December 22, 2015
Troubles with TRID
Law360 quoted me in Rule-Driven Home Sale Slump Could Be Temporary. It reads, in part,
A slump in existing home sales in November can be traced to the implementation of a new Consumer Financial Protection Bureau mortgage closing regime, although experts say that most of the closing delays could ease as the industry and consumers get more comfortable with the new rules.
The National Association of Realtors released a report Tuesday saying that while a continued lack of inventory of existing homes for sale and other factors helped drive down the number of completed home sales in November, the number of signed contracts for home purchases remained relatively constant. With that in mind, the Realtors pointed to the CFPB’s TILA-RESPA Integrated Disclosure rule, which combined two key mortgage disclosure forms and went into effect in October, as the reason for the slowdown.
That slowdown was anticipated because real estate agents and lenders had reported difficulties in complying with the rule, which combined closing forms required by the Truth In Lending Act and the Real Estate Settlement Procedures Act, prior to it coming into effect. However, experts say that the closing delays are likely to decrease as the industry understands the rule better and technology to comply with it improves.
“It’s like a python swallowing a boar … the boar has to work its way through the python,” said David Reiss, a professor at Brooklyn Law School.
The National Association of Realtors reported that existing home sales slumped to 4.76 million nationwide in November from 5.32 million in October, a fall of 10.5 percent. That October figure was also revised down from an initial estimate of 5.36 million.
The November figure was also down from the 4.95 million existing sales figure from the same period last year, and put total existing home sales 3.8 percent behind the total from last year, the National Association of Realtors said.
While the real estate industry group cited the usual factors of tight supply and inflated prices in many regions of the country as a reason for the slowdown in existing home sales, it also cited the TRID rule’s implementation as a reason for the slump.
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Most lenders, real estate agents and other market participants had already begun to factor in the new TRID requirements in the closing process, adding 15 days to the usual 30-day closing process, said Richard J. Andreano, a partner at Ballard Spahr LLP.
“When I saw the November drop, I thought that was a natural consequence of correct planning,” he said.
Despite the slowdown, Yun said in the NAR release that because contracts were signed and the problems came down to issues with closing.
“As long as closing time frames don’t rise even further, it’s likely more sales will register to this month’s total, and November’s large dip will be more of an outlier,” he said.
The CFPB, Reiss and Andreano all agreed that at least some of the delays will work out of the system as the industry gets more accustomed to TRID’s changes.
“The ones that have adjusted have done it by adding a lot of staff, either reallocating or hiring and assigning them to the closing process to get it done,” Andreano said.
And the delays that remain may not be a bad thing, Reiss said.
“It really keeps consumers from being surprised at the closing table. This gives a little bit more time to the consumer where they’re not getting waylaid,” he said.
December 22, 2015 | Permalink | No Comments
December 21, 2015
Exotic Mortgage Increase
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DepositAccounts.com quoted me in 10 Things You Might See From Your Bank in 2016. It reads, in part,
It’s that time of year when experts pull out the crystal ball and start talking about “what they see”. Banking pros are no exception. When it comes to 2016, they expect plenty; change is on the horizon. Here’s a look at some of them.
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4. Exotic mortgages increase
David Reiss, a professor at Brooklyn Law School, specializing in real estate believes that banks are going to get more comfortable with originating more exotic mortgages as they have more experience with the mortgage lending rules that were prescribed in Dodd-Frank. These rules, such as the Qualified Mortgage Rule and Ability To Repay Rule, encourages lenders to make “plain vanilla” mortgages. But there are opportunities to expand non-Qualified Mortgages, so “2016 may be the year where it really takes off,” says Reiss. The bottom line? “This means consumers who have been rejected for plain vanilla mortgages, may be able to get a non-traditional mortgage. This is a two-edge[d] sword. Access to credit is great, but consumers will need to ensure that the credit they get is sustainable credit that they can manage year in, year out.”
December 21, 2015 | Permalink | No Comments
December 18, 2015
Rates up in ARMs
Marriner S. Eccles Federal Reserve Board Building
TheStreet.com quoted me in Fed Hike Means Adjustable Rate Mortgages Will Rise and Increase Monthly Payments. It opens,
The first interest rate hike by the Federal Reserve in nearly a decade means consumers can no longer take advantage of a zero interest rate environment. Particularly challenged will be homeowners who have adjustable rates and stand to face higher mortgage payments.
Record low mortgage rates are set to be thing of the past as the Fed raised rates by 0.25%, which appears to be a nominal amount initially. Of course, consumers need to consider the cumulative effect of the central bank’s decision to increase rates periodically over a span of two to three years. The consecutive rate hikes will affect homeowners with adjustable rate mortgages when they reset, which typically happens once a year.
“The initial interest rate move is very modest and consumers will see a corresponding increase in their credit card and home equity line of credit rates within one to two statement cycles,” said Greg McBride, chief financial analyst for Bankrate, the North Palm Beach, Fla. based financial content company. “The significance is in the potential impact of whatever interest rate hikes are put into effect over the next 18 to 24 months.”
The Fed will continue to raise rates several times next year since yesterday’s move is not a “one and done” move, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa. The Fed will likely follow with a series of three to four rate increases in 2016 if the economy continues to improve. The central bank could raise interest rates to a total of 1.0%, which will cause mortgage rates, auto loans and credit card rates to rise in tandem.
Adjustable rate mortgages, or ARMs, are popular among many younger homeowners, because they typically have lower interest rates than the more common 30-year fixed rate mortgage. Many ARMs are called a 5/1 or 7/1, which means that they are fixed at the introductory interest rate for five or seven years and then readjust every year after that, said David Reiss, a law professor at Brooklyn Law School in N.Y. The new rate is based on an index, such as the prime rate or the London Interbank Offered Rate (LIBOR), as well as a margin on top of that index. LIBOR is used by banks when they are lending money to each other.The prime rate is the interest rate set by individual banks and is usually pegged to the current rate of the federal funds rate, which the Fed increased to 0.25%.
The prime rate is typically used more for home equity lines of credit, said Reiss. LIBOR is typically used more for mortgages like ARMs. The LIBOR “seems to have had already incorporated the Fed’s rate increase as it has gone up 0.20% since early November,” Reiss said.
“The prime rate is influenced by the Fed’s actions,” Reiss said. “We already see that with Wednesday’s announcement that banks are increasing prime to match the Fed’s increase.”
The main disadvantage of an ARM is that the rate is only fixed for a period of five or seven years unlike a 30-year fixed rate mortgage, which means that monthly payments could rise quickly and affect homeowners on a tight budget.
Over the course of the next couple of years, the cumulative effect of a series of interest rate hikes could take an adjustable mortgage rate from 3% to 5%, a home equity line of credit rate from 4% to 6% and a credit card rate from 15% to 17%, said McBride.
“This is where the effect on household budgets becomes more pronounced,” he said.
Homeowners should start researching mortgage rates and refinance out of ARMs and lock into a fixed rate, said McBride. The 0.25% rate increase equals to a payment of $0.25 for every $100 of debt.
Since many factors impact the interest rates of mortgages, consumers need to examine the actual benchmark used by their lender since some existing interest rates already priced in some of the anticipated rise in the federal funds rate, said Reiss. While ARMs expose the borrower to rising interest rates, they typically come with some protection. Interest rates often cannot rise more than a certain amount from year to year, and there is also typically a cap in the increase of interest rates over the life of the loan.
An ARM might have a two point cap for one year increases if the introductory rate of 4% increased to 6% in the sixth year of a 5/1 ARM, he said. That ARM might have a six point cap over the life of the loan, which means a 4% introductory rate can go to no higher than 10% over the life of the loan.
“While this is not chump change, it is also not immensely burdensome to many homeowners,” Reiss said. “The bottom line is that it is worth figuring out just how your ARM works so you can understand what your worst case scenario is and then plan for it.”
December 18, 2015 | Permalink | No Comments
Friday’s Government Reports Roundup
- HUD, the Department of Veterans Affairs and the Department of Labor released “Veterans Homelessness Prevention Demonstration (VHPD) Evaluation Final Report” evaluating a program designed by Silber & Associates and the Urban Institute.
- CFPB released report on student loan financing finding that the current collective student loan debt is at $1.2 trillion, the second largest form of consumer debt behind mortgages.
- The Commerce Department released report on consumer spending, which showed that it was largely driven by housing and healthcare.
December 18, 2015 | Permalink | No Comments
December 17, 2015
Homebuyer’s Guide to Rate Hike
Fed Chair Yellen
U.S. News & World Report quoted me in A Consumer’s Guide to the Fed Interest Rate Hike. It opens,
The era of cheap money isn’t exactly over, but on Wednesday, after seven years of having near zero interest rates, the Federal Reserve voted to raise the central bank’s benchmark interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent. Economists have largely seen this as a positive development – it means the American economy is considered strong enough to handle higher interest rates – but, of course, the all-important question on everyone’s minds is likely: What does this mean for me?
It depends, of course, on where you’re putting your money these days.
Homebuying. While it’s expected that the minor interest rate hike will result in it being more costly to borrow money to buy a home, that isn’t necessarily the case. Numerous factors influence mortgage rates, from where in the country your home is located to the state of the global economy to whether inflation is believed to be around the corner. Still, there’s a pretty fair chance that the interest rate hike will lead to higher borrowing costs.
But it’s worth remembering that even if the rates go up, it’s still cheap to buy a house compared to the recent past. According to Freddie Mac’s website, the average 30-year fixed-rate mortgage currently stands at 3.94 percent. If you bought a house, say, 15 years ago, the annual average rate in 2000 was 8.05 percent.
David Reiss, a law professor at Brooklyn Law School who specializes in real estate, says he wouldn’t rush out to buy a home based on the Fed’s announcement.
“I would caution strongly against letting the Fed’s actions on the interest rate influence the home-buying decision all that much, no matter what market you live in,” Reiss says. “First of all, the mortgage market has taken the Fed’s likely actions into account already, so interest rates … incorporate some of the rise in rate already.”
Bottom line, he says: “Generally, people should be buying a home when it makes sense for their lifestyle. Expect to stay put for a while? Maybe you should buy a home. Expecting kids? Maybe you should buy a home. Retiring to a warmer clime? Maybe you should buy a home.”
Again, the interest rate climbed 0.25 percent, and while the Fed has indicated that rates may continue to rise, Federal Reserve Chair Janet Yellen has stressed that any future hikes will be gradual.
“Small changes in interest rates do not generally make that much of a dollars-and-cents difference in the decision to buy,” Reiss says.
December 17, 2015 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Round-Up
- The Center for American Progress (CAP) has released An Opportunity Agenda for Renters in which it laments its finding that where one lives determines such things as income, mobility and education. In order to address these stubborn patterns CAP recommends a two pronged approach, promoting residential mobility and investment in racially segregated neighborhoods.
December 17, 2015 | Permalink | No Comments
