Crime isn’t paying for a resident in East Texas, who were recently convicted of real estate fraud. Jack A. Brown, from Tyler, took investors for more than $27M. According to the article from News-Journal.com, Brown was ordered to pay restitution of  $8,286,950 while his partners were each ordered to pay $27,540,302.

I’ve had conversations with agents and clients the past few days about the number of scams and unethical investors involved in real estate. Many investors that are know are good people who are straightforward with potential buyers and seller, but there has been a noticeable increase in the number of investors who are inexperienced and/or outright dishonest.

In this case, a consumer defrauded investors, which illustrates that even experienced investors can become victims if they aren’t careful.

Link: Marshall man sentenced in real estate fraud.

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I’ve been getting questions from buyers about Option ARMs (Adjustable Rate Mortgages). I recently wrote an article on how adjustable rate loans have been the source of foreclosures in Dallas, San Antonio, and Austin. With our state having high property taxes compared to the rest of the nation, buyers need to be careful when purchasing using ARMs. Once they start adjusting, the peaceful ride is over and you’re on an ascending roller coaster.

According to Bankrate.com: 

An option ARM is an adjustable-rate mortgage that gives the borrower four choices of a payment each month. The borrower can pay the amount necessary to pay the loan off in 15 years or in 30 years. The borrower can pay only the interest charged in the previous month. Or the borrower can make a minimum payment that doesn’t even cover the interest, so that the loan balance increases.

Most option ARMs have absurdly low introductory rates,
sometimes below 2 percent, that last just a month. Then they rise. And
rise. The rate changes each month, but the minimum required monthly
payment changes only once a year.

The main problem with Option ARMs is that buyers think it sounds great, but don’t properly compare loans. Although they sound like a great way to get into a home, they may be the reason why you’re in foreclosure within the next few years. Before you or someone you know gets an Option ARM, read the Bankrate article on the topic.

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I am refinancing a few properties and received estimates from a two lenders. When I compared the paperwork, one loan had a "demand clause" on the Truth in Lending Statement. Buyers should read their Truth in Lending page because it shows how much your loan really costs and let’s you know whether you have a prepayment penalty, etc. The "demand clause" is just a checkbox and isn’t explained on the statement, so I looked it up.

According to MortgageProfessor.com:

A demand clause is even better (for the lender) than a due on sale clause.  With a due on sale clause, the loan must be repaid upon sale of the property.  Its purpose is to protect the lender in a rising interest rate market.  Lenders are concerned that borrowers with low-rate loans who sell their homes will arrange for the buyers to assume the loans.  Lenders want these loans repaid so they can make new loans at higher rates.

A demand clause is also better (for the lender) than an acceleration clause.  An acceleration clause allows the lender to call the loan if the borrower violates some contractual provision, such as a requirement that the loan must be repaid upon sale of the property.

Imagine my surprise and dismay when I learned that my lender was trying to give me a loan that allowed the investor to demand my properties at ANY TIME for ANY REASON. I immediately contacted my lender and told him to remove the prepayment penalty as well as the demand clause or I won’t sign the docs.

In Austin, we have some areas with significant appreciation. My properties happen to be in East Austin, which is a very hot investment area. If I accept a loan with a demand clause, the lender could theoretically try to raise my rate or demand full payment for any reason. If I didn’t immediately pay off the loan in full, I could be forced to hand over the property. On top of that, there was a prepayment penalty, so I’d have to pay thousands of dollars if I tried to refinance.

Let the buyer beware indeed…

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Finally! After three weeks, fixed mortgage rates have finally stopped rising. The federal reserve had raised interest rates on the 29th of June, as expected, but this decrease in mortgage rates comes as a surprise to many.

"RISMEDIA, July 7, 2006—After rising for three consecutive weeks, fixed mortgage rates took a breather in the immediate aftermath of the Federal Reserve’s June 29 interest rate hike. The average 30-year fixed rate mortgage slid to 6.91 percent from 6.93 percent the day before last week’s Fed announcement. According to Bankrate.com’s weekly national survey of large lenders, the 30-year fixed rate mortgages had an average of 0.31 discount and origination points."

This comes as good news to many investors and home buyers. In fact, I was recently asked how I think interest rates will affect the market in Greater Austin when I was at lunch with a friend.  They were a little shocked at my response that I don’t think higher interest rates will cause our market to slow down at all. The reason is because we have more demand that available properties. We have pressures from out-of-state investors, relocating companies, Baby Boomers, college grads, and incoming college Freshmen.

With so many people wanting to live in our area, interest rates won’t deter.

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Home foreclosures skyrocketed throughout the U.S. in April as homeowners struggled to make mortgage payments in the face of rising interest rates.  Much of the blame is being laid at the door of adjustable rate mortgages (ARMs) where monthly payments are tied to rising Federal Reserve interest rates.  Foreclosure rates were up by one-third in April 2006, compared to April 2005.  Texas foreclosures were up 22%. 

Indiana saw an increase of 61% and Georgia had a 300% increase.

Southern California real estate foreclosures jumped 29% during the past six months, with Riverside, San Diego and Los Angeles counties leading the state.  Most foreclosures were on single-family homes.

In Texas, we’re actually seeing less foreclosures due to increased demand. Round Rock and Pflugerville, just outside of Austin, used to have a significant number of foreclosed properties, but we’ve seen less as the market heats up. Property prices are expected to continue to rise as investors and buyers flock to the area. I do have mention the fact that most foreclosures that I see in Greater Austin are in new home subdivisions. The builder’s representative and/or agent sometimes do not warn buyers that they will later have to pay property taxes based on the new appraised value once the house is finished.

For instance, if a home is not built, it is appraised on the value of the land. Once the home is built, the taxes will be calculated at the full appraised value. This will often mean a difference of $300 per month or more. Tax rates in some areas are as high as 3.54%(!), so please make sure you pay attention to this.

Dee Copeland, Investment Specialist
AustinHomeNews.com, Team Dee Residential
eRealtyAlliance Commercial Real Estate 

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Some home buyers are paying unnecessary costs that some unscrupulous mortgage lenders have creatively disguised as official-sounding fees.  The article written by Sandy Gadow says, "There are other fees, such as courier fees, notary fees, documentation fee, overnight delivery fee, points, processing fee, which may be duplicates of other fees, or which are fees which the originator has marked up to add to it’s profit margin. These are the fees, sometimes called hidden fees, which you may overlook or not feel you have the right to question. You do have that right."

Most honest mortgage lenders won’t try to impose unexpected last minute fees, and if  dealing with a direct lender, such as Wells Fargo, Bank of America or Countrywide, the lender’s good faith estimate must reveal all loan charges.  Mortgage loan shoppers may want to seek no-cost, no-fee home loans that will include all lender charges in the interest rate.

It’s not tough finding a good, honest mortgage broker, but buyers and investors should make sure they interview at least three companies before they make their final decision. Most real estate agents have pre-interviewed and approved some lenders. I find that some of the smaller companies provide the best customer service. Most credit unions and local banks are excellent.

Dee Copeland, Investment Specialist
AustinHomeNews.com, Team Dee Residential
eRealtyAlliance Commercial Real Estate

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I had a discussion with someone yesterday to explain my theory on why home values are falsely inflated by zero-down loans. A few decades ago, most homeowners were putting 20% down in order to obtain a loan. Somewhere in the 90s, mortgage brokers and buyers started doing a lot of 100% loans, which became even more popular as home prices increased and interest rates became more affordable. Currently, most loans that I see from non-investment borrowers are completely financed. Closing costs and some repairs are often rolled into these loans.

If you think about it, if you buy a house that is valued at $200k and then roll in $15k of costs, is this home really worth $215k? That’s what the city of Austin and other taxing authorities say, especially when the lender and appraiser agree. Now that buyers are financing everything into their loan, appraisers must value the home at the slightly higher price to adjust. In theory, if the home was not work $215k, it could not appraise. In the real world, most appraisers and lenders hate to be the bearer of bad news and tell a borrower that they need to pay $15k of unexpected costs.

Are the lenders and appraisers to blame or is the agents and buyers? I can’t point to any one group, but we’ve seen property tax values skyrocket in our local areas. Besides shrinking inventory, I believe part of it is due to these 100% loan products. Zero down loans aren’t necessarily a bad thing, but it’s going to take time to see their full effect on the economy and housing markets. If you remember, everyone was in love with Ajustable Rate Mortgages (ARMs) between 2002-2005, but now foreclosures are on the rise because the interest rates have started increasing every 6 months to year for these home purchasers.

Again, only time can really show the zero-down loan’s long-term effect.

Dee Copeland, Investment Specialist
AustinHomeNews.com, Team Dee Residential
eRealtyAlliance Commercial Real Estate

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For those of you who thought 30-year mortgages were long-term, guess again. Half-century mortgages may soon start making their debut in Texas. Talks of 40 and 50-year mortgages are said to give buyer’s options, but at what cost? This is a recent debate topic among real estate professionals and others since the mortgages first started appearing in high-appreciating states such as California.

Realty Times published an article in May regarding 40 and 50-year mortgages. The article outlined the difference in payment among the longer-term mortgages versus 15 and 30-year terms. The gist is that these mortgages allow buyers to have a lower monthly payment, which is similar to the purpose of an ARM (Adjustable Rate Mortgage), but at a fixed rate. Reports show that there are a great deal of owners now losing their homes after their ARMs reach the adjustable period.

While some may see these long-term mortgages as a solution, most agents and mortgage brokers will reiterate the following…"If you cannot afford the payment, do not buy the property". The question is whether we need these types of mortgage products in Texas.  Although property taxes are generally higher in Texas than other states, real estate is still affordable. There currently is no real need for 40 and 50-year payment periods since real estate prices are not extremely inflated and interest rates are still affordable.

Residential buyers should beware of these long-term mortgages since the time to build equity will be lengthened. These loans can be especially damaging when the real estate market declines and homeowners have not built enough equity to break even on a sale.

—
Dee Copeland, Investment Specialist
AustinHomeNews.com, Team Dee Residential
eRealtyAlliance Commercial Real Estate

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Mortgage rates for black and Hispanic homebuyers tend to be higher than rates charged to white borrowers who have similar credit ratings and income levels, The Center for Responsible Lending in Durham, N.C. reports. 

The non-profit center found blacks were 29% more likely to pay a higher interest rate on a fixed-rate home loan.  Latinos were also more likely to pay a high rate, the center said after studying a 2004 database of approximately 177,000 loans made by “sub prime” lenders who charge interest rates higher than bank rates. 

The Federal Reserve Board is taking a closer look at some 200 such lenders for possible discriminatory practices.   The Charlotte (N.C.) Observer also reported that black home loan borrowers, even those with annual incomes higher than $100,000, were four times likelier to pay higher rates than white borrowers with incomes below $40,000. 

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Bankrate.com reported that the increase in U.S. jobs has caused a recent rise in interest rates. "Mortgage rates drifted upward to nearly a four-year high during a week when a report on employment delivered better-than-expected news."

"…The conventional wisdom holds that greater-than-expected job growth and a falling unemployment rate herald rising inflation because scarce workers will be able to demand higher wages. That hasn’t been happening during this part of the economic cycle: Rising corporate profits have mostly been going to stockholders and executives, not to nonsupervisory workers…Richard W. Fisher, the president of the Federal Reserve Bank of Dallas, noted last week that economists have been rethinking the connection between employment and inflation. Speaking in Wichita Falls, Texas, Fisher said that the notion that low unemployment breeds inflation is "based on assumptions of a world that exists no more."

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