Thursday, April 12, 2007

Mortgage Foreclosures: Subprime and Job Loss Not the Real Reasons

As usual, the mainstream media manage to be several years late to the housing bubble story—and still get the story wrong.

The better than average Investor’s Business Daily helpfully mentioned that job loss might better explain recent foreclosures but even they missed the main point.

The borrower’s bad behavior is the main reason for the borrower’s bad situation.

Bad loan terms and job loss problems are only symptoms of the borrower’s bad behavior:

  • If you chose bad loan terms of 50% interest but you only borrowed $1, it is unwise but not dangerous.
  • If you lost your job a year later but only owed $1 and change, it is annoying but not catastrophic.

The true problem is overconsumption, buying a $500k house on a $250k budget.

Buy a $125k house on a $250k budget and adjustable rates or job loss will not mean foreclosure.

Wednesday, April 11, 2007

Danger: Preferred Providers Conflict of Interest

Previous: How To Protect Yourself from Fraud: Avoid Preferred Providers

This example of the dangers of preferred providers should interest everyone, especially recent home buyers.

Hat Tip: Marin Real Estate Bubble

More biased advice: “Savings” Pitch Tricks You into Overspending

Tuesday, April 10, 2007

How To Protect Yourself from Fraud: Avoid Preferred Providers

I previously warned about avoiding "preferred provider" lists for home-buying services (the ones that a realtor or mortgage broker might push on you): The recent student loan financial scandal reminds us that the warning applies in all your financial plans. In the student loan scandal, schools or their agents took kickbacks to push high interest rates or other bad terms on students. Today's NPR reported that 90% of students accept school's "preferred lenders" recommendations instead on shopping for themselves.

I will repeat the rule:

A "preferred provider" is preferred by the person making the recommendation--i.e. it benefits him or her but not necessarily you.

Important: This is not just about criminal fraud.

The fundamental lesson goes beyong legalities so do not trust the government to protect you either. Anyone who thinks that stopping the specific fraud in student loans will end the danger is missing the whole point:

The recommender's self-interest might be an illegal kickback but it also could be a perfectly legal and unregulated benefit such as easier paperwork for the recommender even if it costs you more.

This rule applies to everything including medical treatments and prescriptions.

The bottom line: Do your own homework.

Do not expect anyone to care more about you than you do.

How To Do "Punch List" Home Buying Inspection

Crossposted from Inexpensive Home Building

A "punch list" is the list of mistakes that you find after the house is supposed to be "turn key" finished (ready to move in)--a list of things that make you want to punch the contractor.

Do it. Do it right.

  • Do not rush.
  • Do not be too "nice" (a pushover).
  • Do not rely on anyone's "preferred" inspectors: House problems mean a lower price which means a lower commission for your realtor, so some people consider "preferred" inspectors to be a list of whom NOT to pick from the Yellow Pages.
  • Do not trust your "professional" inspector completely: Check all structural items and at least spot check other "already inspected" items.
  • Bring a 3-prong outlet tester, nightlight, and light bulb to check every socket.
  • Move furniture/equipment (carefully), or have it moved, to leave no spot unchecked (people like to hide damage).
  • Ask questions.
  • Treat anything that cannot be answered as broken.
  • Treat anything that cannot be checked as broken.
  • Treat anything "to be done later" as "broken" (unavailable).
  • Realize that previously OK items can be broken while installing/fixing other things.
  • Pick everyone's brain for both initial and regular maintenance tips.
  • You only look stupid if you fork over several hundred thousand dollars on blind faith.