Cost of Cash

I came across an interesting question today and thought it would make a nice little post.  Simple: What are closing costs when buying with no mortgage?  Well, the short answer is usually less than when buying with a mortgage.  But to try to be more specific, here’s a break down of different costs and whether you pay them with and/or without a purchase with a mortgage.  Keep in mind these are general and there are always exceptions where the costs may exceed what I describe.

• Tax prorations – Paid on all transactions (unless agreed otherwise which is rare)
• Administrative fee/additional commission to real estate broker – range from $0 to $400 - Paid on all transactions
• Appraisal fee – range from $250 to $500 – Paid only on transactions with a mortgage
• Credit report – range from $10 to $40 – Paid only on transactions with a mortgage
• Tax service fee – range from $60 to $100 – Paid only on transactions with a mortgage
• Loan origination fee/discount points – range from $300 to thousands if multiple points paid to buy down rate – (duh) only on transactions with a mortgage
• Interim interest – range from $0 to thousands based on date of closing, interest rate, amount of loan, etc. – Paid only on transactions with a mortgage
• Up-front mortgage insurance – typically a percentage of the loan amount – rare outside of FHA mortgage transactions, never on cash transactions
• Hazard (aka homeowner’s) insurance – range from few hundred to over a thousand – required on mortgage transactions, but definitely should not go without on a cash transaction either
• Escrow deposit – range from zero to thousands of dollars – Paid only on transactions with a mortgage (although ultimately the taxes are paid no matter what, escrow is just a way station)
• Title insurance – range from (in PA) $378 to thousands based on purchase price – Required on mortgage transactions but absolutely should be purchased on cash transactions also
• Title endorsements & closing protection letter – range from $225 to $325 – Rare outside of mortgage transactions
• Recording fees – range from $50 to $130 (occasionally more when additional documents are to be recorded) – less when a cash transaction, but always a cost of some amount
• Realty transfer tax – range from 2% to 4% of the sales price – Paid regardless (there are exemptions for certain transfers though

Keep in mind that there are other costs that will pop up from time to time on mortgage transactions.  Some of these might include a pest inspection or a well or septic test if the property is not connected to the public system.  Each of these costs could merit it’s own separate post (it might kill the modest readership numbers I have though).  But there are ways to save whether the purchase is with or without a mortgage.  It takes a little extra effort, but it is certainly worth the trouble.

As the escrow flies…

An excellent issue was raised on Twitter today that I wanted to write about in some detail.  So here’s the setup:

-Out of the blue, the mortgage servicer sends our homeowner a check for $700+ which turns out to be a refund from the escrow account.  Homeowner is struck with joy at this unexpected windfall.  Presumably (although I’m taking artistic license at this point), homeowner has grand designs on taking said windfall and putting it to well-deserved use.

And here’s where Darkcloud Closer (aka me) steps in and says, “Let’s slow down just for a bit.”  Because the truth is…, well, let’s cover some more foundation before we get to “The Truth”.  An escrow account is essentially a fancy word for an account which holds someone else’s money for a particular purpose.  Attorneys have them to hold funds on behalf of clients.  Real estate settlement companies use them to hold funds pending distribution from a closing.  And a mortgage servicer uses them to hold the monthly payments for homeowner’s insurance and property taxes until the annual bills come due.  Because these are accounts controlled by one party (the mortgage servicer) of funds that are really for the benefit of another party (the homeowner), there are some serious regulations that covers how a servicer can administer the account.  One of the requirements is under RESPA (short for Real Estate Settlement and Procedure Act) which prohibits a lender from holding an excess reserve in an escrow account.  At one point, servicers could hold an unlimited reserve in the event that an insurance premium or property tax jumped a significant amount unexpectedly.  That way, the servicer was never having to try to collect extra funds from the homeowner in a short period of time or come up with their own money to pay the insurance premium or tax bill.  But now (and for quite a few years actually), RESPA only allows a two month reserve to be held by a servicer.  So, for example, Joe owns a home with annual property taxes of $1000 and an insurance premium of $200.  So add those up, divide by 12 and, voila’, Joe’s escrow payment is a nice, flat $100 per month.  Next step is to figure out when the escrow account is going to hit its minimum ending balance.  In Western Pennsylvania, that is typically late summer when school taxes are due (except in the City of Pittsburgh which operates on a different calendar for school taxes).  So let’s say Joe’s school taxes are due in August, then his escrow balance should hit it’s lowest point at the end of August.  For a two month reserve, Joe’s servicer can keep a reserve up to $200 (twice his monthly payment) and that’s the amount he should have right before Labor Day.

Now, what happens if it’s not at the right reserve?  If there isn’t enough money in escrow, then the servicer will adjust the escrow payment to add additional funds to the escrow.  In short, monthly payment increases.  The good part for the homeowner is, even if there isn’t enough money in the escrow to pay a bill, the servicer will pay it even if the servicer has to kick in money to pay it in full.  That means the payment is going to adjust even higher when a fix is made down the line though.

If there is too much money in the escrow, then the opposite happens: the payment decreases.  But the lender will also refund the amount that exceeds what the lender is allowed to keep as a reserve.  And this is what happened to our lucky homeowner.  At least we hope.

But before we buy that sparkly trinket we’ve wanted, first our homeowner should be checking out why exactly an escrow refund happened.  And for this, we have to dig beyond the trigger of simply “balance exceeded permitted reserve”.  To get a $700+ escrow refund, something fairly significant happened to cause the balance to exceed the permitted reserve.  So let’s move on to “The Truth” or actually more like a few possibilities of it:

1.  The Homestead Exemption:  This was floated on Twitter as the possible culprit.  If it were possible, it would be supremely good news for our homeowner as it would mean that the taxes were significantly lowered by the exemption.  Here’s the rub though:  the exemption only reduces the value of a property by $15,000 for county taxes.  Based on a millage rate of 4.69 in Allegheny County, that’s only a dollar reduction of about $70.  Now it also qualifies the homeowner to save on school taxes, but the amount varies based on the school district.  So there are some additional savings available for school taxes, but the odds of saving over $600 per year in school taxes though is virtually nil.  And if the previous owner had the homestead exemption also, any excess funds being held in escrow was unlikely to be caused by a new homestead exemption filing.

2.  Other reduction in taxes:  Possible because an assessment appeal could have been filed to reduce the assessed value of the property.  Or the municipality or school district could have reduced their millage rates.  But incredibly long odds of those happening.  In the former, the homeowner would have known all about it and the latter just doesn’t happen, especially now when D.C. and Harrisburg are cutting  back dramatically.

3.  Taxes were overestimated at closing:  One of the great misunderstandings that most people have about taxes is that they’re so easy to get.  For Allegheny County, it’s true.  Online, look ‘em right up on the internet.  Now, what about the others? Where do you look them up? You don’t.  You order them from the tax collector.  You mail a check (yes, via the mesozoic era USPS) or you take a check in yourself and ask for a statement.  In any event, the settlement company typically is charged with obtaining this information but they can make errors.  If an error was made in documenting the amount of the taxes to the lender at closing, it’s possible that the lender simply was holding too much money.  This is the best possible outcome for our homeowner as it means that the only screwup was that they were being overcharged previously, but now the error has been fixed.

4.  Taxes were paid in duplicate at closing:  Because of the cumbersome nature of documenting tax amounts, settlement companies don’t want to order a tax statement the day before closing.  So it does happen that sometimes a seller would pay a tax right before it’s due, but it happens after the tax statement for the settlement company is prepared.  So the seller pays the tax from their escrow account and the buyer has money set aside to pay it shortly after the closing.  But the buyer never gets billed for it because the seller has already paid it.  There are two problems with this scenario.  The first is that, if it did happen this way, the buyer has really been refunded money thanks to a duplicate charge to the seller.  If discovered by the seller, the seller could attempt to recover the refund that the buyer received.  The second is that almost every lender would never escrow any tax bill coming due in less than 60 days.  So although this could happen, it’s rare.

5.  A tax wasn’t paid from the escrow:  Sadly, this is the most likely of the possibilities.  In light of the large amount of the refund, something went majorly awry and not paying one of the taxes in its entirety is the quickest way to end up with a $700 excess in reserve.  How does a bill just not get paid?  Two main causes:

i. The settlement company didn’t put the correct information for the tax billing on the deed meaning the tax bills are going somewhere else.  The deed in Pennsylvania is required to have a Certificate of Residence that instructs the assessment office where to send tax bills and other assessment notices.  In Allegheny County, a deed must have an address for general assessment notices and a separate address for tax billing.  If the tax billing address isn’t completed correctly, the bills aren’t going to go where the escrow money is being held.  And if the servicer doesn’t get a bill, it isn’t going to track it down.

ii. The assessment office didn’t get the new tax billing address changed in time and when the tax bill was mailed by the tax collector, the tax collector still had the previous owner listed.  Again, no tax bill, no pay

So if the tax bill wasn’t paid, the servicer is responsible, right?  Uh, no.  A mortgage generally has a section that identifies the borrower on the loan as the party responsible for paying any debt which is assessed against the property.  If it is paid through the escrow account, the servicer is just helping out (more or less, there are some caveats, quid pro quos, etc. at play as well). But what could very well happen is that when the tax billing is corrected and the escrow account is now paying the proper amount, an escrow deficiency will result which could dramatically increase the monthly payment.  Simply sending the $700 back to replenish the escrow may be the best move in such a situation.

Well, grrr.  Most of these don’t sound very appetizing!  Nope.  As anyone should expect, receiving a check out of thin air for that sum of money should be treated with a healthy dose of skepticism.  Someone screwed up, end of story.  Hopefully, the screwup is only in the past.  But to verify, the homeowner must contact the tax collectors to see if any payments have been missed.  They should also go back to their settlement company and ask questions about whether or not the correct information was provided to the servicer.  They should also check with the assessment office to make sure that all of the information for ownership and tax billing is correct.  If it all checks out, everything is paid and the escrow is finely tuned, then and only then should our homeowner friend take that check and do whatever their little heart desires.

Sorry for the raincloudish post here, but better to deal with the raindrops before you go and spend that refund on something other than an umbrella.

Stoppage and listen, part two

Moving on from the point about keeping thoughts to yourself during negotiations, here’s another lesson we can learn from the NFL and the former NFL players union from their recent failed negotiations:  Be watchful for contrived bargaining chips.

How does compromise work?  Simple, each side gives up something of value that they want in order to reach an agreement that isn’t ideal for either party, but both can still say is a good deal in the end.  But a clever negotiator may try to make it appear that they want something that they really don’t care much about.  Once the negotiations reach a point of compromise, the false bargaining chip can be sacrificed and the clever negotiator can reach a deal where he doesn’t really give up anything he truly wants.

In the context of the NFL’s recent disagreement, the league had for months spoken repeatedly that they wanted an 18 game schedule and claimed that it was the will of the fans.  Polls, however, showed that the fans didn’t necessarily care about an 18 game regular season.  Not to mention, the league is set in to divisions that make a 16 game season ideal and it wouldn’t mean a substantial increase in ticket revenue for many franchises that require a purchase of preseason tickets as part of a season ticket package.  Beyond that, any additional revenues would be depleted by the need to provide greater compensation to the players.  So what was the value of asking for an 18 game season?  Because the league knows that the rank-and-file players would loathe it.  Risk of permanent injury increases.  More practices.  More meetings.  Sure enough, the league offered (in the hopes of pushing the players to a compromise) offered to delay having an 18 game season.  It didn’t or it didn’t do enough, but it was a solid attempt by the league.

As for the players, they claimed that they wanted full access to the financial records of each team.  When the league offered to provide more than previously permitted but less-than-full access, the players (according to accounts) never responded.  I can’t say for sure, but my guess is that the players knew the owners would never give up full access but continued to ask for it so the players could a.) Use it as the reason why negotiations broke down and b.) Push the owners on financial disclosure until they were given what they wanted on other issues.  Either way, the players’ gained nothing really by access to financial records, but they needed something to ask for that the owners didn’t want to give up to get leverage on getting their share of the revenue pie and other benefits.

For a home buyer or seller, when considering the demands of the other party, be wary of anything the opposing side seems to quickly offer to relinquish.  It is possible that they are baiting you to give up what they truly want.  Another red flag is when the other side is determined to link two separate issues that aren’t naturally connected.  Or if the other party is asking for something that simply doesn’t make sense (for example, the retired couple saying they want the kids’ backyard playset).  If you think the other side is trying this, try to isolate the issue, resolve it independent of other items of disagreement first and then move on to resolve the truly material issues.

Part three coming soon!

Stoppage and Listen, Part One

“It’s just a game.”  I’ve heard that from my wife a lot.  Usually, I’ve gotten it when I’m in a foul mood thanks to a Steelers loss.  Since it’s the middle of March and the NFL and its players are locked in a collective bargaining death spiral, I’d say the chances that I’ll be hearing that admonishment again anytime soon is depressingly slim.

But back to the “It’s just a game” phrase.  It’s definitely true.  At the end of the day, nobody is cured of disease or given a roof over their head or clothed against the elements depending on whether or not our beloved Steelers win or lose.  Nevertheless, football can offer lessons aplenty thanks to its microcosm of limited actors, distinctive variations in strategy, time and rule limitations, and clearly defined measures of success and failure.  It is, in a very real way, a laboratory of human behavior and competitive strategy.

Today and in a few other posts though, rather than extract knowledge from the game on the field itself, I want to take a few moments to point out some nuggets from the collective bargaining negotiations because there are incredibly useful lessons that can be applied to situations that any person might run across.  In my professional experience, these are particularly useful when negotiating to purchase or sell a home.

Lesson One:  When it gets heated, avoid breathing fire.

Not all negotiations are adversarial.  But the truth is that the seller will always want more money, fewer inspections and no contingencies while the buyer wants to spend less and to have plenty of outs if they can’t get financing or it turns out the house is built on a foundation of eggshells. Sure, there are plenty of times when buyers and sellers become great friends and, trust me, it makes it loads easier on the agents and everybody else working to facilitate the closing when that’s the case.   But just in case you find yourself in a scenario where everyone isn’t going out for ice cream on a regular basis, the less you speak with the opposite party, it’s probably for the better.  In theory, it sounds easy.  But I know lots of people that have expressed to me their want to confront the other side, argue persuasively and passionately and are confident that they can convince the other side of the merits of their position.  And in their own mind, I know that they intend to be as polite and tactful as possible, but the core message that is going to come through is, “You’re wrong.”  And nobody really likes hearing that they’re wrong.  And sometimes the other side doesn’t politely and tactfully respond.  And now we’ve got an escalating conflict.  But keep it simple, to the point and devoid of drawn-out descriptive arguments and it will encourage the other party to act likewise.

Let’s examine in light of the NFL labor negotiations:

According to this insight from ProFootballTalk, during one of the bargaining sessions, Jerry Jones made a comment to the players representatives that “You clearly don’t understand what we’re saying.”  and went on to make some thinly veiled threats at unpleasantness directed to the players.  Truthfully, I don’t think the negotiations were ever really going anywhere.  Nevertheless, the owners had the players at the table and had a chance to create an environment where real, productive, material negotiations could have taken place.  But, in my opinion, for the owners to get the players to participate meaningfully in negotiations, the owners had to demonstrate that they sincerely considered the players as equal partners in certain elements of the operation of the league.  By insulting the players’ ability to grasp what the owners were offering, any chance of conveying a feeling of sincerity was seriously damaged.

From the players’ perspective, however, they’ve not handled things entirely smoothly either.  Despite the raging war between the two sides and the unrivaled popularity of the NFL versus other sports, the league cannot be complacent about continued patronage from the public.  It is critical for both sides that in addition to dividing the pile of money to their advantage, that the pile of money doesn’t shrink.  So it is incumbent on the players not to pointlessly make idiotic statements that will inflame anger among fans already perturbed by the potential of a damaged or lost 2011 season.  Adrian Peterson didn’t get the memo.  Or he did and just accidentally figured out the worst possible way to not follow it.

In both cases, the less said by either party, the better.  Jones could have skipped the threats and simply walked out.  Peterson could have given the usual Bull Durham sports babble, i.e. give a long-winded equivalent of a “No comment”.  When in a contentious negotiation, keep it terse.  Stick to the material points.  Maintain a professional demeanor.  This may be the house of your dreams that happens to be owned by some very difficult individuals.  But keep in the back of your mind, if you can get it to close, they’re going to move out.  Maybe even to Sweden.  And you’ll very likely never hear from them or of them ever again.

People & Places & Zzzzzzz…

I know what I’m about to say makes me sound as of I’m from the Paleolithic Era, but I love the Sunday newspaper.  The full of fat, ink-stained, stuffed with pharmacy fliers, wrapped in the oh-so-environmentally-unfriendly green plastic bag, print edition of the Pittsburgh Post-Gazette.  I am dinosaur, hear me rustle… the pages.

In my line of work, I should be interested in the Real Estate section, but quite frankly, I hardly ever look at it.  I’m not in the market for a house personally and professionally, we have very little exposure to settlement work on new homes by the local big builders because they provide incentives against using anyone but their in-house lender  and closing company.  These incentives are a topic for another day, but trust me, I’ve got opinions on those too.  So I have very little non-work or work interest in most of the Sunday Real Estate news.  But I do typically take a glance at the People & Places column to see if anyone I know has changed brokers or received any of the constant stream of monthly sales & listings awards that the local big brokers are dishing out.

But I did pick up on one interesting thing in the past couple of People & Places column that caught my eye.  Last week, one of the larger brokers announced all their new agents.  There were twenty-two of them.  In itself, not that big a deal.  These guys have dozens of offices and dozens of agents in each office.  So it isn’t that noteworthy when one of them announces a slew of new agents.  But what I noticed was that only one was noted to have moved laterally from another broker.  It’s possible that others were making a move from another broker, but it wasn’t mentioned.  Today, again there was a broker announcing a string of new agents (sixteen this time) and almost half were listed as making a lateral move.

Now, I would never advocate that anyone choose an agent based on the logo on the agent’s business card.  Actually, I would suggest that the logo on the card and the sign over the door means almost nothing.  Anyone looking for an agent should foremost, middlemost, lastmost and all mosts-in-between  be concerned that the individual agent you choose is one that fits best for you regardless of whether they’re sporting red, green or blue trademarks.  But if you are just calling a broker and asking to be connected to a random agent, I would certainly advise you to call the one with the higher ratio of experienced hires.

Eggs and issues

I really like a good omelet.  Eggs, cheese & other goodies all served hot for a nice rib-sticking breakfast is about as good as day can start.  It’s the mixture really.  Having eggs here, cheese over there & the other ingredients separate just isn’t the same.  But blend them together and it’s delicious.

But mixing things together isn’t always the right way to go.  And when it comes to policy and legal issues, it’s a really, really bad idea.  I was already exasperated with an example of this yesterday when I came across this CNBC article on the proposed settlement by the 50 state attorney generals and the major mortgage servicers.  I don’t want to get in to great detail on the settlement because there are better places to get the latest (like here, here and here).  But I do want to get in to a broad theme about what the attorney generals apparently are pushing and has been a principal point of consumer advocate protests about the settlement.  According to reports, part of the settlement was to include $20 billion as a fund to be used to assist homeowners that are currently struggling with mortgage delinquencies.  Protestors, according to CNBC, are unhappy with how the proposal will affect future modifications.

Maybe I’ve gotten the whole mess confused, but the attorney generals aren’t economic advisers.  They aren’t consumer advocates (although they do serve the public).  They aren’t affordable housing programs.  Their job is to be the principal criminal prosecutor of the state that they serve.  So I’m befuddled why they are negotiating a settlement where a (if not “the”) principal punishment is a housing affordability program.

This got started because it was revealed that on foreclosures that have already happened, servicers were “robosigning” and engaging in other slipshod practices that amounted to fraud on the courts and perjury.  The whole point of the criminal justice system to is bring wrongdoers to justice, partly out of the desire to see that those who injure others are punished as a retribution by society (hence why criminal matters are often captioned as “The People v. John Accused Doe”) but, even more importantly, to provide a very vivid and tangible deterrent to others that might be tempted to act in a similar unlawful manner.

So to the attorney generals, it’s time to quit scrambling eggs and sausage.  Put somebody in jail for crimes committed during foreclosure processes from the past.  Preferably someone who made the call to engage in the perjury and fraud or pushed employees to handle a workload that couldn’t possibly be administered properly.  But certainly anyone who is on video admitting that they didn’t read affidavits that they signed or that they notarized documents with signatures that they never witnessed should be on the list.  Once you put one in jail, keep looking for more.

As for the consumer advocates and protestors seeking writedowns, that’s an issue of what happens moving forward.  It’s less a criminal justice matter and more of an economics and public policy issue.  Protest away, but direct it to the officials that set aside $37 billion for a HAMP program that has been so tightly wound in rules and procedures that only a fraction has been used.  Or to the legislators that are not trying to cancel HAMP instead of reform it so that more than a small percentage of applicants can get permanent modifications.  Or to the underwriters at Fannie Mae and Freddie Mac that are denying loans due to low appraisals even when the new loans will have the same or lower balances that the current loans held by Fannie & Freddie.  Or to any number of other vested interests that have either bungled attempts to provide appropriate relief or have allowed short-term, short-sighted concerns to create obstacles.

That’s enough.  I’m still peeved.  But now I’m hungry more.

EDIT: I had to link to this piece from Housing Wire over a Congressional Republican reaction to the proposed settlement.  I don’t agree with some of it, don’t know enough about how the process worked to get to this point to comment about other parts of it and I concede that I suspect that much of what was said is actually directed less or not at all at influencing the settlement and is more about hamstringing the influence of the Consumer Financial Protection Bureau and using the HAMP issues to take shots at a Democrat administration.  Nevertheless, the statement that the settlement is more about legislating future conduct is on point and wholly valid.  The attorney generals are responsible for enforcing the laws as they are written and there are plenty to enforce against the servicers and their attorneys in how they’ve handled foreclosures.

Moreover, it should be troubling that a collection of state elected or appointed officers have banded together to craft what would essentially be a nationwide code of conduct.  As unpopular as Congress might be, instituting such government oversight is either within the jurisdiction of the U.S. Congress for any law to apply to all 50 states or it is within the purview of each individual state.  As a resident of Pennsylvania, I am troubled that the attorney general of Iowa, who should have no power beyond the borders of that state, who I have no right to vote for or against and who might not know an Act 6 notice (a Pennsylvania notice of default commonly required before beginning a mortgage foreclosure) from a take-out menu is the one that has been trusted by our attorney general and those of other states to take the lead.  Quite frankly, I’d prefer if the Pennsylvania attorney general’s office did its own investigation and start dragging people in to a Court of Common Pleas in any county of this Commonwealth and putting them on trial. Maybe it wouldn’t be the politically expedient thing to do.  Maybe it would drag out the foreclosure mess and hinder the housing recovery (although I don’t think it would more than this mess already has).  Maybe it would cost a lot of taxpayer dollars when Harrisburg seems to want to chop every budget in sight.  But I’d feel a lot better about making sure that when a mortgage lender operates here in Pennsylvania that we can trust that they’re going to follow Pennsylvania laws and not fall back on using widely-accepted industry standards for how they should operate.

EDIT NO. 2: As I mentioned above, there are some things about the Republican statement against the settlement that I think are off-base.  Here is a nice post that makes provides a far more detailed critique than I have.  I stand by my criticism of the settlement as a misguided coordinated effort to regulate future conduct rather than prosecute criminal transgressions that are already in the books.  But the arguments in the post are compelling.  I highly recommend checking it out.

EDIT NO. 3: There are few, if any, writers covering the real estate scene with more incisive analysis than Rob Hahn.  Frequently, I want his conclusions to be wrong but it’s rare to find flaws in his logic.  He put up a post with his thoughts on the foreclosure settlement.  If you have any interest in the topic, it’s mandatory material.  Thanks for the great insight Rob.

Disagreement over pennies

I’m a regular reader and a fan of Barry Ritholtz, the principal author at The Big Picture.  I highly recommend making it a regular stop as it has incisive commentary of many financial topics (although the financial industry is not the exclusive genre) and Barry has no qualms about regularly upsetting the apple cart of conventional wisdom.  Moreover, it is one of the very, very few sites where I have found (most of the time) educated and responsible comments from other readers.

But I have to disagree with a post Barry had yesterday over a settlement between Bank of America and Freddie Mac.  The posts states:

Did Bank of America get a deal?  Probably, but not nearly the deal described of 1 cent on the dollar.  Why?

1.  Sure, a payment of $1.28 billion versus $127 billion in loans is right about 1% of the loan value.  But despite some considerable (and sometimes warranted) hysteria about the housing and rampant delinquencies and foreclosures, most of those loans are going to be repaid.  Based on the last delinquency report from the MBAA, the percentage of loans in some type of delinquency (ranging from full-blown foreclosure proceedings to being one month behind on payments) is a little under 14%.  It’s possible that Bank of America’s loans are running at a higher delinquency rate.  For the sake of this hypothetical, I’ll just concede that they are running a 50% higher delinquency rate.  That’s a 21% delinquency rate.  Again, although there is no reason to do so, let’s also assume that the value of the average delinquent loan is higher than the average loan in this pool in general.  Then we get a very unconservative estimate of potential losses of 25% or about $32 billion of bad loans.

2.  It should be noted that a delinquent loan can be a total loss, but rarely is.  In fact, with some delinquent loans, a lender can not only recover the full balance payable and costs incurred with collection, but a delinquency also permits late charges.  So in some cases, a delinquency is actually a windfall.  But let’s imagine a worst case where all $32 billion in delinquent loans goes to foreclosure and that the loans were permanently delinquent from the initial payment.  The loans are secured by collateral, namely the borrowers’ homes.  Ultimately, the lender will recover a healthy amount after taking title to the property and selling it to a new owner.  How much could they recover?  As of about a month ago, properties selling after a foreclosure were selling at a 32% discount to other properties.  But that percentage is a comparison to other sales prices, not to the amount of the loss on the loan.  So we can’t immediately determine that the recovery would be 68% of the loan amount.  Moreover, by the time the foreclosure is complete, the lender may also be on the hook for some property taxes, commission, court costs  along with other expenses.  It’s tough to get a good grip on how much would be available to offset that hypothetical $32 billion in losses.  To be seriously pessimistic, let’s figure that every loan exceeded the value of the property by 20% meaning we’ve got what would typically generate about $25 billion in property sales.  From that $25.6 billion, apply the 32% discount and we get $17.4 billion.  From there, with expenses of sale and foreclosure, there is going to be another healthy reduction.  How much is difficult to determine beyond the commission to real estate brokers (typically 6%), so let’s continue with the pessimism streak and quadruple the commission to account for those other expenses.  That leaves $13.2 billion to offset our $32 billion loss.

Let’s stop there even though there may be other methods for Freddie Mac to offset their losses (tax reductions, mortgage insurance claims and deficiency judgment actions for example).  We’ve now got a bit under $19 billion in losses.  Now we’re at a rate of 7 cents to the dollar which still seems terrible.  But we’re also talking about a far smaller total loss.  When we started, the hit to Freddie Mac and via Freddie Mac and the US Treasury to the taxpayer, was $132 billion.  Now the loss (with some worst case estimates to get to that point) is under $18 billion.

So really, out of that $132 billion, Freddie Mac is now almost certainly recovering at least $114 billion which is 86 cents on the dollar.

Is it unfair to flip it that way as it seems to delude the reader that the loss isn’t that serious?  Yes.  In a way that is equally unfair to the manner in which a reader is told that, as a taxpayer, they’re on the hook for 99% of Bank of America’s bad loans.

Now that we’ve walked through all this, let me go back to where I stated that I disagree and modify it a bit.  I do disagree with the comment about the 1 cent on the dollar settlement.  I don’t disagree about how the federal government conservatorship of Fannie Mae and Freddie Mac has been a way to bail out huge Wall Street financial institutions in a way that may not get as much public notice as TARP.  But that point was too easily lost with the one cent on the dollar discussion.  It’s certainly OK to be outraged, but if we’re going to be outraged, let’s precisely articulate the issues and not sensationalize things.  Even if my estimates are wildly overblown, even if Freddie Mac doesn’t come anywhere near the losses that I’ve come up with here, even if the taxpayers are on the hook for only a small percentage of the losses, we should still be horrified that taxpayer are being soaked, whether it’s for $18 billion or $18, while Wall Street executives are showered with bonuses and shareholders reap profits.  But if we throw out the 1 cent argument, upon close examination, we’re going to make those bank executives look smarter than us when they justifiably show it to be terribly misleading.

Winter Coffee Hinterlands, Part III

I’m a bit reluctant to include the area where I work (Wexford) in the “Hinterlands”, but I’m rolling on a theme so we’ll just go with that.  Besides, back when I knew little outside the East End, I’d consider Wexford beyond the hinterlands.

Today’s hinterlands visit was to a new shop that’s been open less than two weeks.  Amarabica Coffee is located right on the main Route 19 corridor in Wexford just north of the Route 910 overpass.  In other words, it is a bit removed from the traffic light nightmare that runs from the North Allegheny High School campus along all the car dealerships. As far as first impressions go, the attention to its interior design is impressive.  It features an impressive palatte of bright colors and style that I’m guessing was inspired by the traditional Santa Fe style.

The service was friendly and quick.  The wifi is free.  The prices are in line, maybe even a bit less, than other local independent shops.  The latte was very solid.  The milk was steamed perfectly.  The shots of espresso though were a touch acrid.  This was obviously more pronounced in the straight espresso that I prefer to start with.  I noted the beans were from Magnum Coffee Roasters which is not a supplier that I’ve encountered before.  I suspect that either this roast is more bold than my style or it was simply a batch that was left a bit too long in the roaster.  I’m going to stop in again to see if I notice a difference.

Anyway, Amarabica is a lovely new addition to the Wexford community.  For a quiet place to get a little caffeine and relax/study/work remotely, I definitely recommend it.  If you happen to be in the area and need a coffee drinking companion, I’d love to oblige.  Shoot me a tweet.

Winter Coffee Hinterlands, Part II

I ventured to Murrysville today for a closing and visited a new coffee place for the first time.  Farmhouse Coffee is located at the intersection of Valley Brook Road and East McMurray Road which is a few minutes east of the main commercial corridor on Route 19.  As I did earlier this week when I bypassed the national chain for a Pittsburgh one, I thought I’d see if Farmhouse could provide a superior drink.

Before I get to the drink, though, the atmosphere at Farmhouse is about as charming as can be.  It is located in an old farmhouse (appears to be Victorian era style, but does not have the traditional full-blown Victorian detail) with a wraparound porch and a setting that I would guess is stunning when it isn’t a frigid Pittsburgh December.  The interior is part independent coffee shop, part early 20th century living room (although based on the number of laptops I noted, served by wifi).

As for the beverages, the shot of espresso while I waited was crisp and balanced, very solid.  It didn’t have the fully extracted bright flavors that I notice in the shots at 21st Street, but I’d give it 3/4 stars.  The service was fast and friendly.  The prices were below the national chain, but not significantly so.  Most importantly, the latte was well executed.  I worry when drinks are prepared too quickly as this frequently results in a drink where the milk hasn’t adequately settled after steaming or it is so hot that it is undrinkable for 10-15 minutes.  Instead, it was a delightful drink with no shortcomings.  I wouldn’t say it went all the way to the religious experience standard.  I’ll be visiting again though for sure.

Winter Coffee Hinterlands

I still remember the first time I had an espresso drink.  It was 1991.  I had heard of espresso and cappuccino, but not a latte or a mocha or any of the other drinks that are made with an espresso base.  I was in the City of Pittsburgh for one of the first times.  We went to a place on South Craig Street called Cafe Arabica.  Fortunately, someone told me to get a latte or I would have stood dumbfounded in front of the menu while people queued up behind me.  I remember liking it.  I wasn’t blown away.  But after a while, I became increasingly enamored and as the Starbucks tidal wave hit the Pittsburgh market, I eventually became such a regular that I didn’t have to order my regular drink out loud, I got to know some of my baristas rather well and I was annoyed when changes to the store were made without my consultation.  Kidding about the last one.  A little.

At one time, I was as loyal a Starbucks customer as there were.  My parents owned stock in the company.  My sister worked at headquarters in Seattle as a project manager.  I hit the place religiously.  At one time, when I was doing extensive local travel, I knew at all times where the closest location was.  But then the atmosphere became more of a store than a coffee place.  Coffee merchandise?  Fine.  Music?  Books?  Chocolate?  Mints?  Too much.  The seismic change for me though was a visit to 21st Street Coffee.  Since I’ve made the pilgrimage to the Holy Pittsburgh Grail of Coffee, it’s far and away my favorite place to imbibe caffeine.  Sadly, I live in the North Hills, my office is in the North Hills and a morning jaunt to 21st Street at either their Strip or Downtown locations is about a 40 minute trip on the way in to the office.  Unless I’ve already got another destination in the city, I just can’t take the time or justify the extra gas just for a sensational mug of java.  And I haven’t (yet) discovered an equally outstanding source near my office.

Instead, most days I do a little French press at home and then try to get through the rest of the day.  But occasionally, I still need a jolt especially when I’m out and about doing banking or coming to or fro for closings.  This time of year (the Holidays), I’m even more likely to pick up a beverage because this is the one time of year that I will deviate from my “No Flavored Coffee” edict.  I’ll deviate for a good eggnog latte.  I like eggnog.  I like espresso.  Combined?  Yes.  Please.

So on Monday, I purchased my first eggnog latte of the season.  I was in Cranberry.  There’s a couple Starbucks up there.  There’s also a place called Steamers at the Streets of Cranberry.  But I was right by the Starbucks on 228 which (bonus) is a drive-thru.  This was a mistake as by the time I was back on I-79 and took a sip, I realized the drink had been unforgiveably botched.  It tasted awful.  I wanted to turn around and get it fixed, but I didn’t have the luxury of time on Monday.  The following day, I was further down Freedom Road at the Northwood office.  On the way back, I spotted the Crazy Mocha which is just about a minute or two further down Freedom Road.  I hadn’t visited a Crazy Mocha before, but I had heard they were a Pittsburgh outfit.  I had no idea until I was writing this that they had over 20 locations around the area.  So now I feel a bit sheepish for not trying them a long time ago.  But try them I finally did.  Not only was their eggnog latte exceptional (buttery, nutmegy but not too foamy), it was also almost a dollar cheaper than Starbucks.

Next time I’m jonesing for a java around Cranberry, I’ll be taking Freedom Road a bit further to Crazy Mocha.  Not only is it a local provider, it’s an awfully good cup of coffee.