REFinBlog

Editor: David Reiss
Cornell Law School

September 19, 2016

Subprime v. Non-Prime

By David Reiss

photo by TaxRebate.org.uk

The Kroll Bond Rating Agency has issued an RMBS Research report, Credit Evolution: Non-Prime Isn’t Yesterday’s Subprime. It opens,

Following the private label RMBS market’s peak in 2007 and the ensuing credit crisis, non-agency securitizations of newly originated collateral have focused almost exclusively on prime jumbo loans. This is not surprising given the poor performance of loosely underwritten residential mortgage loans that characterized certain vintages leading up to the crisis. While legacy prime, in absolute terms, performed better than Alt-A and subprime collateral, it was apparent that origination practices had a significant impact on subsequent loan performance across product types.

Many consumers were caught in the ensuing waves of defaults, which marred their borrowing records in a manner that has either barred them from accessing housing credit, or at best made it extremely challenging to obtain a home loan. Others that managed to meet their obligations have been unable to qualify for new loans in the post-crisis era due to tighter credit standards that have been influenced by regulation.

The private label securitization market has not met the needs of these consumers for a number of reasons, including, but not limited to, reputational concerns in the aftermath of the crisis, regulatory costs, investor appetite, and the time needed for borrowers to repair their credit. The tide appears to be turning quickly, however, and Kroll Bond Rating Agency (KBRA) has observed the re-emergence of more than a dozen non-prime mortgage origination programs that intend to use securitization as a funding source. Of these, KBRA is aware of at least four securitization sponsors that have accessed the PLS market across nine issuances, two of which include rated offerings.

Thus far, KBRA has observed that today’s non-prime programs are not a simple rebranding of pre-crisis subprime origination, nor do they signal a return to the documentation excesses associated with “liar loans”. While the asset class is meant to serve those with less pristine credit, and can even have characteristics reminiscent of legacy Alt-A, it is expansive, and underwriting practices have been heavily influenced by today’s consumer-focused regulatory environment and government-sponsored entity (GSE) origination guidelines. In evaluating these new non-prime programs, KBRA believes market participants should consider the following factors:

■ Loans originated under sound compliance with Ability-To-Repay (ATR) rules should outperform 2005-2007 vintage loans with similar credit parameters, including LTV and borrower FICO scores. The ATR rules have resulted in strengthened underwriting, which should bode well for originations across the MBS space. This is particularly true of non-prime loans, where differences in origination practices can have a greater influence on future loan performance.

■ Loans that fail to adhere to GSE guidelines regarding the seasoning of credit dispositions (e.g. bankruptcy, foreclosure, etc.) on a borrower’s credit history should be viewed as having increased credit risk relative to those with similar credit profiles that lack recent disposition activity. This relationship likely depends on, among other things, equity position, current FICO score, and the likelihood that any life events relating to the prior credit issue remain unresolved.

■ Alternative documentation programs need to viewed with skepticism as they relate to the ATR rules, particularly those that serve borrowers with sub-prime credit histories. Although many programs will meet technical requirements for income verification, it is also important to demonstrate good faith in determining a borrower’s ability-to-repay. Failure to do so may not only result in poor credit performance, but increased risk of assignee liability.

■ Investor programs underwritten with reliance on expected rental income and limited documentation may pose more risk relative to fully documented investor loans where the borrower’s income and debt profile are considered, all else equal. (1, footnotes omitted)

I think KBRS is documenting a positive trend: looser credit for those with less-than-prime credit is overdue. I also think that KBRS’ concerns about the development of the non-prime market should be heeded — ensuring that borrowers have the ability to repay their mortgages should be job No. 1 for originators (although it seems ridiculous that one would have to say that). We want a mortgage market that serves everyone who is capable of making their mortgage payments for the long term. These developments in the non-prime market are most welcome and a bit overdue.

September 19, 2016 | Permalink | No Comments

Monday’s Adjudication Roundup

By Robert Engelke

September 19, 2016 | Permalink | No Comments

September 16, 2016

What Is a Probate Sale?

By David Reiss

Charles Dickens' Bleak House

Charles Dickens’ Bleak House

Realtor.com quoted me in What Is a Probate Sale? A Home You’ll Have to Win in Court. It opens,

If you’re looking to buy a home on the cheap, you might have stumbled across a probate sale. But what exactly is a probate sale? Basically it means that the homeowner died without a will bequeathing the house to an heir. In most cases, this means that an estate attorney or representative has to sell the property in order to liquidate the asset and distribute the money to family members—and that can spell a major bargain for you.

Probate sales can be attractive to buyers because they’re often priced below their market value, much like foreclosures. But since a court has to supervise and approve the home’s sale, the process is more complicated—and lengthier—than usual.

Here’s a look at the legal hoops you’ll have to jump through to make a probate sale happen.

How A Probate Sale Works

In a probate sale, the estate attorney or other representative hires a real estate agent to post the listing and sell the home. While buyers may be drawn in by the budget-friendly price, probate homes are not for everyone, starting with the fact that the homes are typically sold as is.

“Usually the estate doesn’t have an interest in renovating the property, either because of logistics, timing, or available funds,” says Richard Witt, owner of Long Island Cash Home Buyer. So, don’t expect the estate owners to make any repairs before you move in; what you see is what you get. That said, those in the know advise getting a home inspection just to make sure there aren’t major problems that would deter you from moving forward.

Here’s another difference with probate sales: If you decide to make an offer, that must be accompanied by a deposit totaling 10% of the price of the home. That’s in addition to your down payment, although this deposit can be folded into your down payment if the deal goes through.

Once your offer is accepted by the estate’s representative, that’s not where the negotiations end. From there, the estate attorney has to petition the court to approve the sale. And as you might expect, courts move at their own pace; expect to wait 30 to 45 days (or even longer) for your day in court when you can claim your home.

Playing the waiting game isn’t the only frustrating aspect of probate sales. In certain states, even as your offer is making its way through the courts, the home can remain listed and be open to other bidders who may be allowed to show up at your hearing and outbid your offer.

“In California, for instance, probate homes typically do go up for auction at the courthouse after the offer comes in,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “This builds a lot of uncertainty into the process for the bidder who gets the ball rolling in the first place.” All that said, you also have a right to counteroffer and, even if you do lose out, you should at least get your 10% deposit back. 

September 16, 2016 | Permalink | No Comments

Friday’s Government Report Roundup

By Jamila Moore

  • America is thinking through how English Language Learners receive housing subsidies and support. Although the Fair Housing Act protects specific classes, individuals with limited English understanding and speaking are not fully covered. The U.S. Department of Housing and Development outlines specific rules to ensure these individuals are not discriminated again.
  • The U.S. Department of Housing and Urban Development are seeking to help tribal communities across the nation. After completing a study, they have recently awarded 56 million dollars to these efforts.Particularly Alaska  is extremely exciting because they are hoping to mitigate their decline in population and add more affordable housing.

September 16, 2016 | Permalink | No Comments

September 15, 2016

Down in ARMs

By David Reiss

group-of-hand

TheStreet.com quoted me in Top 5 Lowest 7-Year ARM Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates, especially if you don’t plan on staying in your first home for more than seven years and are learning toward 7/1 adjustable rate mortgages (ARMs)?

The 7-year ARMs are attractive to consumers, especially first-time homebuyers, because the interest rates are lower, helping you save more money each month compared to the traditional 30-year mortgage.

“You get what amounts to a fixed rate mortgage, but at a lower rate than the traditional 30-year fixed,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

While lower monthly payments are appealing, the interest rates reset after seven years, and it can be difficult to determine how much they will increase.

“If your timetable changes, then you may want to reconsider the loan you have,” he said. “You don’t want to be in the position of facing rising monthly payments that squeeze your budget or jeopardize your ability to afford your own home.”

Consumers on fixed incomes and saddled with student loans and credit card debt might opt for a 30-year fixed rate mortgage, because it represents “permanent payment affordability,” McBride said. The principal and interest will never change, because it is a fixed rate and can be easier to budget.

“It may not always be the optimal choice, but it is the safest choice,” he said.

Adjustable rate mortgages can still be beneficial if homeowners take advantage of the savings each month and allocate it towards paying down debt or into an emergency fund.

“Even if you’re still holding the 7-year ARM at the end of seven years, that doesn’t automatically turn it into a bad decision,” McBride said. “You will have banked seven years of savings relative to the fixed rate mortgage that can help you absorb any payment increases until you refinance or sell the home.”

Many consumers gravitate toward the 30-year mortgage, because the payments are stable and have been very low, said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. Others are seeking the 7-year ARM, because they are more likely to qualify for a mortgage.

Mortgage activity so far in 2016 reveals that only 3% of mortgages have had shorter rate terms, according to Realtor.com’s analysis of purchase mortgage activity. Hybrid term mortgages such as the 7/1 ARM typically increase in share when “mortgage rates rise because the shorter fixed term offers a lower rate, often between 40 and 100 basis points,” he said. “The lower rate translates into a lower payment for the duration of the initial term, which is seven years.”

Each lender utilizes a benchmark such as a the 10-year U.S. Treasury or LIBOR rate and a margin, which is “what is added to the benchmark to determine your new rate,” Smoke said. The loans also have a cap on how high any single rate change can be and also a ceiling on how high the rate can ever be, he said.

At the end of the seven years, homeowners can choose to refinance to a lower fixed rate, but need to budget for the closing costs.

A lower rate upfront can be favorable for younger homeowners, but examining the ceiling rate and how it will impact your monthly payments is crucial.

“A mortgage broker or lender can help you walk through scenarios to determine if your timeline could benefit,” Smoke said. “To help calm any nerves about just how high your payment could go, ask yourself if you are willing to exchange the initial seven year savings for how long you might keep that mortgage after the seven-year period is up.”

Paying the premium for the peace of mind that your payments will remain static means that if interest rates rise several percentages in the next few years, you won’t be faced with having to consider the lower rate options or lower priced homes and/or more money down, he said.

“That’s why hybrids will likely become more popular in the future compared to how little they are used today,” Smoke said.

Since people have a tendency to change homes every seven years on average, a 7/1 ARM could be a good option because the savings can be substantial, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“Even if you are not planning to move now, the future may bring changes such as divorce, frail relatives, job loss or new job opportunities,” he said. “Some people like the certainty of the 30-year fixed rate mortgages, but it is worth calculating just how much that certainty will cost you.”

September 15, 2016 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Roundup

By Jamila Moore

  • Douglass Elliman recently completed a report detailing rent trends in the New York City area. They found that as the supply of apartments has increased; however, rent prices are slipping.
  • As the income for young adults increase, their demand for purchasing home has risen as well. A recent Census data report shows that over a seven year period the median salary in the U.S.increased by 5.6%. This was a rise the nation had not seen since 2007.
  • Enterprise Community Partners released a report analyzing the distribution and best practices that municipalities use when disseminating the affordable housing tax credit. 

September 15, 2016 | Permalink | No Comments

September 14, 2016

When Should Millennials Buy?

By David Reiss

photo by Richard Foster

SelfLender’s personal finance blog quoted me in When Should You Start Worrying About Buying A House? It opens,

If you’re a young person, then you’re probably already familiar with the fact that younger generations are more hesitant to purchase a home than previous generations.

Times are much different than when your parents were worrying about buying a house for the first time. In the “olden days,” the traditional life plan was set in stone: get married, buy a house, raise a family.

Fortunately (or unfortunately), young people aren’t jumping into homeownership within the same timeline as the generations before did, which is causing a stir amongst the real estate and financial industries.

What’s more bothersome is that many young people are having trouble gauging when they should actually start worrying about becoming a homeowner.

The answer is: it depends.

Figuring out when to buy a house is different for everyone. There is no set age that signals the right time. There are, however, financial and lifestyle signals that will help you make an educated decision on when you should, if at all, purchase a home.

The following is our rough guide to figuring out if homeownership is right for you or if you should continue renting.

Homeownership is Long Term

Purchasing a home is not for everyone. Especially for people who like to move and travel. Unless you’re able to pay for your house outright in cash, then purchasing a home might not be a good idea for someone who has been known to move around frequently.

Lauryn Williams, four-time Olympian and owner of Worth-winning.com, a financial planning company for young professionals and professional athletes, says that millennials love traveling and moving around. Just take a browse through Instagram and count the amount of selfies in exotic locations.

“My tip would be not to buy a home, because it seems to be ‘the next logical’ step in life,” says Williams. “Think about your lifestyle and whether homeownership is truly for you.”

You need to think long term about whether or not you’ll be in the same place that you’re buying your house.

Maybe you don’t travel much, but is your current job security good enough to keep you in one location for more than a few years? What if you get a better job offer that would require you to move?

The traditional career path in America is to graduate school, find a company and stay with that company for your entire life, which is not the case today. Millennials are more likely to switch jobs than previous generations.

“When people are thinking about settling down for five or more years in one location, they should start to seriously think about owning over renting,” says David Reiss, a Professor of Law at Brooklyn Law School.

September 14, 2016 | Permalink | No Comments