Tag Archives: Brooklyn Law School

Low Down Payment or Low Interest Rate?

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MainStreet.com quoted me in Consumers Should Not Assume a Lower Down Payment Is a Better Option. It reads, in part

First-time homeowners are often caught in a conundrum when they are faced with tantalizing offers of either lower mortgage rates or a smaller down payment.

The decision is much harder to make than it appears because of many variables such as the stability of your profession, the likelihood of buying another home within a few years and the long-term costs of higher payments.

While at first glance paying a smaller down payment sounds like the obvious choice for many Millennials and Gen X-ers who want to own a home, but are also saddled with student loans and credit card debt, the decision has other ramifications. A higher mortgage rate means paying thousands of extra dollars in interest alone over time.

A recent study conducted by the Federal Reserve Bank of New York found that when a lower down payment is required, it affects the demand on housing more as additional consumers are eager or able financially to purchase a house. Changes in the mortgage rate have a “modest” effect, wrote Andreas Fuster and Basit Zafar, both senior economists at the Federal Reserve Bank of New York’s research and statistics group. The study asked 1,000 households what would affect their willingness to buy a home if they were to move to a similar city and a comparable home.

When the households were offered either a 20% down payment compared to a 5% down payment, the number of people willing to pay for a house rose by 15% when the lower amount was an option.

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Advantages of Lower Interest Rates

While a lower down payment might be more appealing for a first time homebuyer, it can often result in paying more money just on the interest alone, said David Reiss, a law professor at Brooklyn Law School in N.Y. Lenders offer mortgage rates largely based on the credit score of the homeowner, so a cheaper interest rate may not always be available.

Let’s say the homebuyer is considering a $100,000 property that is paid for with a $90,000 interest-only mortgage with a 4% interest rate and a $10,000 down payment or with a $95,000 interest-only mortgage with a 5% interest rate and a $5,000 down payment.

The first mortgage means the consumer would pay $3,600 a year in interest. However, the second mortgage results in the consumer paying $4,750 a year in interest.

“That is not an apples-to-apples comparison, because the second mortgage interest payment reflects the higher loan to value ratio and the higher interest rate and it also does not take into account the tax treatment of interest payments,” he said.

Homeowners need to decide if paying additional money in interest is “worth it,” since a consumer would pay about $1,000 a year more in interest for the “privilege of paying the lower down payment,” Reiss said.

“I think that it is smart to figure out how to pay as low of an interest rate as possible, given the other financial constraints you face,” he said.

Many consumers believe there is not much of a difference between a 3.5% or 4% mortgage rate, but it can result in another few hundred dollars each month in mortgage payments, which can add up easily in 30 years.

Refinancing a mortgage in the current market conditions means your rate is not likely to decline much, so receiving a lower rate now will have a larger impact over the next 30 years, he said. After paying closing costs, many homeowners do not see the impact of the lower rates until the fourth year after the refinancing occurred.

“Since refinancing requires a large upfront cost of thousands of dollars, you need to live there long enough for it to make sense if you are only saving less than 1% on your mortgage rate,” he said.

Buying in a Boom

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TheStreet.com quoted me in How Consumers Can Buy Houses in a Booming Market. The story reads, in part,

The housing market has been rebounding and the increased competition is leaving the number of available homes scarce in many cities.

Home prices have also risen compared to last year as the number of homes sold rose in all parts of the country except for the Midwest, according to a recent report from PNC, the Pittsburgh-based financial institution. The median sale price for an existing single-family home was $288,300 in July, up from $279,700 in June.

“The housing market continues to gradually recover from the Great Recession, supporting economic growth,” Stuart Hoffman, chief economist for PNC. “Stronger demand and good affordability are supporting home sales and pushing up house prices.”

Many economists are predicting that home prices will continue to increase this year. PNC said prices will rise by 3.7% in 2015 and 2.7% in 2016, down from 6.6% in 2014.

“This year we [saw] inventory continue to grow in August and while overall demand is strong, the trend in median days on market is suggesting that the market is finding more of a balance,” said Jonathan Smoke, chief economist of Realtor.com, the San Jose, Calif. real estate service company. “This bodes well for would-be buyers who have been discouraged by the inability to find a home to buy this spring and summer.”

Consumers who are still eager to purchase a home still have many opportunities left to negotiate a deal within their price range. While it is tougher to buy a house in a tight market, here are some tips to give homebuyers a head start.

Looking for a house in the fall is generally a better bet. Even though there are fewer homes on the market right now, there are “definitely less buyers, so there’s less competition,” said Mark Lesses, a broker with Coldwell Banker in Lexington, Mass.

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Renters Who Wait Can Benefit

Buying a house during a tight market could prove to be an expensive endeavor. Staying out of the market might be a good option, because housing prices could level off and decline, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“Sometimes it is cheaper to rent,” he said. “Don’t try to time the real estate market. Look at your needs and what you could afford, and consider if it is a good choice.”

Seniors Selling Their Homes

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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.

Saving on Home Insurance (en Español y Ingles)

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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.

Debt Collection in Flux

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Bloomberg BNA Banking Daily quoted me in Loans in Flux as Appeals Court Rebuffs Midland Funding (behind a paywall). It opens,

Lenders, investors and others are watching to see whether the U.S. Supreme Court is the next stop for a case raising questions about how a host of loans are collected, purchased, structured, and priced (Madden v. Midland Funding LLC, 2015 BL 162010, 2d Cir., No. 14-cv-02131, 5/22/15).

At issue is a May ruling by the U.S. Court of Appeals for the Second Circuit that said a debt collector cannot claim protection from state-law claims under the National Bank Act for loans acquired from a national bank (100 BBD, 5/26/15).

The ruling, which jolted banking lawyers who say the decision upsets expectations that assignees may charge and collect interest at rates that were valid at origination, hit with renewed force Aug. 12, when the Second Circuit turned away a petition to rehear the case (156 BBD, 8/13/15).

New questions about the impact of the case arise almost daily, but for many the main question is whether the debt collector, Midland Credit Management, will take the case to the U.S. Supreme Court.

Many expect the company to seek review by the justices. Midland has until early November to do so.

Brooklyn Law School Professor David Reiss isn’t making a prediction, but ticked off a list of factors that might make the difference, including a possible circuit split, questions raised by the case that have “serious doctrinal consequences” for the National Bank Act and other federal statutes, and the potential for friend-of-the-court briefs by the banking industry to grab the justices’ attention.

“While it is a fool’s game to predict confidently which cases will be picked up by the Supreme Court, this case has a bunch of characteristics that make it a contender,” Reiss said Aug. 17.

Smoldering FIRREA

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American Banker quoted me in Banks Take Losses in MBS Case Appeals; Is Supreme Court Next? (behind a paywall) The story reads, in part,

Banks that sold faulty mortgage-backed securities right before the crisis have suffered a string of legal defeats over the timing of government lawsuits, but some experts believe the industry may still have a shot in the Supreme Court.

Since the crisis regulators have brought a slew of actions against big banks for assets they sold to acquirers that ultimately failed. But in some cases, the parties have tussled over whether the government missed the statutory deadline for bringing a claim.

Appeals courts lately have disagreed with banks that plaintiffs missed court filing deadlines imposed by state law and other regimes, which are stricter than deadlines in federal law. Most recently, the U.S. Court of Appeals for the 5th Circuit ruled in favor of the Federal Deposit Insurance Corp. in the agency’s case against RBS Securities and other issuers related to the 2009 failure of Guaranty Bank.

Still, other cases are pending and some say banks may be emboldened after the Supreme Court last year favored state-mandated timelines in an environmental case.

“I would expect that [banks] would continue to try to pursue the issue and get relief from the Supreme Court,” said Paul Rugani, a partner at Orrick, Herrington & Sutcliffe LLP based in Seattle.

The government has sought billions from MBS issuers that officials say misrepresented the quality of securities leading up to the crisis. The FDIC and National Credit Union Administration sued companies that had sold assets to institutions that ultimately failed, and the Federal Housing Finance Agency brought claims over securities sold to Fannie Mae and Freddie Mac.

But many banks have fought the agencies over whether they could bring the suits in the first place. Defendants seemed to gain ground in the lower courts and when the Supreme Court handed down its decision last year in a North Carolina environmental case.

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“The Supreme Court generally does not take a case where there isn’t a split among different circuit appeals courts, and the 5th and 10th circuits are in agreement,” said an attorney familiar with the situation.

But other decisions are still pending. Rulings have yet to come from the 9th circuit as well as a separate case still to be decided in the 2nd circuit. Both involve the FDIC’s extender statute related to MBS losses at the failed Colonial Bank.

“I would think that the parties that lost the case would wait for the 2nd and 9th circuits to decide and then hope that either of them disagrees with the 5th circuit before deciding to take the case up to the Supreme Court,” said Sanford “Sandy” Brown, a partner at Bracewell & Giuliani LLP.

Others said the extender statute in the law at issue in the Supreme Court’s environmental decision – the Comprehensive Environmental Response, Compensation, and Liability Act – is different enough from the extender statute in FIRREA that the justices on the high court may want to weigh in.

The 5th circuit decision “is a well-reasoned opinion, but there is no question that such an interpretation could be challenged in an appeal to the Supreme Court,” said David Reiss, a professor at Brooklyn Law School. “While circuit courts have had a consistent interpretation of the FIRREA extender statute, there is enough interpretation going on that the Supreme Court could come up with a reasonable alternative to the courts of appeal that have ruled on this issue.”

Buying A Home After Retirement

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HSH.com quoted me in Buying A Home After Retirement Is Possible, but Challenging. It reads, in part,

The ideal situation is to enter your retirement years without any monthly mortgage payments. But what if you’ve finally found your dream home at the same time that you’re leaving the working world? What if you’re ready to buy a home in a new city in which you’ve always wanted to live, but you’re approaching your 70th birthday?

The good news is that the federal Equal Credit Opportunity Act law prohibits lenders from denying potential borrowers because of their age. The bad news is that you’ll have a mortgage payment and the burden of caring for a house in your retirement years.

“It can be bad to have a mortgage payment in your 80s,” says Keith Baker, professor of mortgage banking at North Lake College in Irving, Texas. “All sorts of things can happen to you, unfortunately. What if you develop Alzheimer’s? What if your children aren’t financially sophisticated and can’t take over handling your mortgage for you? There are all kinds of reasons not to have a mortgage when you’re that age. But if you can afford a mortgage payment when you’re in your 60s and early 70s and you’re in good health, why not buy that home that you’ve always wanted?”

If you want to buy a home after you’ve retired, you’ll need to first consider several factors, and you’ll need to overcome a variety of hurdles both to qualify for a mortgage loan and to find a home that fits your changing needs as you get older.

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Many borrowers apply for 30-year loans because they generally come with the lowest monthly payments. But such a long-term loan might not make sense for borrowers who are already in their retirement years, says David Reiss, professor of law and research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School in New York City.

“If you are 62, you will not have paid [the loan] off until you are 92,” says Reiss. “Retirees should look at their expected incomes over those 30 years to ensure that they have sufficient income to cover the mortgage over the whole period.”

Income can fluctuate during the retirement years. Maybe payments from a legal settlement run out. You might struggle to find renters for your investment properties. Royalties can dwindle. At the same time, expenses — especially medical ones — might rise.

Reiss says that it makes sense for retirees to take out a loan with a shorter term, such as a 15-year fixed-rate loan, if they can afford the higher monthly payments that come with such loans.