James "J.R." Samsing

Far be it for me to disagree with the venerable Mr. Warren Buffet but I just about choked when I read his recent comments regarding mortgage lending and the housing crisis. In his Annual Letter to Berkshire Hathaway shareholders Mr. Buffet indicated that "home purchases should involve an honest-to-God down payment of at least ten percent." This paradoxical statement immediately follows his observation that "commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called upside down loans)." So if foreclosures don't occur because of the absence of equity, then what exactly is the purpose of the down payment?

As a mortgage and real estate veteran of nearly 20 years, I am frustrated that the media continues to focus on low down payment and "liar loans" as the primary cause of the current housing crisis (with rising unemployment a legitimate 3^rd strike). I am particularly concerned that this misinformed analysis of mortgage defaults is missing key elements of risk and is shaping government lending standards (which now represent the vast majority of the mortgage market) in a way that is counterproductive.

For example, what benefit was derived by HUD's recent increase in the FHA 203B program from 3.0% to 3.5%? Does the government actually believe that a home buyer putting an extra .5% down payment is less likely to default? This while FHA still allows people to qualify with total debt in excess of 50% of their take home pay and with ZERO cash reserves. I guess HUD would rather have their borrowers put every last dime they have into a house rather than save a little for a rainy day...

Personally, I believe that zero/low down payment loan programs can perform at high rates under any market condition within the context of proper lending guidelines. These guidelines would include full income documentation, debt ratios in line with FNMA/FHLMC (28/36), A DISPOSABLE INCOME REQUIREMENT to ensure that borrowers have enough variable income to afford non-housing items, a liquid reserve requirement the equivalent to 6 months of housing payments, and mortgage insurance to provide 25% coverage for the lender. As a lender I would much rather have a borrower with a more solid capacity to repay and cash reserves rather than a consumer leveraged up to their eyeballs so they can put 10% into a home purchase.

But no, all I hear from business pundits today is that we should be requiring people to put more money down when they buy a home. Like 10% "skin in the game" is really going to make a difference in ANY declining market. Tell that to my neighbor who paid $800,000 for his house 3.5 years ago, is being transferred and is trying to sell his home for $320,000 today.

Fortunately there are a few low down payment options still available. FHA offers $100 down payments on HUD owned properties in addition to their standard 3.5% down payment requirement on non-HUD listings (down payment can still be a gift). FNMA is currently offering 3% down payment loans with no mortgage insurance on its REO listings. And of course there are still "zero down" VA and USDA loans for those who meet the requirements.

The markets I serve, Litchfield Park, Goodyear, Surprise, Avondale and Glendale, AZ have a decent selection of HUD & FNMA REO properties that I can show to clients looking for a low down payment option, so it hasn't affected my business as much. But I can't wait for the day when sensible lending guidelines return and these programs will be more widely available.

In the spring of last year i Real Estate Services made the decision to offer Home Buyer Rebates of up to 50% of our commission to clients using our brokerage services when purchasing a home. Over the last few months I have had some interesting conversations with Realtors regarding the use of the rebate program. Naturally, Realtor opinions vary greatly and I have heard everything from "that's a wonderful idea" to "you're committing fraud and killing our industry." With such a wide array of comments I thought it would be a good idea to make the case for offering Home Buyer Rebates.

Why we made the decision.

I don't think anyone doubts that we are currently in a Buyer's Market. The region I personally serve, the West Valley of Phoenix, AZ, is enjoying the highest level of housing affordability in a generation. Buyers generally have their pick of hundreds of available homes, the majority of which are foreclosures and short sales. Today a qualified, patient buyer has substantially more leverage than most sellers. As a result, representing buyers in today's market is a lot easier, offers more options, and is typically less stressful. In some cases it's downright fun.

Conversely, representing private sellers in this market is incredibly difficult. Many sellers in my market are "upside down" and require lender approval of a short payoff to sell their home. And a glut of homes for sale, including foreclosure properties at below market prices, is making it extremely difficult to close traditional resales.

Given this fact alone, it would make sense to accept less compensation representing buyers than to represent sellers.

But there are many more reasons why we choose to offer Home Buyer Rebates. Consider the following:

• A buyer receiving a real estate commission rebate has more options at the closing table.
• Nearly all lenders will allow home buyer credits to be used to offset closing costs. As a result, commission rebates can be used to reduce a buyer's "cash to close" amount. Note: Commission rebates typically cannot be used to offset a borrower's down payment requirement unless the licensed agent is a direct relative and the rebate meets the Lender's/HUD's "gift" requirements.
• Realtor rebates can also allow buyers to "buy down" their mortgage interest rate and reduce their monthly payment with no additional out of pocket expense. Not only does this make the home more affordable, it also lowers the borrowers "debt-to-income ratio" making it easier for the buyer to qualify for a mortgage.
• The buyer rebate can be used to help borrowers with borderline qualifications to increase their cash reserves, thus improving their chances of obtaining financing. Liquid assets are a key compensating factor for the LP/DU decision engines and can often mean the difference between a "Refer" and an "Eligible" finding.
• A Buyer receiving a cash rebate is more likely to close. Getting extra cash after the close of escrow can go along way toward alleviating some concerns about buying a property like moving costs, home improvement expenses, furniture and decorating, or even just making the first mortgage payment.

How our Home Buyer Rebate Program works.

In order to be eligible for our homebuyer program we do require 3 things from our clients.

1. Prospective buyers must be pre-approved with a lender before we sign a Buyer's Agency Agreement. We do not go to work on a home buyer's behalf until they have evidence of the ability to close.
2. Prospective buyers must identify communities of interest within our agent's service area. For example, I serve the West Valley Phoenix cities of Litchfield Park, Goodyear, Surprise, Avondale & Glendale and only offer home buyer rebates in these cities. This benefits the agents who do not incur the additional costs of a wider search and benefits the clients by ensuring they are working with an agent who is a focused, knowledgeable expert on their community.
3. Prospective buyers must do some of the leg work on-line by using our website to narrow their search for homes. Naturally we provide a wealth of tools to assist homeowners and, as a full service agency, will help as much as needed with property searches. But we do ask that our clients perform advance work to narrow their search criteria as much as possible.

That's it. In return for agreeing to these 3 things, i Real Estate Services offers to provide full buyer's agency representation and rebate 50% of our buyer's commission (with a minimum commission amount of $1500). Everything is fairly straightforward.

Is it Legal?

In the states we do business, Arizona and California, real estate broker commission rebates are legal. There are no state prohibitions against sharing any portion of a real estate commission with a home buyer. Please be aware that state laws do vary so residents of other states would need to check with their appropriate regulatory agency.

In addition, there is no federal law that prohibits real estate commission rebates.

However, the Real Estate Settlement Procedures Act does specifically require the disclosure of commission rebates to the parties of a real estate transaction. Generally, this is accomplished by including the buyer's credit on the HUD-1 Settlement Statement. Note: THIS DOES NOT MEAN THAT THE BUYER'S REBATE CANNOT BE PAID IN CASH OUTSIDE THE CLOSE OF ESCROW. Cash rebates paid outside of escrow are legal if fully disclosed to both parties. For example, a line item added to the final HUD-1 Settlement Statement evidencing the buyer's credit and marked "POC" (Paid Outside of Closing) is completely acceptable.

The bottom line is that Home Buyer Rebates are legal, ethical, a benefit to the consumer and, in my opinion, make good business sense in today's market.

The Litchfield Park Cityline Newsletter has been updated for the period March - June 2009. Click here for the latest update from the City of Litchfield Park:

City of Litchfield Park's March through June, 2009

Have a question about Litchfield Park Real Estate?

Contact me today.

James R. Samsing, MBA

Designated Broker

(623) 444-5182 (Direct)

No really, I'm not kidding.

I did.

Like many of you I was once stuck living in an expensive metropolitan area, stressed about keeping my job because I had a wife, 4 kids and a $6500/mo house payment. That's $6500/mo so I could live in a 30 year-old, 4 bedroom, 3 bath, 3,000 sq ft tract home in an average neighborhood of Southern California.

Today I live in a newer, 5bd/5ba, 4,600 sq ft home on 1/3rd acre, in a gated community with a pool, spa and every amenity you could dream of. My kids attend a great school, with amazing teachers and new facilities. My son plays Little League on fields used by major leaguers for spring training. I get to play golf on dozens of world class courses, some for less than $20. I can go snow AND water skiing if I want to...in the same day. I have incredible shopping, entertainment and sporting venues all around me. And just about every day I get to see some of the most dramatic landscapes on the planet and enjoy the most amazing sunsets imaginable.

But best of all my annual house payment is less than my old property tax bill. I no longer worry about making ends meet because I could flip burgers for a living and still enjoy my current standard of living. And Arizona's unemployment rate is still below the national average, with new industries relocating to Phoenix, which is definitely reassuring.

In the Arizona communities I serve - Litchfield Park-Goodyear-Surprise-Avondale-Glendale - there are currently more than 400 single family home listings under $100K. These are all homes that were built this decade, with at least 3 bedrooms, 2 baths, and 1500 sq ft. There are currently 1,400+ listings available up to $150K. And more than 2,000 properties are available up to $200K!

I just showed a banked owned home a few days ago where the lender had painted, installed new carpeting, and fixed the pool, spa and rock waterfall/slide. It's a 4bd/3ba, 3600 sq ft home with a bonus room built in 2004 and was listed for $184,000. Assuming good credit you can buy this house with a $6,500 down payment and a fully amortizing, 5 %, 30-yr fixed rate, PI payment of $954/month (5.766% APR). I know people with car payments bigger than that! For a beautiful 3,600 sq ft house!?

Better still, I just viewed a nice 4bd/2ba home in a new community in Goodyear last week that was listed for $58,500!!! I feel like I'm a character in a TV show and just got transported back to the year 1995. There are so many incredible houses for sale in my market under $50/sq ft that it blows my mind.

So if you're reading this, and you're living in some other place worried about maintaining your standard of living, just start packing now. Move to Arizona. You won't regret it.

Now if you'll excuse me, I'm going for a dip in the pool. It's 80 degrees and sunny outside on this fine February day...way too nice to be inside writing a blog!

Over the course of the last week I've had the chance to read a large number of blogs and Realtor posts regarding short sales. I can't imagine there is another subject with a wider degree of opinion! There is so much information, both good and bad, it is easy to see how consumers and Realtors alike are easily confused.

I have been a licensed Broker since 1995, but for nearly 20 years I have been principally engaged in the lending side of the business. During that time I have helped hundreds of consumers negotiate short payoffs of private and institutional loans, obtain prepayment penalty waivers, perform rate modifications on existing loans and assist with lien payoff resolutions including IRS tax liens.

Short sales and loan modifications are nothing new.

What has changed is the sheer volume of consumers who are upside down on their homes and the complexity of the mortgages they hold. This has created a tremendous market for short sale "experts" and loan modification "specialists" who offer services to desperate homeowners. And it's created a log jam at loan servicing departments with overwhelmed loss mitigation units processing inordinate numbers of applications. Of course, compounding the problem is this crazy financial services environment where the major servicers (retail banks) are incapable of adequately staffing temporary loss mitigation departments due to their financial condition. Oh, and don't forget the hideous maze of ownership rights to modern mortgages; many of whom have been sliced and diced from mortgage pools into CDOs with no clear owner, and a servicer with no vested interest in the loan itself. Fun Stuff!

Yet in spite of this there are plenty of local Realtors and Loan Modification Companies touting themselves as short sale experts with the ability to make the process "easy," "simple" or "fast."

Uh huh.

Short sale situations are as varied as the stars in the sky. Every consumer's situation is different and there is no single cookie cutter/template that will work for everyone. With that in mind here is my best attempt to provide some general guidance to homeowners or Realtors seeking to sell a home for less than is owed on the mortgage(s).

Bit of Advice #1. Get to the right people the first time around.

Mortgage ownership and servicing rights change hands at an ever more rapid pace. It is important to know WHO owns your mortgage and WHAT department handles short payoff approvals.

If you aren't sure of who owns the mortgage, perform a free search through the MERS (Mortgage Electronic Registration System) website: https://www.mers-servicerid.org/sis/ MERS is a national registration system for mortgage loans and nearly all institutional loans are registered with them.

Once you have determined who the correct servicer/owner of your mortgage is, then you need to identify which department handles short sale approvals. Do not contact the general toll free number listed on a mortgage statement or website unless you want to spend lots of time listening to "sold on hold" messages while being bounced from person to person. I generally "Google" the specific company department I am looking for if I cannot find it in my own rolodex. There are a few free public lists of Loss Mitigation Departments that you might also try. Here is one I recently found: http://iamfacingforeclosure.com/blog/loss-mitigation-phone-numbers/

Once you contact the appropriate Loss Mitigation department make sure to get a detailed list of their requirements, including any company specific forms they require. Do not use a cookie cutter template provided by some 3^rd party.

Note: If you are dealing with multiple institutional mortgages on a single property then - in my opinion - you are trying to do the impossible. However, you can get short sale approvals done when the 1^st & 2^nd mortgages are owned by the same company. Many lenders now have "Co-Loss Mitigation" Units that workout settlements on multiple loans simultaneously. I recently completed a short sale in Southern California with Wells Fargo by working with a group specifically setup to negotiate on behalf of Wells Fargo Mortgage (1sts) and Wells Fargo Home Equity (2nds).

Bit of Advice #2: Hardship, smardship. You have a sad story, boo hoo hoo. Now what's in it for us?

If you scan the internet you will find hundreds of samples for short sale hardship letters. Too often they focus on the borrower's reasons for needing a short sale and not the bank's reasons for accepting the short payoff. It is ok to spell out hardship but FOCUS ON THE REASONS WHY THE BANK SHOULD ACCEPT YOUR PETITION. The bank only cares about getting the maximum amount of money, in the shortest amount of time. Anything you can point out to that effect should be at the heart of your letter and application.

And be as detailed and accurate as possible. You will need an estimated HUD-1 that is spot on. And if you are looking for a pre-approval, or if you can't get the numbers to be deadly accurate, then make sure to add a minor level of padding to allow yourself some wiggle room with negotiations. Remember that the Loss Mitigator is also looking for some sort of "win" and, as it is with your clients, it's much better to under-promise and over-deliver. Besides, if the deal ends up short to close guess where the extra money is likely going to come from??? It isn't going to be from the lender whose agreed to take tens (or hundreds) of thousands less on their loan!

The key here is that you want to give the Loss Mitigation Officer as many reasons as possible to approve the short sale. Which leads me to my next piece of advice...

Bit of Advice #3. Know who you are dealing with.

Imagine yourself working in a temporary/contract $40,000 year job, sitting in a cubicle farm surrounded by hundreds (if not thousands) of other collection professionals. Your daily work life resembles a Dilbert cartoon with stacks of files on your desk that stretch to the ceiling. Pinned to the punchboards on your cubicle walls are "Matrices" of loss mitigation guidelines which spell out what you must review and what you are permitted to approve. Your phone rings incessantly and you have 14 new voicemail messages, each from some histerical Realtor or homeowner wondering when their application will be approved. You can barely go to the bathroom without someone's permission let alone approve an exception from the "greater of 80% payoff or 100% of bank AVM" rule in your region. Those exceptions require the written approval of a Loss Mitigation Officer II-A and you have only been with the bank 6 months...

Do you really want to harass this guy? You think he really wants to take your call? Bother him too much and my guess is your short sale application will be placed in the "cylinder filing cabinet."

Instead, be nice. Don't call and harass anyone. Get an e-mail address. Nearly all of the banks have a generic e-mail string like john.doe@bankofamerica.com. Send him polite update requests every few days that he can respond to at his leisure. Keep him apprised of any market conditions regarding the subject property that might hasten his decision. Remind him of important milestones in the purchase contract. Offer to bake him cookies. Whatever it takes (within legal limits) to keep him engaged with you and your file.

Last Bit of Advice (For Realtors Only): Own the process.

I live and work in the West Valley of Phoenix and there is hardly a home seller here who is not upside down. I know a lot of Realtors who choose to avoid short sale listings altogether because of the time and energy they take. Others choose to use 3^rd party vendors and leave it up to someone else to do most of the work. While I would never advocate that Realtors spin their wheels and work for free, I do believe that we all have some degree of responsibility to the markets and communities we serve. And remember, the more short sales we close, the fewer foreclosures there will be, the greater the number of qualified buyers that will exist in the future, and the faster we will return to a period of home value appreciation.

There's my 2 cents. My sympathies to the millions of homeowners in this country who are upside down on their home through no fault of your own. I wish you the best of luck.