The ‘Gray Area’ Of Faulty Data
The Associated Press reports on incentives. “Buyers are demanding cash payments and other incentives that may be artificially propping up sales prices, suggesting the market downturn could be even more pronounced than has been reported.”
“Gonzalo Sotelo, a licensed real estate agent in Salinas, Calif., said that three times in the past few months, buyers’ agents approached him about securing cash back at closing without informing the lender. An agent from the nearby San Francisco Bay Area proposed having a home with a $539,000 asking price reappraised and sold at $600,000, with Sotelo’s client paying back $60,000 in cash to the buyer.”
“Sotelo said he turned down the deal and hasn’t heard from the agent since. ‘Because the market is changing right now, I think people are trying to be a little bit more creative,’ Sotelo’s boss, Jose Palma said. ‘We tell our agents: ‘There’s a black area and a gray area.’ I tell them to stay away from the gray area.’”
“Offers abound from sellers; giving cash back allows a seller to sweeten the offer without having to lower the actual stated value of the home. Economists say the practice could be inflating reported prices and distorting our view of a market already suffering from higher mortgage rates and a sense that the market is enduring a significant correction.”
“Inflated prices potentially cause harm to banks, which could take a hit if the mortgage holder defaults and the home turns out to be worth less. It also could affect buyers of neighboring homes, who may be making decisions based on faulty data.”
“When sellers use incentives to reduce the actual price without cutting the reported price, ‘then the reported prices are an overstatement of the true net selling price,’ said Lawrence White, at the Stern School of Business at New York University. ‘So that very likely means that the real drop in home prices is greater than what the standard sources, like the National Association of Realtors, have been reporting.’”
“Noncash incentives also have an effect, but aren’t reflected in the prices, or for that matter, the statistics. ‘It’s simply not reflecting the pace of change in them,’ Mortgage Bankers Association Chief Economist Doug Duncan said.”
“‘If you look at the federal statistics on price, it’s not adjusted for the quality change,’ he said. ‘So if you take the house and list it for $250,000 and you add a finished basement and granite countertops, is it still the same house? Not really.’”
“Citigroup economist Steven Wieting said, ‘It’s possible the price statistics are not reflecting the incentives.’ Wieting wrote, ‘In August, the median new home sales price fell 1.3 percent. Building ‘incentives’ are probably much larger.’ D.R. Horton offered buyers $120,000 in savings last month at the Tuscan Estates in the Elk Grove area near Sacramento.”
Inman News reports on appraisals. “They aren’t about to replace experienced appraisers, but proponents of automated valuation models say they can give their human counterparts a run for their money as lenders look for numbers they can trust in a down market.”
“‘Not only are the properties tougher to appraise, but loan officers ‘are trying to push you on value,’ Dearborn, Mich-based appraiser Terry Hanning said. ‘But that’s true for every appraiser.’”
“If AVMs are vulnerable to faulty or old data, there are those who say human appraisers are too susceptible to influence by their clients, who may persuade them to value properties according to a predetermined loan size or sales price rather than market value.”
“If AVMs are picking up converts, Mark A. Cannon, South Florida residential division director for Integra Realty Resources, is not one of them. Cannon said AVMs are easily thrown off by details or circumstances that human appraisers are trained to spot.”
“‘I specialize in litigation, high-end residential valuations and mortgage fraud,’ Cannon said. ‘When the market slows down, our firm gets very, very busy with pre-foreclosures and fraud, going after other appraisals.’”
“An AVM, you push a button and pull up all these sales,’ he said. ‘They all look like arms-length transactions. You come up with a price per square foot, multiply by square footage, and conclude. But what happens if you have an investor going in and purchasing condos in bulk? Lets say there is mortgage fraud and they are selling them to themselves, to family and friends at 25 to 30 percent over market. An AVM is not going to be able to tell you that.’”
“‘The loan processor, the mortgage brokers, the loan originators are the ones who get paid the big bucks, because they are the ones charging all these major fees,’ Cannon said. ‘When the appraiser asks for his few hundred dollars, they say, ‘I can get somebody to do it for less.’ That’s why these AVMs have come about.’”
“But Cannon said that lenders who skimped on appraisals during the boom years set themselves up for a fall. ‘When things are good, nobody questions (the quality of appraisals),’ he said. ‘When people stop making the mortgage payments, and we have an increase in foreclosures, lenders are going to say what did we do? Why did we go to the AVMs? We should have been in control of this.’”
Unreported incentives is one area where price declines can be hidden. Another is the reporting of the YOY median sales price. Buyers are paying almost the same price as last year, but they’re getting much more house for that price this year. Too bad we can’t track homes’ initial asking price vs. final selling price.
I don’t think the initital asking vs. selling price is that helpful because so many people put “fantasy” prices on their homes when they first try to sell, especially when the market has been trending up. It is much better to look at actual selling price of the same house, but much less data on that since most houses don’t sell every year or two.
“Fantasy prices”: prices 20% or more higher than any similar house in the area has actually sold for. I see quite a few of them around here (greater Seattle area).
Normally they’re found on For Sale By Owner homes. These jokers think they’re so crafty, saving on commissions, but then the house just doesn’t move. Its overpriced, and no realtors will show it anyway in this market.
No, I am seeing them with realtors, as well. the houses around me seem to be holding out - and not selling.
in my country the most extreme ‘phantasy prices’ are always those from realtors, usually the more flashy offices that have learned they can get away with simply asking the previous sales price plus 100%. When the market is going up, there is always a buyer who doesn’t care about the price (because they pay with black money, are 100% subsidized by the government, have no money of their own invested etc.).
“There’s a black area and a gray area.’ I tell them to stay away from the gray area.’”
I am no expert but the examples given seem to be deep into the “do not pass go, go directly to jail” area.
It’s easy to dance in the gray area when the market is appreciating 25%+ per year. For those accustomed to this practice, considering todays market, I suggest you stop.
yes, it is called a KICKBACK
Most city/county government contracts wouldn’t take place without it!
This type of kickback is normal in car sales.
There is the invoice - the price the dealer pays the manufacturer for the car. When the car is sold at invoice plus profit, a certain amount of money - called holdback - is refunded to the dealer, giving the dealer that much more profit.
It started because consumers started understanding how the car business worked.
I’m not surprised that another group of salespeople would try to adapt this technique to their operations.
New definition of Criminal Behavior=Grey Area.
Or is it that the behavior can get you a multi striped Grey outfit.
In California it would be an “Orange Area” (Orange Outfit)…a whole new meaning for the Orange County Debtor and criminal’s in the RE mortgage game.
“Where’d you get the Orange Jump Suit?” It came with my HELOC.
“Where’d you get the Orange Jump Suit?” It came with my HELOC.
LMAO
When all these bad loans hit the fan lenders will learn there is also a brown area.
Jose Palma said. ‘We tell our agents: ‘There’s a black area and a gray area.’ I tell them to stay away from the gray area.’”
Sorry… probably a really stupid question. But isn’t the above line like saying, “Only do the REALLY seedy stuff…If it’s only slightly illegal or shady, stay away.”
Sometimes our true colors are brought forth by what we say ad lib.
You nailed it. Reamtors are like poltergeist — stay away from the light.
That is very unsophisticated. Realtors are salespeople and can be expected to make attempts to gild any product they sell. The buyer must beware and understand that it is not necessary to sign on the dotted line. Bringing buyers and sellers together in a way that makes transactions work is neither trivial nor inherently dishonorable.
What he really means by black area is keep it legal. Of course, what the guy does not seem to understand is that there are TWO black areas: those that are clearly legal and those that are clearly illegal. Gray is supposed to be the area in between legal and illegal but that kickback he described is clearly in the black area; the illegal side of the black area that is.
Yes, that’s how I understood it as well. The black area means legally possible (as in writing in black ink on the books) while the grey area means moving away from what is legal.
I don’t think anyone was confused by what he meant — they were taking a humorous read-between-the-lines look at the statement.
I understood what he meant, but I believe he meant black vs white (after all, 2 blacks do not make grey). As dude mentioned, it’s somewhat telling that he let that slip as referring to black as the clearly legit color (vs. white).
I don’t think that is what he meant. When he said black it meant in ink or what is writing that one can or can not do via the law. Grey means the ink is disappearing or that what is writing related to the can or can not do becomes fuzzy.
I don’t think it matters anyway. But, it was clear to me. White, on the other hand, makes no sense. If all our legal rules were written in white, nobody could see them…assuming the paper is white as well.
Cash-back deal seems legit but the banks is definitely the victim here. Bankers don’t seem to care if buyers can or can’t afford what buyers buy. That’s why “liar loans” and “easy qualified loans” exist. Lenders make up rules and it looks like there’ll be an overhaul pretty soon.
Why should the bankgsters care? It’s not their money. It’s their depositors FDIC insured money, after all. Moreover, any second now FNM is going to swoop in and package those ‘bad boys’ and ship ‘em offshore to Asia or somewhere else around the globe.
It’s all good; don’t fret. Asian like buying our paper in exchange for their labor intensive products. What a deal!
Asian = Asian central banks
Just think if China ever want to impose “sanctions” on the US.
Neighbors who have their property taxes reassesed based on phony “comps” are also victims. Of course, if they’re the stupid type that thinks a bubble is a “good thing” they deserve it….
gosh , say it ain’t so”!
that may be artificially propping up sales prices, suggesting the market downturn could be even more pronounced than has been reported.”
may be ?
Speaking of manipulating prices, how about a free Maserati?
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/10/17/BUGQCLQHCO1.DTL
Thanks, but no thanks. The insurance premiums on the Maserati would be a bear!
I seem to recall that previous iterations of that product produced amazing fireballs, when their italian electrical components met with a gush of hot fuel from the substandard fuel hoses… Way to go in an overpriced POS.
I guess the REIC is hoping the prices do a 180 degree turn and start rocketing upwards again before anyone realizes how low market values have actually fallen?
Stealing and fraudulent appraisals have been a major driver in this market run-up. There have been numerous articles about “flipping” houses between friends and relations with false appraisals, straw purchasers, and phoney holding companies that have scammed lenders out of MILLIONS of dollars. All those fake deals show up as comparable sales for setting house valuations.
In most cases the scammers doubled the values of the houses they re-sold, in a same day transaction. Original Cost $145k, new price $290. It’s no wonder “valuations” are so high. It’s not demand it’s fraud.
I occasionally scan http://www.mortgagefraudblog.com.
The woman who runs it lists criminal activity throughout the country.
This “cash-back” at closing, undisclosed as part of the selling price should be treated the same way, as fraud. The lender is not getting a real SELLING PRICE. When will more people go to jail ??
I hope she’s included that idiot Casey on her blog.
What a idiot that guy is. The sheer numbers of this type of activity would argue that he might have been able to skate under the radar but not making a spectacle of himself the way he has.
Speaking of Casey, I looked at his blog today. Apparently, he managed to borrow $3000 from a friend last week and guess what? He put an offer in for a fixer-upper to flip….
because that is his nature.
NorthernR
I have seen a couple very suspect sales in the MLS lately. The house has been on the market for months, suddenly the listing agent raises the asking price $70k and puts it into escrow. Gee, I wonder what happened??? The fraud is so easy to see, yet the deal closes. I’d love to put a stop to this kind of nonsense, but what can you do? The lenders in these cases clearly don’t want to see the fraud, they want to make the deal and collect the fees and commissions.
That is why it was allowed to continue, take away the safety net of selling the loans off and I bet you would see this stuff stop in a heartbeat. It is because they have set up a system of zero risk that they continue to give these loans.
In other words, follow the money trail. That would unravel the entire real estate bubble. But I suspect congress will do the opposite and pass a bunch of half-ass laws that just make the problem worse, without addressing the real cause: greed.
And how do you propose to address “greed”? The general method used - not being cute here - is communism.
I’m definitely a fiscal and government conservative, but passing laws that criminalize fraudulent behavior is far from being communism. The fallout from the housing crash will create similar types of oversight for real estate and lending practices as we currently have with securities. Though I think the scope will be less.
But one thing I definitely foresee is no more packaging of mortgages to be sold on the market- or at least only a fractional percentage from a lender can be placed on the market. I think, perhaps, the largest factor to the scope of the bubble came as result of a lack of lender responsibility. The general population in any country, and that includes the US, has an incredible number of stupid people who let greed get in the way of good judgment, which they’re already in critically short supply of in the first place. We should have laws that prohibit certain practices that come from this lack of judgment that has crippling effect on the economy. The banks used to have responsibility in this area, but in the latest boom this has been abrogated to a large degree.
Fact is, no lender in its right mind would issue option ARMs and stated interest loans if they actually had to hold onto these loans. If there are no toxic loans, then majority of purchases probably wouldn’t have taken place in many of the bubble markets at the price the buyers paid. In other words, prices would have had to come down or stagnate at a certain level so people could afford it on a 30 year fixed.
Excellent points, TRich. It’s not about criminalizing “greed” or stupidity (impossible and undesirable in a free, capitalist society). It’s about structuring incentives in the credit markets to re-align risk with reward.
20 years ago, banks would typically “book” the loans they issued, thus assuming the default risk. And as a result, they made darned sure the borrowers were creditworthy. Today? Just shower any illegal or homeless guy who walks in the door with Fed/GSE Bubble Bucks and sell it downstream –along with the risk.
What I keep seeing on bank balance sheets is that many banks hang onto the option arm loans because no investor in their right mind is going to buy a package of them (way too hard to review that sort of credit risk without getting individual details).
We don’t need Bolsheviks because we have RICO.
PERCEIVED zero risk, Sponge Bob. Why do I have to live with idiots like you and Patrick?
Why do we have to live with people who call people names?
Sponge Bob,
One super sharp poster here made the observation that all that needs to be done to correct this is to only do loans on “auto-pilot” when the selling price represents CPI+ a point or two! If you want to sell your home for 10-15-50% more than it appraised for LAST YEAR we’re not saying that “isn’t” possible, just highly freaking doubtful. If the buyer demands to pay way over any historic norm for appreciation then pay for a “special appraisal” or bring a wheel barrow full of cash to the closing! I get the sense that this policy would nip this in the bud in short order! Now where are my bud nippers?
Once upon a time (last in the 1970’s) it was common in many areas that one bought anything above a “starter home” with a 20% down payment and the last year’s appreciation. That rule works for me.
E.g., say you have a $500,000 home (circa the prior year) and you bid $525,000. The required down payment would be $125,000. Simple, neat, and not flipper friendly.
Neil
“take away the safety net of selling the loans off”
The problem with selling off the loans to investors is that you have to take them back if mortgage fraud was involved. I’m wondering how much of this stuff is going to come back to the loan originators…and how many will be *able* to take them back (vs. go bankrupt or escape the country).
Take away the Bank’s ability to hide it’s bad loans in an “Up for Sale” category. When they do this they do not have to adjust the value just cover the shortages. Bleed slowly over many years, at some point it is another VP’s problem as managment will be looooong gone.
This unwinding is gonna take years, and the Truth of how bad it got in the “Fraud and Lending” atmosphere may never be known.
Loans held for sale must be marked to “lower of cost or market” (LOCOM) *and* tested for impairment. You are going to see lots of “mark to market” losses as held-for-sale credit impared loans portfolios decline in price.
Someone mentioned before, our corporate veil laws allow you to create a shell corporations — these loans won’t be bought back if the originator has vanished.
That’s it! If the banks that lent this money out actually had to hold the mortgage notes, then you would see all kinds of reform real quick. However, when these liar loans are packaged and sent overseas, who cares, not my problem, bangster says. However, as we have seen in the last couple of weeks, Wall Street starts sending these loans back to the banks a little more often and quicker we might yet see a correction, albeit it will take some time, though. Bottom line, banks don’t have to worry about the borrower so lend’em whatever they want. No questions here, just move along, nothing to see.
OC Dan,
“bangster”? I love it! (I’d be trademarking that one!) LOL!
I’ve made comment that I’ve become weary calling these guys “lenders” and “bankers”. I now prefer “bagmen” but bangster is more in keeping w/the times!
DinOR,
Thanks! Just a comment about these bangsters that everyone on this blog should now about. About a month ago my wife and I needed to move 80K from one bank to another. Well we got a cashier’s check from bank A to deposit into bank B. Anyway, bank B said there would be a 5-day hold on the check. I said that is what the cashier’s check is for, to guarantee it. Teller told me only cash was guaranteed. Now you guys know I am somewhat doom and gloom, but when the bank tells me only cash is guaranteed, you know things are going to get tight down the road if not flat out depressed.
I don’t think they’re worried that the check won’t clear, they’re worried that the check has been forged.
Baloney, call the originating bank then. A simple phone call would have been all that was needed. However, my point was really that the teller made the comment about cash. That was telling.
To the best of my understanding, all of these explanations are wrong.
The bank is making money off the float. They have the money, they just aren’t giving it to you yet. My understanding is that this adds up and that banks make a significant amount of money from check float.
In the old days, before electronic transfer, this was forgivable. However, banks do not want to change their business model even though times have moved on.
The financial industry has us all snookered. It has all the political, legal, and information leverage.
I found out recently when I bought a used car and the dealer wouldn’t take a cashiers check - even a real cashiers check can now be cancelled by the payer before the check clears - they go to the bank and say the check was lost or stolen, and then the payee doesn’t get the money. Of course it’s fraud for the buyer to do that, but anyone selling anything that a buyer can drive or take away shouldn’t take cashiers checks anymore.
Next time set up an ACH transfer. It’s basically what your doing if you have a ING or emigrant Account. It’s free for a lot of accounts but they sometimes have limits (50,000) usually.
Electronic Transfer of Funds. Whereas if you Wire the money, you are usually charged 20 bucks.. Another bank trick that peeves me. During the grace period on a CD renewal most banks don’t pay interest if you don’t renew. So if your not renewing the deposit, remove the money immediately.
I am a realtor in Scottsdale and see this happening quite a number of times. Like you, what can be done about this? Who is going to lose in the end? Its either the Mom and Pop investor or the Taxpayer.
My guess is that on the lending side Asian banks that purchased the debt are going to receive the brunt of the losses, possibly to the point of disrupting (if not destroying) the entire international finance system. There’s going to be a lot of collateral damage that extends far beyond American homeowners and the US government.
“Mom and Pop” investors in the states are going to get off relatively easy considering their flagrant complicity in this mess.
Cash-back seems like an easy ATM to some buyers but lenders have truly been an ATM to home buyers the last several. Getting a home loan is easier than getting cash advance at the ATM.
Getting a home loan is easier than renting. Renting requires more money up front and better credit.
No kidding! I was shocked when we put in our rental application earlier this year. They actually wanted to see our paycheck stubs and to call our employers to make sure were were really employed! They said they do not rent to anyone who cannot prove the rent is 30% or less of monthly income.
We had the same experience when we rented our house in 2004. They called every single one of our references and employers, even though we had high 700/low 800 FICO scores.
Let’s see mortgage brokers do that these days — housing prices would crash through the floor!
(The lenders in these cases clearly don’t want to see the fraud, they want to make the deal and collect the fees and commissions.)
And sell it on the secondary market.
I smell Iiability….
it’s good to see that no one is stepping across that thin grey line in order to put a few commission dollars in their pockets. sheez, that stuff is outright loan fraud and it shows how oblivious the real estate/mortgage community is to the consequences. when the market is appreciating 25-30% a year, people pull this sh%t with no consequences to anyone, the home gets sold or refinanced and all is well. pull that some sh%t this year and you’ll be wearing handcuffs. can’t wait to see it.
Same thing happened in the stock market. Nobdy cared while “everyone” was making money.
my email of the day from our friends at novastar:
From: Melissa xxxx
Sent: Tue 10/17/2006 9:48 AM
To: AE’s — Mideast
Subject:
Help we NEED FILES BAD !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! I have AM’s calling out on pipelines…
We are at less than 24 hours in underwriting, QC is at 36 hours and Appraisal Review is at 36 hours.
Melissa
Regional Operations Supervisor Mideast Region NOVASTAR Mortgage
6200 Oak Tree Blvd
Independence Oh 44131
216-xxx-5072 phone
816-xxx-6411 Fax
Melissa.xxxx@Novastar1.com
uhh, they are spending more time on quality control and appraisal review than they are on underwriting, BECAUSE (drum roll please)- everything in the file is a lie. ugly.
Those numbers refer to turnaround time?
yes
I’m not familiar with the acronyms. Anyone want to translate?
AE = Account Executive
AM = Account Managers
QC = Quality Control/Check
It’s interesting - I was talking to an insurance agent buddy of mine the other day. When they’re qualifying someone for a life insurance policy, they are not the ones that make the order to the phlebotomist for the blood work. They are not allowed to due to the fact that the phlebotomist could possibly be coerced and manipulated by the agent to do something unethical. It’s the underwriting department of whatever potential insurance company that makes the call. Makes sense to me. Yet in our industry it’s the loan agent or the realtor that orders the appraisal. Asd long as this exists, there will be manipulation, unethical pressuring, and flat out fraud. The lenders underwriting department should be making the orders, not the brokers.
Also, a lot of appraisers do not need coercion these days to inflate values. A lot of these guys have a big stake themselves in the market and loathe to see price declines. Propping the market up is in their best interest. This I’ve seen quite a bit lately.
I don’t see where anyone in the real estate industry is currently benefiting from inflated prices since little is moving as a result. If prices came down a lot, sales would kick back up and everyone would get their little piece of the action…
with all those special incentives the realtors definitely make fat profits on the few properties that DO get sold. I guess a lot of those incentives are below the table (tax free) as well.
Also, the mortgage mob is profiting from inflated prices as this keeps the impression that all those mortgages are still backed by actual market prices (at least until the next paycheck) and it keeps the refinance machine going a little longer.
“Bankgsters” & “mortgage mob” –I love this blog!
Everyone in RE drank the koolaid and everyone is in the same boat. No one wants to lower prices because they have their own flips.
“As long as this exists, there will be manipulation, unethical pressuring, and flat out fraud.”
Especially when FNM stands with open arms willing and able to purchase all paper…
nnvmtgbrkr,
I agree. IMO, the mortgage broker should have absolutely NO contact with the appraiser. When they receive an application, they should send a notice to the *final* lender with the address and request for appraisal with a time limit. No price, no additional info, nothing else.
The appriaser would work directly for the final lender, so he/she would not be threatened with loss of work. His/her job is to protect the lender from future losses. That is all.
last year my redondo beach townhome (2 bed 2300 sq ft) got AVM’d for 1.2 MM during a no cash out refi with 150k equity line. The total ltv including equity line was less than 30% so maybe its justified to use AVM in my case, but the value was way off. I would guess my place was worth 1 MM tops and that would have been timing the market flawlessly. I would estimate we are in the mid 900’s today…. and sliding. If AVMs are being used on deals approaching or passing 80% LTV these lenders are even more screwed that we thought.
OT a bit. Yesterday I mentioned a place near me that is up FSBO at 529,000. I checked on zillow and the price is extremely incorrect. 2115 Penasquitas 95003. This area is bubbleized but not by that much!
I’m still trying to figure out what isn’t in the “gray area” where real estate is concerned? The data is so tweaked and convoluted it’s flirting with meaningless. DOM? Pffft, you’re joking right? Among all the homes I’ve bought/sold/re-fi’d over the years I’ve only had ONE guy that did a really honest appraisal. Some of the observations he made rubbed me the wrong way but after I calmed down I realized the guy was just being accurate. Very thorough and objective. This was the very early 90’s so he’s probably been out of the business for some time.
Things are starting to get interesting in a sense, since the auto industry and housing market are taking a dump, the domino effect will take place for almost every industry. Where will the next bubble market arise from, who will have money to purchase these comodities? What will the next wave of employment be? I think we are sitting in unchartered territory, I can look out my office window and see all the reduced prices or discounts hanging in store windows.
everyone gets hit except gov workers- RE touches everything
No, gov workers won’t be exempt: lower property values means less income for municipal workers. Loss of RE jobs means less income tax at both state and fed level. And loss of HELOC ATM means less sales tax!
Former Government workers dependent on pension funds will be hammered since who knows how many funds have invested in MBS, REIT and any other real estate investments [are any hedge funds focused on R.E.?].
You’ve got it, DannyHSdad!
This under the table cash back is a last gasp of this bubble, or any bubble. You can do things like this in the first phases of a price correction, however as the correction gathers momentum the incentives and opportunities dry up. If I recollect the tech bubble had weird actions like this at the end. As companies and people grew desperate they started to take the only out they could, however this also contributes to the intensity of the crash, because if we’re hearing about it, then it’s fairly common. Ergo: the end result is even more depreciation and fright.
I welcome this development, cause it seals and locks in a sharp correction. The less transparency of prices (like cash-back, like pools, like kitchens etc) inevitably leads to obfuscation of the true price and the housing market is like any market the needs clarity of price for it to function properly. Without clarity of price the inevitable declines will be further excentuated due to shock and panic of those left holding the bag. I’ve been watching the use of incentives and it speaks to me that this process is a bit like “beggar thy neighbor”, choice, which WILL result in a worse, much worse end to the housing bubble.
So I say, bring on the BS, cause there is only one way BS ends and it gain good……..
antoine — ['accentuated', no offense] - I think you are exactly right about fraud accompanying end of bubbles - or at least, being more obvious at the end of bubbles - what comes to mind is the wave of corporate accounting scandals that approximately coincided w/ 2000 stock crash.
“…the housing market is like any market the needs clarity of price for it to function properly.”
So, Antoine, what you are saying is that the housing market is turning into more and more of a market for lemons. I guess Yellen could appreciate that
I have already seen declines of 10%-15% (from the peak) in Socal, numbers the NAR does not seem to report. We all know the trend is still falling, so I suspect it will take a another 6-12 months before things get noticable worse for the “FB”.
I think it will need to be another 10% before the panic sets in. I am thinking so what, my home is down 10%. Since I don’t plan on moving for another 10 years and I bought in 1995 (moved in 2000 to a less expensive house, but used all profit from 1st house for down) a 25%-35% correction is not a big deal. However, I think a correction of that magnitude will have a huge impact on many. I guess we will see in another 6-12 months.
HIC is dead
long live MIC ! the transfer payment economy
# Defense Department awards H-P $440M in contractsTue 12:37PM ET - bizjournals.com
# Boeing gets $1.2B order for four 747-8 FreightersTue 12:07PM ET - bizjournals.com
Bottom line is the Feds are praying for the next bubble. Let’s face it the economy, despite what the MSM and Bush say, sucks. It’s in the crapper. Pretty soon the auto industry will have to do like the housing industry, but in reverse. Buy Maserati, we’ll throw in a house and pool for you. However, nothing will be done about the economy because their is too much greed among the wealthy and the middle class is being squeezed and too many are already in debt past their heads to take any time to reflect or be heard by the government. Too busy to pay those bills, you know. Meanwhilem, the savers and the investors on this blog are worried, and rightfully so, since the government frowns on saving at best. Sorry for the rant, but what kind of country has the US become. On top of all that now we have the MSM talking about how 300,000,000 people live in America. BFD! We can’t even keep this country going as it is without another pyramid/ponzi scheme and all the media wants to talk about is some population growth. Sad to say, but I give this country another 100 years if we are fortunate. Then it will be everyone and every family for themselves. Things cannot keep on going as is.
30 million are net federal taxpayers-tops
“Sad to say, but I give this country another 100 years if we are fortunate”
I’ve been projecting maybe 50 years at the outside where we survive in our present form. But maybe not. With the way everything is moving in fast motion…The economy can’t survive that long with no middle class and the class warfare that has begun from the top and at some point will force a reaction from the have-nots bodes ill for anything short of a complete “Big Brother” society. Gonna get ugly for our kids and grandkids. Maybe time to head north…
I’m with you. US has a whole different paradigm in about 30-50 years. I will likely be gone by then, but I worry for my kid.
An agent from the nearby San Francisco Bay Area proposed having a home with a $539,000 asking price reappraised and sold at $600,000, with Sotelo’s client paying back $60,000 in cash to the buyer.
Can somebody tell me why this make sense from the buyers perspective? Each dollar of kickback is worth far less than a dollar in price reduction to the typcial buyer, I suspect, once you throw in increased property taxe, fees, etc. Also, why would I want $60K in cash instead of $60K less that I owe the bank?
Looking at it another way, the seller should be able to reduce the price less than $60K in order to get the same effect as a $60K kickback.
“… why would I want $60K in cash instead of $60K less that I owe the bank?”
They may have no intention of ever repaying the bank. With $60K cash in their pocket, they can let the house go into foreclosure and dare the bank to collect from them…
Peter,
I think this happening in many deals because it is like getting a HELOC without having to really do the secondary paperwork, or, you can still get a HELOC for more based on that extra cash back kicked in. Sad to say, but these buyers and sellers are hungry for cash on both ends. Even in out economy 60K in cash is still 60K. Sadly, if these buyers were smart, you would take that 60K and use it to pay the first 20 months of the 3K/month mortgage all the while saving your salary and earning interest. Then you could go on paying. You may not make the full 30, but you could keep the thing moving for awhile. However, most of these idiots will probably spend the money on the around the world cruise or a new escalade or some other POS that will never give them satisfaction or their money back.
dumb question - why does anyone use a human in a loan origination
click,click , bing
To screen out bad credit risks — you can tell them by the glint in their eyes…
Also, why would I want $60K in cash instead of $60K less that I owe the bank?
use the $60,000 to make your payments for a couple of years. by the time the money runs out, i’m sure they’ll be able to sell it for at least a million, lol.
Yeah, maybe if this were 2002.
I’ve come up with a conjecture. I teach math and I have determined from much personal experience that about 80% of Americans cannot understand simple interest. Hence, I’m thinking about 80% of all the folks who bought a home in the last 3 years will probably default. Could this be a problem?
Is your student population a representative sample of the American public?
I’ve taught ‘em all.
So have I, Kurt, but your 80% estimate would only be applicable to “Americans” if the group you have taught is representative. Not to say that I doubt the 80% estimate…
Yep. Talking about ‘Mericans. Ain’t they the ones buying all the houses lately?
“Gonzalo Sotelo, a licensed real estate agent in Salinas, Calif., said that three times in the past few months, buyers’ agents approached him about securing cash back at closing without informing the lender.”
Isn’t this patently illegal? And if so, why is it any different if the payment at closing comes in the form of a new car or an agreement to make payments on the buyer’s other mortgage over the next year (in other words, the kind of incentives homebuilders are using to mask falling prices)?
This could result in massive class action lawsuits on behalf of home buyers. Buyers (the few that there are) are being deceived right now by practices that give the real-estate market the appearance of a soft-landing. How is this different than creative accounting practices at Enron?
“When sellers use incentives to reduce the actual price without cutting the reported price, ‘then the reported prices are an overstatement of the true net selling price,’ said Lawrence White, at the Stern School of Business at New York University. ‘So that very likely means that the real drop in home prices is greater than what the standard sources, like the National Association of Realtors, have been reporting.’”
Not only do incentives result in price statistics which are an upward-biased measure of market value, but they also result in financing a lot of consumption spending on thirty-year payment plans in the guise of home mortgage amortization. This does not sound to me like an optimal way for households (or those who lend them the money) to pay off the cost of lattes, sports cars and fancy vacations. I am wondering if this phenomenon is unique to the current housing downturn, or has a similar situation arisen in the past? Not having paid careful attention during previous downturns, I don’t know the answer.
But it helps disguise the fact that wage growth has been flat for the last few years. The only way to keep people buying cr@p is to convince them that they’re still doing okay. After all, their HOUSE will make them rich.
It does get a tax break and very low interest rate on your consumption loan. Bet a signiture loan is a good 300 bp higher, if available at all for most of the credits that get cash back on closing for their home.
People would probably not engage in fraud if honesty paid off just as well.
So the big question is, is this fraud or illegal?
I gotta go with yes.
There are three frauds in one here:
1) Appraisal fraud, if the home appraises at market value + value of incentives;
2) Lending fraud, if the loan supposedly earmarked for purchasing a home is used to purchase toys and lattes;
3) Statistical fraud, if the widespread use of incentives results in a misleadingly high average new home sales price.
Here is another potential addition to the list:
4) Accounting fraud, as the homebuilders get to value built home inventory at the nominal sales price, “forgetting” to subtract the value of incentives.
Other frauds:
Overstating income.
Stating owner occupancy for rental property.
Falsifying asset statements for source of down payment and reserves.
Hiding expenses, obligations.
Absolutely. Misrepresenting material facts on a loan application or corporate financial statements is clearly illegal. The problem is that its so wide-spread and gone unchecked for so long, how should the government go about reigning it in?
IMHO the focus should be on preventing future abuses rather than on punishing past abuse (those complicit on both the lending and borrowing side of things will be mostly ruined anyway).
“The problem is that its so wide-spread and gone unchecked for so long, how should the government go about reigning it in?”
Your comment pertains to the options postdating scandal, too.
Punishing past abuse is a great way to send a signal that future abuse will not be tolerated. And it is good for the karmic balance as well — just ask Ken Lay when you meet him in the next life.
as far as avms,they are not a lot worse than the usual “drive by” appraisals which is all most lenders have been willing to pay for the last few years.and cash back at closing,not disclosed to the lender is fraud.it is amazing to me that an appraiser would go along with this,they are going to make a few hundred bucks per appraisal,and face 10 years in the federal pen for each count,plus of course the conspiracy charges.there is no limit to human stupidity.