I wrote this article in July of 2006. In light of where we are at today I'd say my concerns were valid.
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Negotiated a deal on one of my listings yesterday. The Buyer is purchasing using 100% financing with the Seller paying closing costs. My market is affordable housing with the majority of homes priced from $190s to $250s and it seems like most of the Buyers lately have been purchasing with no money down.
Now don't get me wrong I am in favor of home ownership for everyone but I fear a lot of the Buyers are going to have financial difficulties in the near future. With high insurance costs, property taxes and mortgage payments I am seeing payments of close to $2,000 per month for a starter home. That's a pretty big nut to crack every month, in my area, where most families are regular working class people and don't have any reserve funds if they should encounter a financial setback.
Also, a good number of these purchases are being made with ARMs with the Buyers basing their ability to pay on future raises at work or a part time job that they may or may not be getting. In my opinion Mortgage Brokers and Realtors are being overly aggressive in selling these folks on the advantages of home ownership without really taking the time to counsel the Buyers on the true costs involved. And since they don't have to come up with any money at closing they are sitting ducks for Mortgage Brokers who are charging them sometimes outrageous fees for doing these types of loans.
So my challenge to REALTORS(R) who are dealing with first time Home buyers, with a little or no money down, is to really take the time to explain the pros and cons of purchasing a home. If the Buyers are fully informed and are wanting to move forward then help them to negotiate fees or guide them to the myriad of programs available that can help them with financial assistance. Placing a Buyer in a home he can't afford can damage them for years. It can cause bankruptcies, divorces and even illnesses. So let's "Protect the public" it's what REALTORS(R) are supposed to do.
Hi Bryant,
As usual your crystal ball was crystal clear.
Please let TLW know that we continue to remember and pray for a speedy recoverey.
Mortgage Brokers and Realtors are being overly aggressive in selling these folks on the advantages of home ownership without really taking the time to counsel the Buyers on the true costs involved.
Mortgage Brokers and Realtors are being overly aggressive in selling these folks on the advantages of home ownership without really taking the time to counsel the Buyers on the true costs involved.
Mortgage Brokers and Realtors are being overly aggressive in selling these folks on the advantages of home ownership without really taking the time to counsel the Buyers on the true costs involved.
You know what EVERY time I explain to them why one home is better for them than another from a financial standpoint they go the other way! Maybe I should use a reverse tactic . But your blog point is well taken and I think lending advise is a role we should play.
It's a fine line that we walk as far as providing lending advice, yet it is crucial for our clients to know and understand that we truly have their best interests at heart. Connecting with the right lender or mortgage broker helps and that is why I always tell my clients to get as MUCH information about what to expect BEFORE you go to the closing table.
Bryant--I think a lot of us were asking this same questions...maybe for a few years prior to this.
BB - You right about protecting the public and this post correctly forseen the mess we are in right now. We as Realtors (r) can preach and teach all day long, leaves me wondering how many buyers still bought their home with their eyes instead with their minds.
Bryant,
Thanks for the post. We have seen these scenarios played out before, just no to such a tragic degree.
BB- You were right on in 2006. How about that? Now, could you just predict when this market will recover???
Bryant; Loved the video. Your "the man"
BB - pretty prophetic I'd say. So what are your new predictions?
Jeff
Bryant,
They say that hind sight is 20/20!
They are wrong!
It may be Politically Correctto to assume the obvious and it's certain that the politicos are going to curer the assumptions. But, no one is searching for the cause! No one even seems to care what the cause is, as long as it wasn't them! In deed there may be several causes, the predominate problem in Las Vegas is very diff rent than South Eastern Texas.
Your theory has one big flaw, how do you explain the over whelming success of the very programs you blame?
No one wants to say anything about the consumer. It has become PC to be a victim! We're all synaptic towards victims of anything, but who are the victims? Is it the people that lose their home? Or, is it their former neighbors who's home value went down because of the low priced REO's and Short Sales?
We're all victims! There are allot more honorable victims than the relative few former home owners! The majority are going to suffer allot more than the so called "victims."
We're in great danger everyday Congress is in session. There going to save us without even determine what we need saved from. Such simplistic fixes are only good for show!
You say you're in favor of home ownership, but you would restrict it to the deserving! Well who's to say who is deserving? The VA has been making 100% loans since WW2, with little problems! So are vets "deserving?" That's ok with me I did my thing, but is that the idea we served for?
Your solution, down payments requiments effectively sentances may to life in Rental Prison. I suggest capital punishment for fraud by and against consumers and the opportunity for a home of their own for all. Opportunity not results is the American promise!
God help us, Congress and the hysterical masses won't!
Bill
Bryant - You were right! People were definitely getting in over their heads. I hope we've all learned something from this... :)
Bryant, you really called that right. You inspired a post. What would you have done differently if you actually knew what was coming?
I went through my 2006 emails the other day and counted 37 emails I sent out to our staff telling them that we would NOT do Interest Only Stated Income 100% loans - or 95% loans... ONLY 90% deals. I was concerned that people were getting into homes and then they would not have enough equity (not paying any principal) to afford a commission. I did not believe that in a slowing market where we only had 2 to 3% appreciation it was smart for someone to have NO BREATHING ROOM. We had some loan officers leave - because of our policy - but in the end - I still think we did the right thing. Stated Income Loans and No Doc loans are against the law in NC now.
What a mess! Too bad we're not playing golf cause we could use a mulligan right about now.
No matter what kind of market we're in it is our responsibility to give them our best advice and opinions regarding a home purchase AND home sale. ]
Back when the market was good both the loan officer and I kept telling our clients that they were overextending themselves. They are still in the home...having a hard time...but making it work.
The loan programs are few... but it is still possible. The one thing all this did is weed out the ones who were not serious about home OWNERSHIP.
Bryant -- good post and accurate as well! RE: Bill's comments, Bill, I think you're missing an important point. Yes we want folks to be able to buy homes (that's our business). And if they've got some skin in the game, that's ideal. But the most important criterion has zero to do with whether or not they are deserving. It has only to do with whether they are likely to be able to pay the debt they incur. Like Bryant, in '05 and '06, I saw this train wreck coming because lenders were giving mortgages to people based primarily (apparently) upon the fact that they could fog a mirror.
Certainly consumers bear primary responsibility for their choices, but the Professional -- the one with education, training, experience and DUTY to protect the client (that includes the mortgage loan officers, too) should have as primary concern, assuring that the borrowers are purchasing a product that will meet their needs and with which they will be happy over the long term. If we sell things to people that don't meet these criteria, and with which they are ultimately unhappy, we have, in fact, harmed them, and even if they don't end up in foreclosure or doing a short sale, they'll still have a nasty taste in their mouths over the whole deal and will be very unlikely to come back, or refer business to us in the future. Hence, we've harmed ourselves as well.
Finally, with regard to the success of ARMs, I would simply point out that popularity is not necessarily equivalent to success, for all the reasons I just enumerated.
All that having been said, Bill, here's a more important point I'd like to make: Thank you for your service to our country! Best wishes to you and all AR professionals for continued success!
Dear BB,
It looks like you were spot on in 2006. so what does our future hold now?
just B
You were absolutely spot on - and as the others are wondering - where do we go from here?
BB- I am glad to see I am not the only one with that ESPN ESP talents...your words were so wise!
"I am seeing payments of close to $2,000 per month for a starter home" - is more of the problem than no down payment. Add to that the fact that effective first time home ownership counceling simply wasn't made a requirement. People laugh when I teach FTHB courses and I ask, "Do you own towels? Curtains that match your imaginary new home? A lawnmower? A washer and dryer? How about a mail box, do you own one of those?" I remember my first home and I wasn't clueless. After I bought my home I was blown away at how much it cost to buy a new shower curtain, window treatments, cleaning supplies, a lawn mower, a washer and dryer, etc. Then the pre-approved credit cards and home improvement credit lines. Then there was cable and an alarm. Like I have always said, "Education beats legislation every time."
"without really taking the time to counsel the Buyers on the true costs involved" Lenn is right. Most lenders, especially the big ones or the ones who work 12 states away don't give a rip. My clients can drive to my office and beat the fool out of me within 20 minutes. I shop where they shop, eat where they eat and I'm very visible in my community. It really isn't the place or in the job description of the agent to do this just like it is not our place to consult the buyer on their contract or negotiations.
Bill A is right too - You see, I have NEVER made a down payment. Ever. Not on my first home, not on any of my investment properties and not on that big clucking campus I live in now. So 100% financing is not the problem. I did my share of 100% finances - 1632 since January 1 2002 to be exact. As of today - a total of 2 have foreclosed. TWO. The reason was we weren't approving people who could not afford the homes at the time of purchase or who did not demonstrate a reasonable ability to repay the loan. So you won't find me on the "no down payment is the fault" plan.
Bryant - our grandparents made mistakes, our parents made mistakes and now we have made mistakes. May we be blessed to see our children and their children make mistakes. Nevertheless - it hurts everyone.
Broker Bryant, Interesting that you would post this today. I had to explain to a client yesterday who had less than 5% to put down on a house here in Southern California! Not only that limits the type of loans they can get, but also puts a lot of pressure on their monthly budget. I can't believe that after all the turmoil, there are still buyers out there that would consider risky home buying practices.
Bryant - You are right about homeownership. Overflowed by money banks created all these easy-to access financial programs, mortgage originators and real estate agents promoted these easy money via Why rent when you can own campaigns. As a result, we got where we are.
Many people really benefited from availability of mortgage money. I mean small business owners, recent college graduates, just name more - all people who could be responsible and accountable for their actions and who expected a higher income in the nearest future. These people did not lose anything by borrowing 95 or 100 %.
However, too many people just don't have any idea of the huge responsibilities created by homeownership. Too many people just tried to be homeowners.
Homeownership is a responsible business. Here is no place for try. What should professional real estate consultants do? Educate our clients. After all, it's their decision and their money. And - be selective, work with the right clients. Interesting, but back in 2006 when everyone was selling like crazy to 0 down buyers, not-so-perfect-credit-score buyers, ect., I started the Ad campaign rewarding the buyers with 720+ credit score. I am very glad I did it, especially when all this mess started...
Help buyers to buy a less expensive home, don't max out to meet their wants.
You seen what was going on, seeing it coming is important.
You must use your instincts.
Richard
Hi Bryant. It seems so obvious today that what was going on a few years back was messed up. Great foresight on your part.
Thanks for writing,
Ken
Bryant, I am trying to see if I can print a response from my congressman to a letter I sent to him in March of 05. I am not the sharpest tool and I don't have a crystal ball but if you've been reading my resposes and my blog which I don't know why anyone would but I had a lot to say from 05 to 07 about where we as a country were headed. I really don't know of too many mortgage companies or Realtors that couldn't have seen this coming. Some ignored it at old scool, some because they didn't think it would effect them and most because of money.
Just saw this listing. Can this be for real? 6 bedroom in Poinciana for under $170k?? My goodness...
MLS ID #S4639809
great post. I believe there is blame to go around on the consumer as well, as has been stated here, but the heart of your post is well taken. In the craziness of the no money down, and exotic mortgage boom, too many folks lost sight of the potential down side to signing up these mortgages
Thanks for the post.
I am so happy to say to this date, I have only had one past client that I sold a home to go to foreclosure. I am not happy that they went to foreclosure, that broke my heart. I am happy that it was only one. The fact of that story was that they bought their home for good terms and had plenty of equity but years afterward they kept taking money out of the house, not understanding what they were getting themselves into. All of my buyers, and most are first timers, get a clear understanding of what they are signing, what is the best type of loan for them and their circumstances.
You are a good forecaster. So many people did the wrong thing. However if you were the decider on what they should be doing you would have lost the deal.
My husband had this pegged several years ago----I thought he was crazy. You were right on with your assessment.
Hi Bryant,
Good post! It takes a strong will to go against the 'Buy Now or You'll be Priced Out of The Market' crowd.
On 11/17/05 I published an article – "A Trend to Go National?" and I re-published it again on 7-20-06. You can view it at the San Diego real estate blog
Wow!! Great comments.
OK Bill....do you see anywhere in my post where I disagree with 100% financing? In fact, I just closed on a FHA/Nehemiah DPA with a 6% contribution from the seller. Not only was it a no money down deal but it was also a short sale!!!! This post is about helping the consumer understand what they are getting into and guiding them towards programs that may help them buy a house AND keep it. Did you know in my area you can get grant money? Shouldn't a buyer know that they may qualify for a $56,000 grant that they don't even have to pay back? I am a staunch defender of DPA programs. I am not however a defender of folks being sold loan programs that are based on future events lining up i.e raises, new jobs.
The buyers, that brought this post on, were in foreclosure in less than 6 months!!! I knew sitting at the closing table that they would default and default quickly. They bought this home as their primary residence on a stated income loan even though the wife was unemployed and the husband lived in Miami. They were HOPING to relocate and get better paying jobs. I know all of this because neither their REALTOR(R) or mortgage broker showed up for closing. These buyers were clueless of what was going on.
My post is not blaming anybody. It is suggesting that we as professionals be a little more diligent in the way we counsel our customer/clients. AND I was right.
RssSafety, It's for real!!! There are some awesome buys in Poinciana right now. Houses that are only 2 to 3 years old are selling for as low as $40 to $50 per sq ft!!! I had a closing Tuesday for a buyer on a 4 bed 2.5 bath with 2300 sq ft built in 2006. Sold for $120,000 with the seller paying 6% of that towards the buyers closing costs!!!
Last month I helped a buyer in England buy a 5 bedroom 3 bath pool home built in 2005, in a gated community 10 minutes from Disney, for........$138,000!!!!
Another great post, BB. I just wish more Realtors, mortgage brokers and others dealing in real estate and lending had been so conscientious. We wouldn't be in nearly as deep a hole. Of course there is only so much you can tell a buyer and only so much advice they will actually follow, but I fear that many saw dollar signs over their clients' heads and didn't even try to explain what they might be doing to themselves. It is very sad for the upside down borrowers and very sad for the entire industry that we are in this mess. I know that buyers deserve some of the blame, but many of them really did not understand the risk they were assuming, and no one explained it to them.
Bryant - it seems many in Congress feel that home ownership is an Entitlement, rather than a Reward.
Many of us saw a problem coming down the road and it's here right now and the problem was never 100% loans it was the Liars Loans and the folks who encouraged the Lies on the Loans.
I came very close to being lulled into a loan that I knew I could not afford. My friend was all excited because a big builder had just opened a new subdivision and the prices were great. Her philosophy was to count on the appreciation. Put the bid in now and it will appreciate 30-50% before its built. I plunked my deposit down, I spent hours at the design center. I loved all my finishes. I had a photo album of the model streaming on my screen saver.
Then I watched in horror as the industry started to slide (this was early 2007). My earnings as a home warranty rep are directly tied to the resale market. So, I was watching my own business slide downhill too, By the time I was supposed to close, I came to the full realization that there was no way I was going to be able to afford my dream home.
Sadly, I think buyers (I count myself as one) get caught up in the home, the purchase, the dream and have a hard time walking away from it all. It is one part anticipation, one part ego and one part insanity.
Even though I walked away from my deposit, I am thankful that I did not go through with the purchase. It would be the one year anniversary of my home purchase had I gone through with it. I cannot describe the heartache I would be having right now. Had I closed, I doubt I could have hung on this long. It was hard to cancel the sale (I cried in the builder's office) but in my heart I know I made the right decision.
Now is the worst and best time to invest in US real estate. True, financing is harder and nobody knows what will happen next. But long term, current prices will prove a real bargain. Real assets will soon look more attractive than anything else, including derivatives and treasuries...
<a href="http://www.jphenin.com">www.jphenin.com</a>
http://www.jphenin.com
Unfortunately some lenders and agents did not have the publics best interest in mind it was all about the commission.
Wow... You were right on!!!
I agree with the statement that the more important question is whether they are buying a home they can afford. There are too many stories about buyers who do not have the ability to make the payments, yet they got a mortgage.
.
Code of Ethics 101!!! Thanks for the post!!!!!!
If only more Realtors, Bankers and Mortgage Brokers were thinking along the same lines... And that was just 2 years ago. Things can change fast. Thanks for the post!
It is a two edged sword. We want this to be an ownership society, and at the same time there are those that aren't ready for that responsibility. Of course the problem is that it isn't politically correct to say so. When the problem was in its infancy a few years ago, anyone that said so was thoroughly trashed...
BB~ I always encouraged (and still do), my buyers to spend LESS than they could afford and told them it isn't any fun being "mortgage poor!" But, I can't say they always listened! For example, I had one couple tell me that if I didn't show them this particular home (Yes, it was way too expensive for them) that they would find someone that would... So, I showed it to them, they bought it, and then they ended up losing it not too long after! You were right on the money with this post of 2006!
BB~ I always encouraged (and still do), my buyers to spend LESS than they could afford and told them it isn't any fun being "mortgage poor!" But, I can't say they always listened! For example, I had one couple tell me that if I didn't show them this particular home (Yes, it was way too expensive for them) that they would find someone that would... So, I showed it to them, they bought it, and then they ended up losing it not too long after! You were right on the money with this post of 2006!
Can I borrow your crystal ball sometime....just for a little while? I promise I won't break it. GBU!
"Your solution, down payments requiments effectively setenes may to life in rental person. I suggest capital punishment for fraud by and against consumers and the opportunity for a home of their own for all. Opportunity not results is the American promise!"
After running your comments through a few spellcheck programs, I believe I know what you are trying to say.....
"Rental Prison".....Puh-Leeze, what an asinine statement. NO COMPANY should loan money on any asset w/o a down payment and additional collateral; such as old fashioned notions of valid employment, proof of income, etc. We still don't know how much damage has been done to the economy due to policies and opinions such as the ones you express.
Thanks for the post. Homebuyers need to be prequalified for a monthly payment with the understanding that there are other costs associated with home ownership. $2,000 for starter home payments is high, but add in the additional costs of ownership (utilities, maintenance, etc.) and it's no surprise that they can't make the payments.
Broker Bryant... Very interesting information... Great post as well. It is very interesting to what some of these buyers will do for a home. Some times they just need to stop and think first.
Bryant, your re-post makes me think of what Yogi berra said - "This is like deja vu all over again."
Bryant,
I'm guilty!
I saw "The Buyer is purchasing using 100% financing with the Seller paying closing costs." Then reading the rest, I made an assumption. In my defense we've had the 100% debate before.
Where did this come from? "Shouldn't a buyer know that they may qualify for a $56,000 grant that they don't even have to pay back?"
Maybe I'm not the only one reading between the lines.
All my best.
Bill
History always repeats itself....
That's OK Bill...I knew you were reading it wrong :) In my area there are county grants available for lower income buyers. As a REALTOR(R) it is my job to make sure I have explored these options of the buyer qualifies. My post is about properly counseling our customer/clients. If my buyer qualified fror a grant and I didn't let them know about it and instead placed them in a home they couldn't afford I would be negligent in my duties as REALTOR(R) who has taken an oath to "protect the public"
Here' an excerpt from the preamble to our CoE:
In recognition and appreciation of their obligations to clients, customers, the public, and each other, REALTORS® continuously strive to become and remain informed on issues affecting real estate and, as knowledgeable professionals, they willingly share the fruit of their experience and study with others. They identify and take steps, through enforcement of this Code of Ethics and by assisting appropriate regulatory bodies, to eliminate practices which may damage the public or which might discredit or bring dishonor to the real estate profession. REALTORS® having direct personal knowledge of conduct that may violate the Code of Ethics involving misappropriation of client or customer funds or property, willful discrimination, or fraud resulting in substantial economic harm, bring such matters to the attention of the appropriate Board or Association of REALTORS®. (Amended 1/00)
Thanks for the info Bryant. I'd imagine that it might be close to calling a bottom on some of those foreclosure prices. Unfortunately, there are probably many many folks who simply cannot afford to sell at that bottom prices.
Banks would be very wise to work out any kind of loan that keep folks in these homes as the banks must be getting crushed in these foreclosures as the prices just continue to drop. Seems to me the bankers aren't so smart, they kick folks out of there homes which pushes prices down which only makes the banks entire asset base worth less. Really really stupid....
Keep posting these prices. I'm a member of a sports message board in Boston and everytime you post a bargain, I spread the good news to a couple of thousand posters up here in New England.
Kathryn, Thanks fro sharing your story. It's a story that has played out 1,000s of times across the country. I counseled one of my investors to walk away from a $30,000 deposit last year. Fortunately he, like you, took the wise move and let it go.
Hey Stan good to see you.
Hey everyone. I appreciate all the great comments. Even though I am not responding to all of them please know I have read each and every comment. They really add a lot to the conversation. Thanks
as realtors, it has to become our resposnibility to advise clients a bit more on what they can and cannot afford. It is tough postiion, however, it has hurt our industry and credibility
Bryant, really well said! I think a lot of people who are in a pickle now didn't understand what they were getting into.
Seems like your thoughts were right on the mark. Those 190K houses are probably now selling for 100K or less, I assume.
Hi Bryant, I read it back then and I have to say it couldn't ring truer. The only different it is our future for a while. Nice post Bryant.
Stan,
Are you in the real estate bussiness or an English teacher?
You're right, I'm a very poor speller, it often gets worse with the spell checker on AR because I have trouble reading the small type.
Just who's the ass?
"Rental Prison".....Puh-Leeze, what an asinine statement. NO COMPANY should loan money on any asset w/o a down payment and additional collateral; such as old fashioned notions of valid employment, proof of income, etc. We still don't know how much damage has been done to the economy due to policies and opinions such as the ones you express."
VA has been writing no money down loans since WW2. FHA ask for little or nothing. Many of my early loans 39 years ago were for down payments. No money down has been with us for longer than any one can remember. We may do it diffrently but it has always been leagaly there!
If you look beyound the political retoric, you'll see that the overwelliming majority of these loans have succeeded. That is no comfort to those who've lost a home, but it is true. We've put more people into their own homes than any country in the world. And, that's good!
We have some major problems. Not the least of which is the simplistic PC desire to blame easy targets. It doesn't matter how much money a person puts down if they stop making their payments, they lose the house. In so many markets values have fallen 10 / 20 / 30 % or more so what's the down payment matter? Even with 30% donw many have no equity.
No one with the power to do any thing has studied the problem. They don't want to know the real cause! Even you would rather study my spelling problems and call names rather than the issue. This is a real estate forum, I'm sure the Englishs teachers have their own forum and they can feel free to use me as a bad example.
We are about to be handed a 700 billion dollar bill because people like you would rather call names than solve problems.
God help us.
Bill
William J archambault Jr
I'm having a homeowner situation today. I wanted to buy a little pop-up camper to take the family camping... but after coming home from a birthday party, we found our fridge not "fridging"... So, instead of a camper, I'll be buying a fridge and delaying the purchase of a new toy.
Too many people for too many years have thought that the would just swipe the card in the ATM and do both... no regard for the consequences.
The biggest issue with 100% financing started when they were lending 100% to someone with a 580 credit score, and stated income because being a cook at Denny's wouldn't show enough income, after child support, to qualify for the loan.
Now, after less than 1 year later, this NEW home, now with a HOUSE on it get reassessed through the nose and the Denny's cook that almost had a 1st payment default to begin with says "well maybe I should just RENT instead".
There is where the many issues started!
I'll be back
Bill,
My O My, talk about going off on a tangent! Please re-read my comments. Your original post was so incoherent, one had to assume your meaning. There, I've done it again, used a word that contains the word "ass". :)
**NO COMPANY or agency should loan money to anyone w/o solid collateral to back the transaction. If market conditions don't allow such protection.....don't make the loan. By anyone's definition, a sound fiscal and business principle.**
Hate to disappoint you, but I won't stoop to your level and use BB's blog for personal attacks. However, I am happy you posted what you did.....speaks volumes about you.
I will agree with your "Rule # 5. Avoid Whores!" Sound advice for everyone!!!!! You sir, are a piece of work. ROFL
BB - I'm curious about the $56,000 grant money? Can you explain how that program works and who would qualify? Between the low price of homes in your area and the grant money, that could be an incredible incentive for folks whose retirement accounts have declined thanks to the financial crisis to relocate to your area. Thanks.
Gail, We have a progarn called S.H.I.P. This is actually a State program to assist low to moderate income people purchase a home.
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SHIP loan is forgiven after 10 years of owner occupancy. Repayment of the loan becomes due if:
BB - It sounds like a good program. Thanks for explaining it.
Can you tell me the lottery numbers for next January?
GOL @ Todd. Translation=Giggling on line :)
TLW...ROAR!