Lonnie Glessner

Yesterday we learned that banks truly have the safety and peace of mind we crave when we have lots of equity in our homes or we make larger than necessary down payments. So, how can we turn the tables on the banks and regain safety and peace of mind for US?

Here's the secret-Liquidity. Liquidity is a fancy economic term for money in the bank. Thousands of companies have gone out of business, not because they are not profitable; but because they ran out of money. For instance, in June 2007 First Magnus was named one of the 20 largest wholesale and correspondent mortgage lenders in the country and rated a best buy by many stock analysts because of their increasing market share and profit margin. By the end of July they were out of business! Why? They ran out of money and did so in about 2 weeks after Countrywide pulled the plug on them.

CASH IS KING! Money talks! Money in the bank is a wonderful thing for a business and for an individual or a family.

Let's assume you were buying a $200,000 home and you had $22,000 in the bank. Should you put 10% down or $20,000? Or should you put down $7,000 or 3.50%? Traditional wisdom tells us to put 10% down so that you feel safer; but we learned yesterday that our feelings can betray us.

What's the safer choice?

It comes back to liquidity and money in the bank. I would recommend that you only put 3.50% down or $7,000, as that will leave you with $15,000 in the bank after closing. And every financial advisor will tell you to keep at least 3 to 6 months of living expenses saved in the bank and maybe even more right now.

You see your home is safer when your money is parked OUTSIDE of your home in the bank where you can get to it easily when needed. Whereas, your home is more at risk with a larger down payment, as that large down payment parks your money INSIDE your home where it is very tough to get at when needed.

Remember the adage: "It's better to have and not need, then to need and not have"? This is the principle I am talking about. It's better to keep your money in the bank and have access to it (liquidity) and not need it then to have your money in the house and need it and not have access to it. Because, when do you really really NEED peace of mind? When catastrophe or trouble strikes. Will you be prepared?

I recently have had 2 clients trying to decide between putting the smallest down payment possible on a house or putting extra money down on that house for safety and peace of mind. Currently, the smallest down payment possible is 3.50% for a FHA loan unless you are a veteran and qualify for a Veterans loan with no money down.

I want to deal with the emotional question which loan is safer: a loan with 10% or more down or a loan with 3.50% down? If we were to poll Americans on this exact question, I would bet that 90% of Americans would say the loan with 10% or more down is safer. And I would say you are "correct".

But, for whom? Let me tell you a story one of my clients told me a couple years ago. One of her parents' neighbors had owned his home for 27 years and had been paying on their mortgage for 27 years. He was just 3 years from paying off his house in full. Then, catastrophe struck and he no longer had any income to make any more mortgage payments. He had lots and lots of equity in his home; but because he had no job and no income he could not get a new mortgage or line of credit to make the house payment with. And thus he LOST his home to foreclosure and he lost over $300,000 in equity!

I bet before his catastrophe struck that he felt "very safe" because he had a lot of equity in his house. It made him feel safe. But, what he did discover through the School of Hard Knocks? That your home's equity is NEVER SAFE or guaranteed until the house is completely paid off.

Who truly WAS safe after 27 years of payments from the borrower? The BANK! The BANK had the safety and peace of mind, not Mr. Homeowner.

The same principle applies when we choose to make a larger down payment than needed to buy a home. We "feel" like our home and our loan is safer to us; but, it is NOT! It's safer for the bank, not us as they have more certainty of getting their money back as they have more of your money.

So, what's the safer loan? I will discuss that tomorrow along with the fact that most borrowers are confusing safety with liquidity.

As I wrote about yesterday the new Home Valuation Code of Conduct or HVCC is wrecking havoc on thousands of buyers and sellers of real estate in its first two months. According to a recent survey by NAR 37% of their agent members had already experienced a lost sale due to this new rule in just the first two months of this rule. Today, I want to cover two things: first, what passes for an appraisal today and second how to protect yourself or your clients.

I was talking with my best appraiser Jim Boehm this week about the HVCC and its effects. Many of you probably know Jim from my Business Success Lunches and I have referred dozens of you to him over the years.

Jim said he and The Appraisal Institute is hearing stories of what passes for an appraisal at many large Appraisal Management Companies with the BIG banks.

•· The appraiser never visits or sees the home; instead some other lower paid employee visits the home and takes pictures.

•· The information about the lot is pulled from county records, MLS data, Google Maps, etc.

•· The appraiser may pull more pictures of the home from the MLS.

•· The sketch diagram of the interior of the home is pulled from county records if available; if not available, apparently the sketch diagram is "created".

•· Appraisers are often located many miles away from the property and have no familiarity with the neighborhood.

Word for the Wise-Don't let your clients choose a BIG bank as their lender either on the retail side of the business or from wholesale lenders. Your check, your sanity, and your referability is at stake!

I pretty much refuse to use any of my wholesale lenders on conventional loans because I don't know what I am going to get from the appraiser. Normally, I almost always close loans as a Banker in our company's name which gives me more control. I don't get to choose the appraiser anymore; but I know as a company we did a great job of selecting our roster of 25 highly experienced and competent appraisers to minimize problems and issues.

If you have had an appraisal problem since May 1^st please let me know. I want to hear your story.

The National Association of Realtors recently surveyed their members about the effects of the Home Valuation Code of Conduct or HVCC on their business in the first two months of this new rule. The HVCC eliminates the ability of the mortgage professional from ordering your appraisal with a professional appraiser that he or she knows and trusts to do good work.

This new rule came about after NY Attorney General Andrew Cuomo sued WAMA and its Appraisal Management Company or AMC that it owned for negligent and inflated appraisals in the state of New York. Mr. Cuomo then went after Fannie Mae and Freddie Mac too for not protecting borrowers and the public from this problem. Let's be clear about the problem, the problem was inflated appraisals created by the Appraisal Management Company or AMC that WAMU owned.

Mr. Cuomo's solution to this problem is to require every bank and mortgage lender in the country to form a AMC of their own or create a separate department within their firm to handle the appraisal process.
Mr. Cuomo did what ONLY a politician could do--solve a problem wherein the solution to the problem is the very thing that caused the problem! See the irony? The problem was the AMC which was owned by the bank, now every bank and lender is required to use an AMC which may be owned by them. This is like telling a drunk we are going to get you to quit drinking, by having you drink MORE. It's a stupid idea that only a politician could fathom. To make matters worse the AMCs are NOT regulated either whereas the bank or lender is.

After this background information on the HVCC, here are the results of the NAR Survey--

* 37% of their members have already lost a sale due to an appraisal that came in below sales price. This was just in 2 months!

* A majority of Realtors reported that the appraisers were out of the area and not familiar with the neighborhood.

* The appraisers did not use true comparables for their sales data because they were not familiar with the area; thus the appraisals came in low.

You may be thinking "big deal". Here's why it is a big deal--each of those Realtors represent a buyer or a seller in the sale of a home. 37% of all homes where the buyer chose a conventional loan, the deal fell apart and did not close. Dreams shattered! Moves cancelled! Families split apart! This is shocking news!

So, how do you keep it from happening to you? I will write about that tomorrow along with a story of what now passes for an appraisal with the big banks and their AMCs. You won't want to miss my next post.

I had several out of state people ask me to take notes from my speaker, Chuck Blakeman, last week whose topic was "How to Double Your Income in 90 Days" Thus, here are my notes--

•· The market is NOT the problem, your strategy is the problem.

•· Marine Corps Motto-"Bad plans carried out violently many times yield good results. Do something! Act with passion and enthusiasm.

•· A beautifully written Business Plan in a 3 ring binder looks great; but you MUST ACT on it.

•· Action is key! Implement now and perfect as you go.

•· You MUST have a WHY to be able to do this?

•· You MUST set a date! A goal without a date is just a wish.

•· If you want something to change, you will have to change something.

•· You will have to change your mindset and discover your obstacles and then write down the 1 thing you will do to overcome that obstacle.

•· You need help. You need a community or a coach around you to do this. You can't do it alone!

•· KISS-Keep it simple stupid! Many of us have too many pillars or channels of business and we don't do any of them well. Focus on just 1 or 2 and hit it out of the ballpark with those 2 pillars.

If you choose to accept this adventure of doubling your income in 90 days, I encourage you to call Chuck Blakeman to learn more. Team Nimbus groups are available all over the country. He will be starting new small groups of people in January and these groups meet weekly for 90 days. What an awesome way to kick off the new year! What a great resolution that would be.

Chuck can be reached at 720.641.2033 or visit www.teamnimbuswest.com.