San Jose Short Sale Agent: Silicon Valley Foreclosure Prevention Specialists

It’s about time something like this took away these incentives which were often not disclosed to the borrowers.  It is my humble opinion one of the major reason why we had the sub-prime and the Option ARM mess was primarily due to this practice: paying loan brokers a bonus for steering their clients into high risk loans which they knew would not benefit their clients.  This was the classic case of agency going awry: the agent was looking out for his own interest to the detriment of his client. A serious conflict of interest.

My philosophy is simple: always know how people get paid to determine their motivation.   My commission structure is written out in our listing contract; there is no room for undisclosed bonuses.   My clients know exactly how I get paid, so they know my motivation from the start.  Imagine if I got a huge bonus from the buyer’s lender if I chose their offer over another and steered my clients into accepting their offer, which was a less than favorable offer because I was influenced by said bonus.  Would this be a conflict of interest and would the client have taken my advice if they knew of this secret bonus?

How did the Realtor Associations avoid this type of conflict of interest?  By the use of the Agency Relationship Disclosure document(CAR form AD).  This document laid out exactly the contractual obligation of the agent vis a vis his client.   It states, I owe my sellers or my buyers (depending on whom I represent): “A Fiduciary duty of utmost care, integrity, honesty and loyalty in dealings with the Seller.” (or buyer, if I represent the buyer).

What does Fiduciary duty mean?  According to dictionary.com fiduciary duty is:

“the legal duty of a fiduciary to act in the best interests of the beneficiary”

Best interest of the beneficiary, or my client.  I have to put my client’s interest over my own.  Hence, even if I were to be offered a secret bonus, I could not take said bonus if it would not be in the best interest of my client.  Naturally, I could accept such a bonus if I revealed it to my client and they still thought said bonus would be in their best interest.

I am not saying all Realtors are angels, but because they had to sign these disclosures which contractually obligated them, it removed any temptations.  The same can be said of loan brokers; I am not accusing all loan brokers of this despicable practice, I’m sure most didn’t engage in such practices.   However, because there was no mandatory requirement for the use of such instrument as the Agency Relationship Disclosure, it made it tempting for those brokers who may have decided enriching themselves was more important than looking out for the best interests of their clients.

To control the practice of such steering, the Federal Reserve chose to simply remove the temptation by banning the practice of paying such bonuses all together.  One way or another, the borrower’s best interest will now be better protected and that is a good thing.

I have been talking about the problems brewing in the Alt A and more specifically about Option ARM loan markets.  Alt A loans reside between prime and sub-prime loans in terms of credit risk from a lender’s perspective and are characterized by the lack of documentation or proof of assets; they were often called Liar’s loans.   A good explanation of Alt A can be found in this article.

CAR’s data regarding activities in Sub-Prime and Alt-A loans for 2009 revealed some disturbing trends in the coming months.

Look at the numbers of Alt-A loans out in the market: 632,215 or 5% of all loans in California. And of those, 70% are ARMs or adjustable rate mortgages – meaning their teaser rates will reset some time in the future.   The bulk of the Sub prime mess has already reset and in the coming future only a small number is scheduled to reset in the next 24 months (15.6%).  But look at Alt-A by comparison.  Only 46.9% have already reset and look at the bomb that is ready to reset within the next 24 months as of May 2009!  40.4%! Unfortunately, there were no dollar figures associated with this graph. And buried in that number is the truly toxic Option ARM which is almost a guaranteed foreclosure simply waiting to happen. If people think the sub-prime mess is over, they are probably correct.  But look at the beast that  is coming down the road; we may only be half done.

Here are some fantastic data from the CDPE organization which closely tracks national industry numbers.

As of Q2 2009, here are some numbers for you to digest

Type of  Mortgage            In Foreclosure                      In Default (30+ Days late) Total

All Mortgages                               4.3%                                                      8.86%                                                             13.16%

Sub Prime Mortgages               15.05%                                                25.35%                                                           40.40%

Prime                                                 3.00%                                                  6.41%                                                                 9.41%

It’s not surprising to see that sub-prime loans represents over 40% of distressed properties out there.  As of the end of Q2  2009, however, distress in prime mortgages (or the Mercedes of mortgages) represent roughly 1/4 of the volume of sub-primes mortgages. This may surprise some people, as we have been repeatedly told by the media, that sub-prime market is what brought our economy down.   However, with National Unemployment at 9.4% (as of July 09 when these stats were released) , it is no longer those who gambled on high risk mortgages, but the regular people who were doing the responsible things, who are being forced into default.

I believe the sector of mortgages to look out for in the coming months is the prime market.  I argue they will rise dramatically in numbers, relative to sub-prime mortgages.

Additional statistic I want to point out are marked in red above.  4,760,000 represents the total volume of home sales NAR predicted for 2009.  9,550,000 represents the total distressed properties in the nation as of Q2.  This means if these distressed properties have to be sold to get homeowners out of their situation (either as a short sale or foreclosure), it will take over two years to  unload the current inventory of distressed properties!

Some food for thought………

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Unfortunately, the prime borrowers are now failing to pay their mortgage rates at an increasing rate; I am seeing this more and more as a San Jose Short Sale Agent.  This trend becomes problematic as the prime market represents 80% of the mortgage market. The delinquency rate for prime borrowers is at 6.4%, compared to sub-prime borrowers whose delinquency rate is an astonishing 25,4%!

The unemployment issue which is devastating the economy is the culprit behind this problem and makes it difficult for this segment whose good credit scores  would otherwise have given them access to either credit or equity in their homes to ride out their unemployment in the past.  Such options are no longer available to them.

This is the ridiculous mortgage that people were offered during the crazy heydays of “anyone can get a mortgage” era of a few years back.   Simply put, several payments options were given to the borrower, but the one that was selected most often was the low teaser rate option to pay less than the interest payments and have the deficiency tacked on the end mortgage; hence, the principal actually increases with time, rather than decrease!   This was also referred to as the negative equity loan: your equity was actually decreasing rather than increasing.  This was the Option Adjustable Rate Mortgage (ARM).

This was a pure gamble!   You were gambling that the housing prices would continue to increase and you would be able to re-finance your way out of the negative equity situation some time in the future.  Naturally, during 2006 or 2007, everyone was so drunk on the prospect of instant wealth, most of the borrowers who were presented this option took it, so they could buy a little more house than they would otherwise be able to afford. Unfortunately, the gamble did not pay off.

Throw 12% unemployment into the equation in California and see if this will not present itself as a serious crisis coming down the line.    As a San Jose Short Sale Agent and every Certified Short Sale Agent worth his/her designation knows that the re-setting of these option ARMs will be the next wave of foreclosures.