Another pitfall of student debt

Jun 28, 2013 Kenneth R. Harney

WASHINGTON — They’re not yet an endangered species, but their steadily diminishing presence has some real estate analysts worried: First-time buyers are missing in action in housing markets across the country.

Traditionally first-timers have accounted for around 40 percent of purchases in the resale market. But in May, according to the National Association of Realtors, they were just 28 percent, down from 29 percent in April and 34 percent a year ago.

Big deal? Yes. If predominantly young, first-time purchasers are not entering the homeownership pipeline at anywhere near their traditional rate, at some point the system begins to choke. Owners of modest-priced starter homes find it more difficult to sell and move up. They in turn can’t buy the larger homes they crave, reducing demand for houses in the more expensive categories. A shortage of first-time buyers at the intake level eventually triggers problems all the way up.

Where are these previously dependable first-time homebuyers in their late 20s and early 30s? A new national study released last week offers important clues: A lot of them are carrying such heavy debts from student loans that they’re postponing buying houses.

Researchers for the One Wisconsin Institute found that the rate of homeownership among individuals who are paying off student loans is 36 percent lower than their peers who have no student debt. The disparity can be seen at all income levels. Among individuals who earn $50,000 to $75,000 a year, those who are still paying down student loans have a 28 percent lower rate of homeownership compared with others in the same income group.

Bulging student-loan balances aren’t short term issues, either. The institute’s study found that the average payoff time is 21 years, ranging from 17 years for those who attended college but did not get a degree to 23 years for those with graduate degrees.

Worse yet, student loans are exhibiting high default rates — currently about 13.4 percent. That depresses credit scores and makes it more difficult to qualify for a mortgage under today’s toughened underwriting standards, where average FICO scores for buyers using conventional mortgages top 760.

Even financial regulators are now acknowledging the troubling linkage between student-debt loads and declining home purchases. In a recent report, researchers at the New York Federal Reserve said heavy student-loan balances that limit access to credit “may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally.”

Total outstanding student debt now exceeds $1.1 trillion. Debt loads for recent graduates average just under $27,000, but an estimated 13 percent of outstanding balances range from $54,000 to $100,000.

Student debt troubles are hardly the only barrier keeping first timers out of the market, however. Stan Humphries, chief economist for Zillow, the online real estate site, says there are three additional important reasons behind the trend

– High down payment requirements for conventional loans — averaging just below 20 percent. The Federal Housing Administration’s lower down payment options are attractive, but recent premium hikes can make FHA loans more expensive than competing conventional mortgages.

– Persistent negative equity problems among the owners and potential sellers of the lower-priced start-up homes that first-time buyers traditionally could afford are keeping those properties off the market because owners don’t want to take a loss at settlement. Roughly 43 percent of owners in the 35 to 39 age bracket are still underwater on their mortgages — nearly double the rate for homeowners overall.

– Cash-rich investor competition. For those affordable homes that do come on the market, first-time buyers frequently are losing out to investors who can pay hard cash, no financing contingencies.

Problems like these aren’t likely to go away anytime soon, Humphries believes, but they could improve gradually. For example, financing terms could loosen up as interest rates rise and lenders who’ve been feasting on refinancings are forced to reach out to purchasers — including first timers — with more favorable deals. Similarly, as home prices rise, investors are likely to cut back on their purchases of starter homes they turn into rentals, thereby opening new doors for first-time buyers.

Student debt burdens are a much tougher nut, though. Until the unrelenting increases in higher education costs get under control, it just may be that some first timers will have to enter the market later than they have done traditionally.

Another pitfall of student debt

Jun 28, 2013 Kenneth R. Harney

WASHINGTON — They’re not yet an endangered species, but their steadily diminishing presence has some real estate analysts worried: First-time buyers are missing in action in housing markets across the country.

Traditionally first-timers have accounted for around 40 percent of purchases in the resale market. But in May, according to the National Association of Realtors, they were just 28 percent, down from 29 percent in April and 34 percent a year ago.

Big deal? Yes. If predominantly young, first-time purchasers are not entering the homeownership pipeline at anywhere near their traditional rate, at some point the system begins to choke. Owners of modest-priced starter homes find it more difficult to sell and move up. They in turn can’t buy the larger homes they crave, reducing demand for houses in the more expensive categories. A shortage of first-time buyers at the intake level eventually triggers problems all the way up.

Where are these previously dependable first-time homebuyers in their late 20s and early 30s? A new national study released last week offers important clues: A lot of them are carrying such heavy debts from student loans that they’re postponing buying houses.

Researchers for the One Wisconsin Institute found that the rate of homeownership among individuals who are paying off student loans is 36 percent lower than their peers who have no student debt. The disparity can be seen at all income levels. Among individuals who earn $50,000 to $75,000 a year, those who are still paying down student loans have a 28 percent lower rate of homeownership compared with others in the same income group.

Bulging student-loan balances aren’t short term issues, either. The institute’s study found that the average payoff time is 21 years, ranging from 17 years for those who attended college but did not get a degree to 23 years for those with graduate degrees.

Worse yet, student loans are exhibiting high default rates — currently about 13.4 percent. That depresses credit scores and makes it more difficult to qualify for a mortgage under today’s toughened underwriting standards, where average FICO scores for buyers using conventional mortgages top 760.

Even financial regulators are now acknowledging the troubling linkage between student-debt loads and declining home purchases. In a recent report, researchers at the New York Federal Reserve said heavy student-loan balances that limit access to credit “may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally.”

Total outstanding student debt now exceeds $1.1 trillion. Debt loads for recent graduates average just under $27,000, but an estimated 13 percent of outstanding balances range from $54,000 to $100,000.

Student debt troubles are hardly the only barrier keeping first timers out of the market, however. Stan Humphries, chief economist for Zillow, the online real estate site, says there are three additional important reasons behind the trend:

Senators introduce bipartisan bill to replace Fannie, Freddie with new agency

By Danielle Douglas, Published: June 25

A bipartisan pair of lawmakers have laid out the first substantial plan to redesign the nation’s mortgage market, nearly five years after the government spent more than $100 billion to rescue the system.

Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) introduced legislation Tuesday to replace mortgage finance giants Fannie Mae and Freddie Mac with a new government agency that would shift more of the risks of mortgage lending to the private sector.

“This bill has the opportunity to be the blueprint that could spark the debate both in the House and the Senate, and ultimately become” a pathway for reform, said David Stevens, chief executive of the Mortgage Bankers Association.

The senators are attempting to bridge the contentious divide in Washington over the role of the government in the housing market. Congressional Republicans, who partly blame Fannie and Freddie for the financial crisis, want to leave mortgage financing solely in the hands of the private market.

Many Democrats, however, argue that though the current system is not ideal, the government is needed to ensure that affordable mortgages are available for a wide range of Americans.

Since the financial crisis in 2008, Fannie, Freddie and other government-backed agencies have insured nearly 90 percent of new mortgages. While that has made home loans widely available despite the financial upheaval, it means taxpayers are at risk if homeowners default on their loans.

Against this backdrop, Corker and Warner have proposed a compromise that would make the government the last line of defense in the event of a housing crash. Under the new proposal, homeowners, banks and other private-sector firms would suffer first if a borrower stops paying a mortgage.

A borrower would either have to put 20 percent down to get a government-backed loan, or, if the borrower put down less money, would have to pay for mortgage insurance to make up the difference. That puts the borrower or private mortgage insurance company on the line for 20 percent of the value of the loan. (And the home could be sold for the remainder of the loan value, assuming that it has not declined in value by more than 20 percent.)

If the home’s value had dropped more than 20 percent – the bank issuing the loan would have to absorb losses, up to 10 percent of the value of the loan. Finally, if that’s still not enough, the government would promise to cover the losses on the loan.

The government would create a new single agency, modeled after the Federal Deposit Insurance Corp., to insure these mortgages. The new agency would charge premiums to lenders in exchange for the guarantee, which likely would be passed onto borrowers.

Most mortgage loans are pooled into securities that are traded around the world, from foreign central banks to domestic pensions. Without the U.S. government’s stamp of approval, investors would be more wary of putting money into American home loans, and financing the purchase of a home could become more expensive, as is it in many other countries.

Under Corker and Warner’s bill, Fannie and Freddie will have no more than five years to sell off their assets and cease operation. The Federal Housing Finance Agency would also be abolished and its staff and infrastructure transferred to the new government entity.

The legislation calls for banks to hold a piece of the mortgage-backed securities they sell to investors. While big banks have fought against rules requiring them to keep a stake in mortgages in the past, analyst suggest they could be swayed by being allowed greater access to the securitization process.

“A package that gives the bigger banks a broad role in packaging loans while ensuring community banks have unfettered access to mortgage securitizations is the best way to build industry support for legislation,” Jaret Seiberg, an analyst at Guggenheim Securities LLC’s Washington Research Group, wrote in a policy note.

But the way the government structures the loss and capital requirements could make it more difficult for borrowers to get a home loan. Lenders are sure to pass any additional costs they incur on to consumers. Capital requirements will likely be much greater for borrowers with low down payments and credit scores, which means those on the margins of the financial system could wind up paying more for a mortgage, Stevens said.

“Making sure that the first loss and private capital up front is substantial enough to protect the taxpayers, but not overly burdensome to the point where it restricts access to credit, is the dynamic tension we’ll be looking at in the coming weeks,” he said.

Despite calls by lawmakers and others to abolish Fannie and Freddie, the Obama administration has not offered any substantial plans to revamp the housing finance system since the government placed the firms in conservatorship in 2008. Rather, it has laid out options.

A White House spokesperson said Tuesday that the president “welcomes this bipartisan effort on reforming our housing finance system.” The administration wants to ensure that whatever system replaces Fannie and Freddie protects “the 30-year fixed-rate mortgage and broad and affordable access to housing for responsible working families from all communities,” the person said.

Getting the Corker-Warner bill through the House will be an uphill battle. House Financial Services Chairman Jeb Hensarling (R-Tex.) has been a strong proponent of fully privatizing the system.

“The GOP-controlled House is a real obstacle to reform even for measures that enjoy bipartisan support in the Senate,” Seiberg said. “One only has to look at the farm bill to see how more radical interests in the Republican Party can defeat a bill that emerged from the Senate on a bipartisan basis.”

There is a small chorus of investors who support restructuring, rather than eliminating, Fannie and Freddie. The tide of opinion started to turn some after Fannie May posted a record $7.6 billion in profits in the final quarter of 2012, making observers wonder whether they could survive without government support. Last month, Fannie Mae repaid the government $59.4 billion.

The overwhelming momentum, however, is behind doing away with the mortgage finance giants.

Someone is watching buyers

Jun 21, 2013 Kenneth R. Harney

WASHINGTON — You can call it Big Brother. You can call it high-tech snooping. But be aware: If you are applying for a mortgage in the coming weeks, you can be sure that your credit will be checked and re-checked — possibly monitored daily — to make certain no hints of new debts pop up before you close on the loan.

Just as the federal monitoring of phone traffic that’s been in the headlines lately was a direct outgrowth of 9/11, pre-closing credit monitoring is a byproduct of the housing crash. Lenders are terrified of being forced to “buy back” loans from investors Fannie Mae or Freddie Mac because borrowers had more debts than they disclosed at the time of application.

As a result, virtually all banks and mortgage companies now use some form of commercially available program to keep tabs on credit files between the date of your loan application to your settlement. One of the three national credit bureaus, Equifax, offers a popular service that monitors applicants 24/7 and can detect even subtle hints that a home purchaser is planning to add on new debt before the closing.

Say your mortgage application was just approved. In the documents you laid out all your credit obligations and just barely passed the lender’s crucial “debt-to-income” ratio test. You’re feeling upbeat about the prospect of moving to a new home and you start thinking of things you need to buy: Furniture for the living and family rooms. New beds. TVs. Audio equipment.

So you visit a couple of stores and take up their offers for low interest-rate credit lines. You apply for what could come to as much as $14,000 worth of new debt, all to be paid off monthly.

Ping! In Equifax’s computer maze, your credit “inquiries” to merchants trigger alerts. Your lender or mortgage broker is notified immediately that you are pursuing additional credit. And in this case, that $14,000 in potential new payment obligations could knock your debt-to-income ratio over the cliff.

Lenders say clients can mess up transactions in all sorts of ways. Annie Austin, a senior loan officer with Cobalt Mortgage in Bellevue, Wash., says one borrower went out and bought a new Porsche on credit after getting his loan application approved, despite warnings not to incur new debt before closing.

Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says that although he hands a prudent “do not do this” list to every applicant, some borrowers ignore it or forget that they’ve got credit-related situations they never disclosed, such as co-signed student loans, applications for overdraft coverage on checking accounts, or even that the down payment cash they claimed as their own was actually lent to them by someone else and must be repaid. One borrower, Skeens recalled, had received home purchase money on the side from a “loan club” that would require $600 a month to pay off. Oops!

According to Equifax Vice President Raymond White, undisclosed debts — or fresh inquiries for additional credit never disclosed to the lender — now turn up in “nearly one out of five” mortgage applications. Yet under Fannie Mae and Freddie Mac rules, any increase in the total debt-to-income ratio of more than three percentage points, or that pushes the ratio beyond 45 percent, can put the lender into a vulnerable position. If the mortgage later goes bad, Fannie and Freddie can force the lender to buy it back — financial torture for any bank.

White says that failure to disclose debts on mortgage applications is an equal opportunity problem, seen in all market segments, including well-off borrowers who have excellent credit. Research by Equifax found that people with high credit scores are significantly more likely to have undisclosed debts — or new credit obligations in the works before settlement — than other categories of applicants.

“The higher the FICO score you have,” said White in an interview, “the more likely you are to buy something” — or apply for new credit — that triggers an alert.

It’s counterintuitive, he agrees, and it’s probably because consumers with higher FICOs feel more confident about their credit and may have more resources to handle new debts. But inquiry pings from auto or boat dealers can still mess up their home purchases or refinancings.

Bottom line: From application to closing, don’t shop for new credit. It’s entirely possible someone is watching. And you are suddenly a person of interest.

Read more at http://www.arcamax.com/homeandgarden/thenationshousing/s-1343698?print#4MbR0 DtvoBrim9vl.99

Someone is watching buyers

Jun 21, 2013 Kenneth R. Harney

WASHINGTON — You can call it Big Brother. You can call it high-tech snooping. But be aware: If you are applying for a mortgage in the coming weeks, you can be sure that your credit will be checked and re-checked — possibly monitored daily — to make certain no hints of new debts pop up before you close on the loan.

Just as the federal monitoring of phone traffic that’s been in the headlines lately was a direct outgrowth of 9/11, pre-closing credit monitoring is a byproduct of the housing crash. Lenders are terrified of being forced to “buy back” loans from investors Fannie Mae or Freddie Mac because borrowers had more debts than they disclosed at the time of application.

As a result, virtually all banks and mortgage companies now use some form of commercially available program to keep tabs on credit files between the date of your loan application to your settlement. One of the three national credit bureaus, Equifax, offers a popular service that monitors applicants 24/7 and can detect even subtle hints that a home purchaser is planning to add on new debt before the closing.

Say your mortgage application was just approved. In the documents you laid out all your credit obligations and just barely passed the lender’s crucial “debt-to-income” ratio test. You’re feeling upbeat about the prospect of moving to a new home and you start thinking of things you need to buy: Furniture for the living and family rooms. New beds. TVs. Audio equipment.

So you visit a couple of stores and take up their offers for low interest-rate credit lines. You apply for what could come to as much as $14,000 worth of new debt, all to be paid off monthly.

Ping! In Equifax’s computer maze, your credit “inquiries” to merchants trigger alerts. Your lender or mortgage broker is notified immediately that you are pursuing additional credit. And in this case, that $14,000 in potential new payment obligations could knock your debt-to-income ratio over the cliff.

Lenders say clients can mess up transactions in all sorts of ways. Annie Austin, a senior loan officer with Cobalt Mortgage in Bellevue, Wash., says one borrower went out and bought a new Porsche on credit after getting his loan application approved, despite warnings not to incur new debt before closing.

Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says that although he hands a prudent “do not do this” list to every applicant, some borrowers ignore it or forget that they’ve got credit-related situations they never disclosed, such as co-signed student loans, applications for overdraft coverage on checking accounts, or even that the down payment cash they claimed as their own was actually lent to them by someone else and must be repaid. One borrower, Skeens recalled, had received home purchase money on the side from a “loan club” that would require $600 a month to pay off. Oops!

According to Equifax Vice President Raymond White, undisclosed debts — or fresh inquiries for additional credit never disclosed to the lender — now turn up in “nearly one out of five” mortgage applications. Yet under Fannie Mae and Freddie Mac rules, any increase in the total debt-to-income ratio of more than three percentage points, or that pushes the ratio beyond 45 percent, can put the lender into a vulnerable position. If the mortgage later goes bad, Fannie and Freddie can force the lender to buy it back — financial torture for any bank.

White says that failure to disclose debts on mortgage applications is an equal opportunity problem, seen in all market segments, including well-off borrowers who have excellent credit. Research by Equifax found that people with high credit scores are significantly more likely to have undisclosed debts — or new credit obligations in the works before settlement — than other categories of applicants.

“The higher the FICO score you have,” said White in an interview, “the more likely you are to buy something” — or apply for new credit — that triggers an alert.

It’s counterintuitive, he agrees, and it’s probably because consumers with higher FICOs feel more confident about their credit and may have more resources to handle new debts. But inquiry pings from auto or boat dealers can still mess up their home purchases or refinancings.

Bottom line: From application to closing, don’t shop for new credit. It’s entirely possible someone is watching. And you are suddenly a person of interest.

Read more at http://www.arcamax.com/homeandgarden/thenationshousing/s-1343698?print#4MbR0 DtvoBrim9vl.99