The Mortgage Reports Blog

How Closing Costs In A Home Purchase Are Shared (Chicago Edition)

 

This graphic is from a seminar I regularly co-host and I thought it would play well for the Chicago crowd. 

The percentages are based on a few assumptions:

• $300,000 mortgage
• Condominium purchase
• Property inside the Chicago city limits
• The average the fees from more than ten purchase closings where purchase price was $250,000-$400,000
• No discount or origination points

I was the loan officer for all of the transactions and verified numbers against the HUD-1 (i.e. settlement statement).  These are accurate, folks.

In seminars, I use the above graphic to illustrate the relative helplessness that a mortgage lender has with respect to overall closing costs in a purchase. 

After all, a lender can only control what his company charges and the rest of the pie is determined by the fee structures of the other parties involved. 

In our Chicago-based world, the lender's portion is about 7% of a home buyer's total "closing costs".

When I share this with my first-time clients in Rate Shopping Mode, I make a point to show them how other mortgage lenders may purposefully understate the other 93% of purchase fees so that the Good Faith Estimate I provided looks ridiculously expensive by comparison.

My competitors sometimes reduce the title charges to unreasonable levels, skimp on real estate attorney fees, or omit other third-party expenses completely to make the line item labeled "Estimated Closing Costs" as low as possible. 

It's a deceptive, unconscionable practice and all home buyers can fall for it -- even the most experienced ones.  I try to use the graphic to minimize the number of times that it happens, and to protect people that -- in their quest for the "best deal" -- forget the old adage: If it looks too good to be true, it probably is.

As we all know, an educated consumer is less likely to fall for the puffery of a dodgy loan officer.  Hopefully, you've learned something, too.

HB 4050: Is HB 4050 On Its Way Back?

I thought that the HB 4050 issue went to bed when Blago changed its zip codes two months ago.  Apparently not, if this not-yet-verified latest story is true.

I received a tip today that Secretary Dean Martinez of the IDFPR is part of a plan to reinstate Illinois House Bill 4050, the Predatory Lending Database Pilot Program Act.

This time, though, instead of focusing on 10 zip codes in Cook County, the reincarnation of HB 4050 will apply to all of Cook County.

According to the advance (and not-yet-confirmed) notice I received, the plan is for HB 4050 to apply to the following classes of people in all of Cook County:

• First-time home buyers
• Home buyers that have not bought a home in the last three years
• All refinance borrowers

If a borrower is in one of the above "classes", then he/she is HB 4050-susceptible.  For these borrowers, if the selected loan product meets any of the following criteria, HB 4050 counseling will be required:

• The home loan has a prepayment penalty
• The home loan can negatively amortize
• The home loan carries an interest only feature
• The home loan has fees in excess of 5% of its size
• The home loan is a "stated income" loan (i.e. income is not verified)
• The home loan(s) are for 100% of the home's value
• The home loan is an ARM that adjusts in fewer than 5 years

The last time HB 4050 was in effect, lenders decided that it was easier to avoid Cook County altogether than to try and play by their rules.  As a result, the amount of lenders making loans in the area plummeted and people in need of money were left hanging.

Area home sales dropped by 45% on both an annual and a year-over-year basis, partly as a result of HB 4050.

Like we've said before, Cook County is the crazy ex. 

To be fair to Cook County, though, this story has not been confirmed by the IDFPR Web site nor from IAMB. 

What we do know that the state is "re-writing the rules" for HB 4050 and that no definite decisions have been made.  Once new rules are written, the law will be subject to the standard 45-day period for comments before being enacted as a new law.

Stay tuned for more...

The Chicago Real Estate Market Benefits From Mayor Daley's Big Box Ordinance Veto

According to the Sun-Times, Chicago's Mayor Daley has the votes needed to remove the Big Box ordinance from the City of Chicago books.

This is good news for homeowners in Chicago, and should work to keep mortgage rates down and home prices afloat.

If Chicago's laws prevent major employers such as Wal-Mart, Target, Menard's, Home Depot, and others from opening shops withinin the city limits, there are several major impacts, including the major possibility of an increase in property taxes for homeowners.

From an employment base perspective, a lower employment base = less income taxes generated = higher property taxes needed to make up the city's budget shortfall.

From a sales volume perspective, lower sales volume = less sales tax generated for city = higher property taxes in city needed to make up the city's budget shortfall.

The tie-together:

Higher property taxes = less demand for homes in Chicago = lower home values across the City

In 2005, Wal-Mart paid nearly $80 million to Illinois state and local governments in taxes.  If the veto holds, some of those dollars can offset Cook County property taxes and help keep Chicago affordable for many people.

Piggy-back this story on the possibility that the Foie Gras ban is lifting in Chicago and it looks like the aldermen are tired of being laughed at and are ready to do something about it.

Cook County Businesses To Stay Put As 7% Property Tax Exemption Sunsets

The Cook County 7% property tax exemption expired after a long fight in the state capitol. 

Beginning in 2007, the 5.3 million residents of the 2nd largest county in the United States will face a potentially sharp increase in their property tax bill.

The plain-English story behind the 7% property tax exemption goes like this: 

• Cook County spends money, uhhhh, differently from most other locales.  As a result, more tax dollars are needed. 
• Property values increased in Cook County over the past 5-10 years and many people struggled to pay their property tax bill.
• Cook County put a cap on the annual property tax increase for Cook County residents.  The maximum increase was 7%.
• Cook County compensated for the loss of residential tax dollars by increasing the tax burden on businesses that operate in Cook County.
• The law passed in 2003, with a 3-year sunset.

The Chicagoland Chamber of Commerce, the highest-rated of only seven 4-Star Chambers by the U.S. Chamber of Commerce, is a business advocacy group that led the fight against the extension of the 7% exemption. 

It is natural that the CCC fought against the 7% exemption law, but 26 other business and community groups were listed as the opposition, too.  Cook County (and Chicago, in particular) are already non-business friendly. 

The CCC successfully argued that, in the face of higher tax burdens, businesses would continue to leave Cook County -- along with the residents -- and the total tax dollars collected would decline.

From the Chicagoland Chamber of Commerce Web site:

A University of Illinois report on the impact of the assessment cap highlighted many inequities and unintended consequences including higher tax rates for every Cook County property taxpayer. This translated to higher tax bills for hundreds of thousands of homeowners whose homeowner exemptions weren’t high enough to offset the higher tax rates and for all taxpayers who do not receive the exemption.

Opponents of the law stated that tax policy aided Cook County officials in avoiding accountability for excessive spending.  Noted William Bornhoff, Director of the Chicago Development Council: "Given responsible and constrained local fiscal policy, market driven increases in property assessments should cause tax rates and their individual tax bills to go down, not up."

The Illinois House of Representatives defeated the bill by a vote of 69 to 37.

Source
VICTORY!  The Extension of the 7% Property Assessment Cap was Defeated!
Chicagoland Chamber of Commerce
http://www.chicagolandchamber.org/sub/initiatives_detail.asp?INI_ID=301

Largest Counties -- Smallest Counties -- Largest Metro Areas
Matt Rosenberg, About.com
January 1, 2002
http://geography.about.com/library/weekly/aa010102a.htm

The Exodus From Cook County Makes Sense

As the nation's second most populous county, Cook County, Illinois, is in danger of slipping a few notches.  Nationwide, Cook County lost more residents than any other county in 2005.

Cook County includes Chicago, and other towns in its 956-square-mile jurisdiction. 

As a Cook County resident, this makes complete sense to me.  Let me see if I can relate to the rest of you what is happening here in Chicago, and the neighboring towns in Cook County:

• Chicago sales tax: 9.00%
• Cook County property tax: 7% annual cap for now, after a 22% run-up 2000-2004.
• Downtown Chicago 1 BR, 1 BA condo price: $180,000-ish plus $200-400 monthly assessment
• Downtown Chicago 2 BR, 2 BA condo price: $300,000-ish plus $200-$400 monthly assessment
• Close-to-downtown house with a yard?  Homes starting at $750,000 plus $12,000 annual real estate tax.
• Public school system is <ahem> less-than-praised and badly in need of funding
• Private schools are $8,000-$22,000 annually
• Public transportation is $1.75 per ride

Of course, if you live here, you've had this conversation: "I love Chicago, and I know it's too expensive, but what am I going to do?  Move to Schaumburg?  Move to Naperville?  I hate the suburbs!"

Never mind that Naperville is consistently ranked among the nation's Best Places to Live by Money Magazine -- it's just too far!  The commute from Naperville (and other suburbs) to downtown is 90 minutes on a good day.

Chicago does a terrific job of attracting young professionals and new graduates from all over the Midwest, but it does not do a very good job of keeping them once they start families. 

Chicago is an expensive city, but the costs go up dramatically for young families.

It's no wonder that Cook County is losing residents to neighboring counties such as Lake and McHenry (to the north), and DuPage, Will and Kendall (to the west).  The cost of living is much, much lower and the living space is much, much greater.

Of the top 10 most populous counties in America, Cook County is the only one has fewer residents in 2005 than it had in 2000.  So, even as the Commerce Department tells us that national housing starts slowed by 7.8% in March, Chicago-area starts actually increased. 

As I drive the suburbs and watch new developments sprout like weeds, it makes complete sense to me -- as the Cook County Exodus continues, these people are going to need somewhere to live.

Source
Chicago's Home Prices, Taxes Spark an Exodus From Cook County
Lynne Marek
Bloomberg.com, Thursday, April 6, 2006, 2:23 P.M.
http://www.bloomberg.com/apps/news?pid=10000103&sid=a2gfTCMygdXI&refer=us

Best Places to Live: Naperville -- Snapshot
CNNMoney.com, 2006
http://money.cnn.com/best/bplive/snapshots/45297.html

Cook County 7% Property Tax Exemption May Expire

In a form letter sent to my home by Cook County Assessor James M. Houlihan, there was a full paragraph about the sunsetting of the Cook County 7% cap on property tax increases.

"The 7% expanded homeowner exemption was enacted in 2003 and was designed to save  taxpayers money by expanding the current homeowner exemption and increasing the amount taken off the taxable value of a home.  The expanded exemption was designed to run for one re-assessment cycle for each assessment district and is set to expire at your next reassessment [sic].  The legislature is currently re-evaluating the expanded exemption and will decide if it will expire or be renewed."

Translated: The property tax increase cap is ending for City of Chicago residents in 2006 unless the state votes to extend the cap. 

The press release from the Cook County Assessor's office is worth reading.  It highlights the key benefits to homeowners, and shows that residential property owners have "saved" a lot of money.

According to Cook County, here are the vital stats:

• 80% of City of Chicago residents saw their tax bill decrease
• 56% of Northern Suburbs residents saw their tax bill decrease
• 84% of South and Western Suburbs residents saw their tax bill decrease
• Somehow, I was in the 20% City of Chicago group that had a ridiculously high increase in taxes.  [Enter expletive here]

But, there are always two sides to the story. 

The Chicagoland Chamber of Commerce, the highest-rated of only seven 4-Star Chambers by the U.S. Chamber of Commerce, is a business advocacy group that opposes the 7% exemption. 

It's natural that the CCC opposes the exemption considering the group's agenda.  Some key points follow (bold face is from the original Web page):

• Promoting economic development to assure continued economic growth in the Chicagoland area
• Encouraging a tax climate that promotes Chicagoland as a fair and competitive place to do business
• Creating an arena that fosters an entrepreneurial culture

When property taxes were reduced for so many homeowners, the slack had to be picked up somewhere and the CCC purports that the 7% expanded homeowners exemption shifts an unfair tax burden from homeowners to commercial and industrial property owners.

In their own press release, CCC chops through the spin of the Cook County Assessor's office in claiming their own version is the real truth:

• Higher tax bills on business, and commercial and industrial property owners undermines economic growth and job creation
• Cook County property tax rates are 3-7 times higher than in other Illinois counties because of the Cook County Classification System
• As tax rates go up, businesses will move to areas with more favorable tax rates, further eroding the non-residential tax base in school districts.

On March 2, the Illinois Senate voted to extend the 7% expanded homeowner exemption and the issue should come before the Illinois House for a vote in the coming weeks.

Both sides have a clear point -- rising taxes are a burden for homeowners who may then be forced to sell their homes; and rising taxes are a burden for business owners and commercial/industrial land owners who may take their jobs out of Cook County in order to maintain profitability.

Chicken or the egg, right?  Let the fighting begin.

(Image courtesy: The Guardian)