Tag Archives: homeowner

Down in ARMs

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TheStreet.com quoted me in Top 5 Lowest 7-Year ARM Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates, especially if you don’t plan on staying in your first home for more than seven years and are learning toward 7/1 adjustable rate mortgages (ARMs)?

The 7-year ARMs are attractive to consumers, especially first-time homebuyers, because the interest rates are lower, helping you save more money each month compared to the traditional 30-year mortgage.

“You get what amounts to a fixed rate mortgage, but at a lower rate than the traditional 30-year fixed,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

While lower monthly payments are appealing, the interest rates reset after seven years, and it can be difficult to determine how much they will increase.

“If your timetable changes, then you may want to reconsider the loan you have,” he said. “You don’t want to be in the position of facing rising monthly payments that squeeze your budget or jeopardize your ability to afford your own home.”

Consumers on fixed incomes and saddled with student loans and credit card debt might opt for a 30-year fixed rate mortgage, because it represents “permanent payment affordability,” McBride said. The principal and interest will never change, because it is a fixed rate and can be easier to budget.

“It may not always be the optimal choice, but it is the safest choice,” he said.

Adjustable rate mortgages can still be beneficial if homeowners take advantage of the savings each month and allocate it towards paying down debt or into an emergency fund.

“Even if you’re still holding the 7-year ARM at the end of seven years, that doesn’t automatically turn it into a bad decision,” McBride said. “You will have banked seven years of savings relative to the fixed rate mortgage that can help you absorb any payment increases until you refinance or sell the home.”

Many consumers gravitate toward the 30-year mortgage, because the payments are stable and have been very low, said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. Others are seeking the 7-year ARM, because they are more likely to qualify for a mortgage.

Mortgage activity so far in 2016 reveals that only 3% of mortgages have had shorter rate terms, according to Realtor.com’s analysis of purchase mortgage activity. Hybrid term mortgages such as the 7/1 ARM typically increase in share when “mortgage rates rise because the shorter fixed term offers a lower rate, often between 40 and 100 basis points,” he said. “The lower rate translates into a lower payment for the duration of the initial term, which is seven years.”

Each lender utilizes a benchmark such as a the 10-year U.S. Treasury or LIBOR rate and a margin, which is “what is added to the benchmark to determine your new rate,” Smoke said. The loans also have a cap on how high any single rate change can be and also a ceiling on how high the rate can ever be, he said.

At the end of the seven years, homeowners can choose to refinance to a lower fixed rate, but need to budget for the closing costs.

A lower rate upfront can be favorable for younger homeowners, but examining the ceiling rate and how it will impact your monthly payments is crucial.

“A mortgage broker or lender can help you walk through scenarios to determine if your timeline could benefit,” Smoke said. “To help calm any nerves about just how high your payment could go, ask yourself if you are willing to exchange the initial seven year savings for how long you might keep that mortgage after the seven-year period is up.”

Paying the premium for the peace of mind that your payments will remain static means that if interest rates rise several percentages in the next few years, you won’t be faced with having to consider the lower rate options or lower priced homes and/or more money down, he said.

“That’s why hybrids will likely become more popular in the future compared to how little they are used today,” Smoke said.

Since people have a tendency to change homes every seven years on average, a 7/1 ARM could be a good option because the savings can be substantial, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“Even if you are not planning to move now, the future may bring changes such as divorce, frail relatives, job loss or new job opportunities,” he said. “Some people like the certainty of the 30-year fixed rate mortgages, but it is worth calculating just how much that certainty will cost you.”

Low, Low, Low Mortgage Rates

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photo by Martin Abegglen

TheStreet.com quoted me in Top 5 Lowest 15-Year Mortgage Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and the stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates?

How to Get a Low Rate

Low mortgage rates can play a large factor in homeowners’ ability to save tens of thousands of dollars in interest. Even a 1% difference in the mortgage rate can save a homeowner $40,000 over 30 years for a mortgage valued at $200,000. Having a top notch credit score plays a critical factor in determining what interest rate lenders will offer consumers, but other issues such as the amount of your down payment also impact it.

A high credit score is the key to ensuring that borrowers receive a low mortgage rate. Here’s a quick rundown of what the numbers mean – a score of anything below 620 ranks as poor, 620 to 699 is fair, 700 to 749 is good and anything over 750 is excellent. Think carefully before canceling a credit card with a long, positive history, but decrease your debt. One of the biggest factors which impact your credit score is your credit utilization rate.

Many potential homeowners focus only on the interest rate or the monthly payment. The APR or annual percentage rate gives you a better idea of the true cost of borrowing money, which includes all the fees and points for the loan.

The origination fee or points is charged by a lender to process a loan. This fee shows up on your good faith estimate (GFE) as one item called the origination charge. However, the origination fee can be made up of a few different fees such as: processing fees, underwriting fees and an origination charge.

Homeowners who are able to afford a 20% down payment do not have to pay private mortgage insurance (PMI), which costs another 0.5% to 1.0% and can tack on more money each month. Having at least 20% in equity shows lenders that there is a lower chance of the individual defaulting on the loan.

Choosing Between 15-year and 30-year Mortgages

Obtaining a 15-year fixed rate mortgage instead of a traditional 30-year mortgage means homeowners can save thousands of dollars in interest. One drawback of a 15-year mortgage is that consumers will be locked into higher monthly compared to a traditional 30-year mortgage or a 5-year or 7-year adjustable rate mortgage, “which could put the squeeze on homeowners when times are tight,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

Many households would not benefit from a 15-year mortgage because it “does more to limit their financial flexibility than to enhance it,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

“Locking into higher monthly payments makes the household budget tighter and for what?,” he said “So you can pay down a low, fixed rate loan? On an after tax, after-inflation basis you’re essentially borrowing for free.”

McBride suggests that this strategy does not bode well for homeowners, especially if they are not paying down their higher interest rate debts and maximizing their tax-advantaged retirement savings options such as IRAs and 401(k)s.

“Even then, you might be better off investing your money elsewhere than tying up more of your wealth in the most illiquid asset you have – your home,” he said. “Just 28% of American households have a sufficient emergency savings cushion, so why the hurry to pay off a low, fixed rate, tax deductible debt. Money in the bank will pay the bills, home equity will not.”

The current economic situation has pushed down rates with 15-year mortgages becoming “relatively more attractive” than even 5-year adjustable rate mortgages (ARMs) over the last year, said David Reiss, a law professor at the Brooklyn Law School in New York. Last week Freddie Mac announced the average 15-year mortgage rate was 2.74% and the average for the 5-year ARM was 2.75%.

“These rates are virtually the same,” he said. “A year ago, the 15-year was relatively more expensive than the 5-year by about 0.16%. If you can swing the higher principal payments for the 15-year mortgage you will be getting about as good an interest rate as you could hope for.”

Millennial Homeowners Following ‘Rents

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TheStreet.com quoted me in Potential Homeowners Follow in Footsteps of Parents. It opens,

Consumers tend to follow the strategies of their parents when they are faced with whether they should stick with renting or buying their first home.

Potential homeowners, including both Gen X-ers and Millennials, are influenced by the decisions made by their parents. As homeownership rates in the U.S. have fallen to a 51-year low, one reason Gen Y-ers tend to skip homeownership is due to the choice made by their parents while others are faced with mounting student loans and higher costs to purchase a house.

Consumers are nearly three times as likely to purchase a house if their parents were homeowners compared to parents who rented, said Felipe Chacon, a housing data analyst at Trulia, a San Francisco-based real estate website, which analyzed over four decades of data from the University of Michigan in Ann Arbor.

 “What the analysis in the report suggests is that people who grew up in rented homes are less likely to own their own home, even after you exclude those who have gotten financial help from their folks or their spouse’s folks,” he said.
As Millennials are heading toward their 30s, the impact of their childhood is taking effect as ones which grew up in homes the parents owned were 2.8 times more likely to seek the same goal, the researchers found. The trend of home ownership has declined among Millennials and part of the reason could be that people who are 19 to 34 years are less likely to have been raised in homes where their parents owned the homes compared to Gen X-ers or those who are 35 to 45 years old.
“It could simply be an issue of values, where those from owned homes make homeownership a more urgent priority and strive to reach it sooner simply because it is familiar and comfortable to them,” Chacon said.
Consumers are probably more likely to buy a house if their extended family can explain how the process works and what criteria should be prioritized from improving their credit score to saving for a down payment.
“It probably helps to have parents and relatives around who can help you navigate the system as a first time homebuyer,” he said. “Since Millennials, especially younger ones seem to be slightly less likely to be raised in owned homes, there could be a long term cooling effect on the ownership rate among this group.”
The attitude of Americans owning their homes and pursuing the traditional “American Dream” has remained pretty steady over the past five years. In fact, more Millennials are eager to purchase a home and 80% expressed this sentiment in 2015 compared to 71% in 2010, according to a Trulia survey. The overall population mirrors this belief with 75 % who agree in 2015 from 72% in 2010.
One of the hurdles to homeownership is accruing enough money for the down payment. Millennials who grew up with parents who owned a home received more help financially with 11.4% who were given money compared with 2.6% of those who grew up in mostly rented homes.
“The American homeownership rate carries a lot of political and social significance with it and for many, it is seen as a marker of the health of American society,” said David Reiss, a law professor at Brooklyn Law School in New York. “The significant dip in the homeownership rate that has occurred since the financial crisis has shaken the confidence of many that the nation’s households are on solid footing.”

 

Protecting Fannie and Freddie’s Golden Future

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The Federal Housing Finance Agency had requested input on its Update on Implementation of the Single Security and the Common Securitization Platform. By way of background,

The Federal Housing Finance Agency’s (FHFA) 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac includes the strategic goal of developing a new securitization infrastructure for Fannie Mae and Freddie Mac (the Enterprises) for mortgage loans backed by 1- 4 unit (single-family) properties. To achieve that strategic goal, the Enterprises, under FHFA’s direction and guidance, have formed a joint venture, Common Securitization Solutions (CSS). CSS’s mandate is to develop and operate a Common Securitization Platform (CSP or platform) that will support the Enterprises’ single-family mortgage securitization activities, including the issuance by both Enterprises of a single mortgage-backed security (Single Security) and to develop it in a way that allows for the integration of additional market participants in the future. (1)

This is obviously very technical stuff. My own brief comment focused on the need to model and contextualize this development:

FHFA has requested public input on its Update on Implementation of the Single Security and the Common Securitization Platform. The FHFA has made significant progress on the Single Security and the Common Securitization Platform (SS/CSP). In doing so, FHFA has proceeded apace on the technical goals set forth in both the 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac and the 2016 Conservatorship Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions.

Congress’ failure to act on housing finance reform has left it to FHFA to determine the future of the residential mortgage market for the foreseeable future. It is therefore incumbent upon FHFA policymakers to provide further context on how the SS/CSP will operate when fully implemented in 2018.

Thus, FHFA should provide further updates that provide (1) scenarios of how the secondary market may look in 2018 and beyond; and (2) it should also evaluate how SS/CSP would be integrated with the major reform plans that have been proposed by lawmakers and policy analysts, in case Congress were to adopt one of them.

  • FHFA should model how SS/CSP might impact market share of various mortgage originators such as large and small financial institutions as well as how it might impact the credit box for residential borrowers.
  • FHFA should consider how SS/CSP would work with theCorker/Warner bill; the Parrott et proposal; the Bright & DeMarco proposal, among others. FHFA should explain how SS/CSP path dependency might impact each of these proposals. In particular, it should evaluate transition costs that are likely to arise with each option.

FHFA has approached SS/CSP as a technical challenge.  But when implemented, SS/CSP may be setting up a housing finance system that lasts for decades. While Congress has failed to act, FHFA must do its best to evaluate how SS/CSP will affect the housing finance ecosystem.  The stakes for market actors and homeowners are too high not to. (1-2)

The American housing finance system has been the goose that has laid golden eggs decade after decade. We want to be certain that FHFA doesn’t kill it, or even weaken it, unintentionally.

Homeownership in NYC

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photo by Nathan Hart

Brooklyn’s Charles Millard Pratt House

NYU’s Furman Center and Citi have released their joint Report on Homeownership & Opportunity in New York City. It opens,

In New York City, the notoriously high costs of rental housing are well documented. But becoming a homeowner in the New York City real estate market is also a considerable challenge for low- to middle-income households. Households earning less than $114,000 face a severely constrained supply of homeownership opportunities in New York City.

This report seeks to shed light on the extreme variation in homeownership rates among New Yorkers and quantify the homeownership options that exist at different income levels. We do this by analyzing 2014 home sales prices and examining the potential purchasing power of households at various income levels in New York City, as well as in the nearby counties of Nassau, Suffolk, and Westchester.

We use five income categories for this analysis—Low-Income, Moderate-Income, Middle-Income, NYC-Middle-Income, and High-Income. These income bands are based on percentages of Area Median Family Income (AMFI) for the New York City metropolitan statistical area established by the Federal Financial Institutions Examination Council (FFIEC) and are based on data from the 2006-2010 American Community Survey. This report includes an additional middle-income band (NYC-Middle-Income), given that affordable housing programs in New York City serve households up to 165 percent of the U.S. Department of Housing and Urban Development (HUD) area median income (AMI). (3)

You’re all wondering, of course, what NYC-Middle Income is, so the report provides the following explanation of the income categories:

“Low-Income” households have an annual income of $34,000 or less, or 50 percent of AMFI;

“Moderate-Income” households have an annual income between $34,001-$55,000, or 50 percent to less than 80 percent of AMFI;

“Middle-Income” households have an annual income of $55,001-$83,000, or 80 percent to less than 120 percent of AMFI;

“NYC-Middle-Income” households have an annual income of $83,001-$114,000, or 120 percent to less than 165 of AMFI; and

“High-Income” households have an annual income above $114,001, or 165 percent of AMFI or greater. (3, emphasis added)

The report finds that

the purchasing power of most New York City households is limited, largely due to growing housing prices and stagnating incomes since 1990. In addition, while New York City had a relatively low share of homeowners compared to the U.S. in 2014, it was disproportionately low for Low-Income and Moderate-Income households relative to their U.S. counterparts.

The vast majority of home sales in New York City in 2014 were at prices unaffordable to Low-Income and Moderate-Income households, which comprised 51 percent of New York City households. Of the nine percent of sales in the city affordable to these households, three percent were affordable to Low-Income households and an additional six percent were affordable to Moderate-Income households. Home sales with prices that were affordable to Low-Income and Moderate-Income households in 2014 were, for the most part, concentrated outside of Manhattan.

Prospects for homeownership were not much better for Middle-Income households. In 2014, Middle-Income households, which comprise 15 percent of New York City households, could afford an additional 13 percent of sales (based on a total purchase price of up to $364,000), leaving 78 percent of sales out of reach for households with incomes of less than $83,000 annually. Less than half of sales in 2014 (42%) were affordable to 77 percent of New York households, including those characterized as NYC-Middle-Income.

Moving outside of New York City does not necessarily improve a New York City household’s potential to buy a home. In Westchester County, only two percent of sales were affordable to New York City Low-Income and Moderate-Income homebuyers combined in 2014. In Nassau County, only 24 percent of sales were affordable to New York City Low-Income, Moderate-Income, and Middle-Income homebuyers in 2014. In Suffolk County, 42 percent of sales were affordable to New York City Low-Income, Moderate-Income, and Middle-Income households. (4)

New Yorkers, and a lot of non-New Yorkers, are going to eat up the graphs in this report (what IS the median sales price in Brooklyn?!?), so it is worth a read for the real estate obsessed (yes, you). But it also has policy implications about the housing stock of the City and the surrounding region. The report itself does not make any policy recommendations, but it offers a stark reminder of how important rental housing policy is to any effort to maintain socio-economic diversity in the City.

 

The Future of Mortgage Default

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photo by Diane BassfordThe Consumer Financial Protection Bureau has shared its Principles for the Future of Loss Mitigation. It opens,

This document outlines four principles, Accessibility, Affordability, Sustainability, and Transparency, that provide a framework for discussion about the future of loss mitigation as the nation moves beyond the housing and economic crisis that began in 2007. As the U.S. Department of Treasury’s Home Affordable Modification Program (HAMP) is phased out, the Consumer Financial Protection Bureau (CFPB) is considering the lessons learned from HAMP while looking forward to the continuing loss mitigation needs of consumers in a post-HAMP world. These principles build on, but are distinct from, the backdrop of the Bureau’s mortgage servicing rules and its supervisory and enforcement authority. This document does not establish binding legal requirements. These principles are intended to complement ongoing discussions among industry, consumer groups and policymakers on the development of loss mitigation programs that span the full spectrum of both home retention options such as forbearance, repayment plans and modifications, and home disposition options such as short sales and deeds-in-lieu.

The future environment of mortgage default is expected to look very different than it did during the crisis. Underwriting based on the ability to repay rule is already resulting in fewer defaults. Mortgage investors have recognized the value of resolving delinquencies early when defaults do occur. Mortgage servicers have developed systems and processes for working with borrowers in default. The CFPB’s mortgage servicing rules have established clear guardrails for early intervention, dual tracking, and customer communication; however, they do not require loss mitigation options beyond those offered by the investor nor do they define every element of loss mitigation execution.

Yet, even with an improved horizon and regulatory guardrails, there is ample opportunity for consumer harm if loss mitigation programs evolve without incorporating key learnings from the crisis. While there is broad agreement within the industry on the high level principles, determining how they translate into programs is more nuanced. Further development of these principles and their implementation is necessary to prevent less desirable consumer outcomes and to ensure the continuance of appropriate consumer protections.

The CFPB concludes,

The CFPB believes these principles are flexible enough to encompass a range of approaches to loss mitigation, recognizing the legitimate interests of consumers, investors and servicers. One of the lessons of HAMP is that loss mitigation that is good for consumers is usually good for investors, as well. The CFPB therefore seeks to engage all stakeholders in a discussion of the principles for future loss mitigation.

I have no beef with this set of principles as far as it goes, but I am concerned that it does not explicitly include a discussion of the role of state court foreclosures in loss mitigation. As this blog has well documented, homeowners are facing Kafkaesque, outrageous, even hellish, behavior by servicers in state foreclosure actions. Even if the federal government cannot address state law issues directly, these issues should be included as part of the discussion of the problems that homeowners face when their mortgages go into default.

What Is an HOA?

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photo by Clotee Allochuku

Realtor.com quoted me in What Is an HOA? Homeowners Associations—Explained. It opens,

If you’re buying a condo, townhouse, or freestanding home in a neighborhood with shared common areas—such as a swimming pool, parking garage, or even just the security gates and sidewalks in front of each residence—odds are these areas are maintained by a homeowners association, or HOA.

So what is an HOA, and how will it affect your life?

HOAs help ensure that your community looks its best and functions smoothly, says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. For instance, if the pump in the community swimming pool stops working, someone has to take care of it before the water turns green and toxic, right? Rather than expect any one individual in the neighborhood to volunteer their time and money to fix the problem, HOAs are responsible for getting the job done. And the number of Americans living in HOAs is on the rise, growing from a mere 1% in 1970 to 1 in 4 today, according to the Foundation for Community Association Research. So, it’s wise to know exactly how they work.

How much are HOA fees?

To cover these maintenance expenses, HOAs collect fees (monthly or yearly) from all community members. For a typical single-family home, HOA fees will cost homeowners around the $200 to $300 per month, although they can be lower or much higher depending on the size of your unit and the services provided. The larger the home, the higher the HOA fee—which makes sense, because the family of four in a three-bedroom condo is probably going to be using the common facilities more than a single woman living in a studio.

In addition, most HOAs charge their members a little more than monthly expenses require, so that they can build up a reserve to pay for emergencies and big-ticket items like repairing the roof and water heaters, or acquiring new carpeting, paint, and lights for the hallways.

If the HOA doesn’t have enough money in reserve to cover necessary expenses, it can issue a special “assessment,” or an extra fee, in addition to your monthly dues, so that the repairs can be made. For example, if the elevator in your condo building goes out and it’s going to cost $15,000 to replace it—but the HOA reserve account holds only $12,000—you and the rest of the residents are going to have to pony up at least an additional $3,000, divided among you, to make up the difference.

And yes, you would still have to contribute your share even if you live on the first floor.

HOA rules: What to expect

All HOAs have boards, made up of homeowners in the complex who are typically elected by all homeowners. These board members will set up regular meetings where owners can gather and discuss major decisions and issues with their community. For major expenditures, all members of the HOA usually vote.

In addition to maintaining the common areas, HOAs are also responsible for seeing that its community members follow certain rules. Homeowners receive a copy of these rules, knowns as “covenants, conditions, and restrictions” (CC&Rs), when they move in, and they’re required to sign a contract saying that they’ll abide by them.

CC&Rs can cover everything from your type of mailbox to the size and breed of your dog. Some HOAs require you to purchase extra homeowners insurance if you own a pit bull, for example; others prohibit certain breeds entirely. An HOA may even regulate what color you paint your house, and what kind of curtains you can hang if your unit faces the street. Its goal is not to meddle—it’s merely to maintain a neighborhood aesthetic. However, if you don’t like being told what to do with your home, an HOA may not be for you.