Tag Archives: homeowner

Investing in Mortgage-Backed Securities

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US News & World Report quoted me in Why Investors Own Private Mortgage-Backed Securities. It opens,

Private-label, or non-agency backed mortgage securities, got a black eye a few years ago when they were blamed for bringing on the financial crisis. But they still exist and can be found in many fixed-income mutual funds and real estate investment trusts.

So who should own them – and who should stay away?

Many experts say they’re safer now and are worthy of a small part of the ordinary investor’s portfolio. Some funds holding non-agency securities yield upward of 10 percent.

“The current landscape is favorable for non-agency securities,” says Jason Callan, head of structured products at Columbia Threadneedle Investments in Minneapolis, pointing to factors that have reduced risks.

“The amount of delinquent borrowers is now at a post-crisis low, U.S. consumers continue to perform quite well from a credit perspective, and risk premiums are very attractive relative to the fundamental outlook for housing and the economy,” he says. “Home prices have appreciated nationwide by 5 to 6 percent over the last three years.”

Mortgage-backed securities are like bonds that give their owners rights to share in interest and principal received from homeowners’ mortgage payments.

The most common are agency-backed securities like Ginnie Maes guaranteed by the Federal Housing Administration, or securities from government-authorized companies like Fannie Mae and Freddie Mac.

The agency securities carry an implicit or explicit guarantee that the promised principal and interest income will be paid even if homeowners default on their loans. Ginnie Mae obligations, for instance, can be made up with federal tax revenues if necessary. Agency securities are considered safe holdings with better yields than alternatives like U.S. Treasurys.

The non-agency securities are issued by financial firms and carry no such guarantee. Trillions of dollars worth were issued in the build up to the financial crisis. Many contained mortgages granted to high-risk homeowners who had no income, poor credit or no home equity. Because risky borrowers are charged higher mortgage rates, private-label mortgage securities appealed to investors seeking higher yields than they could get from other holdings. When housing prices collapsed, a tidal wave of borrower defaults torpedoed the private-label securities, triggering the financial crisis.

Not many private-label securities have been issued in the years since, and they accounted for just 4 percent of mortgage securities issued in 2015, according to Freddie Mac. But those that are created are considered safer than the old ones because today’s borrowers must meet stiffer standards. Also, many of the non-agency securities created a decade or more ago continue to be traded and are viewed as safer because market conditions like home prices have improved.

Investors can buy these securities through bond brokers, but the most common way to participate in this market is with mutual funds or with REITs that own mortgages rather than actual real estate.

Though safer than before, non-agency securities are still risky because, unlike agency-backed securities, they can incur losses if homeowners stop making their payments. This credit risk comes atop the “prepayment” and “interest rate” risks found in agency-backed mortgage securities. Prepayment risk is when interest earnings stop because homeowners have refinanced. Interest rate risk means a security loses value because newer ones offer higher yields, making the older, stingier ones less attractive to investors.

“With non-agencies, you own the credit risk of the underlying mortgages,” Callan says, “whereas with agencies the (payments) are government guaranteed.”

Another risk of non-agency securities: different ones created from the same pool of loans are not necessarily equal. Typically, the pool is sliced into “tranches” like a loaf of bread, with each slice carrying different features. The safest have first dibs on interest and principal earnings, or are the last in the pool to default if payments dry up. In exchange for safety, these pay the least. At the other extreme are tranches that pay the most but are the first to lose out when income stops flowing.

Still, despite the risks, many experts say non-agency securities are safer than they used to be.

“Since the financial crisis, issuers have been much more careful in choosing the collateral that goes into a non-agency MBS, sticking to plain vanilla mortgage products and borrowers with good credit profiles,” says David Reiss, a Brooklyn Law School professor who studies the mortgage market.

“It seems like the Wild West days of the mortgage market in the early 2000s won’t be returning for quite some time because issuers and investors are gun shy after the Subprime Crisis,” Reiss says. “The regulations implemented by Dodd-Frank, such as the qualified residential mortgage rule, also tamp down on excesses in the mortgage markets.”

Deductible Up, Premium Down

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photo by Stewart Black

InsuranceQuotes.com quoted me in Homeowners Insurance: Higher Deductibles Lower Premiums, But Can You Afford to Take the Risk? It opens,

Raising the deductible on your home insurance policy is one proven way to save money on your premiums, but it’s not the best financial decision for every homeowner.

Before you reach for the phone to bump up your deductible there are two important factors to consider: Do you have enough money saved to cover higher out-of-pocket claim costs, and have you discussed potential savings and ramifications with an insurance agent?

“The bottom line is that you want to make sure you are comfortable with the deductible amount you’ve selected,” says Stacy Molinari, personal lines and claims manager of Insurance Marketing Agencies, Inc. “And that means you need to make sure you have enough of a financial cushion to cover the deductible. Otherwise it could cost you more in the long run.”

So, just how much savings are out there when switching to a higher deductible? Let’s break it down by looking at a report commissioned by insuranceQuotes.com.

The 2016 Quadrant Information Services study examined the average economic impact of increasing a home insurance deductible (i.e. how much you pay out of pocket for a claim before your insurance coverage kicks in). Using a hypothetical two-story, single-family home covered for $140,000, the study looked at how much an annual U.S. home insurance premium can decrease after increasing the deductible.

According to the National Association of Insurance Commissioners (NAIC), the average home insurance premiums is $1,034, and the study examined three different percentage increases and their respective premium savings:

  • Increase from $500 to $1,000: 7 percent savings.
  • Increase from $500 to $2,000: 16 percent savings.
  • Increase from $500 to $5,000: 28 percent savings.

What makes home insurance deductibles so significant?

In short, a home insurance deducible is one of many gauges an insurance company uses to determine how much risk the consumer is willing to accept. A higher deductible means more risk being taken on by the homeowner, and that additional risk makes it cheaper to insure the policyholder.

“A higher deductible is a signal to the insurance company that the homeowner is less likely to file claims because they are agreeing to a higher threshold for doing so,” says David Reiss, law professor and research director at Brooklyn Law School’s Center for Urban Business Entrepreneurship. “And the less likely you are to make a claim, the lower your premium is going to be.”

Owning v. Renting Smackdown

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Forbes quoted me in Are You Really Just Throwing Your Money Away When You Rent? It reads, in part,

There are a number of reasons for wanting to buy a home over renting and most are valid. Some people want to buy because their current rental unit may have restrictions on owning a pet, while home ownership would, in most cases, not have this limitation. Others want to diversify their assets beyond the stock market. Still others may be pressured by friends and family – loved ones may claim you are simply throwing your money away if you rent, but with owning, you could be building equity every month.

Is this really true?

You Are Building Equity As A Homeowner, But…

It is true that you are building equity each month as a homeowner. However, the amount of equity you’re building is equivalent to the portion of your monthly mortgage payment that goes toward paying down principal.

Because most mortgages are structured to have a uniform monthly payment for the life of the loan, in practice, this means that your early payments will consist of more interest than principal. So while you are paying down principal and building equity, you may not be building as much as you imagined.

For example, let’s say you had a 30-year fixed rate mortgage with an interest rate of 4% and a starting loan balance of $500,000. Your monthly payment would be $2,387, but just 30% of this payment or $720 would go toward “building equity” during the first month. Over the first five years, less than 35% of your total mortgage payments go toward paying down principal (i.e. about $48,000 out of $143,000 of total payments).

Scott Trench, director of operations at real estate investment social network BiggerPockets, added, “Yes, equity can make you feel good, but it’s not really money you can use freely until you’ve sold the property. And if you end up selling in a down market, you may not end up realizing as much equity as you expected.”

*     *     *

The Transaction Costs Are Large For Buying!

The costs of buying and selling real estate are significant, and those costs don’t go toward building equity either.

“Buying a house entails many transaction costs that add up to three, four, or five percent of the price of the home and sometimes even more,” said David Reiss, a professor who teaches residential real estate at Brooklyn Law School. “Many advise that homebuyers should have at least a five-year time horizon or they risk having those transaction costs eat into any gains they were hoping to get out of the sale of their home. Even worse, those costs can lead to a loss, if the local market is soft.”

 On a $500,000 home purchase, three to five percent of closing costs translates to $15,000 to $25,000 – not an immaterial amount of money. When you ultimately sell your home, you may have to pay another three to five percent in closing costs or more.

That’s why your expected time horizon in a home is one of the most important factors to consider when deciding whether it is the right time for you to buy. A longer time horizon gives your home a better opportunity to realize sufficient price appreciation, to offset those large transaction costs.

Plunging Minority Homeownership Rates

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Construction Dive quoted me in Why Minority Homeownership Rates Plunged After the Housing Crash — and How to Reverse The Trend. It opens,

The recovery from the 2007 U.S. housing crash is still underway, with the ramifications of foreclosures and subprime mortgages still playing out for many current and potential American homeowners. Northeastern markets are still struggling to clear out crisis-era inventory, largely due to foreclosure laws, and members of Generation X — one of the hardest hit groups during the crash — are just now building up the required financial strength and confidence to claw their way back to homeownership.

While the Census Bureau Housing Vacancy Survey indicated that U.S. homeownership overall was 63.5% in the first quarter of 2016 — down significantly from a 25-year average of 66.2% — the groups encountering the most difficulties snapping back from the housing crisis are the black and Hispanic populations.

The Census Bureau found that 41.5% of black households and 45.3% of Hispanic households are currently homeowners, compared to 72.1% of white households. And last year, while the Urban Institute projected that Hispanic homeownership would rise over the next 15 years, it also predicted that black homeownership would drop to 40%.

The stagnant and declining minority homeownership numbers are clear, but experts have varying views regarding why this situation is occurring and what can be done to reverse the trend.

 *     *     *

In Newark, NJ, for example, entire minority neighborhoods were targeted with home renovation schemes, which ended in high-interest home equity loans for the consumer, according to David Reiss, professor of law and academic program director for urban business entrepreneurship at Brooklyn Law School. “You would see entire streets with home improvement projects through the same company,” he said.

A study by University of Buffalo professor Gregory Sharp and Cornell University professor Matthew Hall found that “race was the leading explanation for why people lost homes they owned and turned back to rentals.” Sharp and Hall said that minorities were “exploited” by the mortgage lending system, which led to blacks being 50% more likely than whites to lose their homes and enter the rental market.

After the housing market crash, there weren’t enough educational resources and financial literacy programs available to minority groups to help them navigate the “new normal” of adjustable-rate mortgages and increases to their monthly payments, according to Franky Bonilla, with Churchill Mortgage in Houston. “Without access to even the most basic information, such as how to save money or properly document income, many borrowers were unequipped to overcome (these problems), and, as a result, many owners walked away from their homes,” he said.

How to boost homeownership among minorities

So with minority homeownership rates lagging — and in some cases sinking — since the housing crisis, what’s the answer to reverse the trend?

Bonilla, who is also a member of the National Association of Hispanic Real Estate Professionals (NAHREP), said approximately 60% of his business comes from minority homeowners and that this group in particular could benefit from borrower education and outreach, such as bilingual employees, as well as workshops and seminars.

“Lenders with more cultural diversity have an advantage because they can relate and communicate more effectively with individuals who might otherwise feel disadvantaged or intimidated by the mortgage process,” Bonilla said. “In turn, this creates an opportunity to establish a relationship at a personal level and determine which mortgage options are the best fit for each borrower’s unique financial situation.”

Another possible solution to increasing minority homeownership rates, along with homeownership among those who don’t meet the credit requirements for prime loans, is an overhaul of lending criteria for mortgages.

Reiss said there has been a move by some housing advocates to have credit for mortgage purposes reflect factors more indicative of future success as a homeowner. One of the critical issues, however, is to try to determine exactly how much credit is the right amount of credit. “You want to make credit available to people without having excessive default rates,” Reiss said. “Clearly the amount of credit we had in the early 2000s was too much credit, and it ended poorly for many people.”

Reiss added that home lending has always involved a careful balance between underwriting and available credit. “I think everyone would agree that the ‘Wild West’ days of lending were not good for American households in general,” he said.

Saving On Homeowners Insurance

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Trulia quoted me in 5 Ways To Save On Homeowners Insurance. It opens,

Some basic decisions in life shouldn’t demand much debate in your mind. Behind car and life insurance, homeowners insurance is one of the biggest no-brainers. When golf ball–sized hail rips your Boca Raton, FL, roof to shreds, your dog bites a clueless runner, or someone breaks in and steals your vintage Larry Bird jersey and Grandmother’s pearl earrings, a basic homeowners insurance policy should have you covered. But as with any other form of shopping, it’s always best to look around, sniff out a good deal, and compare home insurance options. Luckily, deep discounts can be found. Here are five ways to save on your policy.

1. Shop around, then enlist help

Finding the biggest discount isn’t just for cars and airline tickets. In fact, a few phone calls and internet searches can land you some serious deals on homeowners insurance. “Start by looking to see if there are any companies that offer discounts,” says Cory Gagnon, associate financial adviser, The Beacon Group at Assante Wealth Management Ltd. in Calgary, Canada. “An insurance broker or financial planner can be very helpful in these situations as they have access to databases that allow them to source a wide variety of companies.”Then think about memberships you have — are you a veteran or AARP member? If you’ve used membership discounts for say, buying a car or booking a vacation, see if the association has discounts for homeowners insurance. Think hard about groups you’re part of: Check if your college alumni association offers discounts, or even the wholesale club you belong to (like Costco, BJ’s, or Sam’s Club).

2. Improve your home

Sometimes, Gagnon adds, little changes and improvements to your home can lead to lower premiums. “Some insurance companies offer lower rates for a variety of factors having to do with the structure and build of your home, including the type of wiring, plumbing, and structure material,” he says. “If you are in an older home, making an investment in upgrades to some of these core elements will make your home safer — for example, less threat of pipe bursts, electrical fires — and thus lower your insurance premiums with certain companies, saving you money in the long run.”

3. Know the difference between replacement cost and actual cash value

Homeowners insurance comes with options, and the best way to navigate those options is to know what they are. “One of the most important things that a homeowner should know about when shopping for [a] new or existing homeowners policy is the difference between replacement cost versus actual cash value [ACV],” explains Craig Ciotti, an insurance agent/broker with Fidishun Insurance & Financial Inc. in Yardley, PA. “Replacement cost will insure you for the cost that it would take to replace your home and all of the other personal property in it,” he says. “The other option is actual cash value. ACV is the actual value of your home and does not take into consideration zoning permits or removal of damaged property. ACV is more often used by investors and not homeowners.” If, for instance, a laptop you bought for $1,000 is stolen, with replacement cost insurance, you will get $1,000 for a new laptop. With ACV, you’ll get the current market value for the laptop — which will most likely be far less, since it has probably depreciated over time. ACV premiums generally cost less, but you’ll likely pay more out of pocket after a loss.

4. Agree to a higher deductible

As with other forms of insurance (ahem, car), you can save big on your policy if you simply increase your deductible. “This can shave a significant amount off of your annual premium, which is the good thing,” says David Reiss, professor of law and research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “The bad thing about it is, if you have a casualty, you will be responsible for it until it reaches the higher deductible limit. Thus, you should be able to handle that additional amount before agreeing to the higher deductible. Given that your premium typically goes up when you make a claim, a silver lining of the higher deductible is that you will file fewer claims.”
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Why Houses Don’t Sell

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I was quoted on Trulia in 8 Reasons Your House Isn’t Selling. It opens,

It’s a seller’s market in many cities across the U.S. If your home is in one of those cities, say Charleston, SC, or Colorado Springs, CO, and isn’t getting offers, something could be wrong. The good news? Knowing there’s a problem is the first step toward resolving it. However, there could be many reasons your house isn’t selling. We’ve asked real estate professionals and agents from all over the country what those top reasons might be — and they’ve provided some sound advice on how to remedy each situation.

1. You’re overconfident

Being in a seller’s market might mean that your home will get snapped up for premium price, no matter its condition. But that isn’t always the best strategy to count on. “Sometimes homeowners and agents get overconfident in a seller’s market and get lazy about ‘Home Selling 101,’” says Sep Niakan, broker and owner of HB Roswell Realty in Miami, FL.

Solution: Be realistic from day one. Although you may love your house, brace yourself for it to potentially sit on the market for quite some time. And no matter the market, it’s still important to “position your home to sell well,” says Niakan. “What does that mean? Staging, staging, and more staging.

2. The house is priced too high

Classic supply and demand conditions come into play in a seller’s market: There’s high demand, yet low supply. Therefore, you can usually expect to get more money for your home. But that doesn’t mean the sky’s the limit when it comes to your listing price. “In a seller’s market, a seller may feel comfortable pushing the asking price a bit higher, and this can be a huge mistake,” says Chase Michels of Brush Hill Realtors in Downers Grove, IL. “Determining the best asking price for a home is one of the most important aspects of selling a home. If your home is listed at a price that is above market value, you will miss out on prospective buyers.”

Solution: Make sure that you and your agent are certain of the value of your home in your market and price it right. “Get an analysis of the local market with a professional agent, solid comparables, and specific market trend data,” says Jill Olivarez, a Miramar Beach, FL, real estate agent.

3. The home needs some TLC

It can be a bitter pill to swallow to pay for home improvements that you may not enjoy for long. But if you want to sell for full asking price, you might need to get your house in a condition that warrants it — and not base this number only on price per square foot. “Retail buyers understandably still want the most house for their money,” says Barbara Grassey, author of How to Sell Your House Fast in a Slow Market and founder of the West Florida Real Estate Investors Association.

Solution: “The seller should have amenities comparable to other properties for sale in that price range and should really upgrade certain amenities,” says Grassey. Some upgrade examples, she says, include a pull-down gooseneck faucet, an upgraded ceiling fan, a double-bar towel rack, or upgraded door handles. They sound simple, but a few small changes can make a big impact.

4. There’s a problem with the title

“Title” in this case doesn’t mean the cute name you might have given your place (“The Laurels,” “The Conners’ Corner Cottage,” etc.). Rather, it’s the document that shows ownership. “One reason a house won’t sell is because there is a problem with the title to the house that spooks buyers,” says David Reiss, law professor at Brooklyn Law School in Brooklyn, NY. Here are some examples he gives of title problems:

  • Conveyance without a recorded deed (can sometimes happen in transfers between family members).
  • A paid-off mortgage that is still showing up as a valid lien on the house.
  • A mechanic’s lien that was filed for work done on the house by a subcontractor.

Solution: “Some [title] problems just require a little time to resolve,” says Reiss. Contact the title company to find out what you need to do to prepare for selling — then do it.

Who are Fannie and Freddie?

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Realtor.com quoted me in What Is Fannie Mae? And Freddie Mac, for That Matter? It opens,

Whether you are shopping for a mortgage or just occasionally read financial news stories, you’ve probably heard of Fannie Mae. But what is Fannie Mae, anyway? And for that matter, what about her buddy Freddie Mac? While they may sound like a Nashville singer and standup comic, respectively, they aren’t actual people. Rather, they’re oddly cute nicknames for major forces in the mortgage market.

Fannie Mae stands for the Federal National Mortgage Association, or FNMA (FNMA becomes Fannie Mae, get it?). Fannie’s brother organization is Freddie Mac, aka the Federal Home Loan Mortgage Corporation, or FHLMC. In a nutshell, these two government-sponsored enterprises—hybrids of government agencies and private corporations—help thousands of Americans get loans for homes, so it pays to familiarize yourself with what they do in more detail.

How Fannie and Freddie help homeowners

Fannie Mae was born in 1938, during the height of the Great Depression, when about 25% of Americans were defaulting on their mortgages. As part of the New Deal, the federal government created Fannie (followed by Freddie in 1970) to stimulate the housing market by making mortgages more accessible to lower-income borrowers who might not qualify otherwise. So how do they do that, exactly?

For starters, Fannie and Freddie don’t actually make loans—which is why you may have only heard about them in vague terms, since you wouldn’t approach them directly for a mortgage. Instead, these organizations purchase other lenders’ loans on the secondary market, package them (into mortgage-backed securities), and sell them to investors such as hedge funds.

By buying up banks’ loans, Fannie and Freddie essentially flood those companies with cash, which they can then turn around and lend to more home buyers. This, in turn, helps more buyers get homes who might not qualify otherwise.

“They are the behemoths of the housing finance sector, owning or guaranteeing nearly half of all the residential mortgages in the United States,” says David Reiss, professor of law and academic program director at the Center for Urban Business Entrepreneurship at Brooklyn Law School.