until I start tracking home prices.  Tracking prices is pretty straightforward, and has some advantages:

• It’s easier to recognize a deal when it comes along.  There is a huge amount of information literally a mouse click away, and tracking the price of desirable houses over time shows clearly what these houses were being offered at.  Rather than sensing that a house is a good deal, I can see that it is.
• It’s active.  It’s searching with a purpose.  It’s still basically window shopping, but I know which stores I’m going to. 
• It’s focused.  We’re looking for a house to move into.  This narrows our search and makes it more time-effective.

Here’s how we’re going about it now:

1. I signed up for an account at Realtor.com.  This allows me to save searches — and have daily or weekly e-mails sent to me — filtered by ZIP code, price, number of bedrooms, etc.
2. Since my wife is pickier (!) she chose the acceptable candidates among the few dozen houses that met the search criteria that Realtor.com allowed.  We could have fewer results to go through if we filtered by square footage, but not all of the listings include a square footage.  So, we pile through some more listings but turn up a few more candidates.  We eliminate most split foyers since she really doesn’t like those.
3. We build up a spreadsheet with the following columns:  ZIP Code, Address (to identify the house), Subdivision, Bedrooms, Bathrooms, Square Footage, Basement (no, yes, or split level), Garage (no, one-car, or two-car), and Asking Price.  We make one row per house, and add columns at the end to track the asking price over time.  We also list the houses that meet the search criteria but don’t meet our criteria so that we don’t have to re-visit those listings each week.  The columns are the criteria that are important to us; if you do this, you may have other columns you want to consider.
4. Houses keep getting prices added as long as they’re listed.  If they’re taken off, then we keep them to see if they come back on again.
5. Later we may add houses listed for auction or on other services, since some sellers are going the route of national real estate listing without the commissions.

Here are some of the measurements that can be done from these numbers:

• Number of listings.  The number of listings can fluctuate with the seasons (winter is slower).  If prices are going down for similar properties, or if the prices for properties we’re following are going down, then an increase in the number of listings could be good, as it means people are coming to their senses and trying to sell for what they can get.
• Time on the market.  We’ve gotten a few new listings, so we can see how long they stay on the market.  Knowing this would help us should we want to make an offer.  If the house has been on for a good long time, we can offer more aggressively (lower).
• Price per square foot.  This is a rough measure but a useful one.  If we really can buy more house for our money, we should see a reduction in the price per square foot.

The nice thing about this method is that it’s free.  Once we get the hang of this and get closer to making a decision we may sign up for www.RealtyTrac.com to get a handle on foreclosed and bank-owned properties.  We’ll probably pull the trigger on this when we are in a better position to make offers.

Tracking prices takes a little time but I’m sure this will help us to make a wise decision when we decide to look in earnest.

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I was a bit surprised to hear that the word subprime has just now made it into Merriam-Webster’s Collegiate Dictionary. I guess it takes a full-blown crisis to get a word in edgewise.

The “sub” refers to the quality of the loan rather than the rate, since the rates of subprime loans usually end up higher than loans to people with excellent credit. (”Superprime” just sounds like a Number 17 with big muscles, I suppose.) It’s an innocuous enough of a term to not induce utter panic but has enough of a twinge of badness that we suspect that things aren’t quite right.

At least this euphemism for “risky” can modify both borrower and lender, so any comeuppance can be equally shared. (Or not. Since there is enormous pressure for lawmakers to Do Something About It, comeuppance will probably just get spread around to the rest of us, too.)

So again, I was a bit surprised that subprime wasn’t a full-fledged dictionary word, but I’m also very happy that it’s getting the legitimacy it deserves.

Now if we could just get deflabbify in there too …

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This is impressive. Impressive how is the question:

Single mom selling home, heart online

Sound bite version: Forty-two-year-old single mother needs to sell her south Florida home — and is offering her hand in marriage as part of the deal.

First, it was free closing costs. Then it was free upgraded appliances and a bonus room. Then, a free Porsche. Following that, a free house. Now, apparently, it’s a free spouse! Curiouser and curiouser.

A sign of the times? Unusual even given the times? A headline for the National Enquirer? Dr. Demento? Twilight Zone?

What’s your take?

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