Easy Money From Fannie Mae

The San Francisco Chronicle quoted me in Fannie Mae Making It Easier to Spend Half Your Income on Debt. It reads in part,

Fannie Mae is making it easier for some borrowers to spend up to half of their monthly pretax income on mortgage and other debt payments. But just because they can doesn’t mean they should.

“Generally, it’s a pretty poor idea,” said Holly Gillian Kindel, an adviser with Mosaic Financial Partners. “It flies in the face of common financial wisdom and best practices.”

Fannie is a government agency that can buy or insure mortgages that meet its underwriting criteria. Effective July 29, its automated underwriting software will approve loans with debt-to-income ratios as high as 50 percent without “additional compensating factors.” The current limit is 45 percent.

Fannie has been approving borrowers with ratios between 45 and 50 percent if they had compensating factors, such as a down payment of least 20 percent and at least 12 months worth of “reserves” in bank and investment accounts. Its updated software will not require those compensating factors.

Fannie made the decision after analyzing many years of payment history on loans between 45 and 50 percent. It said the change will increase the percentage of loans it approves, but it would not say by how much.

That doesn’t mean every Fannie-backed loan can go up 50 percent. Borrowers still must have the right combination of loan-to-value ratio, credit history, reserves and other factors. In a statement, Fannie said the change is “consistent with our commitment to sustainable homeownership and with the safe and sound operation of our business.”

Before the mortgage meltdown, Fannie was approving loans with even higher debt ratios. But 50 percent of pretax income is still a lot to spend on housing and other debt.

The U.S. Census Bureau says households that spend at least 30 percent of their income on housing are “cost-burdened” and those that spend 50 percent or more are “severely cost burdened.”

The Dodd-Frank Act, designed to prevent another financial crisis, authorized the creation of a “qualified mortgage.” These mortgages can’t have certain risky features, such as interest-only payments, terms longer than 30 years or debt-to-income ratios higher than 43 percent. The Consumer Financial Protection Bureau said a 43 percent limit would “protect consumers” and “generally safeguard affordability.”

However, loans that are eligible for purchase by Fannie Mae and other government agencies are deemed qualified mortgages, even if they allow ratios higher than 43 percent. Freddie Mac, Fannie’s smaller sibling, has been backing loans with ratios up to 50 percent without compensating factors since 2011. The Federal Housing Administration approves loans with ratios up to 57 percent, said Ed Pinto of the American Enterprise Institute Center on Housing Risk.

Since 2014, lenders that make qualified mortgages can’t be sued if they go bad, so most lenders have essentially stopped making non-qualified mortgages.

Lenders are reluctant to make jumbo loans with ratios higher than 43 percent because they would not get the legal protection afforded qualified mortgages. Jumbos are loans that are too big to be purchased by Fannie and Freddie. Their limit in most parts of the Bay Area is $636,150 for one-unit homes.

Fannie’s move comes at a time when consumer debt is soaring. Credit card debt surpassed $1 trillion in December for the first time since the recession and now stands behind auto loans ($1.1 trillion) and student loans ($1.4 trillion), according to the Federal Reserve.

That’s making it harder for people to get or refinance a mortgage. In April, Fannie announced three small steps it was taking to make it easier for people with education loans to get a mortgage.

Some consumer groups are happy to see Fannie raising its debt limit to 50 percent. “I think there are enough other standards built into the Fannie Mae underwriting system where this is not going to lead to predatory loans,” said Geoff Walsh, a staff attorney with the National Consumer Law Center.

Mike Calhoun, president of the Center for Responsible Lending, said, “There are households that can afford these loans, including moderate-income households.” When they are carefully underwritten and fully documented “they can perform at that level.” He pointed out that a lot of tenants are managing to pay at least 50 percent of income on rent.

A new study from the Joint Center for Housing Studies at Harvard University noted that 10 percent of homeowners and 25.5 percent of renters are spending at least 50 percent of their income on housing.

When Fannie calculates debt-to-income ratios, it starts with the monthly payment on the new loan (including principal, interest, property tax, homeowners association dues, homeowners insurance and private mortgage insurance). Then it adds the monthly payment on credit cards (minimum payment due), auto, student and other loans and alimony.

It divides this total debt by total monthly income. It will consider a wide range of income that is stable and verifiable including wages, bonuses, commissions, pensions, investments, alimony, disability, unemployment and public assistance.

Fannie figures a creditworthy borrower with $10,000 in monthly income could spend up to $5,000 on mortgage and debt payments. Not everyone agrees.

“If you have a debt ratio that high, the last thing you should be doing is buying a house. You are stretching yourself way too thin,” said Greg McBride, chief financial analyst with Bankrate.com.

*     *     *

“If this is data-driven as Fannie says, I guess it’s OK,” said David Reiss, who teaches real estate finance at Brooklyn Law School. “People can make decisions themselves. We have these rules for the median person. A lot of immigrant families have no problem spending 60 or 70 percent (of income) on housing. They have cousins living there, they rent out a room.”

Reiss added that homeownership rates are low and expanding them “seems reasonable.” But making credit looser “will probably drive up housing prices.”

The article condensed my comments, but they do reflect the fact that the credit box is too tight and that there is room to loosen it up a bit. The Qualified Mortgage and Ability-to-Repay rules promote the 43% debt-to-income ratio because they provide good guidance for “traditional” nuclear American families.  But there are American households where multigenerational living is the norm, as is the case with many families of recent immigrants. These households may have income streams which are not reflected in the mortgage application.

Housing Tomorrow’s Seniors

photo by Government of Alberta

Harvard’s Joint Center for Housing Studies has issued a report, Projections & Implications for Housing a Growing Population: Older Households 2015-2035. The report opens,

Over the next twenty years, the population aged 65 and over is expected to grow from 48 million to 79 million. Meanwhile, the number of households headed by someone in that age group will increase by 66 percent to almost 50 million—with the result that by 2035, an astounding one out of three American households will be headed by someone aged 65 or older.

Older adults’ homes and living situations are keys to their quality of life and capacity to live independently. The expansion of the older population will increase the need for affordable, accessible housing that is well-connected to services well beyond what current supply can meet. In addition, the home is an increasingly important setting for the delivery of long-term care, a trend likely to grow over the next two decades as millions more seek to remain in their current dwellings while coping with disabilities and health challenges.

Over the next two decades, many older households will have the financial means to secure housing and supportive services suited to their needs as they age. The focus for these households should be on making informed choices about potential living situations and locations, investments in home modifications, and care—before physical or financial needs become pressing.

Yet over the same period, millions of low-income older households will struggle to pay for appropriate housing and necessary supportive services. For these households, basic housing costs will drain resources needed to pay for home modifications or in-home services, and may force reductions in spending on critical needs like food and healthcare.

The nation is now at the beginning of a twenty-plus-year surge in the older population, and is thus at a critical point for putting in place the affordable housing options, accessibility features, and in-home care services that will be needed over the next two decades. Transportation and technologies to ensure people can remain engaged in their communities and access supportive services are also needed. While many older adults indicate that they prefer to age in their current residences, a wider array of housing types can offer safer, more affordable, and lower-maintenance homes within existing communities, improving housing situations without uprooting older adults from the places they have called home for years or even decades. (4-5)

The report obviously raises important points about the need to plan for the aging of the American population. I am not hopeful, however, that the federal government will be offering leadership on these issues. It will be up to the states to identify policies that the can implement. Some proposals that are worth a look include

  • providing incentives to include accessibility (or at least accessibility-ready) features in new construction;
  • strengthening the ties between health care and housing; and
  • increasing public awareness of the benefits of planning for the challenges of aging before they actually arrive.

No Mortgages for New Moms

photo by tipstimes.com/pregnancy

Realtor.com quoted me in Mom on Maternity Leave Denied a Mortgage: Could It Happen to You? It opens,

Hopeful home buyers can be denied loans for all kinds of reasons, from a poor credit score to low income. It sucks, but it makes sense: Lenders prefer giving cash to people who can pay them back. (Can you blame them?) Yet, sometimes people are turned away for dumb reasons. Take, for instance, the recent case of a Philadelphia mom who was denied a mortgage because she was on maternity leave. It was even paid maternity leave, with a firm date to return to her job. What’s up with that?

According to the Washington Post, the mom in question (who remains anonymous) had applied for financing with her husband to fund renovations on a house in Philadelphia. But due to her maternity leave, her pay stubs showed she was on “short-term disability,” which prompted the loan’s underwriter to surmise she might not resume working full time—even though her employer was happy to submit a letter indicating the day she’d return to the office.

And this mom is hardly alone: Over the past six years, the Department of Housing and Urban Development has documented over 200 cases alleging maternity-related discrimination against women seeking mortgages. In one case, a lender in Arkansas allegedly told the applicant that she’d have to be back at work before her loan could close!

And this is a shame, because housing discrimination—based on gender, familial status, disability, race, and other factors—has been illegal since the Fair Housing Act of 1968. Yet apparently it still exists even at prominent mortgage companies, as evidenced by the cases against Wells Fargo, Bank of America, PNC Mortgage, and others.

As for why this happens, experts surmise it’s because some lenders have outdated notions of women in the workplace, presuming most will bail or scale back on their jobs once kids enter the picture, permanently reducing the family’s income and eligibility for a loan. But it’s hardly the norm: Census data suggest that more than half of first-time mothers return to work within three months. Another study by the Department of Health and Human Services’ Maternal and Child Health Bureau found that the average maternity leave lasted a mere 10 weeks.

Bottom line: These days, many moms return to the office—yet some mortgage companies have missed that memo. But luckily, some moms are fighting back—like the Philadelphia woman above, who has recently reached a “conciliation agreement” with the lender, Citizens Bank of Pennsylvania. Although the company denied discriminating against her, it also agreed to conduct fair lending training sessions with staff.

And more should follow, Shanna Smith, president and chief executive of the National Fair Housing Alliance, told the Post: “There needs to be much better training for [lenders] about how to deal with interrupted income for loan closings when a woman is pregnant and [on] paid maternity leave.

All of which may have women everywhere wondering: If they hope to buy a home, might maternity leave get in their way? And if so, what should they do? Probably the first step is just knowing that it’s wrong: Maternity leave—paid or unpaid—is not a legitimate reason to refuse a loan.

“It always helps when you know your rights,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “If your lender appears to be violating fair lending laws, you may want to raise the issue directly with your banker and ask to speak to the supervisor to ask the bank to clarify its policy. If your lender continues to enforce a discriminatory policy, you can reach out to the relevant regulators, including HUD and the Consumer Financial Protection Bureau.”

Who Benefits from the Low Income Housing Tax Credit?

HUD’s Office of Policy Development and Research has released a report, Understanding  Whom  the  LIHTC  Program  Serves: Tenants  in  LIHTC  Units  as  of  December  31,  2012. By way of background,

The Low-Income Housing Tax Credit (LIHTC) Program provides tax credits to developers of affordable rental housing. The tax credits are provided during the first 10 years of a minimum 30-year compliance period during which rent and income restrictions apply. The LIHTC Program, although established in the U.S. Internal Revenue Code (IRC), is structured such that state-allocating agencies administer most aspects of the program, including income and rent compliance, with the Internal Revenue Service (IRS) providing oversight and guidance. Local administration allows states to address affordable housing needs specific to their populations. (1)

 Here are some findings of note:

  • Approximately three-fourths of reported households include disability status for at least one household member.
  • 36.4 percent of reported LIHTC households had a least one member under 18 years old.
  • Nearly 33 percent of reported LIHTC households have an elderly member, and 28.6 percent of reported LIHTC households have a head of household at least 62 years old.
  • The overall median annual income of households living in LIHTC units was $17,066, ranging from $8,769 in Kentucky to $22,241 in Florida. By comparison, the median income of HUD-assisted tenants was $10,272 in 2012.
  • Approximately 60 percent of reported households nationwide had incomes below $20,000.
  • The study found that approximately 39 percent of all LIHTC households paid more than 30 percent of their income for rent, thus making them housing cost burdened. Ten percent of all LIHTC households faced a severe housing cost burden, paying more than 50 percent of their income towards rent.
  • In 23 states, HUD was able to collect some data on the use of rental assistance in LIHTC units, which can eliminate cost burden for households who have it. Approximately half of reported households receive some form of rental assistance, with the greatest use in Vermont (64 percent) and least use in Nevada (23 percent).

The Housing and Economic Recovery Act of 2008 requires that this information be collected on an ongoing basis. It should be of great value as policymakers formulate federal housing policy for low-income households going forward.