Questionable Behavior – Ethics

Top Housing-Related Gripes From Customers


Daily Real Estate News |-Tuesday, August 09, 2011 

Consumers have a lot of gripes when it comes to housing or real estate issues. A survey conducted by the Consumer Federation of America, National Association of Consumer Agency Administrators, and the North American Consumer Protection Investigators revealed the top consumer gripes based on more than 252,000 complaints lodged with regulators in 2010.Here are some of the top gripes that emerged related to housing and real estate:

  • Home improvement/construction:bad construction work, failure to begin or finish a job on time, or problems with rebates, coupons or gift cards.
  • Credit/debt:Mortgage-related fraud, credit repair, debt relief services, predatory lending, illegal or abusive debt collection tactics.
  • Household goods: Misrepresentations, failure to deliver, faulty repairs in connection with furniture or appliances.
  • Landlord/tenant: Unhealthy or unsafe conditions, failure to make repairs or provide promised amenities, deposit and rent disputes, illegal eviction tactics.

The survey also asked what new laws were needed to better protect consumers, with many of the responses relating to credit and debt problems. For example, survey respondents said there needs to be stronger laws to prevent abusive debt collection practices as well as stiff monetary penalties needed for landlords who knowingly rent a property that is–or is about to be–in foreclosure.

View more customer complaints from the survey.

Source: REALTOR® Magazine Daily News


There never was a surplus

Jul 27th 2011

YESTERDAY the White House published a chart that explains how we got from the Clinton administration projection that the government would pay off its entire debt and then build up $2.3 trillion in savings by 2011, to the $10.4 trillion in debt we actually wound up with. Of that $12.7 trillion shift, the Bush tax cuts account for $3 trillion. James Fallows explains: “As the figures demonstrated, the Bush-era tax cuts, extended last year under Obama, were the biggest single policy source of deficit increase over the past ten years. Therefore you can be for reducing deficits, or you can be for preserving the tax cuts, but you cannot rationally be for both.”

I think there’s something else we need to look at in this chart. It’s the very first item at the top of the chart’s right-hand column: the shift in the debt profile that resulted from no policy change at all, but from “Economic and technical changes (eg, lower tax revenues due to recession)”. It’s $3.6 trillion.

In other words, that massive surplus pile of government savings, or sovereign wealth, or whatever you want to call it, simply never existed.* The Clinton administration’s calculations in 2000 that the government would pay off its debt and accumulate savings of $2.3 trillion over the following ten years were wrong. And they were wrong not because of any stupid error or dramatically incorrect theory about the economic world, but simply because they failed to predict that the American economy would experience a financial crisis in 2008, followed by the worst recession since the Great Depression and a historically anaemic recovery. (I assume they failed to predict the 2001 tech-crash recession as well.) The Clinton administration delivered a couple of years of real verifiable budget surpluses in the late 1990s, and if Clintonian levels of taxation and spending had continued, they likely would have generated annual surpluses that would have shrunk the debt by over $2 billion over the decade thereafter. But the forecast that they would have eliminated the debt entirely and replaced it with trillions of dollars in sovereign wealth was a mirage.

This isn’t particularly surprising; we simply don’t know how to make long-term projections about the economy or government revenues that don’t have trillions of dollars worth of error margin on either side. Which is why we need to be careful about budgeting and get our tax rates and our spending more or less in balance over the long term, running surpluses in good years and deficits in bad ones. The Bush tax cuts did the opposite: $3 trillion worth of tax cuts were predicated on the premise that we were returning the people “their” money. As it turned out, the money wasn’t there to return. Even without the tax cuts, the wars, or anything else, the government would have entered 2011 with $1.3 trillion in debt, not $2.3 trillion in savings. Basically, in the grip of careless enthusiasm about the economic future, we borrowed $3 trillion from bond markets and handed it out to citizens in rough proportion to how rich they already were. In the middle of a recovery. This is not a useful thing for the government to do.

* I’ve changed the wording in this paragraph to avoid any potential reader confusion between annual budget surpluses, which Clinton-style budgets would have generated, versus an overall buildup of sovereign wealth rather than debt, which they wouldn’t have. (Incidentally, the fact that we don’t even have a readily available word for a buildup of sovereign wealth in the vocabulary we normally use to talk about the American government seems kind of worth noting.) Additionally, I realise that if we hadn’t had the Bush tax cuts, the entire economic story of the past decade could be different; perhaps we wouldn’t have had the financial crisis. Or maybe we would have anyway. I don’t know, and I think that takes things too far. What I’m trying to say in this post is that when you get a budget forecast that says, hey, over the next ten years we’re going to pay off our entire debt and then some, you shouldn’t go rushing out to spend the money on massive decade-long multi-trillion-dollar tax cuts. Ten-year economic forecasts are not very accurate. Not to mention the fact that your decade-long tax cut will be very hard to repeal at the end of the decade.


19. Jul, 2011

FTC Rules That Real Estate Agents No Longer Have To Comply with the Mars Advertising Rules

Just a few short months ago, the Federal Trade Commission (FTC) issued the new M.A.R.S. rules and specifically determined that these new rules would be applicable to real estate agents who list short sale properties. This would require that all the mandatory advertising disclosures be included in all short sale marketing materials. On July 15 the FTC commissioners voted 5 – 0 to stop enforcing most provisions of the new rules against real estate brokers and their agents who assist financially distressed consumers in obtaining short sales from their lenders or servicers.

As a result of the stay on enforcement, real estate professionals will no longer have to make the disclosures required by the rule if they are assisting with the listing or purchase of short sales. It had become evident that the new disclosures were in the context of short cells misleading and confusing consumers and was having the inadvertent effect of discouraging real estate professionals from helping consumers with these types of transactions when more and more American homeowners are seeking assistance with short sales.

Commission stated that the stay of enforcement apply only to real estate professionals who are 1) are licensed and in good standing under state licensing requirements; 2) comply with state laws governing practices of real estate professionals; and 3) assist or attempt to assist consumers in obtaining short sales in the course of securing the sales of their homes. The stay exempts real estate professionals who meet these requirements from the obligation to make disclosures and from the ban on collecting advance fees. Agents however, will remain subject to the rules ban on misrepresentations. The commission further stated that the stay does not apply to real estate agents who provide other types of mortgage assistance relief such as loan modifications.

I guess that this is another example of the government hurriedly writing and passing rules to protect consumers from foreclosure scammers without really considering their impact or even asking for input on how the new rules would work in the real world. Because of this lack of foresight, tens of thousands of short sale agents around this country with almost no advance notice were forced to change all their advertising and marketing at great expense or risk violating federal law. Now the rules are as they were before M.A.R.S. was implemented. To read a copy of the FTC’s news release go to

Strategic default smarts

By Tara Tran • Jul 7th, 2011 • Category: Feature Articles, Journal Articles, July 2011 Journal


This article reviews a newly-developed Fair Issac Company (FICO) analytics model which predicts a borrower’s likelihood to exercise a strategic default and revisits the financial advantages of a strategic default for a negative equity homeowner.


FICO findings

Fair Issac Company (FICO) researchers have developed new analytics to predict a borrower’s likelihood of walking away from a mortgage – a strategic default – whether or not he is delinquent on his payments. The rise in strategic defaults over the past year is of concern to mortgage lenders. Thus, FICO consulted with them (not underwater homeowners) to develop the analytics with the purpose of preventing strategic defaults and their costly impact on lenders, investors, homeowners and the housing market.

35% of mortgage defaults in September 2010 were strategic, an increase from the 26% more than a year earlier in March 2009 according to a University of Chicago Booth School of Business study. 22.5% of residential mortgage defaults nationwide were strategic in the third quarter of 2010. This number increased to 23.1% in the fourth quarter of the same year.

In negative-equity-laden California, strategic defaults are also widespread (more so than the nation as a whole since California is a nonrecourse state and lenders cannot viably threaten to sue for their losses). There were 45,380 strategic defaults in 2009 – 80 times the number in 2005. [For more information on the strategic default trend, see the August 2010 first tuesday article, Fannie Mae, our government and strategic defaults.]

FICO researchers found borrowers who walked away from their mortgages had common traits including:

  • higher FICO scores;
  • better credit management (understood financial statements);
  • less retail balance (did not need credit to buy);
  • shorter length of residence on the property and thus greater likelihood of a negative equity; and
  • more open credit in the past six months with which to purchase items. [For more information on FICO’s findings on strategic defaulters, see the FICO article Predicting Strategic Default.]


The study concluded the degree of difference in the loan-to-value (LTV) ratio between the current market price for a home and the mortgage owed on the home (home price depreciation) is not as strong of an indicator for predicting a homeowner’s ability or willingness to strategically default. However, the study did conclude a borrower with a stronger history of good money management and a higher credit score tended to strategically default at a higher rate than other borrowers.

FICO and mortgage servicers are alarmed of the increasing frequency of strategic defaulters and warn homeowners of the consequences of walking away from their mortgage payments. Not only will homeowners suffer a 150+ point hit to their credit scores, but they may also face higher rates, tighter terms for other types of credit and a bump in insurance premiums. FICO goes on to implicitly threaten the homeowner who reverts to renting after walking away by saying landlords will be more unwilling to accept them as a tenant when they see a strategic default on the tenant’s credit record. [For more information about the fallacy of FICO’s argument, see the June 2010 first tuesday article, The FICO score delusion.]

This is a fabrication of the worst type. FICO and the lenders they consulted with (who incidentally are the ones who pay FICO for the use of their algorithms) have an economic interest in keeping California’s population of negative equity homeowners imprisoned in their underwater homes. The truth is, any landlord fully understands that a strategic defaulter is going to make a very fine, long-term tenant if they have a job and otherwise pay their bills – and most all do since they made the sound decision to strategically default.

Walking away is for smart people, and lenders know it

Several studies over the past years have already observed strategic defaulters tend to hail from a more financially savvy crop of people. The recent FICO study repeats this conclusion of which many of us are familiar.

What it also advertises — to the endorsement of lenders — are the detrimental effects of walking away from a mortgage. Agents and brokers must construct the bigger picture, especially in California where underwater homeowners collectively hold over 2,000,000 negative equity mortgages. [For more information on the relationship between higher credit scores and strategic defaults, see the October 2009 first tuesday article, Financially savvy homeowners turn to mortgage defaulting as a strategy.]

California negative equity homeowners have the short end of the stick with black-hole assets on their hands, so the question they should be answering is not whether a strategic default would be a in the best interest of their lenders. Rather, they should be considering whether a strategic default would be a prudent choice for their personal financial situation.

It’s true, homeowners will see a hit to their credit scores from a strategic default — and of course FICO will highlight this since the media often overstates this figure — but homeowners must not be inveigled into staying in negative equity properties by the vague economic threat of a lower FICO score. It’s not about the FICO score alone, but the costs versus benefits analysis of the homeowner’s individual situation.

Either a homeowner can continue to siphon his money into a dead-end loan, or he can save that money and invest it into a much more lively investment — improving his family’s standard of living.

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians.

A strategic default when the LTV is above 125% is not a dishonest financial bailout – it is prudent business decision. It may temporarily hurt the pride and credit scores of California homeowners, but these things are soon remedied. [For more information on when to strategically default, see the May 2011 first tuesday article, Short sale or foreclosure? The naked truth for underwater homeowners.]

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians. If they aren’t going to get any cramdowns in bankruptcy courts, they need to exercise their legal right to strategically default — that “put option” in every trust deed. Besides, it’s what all the smart people are doing anyway, right?

– ftCopyright © 2011 by the first tuesday Journal Online –;
P.O. Box 20069, Riverside, CA 92516

Readers are encouraged to reproduce and/or distribute this article.

Don’t Let Myths Get the Best of Your Clients

By Erica Christoffer, Multimedia Web Producer, REALTOR® Magazine

turning-myths-into-moneyThe only way you’ll be winning the real estate game is if your clients are. Industry veteran Richard Steinhoff wants to help you help them. With more than 30 years under his belt, Steinhoff drew from his plethora of client-centric experiences to write his new book, Turning Myths into Money: An Insider’s Guide to Winning the Real Estate Game. He’s blowing open misconceptions and busting myths that may be tripping-up your clients’ real estate process.


Q&A with Richard Steinhoff:

How did you get your start in real estate?

Steinhoff: I had a friend who just got their real estate license and they needed some help getting a house sold. I already had a college education and I decided to get my broker license. We opened our own office and that’s how I got started. My specialty was in commercial, but our office dealt with both residential and commercial real estate and we grew to have about 40 agents.

I’ve wanted to write a book for years and my daughter always encouraged me. When the market took a turn and I started to see all this bad information out there, it became apparent that this was the right time to write a book that helps people by giving them good advice from someone inside the real estate industry.

You include 90 real estate myths in your book. Which ones, in your opinion, are the most important to understand?

Steinhoff: I originally write more than 100 myths, but we cut them down to 90. There’s a whole section on how to find a good agent. Also, the section on short sales and foreclosures are must-reads for people.

What do you cover in the short sale section of your book?

Steinhoff: Well, it’s a complicated field. The book covers the basics, what people’s options are, and what sellers need to do to qualify for a short sale. I discuss the difference between short sales and foreclosures. People don’t always have to go through a foreclosure–there are other options. I also outline the tax implications of a short sale and how it affects a seller’s credit. The whole process of how a short-sale is handled is outlined in the book, including the type of documentation that lenders require.

Short sales are taking an average of 90 days to complete now. I don’t think they should be called short sales anymore, because they are in no way short. But I really like the first myth under the short sale section: “Tall People Can’t Utilize a Short Sale.” There’s a lot of humor like that throughout the book, which gets people’s attention. I also offer a lot of tips on transaction dos and don’ts.

How do you think a real estate professional can benefit from this book?

Steinhoff: It’s beneficial for agents just entering the business to get a footing on the misconceptions that are out there and how to handle objections. But it’s really a beneficial gift to give your clients. I’ve given one to every one of my clients. There’s so much information packed in there, you’ll continually hear people having “ah-ha moments.”

It’s not written like a text book; I incorporate a lot of humor, graphs and charts, as well as tips – pre-emptive tips. Plus, it really explains to clients why they should use a REALTOR®. A lot of articles in the newspaper and in the media just skim over the basics of things. Your clients need more than text book answers to things. They need to know what’s happening in the trenches.

I think a lot of REALTORS® would appreciate you covering Myth #67: Should I Wait for Prices to Increase Before Selling? What advice do you have for agents trying to communicate this issue to their clients?

Steinhoff: Right now so many people are waiting. Buyers are waiting for prices to go down and sellers are waiting for prices to go up. But here’s the thing: interest rates have a much higher impact on what people will pay. It would help for buyers to understand that if the price for a median value home (nationally) goes down 5 percent, assuming the interest rate is the same, your payment would only go down about $40 per month. On the other hand, if the interest rate goes up just half a point, their payment would go up $45. So the client could actually be losing money by waiting. And sellers are going to have a long wait if they are waiting for prices to come back up. They may be waiting five or six years.

The entire “Selling Lessons” section looks particularly helpful and could be incorporated in listing presentations. What practices do you reinforce in that section?

Steinhoff: The segment about offers–I don’t think a lot of people understand that process. For real estate professionals, because this is in print, the book can serve as a verification source and an authority when you’re making your presentation, to back-up your advice to clients.

When you were doing research for your book, was there anything that surprised you or that you learned?

Steinhoff: What I learned most about was about government programs such as HAFA and HAMP, but they’re not working. People are not using them. I think it takes so long that people end up losing their house before they qualify and the program can do anything. They were expecting to help 8 million people and maybe a few hundred thousand have actually been able to utilize those programs.


Myth #28: Short Sales are Simple and Easy

Fiction: A short sale is a transaction in which the lender agrees to allow the borrower to sell the property “short” of the balanced owed on the loan. Hence, the term “short sale.” In this situation, the owner’s mortgage balance is greater than the probable sales price of the home. Since the lender has not yet foreclosed, this creates a window of opportunity for the owner to sell the property on their own.

It is, however, a complicated process. The biggest problem in a short sale is that the home owner must persuade his lender to discount the loan.

It becomes even more complicated when there is a second mortgage and/or an equity line. These lenders must also agree to discount their loans.

Not an easy task, as you might imagine.

The process starts when the home owner receives an acceptable offer. He must then submit a “Short Sale Package” to each of the lenders. This package consists of numerous components, as outlined in Figure 3.1, and is typical of what REALTORS® submit to lenders. If any element is missing or incomplete, the process will be delayed. The key ingredient is the seller’s hardship letter. A sample seller’s hardship letter is shown in Figure 3.2.

The large increase in number of short sales has created a new job title:

Short Sale Negotiator: This is an individual who will, for a fee, negotiate with your bank to obtain a reduction in the amount of their loan. He must, however, have a real estate license and work for a broker.

Once the lender agrees to a short sale, they will issue an “Approval Letter” stating the terms they find acceptable. An example of a lender’s approval letter is shown in Figure 3.3.

You might ask why lenders would ever agree to discount a loan. There are many reasons, but the primary consideration is that they will lose less money than by going through the lengthy foreclosure process.

Once the lender’s approval letter is received, you can open escrow (if you are in an escrow state) and proceed with the transaction in the usual manner. If you are in a state that doesn’t use escrow, you proceed with the transaction in the usual manner.

TIP: Make sure your agent is trained and certified in handling short sales.



American mortgages

Not quite settled

Bank of America’s settlement will worry other lenders

Jun 30th 2011 | NEW YORK | from the print edition

  • NOT for the first time, the tough talk was merely a prelude to a hefty settlement. Brian Moynihan, Bank of America’s boss, had vowed to engage in “hand to hand combat” with investors suing to recover losses on mortgage-backed securities (MBSs) peddled before the housing market collapsed. He had even likened them, none too diplomatically, to buyers of a Chevy who wanted it to be a Mercedes. In the end, though, BofA rolled over surprisingly quickly in order to relieve the worst of its housing-related headaches, a product of its ill-advised purchase of Countrywide, a gung-ho mortgage lender.

The bank will pay $8.5 billion to investors in more than 500 Countrywide-linked securitisations who had claimed the loans breached basic underwriting standards. The deal is backed by the loans’ trustee, Bank of New York Mellon, and 22 of the biggest out-of-pocket money managers, including BlackRock and PIMCO.

The forceful involvement of these big investors—lucrative BofA clients in a host of areas—was an incentive for the bank to agree terms. So was the fact that the Federal Reserve Bank of New York was a plaintiff, thanks to securities inherited in the rescue of AIG. And for all his combative rhetoric, Mr Moynihan has been keen to draw a line under BofA’s problems since taking over from the hapless Ken Lewis 18 months ago. He has shoved dodgy loans into a “bad bank” and restructured key businesses, while completing the integration of Merrill Lynch, an investment bank acquired during the crisis. Analysts saw MBS lawsuits as the biggest of the legacy risks dragging the bank’s share price below its book value.

Some dangers remain. The settlement deals with much of the Countrywide dross but it doesn’t cover loans handled by other BofA units or those securitised after being sold to third parties. Merrill faces $11 billion of residential-mortgage claims, reckons Christopher Whalen of Institutional Risk Analytics, a ratings firm.

BofA still has lots of haggling to do with Fannie Mae and Freddie Mac, the housing-finance agencies that guaranteed piles of duff loans, and with private bond insurers. The final bill will be far higher than the cheque written this week. The bank plans to set aside a further $12 billion for mortgage-related charges and thinks another $5 billion may be needed on top of that, though given the waywardness of BofA’s past estimates, it could be more. The prices paid at the time for Countrywide and Merrill were, it turns out, just deposits.

The capitulation will worry other large banks even though they are less exposed than BofA, which services one in five American mortgages. The two most vulnerable are Wells Fargo and JPMorgan Chase—again, largely thanks to crisis-era acquisitions (of Wachovia and Bear Stearns, respectively). Bear Stearns alone faces $18 billion in securities-fraud claims out of an industry total of roughly $200 billion, calculates Mr Whalen.

Worse, new legal challenges are emerging all the time, the latest from the federal agency that oversees credit unions, some of which were felled by bad mortgage investments. Mortgage servicers are also bracing for combined fines of between $5 billion and $20 billion as part of a settlement with state attorneys-general over foreclosure practices (remember robosigning?). And that’s to say nothing of further loan losses as house prices fall.

Mr Moynihan deserves praise for biting the bullet on MBSs. He is determined to end talk of his firm having replaced Citigroup as America’s clumsiest bank. Still, it will be quite some time before BofA itself looks more like a gleaming S-Class than a lumbering old banger.

‘Mastermind’ of $2.9B Scam Gets 30 Years

Lee B. Farkas, who federal prosecutors have considered the “mastermind” behind one of the largest bank fraud schemes in history, was sentenced on Thursday to 30 years in prison.

Farkas, the former chairman of the mortgage firm Taylor, Bean & Whitaker, is the single largest prosecution from the financial crisis, The New York Times reports.

Prosecutors say the $2.9 billion scheme, which began in 2002, led to the collapse of Colonial Bank and cheated investors and the government out of billions of dollars. Prosecutors claimed that TBW executives secretly overdrew the mortgage lending company’s accounts with Colonial Bank and to cover up the overdrafts, sold Colonial about $1.5 billion in “fake” and “worthless” mortgages, some of which already had been purchased by other investors. Ultimately, Colonial filed for bankruptcy in August 2009, making it one of the largest bank failures in history.

The government, in wanting to send a warning to the financial industry, had originally asked for a 385-year prison sentence for Farkas.

Source: “Former Chairman of Mortgage Firm Sentenced to 30 Years in Bank Fraud,” The New York Times (July 1, 2011)