Thoughts on the Foreclosure Bailout

Everyone has weighed in with their opinions about the proposed government bailout of some of the 1.2 million people facing foreclosure... I guess I'll toss out my nickel (side thought... if everyone that has offered an opinion actually gave up the nickel, WE could bail out the people facing foreclosure...)

I don't like government bailouts.

I'm a libertarian (I haven't joined the party, so I'm not a Libertarian). I don't believe that government has a role in every part of our lives. I think that the US Constitution is the guideline for the structure of our laws... and the role the government is supposed to play.

Even after looking at the Constitution twice, I can't find where it says that people that make bad decisions... mistakes even... should be bailed out by the government. And, that is what we are dealing with here. Banks lowered their standards for giving away money (and that is what they were doing, largely, giving away money). And consumers took out loans that they really didn't have a plan to repay.

So, who are the real victims here?

Is it the banks that are getting stuck with absolutely crappy loan portfolios? No. They got exactly what they deserved when some of them were driven right out of business.

Is it the borrowers that bought $500,000 homes and thought that their payments would remain at $1600/mo. forever? Or maybe the people that refinanced and bought bass boats and Suburbans with their "equity? Maybe it's the investors that bought property with 125% loans and then tried to put in minimal effort for maximum return with a flip? No, nope, and nuh-uh. Again, they ignored the risks so that they could do what they wanted to do. Being able to get someone to finance them only served as justification that their desires were not out of line.

Is it the mortgage backed security buyers? It wasn't, until the government decided to change the terms of the securities they bought.

But what about the fraud and predatory lenders?

Even running rampantly, fraud only accounts for a small percentage of total loan volume. So, it isn't much different than the teacher making everyone put their heads down on the desk because one kid in the class shot a spitball. And, many of the "predatory lenders" aren't that predatory. Sure, it is fun to talk about greed (a term that is vaporous to define anyway) and taking advantage of people in precarious situations, but we need to also keep in mind that the risk/reward equation means that these borrowers presented a higher risk. As some states have found out, when they "clamp down on predatory lenders" and cap rates or otherwise try to control market forces, they end up limiting choices for the very people they are try to protect.

So, instead of writing sweeping legislation, it would be much more effective to enforce current laws against fraud.

So, where does that leave us?

It leaves us with the only real victims being the one group that isn't being protected. And those that made irresponsible decisions being rewarded for those decisions. Instead of finding the 60,000 loans that might actually involve fraud, and prosecuting the people responsible, the government is looking at "fixing" 1,200,000 loans. And, while "fixing" those loans, nullifying agreed upon contracts.

It is a bad precedent.

Lane's "Crazy Idea of the Day"

Barely after midnight, and I have already had my best crazy idea of the day...

In almost every form of motorsport, the drivers are festooned with the names of all of their benefactors. As Kurt Busch stands in Victory Lane, chugging a Coke, wearing a Miller hat, and holding a quart of Mobil1, all of us know that they pay his way. Of course those are the best products on the planet... they pay his check.

When Jimmy Johnson talks up Lowe's, or Jeff Gordon mentions his new energy drink, we know why. There is no question.

But, what I want to know is...

Who spent the big bucks for Hillary Clinton? What about Fred Thompson? John McCain? Barack Obama? Who paid for their last elections, and who is funding them now?

Maybe politicians should get nifty suits like NASCAR drivers. It would be interesting to see who's name shows up where.

Wouldn't that be fun?

Imputed income

Familiar?

Let me give you a quick idea of what it is. Keep in mind that I am not a tax professional, or a lawyer... just a real estate agent.

I guess the easiest way to say it is that it is phantom income. For our current purposes, let's look at a short sale. Let's say that the seller owes $300,000 on their home. In the short sale, the property sells for $225,000. Obviously the difference is $75,000. When the bank takes the loss, they report the write-off as income to the "recipient", the seller. So, that year they get a huge income boost. And they owe taxes. Nice, huh?

Congress is working on altering the tax laws so that people aren't stung by this in many cases. We'll see what happens.

But, that's not all...

A few years ago, a plan was floated to Congress to actually expand imputed income. Some lobbyists felt that there were people that were "unfairly" gaming the current system, and taking advantage of others. How were they doing this, you ask? They bought homes to live in.

You see, these people weren't paying increasing rents. Instead, their fixed rate loans had largely the same payment for years. So, while renters were facing increased rents over time, homeowners had the same payment until they moved or {gasp} paid off their homes. That isn't fair, is it? (trust me, I am shaking my head...)

What to do? Well, figure out what the market rent would be for a homeowners property, and then charge them the difference as imputed income. So, our villain (Biff the homeowner) pays $2000/mo. for his house payment. If he were to rent a similar house, the cost would be $3000/mo. So, obviously our villain is getting over. He is saving $12,000/year compared to the less fortunate (those would be the renters...). So, maybe he should have to pay tax on the extra income.

Luckily, some of our congress critters figured out that they would be committing suicide at the ballot box if they actually tried to implement something like that. Not to mention that every extra penny collected would be swallowed up by the new agency that would have to figure out the rental value of every owned home in the US.

ggrrrr..

D is for Due Diligence

Welcome to part four of my A-Z journey through real estate. Of course, this isn't a definitive glossary of real estate terminology, techniques, strategies or idea, but rather just a few answers to questions. Of course, for every question that gets answered, at least one new question is raised. I guess that makes it like most everything else.

Which brings me right back to Due Diligence. Simply put, Due Diligence is the process of gathering needed information about a property. Some of the information is volunteered, for instance the Seller's Disclosure. Here in GA, the sellers are required to disclose any defects of which they are aware, as well as past defects which may have been corrected. The beginning of the Due Diligence process would include reading the Seller's Disclosure to see if there is anything striking and/or disturbing. Keep in mind that if the seller properly discloses a property defect, the buyer is buying the property with knowledge that defect exists. If the seller were to not include a defect that is known to them to have existed on the property, they could still be liable to correct that defect, even after the sale of the property is executed.

The usual next step in the process of performing Due Diligence would be to have the property inspected by a certified. professional, competent home inspector. There may be issues which the sellers are not aware, or there may be issue which the sellers are knowingly hiding. The inspector's job is to locate these, and inform the buyer of their existence. In some cases, further inspection by a specialist might also be called for. A HVAC technician, electrician, or engineer might need to look at situations beyond the scope of a standard inspection. These specialists might employ techniques and technology not available to a regualr home inspector. Also, the vast majority of the time, an additional inspection needs to be performed to search out wood destroying organisms. These "termite inspections" (which look for a lot more than just termites) are usually required by banks if there is financing, and always a good idea.

Depending on the expected future use of the property, proper Due Diligence might also include checking county records to determine if a proposed use will be allowable. If one wants to convert the property to another type of zoning, or wishes to expand the living space, or add an addition, there might be restrictions from the city, county or subdivision. It is the responsibility of the buyer to determine this during their Due Diligence Period in the contract, if not before entering the contract. If there is a HOA (Home Owner's Association) or other governing board for the community, it is also the buyer's responsibility to get a copy of their Covenants, Conditions and Restrictions (CC&Rs) to review during this same period.

There may be many other questions which would need to be answered during the Due Diligence Period of the contract. Generally, finding these answers are the responsibility of the buyer and/or their agent.

There is one item which ISN'T done by the buyer or their agent, but is done on their behalf. That is the title search. It is performed by (or for) the closing attorney, on behalf of the seller and their mortgage company. The buyer generally pays for the mortgage company's premium for the resulting title insurance. I would add, that the buyer should almost always also pay for additional title insurance to cover themselves if a title problem arises. Problems are rare, but could be devastating.

Stay tuned for E...