Special thanks to Gabe Houston for his proposed “SOLUTIONS” document on the subject. After months of encouragement, Mr. Houston has memorialized our collaborative thoughts and conversations to paper. The proposed SOLUTION is a response to a letter sent from Leo W. Gerard of the United Steel Workers Union to Treasury Secretary Paulsen, dated October 28, 2008. In this letter Mr. Gerard clearly outlines the short comings of the actions taken by the Congress with the $700 billion dollar bail out.

This document provides an economically responsible and realistic solution that was ignored in the frenzy of the last actions of an exiting administration.

Mr. Houston and I have first hand knowledge of the banking sectors’ unwillingness to take losses and liquidate their non-performing assets. There have been an innumerable amount of investors standing in line offering to buy billions of non-performing REO assets from the banks holding the properties. These investors are simply seeking to assume the risk and gain any potential profit in converting non-performing assets into fully performing investments.

The greed of the banking sector prevailed as banks were unwilling to liquidate their REO holdings for relatively small realized losses. The banks refused offers by fund managers, portfolio managers and individual investors to purchase both individual properties as well as bulk REO portfolios at 50-75 cents on the dollar. The banks to date have refused to liquidate their losses at any amount below 80-95 cents on the dollar. Thus plunging the credit market into what the banks conveniently and erroneously label “liquidity problems”. Lack of liquidity implies there are no willing buyers for a willing seller. The current “lack of liquidity” in the housing market is simply a result of the banks unwillingness to sell their REO holdings to the market at current market prices. Today’s prices are deemed “too low” by the banks. Selling at the current bid price requires the banks to take a loss on their investment as a result of their poor and irresponsible investment underwriting. Instead of realizing these losses, the banks sought and received a governmental bailout on the backs of the U.S. taxpayer.

The undeniable facts are as follows:

• The banks assumed the U.S. government would deem them “too big to fail” and thus bail them out. As a result, the banks refused to sell off their non-performing assets at reduced prices 2-3 years ago, when today’s crisis first became inevitable.
• By not selling off these assets and taking the corporate loss two years ago, the banks enhanced the catastrophic losses they now face. They knowingly placed the American taxpayer and the financial markets at risk without regard to basic fundamentals of risk and portfolio management.
• The U.S. government is rewarding the banks, and indirectly their share-holders, for breach of fiduciary duties owed by banking executives to the general public, for their lack of prudent financial and investment decision-making, and for refusal to minimize the losses as a result of a history of governmental willingness to intervene and bail out the banking industry.

The Problem

So, let’s assume we all understand what the problem is. (For a more detailed understanding, see Letter from Leo W. Gerard, President of the United Steelworkers Union, to Treasury Secretary Paulsen, dated October 28, 2008) In a nutshell, Mr. Gerard’s argument in his letter to Secretary Paulson is that the Secretary failed to exercise sound judgment in valuing the assets for which he was committing taxpayer dollars. Just twenty days before Goldman announced that it would “accept” Treasury’s investment; Warren Buffett invested $5 billion into Goldman Sachs and acquired the very same type of security – preferred stock – with the very same form of “upside” – warrants to purchase common stock. Per dollar invested, Mr. Buffett received at least seven and perhaps up to fourteen times more warrants than Treasury Paulson did and Mr. Buffett’s warrants have more favorable terms. In addition, Mr. Buffett’s preferred stock has a higher dividend rate and can only be bought away from him at a premium, while Treasury’s investment of taxpayers’ money pays a lower dividend and can be repurchased at par.

Mr. Gerard argues the Treasury paid $125 billion for securities for which a disinterested party would have paid $62.5 billion. This means that we, as taxpayers, gifted the other $62.5 billion to the shareholders of the largest nine banking institutions. Even worse, it is expected that the nearly $25 billion per year that the firms pay out in dividends to their shareholders will continue. At current levels, dividends to shareholders will distribute all of the money we invested in just five years.

Out in the real economy, we need to restore the balance of power between workers and business, rebuild the middle class and curb corporate excesses. We need to get the government OUT of the business of running corporate America and prevent our tax dollars going to pay for the inefficiencies of Washington. Our politicians are freely spending our tax dollars to “bail out” a troubled sector without establishing any sort of “conditions” of acceptance of such financial assistance. The $700 billion dollar taxpayer investment does NOTHING to deal with the causes of the current crisis. In response, I propose a solution…

The Proposed Solution

To solve the problem, we should start by halting any more taxpayer funds paid to any of the banks. We should mandate the banks liquidate a portion of their REO (Real Estate Owned, e.g. foreclosed homes that are now bank held properties) inventory holdings within 180 days.  Any REO that has been on the books of the banks for longer than 200 hundred days must be liquidated within 60 days.

By requiring the banks to liquidate REO holdings, the banks are then forced to eliminate non-performing assets from their balance sheets. Liquidating REO’s will inject the supply of houses back into the market.  The banks are forced to take actual losses on the poor investments they made.  The banks are then placed in the same position as any other investor when a trade goes against their interest. Liquidating REO’s converts a non-performing asset into a performing asset in the capital market.  By doing this there will be a shift of the risk of fluctuating (or further declines) in housing prices from the banks (who traditionally do NOT like assuming risk) to the market and investing public. Traditionally, banks do NOT like to assume undetermined risk. Furthermore, the marketplace exists to shift risk to the investor and has been the most efficient place to control and manage risk.

In addition, by liquidating REO’s and getting them into the hands of willing investors, the banks would recover some of their losses when the purchasers of these homes seek mortgage financing for their newly acquired asset.  This action has a multiplier effect, spurring investment dollars rolling back through the bank and the financial system.  The banks now would be converting non-performing assets into new loan generation profits.  By taking an initial loss, the banks will be rewarded with revenues in the form of interest rate returns on their lending dollars.  This solution prevents the tax payers from being forced to bail out banks who made poor investment decisions. This action also has the added benefit of putting the risky investments back into the hands of those most willing and efficient at handling such risk. The purchase price received on REOs will reflect the increase risk the market must assume as a consequence to increased risk.

Another benefit of my proposed solution is that the taxpayers are actually the catalyst for returning the median housing price to parity.  The “housing bubble” has resulted in unsustainable housing prices over the past 10 years. Increases in home prices typically keep pace with increases in wages. However, the housing price increases of the last ten years have outpaced increases in wages. National median home prices have increased by more than 45 percent in the last decade (when adjusted for inflation). Median wages per worker, on the other hand, have only increased by 10 percent in the same period. As a result, individuals who are making the median household income cannot afford to buy a median priced home. My solution returns parity to the housing market and permits more homebuyers in the market, thus resulting in more mortgage lending dollars. This is another benefit of the multiplier effect of forcing the banks to take immediate losses on their REO’s in an effort to gain long term profits and benefits from the capitalist markets.

What my solution does NOT include is as important as what it does.  Notice, my solution does not require the government to spend money on ANYTHING. The government is merely required to force the banks (e.g. REGULATE) to liquidate their non-performing assets and take the loss on investments that have already been realized on their books. In other words, this solution forces the banks to turn unrealized, paper losses into actual, realized losses. Although the banks are fearful of taking such huge losses, prudent risk management dictates that every investor must first seek self-preservation. Self-preservation means preservation of capital by liquidating losing trades before your trading account is liquidated.

Interestingly, when not subsidized by a large governmental body or bank account, every investor in the world is forced to manage their risk and take losses before losses overtake their capital account.  A general rule of thumb of investing is “take your losses and let your profits run”.  What this adage means is that you should allow your profits to continue to gain, but you must keep your losses to a minimum. This is also known to the layperson as “playing with house money”. The rationale behind it is that you must never allow your small, manageable losses to become large, unmanageable losses that jeopardize your future ability to invest or trade. See the results of large scale trading failures resulting in liquidating entire corporations

Eerily, almost 10 years ago, Kevin Dowd, a professor of economics at the University of Sheffield and an adjunct scholar at the Cato Institute (a Libertarian think tank based on the principles of limited government, free markets, individual liberty, and peace) wrote about the dangers of governmental intervention in a similar financial crisis. (See Too Big to Fail? Long-Term Capital Management and the Federal Reserve, September 23, 1999). In September 1998 the Federal Reserve organized a rescue of Long-Term Capital Management (LTCM), a very large and prominent hedge fund on the brink of failure. The Fed intervened because it was concerned about possible dire consequences for world financial markets if it allowed the hedge fund to fail. In the short run the intervention helped the shareholders and managers of LTCM to get a better deal for them than they would otherwise have obtained. The intervention also had more serious long-term consequences: it encouraged more calls for the regulation of hedge-fund activity, which may drive such activity further offshore; it implied a major open-ended extension of Federal Reserve responsibilities, without any congressional authorization; it implied a return to the discredited doctrine that the Fed should prevent the failure of large financial firms, which encouraged irresponsible risk taking; and it undermined the moral authority of Fed policymakers in their efforts to encourage their counterparts in other countries to persevere with the difficult process of economic liberalization.

History that we fail to understand or keep at the forefront of our memory, is destined to repeat itself. Recently, the Federal Reserve, the Treasure Department and the Executive Branch of our government have deemed certain industry participants as “Too big to fail”, for fear of the larger implications if such industries or corporations are allowed to become non-existent. What is often overlooked is the fact that market capitalism will always fill voids and gaps in the market. One corporations’ failure and subsequent void results in another corporations’ opportunity to step in and replace the failed entity. Where large banks were willing to over-reach their hand in pursuit of never ending greed and profits, and getting that hand cut off in the process, smaller regional banks, some privately held “mom and pop” operations, were forced to be selective and more conservative in their lending practices. These regional niche banks are largely not as negatively affected to of the failed investment decisions of their larger conglomerate competition. It is these smaller banks who are poised to reap the reward of their conservative investment decision-making. Smaller banks will step up to fill the void left by failed conglomerates.

Unfortunately, the banking sector has been erroneously practicing the philosophy of “take your profits and let your losses run”. Add to that “don’t waste the edge with a hedge” and you have a recipe for large scale financial disaster. Unfortunately for the large, ill-advised banks, the losses have become so large, the government has once again deemed them “too big to fail”.  Our government has once again fallen into the trap and repeated the mistakes of a decade ago. We have failed to learn from our mistakes which make us even more likely to repeat them yet again.

By protecting the large institutions from accepting their losses, the banks are permitted to essentially ignore those losses and continue to act as irrational actors in the market. For example, banks facing large inventories of REO’s, inventories which are growing on a monthly basis, have feared the day that they had to liquidate such listings in a fire sale and actually preserve their equity. By stepping in and bailing the banks out of their financial nightmare, the federal government (e.g. you and I as taxpayers) have assumed the risk incurred by the banks. The banks now essentially have not felt any of their losses as they have been alleviated of the necessity to liquidate losing positions. What this means is that REO’s that have been sitting on their books, depreciating every month for the past 11 months of 2008, now have been injected with fresh taxpayer capital. The banks can now continue to hold on to those REO’s in the hope that someone (anyone) will step in a buy them at a price closest to the price in which the bank is holding the note on.

The SOLUTION in Practice

As an example, a bank lends $500,000 for the purchase of a home. The home falls into foreclosure immediately, with the bank holding the note on the home. This home is now worth $400,000 to a willing buyer, but the bank is un-willing to sell at this price. The bank is unwilling to take an immediate $100,000 loss on this home. Instead, the bank is willing to offer this home to a buyer at $475,000 in the hope of minimizing their loss to a mere $25,000. In the meantime, the buyer at $400,000 disappears and the market price (the price at which a willing buyer and seller would exchange goods) drops to $350,000. Unfortunately, the greed and ignorance of the bank keeps its price at $460,000. The bank is only willing to take $40,000 loss for their erroneous initial investment of $500,000. Keep in mind that this is ONE home, and there is another 5 homes hitting their REO inventory holdings every month. The bank simply asks the government to bail them out of this mess rather than take the loss and clear their balance sheets. Thus, the bank has now shifted the risk of loss due to their own poor investment decision to us, the taxpayers, and still maintains their posture of waiting for prices in the housing market to return to the outlandishly high “bubble” period prices. (e.g. “letting their losses run”).

In my proposal, I require the banks to liquidate any home within 60 days if a home has been sitting as an REO inventory listing for more than 200 days. In the above example, this home would be forced to be sold to a willing buyer at $350,000. The bank would take an immediate loss of $150,000 and the buyer would assume the risk of further price declines. The buyer would most likely seek mortgage financing, resulting in profits to the banking sector. Any new REO listing would be forced to be liquidated within 180 days. This would give the banks enough time to establish a fair and reasonable price without having to resort to a fire sale that could be abused by buyers familiar with the restraints on the bank owned property. The government would not spend a cent to bailout a banks’ poor investment decision. The government would simply require the banks to comply with the liquidation time periods.

Capitalism must be permitted to work in good times as well as bad. Capitalism is the only way to solve a problem rooted in capitalism.  Protectionism will never be able to solve a capitalism problem.  We must force the banks to liquidate their REO holdings and put the houses back into the hands of the market participants.  We must allow the market to assume the risk of fluctuating housing prices. We must force large banking institutions to participate in the market as every other investor must. This means the banks should be permitted to revel in their profits, but must also accept and managing their losses appropriately. We must not allow the banks to strong arm the American public with statements generating fear and paranoia by claiming our money is not safe. We must not be forced to believe that a taxpayer funded bailout is mandatory if the public wants to have access to their savings. The market will bring the housing prices back to parity, thus allowing more American’s to be able to purchase a home.

My solution is sound and is based on proven principles of capitalism. It does not favor any one business or sector over another. My solution does not reward the wrongdoers, the greedy, the bureaucrats or the lobbyists who push for governmental protection. My solution does not punish any market participant any differently than any other market participant. My solution has integrity and treats all participants fairly under the code of market capitalism. Reap your rewards on your solid investment decisions. Accept your losses on your poor investment decisions. Do not ask for government intervention when things are going against you unless you were willing to share your exorbitant profits when your financial situation was favorable to you.

Take Action NOW

Now, I request that every reader of this proposed solution write your Congressman and Senator to pass the along this reasonable solution. Today is Election Day. Change is in the process and we need to encourage our incumbent and newly elected leaders to hold appropriate parties accountable and not penalize innocent taxpayers. We need to bring integrity back to our markets and allow market capitalism to work its magic to cure inefficiencies in the marketplace. Market capitalism cannot exist without Democracy and Democracy cannot exist without market capitalism.

Winston Churchill is quoted as saying “America will always do the right thing - but only after having exhausted all other possibilities”. We have exhausted all other possibilities. Let’s do the right thing by allowing market capitalism to work. Let’s avoid governmental intervention except to promote the economic system we have fought so hard to establish.

–end

T. Gabe Houston is a lawyer in Southern California and the Managing Member of Hegemony Capital Group, an international commodities trading and financial services corporation. He can be reached at Gabe@Hegemony-Capital.com, or visit his website at www.HBLawyers.net.

Roy Slater is a real estate broker, mortgage broker, auctioneer and founder of Hathaway Real Estate Services Corp.   Mr. Slater can be reached at rslater@hathaway-realestate.com or by visiting www.hathaway-realestate.com

This program combined with private lenders such as Ameridream, made it possible for people to add the down payment to their loan for a fee.  Many buyers who qualified for a loan but did not have money to put down or closing costs, would take advantage of this program.  It was one way to put buyers into homes and stimulate the market.

However, if people have no money to put down or enough for closing costs, isn’t this enabling a potential foreclosure? Getting into a mortgage they probably cannot afford and having no equity in it can lead to disaster. This, of course, is a generalization and does not apply to everyone.

First anyone with a pulse could get a loan. Now the guidelines are so stringent that qualified 800’s credit scores, 20% down buyers are not getting into their purchases because the underwriters are being too conservative.  Appraising is a bigger joke now in Columbus, Ohio than ever.

Everything was over appraised and over valued.  We know what happened there….

We are the second highest state for foreclosures….now ligitimate deals are falling apart because of appraisers going to the other end of the spectrum..either buyers have to put more down, sellers have to lower their price (even more) or the lenders raise the buyers’ rates because the LTV is not as great due to the “too low appraisal”

So if you want to “get the money” for your new home built in to your future mortgage..hurry up.  Otherwise, you might just have to do it the old fashioned way…save for your purchase and qualify!!!!

And although the possibility is remote, an accidental loss from sources like a broken pipe may occur while you are away from home.  Especially from water losses, it is extremely important that these issues are immediately addressed so that they do not get worse and cause even more damage.

By simply adding your insurance agent or insurance claims department phone number to your emergency phone list, will help in getting this matter started or even completed before you return from your vacation.  Can you imagine coming home to find out that your neighbor not only watered your plants, but shut off the valve to your hot water heater, contacted your claims department, had ServiceMaster come in to start drying your floor and subfloor and you know this because a check for $4000 is sitting on your breakfast counter.  Someone is getting more than a gift card to the Olive Garden.

Although the above is an extreme and would probably only work in the movies.  The idea of having the correct information at your fingertips is what I am stressing.  You can play the devil’s advocate, and say that a non resident member is making claims against your homeowners policy.  And instead of giving that Olive Garden gift certificate you are slapping them with a lawsuit.  But we all know that the trusted neighbor or family member will hopefully do the first step in shutting off the water and then call you.  How many of us have our insurance agent on speed dial?  Wouldn’t it be nice to get a call from the trusted neighbor, get the bad news, and then ask them for the number to the Matthew Taylor Insurance Agency on your emergency phone list?

I’ve found there is a lot of confusion on how they work or how to make them work. I will share answers to the most common questions I’ve been asked during the past 3 years.

Q) Will an Online Real Estate Auction force me to sell too low?

A) No, not if you structure it correctly. There are 3 main types of online auctions. If you use a Reserve Auction, you can set a hidden reserve price on the system and the auction will not be considered successful unless the reserve is met. If you use a Minimum Bid Auction, you don’t set a system reserve but you can state in your terms that the winning bid is subject to seller approval. The third type is an Absolute Auction, and this is the only type that could force you to sell it too low. Using this type of auction is not suggested, unless you are prepared to sell at a loss.

Q) Are online bids legally binding?

A) Yes, if the terms indicate they are and the online auction system has a trail to show the bid was made by the person. There are pages of legal information I can point you to on this, but I want to keep it short.

Q) What if the high bidder backs out?

A) There is no difference than having a signed sales contract on a property. You decide how much of an effort you want to take to pursue the person legally.

Q) How many properties have been sold through online auctions?

A) No one really knows. I know of many that I’ve sold personally, I’ve also know of many others that have been successful as well. The main thing to realize is the auction method of selling works well. The success, whether live or online all depends on how well the method is executed.

Q) What’s the secret to being successful with an online real estate auction?

A) Good information and Advertising. The online listing needs to contain thorough information about the property, terms that are easy to understand, pictures and a virtual tour, if possible. If the listing is put together well, the other key is to get the word out so people know about it. There are several good Internet advertising sites Free and paid that help along with yard signs, fliers, ads in local publications, etc.

Q) Aren’t auctions just for distressed properties that need a lot of work?

A) No, not anymore. I’m starting to see auctions for brand new properties from builders and banks that just need to get rid of them. Owners of any type of property, who are motivated, are turning to auctions for a solution.

Q) How long does an online real estate auction last?

A) Typically about 3 weeks. It depends on your marketing campaign and how many open houses you plan to do.

Q) Do I need a special license to do an online auction?

A) In every state, you need to be a licensed real estate agent. However, there is no requirement that I’ve come across that requires a special license.

Q) Aren’t online auctions just a fad that will go away when the market gets better?

A) I don’t think so. I think there are more auctions today than ever before because of the current market. However, I also think they provide a solution that is needed in any market, and sellers will find they are an excellent option for a property in high demand too. There are lots of examples on EBay of a unique item selling for some crazy amount. What owner or real estate agent wouldn’t want to watch hungry buyers fight it out online?

Q) How do auctions give you 3 opportunities to sell?

A) By holding an auction it’s not uncommon for someone to bring a written offer when the auction is announced to try and get it without competing with others. The second opportunity is when the auction ends with a winning bidder. The third opportunity is from follow-up with all interested buyers if it doesn’t bring a winning bid.

Q) What about non-U.S. buyers?

A) An online auction makes a property open to a worldwide audience. I was surprised the first time I saw a buyer from France win an auction. It demonstrated to me that online bidding is an effective way to get a property in front of a worldwide audience.

Q) Will an online auction work in my market?

A) It depends. If you are in an area where most people have high speed Internet access, than it will work. If you’re in an rural area where most people use dial-up and therefore aren’t on the Internet much, it will be much harder.

Q) Do I need a special contract or process to sell through an online auction?

A) No. An auction is simply getting you to agreement on price and terms with a buyer. The standard contract takes over from there, just like any other purchase agreement.

Thanks for Reading! I hope you learned something.

Tom Wood
Real Estate Auction Systems

Not reporting major home improvements — such as updating a kitchen or bathroom, enclosing a porch, or making an addition — to your insurance company puts you at risk of being under-insured.
Many homeowners are not adequately adjusting their policy to cover the new value of their home, and often, the only time people review their homeowners insurance is when they first purchase the house.

I recommend contacting your insurance agent or company to increase your coverage before or shortly after construction begins. This protects you from being responsible for the cost of repairing or rebuilding the new addition if it happens to be destroyed or damaged during the construction process.
Homeowners should review their policy each year on renewal to make sure they have enough coverage to rebuild their house in the exact style and quality of the original home. Think about just the material costs if your home is deemed historic! Raw materials such as lumber and stone continue to rise as do labor costs for construction and only 45.6 percent of the respondents said they have floaters or riders attached to their policies to cover jewelry, furs, art, antiques and other items that may not be otherwise adequately covered by their homeowners insurance.

Some recommendations to consumers to keep their home properly insured:

• Always update your homeowners insurance to reflect the increased value after any remodeling or additions.
• Conduct a home inventory – Photograph or videotape your belongings in every room in your house. Open drawers, closets, etc. to make sure you capture all of your personal items. Also, make a list of all highly valuable items in the house (major appliances, electronics, etc.) and include the brand, make, serial number, model and year of purchase of each item.
• Keep information in a safe place – store the inventory list, along with the photos and/or videotape, in a safe deposit box or at the home of a friend or relative so it will be safe in case your home is damaged or destroyed. Another option is to store the photos on an online website.
• Additional Insurance - make sure you have coverage for big-ticket items like furs, artwork jewelry or antiques. You may want to consider purchasing a rider or floater that provides a specific amount of coverage for high-priced or precious items based on their appraised value. Adding a rider to your policy can help ensure that your home office is fully covered.

Two other key perils, or “causes of loss” that are not covered under most homeowners policies are “An example of collapse would be an old barn collapsing from aging. You can’t get coverage for old structures collapsing. However, you may be able to find coverage for earth movement, such as a mud slide following a rainstorm. Often this coverage is available as part of an earthquake policy. Use Google to research these two coverages and their availability in your state.

Priority #4: Content coverage

Homeowner policies also cover your contents; generally at 50% of the value you’re insuring your dwelling for. Example, $200,000 coverage on your dwelling, comes with $100,000 coverage for your contents. But for many people, the standard amount of contents may not be adequate, such as if you have really nice furniture. So it is important you talk to your agent about a “home inventory booklet.” This way you can take inventory of your contents and possessions, and record it. But don’t keep that inventory in your home. What if you have a fire and the booklet burns? So keep it at your office or your friend’s home. Or you can visit www.iii.org and get their online inventory guide. Coverage on the dwelling may include specified water damage, but your contents may not be covered for water damage. Be sure to read your policy contract, and ask your agent to clarify coverages. Ask your agent about specific loss scenarios.

The cost of having an online company verses a local agent might be cost effective today, but insurance is for the unexpected. Ask yourself, how much you will be really saving if your home is not properly covered. Are you insured, or do you just have insurance?

The pricing dilemma

Traditional real estate wisdom says to price high and slowly come down until you get an offer. In a booming market this is great. However, in a normal or slow market this does not work. By doing this you have increased your sales cycle by months and may not get offers altogether if the property sits too long and becomes stigmatized. As an auctioneer we price low and then go high. We end up at the same fair market price you would of achieved by pricing high right at of the gates. The difference is auctioneers do it in 30 days and not 6 months or even a year. Besides, if you wait 6 months to sell your home, think of what six months of mortgage payments equals when pricing your home. The auction method may make even more sense if you start doing the mortgage math.

Are You Insured Or Do You Just Have Insurance?

Thanks to technology today, a computer can now be carried around in your pants pocket. We are being more efficient than effective with this technology and in the insurance world we are being given more choices today than ever before.

So how do we know what is best for our situation? The answer, we do not know. Only our local property/casualty agent who has been trained can give us that sound advice. Every year your agent should review your policy for new discounts, replacement cost calculator and endorsements. By doing so, they are protecting your checkbook and your family’s lifestyle. In the event you do not speak with or do not know who your insurance agent is, the following are some tips when purchasing a homeowners insurance policy.

Top Priority: Be sure your home is insured for the total REPLACEMENT cost.

Since your insurance company offers coverage to repair damage to your home, the proper coverage amount is based on the cost to rebuild the home. It is NOT based on the market value of the home. Building costs are going up as other commodities such as gasoline go up – that’s how building supplies are delivered. Your local agent can help you calculate the sufficient amount of coverage needed to rebuild your home. You don’t want to be caught short of coverage in the event of a total loss. The Insurance Information Institute offers many tips on properly estimating the right amount of insurance, and what policies to buy. Check out www.iii.org

Priority #2: The top two causes of loss are Fire and Water damage.

Four areas of the home that are most prevalent in suffering covered losses are the kitchens (fires), roofs (water and wind), basements and bathrooms (water damage due to burst pipes). Check with your local agent to be sure your Homeowners policy covers these perils. Virtually all policies cover fire (but not arson), but water damage coverage may vary. Most policies cover water damage from “wind driven rain” striking the home, coming through your roof, or coming in through windows. However, rising surface water, even if caused by rain, is not covered. But you can protect yourself in two ways for these perils. Most companies will offer an extra coverage rider (for more premium) that will cover water back-up from pipes or drains on your residence premises However, this does NOT cover rising ground water, such as from a result of heavy rains, flooding streams or causing ground water seep up from the earth. The National Flood Insurance Program (NFIP) does offer a policy to cover rising surface water, such as described above. Many local insurance agents can get a flood policy for you. Check out www.fema.gov/business/nfip/.

The First Step

Nope, I am not going to tell you to call your mortgage company’s loss mitigation department. What I would say is to determine if at the end of the day you can really make the payments even if your mortgage company allows you a forebearance or a cash out refinance to get caught up. In many cases this just prolongs the pain. Based on the credit situation you are now in, you are not going to get a lower rate and a lower payment. So decide first if the payments or your equity(if any) are really worth fighting for. May sound cold but I am not one that likes extended pain.

Second Step

Nope, I am still not going to tell you to call your mortgage company. Whether or not you decide to fight for your home or not, absolutely do not call the mortgage lender yourself. You are too close to the issue and emotional about the home. Have a third party company handle this for you. There are a few good ones out there who know the right people to speak to directly at your current mortgage company. They also know exactly what to say and do. They also know the limits of the mortgage companies, they know who to call and hard to push to accomplish the best results. Do not do this yourself.

Short Sale Hell

One last tid bit. If you decide to short sell your home with the help of a Realtor make sure you know your mortgage loan facts. The first thing the lender is going to ask from your Realtor, which trickles down to you, is a short sale package proving hardship. They will want your w2’s, tax returns, and your story. If you own multiple homes or stated your income in order to purchase the home you are getting ready to short sale, then this may present legal ramifications such as mortgage fraud. Basically by sending in your short sale package to your lender you have incriminated yourself. Could be even worse if you do so and you hold some type of state licensure. Your mortgage company may have more reasons to go after you for fraud. The best thing to do is nothing. Do not contact the lender and just let the property go. Do not complicate matters. Let a third party company, and not a Realtor, handle this for you if at all.

This topic is not one of my favorites. This article is intended for those good people who just do not know or understand the mortgage industry. I have just seen too many people burned by unscrupulous loan officers and real estate agents trying to help themselves and not the mortgagee who will do anything to not have this agony hanging over their head. I do not condone any of these tactics but unfortunately this yields the best outcomes for homeowners in trouble.

The answer is an emphatic yes.
The auction method of sale gives consumers many more options when it comes to selling their home. But before I speak to the advantages let’s clear up some of the misconceptions. The word auction does not always mean foreclosure or short-sale. The auction method of sale is absolutely not always for distressed situations. This method of sale and the psychology behind it generates a tremendous amount of curiosity and interest for home buyers. Just seeing the word Auction on a real estate sign or in the MLS get buyer’s energized. If the auction is marketed correctly and administered ethically by an Auctioneer, the community will recognize this means of sale as a positive and not a negative. Buyers will always want to preview auction properties before traditional real estate listings.

The auction buzz
So now you have the energy and a buzz around your property that is being sold at auction. What are the advantages? The first advantage is flexibility. If you list your home with an auction firm, make sure they are also licensed to carry out traditional real estate sales, too. If the home does not sell at auction then it can immediately come on the market in the traditional sense. This will give you a competitive advantage with respect to a sales strategy. Yes a sales strategy, more tools that can bring an actual signed sales contract in less than 30 days. By coupling the auction method to traditional real estate sales you have created the perfect situation to sell your home.

Just because you see the word “auction” does not mean it is a foreclosure. I need to stress that. And as a matter of fact, buying a home on the court steps during an auction is extremely difficult.

Nonetheless, if you show up to buy a home on the court steps during a foreclosure auction you had better be prepared. Depending on the state the property is located and what is owed on the home, you had better do your due diligence or you may be purchasing a home while at the same time inheriting mortgage debt that puts you upside down right out of the gate. If the property is worth buying, then small and large investors will be bidding with all cash offers because they know the ROI on that property can be realized. So if you are the only person bidding, STOP!!! You may not have analyzed the property circumstance very well.

Make sure to read the terms and conditions clearly. Some auctions may require all cash bids or pending bank approvals. Some court auctions do not allow for bank financing. So for a traditional buyer you are stuck. Save yourself the anguish and clearly read the terms and conditions. The banks may not make it is easy to purchase a property because they would rather have the asset revert back to them so they can sell it traditionally with a Realtor as a bank owned home.

The last item I want to discuss is “pending bank approval.” I absolutely despise this. This is not an auction even though it is being marketed as an auction. You see the ads on TV. “5000 PROPERTIES BEING AUCTIONED” at some fancy hotel.. Read the terms and conditions. WHEN THE HAMMER FALLS THESE PROPERTIES ARE NOT REALLY SOLD. Some asset manager at a bank has to approve it and in nearly all cases they counter back with a higher number. Remember they have a cash deposit to hold you to the fire. Hopefully as auctions gain in popularity as they are now, state regulators will clean this up. It really gives the word “auction” a bad name.

Look for my next article as I discuss non-foreclosure auctions for buyers and sellers. This presents a wonderful situation for buyers and sellers. It is also gaining in popularity over using the traditional real estate agent. Is this sales plan right for you?

This issue is similar to those applying for new jobs as well. The top HR departments and underwriters are Googling you. So don’t be surprised if you are declined for a job, mortgage financing, or insurance based on your internet search engine audit trail.

In real estate and finance this is becoming more and more apparent with the credit crunch. Underwriters are taking a deeper and deeper look at you and you collateral (your home) based on the images from Google Maps “street view.” If your appraiser misstates the quality or uniqueness of your home or you embellish the truth on an insurance application you may find difficulties getting financing or higher insurance premiums.

Savvy underwriters are seeing your home in high definition right from the front curb. They are not just seeing the overhead view. They even have the opportunity to drive up and down your streets and check out the neighborhood with stunning clarity via cyberspace.

It is becoming easier and easier to scrutinize new customers in secrecy. Keep that in mind if and when you decide to embellish the truth on a mortgage or insurance application.

#10. “Oooh, that property (undisclosed)? I forgot about that one.” (even though I closed it for him 6 months ago)

Why: The borrowers “debt to income ratio” or how much they can really afford is not accurate on the loan application. This is loan fraud and also places borrowers in a payment shock situation because they do not really see the gravity of their financial situation on paper.

This happened a lot during the refinance boom. New transactions often did not show up on the credit report for months on end as a result of the high volume of loans being funded. Borrowers were trying to close multiple purchase transactions and cash out refinances with multiple/different lenders at the same time to avoid underwriting approval issues. You may have read about this in the news as of late, some of these people are going to jail for mortgage fraud.

#9. “That mortgage late was on his rental property. So it doesn’t count.”

Why: A mortgage late on a rental is counted just the same as a primary residence. A late is a late. Mortgage lates are just about the worst thing an Underwriter can find in a credit report. Why would someone lend you money on a home if you have a bad track record.

#8. “He’s downsizing, the new property is going to be owner occupied.”

Why: Underwriters are not buying it. From their perspective, buyers does not move into a smaller home or less expensive home to live in when they have a nicer one. Especially when number #6 is evident. An underwriter will call this a second home or a rental depending on the proximity to the home already owned.

#7. “Those aren’t comps, those are short sales so they don’t affect my value.”

Why: This is a point that I will also elaborate on in a future article. #7 has become an increasingly important topic in this declining market. Bank underwriters are ONLY concerned with closed and recorded model matches within .25 miles to .50 miles or properties with same square footage, number of beds, and number of baths.

Underwriters will never give you extra value for a home being the nicest on the block even though your appraiser said so.. The bank does it’s own evaluation along with your appraisal. If the data is too far off they will cut your appraisal value every time in this declining market. This is something Realtors better learn to understand very quickly when it comes to purchase money transactions. The notion that purchase price always sets the value is out the window when their are myriads of foreclosures and short sales around the subject property.

#6. “I know the new house is a 3 hour drive (current is 10 minutes away), but he’s really going to live in it.”

Why: Underwriters will never buy off on this idea. If you buy a house in close proximity to another it must be bigger and more expensive for them to even consider it is going to be owner occupied. Second homes and rentals are not considered owner occupied.

#5. “Do they verify the VOE?”

Why: Yes. On every loan someone will call your employer to verify you work there or they will need a letter from your CPA to verify you are self-employed. If you are lucky enough to qualify for a true “ no Doc” loan then they will verify nothing. You better have perfect credit and a lot of equity if you want to go this route.

#4. “I need a stated, 90% option arm with a 562, but he’s got good credit….Oh, and I need no MI and no impounds.”

Why: Let me get this straight… You need a loan for a borrower that cannot document his income, only has a 10% down payment, wants a negative amortization Arm with the potential of the loan balance increasing more than 110% the value of the home, has horrendous credit scores, that does not want to have mortgage insurance, and does not want to have property taxes and homeowners insurance collected in the monthly payment?? I am not even going to begin to explain why this will not fly on so many levels.

#3. “My appraiser can’t get closer or newer comps…Those are all like, um, $100K less then the value I need to make the loan work.”

Why: I explained this earlier but here it is again. Underwriters are looking for sold and recorded comparables within .5 miles or less, similar square footage/ beds/baths, and comparables preferably within 3 moths old. Otherwise, look to have appraisal values cut by lenders.

#2. “contractor” is the borrower. “No, he doesn’t have a business license. Nope, no business bank account either.”

Why: Do I really need to explain this?.

AND …………..

#1. “Can I use a CPA letter as full doc if he puts how much the borrower made on it?”

Why: NO!!!! As silly as this sounds, borrowers and loan officers alike think that a full doc loan is the equivelent of someone with a professional credential vouching for them. Profit and loss statement, income statement or a bank statement is not going to work on a full doc loan to prove income. A full doc loan means the following and is without exception.

• Last 2 years w2’s and last 2 recent paycheck stubs for wage earning borrowers
• Last 2 years personal tax returns and ALL pages/schedules for self-employed borrowers showing AT LEAST TWO YEARS of self-employed income.
• Cash asset statements showing the necessary down payemnt and or at least 6 months cash reserves depending on the loan program. NOT THE STATEMENT SUMMARY PAGE 1 OF 4. ALL 4 PAGES. THAT MEANS PAGE 1 AND PAGE 2 AND PAGE 3 AND PAGE 4, ASSUMMING THERE ARE FOUR PAGES IN THAT PARTICULAR STATEMENT. “I gave you what I had” is not the answer an underwriter wants to hear. Yes this is a pain for a borrower but it is the only way it works on a full doc loan.

Of course there are other documents that you will need to qualify for a home loan but they are usually trivial documents. The ones listed above are really what get you approved for a loan besides credit scores.

end

If you are considering relocating here to Columbus or one of our great suburbs,or buying or selling here there are plenty of great bargains!

Grandview, Clintonville, Worthington, Gahanna, Upper Arlington, Bexley, Powell, Dublin are strong markets holding their values. New Albany was overpriced for so long that is finally coming back down to reality pricing with the rest of the market…which feels like a depreciation.

Blacklick, tucked in between New Albany and Gahanna is a good value as well as Reynoldsburg and Westerville.

If you need more information, drop me a line!

I would like to address all the “So called Minneapolis Condo Hype” with the facts about the market. Now lets take these facts below and see if all the noise in the market is opportunity is knocking!

In the Downtown Journal which is the local Minneapolis newspaper that publishes a section called the “Condo Watch” in every issue. This pipeline has 44 projects in the pipeline which may to some seem like a lot and to some might not but the BUZZ in Minneapolis Real Estate is that this market is over built, to many condo project, etc…. The True reality is that out of the 44 listed projects 17 of them aren’t even built or there is fabulously no momentum in being built. 21 out of the 44 are projects that I can bring a buyer in and they can move in with in 120 or sooner. But the big message that I want to get across is that out of the 21 in the pipeline there are 9 projects that have less than 10 units remaining. So in roughly the 3rd quarter of 2008 all of them should be closed out. Which that will leave roughly 12 projects left for buyers to choose from! Yes new projects will pop up here and there but this is also great for the re-sale market that has been hurt that last few years!

Downtown Minneapolis has still been a very active market compared to the rest of Minneapolis.

• Closed sales are up 105% YTD form 07 to 08
• Percent of Original List Received: YTD for 01 96.2% / 99.1% +3.0%
• Condo Inventory: Feb 07 543 units and Feb 08 502 -7.6%
• Average Days on Market: 210 days
• Average sales Price: $293,440 4th highest in the city