Tag Archives: renter

Micro Apartments and The Housing Crisis

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photo by BalazsGlodi

The NYU Furman Center has posted 21st Century SROs: Can Small Housing Units Help Meet the Need for Affordable Housing in New York City? The policy brief opens,

Throughout much of the last century, single-room occupancy (SRO) housing was a commonly available type of low-rent housing in New York City, providing housing to people newly arrived in the city, low-income single New Yorkers, and people needing somewhere to live during life transitions. SRO units typically consisted of a private room with access to full bathroom and kitchen facilities that a renter shared with other building occupants. As the city fell onto hard times, so did SRO housing. During the second half of the last century, many SROs came to serve as housing of last resort, and policymakers enacted laws limiting their construction and discouraging the operation of SRO units. Many SROs were converted to other forms of housing, resulting in the loss of thousands of low-rent units in the city.

New research and analysis from the NYU Furman Center addresses the question of whether small housing units (self-contained micro units and efficiency units with shared facilities) can and should help meet the housing need previously served by SROs. In this policy brief, we present a summary of the paper, 21st Century SROs: Can Small Housing Units Help Meet the Need for Affordable Housing in New York City? We provide an overview of the potential demand for smaller, cheaper units, discuss the economics of building small units, analyze the main barriers to the creation of small units that exist in New York City, and suggest possible reforms that New York City can make to address these barriers. (1)

The policy brief makes a series of recommendations, including

  • reducing density limitations for micro units near transit hubs
  • permitting mixed-income and market-rate efficiency units
  • creating a government small unit program to promote the construction of micro apartments

There is no doubt that the lack of supply is a key driver of the affordable housing crisis across the country. Small units should be part of the response to that crisis, not just in New York City but in all high-cost cities.

Renters and Natural Disasters

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Bill Huntington

Avvo quoted me in What Do Renters Need To Know in A Natural Disaster? It opens,

From hurricanes in the East to wildfires in the West, the past few months have seen an on-going slew of natural disasters in the United States. Fires and floods don’t care whether a property is inhabited by owners or renters. However, most states have laws that  address how landlords and tenants deal with a rental property in the aftermath of a natural disaster.

Renters’ recourse in a natural disaster? Leases and local laws.

Check the lease first

The first source of authority on the obligations of landlords and tenants is found in the lease agreement, which should spell out the terms of what happens in case of a natural disaster. But not all leases clearly address this situation. According to Michael Simkin, managing partner of Simkin & Associates in Los Angeles, in cases where the lease is “burdensome or unfair,” local or state laws will govern what happens.

Landlord and tenant responsibilities vary by state

Every state has different laws regarding landlord and tenant obligations after a natural disaster strikes. Here are examples of answers to common tenant questions from some of the states recovering from recent natural disasters.

Can a lease be terminated if a natural disaster makes a rental property unusable?

California: If a rental property is destroyed in a natural disaster, the lease is automatically cancelled. The landlord must refund the rent for that rental period on a prorated basis.

“Many times, the city can come in and condemn the property and effectively force out tenants in unsafe situations. It is also the landlord’s responsibility to terminate a lease when they have knowledge that their rental property is unusable or unsafe,” notes Monrae English, a partner at Wild, Carter & Tipton in Fresno.

Florida: If the premises are “damaged or destroyed,” the tenant may terminate the rental agreement with written notice and move out immediately.

Louisiana: According to the Louisiana attorney general, if a natural disaster damages a property to the point that it is completely unusable, the lease is terminated automatically.

New York: If a rental becomes unfit for occupancy due to a natural disaster, the tenant may quit the premises and is no longer liable to pay rent. Any rent paid in advance should be returned on a prorated basis, according to David Reiss, law professor at Brooklyn Law School.

Texas: Either the tenant or the landlord can terminate the lease with written notice. Once the lease is canceled, tenants’ obligation to pay rent ceases and they’re entitled to a prorated refund of any rent paid during the time the home was not usable.

If the lease is terminated due to a natural disaster, does the renter get the security deposit back?

California: The landlord must return the security deposit within three weeks of the tenant vacating, with any deductions accounted for in writing. The landlord is not allowed to deduct disaster damage.

Louisiana: The landlord is required to return security deposits within one month, as long as the tenant fulfilled the lease obligations and left a forwarding address, according to Brent Cueria, an attorney with Cueria Law Firm, LLC in New Orleans. The landlord cannot deduct for natural disaster damage.

New York: The security deposit must be returned to the tenant, according to Reiss.

Texas: The security deposit must be refunded.

Improving the 30-Year Mortgage

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Wayne Passmore and Alexander von Hafften have posted Improving the 30-Year Fixed-Rate Mortgage to SSRN. The abstract reads,

The 30-year fixed-rate fully amortizing mortgage (or “traditional fixed-rate mortgage”) was a substantial innovation when first developed during the Great Depression. However, it has three major flaws. First, because homeowner equity accumulates slowly during the first decade, homeowners are essentially renting their homes from lenders. With so little equity accumulation, many lenders require large down payments. Second, in each monthly mortgage payment, homeowners substantially compensate capital markets investors for the ability to prepay. The homeowner might have better uses for this money. Third, refinancing mortgages is often very costly. We propose a new fixed-rate mortgage, called the Fixed-Payment-COFI mortgage (or “Fixed-COFI mortgage”), that resolves these three flaws. This mortgage has fixed monthly payments equal to payments for traditional fixed-rate mortgages and no down payment. Also, unlike traditional fixed-rate mortgages, Fixed-COFI mortgages do not bundle mortgage financing with compensation paid to capital markets investors for bearing prepayment risks; instead, this money is directed toward purchasing the home. The Fixed-COFI mortgage exploits the often-present prepayment-risk wedge between the fixed-rate mortgage rate and the estimated cost of funds index (COFI) mortgage rate. Committing to a savings program based on the difference between fixed-rate mortgage payments and payments based on COFI plus a margin, the homeowner uses this wedge to accumulate home equity quickly. In addition, the Fixed-COFI mortgage is a highly profitable asset for many mortgage lenders. Fixed-COFI mortgages may help some renters gain access to homeownership. These renters may be, for example, paying rents as high as comparable mortgage payments in high-cost metropolitan areas but do not have enough savings for a down payment. The Fixed-COFI mortgage may help such renters, among others, purchase homes.

The authors acknowledge some drawbacks for Fixed-COFI mortgages that can make them unattractive to some borrowers:

What do homeowners lose by choosing Fixed-COFI mortgages instead of traditional fixed-rate mortgages? First, they cannot freely spend refinancing gains on non-housing items. When mortgage rates fall, homeowners with Fixed-COFI mortgages automatically pay less interest and pay down the mortgage principal more. Second, they can no longer “win the lottery” played with capital markets investors and lock in a substantially lower rate for the remainder of their mortgage. With Fixed-COFI mortgages, homeowners trade the option of prepayment for faster home equity accumulation. We believe that many households may prefer Fixed-COFI mortgages to traditional fixed-rate mortgages. Furthermore, we believe that many renting households without savings for a down payment may prefer Fixed-COFI mortgages to renting. (4)

American households rely too much on the plain vanilla 30-year fixed rate mortgage for their own good. Papers like this give us some reasonable alternatives that might be better suited for many households.

Easy Money From Fannie Mae

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The San Francisco Chronicle quoted me in Fannie Mae Making It Easier to Spend Half Your Income on Debt. It reads in part,

Fannie Mae is making it easier for some borrowers to spend up to half of their monthly pretax income on mortgage and other debt payments. But just because they can doesn’t mean they should.

“Generally, it’s a pretty poor idea,” said Holly Gillian Kindel, an adviser with Mosaic Financial Partners. “It flies in the face of common financial wisdom and best practices.”

Fannie is a government agency that can buy or insure mortgages that meet its underwriting criteria. Effective July 29, its automated underwriting software will approve loans with debt-to-income ratios as high as 50 percent without “additional compensating factors.” The current limit is 45 percent.

Fannie has been approving borrowers with ratios between 45 and 50 percent if they had compensating factors, such as a down payment of least 20 percent and at least 12 months worth of “reserves” in bank and investment accounts. Its updated software will not require those compensating factors.

Fannie made the decision after analyzing many years of payment history on loans between 45 and 50 percent. It said the change will increase the percentage of loans it approves, but it would not say by how much.

That doesn’t mean every Fannie-backed loan can go up 50 percent. Borrowers still must have the right combination of loan-to-value ratio, credit history, reserves and other factors. In a statement, Fannie said the change is “consistent with our commitment to sustainable homeownership and with the safe and sound operation of our business.”

Before the mortgage meltdown, Fannie was approving loans with even higher debt ratios. But 50 percent of pretax income is still a lot to spend on housing and other debt.

The U.S. Census Bureau says households that spend at least 30 percent of their income on housing are “cost-burdened” and those that spend 50 percent or more are “severely cost burdened.”

The Dodd-Frank Act, designed to prevent another financial crisis, authorized the creation of a “qualified mortgage.” These mortgages can’t have certain risky features, such as interest-only payments, terms longer than 30 years or debt-to-income ratios higher than 43 percent. The Consumer Financial Protection Bureau said a 43 percent limit would “protect consumers” and “generally safeguard affordability.”

However, loans that are eligible for purchase by Fannie Mae and other government agencies are deemed qualified mortgages, even if they allow ratios higher than 43 percent. Freddie Mac, Fannie’s smaller sibling, has been backing loans with ratios up to 50 percent without compensating factors since 2011. The Federal Housing Administration approves loans with ratios up to 57 percent, said Ed Pinto of the American Enterprise Institute Center on Housing Risk.

Since 2014, lenders that make qualified mortgages can’t be sued if they go bad, so most lenders have essentially stopped making non-qualified mortgages.

Lenders are reluctant to make jumbo loans with ratios higher than 43 percent because they would not get the legal protection afforded qualified mortgages. Jumbos are loans that are too big to be purchased by Fannie and Freddie. Their limit in most parts of the Bay Area is $636,150 for one-unit homes.

Fannie’s move comes at a time when consumer debt is soaring. Credit card debt surpassed $1 trillion in December for the first time since the recession and now stands behind auto loans ($1.1 trillion) and student loans ($1.4 trillion), according to the Federal Reserve.

That’s making it harder for people to get or refinance a mortgage. In April, Fannie announced three small steps it was taking to make it easier for people with education loans to get a mortgage.

Some consumer groups are happy to see Fannie raising its debt limit to 50 percent. “I think there are enough other standards built into the Fannie Mae underwriting system where this is not going to lead to predatory loans,” said Geoff Walsh, a staff attorney with the National Consumer Law Center.

Mike Calhoun, president of the Center for Responsible Lending, said, “There are households that can afford these loans, including moderate-income households.” When they are carefully underwritten and fully documented “they can perform at that level.” He pointed out that a lot of tenants are managing to pay at least 50 percent of income on rent.

A new study from the Joint Center for Housing Studies at Harvard University noted that 10 percent of homeowners and 25.5 percent of renters are spending at least 50 percent of their income on housing.

When Fannie calculates debt-to-income ratios, it starts with the monthly payment on the new loan (including principal, interest, property tax, homeowners association dues, homeowners insurance and private mortgage insurance). Then it adds the monthly payment on credit cards (minimum payment due), auto, student and other loans and alimony.

It divides this total debt by total monthly income. It will consider a wide range of income that is stable and verifiable including wages, bonuses, commissions, pensions, investments, alimony, disability, unemployment and public assistance.

Fannie figures a creditworthy borrower with $10,000 in monthly income could spend up to $5,000 on mortgage and debt payments. Not everyone agrees.

“If you have a debt ratio that high, the last thing you should be doing is buying a house. You are stretching yourself way too thin,” said Greg McBride, chief financial analyst with Bankrate.com.

*     *     *

“If this is data-driven as Fannie says, I guess it’s OK,” said David Reiss, who teaches real estate finance at Brooklyn Law School. “People can make decisions themselves. We have these rules for the median person. A lot of immigrant families have no problem spending 60 or 70 percent (of income) on housing. They have cousins living there, they rent out a room.”

Reiss added that homeownership rates are low and expanding them “seems reasonable.” But making credit looser “will probably drive up housing prices.”

The article condensed my comments, but they do reflect the fact that the credit box is too tight and that there is room to loosen it up a bit. The Qualified Mortgage and Ability-to-Repay rules promote the 43% debt-to-income ratio because they provide good guidance for “traditional” nuclear American families.  But there are American households where multigenerational living is the norm, as is the case with many families of recent immigrants. These households may have income streams which are not reflected in the mortgage application.

Rental Potholes

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photo by Eric Haddox

Realtor.com quoted me in Rental Potholes—and How to Avoid Falling Into Them. It opens,

Until you have the money to buy your own home, renting is eventually a part of just about every person’s life. And typically this transaction tends to work out just fine. Until it doesn’t. Because there is indeed plenty that can go wrong, leaving renters learning some difficult lessons through trial and error. To make sure you aren’t one of them, check out these rental roadblocks—and what you can do to keep from getting stuck.

Somebody’s watching you

“My work took our family to Florida and in our haste to find somewhere to live with our two kids, we found a gorgeous townhouse seaside rental. The ocean views were incredible, just what we’d dreamed of. So incredible, in fact, that we didn’t realize the unit lacked window coverings of any kind! And as much as I loved looking at the ocean, there were times when some level of privacy was desired; people could see into the whole house if they were walking along the beach. When we shared this ‘oversight’ with the landlord, his offer was to split the costs of full-house window coverings! We decided not to help the property owner increase the value of his home. We continued to enjoy ocean views on a 24/7 basis but moved out after a year.” – Rhonda Moret, Del Mar, CA

Lesson learned: Don’t let your enthusiasm keep you from doing your due diligence before thoroughly vetting a place and signing on the dotted line.

“This responsibility falls squarely on the tenant; you can’t expect someone else to look out for your interests. That’s your job,” says David Reiss, academic program director for Brooklyn Law School’s Center for Urban Business Entrepreneurship. But by the same turn, don’t fall for a landlord’s request to “split the cost”—any renovations should be his responsibility all the way.

Bye-bye, security deposit

“When I handed our landlord a $1,000 security deposit, I assumed I’d get it back whenever we left, and didn’t bother to do a walk-through of the apartment to make sure it was in decent shape. Big mistake! Once we moved out, the landlord sent us a letter stating he was keeping the security deposit because we had broken a window in the garage. Only we hadn’t—that must have been done by a previous tenant. We got charged for someone else’s damage.” – Mindy Jensen, Wheaton, IL

Lesson learned: “Doing a walk-through inspection is important if you want your security deposit back,” says Reiss. “It’s important to add details like time stamps to everything and get documentation that your landlord received the report.”

Also consider recording a video with your smartphone while you walk through the place. The more backup material you have, the better the odds that you’ll get back what you deserve.

Your pet or your pad

“A few years ago, my family and I rented a townhouse. There was a pet shop on the corner selling the cutest puppies, and we fell in love with a French bulldog and bought him. That’s when things started to get ugly. We hadn’t checked the rental agreement to see if we could own a pet. When our landlord found out, she became hysterical and asked us to leave—or get rid of the dog. We ended up homeless, but with a very cute puppy. Fortunately, we stayed at a friend’s place until we found a dog-friendly home.” – Derek McLane, Sydney, Australia

Lesson learned: “Read the fine print before you sign. This is pretty fundamental, even if it is not fun to do,” says Reiss.

At the very least, ask your landlord what the rules are and to specify where the pertinent parts can be found in the lease. Be aware that many leases don’t allow pets, or will make pet owners pay an extra fee known as pet rent.

You’ve got mail … a mile away

“I was living in an amazing apartment when the mailboxes in the foyer were vandalized to the point where the USPS deemed them ‘unsafe for delivery of mail.’ We were ‘temporarily’ redirected to pick up mail six blocks up and four very long avenue blocks over until the landlords had an opportunity to repair our mailboxes. A year and a half later, they still hadn’t been fixed—and to make matters worse, a stairwell skylight had collapsed. I was forced to take on the practically full-time job of challenging my landlord to make repairs. I finally was able to make something happen by researching the building and finding out that my landlord had illegally jacked up the rent more than was legally allowed by rent-stabilization laws. Eventually, my efforts resulted in a rent reduction, reinstated mail delivery, and a very bad tenant/landlord relationship.” – Tim Tucker, Las Vegas, NV

Lesson learned: “Know your rights. Tenants have a lot of them, particularly in rent-regulated apartments,” says Reiss.

Mortgage Bankers and GSE Reform

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photo by Daniel Case

The Mortgage Bankers Association has released GSE Reform Principles and Guardrails. It opens,

This paper serves as an introduction to MBA’s recommended approach to GSE reform. Its purpose is to outline what MBA views as the key components of an end state, the principles that MBA believes should be incorporated in any future system, the “guardrails” we believe are necessary in our end state, as well as emphasize the need to ensure a smooth transition to the new secondary mortgage market. (1)

While there is very little that is new in this document, it is useful, nonetheless, as a statement of the industry’s position. The MBA has promulgated the following principles for housing finance reform:

  • The 30-year, fixed-rate, pre-payable single-family mortgage and longterm financing for multifamily mortgages should be preserved.
  • A deep, liquid TBA market for conventional single-family loans must be maintained. Eligible MBS backed by a well-defined pool of single-family mortgages or multifamily mortgages should receive an explicit government guarantee, funded by appropriately priced insurance premiums, to attract global capital and preserve liquidity during times of stress. The government guarantee should attach to the eligible MBS only, not to the guarantors or their debt.
  • The availability of affordable housing, both owned and rented, is vitally important; these needs should be addressed along a continuum, incorporating both single- and multifamily approaches for homeowners and renters.
  • The end-state system should facilitate equitable, transparent and direct access to secondary market programs for lenders of all sizes and business models.
  • A robust, innovative and purely private market should be able to co-exist alongside the government-backed market.
  • Existing multifamily financing executions should be preserved, and new options should be permitted.
  • The end-state system should rely on strong, transparent regulation and private capital (including primary-market credit enhancement such as mortgage insurance [MI] and lender recourse, or other available forms of credit risk transfer) primarily assuming most of the risk.
  • While the system will primarily rely on private capital, there should be a provision for a deeper level of government support in the event of a systemic crisis.
  • There should be a “bright line” between the primary and secondary mortgage markets, applying to both allowable activities and scope of regulation.
  • Transition risks to the new end-state model should be minimized, with special attention given to avoiding any operational disruptions. (3-4)

This set of principles reflect the bipartisan consensus that had been developing around the Johnson-Crapo and Corker-Warner housing reform bills. The ten trillion dollar question, of course, is whether the Trump Administration and Congressional leaders like Jeb Hensarling (R-TX), the Chair of the House Banking Committee, are going to go along with the mortgage finance industry on this or whether they will push for a system with far less government involvement than is contemplated by the MBA.

Foreclosure or Short Sale?

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photo by Taber Andrew Bain

BeSmartee.com quoted me in Which One Is Worse: Foreclosure or Short Sale? It opens,

If you’re faced with either a foreclosure or a short sale situation and aren’t sure what to do, read on. We asked some experts which one is worse.

You might have thought that you became a homeowner the day you closed on your home, but that wasn’t exactly the case. Although your status became ”homeowner” as opposed to, maybe, ” renter ,” you don’t really own the home if you have a mortgage. A more accurate term for what you became that day would be ”home borrower.” This isn’t just being picky about semantics. There’s a reason for the distinction.

If you stop paying your mortgage , the real owner of the home, your mortgage lender, could take it back. This process is a foreclosure .

Another option that may be available to you if you can no longer (or no longer wish to) make your mortgage payments is a short sale . A short sale occurs when you sell your home for less than what you owe. Your lender must be on board with this for it to happen.

So which one is worse: foreclosure or short sale? Here are five considerations.

1. Your Credit Score

Your credit score will take a hit, and a huge hit at that, whether you have a foreclosure or short sale on your credit report. ”They are pretty much equally rotten as far as your credit score is concerned,” says David Reiss , professor of law at Brooklyn Law School.

But just how rotten are foreclosures and short sales to your credit? You can probably count on your score tanking somewhere between 100 and 160 points. And like the saying, ”The bigger they are the harder they fall,” the higher your credit score was before the foreclosure or short sale the larger the drop will be. But the good news is that with either a foreclosure or a short sale, you can start to see your score rise in just a couple of years if you continue to pay all your other bills on time, according to myFICO , the consumer division of FICO .

2. What Future Lenders Think

If you wish to get back into the housing game some day, whether you went through a foreclosure or a short sale matters to many lenders. ”There’s not as much of a stigma involved in selling a house via short sale as there is in losing it in a foreclosure proceeding,” says Rick Sharga, chief marketing officer at Ten-X, an online real estate transaction marketplace. ”A short sale indicated that the borrower was willing to work with the lender, and in fact, an active participant in trying to come up with a solution that worked as well as possible for all parties.”

” Fannie Mae and Freddie Mac treat a foreclosure as worse than a short sale when it comes to future lending,” says Reiss. ”Fannie, for instance, won’t buy a mortgage from a lender who lent to someone who has gone through a foreclosure in the past three years in some cases (but as many as seven), but reduces that bar to two years for a short sale.”