Oct. 18: Notes about rates, pricing margins, college costs, HOA liens & foreclosures, and renting versus owning for youngins

Rate volatility is on everyone’s mind. From a broker “east of the Mississippi”: “I closed a guy last week on a purchase, borrower paid. He called today saying at the current rates I could lower his payment $180 per month. I haven’t even received the check from the closing attorney. If these rates hold and there are going to be a pile of these. September was busy and a 60 day rate lock will not get us over the hump.”


On the impact of rates and pricing on volumes and the industry, Luke Slivkoff sent in, “You cited some 2014-2015 volume projections for the industry and in passing BAML said that maybe the easiest ‘fix’ would be to have even lower rates. I would like to add some color to that. Prior to entering a career in mortgage, I was in the paper & packaging industry. Just like mortgage, there is a pecking order of producers in the packaging arena—at the top are paper mills (banks), then converters (correspondents), and finally brokers (wholesalers). Around the time of 9/11, pulp & paper prices continued on a downward spiral (just like our interest rates have done) in an effort to stimulate sales. With slowing volumes, lackluster sales, and low prices, a consolidation of the industry occurred; putting many of the smaller players out of business. The paper mills took back in-house a lot of the mundane tasks that they used to outsource to converters—putting many of them out of business, which also crushed the brokers! Finally, one paper mill stood up and said something to the effect that, we are done lowering prices. ‘This isn’t working anymore. We have closed mills while idling others…we simply aren’t making money anymore.’ Hence, they put into effect a price increase! The industry gasped and said that the price increase would never stick—but it did—and others joined them and to this day, prices have been going up and so has their sales, production, and profits. It was a contrarian approach but it worked.


“I see the same scenario being played out in the mortgage industry. After the mortgage crisis, a massive consolidation has occurred putting many of the smaller players out of business while the big banks have taken a lot of the work back in-house via the retail channel (even though they may not be efficient at it), rates have fallen to all-time lows, and layoffs have occurred; however, volumes continue to plummet…something has to change and I believe once interest rates take a decidedly turn upward (north of 5%), we will see a brief pause and then a steady climb in sales, applications, and funded volumes.


“I was speaking with 2 Realtors yesterday who said they had 11 buyers they were working with but suddenly that has dropped to only 3 because the rest want to wait until January. They didn’t understand why.  Are they waiting for prices to drop?  Rates to slide?  Economy to falter?  We don’t know but these are the exact types of buyers who continue to wait for brighter days and our industry continues to encourage that behavior with lower rates, no fees, etc. We have spoiled the consumer. Perhaps it’s time for Secondary to take a page out of the Paper Book and try a reversal…just some food for thought!” Thank you Luke.


The situation in Nevada (where lenders may see their equity vanish in the event of an HOA foreclosure) is of great interest. John H. writes, “As a follow-up to my e-mail of last week regarding the hot topic of HOA liens, there are options for lenders even when an HOA lien would be legally superior lender’s ‘first’ or ‘second’ mortgage. Here’s a quick summary from an attorney who used to handle foreclosure proceeds for my former bank. In states where HOA covenants can supersede lender liens, lenders may decide to escrow for HOA dues in order to avoid a situation where the homeowner would be in default to the HOA. This presumes, of course, that there is no legal impediment to escrowing for HOA dues in a particular state. If a borrower does go into default on HOA dues and decides to begin foreclosure proceedings, the HOA is typically required to provide notice of their intentions to any other recorded lienholders. Once they do this, the first mortgage lender may elect to go ahead and pay off the HOA lien amount and look to get reimbursed later at time of payoff either through their own foreclosure or when the homeowner sells the property. Any second lienholder could do the same thing as well, but they would probably adopt a “wait and see” approach before paying off any HOA lien and work with the first lienholder in the event that there is enough equity in the property to pay off the 2nd lien.”


John’s note goes on. “If there is enough equity to pay off all lienholders and the property goes to auction anyway, then typically the most subordinate lienholder would find it in their interest to bid at the auction up to a price that’s high enough to pay off all liens ahead of them and prevent them from losing the entire lien amount. They must also out-bid other interested parties at the auction as well. If they are the high bidder, they could then sell the home at market value and recoup what is owed to them or as much of it as they can get. If there are sale proceeds left over after that, then they can pocket the gain. Now, as a practical matter, if the homeowner has enough equity to pay everyone off but they can no longer afford to make payments, we can also presume that they would either refinance into a more affordable loan or sell the property in order to satisfy all liens. This would avoid the foreclosure process altogether. What all this points to is the fact that just because a HOA has a lien that supersedes other lenders in a given state it does not mean that the other lienholders are automatically ‘wiped out’ if the HOA decides to foreclose. However, it does pose additional risk for these lenders. If subordinate lienholder(s) fail to satisfy the HOA lien or if the property does not have enough equity to satisfy everyone’s liens, then there could be some financial loss to any lienholders if the property does go to auction. It’s just not as simple as saying that lienholders other than the HOA are wiped out.” Thank you very much John!


The costs of home ownership versus renting are always in flux, especially as it depends on geography, interest rates, and the regional economy. “We’ve followed with some interest the rise of the rental economy, much of it powered by internet-based communication between people who otherwise would never be able to find one another. [Other examples include Uber, Airbnb, designer gowns, fence post diggers, and so on.] At the same time, we read business articles that express concern about younger consumers not purchasing homes as they have in the recent past.


“It’s speculated that a primary obstacle for first-time home buyers may be the higher down payments required by banks. Research finds the median down payment for a home in the lowest 25% price-range hit a low of 3.1% in 2006. From 2001 – 2007, the median down payment for that sector was 4.2%. What happened next is in the history books. Home prices declined far more than the amount most borrowers had put down, many buyers ended up upside down, owing far more than their home was worth. If they needed to sell their home for any reason, either they took huge losses or many simply walked away. Last year, the median down payment for the cheapest 25% was 7.5% or around $9,500. While the home affordability index has dropped, it is still around the same level as late 2008 and this seems pretty reasonable to us. After all, home buyers who have put down 7.5% have more ability to absorb a market downturn. Further analysis finds that first time home buyers have historically made up about 40% of existing home sales and admittedly the current number is lower (around 28%). This has pushed down the percentage of home ownership to the lowest in 20 years.


“There is concern that the economy cannot fully recover unless younger buyers in greater numbers enter the market and that the trend of lower home ownership fundamentally weakens the foundations not only of the housing market but of the economy as a whole. The other side of the fence is that when people buy a home they cannot fully afford and borrow too much, it puts the whole economy at risk. Many young professionals are earning less due to stagnant wages and also carry high student debt levels, so a lower level of home ownership makes sense given this context.


“Finally, consider that given the state of the economy, buying a home early in a career may be a less advantageous strategy. Since employment is still tepid in many places, and especially given the difficulty in finding quality jobs, it may make sense for younger people to not tie themselves down or increase their debt. Home ownership also means they lose flexibility to relocate early in their careers. As such, many younger people are deciding it is more advantageous to rent than buy a home until their economic picture becomes more certain. Owning a home is considered a time-honored path for building wealth. However, the young consumer’s preference to rent rather than own—be it a formal gown or a home—likely reflects more than a generational trend, but a reflection of the economic times.” So wrote Steve Brown with Pacific Coast Bankers’ Bancshares.


In a similar vein of addressing youth, Stephen Wojnar writes, “A couple of thoughts on college costs. The meteoric rise in college costs correlates very tightly with the introduction of federally guaranteed student loans. The government attempts to deny that this is so, but facts are stubborn things. As with anything else in an economy, when the consumer of a good is divorced from the responsibility to pay for that good (health care, anyone?), the market’s natural ceiling on the good’s cost is removed. This is exactly what has happened with college costs. Yes, students theoretically have to repay their loans, but the percentage of them who do not do so speaks volumes about how seriously that obligation is taken.


“Second, before the era of student loans, college tuition was substantial, but it didn’t threaten a student’s long-term financial health. A college kid could contribute a good part of the cost by working summers and holidays. But very few summer jobs pay well enough to make a dent in a $40,000 tuition bill. To pay tuition, room, and board for four years at Harvard today, at about $65,000 a year, parents need to earn (assuming a 50 percent tax cost) in the neighborhood of $520,000 in pretax money—a pretty exclusive neighborhood. Harvard’s tuition was $1,520 in 1960. Adjusting for inflation, that amount would still be only $11,990 today, but the actual price is $40,016. State schools have also dramatically increased what they charge. In-state tuition at the University of Virginia cost $490 in 1960, which would be $3,865 in today’s dollars, but the current cost is $12,458. Although the government has piles of studies denying it, student loans appear to have induced, or at least facilitated, the astonishing rise in tuition.


“Lastly, another reason for the meteoric rise in the cost of a college education is how little actual educating today’s college professors do. When I graduated from college in 1986 my professors carried a teaching load quite similar to my learning load. I now live next door to a tenured (don’t get me started on THAT!) professor at one of Boston’s very highly rated and competitive colleges with an international reputation and student body. She teaches one class per semester and is paid over $150,000 per year, has a month off at Christmas, the entire summer off, and has a benefits package that you’d drool over (including free tuition, fees  and room and board for her children at this institution or any institution with which it has established reciprocity – and there are many). For one class. I clearly went into the wrong industry. I like her a great deal and she and her family are terrific neighbors, but her ‘workload’ is a key component of the staggering rip-off that is college today.” Thank you Steve.



A man walks into a bar and notices a poker game at the far table. Upon taking a closer look he sees a dog sitting at the table. This peaks his curiosity and he walks closer and sees cards and chips in front of the dog.

Then the next hand is dealt and cards are dealt to the dog. Then the dog acts in turn with all the other players, calling, raising, discarding, everything the other human players were doing.

However none of the other players seemed to pay any mind to the fact that they were playing with a dog, they just treated him like any other player. Finally the man could no longer hold his tongue so between hands he quietly said to one of the players, “I can’t believe that dog is playing poker, he must be the smartest dog in the world!”

The player smiled and said, “He isn’t that smart, every time he gets a good hand he wags his tail.”





(Copyright 2014 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)

Rob Chrisman