Critical Thinking v. Herd Mentality

Who are you listening to?

Robert Ashby's recent post
Who's Advice Do You Take When Getting a Mortgage,

Let’s face it, it is easy to give a 30-year fixed rate mortgage to anyone these days because that is what the borrowers have been told is the best thing for them right now (just read the news).

But is it really? Believe it or not, the Option ARM, yes those dreaded, "evil" loan programs that place homeowners in foreclosure while making mortgage brokers rich, are actually the best solution in a "perfect world". But alas, we are not in a perfect world. As Americans, we tend to do things we shouldn’t, such as use our house as an ATM machine.

How are we to find the best mortgage program for ourselves? Friends, family, Realtors, mortgage brokers? Not likely. We are really on our own if we want to find the best solution. We must do our own research and find the "advisor" that will help us determine the best solution.

Now, be careful as you decide though. Asch’s Conformity Experiment can prove deadly in your decision making process. You see, that experiment proves that while you clearly know the correct answer, being surrounded by those answering incorrectly may lead you to answer incorrectly as well.

Do you seek out the opinions of skilled professionals who have a solid understanding of your specific situation? Option ARM's you say? Well I'd never... remember he said "in a perfect world." Critical listening & thought - it matters when you seek mortgage advice just as much as when you listen to the 11 o'clock news!

This herd mentality carries into other areas too, for example, "now's a bad time to buy" or "I'd never buy a condo". Both of these examples may be true for the 'Madding Crowd", but not everyone. As Ashe discovered, it only takes one dissenting view for critical reasoning to prevail. Everyones situation is unique, their needs, wants, & goals unique. Sadly the current thought is "don't buy, values are still plummeting" while savvy investors are grabbing this down market opportunity - the classic buy low, sell high still holds true.

Applying a critical thought processes to the mortgage & real estate market, just might lead you to an unexpected conclusion. As Ashley notes, "The best solution may be the complete opposite of what you are currently thinking."

What are Fanny & Freddie Thinking? - Update 12/19

Now, or certainly before February 1st is the time to purchase, because mortgage money is going to get more expensive.

What are they thinking? Even as the Chief Executive and the Legislature are cobbling together a quasi-bailout/reform bill, Freddie Mac & Fannie Mae are doing everything in their power to make borrowing more difficult.

Fannie Mae has introduced what they call an Adverse Market Delivery Charge which is an additional fee of .25%. Freddie Mac has already followed suit. Another fee to be added to the buyers' closing costs. According to the Fannie Mae website,

"This charge will ensure that we remain a fully available secondary market partner to our lenders by providing long-term commitments they can rely upon to provide borrowers with steady and reliable access to mortgage financing."

They've also rolled out a declining market area! Fannie Mae has designated the entire area as such and if your appraisal comes in w/ the label 'declining market area' you will have a rough row to hoe. Seems there will be a 5% decrease on the LTV (loan to value) ratios, or your down payment. Simply put - to get the loan you could have gotten with a 5% down payment - you will now need 10%.

To make matters worse, borrowers with less than 680 FICO scores will be charged a premium ranging from .75% to 2% depending on their score.

One thing is certain - these costs will be passed onto the consumer. My lender network is continuing to process the implications of all this - but I can tell you one thing right off the bat... making it more difficult (read more expensive) to obtain mortgage money will certainly make the market recovery more difficult. Why should the borrowers of tomorrow pay for the mistakes of some shady lenders and real estate agents of yesterday? In my opinion - this is just the beginning of the true sub-prime fiasco "cost"! As one of my associates quite elegantly put it,

"our purchasers/borrowers are being punished for the sins of unscrupulous lenders and agents who talked past clients into purchases/loans that they could not afford."

Please stay tuned - I'll keep you all posted....

Closing Costs - Show Me the Numbers

I have noticed in reading some questions on Zillow and other Q&A sites that there is a lot of confusion about closing costs, down payments, and the difference between the two.
So I started a post about the closing costs associated with purchasing. I had intended a line-by-line breakdown exactly as it would appear on the HUD-1, but thought I should ask you.
Are you interested such a post? Let me know what you think - see poll at right.
Thanks for your input...

Closing Costs Leap 500%

Starting January 1, 2008 seller closing costs are set to rise five fold. The policy affects the county transfer tax and the state tax on the recordation of the Deed to the buyer and the grantor's tax to the seller. That's right folks - a 500% increase!

For example, on a $500,000 property the grantor's tax is $500. After Jan. 1st - it will be $2,500.

At least one county (Loudoun) has challenged the increase and the Virginia Supreme Court is scheduled to hear the case in January '08. Until they hash it all out - the new higher tax will be collected. To make matters worse - the percentage collected will be based on the higher amount of either the sales price or the current tax assessors appraised value - which in the current market can be quite a bit higher.

Posted by Northern Virginia Association of REALTORS® (NVAR)
Sunday, November 18, 2007

Grantor’s Tax to Increase January 1, 2008
NVAR has just received notice that the Grantor’s Tax increase approved as part of the 2007 transportation funding package will take effect Jan. 1, 2008. The Virginia General Assembly and the Northern Virginia Transportation Authority (NVTA) voted earlier this year to increase the rate to a total of $5.00 per $1,000. This increase, along with revenues from six additional taxes and fees, will be dedicated to transportation projects in the region.

The localities affected by the increase are:
the City of Alexandria, Arlington County, City of Falls Church, City of Fairfax, Fairfax County (including the Towns of Clifton, Herndon and Vienna), Loudoun County, City of Manassas, City of Manassas Park, and Prince William County.

The Northern Virginia Transportation Authority will release official guidelines on fee collection in early December.