Time to get off the sidelines?

Kenneth R. Harney Apr 25, 2014

WASHINGTON – Are you on the home buying sidelines this spring because you think you won’t be able to qualify for a mortgage? Do you know what sort of FICO credit scores are being accepted by lenders at the moment – they’re lower than they were a year ago – and whether yours could now be good enough?

You may be part of the surprisingly large crowd of folks who fear the home-loan unknown. A new national consumer survey found that 56 percent of all potential purchasers of homes – people who don’t own now but hope to during the coming 24 months – say they’re out of the market because they don’t want to face the possibility of rejection by lenders. Even 30 percent of current homeowners believe they wouldn’t pass muster today.

Using a statistical sample of 1,055 Americans 18 years and older, survey research firm OmniTel – polling on behalf of mortgage lender loanDepot – documented widespread uncertainty and lack of specific knowledge about current market conditions when it comes to qualifying to buy a home. According to the survey, 74 percent of potential buyers who would need a mortgage concede that they have not scoped out the current market or taken the steps needed to qualify. Many potential buyers believe that they need near-perfect credit scores to get a home loan. Half of those surveyed said they had no idea what minimum FICO score is needed for a mortgage and nearly a fifth (18 percent) said the minimum score might be 770 or higher.

Debt-to-income ratios are another insurmountable obstacle in many potential buyers’ eyes – enough so that they don’t even try to obtain a mortgage. Most lenders use two forms of debt ratios- a “front end” ratio that compares the monthly costs of the proposed new mortgage and other housing expenses with the applicant’s monthly income; and a “back end” ratio comparing all recurring monthly debt obligations, including housing expenses, student loans, credit cards and the like, with the applicant’s monthly income. Roughly a third of all potential buyers on the sidelines believe their debt ratios are too high.

But what’s the statistical reality on debt ratios, FICO score minimums and down payments? What are lenders approving? The best answers come from a company called Ellie Mae, whose loan origination and tracking software is widely used by lenders. Every month Ellie Mae analyzes a huge sample of new mortgage originations nationwide and issues an overview report rich with the sort of detail that buyers sitting on the sidelines could use.

Here’s what it found in its report on March, released last week-

- Thirty-three percent of all new loans last month had borrower FICO scores below 700. A year ago it was just 27 percent. (FICO scores max out at 830, which is considered excellent credit; applicants with scores under 700 present higher credit risks to lenders.) Federal Housing Administration (FHA) insured home purchase loans had an average FICO in March of 684. Conventional mortgages, those designed for purchase by investors Fannie Mae and Freddie Mac, still have relatively high FICOs – they averaged 755 in March, but that was down slightly from 759 a year before. Lenders are doing far fewer refinancings this year, so they are loosening up on FICO minimums for purchasers.

- Debt ratios also are more generous than many sidelined potential borrowers probably imagine. FHA’s average front end (housing costs) ratio last month for purchase loans was 28 percent. In other words, if your projected housing and mortgage-related costs represent 28 percent of monthly income, you’re average. Fannie Mae and Freddie Mac loans averaged 22 percent ratios on the front end. Back end (total recurring debt) ratios for FHA averaged 41 percent. For Fannie and Freddie it was lower – 34 percent.

- Down payments can be small if that’s what you need. FHA’s average down payment last month for home purchases was 5 percent, but many borrowers put down just 3.5 percent. Fannie and Freddie allow 5 percent down as well, provided you can pay mortgage insurance premiums. VA loans can go to zero down if your veterans status allows you to qualify. Department of Agriculture home buyer loans – which are designed for people who live in small towns – also allow for no down payments.

The point here- If you’re on the sidelines, check out what’s really going on in the mortgage market. There may be more opportunities – even in an era of tighter underwriting – than you think.

Is spring the time to list a home?

Kenneth R. Harney Apr 18, 2014

WASHINGTON – It’s common knowledge verging on holy writ in real estate- Spring is the absolute best time of the year to sell a house. Right?

But is there hard statistical evidence that listing your house in April, May or June – flowers blooming, birds chirping, lawns greened up after a tough winter – actually nets you a higher price or a shorter time from listing to sale?

Yes, but it’s not as clear cut as you might imagine. There are important nuances in the data. Reviews of realty industry and academic studies suggest that while sales totals generally are highest in May and June, they are actually reflecting listings, contracts and buyer searches that occur earlier in the year.

A study of 1.1 million home listings between 2011 and 2013 in 19 major markets by the national realty brokerage firm Redfin found that, contrary to popular impressions, houses put on the market in winter – defined as Dec. 21 through March 21 – had a 9 percentage point greater probability of selling within 180 days and at a smaller discount to the initial list price than houses put on the market during the spring months (March 22-June 21). The advantage jumped to 10 percentage points over summer listings (June 22-Sept. 20.) Winter listers ultimately sold for prices 1.2 percentage points higher than homes listed during any other season.

Though there were geographic differences, researchers found that even in areas with harsh winters, there were statistical advantages for listers. In Chicago there was a 13 percentage point advantage in selling time for listings initiated in the late December through mid-March period compared with listings in the summer.

In Boston, the advantage was 14 percentage points. In Los Angeles and San Diego, even with their relatively mild winters, the advantage was still evident – 9 points and 11 points, respectively. In Seattle, it was 12 points.

Ellen Haberle, a Redfin economist, said sales agents in Boston and Chicago reported that the greatest impact of winter weather this year was not on buyers – they were scoping out available listings early on. Instead it was the owners who lagged – they were reluctant to list their homes because they didn’t want to shovel snow or start the interior spiffing up needed to properly market their property.

A study conducted by online real estate site Trulia in 2012 found that while prices on closed sales peak in May and total sales peak in June, there are significant differences geographically. Prices tend to peak in the Southern states in March and April, according to Trulia, with the exception of Florida, where the high point comes in May. California, Virginia, Oklahoma, Pennsylvania, New York, New Jersey and Massachusetts prices also hit their statistical peak in May. But it’s later – between June and August – in Oregon, Illinois, Connecticut, Washington and West Virginia.

A scholarly study published in the Appraisal Journal, a professional quarterly, covering valuations and sales in 138 large and small metropolitan areas found that local “seasonality factors” subtly affect what buyers pay. Using a statistical analysis technique to control for differences based on size, age and other property characteristics, researchers found that time of year definitely impacts price.

By how much? It depends on location but it’s probably more than you’d guess. The researchers created “adjustment” factors that can be used by appraisers to eliminate seasonal variations from their reports.

In the Los Angeles area, for example, the seasonal negative adjustment in February, the local low price point, is a minus 2.5 percent. In June, on the other hand, the seasonal factor is a plus 1.7 percent. In Miami, the adjustment is a negative 2.4 percent in January, a plus 1.3 percent in July. In Boston, minus 4.4 percent in February, positive 4.5 percent in June. Should the season influence whether – and precisely when – you list your house for sale? Sure. But other, more personal factors should get higher priority- Is your house ready to list and show? Have you interviewed multiple agents to get comparative market analyses on your home’s probable selling price range? Are you prepared to do what’s necessary to sell at maximum price, which may include staging the interior and completing fix ups and improvements?

Answer those questions, and price realistically based on the market analyses you’ve received from professionals – which may include advice on timing – and you should have a good shot at a successful sale.

Benefit restoration gets complicated

Kenneth R. Harney Apr 11, 2014

WASHINGTON – Renewal of important expired federal tax benefits for homeowners took a major step forward last week, but the route to final congressional approval is beginning to look longer – and potentially bumpier – than previously expected.

Here’s why. The Senate Finance Committee overwhelmingly approved a package of tax code goodies that includes a two-year reauthorization of the Mortgage Forgiveness Debt Relief Act, plus similar extensions for deductions of mortgage insurance premiums and energy-saving improvements to homes.

Mortgage debt relief is crucial for thousands of underwater owners who receive cancellation of a portion of their principal balances from banks in connection with loan modifications, short sales and foreclosures. Without an extension retroactive to Jan. 1 – which the Finance Committee package includes – these owners would be hit with federal income taxes on the mortgage amounts canceled.

Now for the bumps, The full Senate must still pass the so-called “extenders” bill containing the housing provisions. That vote could happen relatively soon – this spring – or could be put on a back burner based in part on the level of urgency the Senate leadership detects from the House side.

And here’s the message Majority Leader Harry Reid, D-Nev., is certain to get from the House’s most influential tax legislator, Ways and Means Committee Chairman Dave Camp, R-Mich., Cool it. We’re not rushing. Camp says he’s more interested in reforming the entire federal tax code for the long haul rather than reapproving tiny pieces of it year after year.

He wants to look at the 50-odd special interest tax benefits in the extenders bill – one by one – to determine whether they merit a place in the code. Among the breaks he plans to evaluate apart from the housing-related ones, Should the federal tax code provide financial subsidies to owners of race horses? TV and film producers? Auto race tracks? Rum producers in the Caribbean?

He’s got a point. Are all the now-expired tax subsidies for niche groups and industries, which sometimes cost billions of dollars in lost revenue to the Treasury, cost-effective? Do they benefit the economy as a whole or are they simply sops to well-shod lobbies? If they can be justified on the merits, fine, we’ll keep them. If not, they should disappear. To achieve this analysis, Camp plans to conduct months of hearings and markups – a challenge given Congress’ already tight pre-election schedule. At the end of the process, it’s likely there will be fewer special interest tax benefits in the House’s bill than the Senate’s. Republicans may also insist that whatever short-term special interest provisions are approved be offset by revenue-raising measures – cutbacks in tax benefits – elsewhere in the code.

How well will homeowner benefits such as mortgage debt forgiveness, mortgage insurance premiums and energy-conservation deductions stand up to Camp’s planned rigorous evaluation?

It depends. At one level, mortgage debt forgiveness tax relief looks like a solid bet to make it into any final package. Since its enactment in 2007, it has helped thousands of owners who, often through no fault of their own, faced staggering tax bills on what amounts to phantom income – money the tax code says they “earned” simply because a mortgage lender decided to subtract it from the principal debt the owner owed on the loan.

To illustrate, say the value of your home dropped sharply, not because you failed to keep it in good repair but because the economy went into deep recession. Your employer cut back on your work hours and you found it increasingly difficult to make full, on-time payments on your mortgage. To help you past these problems, your lender agreed to reduce the amount you owed as part of a loan modification. It canceled $80,000 of your debt. Without the protection of the 2007 mortgage forgiveness relief provisions, the IRS could demand more than $22,000 in income taxes on the $80,000 your lender wrote off – “income” you never pocketed and probably don’t have on hand.

Mortgage forgiveness debt relief has strong bipartisan support in the Senate and some support in the House. But if Camp and the Republican majority demand “pay fors” elsewhere in the code as the price of retaining it – the estimated revenue “cost” of this provision alone is $5.4 billion over 10 years – negotiations could get complicated.

Ditto for mortgage insurance premium deductions and home energy conservation. The political odds in an election year still favor their survival, but it’s likely to get messy along the way.

Add-on fees become an issue

Kenneth R. Harney Apr 4, 2014

WASHINGTON – When you’re raking in tens of billions in profits by helping credit-elite borrowers purchase homes, couldn’t you lighten up on fees a little for everyday folks who’d also like to buy?

That’s a question increasingly being posed to government-controlled home mortgage giants Fannie Mae and Freddie Mac and their federal regulators. Though most buyers are unaware of the practice, Fannie and Freddie – by far the largest sources of mortgage money in the country – continue to charge punitive, recession-era fees that can add thousands of dollars to consumers’ financing costs. This is despite the fact that the companies are enjoying record profits, low delinquency rates, rising home values, plus are protecting themselves from most losses with insurance policies paid for by consumers.

Critics say that by making conventional mortgages more expensive, these fees are partially responsible for declines in home purchases in recent months, especially among moderate-income, first-time and minority buyers. The add-on fees can raise interest rates for some borrowers from the mid-4 percent range to more than 5 percent. Since Fannie and Freddie operate under federal conservatorship and send their profits to the government, the fees amount to a federal surtax on homebuyers.

Last year, the two companies had combined net income of nearly $133 billion and pre-tax income of $64 billion. By contrast, the entire private mortgage industry – big banks, small banks, mortgage companies, brokers, servicers and others – had $19 billion in pre-tax income, according to new data compiled by the Mortgage Bankers Association.

Fannie and Freddie got into deep financial trouble acquiring and backing poorly underwritten loans during the boom years. But under regulatory supervision since 2008, they have improved their performances, primarily by severely tightening their credit standards. As part of that effort, they created a series of fees known as “loan level pricing adjustments” designed to charge borrowers more if they have certain perceived risks. The fees generally are added to the base interest rate paid by borrowers.

Small down payments, for example, get hit with higher add-on fees than large down payments. Applicants with low credit scores are assessed much higher fees than those with pristine records. Buyers of condominium units who make down payments of less than 25 percent get charged a hefty extra fee no matter what their scores. Fannie and Freddie also charge lenders fees to guarantee mortgage bonds – again ladled onto borrowers’ bills – and those have doubled since 2011.

But critics such as Mike Zimmerman, senior vice president of MGIC, a major private mortgage insurance company that does business with Fannie and Freddie, calls the companies’ add-ons “arbitrary” and excessive in view of current market conditions. For some borrowers, he says, the fees can increase the monthly cost of a 5 percent down payment loan on a $220,000 house by up to 7 percent, and lead to thousands of dollars of extra expenses. But since Fannie and Freddie are already insured against most losses on low down payment loans by private insurance policies, he argues, these add-ons are unnecessary, covering risks that are already covered.

Fannie and Freddie could save consumers a lot of money, say industry experts, by reducing or getting rid of the add-ons and deepening their mortgage insurance coverage. Zimmerman estimates that borrowers could see reduced interest rates of between one-quarter of a percent to nearly nine-tenths of a percent if the companies moved in this direction.

A spokesperson for the two corporations’ regulator – the Federal Housing Finance Agency – declined to comment on the issue of add-on fees. The agency has a new director, former North Carolina Democratic congressman Mel Watt, who has made virtually no public statements since he took over effective control of Fannie and Freddie in January. He is said to be studying options regarding key policy issues but is not ready to announce changes, if any.

David Stevens, CEO of the Mortgage Bankers Association, says the companies’ excessive fees are thwarting home purchases. “We’re seeing significant declines in purchase applications because we have priced out a lot of Americans,” especially in the under-$417,000 segment dominated by Fannie and Freddie. “It’s a wonderful thing to be a duopoly,” said Stevens in an interview, but the two companies’ total fees are out of line with their real risks and are hurting homeownership. Could all this change and borrowers get a break? It’s up to Watt and, at least for the time being, he is mum.