Financial Upheaval

The cure is sometimes worse than the problemA man goes to the doctor and says “Doctor, I’ve become a compulsive thief.”

The doctor prescribes him a course of tablets and says, “If you’re not cured in a couple of weeks would you get me a widescreen television?”

I’m in the process of renewing my license, which requires continuing education.  The state mandates a standard practices course and another 30 hours of electives.  Looking over my choices, I decided financing was probably my weakest area, so although some of the other topics were more interesting to me, I opted for Fannie, Freddie, secondary marketing and FICO scores. 

I’ll not bore you with how banal the course is or how I already knew most of what was being taught [yawn].  What my notes do reflect is a veritable time line of governmental intervention of trying to fix problems which precipitated more problems and while the fixes helped there were still new and varied problems which required more governmental fixes to stave off further repurcussions.  The history of real estate financing in specific and financial policy in general is one long run-on sentence.

This week the House Financial Securities Committee hammered out a deal to regulate yet more of the financial industry, all the way from debit card swipes to derivatives trading.  The Associated Press reports, ” The final agreement capped an all-night marathon session of public and private deal making.”  Pause here for just a moment to shiver with me at the notion of “private deal making.”  As my son, Boy v3.0 would say, “That is a big steaming mug of creepy-type tea.”  Government back rooms make me nervous.  If it’s not fit to say in public, it’s not fit to be made into law.

Setting aside derivatives, which is a whole amazing area most people know nothing about, the fallout from this latest Capitol Hill deal making will be

  1. Banks will be under greater scrutiny
  2. It will cost the banks more
  3. The banks will be viewing consumers with greater scrutiny
  4. It will cost the consumer more.

I hope that wasn’t too technical.

And what about that home you want to buy?  Figure you’re going to have to ante up more in bank fees.  The loan amount will be the same, and the interest rate will probably look pretty good, but the other tag alongs may be substantial. 

LLPA’s or “Loan Level Price Adjustments” are fees (with a cute sounding name) instituted in 2007 by Fannie Mae and Freddie Mac to offset the risks associated with loans to the secondary market.  Did I just leave you in the mumbo jumbo of agent-speak?  In plain English, they are charging you more upfront because they don’t like the possibility of losing money.  Man, I wish we could do that in the stock market!  Can you imagine charging your stock broker a fee, to be paid when you buy StockXYZ because it might not perform the way you want it to? Now I’m not calling the banking industry compulsive thieves, they’re just trying to maximize money and have to figure out new ways every time one of their schemes gets regulated. 

And LLPA’s are just one egregious example of how your loan may be front loaded to ensure that while you’re enjoying that home, the primary and secondary markets are going to have minimized any chance you will hit them in the wallet.  Does that make you annoyed?  What can you do about it?

First, if you’re applying for a bank loan, make sure you are not a risk.  Ask your lender what your price range is, then skim off the top 15% and make sure you stay in that range.  For example if he/she says you can qualify for a $300K loan, subtract $45K and don’t look at homes over $255K.  Your housing/income ratio and your debt/income ratios will come out squeaky clean and of course your downpayment requirements will be less as well.

Second, during the loan process, be vewwy vewwy careful, to quote Elmer Fudd, not to use credit or in any way alter your credit history.  Fannie and Freddie’s standards now include pulling credit history at the time of loan application and also just before closing.

  • Do not pre-purchase the major appliances for your new home, to be delivered at closing; that closing might never come.
  • Do not transfer large sums in or out of your bank accounts.  Out means you have less reserve, in means someone is potentially fronting your purchase, without you having declared it as either secondary financing or a gift.

I was the listing agent on a home.  From the outset the buyer’s were “squeakers.”  You wondered even if they could close the home, could they afford the payments, but fortunately that was not mine to worry about.  The selling agent had prepped her clients well.  They were to use cash only.  Do not even use a debit card.  NOTHING was to be bought on credit.  They understood and were very careful.  The husband worked in a casino.  The casino allowed employees to put meals on an account which was settled on their paycheck.  When the lender pulled credit again towards the closing, the debt/income ratio went out of whack because the paystubs showed him having a decrease in income.  The good news is that after some serious working by the selling agent, the property did close.  I still wonder if they’re able to make their monthly payments.

Wow, this has been a long post.  Any other good tips?

Well yes, as it happens.  The entire verbiage thus far has been directed at obtaining financing from and dealing with “retail” lenders.  You do have other options.

Lease option or owner carries the contract

Don’t deal with the banks.  Voila!  Problem solved.

It sounds simple and in many respects it is.  In terms of maximizing your purchase, owner financing puts you in more control and allows you to bypass for the most part, the regulations and fees of “retail” financing.

BIG DISCLAIMER – owner financing should be reviewed by attorneys for both the buyer and seller.  Most owners and buyers are not savvy enough to make sure they get contract law exactly right.

How does owner financing work?  The short answer is, the way both parties agree it will work.  It is a process of arriving at how much the owner is willing to finance, for how long, at what rate and under what terms.  While that sounds scary, consider it’s exactly what you do in a retail lending situation, but the owner has fewer rules he has to be in compliance with.

In the near future I will be posting a series of videos on setting up seller financing and the options you can use, either as a seller or a buyer.  If you’d like to be among the first to see them, subscribe to the post by email (box in right hand column), and I’ll let you know as soon as they’re ready.

If you are looking for a condo with owner financing, the lovely unit by the lake is possibly one of the nicer units available in the North Seattle area.  Private park, dock, boat launch, ground floor patio and secluded from but close to major shopping areas.  A widescreen TV is not included, but you can always go to the doctor’s house; his patient apparently fell off the wagon.


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