Tag Archives: income

Buyer’s or Seller’s Market?

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GoodCall.com quoted me in Is This a Buyer’s, Seller’s, or Balanced Housing Market? It reads, in part,

When buying or selling a home, everyone wants the most advantageous situation. Both buyers and sellers want “the best price,” but this definition varies: Home buyers want to purchase the desired property at a good deal, while sellers want to receive their asking price. But how does the housing market determine who wins this tug of war? Is this a buyer’s housing market, a seller’s market, or a balanced market?

What are the signs of each housing market, and how does each affect buyers and sellers?

WHAT TYPE OF MARKET ARE WE CURRENTLY IN?

Eric D. Berman, director of communications at the Massachusetts Association of Realtors, tells GoodCall that the country is currently in a seller’s market. “We have near record-low inventory, which means the market benefits sellers,” Berman says.

Adam DeSanctis, economic issues media manager at the National Association of Realtors, agrees that most of the country is in a seller’s market. So what does this mean? “Given the imbalances in demand in relation to supply in most of the country, homes are selling quicker than a year ago and prices continue to rise,” DeSanctis explains.

While a balanced market would usually have a six-month supply, DeSanctis says the last time this happened was in June 2012. “Furthermore, total housing inventory has decreased year-over-year for 16 straight months.”

*     *     *

FACTORS INDEPENDENT OF THE MARKET

Whether it’s a buyer’s, seller’s or balanced market, experts agree that some decisions should be made independently of the housing supply. Berman warns that consumers should not take on more debt than can afford – the monthly payment should always be an amount they’re comfortable paying. “On the other hand, sellers should understand there price is not the only factor when it comes to selling a home, and the highest offer may not always be the best offer,” Berman says.

David Reiss, professor of law and academic program director at the Center for Urban Business Entrepreneurship at the Brooklyn Law School in New York, agrees that buying or selling a home is a personal decision.

“Does a new home work for you and your family in terms of its size, its cost, and the length of time you expect to live in it?  Does selling make sense in terms of changes in your family, your work expectations, your retirement plans?” Reiss says these are the types of questions that will produce the best answers. “But if you try to ride a wave in the market, you may set yourself up for a lot of disappointment.”

Mortgages from the Shadows

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Realtor.com quoted me in ‘Shadow Banks’ Are on the Rise for Home Loans: Should We Be Afraid? It opens,

Where do home buyers go for a mortgage? To a bank, of course—or at least that’s what many might think. Yet a new force has taken over home financing, called “shadow banks.” So what are these non-banks exactly, and should we run for the hills?

In a nutshell, these are the less conventional places that don’t provide savings accounts, only loans to buy homes. They include companies like Quicken Loans, which is one of the nation’s largest mortgage providers, Caliber, and loanDepot.com.

But they can also be companies run by wealthy individuals using their personal fortunes to finance loans and then pocketing monthly interest payments, according to the Wall Street Journal. Or they could be funded by private equity, which is financed by pooled investor cash.

And, as a group, they’re no longer operating on the fringes of the housing industry. Instead, shadow banks “have overtaken U.S. commercial banks, to grab a record slice” of the market,” according to a recent housing report by ATTOM Data Solutions.

This group of nontraditional lenders now accounts for 48.3% of mortgages in 2016—compared to just 23.4% in 2008, according to the ATTOM report.

“The big banks got burned by the financial crisis, so they’ve become much more hesitant to make loans that are even close to being risky,” says Daren Blomquist, senior vice president at ATTOM.

These mortgage makers are very appealing to buyers without a 20%—or even 10%—down payment and therefore have trouble getting a loan from a regular old bank, says Blomquist. This might make sense for first-time buyers, or folks who have gone through a foreclosure.

But are they right for everyone? And, more to the point: Are they harbingers of the risky loaning behavior that help bring on the U.S. housing collapse?

Could shadow banks lead to another housing crisis?

As a group, these lenders are not subject to the same level of governmental scrutiny, regulations, and fees that drove many traditional financial institutions, like banks, out of the space after the housing bust. But they still come under a significant amount of federal oversight.

In short, regular banks retreated, so shadow banks moved in. What’s wrong with that?

As market media site Seeking Alpha has pointed out, shadow banks are “some of the same characters that played leading roles [in the last housing crisis].”

Not all experts believe we should be overly worried.

“While it’s true that so-called shadow banks played roles in the last housing crisis … the market itself is very different,” says David Reiss, a professor of Law at Brooklyn Law School and editor of REFinBlog.com.

For one, the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 in response to the housing meltdown of 2008, changed how all lenders—banks, shadow banks, and otherwise—make loans, to better ensure there isn’t another housing bust.

Another big difference: Lenders are now documenting the income of borrowers to make sure these new homeowners can afford to make their monthly payments.

“There’s no evidence out there that non-banks are lending in any sort of imprudent way and/or hurting consumers,” Guy Cecala, publisher and CEO of Inside Mortgage Finance, tells realtor.com®. “In fact, most non-banks are more competitive than banks when it comes to mortgage interest rates and fees.”

“But they don’t have the same level of capital [such as cash], assets, or liquidity as banks do,” he says.

What to consider before getting a shadow bank loan

Borrowers should just take care to tread carefully and examine the terms and conditions of the financing before signing on the dotted line, says Mark Greene, a longtime mortgage lender based in Hackensack, NJ.

He recommends looking for red flags like adjustable rate change terms, prepayment penalties, and other hidden fees.

Good ol’ common sense will come in handy too.

“If your loan is coming from a fishy-sounding company like Two Brothers Fly-by-Night Hard Money-Lenders, Inc., you may want to dig a bit deeper, to figure out what kind of lender it really is,” says law professor Reiss.

REFinBlog has been nominated for the second year in a row for The Expert Institute’s Best Legal Blog Competition in the Education Category. Please vote here if you like what you read.

Can Seniors Get Mortgages? Should They?

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photo by Bill Branson

TheStreet.com quoted me in Can Seniors Get Home Mortgages? Should They? It reads, in part,

Senior citizens can and are getting approved for mortgages, and we are not talking reverse mortgages or home equity lines of credit, but – in many cases – 30-year fixed loans. Even when the borrower might be 85 and the actuarial probability of making it to the end of the loan term is nil.

The federal government is blunt: age cannot be used to discriminate against applicants for home loans. Capacity to repay is a factor – for seniors and every other borrower – but a lender cannot turn down an applicant just because he is 65…or 75…or 85. And loans are getting made.

Which raises the other question: is it wise for the borrower? Bankers can take care of themselves, but seniors need to ask: should I be borrowing a lot of money on a house at my age?

In Vancouver, Wash., Dick Kuiper – who said he is “approaching 70,” as is his wife – “just purchased a new home last year and got a 30 year mortgage at just under 3%, and we both believe this was a brilliant move.”

“We first made sure we made a large enough down payment so we would always have positive equity in the home,” Kuiper elaborates. “With that calculated, we looked at the alternatives, either pay in cash – which would naturally come out of our savings – or take out a mortgage. We looked at what we could get by putting the same amount of money into a retirement annuity with a downside guarantee. That annuity pays a minimum of 5% for life and currently is paying in the 8% to 9% range. Do the math. We’d be crazy to pay cash for the house.”

Kuiper’s right. For his wife and him, it made no sense to pay cash for a house – not when mortgage rates are breathtakingly low.

Case closed? Not at all.

Ash Toumayants, founder of financial advisors Strong Tower Associates in State College, Pa., said that in his experience few seniors ever want another mortgage in retirement after they settled up on their first one. “Most are excited when they pay it off and don’t want another one,” Toumayants says.

Another fact: to get a mortgage, a senior has to demonstrate to a lender a capacity to repay. Age cannot be used against a senior, but lack of cashflow can. And many seniors just have sizable trouble qualifying for a mortgage. “The trick is whether they have enough income to qualify or not,” said Casey Fleming, a mortgage expert in Northern California who said that he right now is working on a loan for an 85-year-old client.

Brian Koss, executive vice president of Mortgage Network, an independent mortgage lender in the eastern U.S., elaborated: “For seniors thinking about getting a mortgage, it’s all about income flow. If you have a consistent source of income, and a mortgage payment that fits that income, it makes sense. Something else to consider: if you have income, you have taxes and a need for a tax deduction. With a mortgage, you can write off the interest.”

*     *     *

But then there is an ugly issue to confront. Is the senior arriving at this purchase decision on his own steam? Brooklyn Law professor David Reiss explained why that needs to be asked. “Seniors should discuss big financial moves with someone whose judgment they trust (and who does not stand to benefit from the decision). Elder financial abuse is rampant.”

Reiss added: “What has changed in their financial profile that is leading them to do this? Is someone – a relative, a new friend – egging them on or leading them through the process?” Reiss is right in the caution, and that’s a concern that has to be satisfied.

The Republican Housing Platform

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The Republican Party adopted its platform earlier this week.  The short housing platform is worth reading in its entirety:

Responsible Homeownership and Rental Opportunities

Homeownership expands personal liberty, builds communities, and helps Americans create wealth. “The American Dream” is not a stale slogan. It is the lived reality that expresses the aspirations of all our people. It means a decent place to live, a safe place to raise kids, a welcoming place to retire. It bespeaks the quiet pride of those who work hard to shelter their family and, in the process, create caring neighborhoods.

The Great Recession devastated the housing market. U.S. taxpayers paid billions to rescue Freddie Mac and Fannie Mae, the latter managed and controlled by senior officials from the Carter and Clinton Administrations, and to cover the losses of the poorly-managed Federal Housing Administration. Millions lost their homes, millions more lost value in their homes.

More than six million households had to move from homeownership to renting. Rental costs escalated so that today nearly 12 million families spend more than 50 percent of their incomes just on rent. The national homeownership rate has sharply fallen and the rate for minority households and young adults has plummeted. So many remain unemployed or underemployed, and for the lucky ones with jobs, rising rents make it harder to save for a mortgage.

There is a growing sense that our national standard of living will never be as high as it was in the past. We understand that pessimism but do not share it, for we believe that sound public policies can restore growth to our economy, vigor to the housing market, and hope to those who are now on the margins of prosperity.

Our goal is to advance responsible homeownership while guarding against the abuses that led to the housing collapse. We must scale back the federal role in the housing market, promote responsibility on the part of borrowers and lenders, and avoid future taxpayer bailouts. Reforms should provide clear and prudent underwriting standards and guidelines on predatory lending and acceptable lending practices. Compliance with regulatory standards should constitute a legal safe harbor to guard against opportunistic litigation by trial lawyers.

We call for a comprehensive review of federal regulations, especially those dealing with the environment, that make it harder and more costly for Americans to rent, buy, or sell homes.

For nine years, Fannie Mae and Freddie Mac have been in conservatorship and the current Administration and Democrats have prevented any effort to reform them. Their corrupt business model lets shareholders and executives reap huge profits while the taxpayers cover all loses. The utility of both agencies should be reconsidered as a Republican administration clears away the jumble of subsidies and controls that complicate and distort home-buying.

The Federal Housing Administration, which provides taxpayer-backed guarantees in the mortgage market, should no longer support high-income individuals, and the public should not be financially exposed by risks taken by FHA officials. We will end the government mandates that required Fannie Mae, Freddie Mac, and federally-insured banks to satisfy lending quotas to specific groups. Discrimination should have no place in the mortgage industry.

Zoning decisions have always been, and must remain, under local control. The current Administration is trying to seize control of the zoning process through its Affirmatively Furthering Fair Housing regulation. It threatens to undermine zoning laws in order to socially engineer every community in the country. While the federal government has a legitimate role in enforcing non-discrimination laws, this regulation has nothing to do with proven or alleged discrimination and everything to do with hostility to the self-government of citizens. (4)

Here are some of the policy proposals that I think it gets right: abolishing Fannie and Freddie in their current form as hybrid public/private corporations; implementing regulation that promotes responsible underwriting and protects against predatory lending; and banning discrimination in the credit markets.

There is a lot of coded language in the platform, however. And that coded language may be inconsistent with some of those goals. For instance, the opposition to the Obama Administration’s attempts to reduce de facto segregation in the housing markets through such initiatives as the Affirmatively Furthering Fair Housing regulation undercuts the claim that the party opposes discrimination in the housing market.

It will be a long, strange trip to the November election. The direction of federal housing policy must be counted as one of important issues at stake.

Urban Income Inequality

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The union-affiliated Economic Policy Institute has released a report, Income Inequality in the U.S. by State, Metropolitan Area, and County. The report finds that

The rise in inequality in the United States, which began in the late 1970s, continues in the post–Great Recession era. This rising inequality is not just a story of those in the financial sector in the greater New York City metropolitan area reaping outsized rewards from speculation in financial markets. It affects every state, and extends to the nation’s metro areas and counties, many of which are more unequal than the country as a whole. In fact, the unequal income growth since the late 1970s has pushed the top 1 percent’s share of all income above 24 percent (the 1928 national peak share) in five states, 22 metro areas, and 75 counties. It is a problem when CEOs and financial-sector executives at the commanding heights of the private economy appropriate more than their fair share of the nation’s expanding economic pie. We can fix the problem with policies that return the economy to full employment and return bargaining power to U.S. workers.

The specific findings are very interesting. They include,

  • Overall in the U.S. the top 1 percent took home 20.1 percent of all income in 2013. (4)
  • To be in the top 1 percent nationally, a family needs an income of $389,436. Twelve states, 109 metro areas, and 339 counties have thresholds above that level. (2)
  • Between 2009 and 2013, the top 1 percent captured 85.1 percent of total income growth in the United States. Over this period, the average income of the top 1 percent grew 17.4 percent, about 25 times as much as the average income of the bottom 99 percent, which grew 0.7 percent. (3)
  • Between 1979 and 2013, the top 1 percent’s share of income doubled nationally, increasing from 10 percent to 20.1 percent. (4)
  • The share of income held by the top 1 percent declined in every state but one between 1928 and 1979. (4)
  • From 1979 to 2007 the share of income held by the top 1 percent increased in every state and the District of Columbia. (4)
  • Nine states had gaps wider than the national gap. In the most unequal states—New York, Connecticut, and Wyoming—the top 1 percent earned average incomes more than 40 times those of the bottom 99 percent. (2)
  • For states the highest thresholds are in Connecticut ($659,979), the District of Columbia ($554,719), New Jersey ($547,737), Massachusetts ($539,055), and New York ($517,557). Thresholds above $1 million can be found in four metro areas (Jackson, Wyoming-Idaho; Bridgeport-Stamford-Norwalk, Connecticut; Summit Park, Utah; and Williston, North Dakota) and 12 counties. (3)

The income threshold of the top 1% for individual counties is also interesting.  For example, New York County (Manhattan) comes in second, at $1,424,582 (following Teton, WY at $2,216,883) and San Francisco County comes in 24th at $894,792. (18, Table 6)

Income inequality is a fact of life for big cities and affects so many aspects of American life — housing, healthcare, education, to name a few important ones. The Economic Policy Institute focuses on union-movement responses to income inequality, but urbanists could also consider how to respond systematically to income inequality in the design of urban systems like those for healthcare, transportation and education. If the federal government is not ready to do anything about income inequality itself, states and local governments can make some progress dealing with its consequences. That is a far better route than acting as if income inequality is just some kind unexpected aspect of modern urban life and then bemoaning its visible manifestations, such as homelessness.

 

 

Couples Leave Money on Closing Table

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photo by Dustin Moore

Geng Li, Weifeng Wu and Vincent Yao, three Fed economists, have posted a research note, Do People Leave Money on the Table? Evidence from Joint Mortgage Applications and the Minimum FICO Rule. The authors state that there “is mounting evidence that households make suboptimal savings and investment decisions” and find that

many mortgage borrowers appear to have failed to apply for mortgages that give the lowest interest rates. Specifically, we find that nearly 10 percent of prime borrowers who applied for their loans jointly could have lowered their mortgage interest rate at least one eighth of 1 percentage point if the mortgage was applied for by the applicant with a higher credit score and an income high enough to qualify for the mortgage. Furthermore, among the joint applicants with a lower credit score below 740, for whom mortgage interest rates are most sensitive to credit scores, more than 25 percent could have significantly reduced their borrowing cost by having the individual with a higher credit score apply. This is due to the fact that when lenders price mortgages with joint applications, the interest rates are determined by the lower score of the two–often known as the minimum FICO rule. We estimate that such borrowers could reduce their annual interest payment by between $220 and $1,400. Consistent with the existing literature, we find that couples who appeared to have left money on the table tend to have lower credit scores and be much younger and less financially sophisticated. (1, emphasis added)

This note provides an example of just how complicated the mortgage underwriting process is, particularly for less financially sophisticated borrowers.

One wonders if the CFPB should take a look at this. Should lenders be required to evaluate if joint mortgage applicants would get a better rate if only one of them ended up taking out the mortgage? And when the answer is yes, should lenders be required to share that information with the applicants? I can think of a variety of reasons why that should not be the case (not the least of which is that it could leave just one member of the family holding the bag if things go south), but it might be worth exploring this question more systematically.