By Dian Hymer
Distributed by Inman News
Risks of trading up to larger home
December 03, 2007
Few homeowners cheer when home prices soften, but a soft market can actually benefit homeowners who have been waiting for a prime time to move up to a larger home or to a more expensive home in a better neighborhood.
Let's say home prices declined 10 percent in your area during the past year. This decline affected all price ranges equally. So, if you owned a house that was worth $600,000 last year, it would be worth only $540,000 today.
However, if the trade-up home you hoped to buy was out of reach financially at $1.5 million, you can now buy it at a discounted price of $1.35 million. Although you lost $60,000 in value on the home you want to sell, you'll pay $150,000 less on the home you want to buy. So your transaction costs will run $90,000 less than they would have a year ago.
This sounds great on paper. However, there are several variables to consider before forging ahead. In the first place, the depreciation rate may not be equal across all price ranges. In many areas the low end of the market has been disproportionately hurt by the recent subprime mortgage fallout.
Depending on where you live, you could find that your house has lost more than 10 percent in value, particularly if it's in a housing development with lots of unsold inventory and a high foreclosure rate. A trade-up home in the same area could have held its value better than your low-end house, making it more, not less, expensive to trade up this year.
Another factor is that the middle price ranges -- the prime move-up segment of the market -- has been plagued with financing difficulties since the credit crunch hit in August 2007. Jumbo loans -- for amounts over $417,000 -- generally have a higher interest rate and more stringent lending criteria.
According to DataQuick Information Services, approximately 57 percent of the home loans issued between January and July 2007 in Alameda County in the East San Francisco Bay Area were jumbo loans. In October 2007, the percentage of jumbo loans in Alameda County dropped to about 36 percent. Jumbo financing may become easier to obtain when investors regain confidence in the home mortgage business. Until then, trading up is fraught with difficulties in the current market.
HOUSE HUNTING TIP: For years, trade-up buyers have preferred to buy their new home before selling the old one. Today, it's easy to make an argument that the more prudent way to make a trade-up move is to sell your home first before buying a new one. In addition to more rigorous financing qualification, it's difficult to know in advance how long it will take to sell your home and for how much. The inconvenience of renting for awhile may be far less onerous than the financial misery you could experience if you buy first and discover you can't sell your old home.
Back in the soft market of the 1980s, some trade-up buyers who bought first ended up having to sell the trade-up home they'd just bought because they were unable to sell their old home. In one case, the trade-up buyer ended up moving back into the house that she'd hoped to sell, forfeiting the $50,000 she'd spent on buying the new home, which included the cost of interim financing.
THE CLOSING: There will be plenty of opportunities to buy good properties at fair prices in the current market. Just make sure that you don't jeopardize your financial security in doing so.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
Copyright 2007 Dian Hymer

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By Jack Guttentag
Distributed by Inman News
Payments to brokers don't always involve 'steering'
December 03, 2007
(This is Part 1 of a two-part series.)
The Mortgage Reform and Anti-Predatory Lending Act of 2007 (HR 3915) is now winding its way through Congress. According to the bill's sponsor, Rep. Barney Frank, D-Mass, one of its important objectives is to prevent mortgage brokers from steering borrowers into higher-cost loans.
Brokers steer borrowers into high-cost loans so they can collect a rebate from the lender. Lenders pay rebates on high-rate loans, and charge points on low-rate loans. Points are upfront payments to -- and rebates are upfront payments from -- the lender. A rebate retained by the broker is called a "yield spread premium," or YSP.
On Nov. 7, 2007, wholesale lenders quoted the following prices to brokers for a 30-year fixed-rate mortgage: 6 percent at zero points, 5.75 percent at 1.25 points, 6.25 percent at 1 point rebate, and 6.5 percent at 2 points rebate. This means that the lender wants to be paid 1.25 percent of the loan amount for 5.75 percent loans, and will pay 1 percent or 2 percent rebates for 6.25 percent and 6.5 percent loans, respectively.
Brokers who operate with full disclosure, including Upfront Mortgage Brokers, tell the borrower their fee, and allow the borrower to select the rate/point combination they prefer. If the broker's fee is 1 point, for example, the borrower who wants the 5.75 percent loan will pay 2.25 points -- 1.25 to the lender and 1 to the broker. If the borrower selects the 6.25 percent loan, the broker's fee will be covered by the lender rebate.
Indeed, a borrower strapped for cash might select the 6.5 percent, or go even higher to get a rebate large enough to cover all miscellaneous lender and third-party charges. "No-cost" loans are created using the lender rebates offered on high-rate loans. Legislators don't want to enact any rules that will deprive borrowers of this valuable option.
Most brokers don't practice full disclosure because they can make more money by pricing opportunistically. Most often, they quote the highest rate they think the borrower will accept, and pocket the rebate, usually without the borrower's knowledge. The borrower may discover it after the fact in closing documents, if they know where to look.
The challenge to legislators is to eliminate opportunistic pricing without eliminating rebates. The obvious remedy appears to be a disclosure requirement -- mandate that brokers disclose their fees upfront, as Upfront Mortgages Brokers now do voluntarily.
For a disclosure requirement to be useful, however, borrowers need information about broker fees at or before their first contact with the broker, which is earlier than any enforceable rule can provide it. Incorporating the fee in the Good Faith Estimate of Settlement (GFE), which is the rule in California, is too late because the borrower has already applied for a loan. Furthermore, even if early disclosure were feasible, borrowers who don't understand the process would not be helped.
Fortunately, there is a better rule. It is simple, easily enforceable, and would help the naive as well as the informed borrower. The rule is that lenders must credit all rebates to borrowers. The borrowers would then have to authorize the payment to brokers. The broker in my previous example, who would like to pocket a 2 point YSP on a 6.5 percent loan, could no longer do it behind the borrower's back.
Loan officers working for lenders also price opportunistically. If they are ignored while brokers are constrained, brokers will move en masse to net branches, a type of entity designed to convert brokers into loan officer employees, while allowing them to operate much as before.
Assume a lender has the same cost of funds as the broker above. If they try to make 2 points, their price on the 6.5 percent loan would be zero, same as the broker, except that the lender has no YSP to report -- its markup is it own business and need not be reported to anyone. Neither a YSP disclosure rule nor the YSP credit rule I proposed above would apply to them.
However, lenders are constrained in their markups because, while some borrowers will pay the high markup, others will shop around and find a better deal. So what many lenders do is price conservatively but give their loan officers the discretion to charge more than the posted prices if they can. These opportunistic price increments are called "overages," and like YSPs the borrower doesn't know about them. Curbing YSPs without curbing overages would be a mistake.
Overages could be eliminated very easily by the following rule: Loan officer employees of lenders must charge the prices posted by the lender.
Some lenders don't allow overages, and some brokers disclose their fees upfront. Both groups are a minority, because the adoption of consumer-friendly practices is costly when competitors are not obliged to follow suit. Good legislation converts the best practices of the industry into rules for all. Next week I will examine whether the current version of HR 3915 does this for YSP abuse.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
Copyright 2007 Jack Guttentag

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Should buyers establish holdback account or sue?
Friday, December 07, 2007
By Ilyce R. Glink
and Samuel J. Tamkin
If the seller fails to make the repairs, does the contract allow you to deduct from the purchase price the cost of the repairs? If you don't close, can you sue the seller for your damages? If you do close and he has not made the repairs, can you sue him after the closing for the repairs?
Some of these questions can be resolved by looking at the terms of the contract. If the contract provides that the seller can return your earnest money in case the seller defaults and that is your only remedy, that won't help you much.
A better option might be to determine what the cost is to fix the heating system and have the closing agent or title company hold back the cost of the repair plus some extra money. The money would be deposited into an account that would provide that you get reimbursed for the cost of the repair.
Sam Tamkin
By using a holdback of the funds, you could close and then get the system fixed. In some ways, if you get to choose the company that makes the repair, you might have a higher level of trust that the work was done properly by a qualified repair company.
If the seller refuses to make the repair and refuses to agree to the holdback, then you'll have to determine what the cost is for the repair and assess whether the house is worth it if you have to pay to fix the problem.
If the repair cost is small, you may decide to close anyway and make the repairs yourself. If the repair cost is large, you might decide it's not worth buying the home and demand that the seller give back any money you paid upfront.
Whether you can get anything more than the money you put down originally is questionable without, perhaps, employing the services of an attorney to force the seller to pay up for the seller's failure to comply with the terms of the contract.
Whenever you look at issues like these you have to first assess the potential cost to you of the repair against the cost of pursuing the seller. If you hire an attorney and the cost of going after the seller outweighs the cost of the repair, it might not be worth hiring the attorney.
At that point, you'll have to decide to move ahead and foot the bill yourself, or move on and find another place to live.
You need more information to make an informed decision. You need to evaluate the potential cost of the repair. Determine how invested you are into purchasing the house, including what you have paid your lender for fees and what other expenses you have incurred in connection with purchasing the home, and what it would cost you to hire an attorney to assist you in this matter.
But don't let your mind be swayed from making a rational decision simply because your lease is up and you're ready to move. You can always find an inexpensive short-term or month-to-month rental that will give you the flexibility to find another home that will be a good long-term purchase.
If you already have hired an attorney, you should discuss these matters further with him or her.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
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What's your opinion? Send your Letter to the Editor to opinion@inman.com.
Copyright 2007 Ilyce R. Glink and Samuel J. Tamkin

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