May 10, 2017
Who Qualifies as a First-Time Homebuyer?
NewHomeSource quoted me in Who Qualifies as a First-Time Homebuyer? It opens,
As you consider purchasing a home, you may have come across down payment assistance programs that aim to assist first-time homebuyers.
“How can I qualify?” you might have asked yourself.
It turns out, you don’t always have to be a first-time homebuyer to qualify, even though it might say otherwise in the name.
“Freddie Mac defines ‘first-time homebuyers’ for its Home Possible program as someone who had ‘no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the mortgage premises,’” says David Reiss, professor of law and research director for the Center for Urban Business Entrepreneurship at the Brooklyn Law School.
Freddie Mac, a government-sponsored home loan mortgage corporation, says that its Home Possible mortgages offer low down payments for low- to moderate-income homebuyers or buyers in high-cost or underserved communities.
Another federal mortgage association, Fannie Mae, also offers down payment assistance programs for first-time homebuyers.
“The Fannie Mae standard 97% LTV Options let first-time homebuyers put down 3 percent,” says Reiss. “The program defines a first-time homebuyer as someone who ‘had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of purchase of the security property.’”
Similarly, the U.S Department of Housing and Urban Development defines a first-time homebuyer as an individual who has had no ownership in a principal residence three years prior to the closing date of the property.
Not a first-time homebuyer under these definitions? There’s hope for you still.
“Given the overwhelming dominance that the FHA, Fannie and Freddie have on the mortgage market, homebuyers who have sat out of the housing market for a while may find that they qualify for first-time homebuyer programs even if they have owned a home before,” adds Reiss.
Additionally, there are also assistance programs available for “displaced homemakers.” A displaced homemaker generally meets the following qualifications:
- Provided unpaid services to family members in the home, such as a stay-at-home parent,
- Were given financial assistance from another family member, but are no longer supported by that income and
- Are unemployed/underemployed with difficulty gaining employment or upgraded pay.
“A displaced homemaker or single parent will also be considered a first-time homebuyer if he or she had no ownership interest in a principal residence (other than a joint ownership interest with a spouse) during the preceding three-year time period,” Reiss says.
May 10, 2017 | Permalink | No Comments
May 9, 2017
Mortgages for Grads
Realtor.com quoted me in College Grads Can Get Home Grants—but There’s a Catch. It opens,
Recent college graduates hoping to buy a home have one more reason to toss their caps in the air these days: Programs offering home grants to new grads are popping up across the country, offering thousands of dollars in assistance that could put homeownership within reach. Talk about a nice graduation gift!
In New York, for instance, Gov. Andrew Cuomo recently announced a $5 million pilot program, “Graduate to Homeownership,” providing assistance to first-time buyers who’ve graduated from an accredited college or university with an associate’s, bachelor’s, master’s, or doctorate degree within the past two years. That aid can take the form of low-interest-rate mortgages, or up to $15,000 in down payment assistance.
The catch? You’ll have to live upstate—in Jamestown, Geneva, Elmira, Oswego, Oneonta, Plattsburgh, Glens Falls, or Middletown—eight areas that many just-sprung college students tend to flee as soon as they have their diploma in hand.
“Upstate colleges and universities have world-class programs that produce highly skilled graduates—who then leave for opportunities elsewhere,” Cuomo admitted in a statement. “This program will incentivize recent graduates to put down roots.”
The trade-off for college grads
New York is not the only state offering this type of assistance to college grads, many of whom are saddled with significant student loan debt. According to analysis by Credible.com, nearly half of states offer some form of housing assistance to student loan borrowers, with a handful focusing on recent grads.
For instance, Rhode Island’s Ocean State Grad Grant program offers up to $7,000 in down payment assistance to those who’ve earned a degree in the past three years. Ohio’s Grants for Grads program offers down payment assistance or reduced-rate mortgages to those who have graduated in the past four years.
Still, what’s noteworthy about programs like New York’s is that you can’t just buy a home anywhere. Rather, you have to plunk yourself down in semi-ghost towns. That’s hardly ideal for someone who’s trying to kick-start a career.
So as tempting as this home-buying “help” might appear at first glance, you have to wonder: Is it enough to offset what these students give up? Some experts say it’s a risky bet.
“The New York program aims to retain highly educated people in economically depressed regions and revitalizing struggling downtowns in those regions,” says David Reiss, research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School. “It can certainly help people who are dealing with high student debt burdens. But programs like this have to deal with a fundamental issue: Do these communities have enough jobs for recent college graduates? Time will tell.”
Find a job first, then a home
Experts say students should think carefully before they pounce on this “gift” and make sure they can be happy in one of the designated locations—and gainfully employed.
“No question, they should have a job lined up first [before buying a house],” says Reiss. After all, “a good deal on a house or a mortgage is not a good deal if we don’t have a job to go along with it.”
May 9, 2017 | Permalink | No Comments
May 8, 2017
What Is An Origination Fee?
Realtor.com quoted me in What Is an Origination Fee, and How Much Does It Cost? It opens,
In the seemingly never-ending mortgage lexicon of home buying and selling, one term in particular stands out as a source of confusion: the origination fee. What is an origination fee? It’s something every homeowner needs to understand. And the good news is that it’s not actually that complicated.
In basic terms, an origination fee—sometimes referred to as a discount fee—is money that a lender or bank charges a client to complete a loan transaction. An origination fee can encompass a variety of different fees added together, says Mark Ventrone, owner and broker with ABLEnding, based in California and Arizona. It can include underwriting fees, administrative fees, processing fees, discount fees (also known as points), and any other fee charged by the lender and/or broker to the borrower.
Origination fee vs. points
Lenders generally speak about the money associated with origination fees as points. The term “point” is slang for 1% of the loan amount; 1 point = 1%. And points are part of those aforementioned closing costs charged by your lender, calculated as a percentage of the principal, says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
If your loan is for $300,000, one point equals 1%, or $3,000, and two points equals 2%, or $6,000.
Because “points” is not an official term, you won’t see the term on disclosures, but you will see it in marketing materials and hear the term from lenders.
What does the origination fee cover?
Lenders charge an origination fee in part because they have upfront costs in originating a loan (origination fee—get it?), so they try to recoup that money with a fee, says David Reiss, a law professor and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.
If a lender doesn’t do this, it risks the borrower paying off the mortgage early and before the lender fully recoups the cost of generating the mortgage. And let’s face it—lenders might also charge an origination fee because it can be a profit center for them just like the interest rate.
Another way to think of an origination fee, according to Fleming: It’s the cost a borrower pays a bank for the chosen interest rate.
What does an origination fee cost?
Putting an exact dollar amount on origination fees can be a bit difficult because they are expressed as a percentage of the loan amount. But a standard origination fee for a conventional loan—or a loan amount up to $424,100—typically runs between $750 to $1,200, says Ventrone.
To see the breakdown of your origination fee, check out Page 2 of the loan estimate your lender provides.
“Each fee will be itemized separately in Box A so you will know exactly what you are paying for,” says Ventrone.
If a loan is $200,000 and the lender is charging a half-point (0.5%) to originate the loan, the borrower will need to pay an additional $1,000 in closing costs, says Reiss. If the lender is charging one point (1%), the fee would rise to $2,000. The origination fee generally ranges from 0.5% or 1% of the loan amount, but it can change depending on the bank and the client.
May 8, 2017 | Permalink | No Comments
May 5, 2017
Banks v. Cities
The Supreme Court issued a decision in Bank of America Corp. v. Miami, 581 U.S. __ (2017). The decision was a mixed result for the parties. On the one hand, the Court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending. Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. On the other hand, the Court held that Miami had not shown that the banks’ actions were directly related to injuries asserted by Miami. As a result, the Court remanded the case to the Eleventh Circuit to determine whether that in fact was the case. This case could have big consequences for how lenders and others and other big players in the housing industry develop their business plans.
For the purposes of this post, I want to focus on the banks’ activities of the banks that Miami alleged they engaged in during the early 2000s. It is important to remember the kinds of problems that communities faced before the financial crisis and before the Dodd-Frank Act authorized the creation of the Consumer Financial Protection Bureau. As President Trump and Chairman Hensarling (R-TX) of the House Financial Services Committee continue their assault on consumer protection regulation, we should understand the Wild West environment that preceded our current regulatory environment. Miami’s complaints charge that
the Banks discriminatorily imposed more onerous, and indeed “predatory,” conditions on loans made to minority borrowers than to similarly situated nonminority borrowers. Those “predatory” practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and—when default loomed—unjustified refusals to refinance or modify the loans. Due to the discriminatory nature of the Banks’ practices, default and foreclosure rates among minority borrowers were higher than among otherwise similar white borrowers and were concentrated in minority neighborhoods. Higher foreclosure rates lowered property values and diminished property-tax revenue. Higher foreclosure rates—especially when accompanied by vacancies—also increased demand for municipal services, such as police, fire, and building and code enforcement services, all needed “to remedy blight and unsafe and dangerous conditions” that the foreclosures and vacancies generate. The complaints describe statistical analyses that trace the City’s financial losses to the Banks’ discriminatory practices. (3-4, citations omitted)
Excessively high interest rates, unjustified fees, teaser interest rates and large prepayment penalties were all hallmarks of the subprime mortgage market in the early 2000s. The Supreme Court has ruled that such activities may arise to violations of the Fair Housing Act when they are targeted at minority communities.
Dodd-Frank has barred many such loan terms from a large swath of the mortgage market through its Qualified Mortgage and Ability-to-Repay rules. Trump and Hensarling want to bring those loan terms back to the mortgage market in the name of lifting regulatory burdens from financial institutions.
What’s worse, the burden of regulation on the banks or the burden of predatory lending on the borrowers? I’d go with the latter.
May 5, 2017 | Permalink | No Comments
Friday’s Government Reports Roundup
- The Financial Services Committee of Congress narrowly passed the Financial CHOICE Act, H.R. 10. Democrats were unhappy about the initial proposal of the new bill. The group took measures to stall the mark-up and voice their opinions regarding the “Wrong Choice Act.” This 591 page bill seeks to end bailouts for big banks resulting in bankruptcy.
- The Federal Open Market Committee refused to raise interest rates. Economic activity decreased in the month of March while job gains remained stagnant. Although this is great news for now, the committee plans to increase rates at two additional points this year.
- The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to review various rules implemented withing five years of their effect. The CFPB committed to reviewing the “mortgage servicing rule” which protected borrowers against mortgage loan servicing practices.
May 5, 2017 | Permalink | No Comments
May 4, 2017
Running Circles around the CFPB
Lauren Willis has posted The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension to SSRN. It addresses an important subject — the cat and mouse game of the regulator and the regulated. The abstract reads,
To ensure that consumers understand financial products’ “costs, benefits, and risks,” the Consumer Financial Protection Bureau has been redesigning mandated disclosures, primarily through iterative lab testing. But no matter how well these disclosures perform in experiments, firms will run circles around the disclosures when studies end and marketing begins. To meet the challenge of the dynamic twenty-first-century consumer financial marketplace, the bureau should require firms to demonstrate that a good proportion of their customers understand key pertinent facts about the financial products they buy. Comprehension rules would induce firms to inform consumers and simplify products, tasks that firms are better equipped than the bureau to perform. (74)
The Bureau has worked hard to tackle financial education in a meaningful way, but Willis is right that this is a Herculean task given the profit incentive that financial institutions have to run circles around consumers and the Bureau itself. Willis explains
the feebleness of mandated disclosures, the inherent flaws in the alternatives the CFPB has been pursuing, the advantages firms have over regulators in ensuring their customers’ comprehension, and the CFPB’s legal authority to require customer confusion audits and enforce comprehension rules. I then elaborate on a few examples of how this form of regulation might operate in practice, including these four key elements:
1. Measuring the quality of a valued outcome (comprehension) rather than of an input that is often pointless (mandated or preapproved disclosure);
2. Assessing actual customer comprehension in the field as conditions change over time, rather than imagining what the “reasonable consumer” would understand or testing consumers in the lab or in single-shot field experiments;
3. Requiring firms to affirmatively and routinely demonstrate customer understanding, rather than relying on the bureau’s limited resources to examine firm performance ad hoc when problems arise ; and
4. Giving firms the flexibility and responsibility to effectively inform their customers about key relevant costs, benefits and risks through whatever means the firms see fit, whether that be education or product simplification, rather than asking regulators to dictate how disclosures and products should be designed. (76) (footnotes omitted)
Hopefully the Bureau will take a serious look at Willis’ critique. It is important, of course, to get consumer financial literacy right in order to benefit consumers directly. But it is also important for the Bureau to get it right in order to protect its reputation as an effective regulator that brings real value to the consumer finance sector.
May 4, 2017 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Roundup
- Homeowners in the U.S. are better at paying their loans. The number of “seriously delinquent mortgages” dropped 1.2 million in the 2016 fiscal year. Today’s negative equity has decreased in the first quarter of the year; however, many pockets throughout the U.S. continue to have high negative equity.
- Goldman Sachs recently paid one-third of it’s 5 billion dollar settlement obligation. In 2016, the financial giant settled with consumers due to their use of “toxic mortgage bonds.” So far entities such as the National Credit Union Administration and the Federal Home Loan Banks of Chicago received millions of dollars as part of this settlement.
May 4, 2017 | Permalink | No Comments
