Tag Archives: homeowner

Nonbank Servicers Pose Risks for Homeowners

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Christy Goldsmith Romero, Special Inspector General for the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP)

SIGTARP Special Inspector General Romero

The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has released its Quarterly Report to Congress (April 27, 2016). The Report focuses on how nonbank servicers raise risks for homeowners participating in the Home Affordable Modification Program (HAMP) of the Troubled Asset Relief Program (TARP). (65) The report states that

Mortgage servicers are the single largest factor in determining whether homeowners applying for, or participating in, TARP’s signature foreclosure prevention program HAMP are given a fair shot, and whether the program runs effectively and efficiently. This is because Treasury has contracted with mortgage servicers to play a predominant role in HAMP, by making the day-to-day decisions related to HAMP that have enormous implications for homeowners seeking relief. Mortgage servicers decide whether homeowners are eligible for HAMP, whether homeowners get a trial run in the program, and whether that trial run should result in the servicer permanently modifying the homeowners’ mortgages. Mortgage servicers decide how the mortgage will be modified, such as whether a homeowner will get a lower interest rate, and if so, what rate. Mortgage servicers decide how much the homeowner will have to pay each month. Mortgage servicers also apply payments they receive, and they make decisions on whether a homeowner should be terminated from the program. Because of this outsized role, all mortgage servicers are required to comply with HAMP rules, and federal laws. Following HAMP rules and federal laws is necessary to protect homeowners from harm.

Non-banks who service mortgages have increased their participation in HAMP, and now play a larger role in HAMP than bank servicers, but that was not always the case.

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HAMP and its related programs have become a lucrative business and reliable source of income for non-bank servicers. Treasury pays mortgage servicers for every homeowner who receives a permanent mortgage modification in HAMP. Nonbank mortgage servicers have received $1.1 billion in Federal TARP dollars from Treasury through the HAMP program.

As non-bank servicers increase their role in HAMP, the risk to homeowners has also increased. Non-bank servicers have less federal regulation than banks that service mortgages. Some of the largest non-bank servicers have already been found to have violated laws in their treatment of homeowners, and have been the subject of enforcement actions by the federal or a state government. Some of the largest non-bank servicers also have been found to have violated HAMP’s rules in their treatment of homeowners. This increased risk to homeowners must be met with increased oversight to ensure that homeowners are treated fairly, and that HAMP and its related programs are effective and efficient. (65, notes removed)

Regulators and other government agencies have been taking a hard look at servicers recently (take a look at this and this). It is important for federal regulators to get their oversight of servicers right because they can and do cause mountains of misery for homeowners when things goes wrong.

Millennials and Homeownership

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photo by flickr@tonywebster.com

TheStreet.com quoted me in Millennials Are Accruing Less Debt, Bypassing Homeownership. It reads, in part,

Millennials are accruing less debt than their counterparts did back in 2003 — despite being saddled with large amounts of student loans — because they are putting off buying homes.

The research conducted by Torsten Sløk, a Deutsche Bank international economist, shows that Millennials, ages 25 to 35, attained less debt in 2015 than their counterparts did in 2003. The data demonstrates a 29-year old in 2003 had an average debt amount of $41,761 compared to $36,810 in 2015 or a 33-year old owed $56,859 in 2003 and $52,640 in 2015.

“It is an urban myth that the young generation today is more indebted, it is the older generations that have higher debt levels,” said Sløk in a research note. “The reason is that since 2009, it has been difficult for Millennials to get a loan. As a result, 25 to 35 year olds today have less debt than in 2003.”

Debt has been “harder to obtain” for Gen Y-ers whether they are credit cards or mortgages, said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization.

“Millennials have not been inundated with easy to obtain credit cards like in past years,” he said. “Creditors are not on college campuses offering credit cards to college students any longer.”

While Millennials are saddled with record levels of student loans because of the skyrocketing costs of college tuition and the ease of obtaining these loans, Millennials “continue to have less credit card and mortgage debt than their parents and grandparents,” Triggs said.

The level of student loan debt is hindering borrowers ages 18 to 35 from paying for necessities such as rent, utilities and even food as 43% expressed this sentiment, according to the National Foundation for Credit Counseling’s 2016 consumer financial literacy survey, said Bruce McClary, a spokesman for the Washington, D.C.-based national non-profit organization.

“There is a staggering amount of student loan debt and it is a burden for many,” he said.

Homeownership Delays

Although Millennials have expressed the desire the own a home in the future, they are keen to keep renting in part because many of them switch jobs frequently, have not amassed a down payment or do not want the financial commitment. The zeal to pursue the “American dream” of owning a home has waned.

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The assumption that home values would rise faster than other investments has been challenged since the Great Recession, said David Reiss, a law professor at Brooklyn Law School.

“One big issue is the role that home ownership plays in wealth creation,” he said. “The bottom line is that homeownership can help build a nest egg for retirement, but long-term trends and individual decisions about homeownership will have a big impact as well.”

The State of Mortgage Lending

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AmericanBankersAssociation-1950

The American Bankers Association has issued its 23rd Annual ABA Residential Real Estate Survey Report for 2016. There is a lot to unpack in its findings. The key ones are

  • About 86 percent of loans originated by banks were QM [Qualified Mortgage] compliant compared to 90 percent in 2014, likely because more banks are adjusting underwriting criteria to target selected non-QM loan opportunities
  • Despite increased non-QM lending, approximately 72 percent of respondents expect the current ATR [Ability to Repay]/QM regulations will continue to reduce credit availability – down from nearly 80 percent in 2014
  • Relatedly, the percentage of banks restricting lending to QM segments dropped from 33 percent to 26 percent, and those providing targeted non-QM lending rose to 54 percent from 48 percent
  • High debt-to-income levels continue to be the most likely reason why a non-QM loan did not meet QM standards
  • The percentage of single family mortgage loans made to first time home buyers continues to climb to a new all-time high as it represented 15 percent of loans underwritten in 2015 – up from 13 percent in 2013 and 14 percent in 2014
  • Approximately half of the respondents state that regulations have a moderate negative impact on business, while nearly a quarter report the impact as extremely negative (4)

The most important finding is that banks are becoming more and more comfortable with non-QM loans. I had thought that this would happen more quickly than it has, but it now seems that the industry has become comfortable with the ATR/QM regs.

There are good non-QM loans — for good borrowers with quirky circumstances. And there are bad non-QM loans — for bad borrowers generally. As a result, the finding that “High debt-to-income levels continue to be the most likely reason why a non-QM loan did not meet QM standards” could cut both ways. There are some non-QM borrowers with high debt-to-income [DTI] ratios who are good credit risks.  Think of the doctor about to finish a residency and enter private practice. And there are some non-QM borrowers with high DTI who are bad credit risks. Think of the borrower with lots of student loan, credit card and auto debt. Unfortunately this survey does not provide any insight into what types of non-QM loans are being originated. That is a big limitation of this survey.

The finding that about “half of the respondents state that regulations have a moderate negative impact on business, while nearly a quarter report the impact as extremely negative” is also ambiguous. Is a negative impact a reduction in the number of loan originations? But what if those loans were likely to be unsustainable because of the high DTI ratios of bad borrowers? Is it so bad for the ATR/QM regulations to have kept those loans from having been made in the first place? I don’t think so. It is hard to tell what is meant by this survey question as well. Perhaps the ABA could tighten up its questions for next year’s survey.

Principal-ed Forgiveness

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photo by Vic

The Federal Housing Finance Agency announced a new program to implement principal reduction for seriously delinquent, underwater homeowners who meet the following criteria:

  • Are owner-occupants.
  • Are at least 90 days delinquent as of March 1, 2016.
  • Have an unpaid principal balance of $250,000 or less.
  • Have a mark-to-market loan-to-value ratio of more than 115% after capitalization. (1)

The program’s “modification terms include capitalization of outstanding arrearages, an interest rate reduction down to the current market rate, an extension of the loan term to 40 years, and forbearance of principal and/or arrearages up to a certain amount to be converted later to forgiveness.” (1) Once the borrower completes three timely payments, the principal forbearance amount can be forgiven.

This program can help just a small proportion of homeowners who have been underwater on their mortgages. Most importantly, it is being implemented years after the foreclosure crisis swamped the nation’s housing markets. But as can be seen from the criteria above, it is targeted just to homeowners with below-average principal balances on their mortgages and who are severely underwater. There are all sorts of political reasons that principal reduction was not a key component of the post-crisis housing finance reform agenda. But it is worth asking now — should we deploy it more quickly in the next crisis? What would be the principled reasons for doing that?

Many argued that principal forgiveness would reward homeowners for making bad, even immoral, decisions. With the benefit of hindsight, it would have been better to put that questions aside and ask what the best policy option for the country would have been. If outstanding principal balances could have been aligned more closely to the new normal of the post-financial crisis economy, the recovery could have proceeded more quickly.

Now would be the time for the FHFA to implement regulations to deal with the next great recession. If principal forgiveness makes sense under certain conditions, let’s identify them now and then have an easier time of it down the road.

Tax Refunds Into Mortgage Payments

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photo by 401(K) 2012

TheStreet.com quoted me in Investing Your Tax Refund Instead of Spending It Boosts Retirement Savings. It opens,

Ramping up your emergency cash fund or IRA with your tax refund is a better option than spending it on a new smartphone or vacation.

Three out of four taxpayers received a refund of $3,000 in 2015. Although many consumers look forward to this windfall each year, it is not a “cause for celebration,” said Joe Jennings, a wealth director for PNC, a Pittsburgh-based financial institution.

“If you are receiving a large refund check, it actually means that you have loaned money to the government throughout the year and the next year the government is paying you back without interest,” he said.

Adjusting your withholdings is a good strategy if your refund exceeds $1,000. Changing the number of exemptions on your W-4 means you will net more income from each paycheck.

Bankrate.com, a North Palm Beach, Fla.-based financial content company, found that 31% of Americans who receive a tax refund this year plan to save or invest it. The survey revealed that 28% will use the funds to pay down debt, 27% will spend it on necessities like food/utility bills and 6% will splurge with a shopping spree or vacation.

Some consumers view the refund as a method of forcing them to save money each year or a way to pay down existing debt such as credit card balances with high interest.

Pay Off Existing Debt

Use your refund check to pay off as much as your credit card or student loan debt as possible since the amount of interest you are paying each month adds up quickly, said Jonathan Bochese, director of resolution services for Tax Defense Network, LLC, a Jacksonville, Fla.-based tax resolution company.

“The best use for any tax refund is to use it to pay off high interest revolving debts,” he said.

With the current low interest rate environment in money market funds and CDs, paying down debt is a no-brainer.

“If you can only make 3% on your investment and your debt is at a higher rate, pay off the debt,” said Carl Sera, a portfolio manager with Covestor, the online investing marketplace and managing principal of Sera Capital Management, a registered investment advisor in Annapolis, Md. “Don’t make it a habit to receive a tax refund, because it is money you have lent the taxing authority at a zero interest rate.”

Homeowners who do not have any other debt should pay down their mortgage by making an extra payment or two instead of stashing the refund in a savings account that is only receiving minimal interest, said David Reiss, a law professor at Brooklyn Law School.

“By doing so, you are making the equivalent of a pre-tax return of the interest rate on your mortgage,” he said. “If your mortgage has a 5% interest rate and your savings account has a 0.1% interest rate that is like getting a 4.9% higher rate of interest without taking any risk at all.”

Buck-A-Home

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abandoned house

The Saint Louis Post-Dispatch quoted me (from an AP story) in Kansas City Presses To Sell Eyesore, Vacant Homes for A Buck. It reads, in part,

Drawn to the idea of buying a house for just a buck, Dorian Blydenburgh paced through the century-old digs in south Kansas City and didn’t mind tree limbs on the living room floor, holes in the ceiling and a funky mold smell.

“This is one everyone is gonna want, and there’s gonna be a fight for this,” said Blydenburgh, 56, a contractor looking at the three-bedroom, 1,500-square-foot house at 4124 Chestnut Avenue as a makeover prospect for a friend, who later applied to buy it. “Some of these places you need a bulldozer to fix, but this is doable. For a dollar, it looks like a go.”

That’s what Kansas City, Mo., officials were hoping to hear. The city and the Land Bank of Kansas City have offered 130 derelict, generally unlivable structures for sale for $1 each to those willing to make them livable again within a year. The buyer’s reward is an eventual $8,500 rebate — the amount it would have cost the city to flatten the houses.

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But it’s buyer beware. Applicants must undergo a background check — applicants who are registered sex offenders or have drug-dealing or prostitution convictions are disqualified — and prove through bank statements or unused credit card limits they have at least $8,500 to devote to the rehab.

Ultimately, the program’s backers warn, rehabbing the properties might cost tens of thousands of dollars, perhaps involving installing or repairing roofs, electrical systems, plumbing, heating and air conditioning or foundations. And that’s beyond the cost of tackling troubling unknowns such as lead or asbestos.

“Most of those buildings on the dangerous list are going to have to come down. We know that,” Mayor Sly James said. “But there are other homes on that low level that could be salvaged, and we want people to know they are out there.”

Other cities have tried similar approaches. In Detroit, with the help of tens of millions of dollars from taxpayers, the city has torn down about 7,100 of an estimated 30,000 to 40,000 vacant houses since May 2014, with the mayor planning to have an additional 15,000 homes gone by 2018. More than 1,300 other homes have been auctioned, Detroit Land Bank Authority spokesman Craig Fahle said. Buyers of those properties, many fetching just the opening bid of $1,000, are required to bring the house up to code and have it occupied within six months — nine months if it’s in a historic district.

Chicago and Milwaukee have are unloading vacant lots. Chicago has sold more than 400 vacant parcels since 2014. In Milwaukee, homeowners next to a vacant lot can buy it for $1.

David Reiss, a Brooklyn Law School professor who focuses on real estate issues and community development, urges would-be buyers to understand the expenses beyond the price tag, including property taxes, upkeep and liability insurance.

“A house for a dollar may be an albatross around your neck,” he said. “I would look at it case by case. If it sounds too good, it probably is.”

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