Editor: David Reiss
Brooklyn Law School

September 3, 2015

Seniors Selling Their Homes

By David Reiss


AARP Magazine quoted me in Selling Your Home. It reads, in part,

Judy and Joe Powell recently faced a decision most of us will eventually have to make: Should we sell our home and downsize to save money and effort, or hang on to the homestead because it’s familiar and full of fond memories?

After mulling the choice for a couple of years, the Texas couple decided to sell their 20-acre cattle ranch to move to a nearby college town.

“We are the sole caretakers of this property. It’s 24/7,” says Judy, 69, who mows the pastures with a John Deere tractor while her husband, 71, tends the cattle. “Basically, we don’t want to have to work this hard. We want time to play.”

The Powells now have their sights set on a single-story house in nearby College Station, where, for a monthly fee, someone else will maintain the yard. What’s more, they will be 30 minutes to an hour closer to their friends and doctors. The savings on gas alone will be more than a thousand dollars a year, Judy says.

Most of us aren’t dealing with the rigors of running a ranch. But, like the Powells, many of us will discover at some point that our homes, though we love them, no longer suit our lifestyles, or that they are becoming labor-intensive money pits.

A recent Merrill Lynch survey of people’s home choices in retirement found that a little more than half downsized and, like the Powells, were motivated by the reduction in monthly living costs and by shedding the burden of maintaining a larger home and property. Still, moving is not a decision easily made.

“The tie to one’s home is the hardest thing to understand from the outside. It’s a very personal decision,” says Rodney Harrell, a housing expert with the AARP Public Policy Institute.

Some people may be reluctant to move from a house where they raised children and created decades of memories, he says. On the other hand, the cul-de-sac that provided a safe place for kids may be isolating if driving becomes a challenge.

A good way to begin the process of figuring out what’s best for you is to “recognize the trade-offs,” Harrell says. First, consider the house itself. Is it suitable for your needs, and will it allow you to age in place? Most homes can be easily modified to address safety and access issues, but location is also critical.

“How close are health facilities?” asks Geoff Sanzenbacher, a research economist with the Center for Retirement Research at Boston College. “Are things nearby, or do you have to drive?”

Even if your current home meets these age-friendly criteria, you need to consider whether it is eating up money that could be spent in better ways to meet your changing needs.

For example, the financial cushion provided by not having a mortgage can be quickly erased by rising utility costs, property taxes and homeowner’s insurance. There is also the looming uncertainty of major repairs, which can cost thousands of dollars, such as a new roof and gutters, furnace or central air conditioner. A useful budgeting guide is to avoid spending more than 30 percent of your gross income on housing costs, says David Reiss, a professor at Brooklyn Law School who specializes in real estate finance.

“This isn’t a hard-and-fast rule, but it does give a sense of how much money you need for other necessities of life, such as food, clothing and medical care, as well as for the aspects of life that give it pleasure and meaning — entertainment, travel and hobbies,” Reiss says.

So if your housing expenses are higher than a third of your income or you’re pouring your retirement income into your house with little money left to enjoy life, consider selling and moving to a smaller, less costly place.

Just as important, once you’ve made the decision, don’t dawdle, Sanzenbacher says. The quicker you move, the faster you can invest the proceeds of the sale and start saving money on maintenance, insurance and taxes.

Take this example from BC’s Center for Retirement Research: A homeowner sells her $250,000 house and buys a smaller one for $150,000. Annual expenses, such as utilities, taxes and insurance, typically amount to 3.25 percent of a home’s value, so the move to the smaller home saves $3,250 a year right off the bat.

Moving and other associated costs would eat up an estimated $25,000 of profit from the sale, leaving $75,000 to be invested and tapped for income each year.

If all of this sounds good, your next decision is where to move. Your new location depends on any number of personal factors: climate; proximity to family and friends; preference for an urban, suburban or rural setting; tax rates; and access to medical care, among other considerations.

“You want to take an inventory of your desires and start to think, ‘Do I have the resources to make that happen?’ ” Reiss says.

September 3, 2015 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Round-Up

By Serenna McCloud

  • Corelogic’s recently released, Home Price Indicator (HPI) predicts that home prices will appreciate 4.7% from July 2015 to July 2016.
  • MakeRoom’s campaign to bring attention to the millions of families who struggle to pay rent.  Every first of the month, when rent due, the organization arranges a concert in the living room of a family struggling to pay rent.  On September first the R&B group Miguel played in the home of Devona.  Devona, a single mother from Detroit, Michigan who is also raising a nice and nephew, pays over half of her income in rent to keep her family in a safe suburban home.
  • The National Housing Conference (NHC) will be hosting a webinar on September 8th  to discuss the ways in which affordable housing development policies are linked to educational outcomes and ways in which organizations are addressing the issue.

September 3, 2015 | Permalink | No Comments

September 2, 2015

Expanding the Credit Box

By David Reiss

Tracy Rosen

DBRS has posted U.S. Residential Mortgage Servicing Mid-Year Review and 2015 Outlook. There is a lot of interest in it, including a table that demonstrates how “the underwriting box for prime mortgages slowly keeps getting wider.” (7) The report notes that

While most lenders continue to originate only QM [Qualified Mortgage] loans some have expanded their criteria to include Non-QM loans. The firms that are originating Non-QM loans typically ensure that they are designated as Ability-to-Repay (ATR) compliant and adhere to the standards set forth in the Consumer Financial Protection Bureau’s (CFPB) Reg Z, Section 1026.43(c). Additionally, most Non-QM lenders are targeting borrowers with high FICO scores (typically 700 and above), low loan to values (generally below 80%) and a substantial amount of liquid reserves (usually two to three years). Furthermore, most require that the borrower have no late mortgage payments in the last 24 months and no prior bankruptcy, foreclosure, deed-in-lieu or short sale. DBRS believes that for the remainder of 2015 the industry will continue to see only a few Non-QM loan originators with very conservative programs.


The ATR and QM rules (collectively, the Rules) issued by the CFPB require lenders to demonstrate they have made a reasonable and good faith determination, based on verified and documented information, that a borrower has a reasonable ability to repay his or her loan according to its terms. The Rules also give loans that follow the criteria a safe harbor from legal action. (8)

DBRS believes

that the issuance of the ATR and QM rules removed much of the ambiguity that caused many originators to sit on the sidelines for the last few years by setting underwriting standards that ensure lenders only make loans to borrowers who have the ability to repay them. In 2015, most of the loans that were originated were QM Safe Harbor. DBRS recognizes that the ATR and QM rules are still relatively new, having only been in effect for a little over a year, and believes that over time, QM Rebuttable Presumption and Non-QM loan originations will likely increase as court precedents are set and greater certainty around liabilities and damages is established. In the meantime, DBRS expects that most lenders who are still recovering from the massive fines they had to pay for making subprime loans will not be originating anything but QM loans in 2015 unless it is in an effort to accommodate a customer with significant liquid assets. As a result, DBRS expects the availability of credit to continue to be constrained in 2015 for borrowers with blemished credit and a limited amount of cash reserves. (8)

The DBRS analysis is reasonable, but I am not so sure that lenders are withholding credit because they “are still recovering from the massive fines they had to pay for making subprime loans . . ..” There may be a sense of caution that arises from new CFPB enforcement. But if there is money to be made, past missteps are unlikely to keep lenders from trying to make it.

September 2, 2015 | Permalink | No Comments

Wednesday’s Academic Roundup

By Shea Cunningham

September 2, 2015 | Permalink | No Comments

September 1, 2015

Credit Risk Transfer Deals

By David Reiss

A Syn

The Federal Housing Finance Agency released an Overview of Fannie Mae and Freddie Mac Credit Risk Transfer Transactions. It opens,

In 2012, the Federal Housing Finance Agency (FHFA) initiated a strategic plan to develop a program of credit risk transfer intended to reduce Fannie Mae’s and Freddie Mac’s (the Enterprises’) overall risk and, therefore, the risk they pose to taxpayers. In just three years, the Enterprises have made significant progress in developing a market for credit risk transfer securities, evidenced by the fact that they have already transferred significant credit risk on loans with over $667 billion of unpaid principal balance (UPB).

Credit risk transfer is now a regular part of the Enterprises’ business. The Enterprises are currently transferring a significant amount of the credit risk on almost 90% of the loans that account for the vast majority of their underlying credit risk. These loans constitute about half of all Enterprise loan acquisitions. Going forward, FHFA will continue to encourage the Enterprises to engage in large volumes of meaningful credit risk transfer through specific goals in the annual conservatorship scorecard and by working closely with Enterprise staff to develop and evaluate credit risk transfer structures. (2)

This is indeed good news for taxpayers and should reduce their exposure to future losses at Fannie and Freddie. There is still a lot of work to do, though, to get that risk level as low as possible. The report notes that these transactions have not yet been done for adjustable-rate mortgages or 15 year mortgages. Most importantly, the report cautions that

Because the programs have not been implemented through an entire housing price cycle, it is too soon to say whether the credit risk transfer transactions currently ongoing will make economic sense in all stages of the cycle. Specifically, we cannot know the extent to which investors will continue to participate through a housing downturn. Additionally, the investor base and pricing for these transactions could be affected by a higher interest rate environment in which other fixed-income securities may be more attractive alternatives. (22)

Taxpayers are exposed to many heightened risks during Fannie and Freddie’s conservatorship, such as operational risk. These risk transfer transactions are thus particularly important while the two companies linger on in that state.

September 1, 2015 | Permalink | No Comments

Tuesday’s Regulatory & Legislative Round-Up

By Serenna McCloud

  • Fannie Mae announced HomeReady – a new affordable lending product which will be rolled out later in the year.  The program includes features designed to make it more flexible for lenders and buyers alike.  For lenders Desktop Underwriter (DU) allows lenders to make credit risk, eligibility and loan availability assessment in one tool.  HomeReady loans also promise simplified execution due to the ability to commingle them with standard loans into Mortgaged Backed Security polls.  Purchasers are able to put as little as 3% down, and are able to use rental income from the property and non-borrower household income to meet the requirements.

September 1, 2015 | Permalink | No Comments

August 31, 2015

Saving on Home Insurance (en Español y Ingles)

By David Reiss

Woman with alarm system

Univision quoted me in 5 Ways to Save on Your Home Insurance (the article is in Spanish). It opens,

The cost of homeowners insurance can vary by hundreds of dollars depending on various factors. If you are looking to obtain a discount keep in mind these five tips when you purchase a policy.

1. Increase your deductible. Even though it is common for homeowners to have a deductible of $500 in their insurance policy, raising it to $1,000 could represent a significant reduction in the premium, says David Reiss, Professor of Law at the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Extra tip:  You should have an emergency fund to cover any additional expenses which may be incurred. Use this fund instead of putting in a claim to your insurance, since this can increase your rate.

August 31, 2015 | Permalink | No Comments