Mark Flanders :: SoundBiteBlog.com

The banking system in the USA is in crisis. The Fed keeps lowering Federal interest rates, but mortgage interest rate predictions are still going up – how can this happen? And what might it mean for home owners today?

The relationship home owners need to grasp to understand interest rate predictions is the interplay between interest rates set by the Fed and mortgage interest rates charged by mortgage lenders.

Interest rates that are set by the Fed flow into the cost of funds to mortgage lenders. Banks and other lenders don’t possess all the funds they lend out when a mortgage is written – they borrow on the wholesale market 90% or more of what they lend out to home owners, at interest rates lower than the mortgage rates they charge home owners for their mortgages.

Banks make their profits from the difference between what they pay when they borrow money, and what they charge when they lend it out.

When the Federal Reserve lowers interest rates, it lowers the borrowing costs for financial institutions, so you would think that mortgage interest rate predictions would fall. However, financial institutions may choose not to pass on the savings to mortgage holders.

The reason for this is not greed – there is adequate competition in the mortgage lending market to ensure that no bank or other lender can profit unfairly. The real motivation is that being a bank that lends for mortgages just became a whole lot more risky, and risk tends to make banks raise interest rates.

Financial institutions are everyone more interest to compensate for their losses on the few who will miss payments on their mortgages.Until the current housing market settles, risks for lenders will remain elevated, and mortgage rates forecast will continue to be high.

The Fed can’t lower interest rates indefinitely. The actual interest rate (called the “nominal” rate) includes inflation. To find the “real” interest rate, you need to subtract the inflation rate from the nominal interest rate.

Today, when you do that, you get a negative number! This means that nominal interest rates are not even high enough to keep up with inflation.

Clearly, this is a situation that cannot continue for long. Sooner or later, probably sooner, the Fed will have to raise interest rates to at least break-even levels, matching the rate of inflation. As soon as it happens, the prime interest rate rise will flow through into mortgage interest rates. The only way is up for the mortgage interest rate forecast.

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Posted in Mortgage Bites | 6 Comments »

Continuing trouble for two of the Country’s largest mortgage lenders

KIRO TV reported that Governor Gregoire is making moves to remove Countrywide Mortgage’s license to do mortgage business in the state of Washington this morning. This is just the most recent problem Countrywide has had to deal with. Countrywide is currently being sued by the State of Illinois (for defrauding borrowers) and being sued by the State of California. I wonder what the Bank of America stock holders think of their purchase now. I guess they wouldn’t be able to call it Countrywide anymore.

Edit 6/26/2008 – Gov. Gregoire announces $1,000,000 fine for Countrywide

Edit 6/26/2008 - The Department of Financial Insitutions has added this banner to  the front page on their website.

Washington Mutual is facing difficulties of it’s own. Union members picketed WAMU’s last shareholders meeting in reaction to the news that WAMU has arranged a $7 billion (yes, billion) cash infusion to try to hold back the floodwaters of bad loans on their books. The shareholders question if $7 billion is enough. You can read the details in the Seattle PI.

In a related article, the PI reported the rather stunning numbers involved in Washington Mutual’s move into credit cards for borrowers with “blemished” credit. Although WAMU insists it is a “very prudent, fiscally conservative approach”, the article reports that the bank added 660,000 new credit card customers in the first quarter of 2008. Mr. Dreman, of Dreman Value Management, LLC (whose company owns 28.8 million shares of WAMU stock) stated “They’re up to their necks in everything bad”.

 I’ll ask the obvious question. Does it make sense to use new high risk credit card accounts to offset the losses from high risk mortgages?

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Posted in Miscellaneous, Mortgage Bites | 2 Comments »

Tags: countrywide mortgage, governor gregoire

If you own or are looking to purchase waterfront property in Kitsap County, better not count on Zillow to get the value right. If the property has a daylight basement, you’ll likely have the same problem with a Zestimate. That’s because Zillow has trouble with these types of property values in Kitsap. The disturbing thing is we have thousands of properties in one or the other of these categories!

Here are the problems. Kitsap County has so much waterfront the Zillow valuation engine gets seriously confused. For example, if you want to see a Zestimate for a property in Manchester, Zillow is likely to include as comparables, property on the South end of Bainbridge Island. As anyone who lives in Kitsap County knows, there is a significant difference in the values of waterfront property between these two communities. Although the two properties may be geographically close (if you happen to be a crow), they are tremendously different in almost all other aspects, and widely separated by road. Zillow hasn’t corrected this yet.

Properties with daylight basements also produce mixed results. If the daylight basement has not been finished for use as living area, Zillow ignores it. If it has been upgraded, Zillow still ignores it! You can tell by comparing the square footage listed on the County Assessor’s website with the square footage Zillow displays. (You can look up any property in the County, by address, here).

Think about how many hills we have here in Kitsap. Properties with finished daylight basements are very common. Bremerton has them, Silverdale has them, as well as Port Orchard, Poulsbo, Seabeck and every other corner of our County.

In a recent conversation with Jim Avery of the Kitsap County Assessor’s Office, I learned that his department has tried to rectify these problems with Zillow. The Assessors Office contacted Zillow’s data provider to point out the discrepancy. Nothing has changed. The Zestimates continue to be innaccurate.

In addition to that, even if the property is not waterfront or does not include a finished daylight basement, the data available at the Assessors Office is data collated in 2007. Our real estate market is moving too fast to rely on data that could be up to 12 months old.

This raises many questions. Kitsap County is a great place to live. We have mountains and plenty of waterfront. But, so do many other states in the US. Do all the states with waterfront properties and daylight basements share the same problem we do?

So, be wary of using free online tools to make large financial decisions. Hire a reputable local Appraiser if you want an accurate idea of local property values. If you are not quite ready to invest several hundred dollars on a full appraisal, check with an experienced local real estate agent. They have access to information that is much more up-to-data than the information Zillow is relying on.

Sellers who rely on a valuation tool like Zillow can also make a costly mistake. Overpricing a property in Kitsap County’s already listing-saturated environment, could cost a seller months of wasted time, while prospective buyers ignore it.

Related Articles

A Zillow thread

Another Zillow thread (our Assessor pointed out the problem to Zillow almost a year ago)

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Posted in Kitsap County Bites, Miscellaneous, Real Estate Bites | 1 Comment »

Tags: Bremerton WA Real Estate, kitsap property values, poulsbo real estate, Real Estate Bites, Silverdale WA Real Estate, zillow

“Do you think its okay to help a client who wants to buy a new home now, so she can then let her current home be foreclosed on?”

This question was posed to me 2 weeks ago in a meeting at my office. The Loan Officer asking the question has been originating loans for many years. She’s a wonderful person, but suffering from a lack of business just like many other Loan Officers around the country. It was an unexpected meeting as we no longer work together. She just stopped in for a visit. We were catching up on each others lives, both professional and personal.

This was the first time I heard of a new form of Real Estate Fraud called “Buy and Bail”. The process goes like this. A homeowner, realizing that they have either no equity in their home, or worse yet, negative equity, attempts to buy a new home, with the intention of letting the old home go into foreclosure after the new transaction is complete. In order to pull this off, the homeowner often provides the lender with a Lease Agreement to artificially inflate their income so the homeowner can qualify for both mortgages at the same time.

After my initial “You’ve got to be kidding me” response, I asked some more questions, thinking maybe I had misunderstood the buyer’s intent. I hadn’t. This was a deliberate, planned attempt to get a new mortgage by misleading the new lender. The buyer had no intention of telling her new lender what she was planning.

This story is morally repugnant on so many levels, I don’t even know where to start. My first reaction was, “this client will have a difficult time finding real estate professionals willing to get involved”, then I found out the client already had a Real Estate Agent working for her, and the Agent was fully aware of what the client intended. The client also had engaged a willing Loan Officer to handle the new mortgage.

I told my friend simply, “If you have information about a transaction that you deliberately withhold from the lender, you are colluding in a deception”. I walked away, shaking my head, hoping she had heard me and would stay as far away from this transaction as she could.

A Wall Street Journal Article

Yesterday I was not surprised read an article in the WSJ, detailing an instance of this scam that is happening in California. The buyer not only thinks nothing is wrong with her plan, she has let herself be quoted in a major newspaper. Her Real Estate Agent’s quotes make it obvious the Agent sees nothing wrong with the plan either, calling it “a business decision”. I hate to state the obvious but “a business decision” to screw a lender, is not a good “business decision”. And any Agent who helps promote it puts themselves in legal harm’s way. The same goes for any Loan Officer who might get involved. And any appraiser (if they are privy to the plan). Not to mention the (probably ficticious) “renter” who signs the lease agreement.

Difficult economic situations, like we have in America today, are just that; difficult. It doesn’t give any of us the right to lie, cheat or steal to improve our own financial situation. Nobody forced this woman to buy a house in the first place. She bought a home, most likely, because she thought she would benefit financially. She made a decision, hoping to improve her personal situation. Now that she finds her decision has hurt her, she wants someone else to pay for a bad decision.

If you are a consumer, and have heard of this ploy as a possible way out of your negative equity, go talk to a lawyer as fast as you can. If you are a Loan Officer; run. And the same goes for any Real Estate Agent who might read this article. Contact your brokerage’s attorney before getting involved. This isn’t the newest opportunity in real estate, this is dangerous territory.

Related Articles

The Sacramento Bee

The Motley Fool

A Sacramento Blog (read the comments on this one)

Bloomberg – FBI diverts agents to investigate mortgage fraud

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Posted in Buyers, Foreclosure, Kitsap County Bites, Miscellaneous, Real Estate Bites | 7 Comments »

Tags: buy and bail, ethics, real estate fraud

First allow me a personal comment.  I came into this job ten years ago following eight years in the real estate business as both a sales associate and managing broker.  I knew how to do a CMA for prospective sellers (and buyers) and I had a fairly good idea how the fee appraisers did their job.  I knew nothing about mass appraisal as done in the assessor’s office.  I was immediately impressed by the sophistication of mass appraisal and the standards established by the International Association of Assessing Officers (IAAO).

 Mass appraisal can be a complex process but let me try to simplify it for the purpose of universal understanding.  I’d first like to make a comparison to CMA’s and fee appraisals.  The CMAs and fee appraisals select sales of properties (usually three) similar to a property being evaluated and then make necessary adjustments to the sale prices in order to match the subject.  In mass appraisal all valid sales within a neighborhood or other grouping of properties are used.  I will try to explain in a simple way how this is done.  There are two key ingredients mass appraisal:

• A database is built containing information (characteristics) important to value on each of 112,000+ properties in the county.  We call the characteristics variables and work hard to ensure the accuracy of the data.  Although we use others, those variables most important to value are lot size, and view quality, plus dwelling size, quality, style, condition and age.  With the land and view classifications we use actual sales of vacant and improved parcels to develop base land rates and view quality adjustment factors.  With the dwelling and other site improvements we use national cost and depreciation rates.  These rates allow us to account for the relative differences of all properties in their individual characteristics.
• Step two is to annually adjust the result derived from step one to the actual market in Kitsap County.  We do this by dividing the county into about eighty market neighborhoods, measuring the previous year’s sales against our current assessed value, and then make global adjustments (up or down) to all properties within each neighborhood.  In this process the important variables mentioned in step one are also tested using the same measuring of sales to assessed value to make sure that the rates are working appropriately.  It is important to understand the timing of our value determinations.  The value for which this year’s taxes are based is our conclusion of value on January 1^st last year.  This means that the value used for taxes due on April 30^th is actually a value from 16 months ago.

 In the interest of brevity I have not discussed the way in which we adjust unique properties using land influence factors and dwelling relative desirability factors.  I have also not discussed the appeal process, where we actually do a mini fee appraisal to verify that our rates and adjustments are producing a reasonable result.  And I have not discussed the mass appraisal of commercial properties, where we rely most on an income approach.  I welcome further discussion on this from any and all readers.

Guest Author

Jim Avery
Kitsap County Assessor
360.337.7085 or javery@co.kitsap.wa.us

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Posted in Buyers, Guest Writers, Kitsap County Bites, Miscellaneous, Sellers | 7 Comments »

Tags: jim avery, kitsap county assessor, kitsap county property taxes