June 22, 2017
State of the Nation’s Housing 2017
Harvard’s Joint Center for Housing Studies has released its excellent State of the Nation’s Housing for 2017, with many important insights. The executive summary reads, in part,
A decade after the onset of the Great Recession, the national housing market is finally returning to normal. With incomes rising and household growth strengthening, the housing sector is poised to become an important engine of economic growth. But not all households and not all markets are thriving, and affordability pressures remain near record levels. Addressing the scale and complexity of need requires a renewed national commitment to expand the range of housing options available for an increasingly diverse society.
National Home Prices Regain Previous Peak
US house prices rose 5.6 percent in 2016, finally surpassing the high reached nearly a decade earlier. Achieving this milestone reduced the number of homeowners underwater on their mortgages to 3.2 million by year’s end, a remarkable drop from the 12.1 million peak in 2011. In inflation-adjusted terms, however, national home prices remained nearly 15 percent below their previous high. As a result, the typical homeowner has yet to fully regain the housing wealth lost during the downturn.
* * *
Pickup In Household Growth
The sluggish rebound in construction also reflects the striking slowdown in household growth after the housing bust. Depending on the government survey, household formations averaged just 540,000 to 720,000 annually in 2007–2012 before reviving to 960,000 to 1.2 million in 2013–2015.
Much of the falloff in household growth can be explained by low household formation rates among the millennial generation (born between 1985 and 2004). Indeed, the share of adults aged 18–34 still living with parents or grandparents was at an all-time high of 35.6 percent in 2015. But through the simple fact of aging, the oldest members of this generation have now reached their early 30s, when most adults live independently. As a result, members of the millennial generation formed 7.6 million new households between 2010 and 2015.
* * *
Homeownership Declines Moderating, While Rental Demand Still Strong
After 12 years of decline, there are signs that the national homeownership rate may be nearing bottom. As of the first quarter of 2017, the homeownership rate stood at 63.6 percent—little changed from the first quarter two years earlier. In addition, the number of homeowner households grew by 280,000 in 2016, the strongest showing since 2006. Early indications in 2017 suggest that the upturn is continuing. Still, growth in renters continued to outpace that in owners, with their numbers up by 600,000 last year.
* * *
Affordability Pressures Remain Widespread
Based on the 30-percent-of-income affordability standard, the number of cost-burdened households fell from 39.8 million in 2014 to 38.9 million in 2015. As a result, the share of households with cost burdens fell 1.0 percentage point, to 32.9 percent. This was the fifth straight year of declines, led by a considerable drop in the owner share from 30.4 percent in 2010 to 23.9 percent in 2015. The renter share, however, only edged down from 50.2 percent to 48.3 percent over this period.
With such large shares of households exceeding the traditional affordability standard, policymakers have increasingly focused their attention on the severely burdened (paying more than 50 percent of their incomes for housing). Although the total number of households with severe burdens also fell somewhat from 19.3 million in 2014 to 18.8 million in 2015, the improvement was again on the owner side. Indeed, 11.1 million renter households were severely cost burdened in 2015, a 3.7 million increase from 2001. By comparison, 7.6 million owners were severely burdened in 2015, up 1.1 million from 2001.
* * *
Segregation By Income on The Rise
A growing body of social science research has documented the long-term damage to the health and well-being of individuals living in high-poverty neighborhoods. Recent increases in segregation by income in the United States are therefore highly troubling. Between 2000 and 2015, the share of the poor population living in high-poverty neighborhoods rose from 43 percent to 54 percent. Meanwhile, the number of high-poverty neighborhoods rose from 13,400 to more than 21,300. Although most high-poverty neighborhoods are still concentrated in high-density urban cores, their recent growth has been fastest in low-density areas at the metropolitan fringe and in rural communities.
At the same time, the growing demand for urban living has led to an influx of high-income households into city neighborhoods. While this revival of urban areas creates the opportunity for more economically and racially diverse communities, it also drives up housing costs for low-income and minority residents. (1-6, references omitted)
One comment, a repetition from my past discussions of Joint Center reports. The State of the Nation’s Housing acknowledges sources of funding for the report but does not directly identify the members of its Policy Advisory Board, which provides “principal funding” for it, along with the Ford Foundation. (front matter) The Board includes companies such as Fannie Mae, Freddie Mac and Zillow which are directly discussed in the report. In the spirit of transparency, the Joint Center should identify all of its funders in the State of the Nation’s Housing report itself. Other academic centers and think tanks would undoubtedly do this. The Joint Center for Housing Studies should follow suit.
June 22, 2017 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Roundup
- Buyers are hungry for a home. Their hunger have caused sellers to control pricing and possess high demands on the buyers. In fact, the sale of existing homes increased in May. Despite seller control, buyers have not given up and have found ways to “cut a deal” given the low inventory of existing homes.
- This time last year the median price for an existing home was 5.8% lower than the price of a home now. On the surface, it seems like many more Americans are purchasing homes at a reasonable price. However, a closer look at the average shows that many homes were sold at a much higher price. When the lower priced homes sold and the higher price sold homes are averaged together, the median price of homes sold is $252,800. This seems great; however, it shows a lack of sell of reasonably price homes.
- Beginning July 1, 2017, the Big 3 Credit Reporting Agencies (CRAs) are changing their reporting practices. When the shift occurs, many consumers may experience an increase in their credit score. This increase will likely affect consumers with pending or current tax liens and/or civil judgments.
June 22, 2017 | Permalink | No Comments
June 21, 2017
Reverse Mortgage Drawbacks
US News and World Report quoted me in 6 Drawbacks of Reverse Mortgages. It opens,
For some seniors, reverse mortgages represent a financial lifeline. They are a way to tap into home equity and pay the bills when meager savings won’t do the job. Others view this financial product with suspicion and point to stories of seniors losing their homes because of the fine print in the paperwork.
Amy Ford, senior director of home equity initiatives and social accountability for the National Council on Aging, says regulatory changes were made in recent years to eliminate many of the horror stories associated with reverse mortgages gone wrong. Home equity conversion mortgages – as reverse mortgages through the Federal Housing Administration are known – now incorporate many consumer protections. These help seniors ensure they can afford the loan and are aware of its potential consequences.
“It’s a magic credit line,” says Jane Bryant Quinn, AARP Bulletin personal finance expert, when asked why people would want a reverse mortgage. “It increases every year at the same rate as the interest you pay.” She recommends that seniors consider taking out a HECM line of credit and then borrowing against it sparingly. That way, retirees have protection against inflation and a source of income in the event of a down market.
Despite their appealing benefits, some financial experts urge caution. “I wouldn’t say there is no place for reverse mortgages,” says Ian Atkins, financial analyst for Fit Small Business. “But that doesn’t make a reverse mortgage a good option for everyone.”
Here are six drawbacks to reverse mortgage products.
1. Not every reverse mortgage has the protections of a HECM. While HECMs are the dominant player in the reverfederally insured
consumer proptection
se mortgage market, seniors could end up with a different product. Atkins says single purpose reverse mortgages are backed by a state or non-profit to allow seniors to tap home equity for a specific purpose, such as making home repairs or paying taxes. There are also proprietary reverse mortgages, sometimes called jumbo reverse mortgages, available to those who want a loan that exceeds the HECM limits.
These proprietary reverse mortgages make up a small portion of the market, but come with the most risk. They aren’t federally insured and don’t have the same consumer protections as a HECM.
A reverse mortgage can be a lifesaver for people with lots of home equity, but not much else.
“Another common issue with [proprietary] reverse mortgages is cross-selling,” Atkins says. “Even though it may not be legal, some companies will want to push investments, annuities, life insurance, home improvements and any other number of products on their borrowers.”
2. Other people in the house may lose their home if you move. HECMs are structured in such a way that once a borrower passes away or moves out, the balance on the loan becomes due. In the past, some reverse mortgages were taken out in one person’s name and the non-borrowing spouse’s name was removed from the title. When the borrowing spouse died or moved to a nursing home, the remaining husband or wife often needed to sell the house to pay off the loan.
“There are now some protections for those who were removed from titles,” Ford says. However, the protections extended to non-borrowing spouses do not apply to others who may be living in the house.
A disabled child, roommate or other relative could wind up without a place to live if you take out a reverse mortgage, can no longer remain in the home and don’t have cash to pay off the balance. “If it’s a tenant, you might not care,” says David Reiss, a professor at Brooklyn Law School and author at REFinBlog.com. “But if it’s your nephew, you may care.”
3. Your kids might be forced to sell the family home. If you’re hoping to pass your home on to your children, a reverse mortgage can make that difficult. Unless they have cash available to pay off the loan, families may find they have no choice but to sell once you’re gone.
That isn’t necessarily a reason to rule out a reverse mortgage, but Ford encourages parents to discuss their plans with family members. Everyone with a stake in the home – either emotional or financial – should understand what happens to the property once the borrower can no longer live there.
4. The mortgage balance might be due early if you have trouble paying your property taxes, insurance or homeowners association fees. Reiss says the marketing for some reverse mortgages can make seniors feel like the product is a cure-all for money problems. “There’s this promise that reverse mortgages will take care of your finances,” he says. “What they don’t mention is that your mortgage doesn’t cover your property taxes.”
If a borrower fails to pay taxes, maintain insurance or keep current with homeowners association dues, the lender can step in. Ford says many companies will try to work with a borrower to address the situation. However, repeated missed payments could result in the loan being revoked.
Financial counseling requirements for HECMs are designed to prevent these scenarios. Quinn says some companies will take additional precautions if warranted. “If the lender thinks there’s a risk you’ll run out of cash, it will set aside part of the loan for future taxes and insurance,” she says.
5. Fees can be high. The Consumer Financial Protection Bureau notes reverse mortgages are often more expensive than other home loans. “Don’t just assume that because it’s marketed to seniors without a lot of money, that it is the most cost-efficient way of solving your [financial] problem,” Reiss says. Depending on your needs, a traditional line of credit or other loan product may be a cheaper option.
June 21, 2017 | Permalink | No Comments
Wednesday’s Academic Roundup
- Foreclosures and the Labor Market: Evidence from Millions of Households across the United States, 2000-2014, Makridis and Ohlrogge
- Regulatory Issues and Challenges Presented by Virtual Currencies, Caytas
- LawTrust, and Development of Crowdfunding, Rau
- Import Competition and Household Debt, Barrot, Loualiche, Plosser, and Sauvagnat
- Mortgage Choice in Rural Housing, Miller and Park
June 21, 2017 | Permalink | No Comments
June 20, 2017
Increasing Price Competition for Title Insurers
The New York State Department of Financial Services issued proposed rules for title insurance last month and requested comments. I submitted the following:
I write and teach about real estate and am the Academic Director of the Center for Urban Business Entrepreneurship. I write in my individual capacity to comment on the rules recently proposed by the New York State Department of Financial Services (the Department) relating to title insurance.
Title insurance is unique among insurance products because it provides coverage for unknown past acts. Other insurance products provide coverage for future events. Title insurance also requires just a single premium payment whereas other insurance products generally have premiums that are paid at regular intervals to keep the insurance in effect.
Premiums for title insurance in New York State are jointly filed with the Department by the Title Insurance Rate Service Association (TIRSA) on behalf of the dominant title insurers. This joint filing ensures that title insurers do not compete on price. In states where such a procedure is not followed, title insurance rates are generally much lower.
Instead of competing on price, insurers compete on service. “Service” has been interpreted widely to include all sorts of gifts — fancy meals, hard-to-get tickets, even vacations. The real customers of title companies are the industry’s repeat players — often real estate lawyers and lenders who recommend the title company — and they get these goodies. The people paying for title insurance — owners and borrowers — ultimately pay for these “marketing” costs without getting the benefit of them. These expenses are a component of the filings that TIRSA submits to the Department to justify the premiums charged by TIRSA’s members. As a result of this rate-setting method, New York State policyholders pay among the highest premiums in the country.
The Department has proposed two new regulations for the title insurance industry. The first proposed regulation (various amendments to Title 11 of the Official Compilation of Codes, Rules, and Regulations of the State of New York) is intended to get rid of these marketing costs (or kickbacks, if you prefer). This proposed regulation makes explicit that those costs cannot be passed on to the party ultimately paying for the title insurance. The second proposed regulation (a new Part 228 of Title 11 of the Official Compilation of Codes, Rules, and Regulations of the State of New York (Insurance Regulation 208)) is intended to ensure that title insurance affiliates function independently from each other.
While these proposed regulations are a step in the right direction, they amount to half measures because the dominant title insurance companies are not competing on price and therefore will continue to seek to compete by other means, as described above or in ever increasingly creative ways. Proposed Part 228, for instance, will do very little to keep title insurance premiums low as it does not matter whether affiliated companies act independently, so long as all the insurers are allowed to file their joint rate schedule. No insurer will vary from that schedule whether or not they operate independently from their affiliates.
Instead of adopting these half-measures and calling it a day, the Department should undertake a more thorough review of title insurance regulation with the goal of increasing price competition. Other jurisdictions have been able to balance price competition with competing public policy concerns. New York State can do so as well.
Title insurance premiums are way higher than the amounts that title insurers pay out to satisfy claims. In recent years, total premiums have been in the range of ten billion dollars a year while payouts have been measured in the single percentage points of those total premiums. If the Department were able to find the balance between safety and soundness concerns and price competition, consumers of title insurance could see savings measured in the hundreds of millions of dollars a year.
The Department should explore the following alternative approach:
- Prohibiting insurers from filing a joint rate schedule;
- Requiring each insurer to file its own rate schedule;
- Requiring that each insurer’s rate schedule be posted online;
- Allowing insurers to discount from their filed rate schedule so that they could better compete on price;
- Promulgating conservative safety and soundness standards to protect against insurers discounting themselves into bankruptcy to the detriment of their policyholders; and
- Prohibiting insurers from providing any benefits or gifts to real estate lawyers or other parties who can steer policyholders toward particular insurers.
If these proposals were adopted, policyholders would see massive reductions in their premiums.
Some have argued that New York State’s title insurance regulatory regime promotes the safety and soundness of the title insurers to the benefit of title insurance policyholders. That may be true, but the cost in unnecessarily high premiums is not worth the trade-off.
Increased competition is not always in the public interest but it certainly is in the case of New York State’s highly concentrated title insurance industry. The Department should seek to create a regulatory regime that best balances increased price competition with adequate safety and soundness regulation. New Yorkers will greatly benefit from such reform.
June 20, 2017 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- The Federal Housing Finance Agency (FHFA) released their 2016 Report to Congress. This report is mandated by federal statute and examines many mortgage and financial institutions such as Fannie Mae and Freddie Mac. Additionally, the report provides guidance for each company’s regulatory rules and FHFA’s research and publications.
- The Department of Housing and Urban Development (HUD) provided approximately 220 million dollars in funds this week to America’s lowest income citizens. The Housing Trust Fund, established by Congress in 2008, dispersed funds to various states in order to aid the poor and homeless.
- The Affordable Housing Credit Improvement Act of 2017 (AHCIA), if approved may improve the productiveness and effectiveness of America’s low-income housing tax credit. If the the shifts are approved, more applicants will qualify for a boost. Additionally, if the proposed Act removes the cap on QCT, more than 20% of families will qualify the housing aid in designated areas.
June 20, 2017 | Permalink | No Comments
June 19, 2017
Treasury’s Trojan Horse for The CFPB
The Procession of the Trojan Horse in Troy by Giovanni Domenico Tiepolo
The Hill posted my latest column, Americans Are Better off with Consumer Protection in Place. It opens,
This month, the Treasury Department issued a report to President Trump in response to his executive order on regulation of the U.S. financial system. While the report does not seek to do as much damage to consumer protection as the House’s Financial Choice Act, it proposes a dramatic weakening of the federal government’s role in the consumer financial services market. In particular, the report advocates that the Consumer Financial Protection Bureau’s mandate be radically constrained.
Republicans have been seeking to weaken the CFPB since it was created as part of the Dodd-Frank Act. The bureau took over responsibility for consumer protection regulation from seven federal agencies. Republicans have been far more antagonistic to the bureau than many of the lenders it regulates. Lenders have seen the value in consolidating much of their regulatory compliance into one agency.
To keep reading, click here.
June 19, 2017 | Permalink | No Comments
