REFinBlog

Editor: David Reiss
Brooklyn Law School

December 13, 2016

Retired With A Mortgage

By David Reiss

photo by Katina Rogers

U.S. News & World Report quoted me in Rethinking a Mortgage While Retired. It opens,

It’s one of the cardinal rules of retirement planning: pay off the mortgage before quitting work. Giving up your income while still supporting a big debt can mean chewing away at your retirement savings way too fast, and can leave you in a tight spot if something goes wrong.

But paying off a mortgage years early is easier said than done, and the Center for Retirement Research at Boston College says way too many pre-retirees are too far behind schedule, largely because of borrowing before the housing bust and financial crisis.

On the other hand, some experts say carrying low-interest debt into retirement is not always such a bad thing, especially if it means leaving money in investments that perform well.

“In 2013, almost 40 percent of all households ages 55 and over had not paid off their mortgages, up from 32 percent in 2001,” the Center reports, citing a study using data from the Federal Reserve’s Survey of Consumer Finances in 2013. “These borrowers were also carrying a lot more housing debt by 2013.”

“I’ve been advising clients for over 20 years and on just an anecdotal level, I can tell you that more clients are retiring with mortgage balances than in years past,” says Margaret R. McDowell, founder of Arbor Wealth Management in Miramar Beach, Florida.

A.W. Pickel III, president of the Midwest division of AmCap Mortgage in Overland Park, Kansas, says many baby boomers traded up as their families grew, then took second mortgages to help fund college costs.

In the years before 2008, homeowners were encouraged to take out big loans when home values appeared to be soaring, the center says. They bought expensive homes or tapped home value through cash-out refinancing or home equity loans, it says.

When home prices collapsed, millions were left “underwater” – owing more than their homes were worth – and were unable to get out from under because they could not sell for enough to pay off their loan. McDowell believes many homeowners also concluded their home was not the rock-solid asset they’d thought, so they felt it unwise to pour more money into it by paying down the mortgage early.

So many just hung in there. By taking on too much debt, and monthly payments so large they could not afford extra payments to bring it down, they left themselves with too much debt too late in the game.

The center says “that 51.6 percent of working-age households were at risk of having a lower standard of living in retirement,” largely because of mortgage debt.

“In recent years, U.S. house prices have started to really improve, to the benefit of homeowners and retirees,” the center says. “But it’s difficult to predict whether the other factor that has reduced retirement preparedness – more older households with big housing debts – was a boom-time phenomenon or represents the new normal.”

But is the situation really as dire as it seems? David Reiss, a professor at Brooklyn Law School in New York City, thinks it may not be.

“According to the National Association of Realtors, the median sales price of an existing home increased from $197,100 in 2013 to $232,200 in October of 2016,” he says. “That is a roughly 15 percent price increase and about $40,000 of additional equity for the owner of the median home.”

Many homeowners who were underwater may not be any longer.

Also, he adds, it’s not necessary to be absolutely debt free at retirement so long as income is large enough to cover expenses and leave a cushion.

“Often, paying off a mortgage gets a retiree where he or she needs to be in terms of that balance, but it is not always necessary,” he says.

The key, he says, is to not be underwater. Once the remaining debt is smaller than the home value, the homeowner is better able to sell. One option is downsizing, selling the current home, then using cash from the sale or a new, smaller mortgage to buy a cheaper home. A less expensive home will also likely have lower property taxes and maintenance costs.

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December 13, 2016 | Permalink | No Comments

Tuesday’s Regulatory & Legislative Roundup

By Robert Engelke

  • According to an announcement from the Department of Housing and Urban Development, the government is granting more than $132 million total to neighborhoods in Boston, Denver, St. Louis, Louisville, and Camden as part of HUD’s Choice Neighborhoods Initiative.
  • Mark Lamster, a professor at the University of Texas at Arlington and a Loeb Fellow at the Harvard Graduate School of Design studying urban planning, wrote an open letter to Carson on how to solve the housing crisis in The Dallas Morning News.
  • Freddie Mac is now rolling out a pilot program that matches nonprofits with socially conscious investors.

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December 13, 2016 | Permalink | No Comments

December 12, 2016

Finding The Right Homeowners Insurance Policy

By David Reiss

family-insurance-home

Zing! quoted me in Find the Right Homeowners Insurance with These Tips. It opens,

For many of us, a tremendous amount of research and work goes into buying a home. When my husband and I bought our first home two years ago, I was surprised to learn that everything I thought I knew, I didn’t really know – including how to choose homeowners insurance.

I hadn’t thought about homeowners insurance until my mortgage company called and told me they needed my policy information. Panic poured over me. What policy? What are my options? How much coverage do I need? Where do I start? I was overwhelmed with questions and at a loss for answers. I had a whole lot of research to do and with a mortgage already underway, not a lot of time to do it.

Homeowners insurance policies can be confusing and complicated, especially if you’re not familiar. While these tips may be too late for me to use, I hope they can help you when considering your home insurance options.

Talk with Your Local Insurance Agent

If there’s one thing I recommend when it comes to homeowners insurance, it would be to talk to someone who knows your area like the back of their hand.

“Local agents are familiar with the city and surrounding areas – this means they should have a general knowledge of the market values and other information that may play a role in determining your coverage needs,” says Sarah Haun of Advanced Insurance Designs, Inc., who has been selling and servicing homeowners’ policies for more than 15 years.

Insurance agents can also help in determining how much coverage you need and if it makes sense to bundle your various insurance policies together. Bundling car and home insurance saves my husband and me a couple hundred dollars a year, but that’s not the case for everyone, so be sure to ask.

Haun also suggests working with an independent agent. “Independent agents have the ability to quote several different carriers, to find you the best coverage at the best value,” says Haun. “This may be a good option if you want to get several quotes without making several phone calls or filling out several online quote forms.”

My agent is an independent agent and I highly recommend using one. If ever I have a question about my policy, I call him directly. It also benefits me in the fact that he’s always looking for ways to save us money each year, and if he sees an opportunity, he shares it with us.

Shop for Home Insurance like You Would a New Car

“It pays to shop around,” says David Reiss, Professor of Law at Brooklyn Law School. “You want to shop around to get the best price, but you also want to get a sense of how each company you are considering treats claims when they are made,” he says. “Do they have a reputation for being difficult to work with and a reputation for not paying legitimate claims? You want to take that into account when you are making your decision.”

If you decide to go it alone, Haun suggests to get three estimates and compare.

What’s Covered and What’s Not

You wouldn’t get halfway through a good book and stop reading it, so don’t just give your policy a once over. Experts recommend you read through your policy in full detail to know what is and what is not covered.

According to Haun, insurance coverage may include damage from

  • Wind
  • Hail
  • Fire
  • Smoke
  • Lightning
  • Weight of snow/ice
  • Bursting of pipes
  • Theft

“Damage from normal wear and tear would not be covered,” adds Reiss. “If an old boiler gives out, that’s on you.”

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December 12, 2016 | Permalink | No Comments

December 9, 2016

Trump and The Housing Market

By David Reiss

photo by Gage Skidmore

President-Elect Trump

TheStreet.com quoted me in 5 Ways the Trump Administration Could Impact the 2017 U.S. Housing Market. It opens,

Yes, President-elect Donald Trump may have chosen Ben Carson to lead the Department of Housing and Urban Development, but as the U.S. housing market revs its engines as 2016 draws to a close, an army of homeowners, real estate professionals and economists are focused on cheering on a potentially rosy market in 2017.

And with good reason.

According to the S&P CoreLogic Case-Shiller Indices released on November 29, U.S. housing prices rose, on average, by 5.5% from September, 2015 to September, 2016. Some U.S. regions showed double-digit growth for the time period – Seattle, saw an 11.0% year-over-year price increase, followed by Portland, Ore. with 10.9% and Denver with an 8.7% increase, according to the index.

The data point to further growth next year, experts say.

“The new peak set by the S&P Case-Shiller CoreLogic National Index will be seen as marking a shift from the housing recovery to the hoped-for start of a new advance,” notes David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices. “While seven of the 20 cities previously reached new post-recession peaks, those that experienced the biggest booms — Miami, Tampa, Phoenix and Las Vegas — remain well below their all-time highs. Other housing indicators are also giving positive signals: sales of existing and new homes are rising and housing starts at an annual rate of 1.3 million units are at a post-recession peak.”

But there are question marks heading into the new year for the housing market. The surprise election of Donald Trump as president has industry professionals openly wondering how a new Washington regime will impact the real estate sector, one way or another.

For instance, Dave Norris, chief revenue officer of loanDepot, a retail mortgage lender located in Orange County, Calif., says dismantling the Consumer Financial Protection Bureau, encouraging higher interest rates, and broadening consumer credit are potential scenario shifters for the housing market in the early stages of a Trump presidency.

Other experts contacted by TheStreet agree with Norris and say change is coming to the housing market, and it may be more radical than expected. To illustrate that point, here are five key takeaways from market experts on how a Trump presidency will shape the 2017 U.S. real estate sector.

Expect higher interest rates – The new administration will likely lead to higher interest rates, which will compress home and investment property values, says Allen Shayanfekr, chief executive officer of Sharestates, an online crowd-funding platform for real estate financing. “Specifically, loans are calculated through debt service coverage ratios and a borrower’s ability to make their payments,” Shayanfekr says. “Higher interest rates mean larger monthly payments and in turn, lower loan amount qualifications. If lenders tighten up, it will restrict the buyer market, causing either a plateau in market values or possibility a decrease depending on the margin of increased rates.”

Housing reform will also impact home purchase costs – Trump’s effect on interest rates will likely depress housing prices in some ways, says David Reiss, professor of law at Brooklyn Law School. “That’s because the higher the monthly cost of a mortgage, the lower the price that the seller can get,” he notes. Reiss cites housing reform as a good example. “Housing finance reform will increase interest rates,” he says. “Republicans have made it very clear that they want to reduce the role of the federal government in the housing market in order to reduce the likelihood that taxpayers will be on the hook for another bailout. If they succeed, this will likely raise interest rates because the federal government’s involvement in the mortgage market tends to push interest rates down.”

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December 9, 2016 | Permalink | No Comments

Friday’s Government Reports Roundup

By Jamila Moore

  • Fannie Mae and Freddie Mac successfully made changes to their mortgage back securities claims the Federal Housing Finance Agency. Furthermore, the agency iterates that this first step is imperative to the long term plan “of a common securitization platform and a single security.”
  • President elect, Donal Trump, has a new plan regarding taxes in the U.S. This plan, if passed, will likely affect homeowners and they types of deductions they may claim on their income tax.
  • The U.S. Deprtment of Housing and Urban Development (HUD) created an efficient tool to help show members of local communities how HUD is investing in their neighborhood. This new resource is called the Community Assessment Reporting Tool (CART).

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December 9, 2016 | Permalink | No Comments

December 8, 2016

Taking up Housing Finance Reform

By David Reiss

photo by Elliot P.

I am going to be a regular contributor to The Hill, the political website.  Here is my first column, It’s Time to Take Housing Finance Reform Through The 21st Century:

Fannie Mae and Freddie Mac, the two mortgage giants under the control of the federal government, have more than 45 percent of the share of the $10 trillion of mortgage debt outstanding. Ginnie Mae, a government agency that securitizes Federal Housing Administration (FHA) and Veterans Affairs (VA) mortgages, has another 16 percent.

These three entities together have a 98 percent share of the market for new residential mortgage-backed securities. This government domination of the mortgage market is not tenable and is, in fact, dangerous to the long-term health of the housing market, not to mention the federal budget.

No one ever intended for the federal government to be the primary supplier of mortgage credit. This places a lot of credit risk in the government’s lap. If things go south, taxpayers will be on the hook for another big bailout.

It is time to implement a housing finance reform plan that will last through the 21st century, one that appropriately allocates risk away from taxpayers, ensures liquidity during crises, and provides access to the housing markets to those who can consistently make their monthly mortgage payments.

The stakes for housing finance reform today are as high as they were in the 1930s when the housing market was in its greatest distress. It seems, however, that there was a greater clarity of purpose back then as to how the housing markets should function. There was a broadly held view that the government should encourage sustainable homeownership for a broad swath of households and the FHA and other government entities did just that.

But the Obama Administration and Congress have not been able to find a path through their fundamental policy disputes about the appropriate role of Fannie and Freddie in the housing market. The center of gravity of that debate has shifted, however, since the election. While President-elect Donald Trump has not made his views on housing finance reform broadly known, it is likely that meaningful reform will have a chance in 2017.

Even if reform is more likely now, just about everything is contested when it comes to Fannie and Freddie. Coming to a compromise on responses to three types of market failures could, however, lead the way to a reform plan that could actually get enacted.

Even way before the financial crisis, housing policy analysts bemoaned the fact that Fannie and Freddie’s business model “privatizing gains and socialized losses.” The financial crisis confirmed that judgment. Some, including House Financial Services Committee Chairman Jeb Hensarling (R-Texas), have concluded that the only way to address this failing is to completely remove the federal government from housing finance (allowing, however, a limited role for the FHA).

The virtue of Hensarling’s Protecting American Taxpayers and Homeowners Act (PATH) Act of 2013 is that it allocates credit risk to the private sector, where it belongs. Generally, government should not intervene in the mortgage markets unless there is a market failure, some inefficient allocation of credit.

But the PATH Act fails to grapple with the fact that the private sector does not appear to have the capacity to handle all of that risk, particularly on the terms that Americans have come to expect. This lack of capacity is a form of market failure. The ever-popular 30-year fixed-rate mortgage, for instance, would almost certainly become an expensive niche product without government involvement in the mortgage market.

The bipartisan Housing Finance Reform and Taxpayer Protection Act of 2014, or the Johnson-Crapo bill, reflects a more realistic view of how the secondary mortgage market functions. It would phase out Fannie and Freddie and replace it with a government-owned company that would provide the infrastructure for securitization. This alternative would also leave credit risk in the hands of the private sector, but just to the extent that it could be appropriately absorbed.

Whether we admit it or not, we all know that the federal government will step in if a crisis in the mortgage market gets bad enough. This makes sense because frozen credit markets are a type of market failure. It is best to set up the appropriate infrastructure now to deal with such a possibility, instead of relying on the gun-to-the-head approach that led to the Fannie and Freddie bailout legislation in 2008.

Republicans and Democrats alike have placed homeownership at the center of their housing policy platforms for a long time. Homeownership represents stability, independence and engagement with community. It is also a path to financial security and wealth accumulation for many.

In the past, housing policy has overemphasized the importance of access to credit. This has led to poor mortgage underwriting. When the private sector also engaged in loose underwriting, we got into really big trouble. Federal housing policy should emphasize access to sustainable credit.

A reform plan should ensure that those who are likely to make their mortgage payment month-in, month-out can access the mortgage markets. If such borrowers are not able to access the mortgage market, it is appropriate for the federal government to correct that market failure as well. The FHA is the natural candidate to take the lead on this.

Housing finance reform went nowhere over the last eight years, so we should not assume it will have an easy time of it in 2017. But if we develop a reform agenda that is designed to correct predictable market failures, we can build a housing finance system that supports a healthy housing market for the rest of the century, and perhaps beyond.

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December 8, 2016 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Roundup

By Jamila Moore

  • Community Development Financial Institutions (CDFIs) needed funding support the economic needs of individuals in low income communities. As a result,  JP Morgan Chase began establishing grants for CDFIs to assist in mobile home ownership, redevelopment in specific low income communities, among other initiatives.
  • Over the past decade, home ownership in the U.S. has declined. A report entitled, “Have Recent Demographic Trends Contributed to the Rise and Fall of the Homeownership Rate?” found that later marriages and child birth attributed to the downward trend.
  • Facebook responded to an affordable home crisis in Menlo Park, Ca. The billion dollar company set aside 20 million dollars to assist local residents in obtaining proper housing and job training in the local neighborhood.

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December 8, 2016 | Permalink | No Comments