This week I spoke with a title agent in Florida who informed me of this new phenomenon where lenders are now adding a 10% reduction from the appraisal price due to a declining market.

Here’s how the situation works…an elderly lady in Miami purchased a house for $800K at the peak of the real estate boom and put down $100K as a down payment. She is now looking to refinance as her monthly payment is too high and understands that the value of her house may have depreciated since she bought it. Her appraisal comes in at $700K, which is not an issue since she owes $700K on the current mortgage. Due to the market that we are in, the lender is taking an additional 10% reduction off the appraisal for the new loan. This means the lender is only going to lend $630K for a house that appraised at $700K.

Upon hearing this I was in disbelief, that was until I spoke with another agency who said the exact same thing, however, it was for a buy/sell transaction. From what I understand, these types of reductions are only in South Florida, but the question is for how long?

Is this the beginning of a new era in home loans?

I was asked to review, or judge, the mortgage related posts made to Active Rain for the week beginning 3/3/08 and ending 3/9/08.  

The idea is to highlight, and celebrate, the best and the brightest among a quickly growing group of real estate professionals. 

The posts that follow are well worth reading:

Blogger: Bo Hunt
Post:  Down Payment Assistance Programs…Saviors or Scoundrels?

The era of captive reinsurance represents some of the title industry’s darkest days.  It’s saddening to visit an underwriter’s site to find the required language of negotiated settlement agreements and forms for aggrieved consumers to request refunds. 

Title insurers, the appointed keepers of public trust, knowingly violated the social mandate that justifies their very existence.  Arguably, HUD avoided legitimate requests to clarify its position, but underwriters acquiesced in the silence to pursue an agenda of illegitimate relationships with sources of business.

An article in the Daily Herald draws stark comparisons between the title industry’s version of captive reinsurance and a similar practice applied to mortgage insurance premiums. 

It’s a little known fact that mortgage lenders pocket significant portions of “premiums paid by borrowers who cannot afford to make a down payment of 20 percent or more.”

The much awaited revamping of HUD policy is expected to make the flow of dollars more transparent to consumers.  A reasonable mind would conclude that disclosure isn’t all that complicated in a real estate transaction.  It’s a shame that so many players in the housing arena are more concerned about preserving “quiet” income streams derived from “back room agreements” than they are about dealing fairly with consumers.

I often discuss the similarities between the title and the medical industries.  It would behoove title professionals to first study and then make practical application of many of the best practices employed by medical offices, hospitals, etc.

For example, consider the professional demeanor of physicians.  They are trained to spend roughly eighteen minutes with patients during a typical office visit.  Apparently, this specific time allotment is adequate to discuss, diagnose, and prescribe medication for most common ailments.  Compare an office visit with a doctor to a real estate closing.  Both are rituals designed to initially create trust and then accomplish an important and serious task in a limited period of time.  It’s not a stretch to say that the average doctor is better qualified than the average settlement officer due to professional standards dictated by the medical profession.  Let’s not ignore the aspect of financial compensation.  Doctors aren’t known to routinely give their services away for free.

The expediency and proficiency with which doctors make diagnosis is something for the title profession to consider as well.  Two licensed physicians, each examining patients with similar profiles and symptoms, are likely to prescribe identical, or nearly identical, treatments. 

Could similar opinions be predicted of two title examiners reviewing an abstract containing a title defect?  Maybe; maybe not!  That’s the problem.

The prominence of the medical profession, which has deservedly attained the status of a social institution, is derived from a fanaticism with selection and training.  Sadly, the title industry can’t decide what to do about anything. 

Interestingly, I’ve learned that there are other similarities between the two industries that speak to an unattractive side of human nature.

From an email sent by a Title-opoly reader:

Someday I need to contribute an article comparing the “for-profit” health care industry with the title insurance industry.  While the economic size of the two industries are in totally different magnitudes, the business practices and challenges facing each are so very similar.

When you examine health care off-shoring practices (radiology reports being pre-screened in India overnight for example), record keeping practices (patients being forced to transport among physicians their radiology files), and the ever-increasing ethics rules applying to physicians (entertaining, meals, honorariums from pharmaceutical firms, equipment ownership prohibitions, etc.), the comparisons are striking. 

 

Just two  weeks ago a prominent private university hospital  in … banned vendors from providing meals and marketing materials (ink pens, etc.) to staff physicians but medial samples can still be provided (“I can give some Viagra samples but no ink pens or meals/educational lunches!”)

 

Sawbuck Realty’s website states that the company is managed by it’s founders: Steve Barnes and Guy Wolcott.  Guy Wolcott commented on Title-opoly last night after a lively day of readers’ remarks about his company’s unusual business model.  It turns out that Barnes and Wolcott own a mortgage company, but direct orders to a national lender that can offer a broad range of benefits to consumers.   It appears that I was incorrect when assuming that Sawbuck is a lead generator for an affiliated mortgage company.   In his comment, Wolcott was emphatic about avoiding any appearance of impropriety.

Sawbuck is in the business of earning commission referrals by providing qualified buyers (leads) to a network of trusted real estate agents. 

Sawbuck recommends local title companies that share a vision of creating new opportunities for consumers demanding transparency.

Networked business derived from shared values among services providers isn’t the same thing as affiliated business even though the model is dependent upon directed orders.  The difference lies in the fact that consumers knowingly make choices.  Many of you were concerned that Sawbuck’s preferred title companies were undercharging for their services.  The model is geo-specific and works due to a combination of high property values and favorable title insurance premiums in the DC, VA, MD area.  The concept may not work in your specific market.

I stand firm in my resolve to expose title agents to the ingenious, and compliant, models that are starting to appear.  It’s my strong opinion that the title company of tomorrow will depend wholly on internet models that cast a wide net to produce local customers with highly defined opinions concerning settlement service providers.  Enter generation “x” and generation “y” as the baby boomers lose their dominance as the industry’s primary source of business.

Guy Wolcott’s comment on Title-opoly:

Ed, thanks for your thoughts on our new venture. It is always interesting to hear how people from each industry we touch (real estate, mortgage, title, technology) feel about what we are doing.

To be clear, even though the founders also own a mortgage company, Sawbuck does not refer business to it (both to enable us to scale up, and to avoid any misperceptions about how we make money). Instead, we partered with a national lender and work with their local retail operation. For our buyers, we’ve negotiated a below-market rate with no closing costs. In fact, we subsidize every loan (the opposite of making money).

On the settlement side, we work with local title companies who agree to our “rules” — no fees, no markups, default to standard coverage. We have no ownership interest in any title company, and have no ABAs. But since no one is used to a real estate company negotiating FOR the buyer, it takes a while for what we are doing to sink in.

Sawbuck ONLY makes money from real estate. After working with them during the early “search” phase, we refer our buyers to top local agents/teams we have identified in each community. We don’t charge agents to be our partner, and don’t charge for “leads”. We get paid our referral fee only when a qualified buyer meets a good agent and successfully buys a house. (Then we take a significant portion of that fee and plow it back into the mortgage subsidy.)

Our idea is that commissions are big enough to support a variety of benefits to buyers. Our goal is to turn the molehill of our referral fee into a mountain of savings for the buyer.

… didn’t close a single deal in 2007 says Jonathan Dalton.

I promise not to post a continuous stream of articles about the subprime shake down.  One is featured today because my opinions figured prominently in a recent article on Broker Newswire.  See: Subprime NINJAs knock down Dow Jones, brokerages, economy (subscribers only). 

The subprime foreclosure story is beginning to surface daily on network news.  The frequency of reports that portray the real estate industry as being shady will escalate virally.  After all, it’s impossible to separate the subprime lending market from the popular real estate culture.  This morning, I heard the foreclosure statistics for the states of Florida, Nevada, and California in passing.  Don’t ask me to recall the specific details, this year over last, but the increase was huge.  It comes as no surprise to me.

Last December, in a post on Flipping Frenzy I wrote:

In some ways, 2006 marked the beginning of a period of accountability for industry insiders who commit or facilitate real estate and mortgage fraud. A dramatic spike in default rates occasioned by rising interest rates has unearthed a generation of loans originated by internally falsified documentation and over inflated appraisals. It is now impossible for lenders to use hyper-appreciated REO values to understate actual losses caused by foreclosures. The crimes of the past decade are finally coming to light. The media suspects that the real estate industry has had its collective hand in the ill gotten profits of fraud. Future articles appearing in respected publications will provide the basis for criminal investigations, regulatory inquiries, and class action litigation …  I predict that fraud statistics in 2007 will escalate to startling heights.

The overall situation holds the potential to reduce the real estate industry’s public image to fatalistic levels.  Worse still, there’s no logical means to estimate the duration of the pending economic adjustment since nothing like this has ever been experienced before.  Much of America’s housing stock is saddled with exotic and upwardly adjusting mortgage debt that far exceeds any reasonable expectation of fair market value.  I suspect, in time, that boarded up properties will riddle many communities that are presently characterized as middle or upper class.  Low income neighborhoods will continue to suffer as they always have, but this time the plight is going to invade the heartland and the suburban sprawl.  Ironically, it was turmoil in durable goods markets that sent global security markets spiraling after Greenspan acknowledged the inevitably of a period of correction.  It makes sense if you think about it.  Many sold their homes at over-inflated prices using phantom equity to purchase very expensive homes that were similarly over-inflated in value.  Even with teaser rates on their new mortgages, these same homeowners were unable to afford new refrigerators, dishwashers, etc to compliment their new extravagant homes. 

We need to blame the industry and more specifically it’s culture.  The threshold of entry into every profession in the industry is a joke.  Continuing education isn’t worth mentioning as such.  There is at least one, possibly two, generation(s) of real estate agents, loan officers, title agents, and appraisers that can’t effectively differentiate between right and wrong in a transaction.  They are unprepared, inadequately trained, and audaciously unconcerned about the associated costs of their actions.  Inflated appraisals are to blame; so are silent seconds; so are falsified employment and savings verifications; don’t forget about the deals that were structured around illegal seller contributions.  And, I won’t miss the opportunity to espouse my anger regarding the most hideous and heinous vehicle of theft ever devised by a human mind:  THE YIELD SPREAD PREMIUM. 

Almost all real estate crime goes undetected, unreported, and un-prosecuted … the pending foreclosure statistics tell much of the real story.  The remainder of the dirty little secrets sit dormant, and somehow forgotten, in countless files, in countless offices, scattered about every community of this country. The statistics will get much worse in time.  So will the consequences. 

For decades, the real estate industry had knowingly (intentionally) fostered a culture of dysfunction and greed that has finally been revealed.  In the aggregate we find the truth about real estate fraud.  The heart of the problem isn’t the criminally motivated behaviour of the notorious and egregious few; look to the collective mis-steps of the many if you’re looking for answers.

On her blog, The Mortgage Porter, Rhonda Porter made a number of great points about the value and proper use of a subprime mortgage.

Rhonda wrote:

Borrowers in a subprime situation tend to have troubled credit or finances due to either

1. Circumstance.  Life events that have happened beyond their control.  For example, illness, loss of employment, divorce, etc.
2. Habit.  Lacks of financial discipline or responsibility.   History of the same behavior such as bounced checks, collections, late payments, etc.

The subprime mortgage is not intended to be “long term” financing.  It is temporary (often with a 2 or 3 year fixed payment period)  …

To read entire post see: Subprime Mortgages and Band-Aids.

The proper function and use of subprime products has been all but lost in the brewing controversy over foreclosures and corporate shutdowns.  I remember recommending exotic loan products to past customers who were relocating temporarily for job reasons and to a friend starting a professional practice that would soon become lucrative.  Used responsibly, subprime loans offer badly needed benefits to many borrowers with unusual needs.

Thanks, Rhonda, for the reminder and the tempered perspective of a professional.