The Mortgage Mess - The Rise

Oh what a mess has been created in the real estate market. Foreclosures, short sales, job losses and no end in sight. What caused this situation?

The cause can be summed up in one word: GREED!

The residential real estate market was doing well. Prices were going up, interest rates were down, people were moving up and in many cases, keeping their old homes as investments. Homes were appreciating at a slightly above normal pace, but nothing out of the ordinary. So what happened?

1. Where there is money to be made, people will flock to the source. In this case, thousands of people became real estate agents and mortgage brokers. Some of these people had no idea what they were doing, and did not go to work for brokers who would properly train them.

2. Low Doc, no doc and stated income loan programs came into being. Oh, they have been around for many years, but normally required significant down payments. These loan programs allowed for nothing down. Anyone could get a zero down, stated income loan if their FICO scores were high enough. While many mortgage professionals understood the meaning of "stated incomes", others used it to mean that they could write in anything they wanted in order to get a loan approved.

3. Lenders representatives, including some of the big name banks, actually coached mortgage brokers on how to prepare the loan package in order to get the loans through. Some of the things that they were teaching were outright loan fraud.

4. Mortgage brokers not only received a commission for putting a loan together, but could also receive what was known as a "yield spread". What is a yield spread? Well, if you can get the borrower to accept a certain program that benefited the lender, an additional fee would be paid to broker! Often, these fees were as much as 3% of the loan amount, on top of the fees the broker was already collecting. What would trigger these fees? Loans with higher interest rates after the start rate. Adjustable loans instead of fixed loans. Prepayment penalties that would lock in a borrower so they could not refinance for a certain period of time without paying the penalty, even if the rates went down. Didn't these need to be disclosed to the borrower? Of course, but it was just another piece of paper in the midst of dozens, which in many cases were never explained or read.

5. Real Estate agents started doing loans as well as represent buyers and sellers. A real estate agent representing a seller of property could end up representing 5 transactions! Think about it. An agent represents the seller, and meets a buyer at an open house. He gets the buyer to make an offer, using the agent's services as a real estate agent and as a mortgage broker. He is going to represent the seller in the sale of his house, as well as when purchasing a new home and taking care of the financing on that one, too. A transaction like this could amount to $100,000 in commissions to the agent. Where are that agent's loyalties?

6. Prices were too high in California for investors, so mortgage people who could do loans in other states began forming investment groups. They would have meetings, present properties and actually take a bunch of people to places like Las Vegas, Arizona, New Mexico, Florida and North Carolina for the sole purpose of making offers on property in those states. How did they get the money for these purchases? Why, they would refinance their primary residence to make the purchases. Appreciation was now spreading across the country.

7. Finally, the crooked people learned that they could manipulate the paperwork to literally steal from the lenders and from uneducated or naive people. I have worked on cases where a broker literally stole almost $2 million from 22 homeowners, and ruined the credit of those he recruited under the guise of helping people get out of trouble. Another case that I worked on involved identity theft, where an individual ended up owning 5 houses which he did not know he owned. The list goes on.

Yes, there were legitimate reasons for much of the appreciation in the real estate market. Unfortunately, due to the fraudulent loans and easy credit (aka, subprime), part of the increase was an illusion. The "bubble" that everyone predicted for 6 years grew from these illusionary loans, and those loans have created the downfall that is now being experienced in the real estate market place.

There are other reasons for the depth of the downturn. Just as there was artificial appreciation, there is currently artificial depreciation. More on that, next time.

Ken Koenen, LLM
Attorney at Law
Law Offices of Ken Koenen
6200 Stoneridge Mall Rd., #300
Pleasanton, CA 94588
Office: 925-924-0100
Fax: 925-397-3044
Email: ken@lawken.com
Web Site: www.lawken.com/
Blog: lawkentoday.blogspot.com/

Merry Christmas

I just want to wish everyone a very Merry Christmas, and a happy, healthy and prosperous New Year!

Ken

Gold Wrapping Paper

"Gold Wrapping Paper"

I received this from a friend who had a choice to make. It said that I had a choice to make too.

I've chosen. Now it's your turn to choose.

The story goes that some time ago a mother punished her five year old daughter for wasting a roll of expensive gold wrapping paper. Money was tight and she became even more upset when the child used the gold paper to decorate a box to put under the Christmas tree.

Nevertheless, the little girl brought the gift box to her mother the next morning and then said, "This is for you, Momma."

The mother was embarrassed by her earlier over reaction, but her anger flared again when she opened the box and found it was empty. She spoke to her daughter in a harsh manner.

"Don't you know, young lady, when you give someone a present there's supposed to be something inside the package?"

She had tears in her eyes and said, "Oh, Momma, it's not empty! I blew kisses into it until it was full."

The mother was crushed. She fell on her knees and put her arms around her little girl, and she begged her forgiveness for her thoughtless anger.

An accident took the life of the child only a short time later, and it is told that the mother kept that gold box by her bed for all the years of her life.

Whenever she was discouraged or faced difficult problems she would open the box and take out an imaginary kiss and remember the love of the child who had put it there.

In a very real sense, each of us, as human beings, have been given a Golden box filled with unconditional love and kisses from our children, family, friends and GOD. There is no more precious possession anyone could hold.

You now have two choices:
1. Pass this on to your friends, or
2. Delete it and act like it didn't touch your heart.

As you can see, I took choice No. 1.
Friends are like angels who lift us to our feet, when our wings have trouble remembering how to fly.

If you receive this more than once in return just know that your friends have also thought of you.


Ask and it will be given;

Seek and you will find;

Knock and the door will be opened to you.

Creative Financing Seminar

In today's real estate market, which has slowed down a little, the emphasis (at least in California) has been to reduce prices and explore "short sales." Neither of these alternatives really help sellers, and rarely attract new buyers.

I offer a seminar on "Creative Financing" to help sellers and real estate agents representing sellers to get properties sold faster, and for more money. In some cases, investors can take advantage of this market by investing in property with no renters, and no negative cash flow, and sometimes with no money out of their pocket.

NO, THIS IS NOT A "GET RICH QUICK" PRESENTATION.

It is a realistic and common sense presentation that will really help sellers, real estate agents and investors.

The local association of Realtors and some title companies have sponsored this seminar, and I normally charge $40.00 for the live, 2.5 hour presentation. I have put the presentation onto a Video-CD, which sells for $20.00.

If you would like to order a copy, or need more information, please feel free to contact me by email at ken@lawken.com.

Ken Koenen
Attorney at Law
Real Estate Broker

Real Estate Joint Venture

I am working on the purchase of a real estate investment that would be converting units into condos. They were originally built as contos in late 1980's, and when the market dropped, they converted to Apartments.

Total cash investment would be $1.5 million. Looking for people who have $150K to invest. As the rentals expire, they will be converted and sold. One year profit on the $150K would be approximately $125K.

For more information, and a prospectus, just reply.

Merry Christmas!

To all of my friends, old and new, Merry Christmas, or whatever holiday you celebrate ...

And a grand New Year.

Ken