Tag Archives: down payment

When Buyers Change Their Minds

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The Wall Street Journal quoted me in When Home Buyers Change Their Minds (behind paywall). It opens,

The offer was accepted. The mortgage was approved. What happens when the buyer gets cold feet and wants to back out of the deal?

Jason Michael faced this issue about 18 months ago when he listed his three-bedroom home in St. Louis. Mr. Michael, a 36-year-old public-relations executive, asked $130,000 for his home and accepted an offer for $127,000. The buyers posted a $1,000 deposit of “earnest money,” completed inspections, negotiated repairs and were approved for a mortgage.

Then they told Mr. Michael that they had found another house and didn’t want to move ahead with the purchase.

While the contract allowed Mr. Michael to pocket the deposit if the buyers defaulted, they refused to authorize their agent to release it. Only after Mr. Michael threatened to sue did they surrender the $1,000.

“My agent had said that people don’t back out of house purchases—that this won’t happen,” Mr. Michael says. “But now I approach it as if the buyer can back out until the very last minute.” He ultimately decided to rent out the house.

According to an online survey of 2,241 adults conducted for finance website Nerdwallet.com in January, home-buyer’s remorse isn’t uncommon. Nearly half (49%) of homeowners who responded said they would do something differently if they had to go through the process again. Broken down by age group, 61% of Generation Xers (the mid-1960s through the 1970s) and 57% of millennial homeowners (born in the early 1980s through about 2004) indicated they had regrets. Many wished they had bought a bigger home or saved more money before buying.

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Here are a few things to consider if you might want to back out of your real-estate contract. Buyers and sellers should consult a qualified real-estate attorney for advice.

• Craft carefully. Rather than having a mortgage contingency allowing you to obtain a mortgage “at prevailing rates,” specify that the mortgage rate can be no more than 4%, for example. Or, consider making the contract contingent on the mortgage actually being funded by the lender. “This extends the contingency all the way to the closing,” says David Reiss, a Brooklyn Law School professor who specializes in real estate.

• Sharpen your negotiation skills. Even if you can’t back out legally, try to negotiate a reduction or return of the deposit with the seller. In a market where prices are rising and the homeowner can get a higher price for their home, there might be a chance to come to terms.

• Remember the broker. Even if the seller lets the buyer off the hook, he may still be liable to the broker for the commission. Contracts state that the commission is due when the broker finds a ready, willing and able buyer. Many brokers will work with the seller in this situation, Mr. Haber says, but it is an issue that needs to be addressed.

 

Can Downpayment Assistance Work?

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The HUD Inspector General issued a report on FHA-Insured Loan with Borrower-Financed Downpayment Assistance. Downpayment assistance has a long history of failure, a history that has led to big losses for the FHA and foreclosures for borrowers. The IG audited HUD’s oversight of FHA-insured loans that were originated with downpayment assistance. The Inspector General had already determined that “lenders allowed FHA borrowers to finance their own downpayments through an increase in their mortgage interest rate as part of programs administered through housing finance agencies.” (1)

The IG found that HUD

failed to adequately oversee more than $16.1 billion in FHA loans that may have been originated with borrower-financed downpayment assistance to ensure compliance with HUD requirements, putting the FHA Mortgage Insurance Fund at unnecessary risk. Between October 1, 2015 and September 30, 2016, HUD guaranteed nearly $12.9 billion in FHA loans that may contain questioned assistance. While governmental entities are not prohibited sources of downpayment assistance, the assistance provided through these programs did not comply with HUD requirements. FHA borrowers were required to obtain a premium interest rate and, therefore, repaid the assistance through higher mortgage payments and fees. Despite the prohibition against similar seller-funded programs, HUD’s requirements appeared to have enabled the growth of these questioned programs. In addition, HUD did not adequately track these loans and review the funding structure of these programs. Despite concerns raised by OIG, HUD failed to protect FHA borrowers against the higher mortgage payments and higher fees imposed on them, which increased the risks to the FHA Insurance Fund in the event of default. (1)

The Urban Institute’s Housing Finance Policy Center has criticized the IG’s report on methodological grounds. I will defer to the Urban Institute’s critique because they have done a lot of work in this area.

But I do think that the IG is right to pay careful attention to downpayment assistance programs. Historically, they have proven too good to be true. One of the FHA’s biggest failures resulted from the downpayment assistance program that was set forth in the American Dream Downpayment Assistance Act of 2003.

The IG recommends that HUD

(1) reconsider its position on questioned borrower-financed downpayment assistance programs,

(2) develop and implement policies and procedures to review loans with downpayment assistance,

(3) develop requirements for lenders to review downpayment assistance programs,

(4) require lenders to obtain a borrower certification that details borrower participation,

(5) ensure that lenders enter all downpayment assistance data into FHA Connection, and

(6) implement data fields where lenders would be required to enter specific downpayment assistance information. (1)

The IG’s procedural recommendations all seem reasonable enough, whether you agree or disagree with the folks at the Urban Institute.

 

Contract Selling Is Back, Big-Time

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The Chicago Reader quoted me in The Infamous Practice of Contract Selling Is Back in Chicago. It reads, in part,

When Carolyn Smith saw a for sale sign go up on her block one evening in the fall of 2011, it felt serendipitous. The now 68-year-old was anxiously looking for a new place to live. The landlord of her four-unit apartment building in the city’s Austin neighborhood was in foreclosure and had stopped paying the water bill. That month, she and the other tenants had finally scraped together the money themselves to prevent a shutoff and were planning to withhold rent until the landlord paid them back. Exhausted with this process and tired of dealing with “slumlords,” Smith wanted to buy a home in the neighborhood to ensure that she, her mother, Gwendolyn, and their dog, Sugar Baby, would have a stable place to live. But due to a past bankruptcy, Smith thought she would never be able to get a mortgage. So when she saw a house on her street for sale with a sign that said “owner financing,” she was excited. The next morning, she called the number listed and learned that the down payment was just $900—a sum she could fathom paying. “I figured I was blessed,” she says.

Her good fortune continued. A man on the other end of the line told her she was the very first one to inquire. The seller, South Carolina-based National Asset Advisors, called her several more times and mailed her paperwork to sign. Smith says she never met in person with anyone from National Asset Advisors or Harbour Portfolio Advisors, the Texas-based company that owned the home. But she says the agents she spoke with assured her that her credit was good enough for the transaction, despite the past bankruptcy. Next, they gave her a key code that allowed her to go in and look at the house, explaining that she’d be purchasing it “as is.” Smith thought the two-flat looked like a fixer-upper—the door had been damaged in an apparent break-in, and there was no hot-water heater, furnace, or kitchen sink—but given her poor luck with apartments of late, she felt she couldn’t pass up the chance to own a home. Both she and her mother, now 84, had been renting their whole lives; after pulling together the down payment, they beamed with pride when, in December 2011, they received a letter from National Asset Advisors that read “Congratulations on your purchase of your new home!”

But within a year, Smith discovered that the house was in even worse shape than she’d realized. In her first months in her new home, Smith estimates that she spent more than $4,000 just to get the heat and running water working properly, drinking bottled water in the meantime. Then the chimney started to crumble. Smith would hear the periodic thud of stray bricks tumbling into the alleyway as she sat in her living room or lay in bed at night; she began to worry that a passerby would be hit in the head and soon spent another $2,000 to replace the chimney. Public records show that the house had sat vacant earlier that year, and the city had ordered its previous owners to make extensive repairs.

Had Smith approached a bank for a mortgage, she likely would’ve received a Federal Housing Administration-issued form advising her to get a home inspection before buying. But as far as she recalls, no one she spoke to ever suggested one, and in her rush to get out of her old apartment, she didn’t think to insist.

The documents Smith signed with Harbour and National Asset Advisors required her to bring the property into habitable condition within four months, and with all the unexpected expenses, she soon fell behind on her monthly payments of $545.

Smith’s retirement from her job as an adult educator at Malcolm X College, in the spring of 2013, compounded the financial strain. Living on a fixed income of what she estimates was around $1,100 a month in pension and social security payments, she fell further behind, and the stress mounted.

“When we got to be two months behind, they would call me every day,” she remembers.

National Asset Advisors also began sending her letters threatening to evict her. That’s when Smith had a heart-stopping realization: She hadn’t actually purchased her home at all. The document she had signed wasn’t a traditional mortgage, as she had believed, but a “contract for deed”—a type of seller-financed transaction under which buyers lack any equity in the property until they’ve paid for it in full. Since Smith didn’t actually have a deed to the house, or any of the rights typically afforded home owners, she and her mother could be thrown out without a foreclosure process, forfeiting the thousands of dollars they’d already spent to rehabilitate the home.

“I know people always say ‘buyer beware’ ” she acknowledges. “But I’d never had a mortgage before, and I feel like they took advantage of that.”

What felt like a private nightmare for Smith has been playing out nationwide in the wake of the housing market crash, as investment firms step in to fill a void left by banks, now focused on lending to wealthier borrowers with spotless credit histories. In a tight credit market, companies like Harbour, which has purchased roughly 7,000 homes nationwide since 2010, including at least 42 in Cook County, purport to offer another shot at home ownership for those who can’t get mortgages. Such practices are increasingly common in struggling cities hard hit by the housing crash. A February 2016 article in the New York Times titled “Market for Fixer-Uppers Traps Low-Income Buyers” examined Harbour’s contract-for-deed sales in Akron, Ohio, and Battle Creek, Michigan. The Detroit News has reported that in 2015 the number of homes sold through contract-for-deed agreements in the city exceeded those sold through traditional mortgages.

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Contract-for-deed sales also offered an attractive loophole from the growing set of regulations on traditional mortgages following the financial crisis. “In the same way that you saw [subprime lenders like] Countrywide get really big in the late 1990s,” says David Reiss, research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School, “one of the real attractions for the businesses operating in this space is that they are underregulated.”

Negotiating Real Estate Fees

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office-negotiationPolicyGenius quoted me in 5 Mortgage Loan Fees and Rates You Should Always Negotiate. It opens,

When it comes to making major purchases or financial decisions, we always hear that mantra, “Everything is negotiable.” You can haggle with the salesman when shopping for a new car, or with the hiring manager at a new job over your starting salary. It’s even possible to negotiate your tuition rates as a college student.

But a lot of the costs associated with buying a house can be difficult to negotiate down, according to mortgage advisor and author Casey Fleming.

“Appraisal, underwriter and processor are chosen by the lender, and the variation in fees is quite small,” he says. “Escrow and title services are typically chosen by the real estate agent of the seller in most areas, so the buyer has little say in what those fees will be.”

There’s also not much way around paying private mortgage insurance — you’ll need no less than a 20% down payment to avoid it.

But, you don’t need to let the non-negotiable items prevent you from bargaining for a better deal on other house-hunting costs. Here are a few fees and costs worth negotiating:

Real estate broker’s fees and commissions

From the outset, consider negotiating your real estate broker’s fees, according to Prof. David Reiss of the Brooklyn Law School, who teaches real estate finance and community development. “If 6% is standard in your community, you can look for brokers who will sell your home for 5% or less,” he says. “Be careful how low to go though, because you want your broker to be motivated enough to sell your property.”

Reiss notes that to gain the most advantage in negotiating their fees, your broker’s listing agreement should outline all the services they’ll provide you regarding advertisements, showing, and the plan in place to buy or sell the property in question.

Muddled Future for Fannie & Freddie

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poster_of_alexander_crystal_seer

The United States Government Accountability Office released a report, Objectives Needed for the Future of Fannie Mae and Freddie Mac After Conservatorships.  The GAO’s findings read a bit like a “dog bites man” story — stating, as it does, the obvious:  “Congress should consider legislation that would establish clear objectives and a transition plan to a reformed housing finance system that enables the enterprises to exit conservatorship. FHFA agreed with our overall findings.” (GAO Highlights page) I think everyone agrees with that, except unfortunately, Congress.  Congress has let the two companies languish in the limbo of conservatorship for over eight years now.

Richard Shelby, the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, asked the GAO to prepare this report in order to

examine FHFA’s actions as conservator. This report addresses (1) the extent to which FHFA’s goals for the conservatorships have changed and (2) the implications of FHFA’s actions for the future of the enterprises and the broader secondary mortgage market. GAO analyzed and reviewed FHFA’s actions as conservator and supporting documents; legislative proposals for housing finance reform; the enterprises’ senior preferred stock agreements with Treasury; and GAO, Congressional Budget Office, and FHFA inspector general reports. GAO also interviewed FHFA and Treasury officials and industry stakeholders (Id.)

The GAO’s findings are pretty technical, but still very important for housing analysts:

In the absence of congressional direction, FHFA’s shift in priorities has altered market participants’ perceptions and expectations about the enterprises’ ongoing role and added to uncertainty about the future structure of the housing finance system. In particular, FHFA halted several actions aimed at reducing the scope of enterprise activities and is seeking to maintain the enterprises in their current state. However, other actions (such as reducing their capital bases to $0 by January 2018) are written into agreements for capital support with the Department of the Treasury (Treasury) and continue to be implemented.

In addition, the change in scope for the technology platform for securitization puts less emphasis on reducing barriers facing private entities than previously envisioned, and new initiatives to expand mortgage availability could crowd out market participants.

Furthermore, some actions, such as transferring credit risk to private investors, could decrease the likelihood of drawing on Treasury’s funding commitment, but others, such as reducing minimum down payments, could increase it.

GAO has identified setting clear objectives as a key principle for providing government assistance to private market participants. Because Congress has not established objectives for the future of the enterprises after conservatorships or the federal role in housing finance, FHFA’s ability to shift priorities may continue to contribute to market uncertainty. (Id.)

One finding seems particularly spot on to me. As I wrote yesterday, it appears as if the FHFA is not focusing sufficiently on building the infrastructure to serve secondary mortgage markets other than Fannie and Freddie.  It seems to me that a broader and deeper bench of secondary mortgage market players will benefit the housing market in the long run.

 

Beware of Contractor

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photo by Rogier Krens

Realtor.com quoted me in Beware of These 8 Red Flags When Hiring a Contractor. It opens,

Finding the right contractor for a major renovation is like finding a spouse. You have to have chemistry, you have to be on the same page, you have to trust each other, you have to love pugs, and you must share a passion for Korean barbecue (oh, scratch the latter two—it’s not totally like finding a spouse). And while there might be more than one Mr. Right, there are plenty of Mr. Wrongs who can transform your beloved renovation project into a nightmare (and give new meaning to the term “punch list”).

In 2011, the average U.S. homeowner spent $2,889 on home improvements—it’s a pretty penny, but a fraction of the cost of a big project like a major kitchen overhaul ($60,000) or bathroom renovation ($18,000). So a lot of cash is at stake here, along with your mental health! Here are some matador-worthy red flags to look for when researching a contractor, and strategies for finding one you’ll love.

1. They have lousy reviews

We live in a world saturated with social media, where it’s harder for bad contractors to hide. When you see a Yelp review that slams a contractor, your antennae should go up. Not that any one review is gospel; review sites often are battlegrounds for competitors who unfairly slam one another.

“Anyone can have one or two bad reviews from cranks or revenge seekers, but a pattern of problems or red flags should make you think twice,” says Sandy Edry, a real estate agent with Keller Williams in New York City.

2. They’re not responsive

As in any long-term relationship, communication is key. If you have trouble getting a contractor on the phone before you give him your business, imagine how hard it will be for him to return calls after he already has your security deposit. Give a prospective contractor 24 hours to return your introductory call—48 hours, tops—before you move on.

3. They insist on unlimited time and materials

The best way to wreck a budget is to sign a time and materials contract that puts no fence around expenditures. Make sure a contractor offers you a flat fee for a project and specifies how much change orders will cost. If he won’t, walk. Or run.

4. They lack a sense of humor

When it comes to home renovations, Murphy’s Law (anything that can go wrong, will) might be a bit exaggerated (although we know quite a few homeowners who’d beg to differ). No matter what, you should be prepared for at least one unexpected problem to arise. Look for a contractor who can keep his footing when things get rocky, and has the expertise to remain calm—and to help calm you down—while sorting out a solution.

5. They overpromise

Before you sign a contract with anyone, do your homework to get a rough idea of how long a project should take and cost. Remodeling’s Cost vs. Value annual report provides national averages for popular projects and is a great resource. Beware of contractors who offer you a much lower price and faster delivery. If it sounds too good to be true, it probably is.

6. They have outdated references

Good contractors have a constantly revolving list of new and satisfied customers. If they can’t provide a current reference, perhaps the quality of their work has dropped.

“You don’t want any old references,” says David Reiss, research director for the Center for Urban Business Entrepreneurship in Brooklyn, NY. “You want references for recent and current jobs, and for jobs that are similar to yours.”

Low Down Payment Mortgages, Going Forward

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photo by TheGrayLion

TheStreet.com quoted me in Home Loan Down Payments Are in Decline: Will Uncle Sam Ride to the Rescue? It opens,

President-elect Donald Trump has enough problems on his hands as his administration takes shape, with the economy, health care, geopolitical strife and a divided country all on his plate.

 Chances are, dealing with a weakening real estate market, especially related to lower down payments, hasn’t entered his mind.
According to the November Down Payment Report, from Down Payment Resource, median down payments from first-time home buyers fell to just 4% of the home’s value, down from 6% in 2015. At the same time, home down payments for FHA-backed loans are also at 4%, signaling that homebuyers aren’t saving enough for home down payments, and thus face higher monthly mortgage payments.
There’s one school of thought that says homebuyers aren’t putting serious money down on a purchase, because they don’t have to.

“U.S. homebuyers are putting less down to purchase homes due to the wide availability of low- and no-down payment loans such as FHA loans, Fannie Mae’s HomeReady program, a resurgence of ‘piggy-back mortgages’ and other programs,” says Erin Sheckler, president of NexTitle, a full-service title and escrow company located in Belleview, Wash. “Meanwhile, USDA and VA loans also do not require any down payment whatsoever.”

Sheckler also notes that lending requirements have begun to ease nationwide, thus giving homebuyers more wiggle room with home down payments. “According to Ellie Mae’s Origination Insight Report, in August, home buyer down payments varied by loan program but, in nearly all cases, down-payments were near minimums,” says Sheckler.

Sheckler also doesn’t expect the low down payment trend to end anytime soon.

“How much money a person decides to put down on the purchase of a new home is a combination of risk and personal tolerance as well as the loan programs available to them,” she says. “As long as mortgage guidelines remain relaxed and with first-time homebuyers being an increasing segment of the market, we will likely see down-payments hover around the minimums into the near-term future.”

The risk with lower home down payments is real, however. “No one wants to find themselves house-poor,” Sheckler adds. “Being house-poor means that the majority of your wealth and monthly income is tied up in your residence. This can be a catastrophic situation if you find yourself suddenly faced with a loss of income or unexpected expenses.”

Homebuyers looking for more help from Uncle Sam, though, may come away disappointed in the next four years. “While Trump has been pretty silent on the housing market, (vice president-elect Mike) Pence and the Republican party platform have made it clear that they want to reduce the federal government’s footprint in the housing market,” says David Reiss, professor of law at Brooklyn Law School. “This is likely to mean fewer low down payment loan options being offered by Fannie Mae, Freddie Mac and the FHA.”