Home-value numbers are still upbeat on equity

Kenneth R. Harney

10/31/2014

WASHINGTON — It’s official: The equity boom, which has added an estimated $1.6 trillion to

the personal net wealth of American homeowners in the past year, has slowed dramatically.

It’s not over by any means. It has just lost some of its previous pep.

In the latest quarterly data from the Federal Reserve, which tracks residential real estate, home

equity holdings across the country rose by $177 billion. That sounds massive but it’s actually

down significantly from the previous quarter, when equity soared by $452 billion — nudging

half a trillion.

So what’s going on and how does this affect you?

First, some basics. Your equity is the difference between the current resale value of your home

and the mortgage debt you’ve got on it. If your house would sell this weekend for $300,000

and your mortgage balance is $150,000, you’ve got $150,000 in equity, not counting

transaction costs. This is wealth stored away in your own private real estate savings account.

You can sit on it, borrow against it to finance home improvements or college tuitions, and you

can factor it into your retirement plans. According to the Federal Reserve, home equity

holdings in the latest quarter hit $10.84 trillion. That’s up from $6.4 trillion as recently as

2011. These are big, brain-numbing numbers no doubt, but equity is a crucially important

subject for millions of people who are counting on it.

The rapid growth in equity has been powered primarily by post-recession gains in homeselling

prices and by pay-downs of mortgage principal debts owed to banks. Total homeowner

mortgage debt outstanding has continued to fall steadily, and is now well below what it was in

2009. Roughly one of three homes is mortgage-free, owned outright, according to industry

estimates. Another approximately 11 million owners have equity stakes of at least 50 percent,

reports housing data firm RealtyTrac in a study released last week.

The flip side of the upbeat equity picture is negative equity — underwater homes where debt

exceeds resale value. Fifteen percent of all houses with mortgages are still in serious negative

equity territory. The RealtyTrac study defines “serious” as owing at least 25 percent more on

the mortgage than the resale value of the home — an outstanding unpaid balance of $375,000

or more on a $300,000 property, $500,000 or more on a $400,000 house.

Despite the increases in prices that many parts of the country have experienced since the

recovery began in 2012, an estimated 8.1 million houses remain seriously underwater, making

them difficult to resell or refinance.

Much of the negative equity pain is concentrated in a handful of states where home values

went into free fall during the housing bust years or where local economic growth has lagged

the national recovery and unemployment remains high. In Nevada, nearly one of every three

(31 percent) homes remains in negative territory; in Florida, it’s 28 percent; Illinois, 26 percent;

Michigan, 25 percent; Rhode Island, 22 percent; and Ohio, 20 percent. One surprise on the

seriously negative equity list: Maryland, which contains some of the wealthiest counties in the

country, has an 18 percent seriously negative rate. Virginia comes in at just 8 percent and the

District of Columbia at 10 percent.

Arizona, which experienced among the steepest drops in prices during the recession, has

rebounded with vigor and now has a serious negative equity rate of 18 percent, just slightly

above the national average of 15 percent. California, where post-bust home price appreciation

has far outpaced all other states in recent years, now has a below-average serious negative

rate: 12 percent.

Where do the folks with high equity stakes live — those with 50 percent plus? Not surprisingly

they tend to have owned their homes for well over a decade and live in higher cost houses

($500,000 and up) in above-average priced markets. Hawaii has more equity-rich residents

than any other state — 35 percent. New York and Vermont come in next at 33 percent,

followed by California (30 percent) and the District of Columbia (27 percent).

Bottom line on the latest equity numbers: They’re basically good news. Fewer people are

underwater — back in the dark days of the bust more than half of owners in some of the worsthit

markets were underwater. Plus the slowdown in prices nationwide is healthy. More modest

growth in list prices means more potential purchasers can afford your house when it’s time to

sell.

For vets, a housing boom

Kenneth R. Harney Oct 24, 2014

WASHINGTON – There may be fewer military boots on the ground overseas, but here at home there have been major campaigns in the housing market this year directed at veterans.

Not only has the Department of Veterans Affairs’ VA home-loan program gained significant market share compared with competing private and government mortgage options, but big banks and mortgage companies have stepped up efforts to help returning veterans obtain decent and affordable housing, including by gifting them hundreds of homes free of charge, with no mortgage attached.

The VA’s home-purchase financing program is now at record levels. New loans to buy houses have more than doubled since 2007. Since 2011, when VA-backed mortgages represented about 3 percent of total home-purchase mortgage activity, they’ve soared to roughly a 7 percent share, according to the Mortgage Bankers Association. For sales of newly built homes, the VA share is much larger – it was 14.5 percent in September compared with a 16.7 percent share for the other major federal housing finance program, FHA, the Federal Housing Administration.

So VA loans are housing’s hot product, but why? Lots of reasons-

- VA-guaranteed mortgages come with terms that no other financing source can match – zero down payment; flexible and generous credit underwriting that emphasizes the individual applicant rather than the algorithm-driven computer programs that dominate conventional lending. Plus VA interest rates are competitive and maximum loan amounts go well into the jumbo range.

- Lenders increasingly recognize VA loans as good business. Despite having features traditionally connected with high risks of serious default and foreclosure – zero down payment borrowers during the housing boom often performed poorly – VA’s default rates are as good as or better than “prime” conventional market performance and far superior to FHA’s. VA’s low rates of serious default are attributable in part to its intensive, hands-on servicing of mortgages. At the earliest hints that a borrower may be facing financial strains, VA servicers get in touch to begin finding ways of solving whatever problem may exist.

- Demand is booming. There are now an estimated 22 million veterans in this country, many of them with eligibility for VA loan benefits. In an era of extremely tight credit and underwriting in most segments of the marketplace, the VA program looks like an extended hand for creditworthy vets who don’t have large amounts of money to put down on a home purchase or are transitioning into regular employment in the mainstream economy.

Meanwhile, with relatively little national publicity, growing numbers of financial institutions are partnering with nonprofit groups to help veterans with housing needs. Organizations such as Operation Homefront, the Military Warriors Support Foundation, HomeStrong USA and Purple Heart Homes have given away hundreds of houses acquired through donations from Bank of America, JPMorgan Chase, Wells Fargo Home Mortgage, U.S Bank, SunTrust Mortgage and others. Bank of America alone has donated more than 1,500 houses to nonprofits that serve veterans, according to a spokeswoman. JPMorgan Chase has donated about 700, part of its commitment to give away at least 1,000. Wells Fargo has gifted $23 million in mortgage-free homes to 150 veterans and families in 40 states.

Some of the nonprofits maintain listings of the homes they have available on their websites. The Military Warriors Support Foundation’s Homes 4 Wounded Heroes program displays a map showing the locations and photos of properties available across the country, along with guidelines for potential beneficiaries- They must be a vet wounded in combat (Purple Heart recipients are given priority) or an unmarried Gold Star spouse from any American conflict; must be honorably discharged or retired from the military; and must not currently have a mortgage.

Operation Homefront has donated more than 450 mortgage-free houses to veterans and families during the past two years and has 60 more ready to award. It takes a go-slow approach to transitioning participating veterans into ownership. For the first 12 to 24 months, the recipients legally are tenants of Operation Homefront. In order to receive the deed to the house, vets must pay property taxes, insurance and homeowner association fees; participate in a customized transition plan that includes financial counseling and set-asides of savings for long-term maintenance of the property; and must allow periodic inspections.

Builders with mortgage affiliates also have jumped into the burgeoning housing-for-heroes movement. Pulte Group, a key player in the field, has committed to build at least 20 mortgage-free new homes for wounded vets this year.

A flip waiver nears its end

Kenneth R. Harney

Oct 17, 2014

WASHINGTON – Can you still do a short-term house flip using federally insured, low-down payment mortgage money? That’s an important question for buyers, sellers, investors and realty agents who’ve taken part in a nationwide wave of renovations and quick resales using Federal Housing Administration-backed loans during the past four years.

The answer is yes- You can still flip and finance short term. But get your rehabs done soon. The federal agency whose policy change in 2010 made tens of thousands of quick flips possible – and helped large numbers of first-time and minority buyers with moderate incomes acquire a home – is about to shut the program down, officials at FHA confirmed to me last week.

In an effort to stimulate repairs and sales in neighborhoods hard hit by the mortgage crisis and recession, the agency waived its standard prohibition against financing short-term house flips. Before the policy change, if you were an investor or property rehab specialist, you had to own a house for at least 90 days before reselling – flipping it – to a new buyer at a higher price using FHA financing. Under the waiver of the rule, you could buy a house, fix it up and resell it as quickly as possible to a purchaser using an FHA mortgage – provided you followed guidelines designed to protect consumers from being ripped off with hyperinflated prices and shoddy construction.

Since then, according to FHA estimates, approximately 102,000 homes have been renovated and resold using the waiver. The reason for the upcoming termination- The program has done its job, stimulated billions of dollars of investments, stabilized prices and provided homes for families who were often newcomers to ownership.

However, even though the waiver program has functioned well, officials say, inherent dangers exist when there are no minimum ownership periods for flippers. In the 1990s, FHA witnessed this first hand when teams of con artists began buying run-down houses, slapped a little paint on the exterior, and resold them within days – using fraudulent appraisals – for hyperinflated prices and profits. Their buyers, who obtained FHA-backed mortgages, often couldn’t afford the payments and defaulted. Sometimes the buyers were themselves part of the con and never made any payments on their loans – leaving FHA, a government-owned insurer, with steep losses.

For these reasons, officials say, it’s time to revert to the more restrictive anti- quick flip rules that prevailed before the waiver- The 90-day standard will come back into effect after Dec. 31.

But not everybody thinks that’s a great idea. Clem Ziroli Jr., president of First Mortgage Corp., an FHA lender in Ontario, Calif., says reversion to the 90-day rule will hurt moderate-income buyers who found the program helpful in opening the door to homeownership.

“The sad part,” Ziroli said in an email, “is the majority of these properties were improved and (located) in underserved areas. Having a rehabilitated house available to these borrowers” helped them acquire houses that had been in poor physical shape but now were repaired, inspected and safe to occupy.

Paul Skeens, president of Colonial Mortgage in Waldorf, Md., and an active rehab investor in the suburbs outside Washington, D.C., said the upcoming policy change will cost him money and inevitably raise the prices of the homes he sells after completing repairs and improvements. Efficient renovators, Skeens told me in an interview, can substantially improve a house within 45 days, at which point the property is ready to list and resell. By extending the mandatory ownership period to 90 days, FHA will increase Skeens’ holding costs – financing expenses, taxes, maintenance and utilities – all of which will need to be added onto the price to a new buyer.

Paul Wylie, a member of an investor group in the Los Angeles area, says he sees “more harm than good by not extending the waiver. There are protections built into the program that have served (FHA) well,” he said in an email. If the government reimposes the 90-day requirement, “it will harm those (buyers) that FHA intends to help” with its 3.5 percent minimum down payment loans. “Investors will adapt and sell to non-FHA financed buyers. Entry level consumers will be harmed unnecessarily.”

Bottom line- Whether fix-up investors like it or not, FHA seems dead set on reverting to its pre-bust flipping restrictions. Financing will still be available, but selling prices of the end product – rehabbed houses for moderate income buyers – are almost certain to be more expensive.

Caught up in refi quicksand

Kenneth R. Harney Oct 10, 2014

WASHINGTON – Ed Fine’s recent rejection for a refinancing of his home loan wasn’t exactly like former Federal Reserve Chairman Ben Bernanke’s. But there are enough similarities to raise questions about current tight mortgage market standards and how lenders scrutinize applicants’ incomes.

At the very least, there are lessons for anybody who can’t document months of steady, predictable income, whether from salary, regular retirement fund drawdowns, or other sources.

Bernanke’s refi blow-up was widely publicized last week. He didn’t specify why he was turned down or by whom, but mortgage industry experts say most likely it was because he experienced a disruption in his regular employment income stream. He retired from the Fed at the end of January. Though reportedly he has since made $250,000 for a single speech, has a book contract and is now a resident fellow at the Brookings Institution, his income pattern may not have fit the standard mold in an era of computer-driven underwriting.

Fine, 72, isn’t coy about why he got turned down by two major lenders – it was an irregular income pattern – and he’s steamed about it. The retired defense contractor lives with his wife in a house they own in Shalimar, Fla. The Fines also own a rental house in Northern Virginia and a rental condo in Shalimar. The couple’s regular monthly income of around $3,500 consists of Social Security and pension fund payments and rental income. They supplement that when needed by making withdrawals from their IRA, which currently exceeds $250,000. With high FICO credit scores and no delinquencies “ever,” Fine says, “we are not hurting financially.”

But, like Bernanke, the Fines couldn’t get through the refi hoops, even though their lender, Quicken Loans, solicited them to apply. Ditto for a term extension on their home equity credit line from Bank of America, which also solicited their application.

The rationale for rejection from both lenders- The Fines’ sporadic drawdowns from their IRA could not be added to calculations of their qualifying monthly income. As a Quicken Loans official said in a letter to them following their complaint to the federal Consumer Financial Protection Bureau, the couple could not show “consistent monthly draws from the [IRA] account.” This creates debt-to-income ratio problems, the Quicken letter said, because for income from retirement accounts to qualify, there must be “verification of regular receipt of [drawdown] income for two months, and verification that the payments will continue for three years.”

Other lenders would require similar verifications, the Quicken official noted, and indeed, Bank of America’s letter to the Fines said their “validated income” was not sufficient to “support the level of your monthly debt.”

Rules like this, Fine told me in an interview, create unreasonable barriers for seniors and retirees who may have significant wealth tied up in stocks and bonds in IRAs that they prefer to tap into only when necessary.

“They [the lenders] don’t trust us to manage our own finances,” he said, despite excellent credit histories and prudent financial management over a lifetime. Fine calls it a new form of age discrimination – one with far-reaching implications as growing waves of homeowning baby boomers surge into retirement and look to their IRAs and 401(k) plans for income.

Lenders such as Quicken and Bank of America reject the discrimination charge outright. “We want to make loans,” said Mike Lyon, vice president of operations at Quicken, but there are industry rules that must be followed. He pointed to guidelines from giant mortgage investor Fannie Mae that require lenders to look for “regular and continued receipt” of income from retirement funds, and to “determine whether the income is expected to continue for at least three years” after application.

Lenders have some wiggle room on granting credit when an applicant has lots of money invested in stocks and bonds and doesn’t want to liquidate them on a regular basis. For example, Freddie Mac allows lenders to “annuitize” applicants’ retirement fund assets, turning untapped IRA and 401(k) wealth into “income” that helps them qualify for a mortgage.

Bottom line- If you are in or heading for retirement and may need mortgage money at some point, be aware of the industry’s rules on recurrent income flows. Lenders will not, as Fine found out, trust you to make intermittent drawdowns of funds when needed to pay the bills. You’ve got to do it consistently – and ideally, well in advance of any mortgage application.

The emerging ‘non-QM’ market

Kenneth R. Harney

Oct 3, 2014

WASHINGTON – If you’re thinking about buying a house, you probably know the sobering realities in the mortgage market. Thanks to strict federal rule changes in the wake of the housing bust, it can be tough to qualify for a loan.

That’s especially true if you don’t quite fit the mold – you don’t conform to all the underwriting mandates on credit, income, debt-to-income ratio and other criteria. You can handle the payments but issues in your application push you outside the box.

But here’s some good news- A small but growing number of lenders has begun offering mortgages with more flexible terms designed for borrowers like you. Say you have solid credit scores and money in the bank but because of student loans or uninsured medical bills, your debt-to-income ratio exceeds the maximum that federal rules generally prescribe.

Or maybe you are self-employed and find it difficult to assemble the documentation most lenders require on income – even though one glance at your bank statements would show that you earn enough to qualify. Perhaps you did a short sale on your underwater home a couple of years ago, too recently to meet the four-year minimum wait time prescribed by giant investor Fannie Mae before you are allowed to obtain a new mortgage.

You are not alone. Some industry estimates on the numbers of “near-miss” applicants or potential applicants nationwide range well into the millions. To serve them, a new segment of the mortgage market has begun taking shape- “non-Qualified Mortgage” or non-QM lending. Interest rates are higher than the standard market by three quarters of a percent to 1.5 percent or more, depending on the lender and the application specifics.

QM refers to the federal Qualified Mortgage rules that are designed to foster safe lending. They ban certain loan features such as negative amortization and interest-only payments; set a 43 percent ceiling for debt-to-income ratios; and impose a 3 percent limit on total loan fees, among other requirements.

Lenders jumping into the non-QM space emphasize that they have no interest in funding subprime applicants who lack the ability to repay their mortgages. Bill Dallas, president and CEO of Skyline Home Loans of Agoura Hills, Calif., says “we want good credit risks, but we don’t think the Ozzie and Harriet one-size-fits-all underwriting” is the only way to go. Skyline is readying loan offerings that allow debt ratios of 50 percent and depart from other QM standards for applicants who have strong compensating factors such as substantial down payment and reserves.

Impac Mortgage Corp., a New York Stock Exchange-traded public company based in Irvine, Calif., already has begun making loans nationwide – $30 million in the past couple of months – on what it calls “Alternative QM” mortgages to several categories of creditworthy borrowers with special needs-

- Near-miss buyers, who almost qualify under standard rules, but not quite. Say they have solid credit scores, good jobs, but have a debt-to-income ratio of 49 percent. They’re likely to have difficulty making it through Fannie Mae’s or Freddie Mac’s underwriting systems, but Impac may fund them after taking a hard look at their bank reserves and assets.

- Self-employed professionals and business owners. They generally can’t show IRS W-2 forms and may have irregular income flows, complex tax situations and periodically high debt levels. Impac allows them to document their income using 12 months of recent bank statements and to have debt-to-income ratios as high as 50 percent.

- Investors with multiple properties who face significant hurdles when they apply for mortgages. Investors who own 10 or more rental homes or commercial properties and seek to refinance and pull money out are frequently turned down by conventional lenders. Impac evaluates borrowers’ incomes based on the properties’ cash flows and has no limit on total properties owned.

New Penn Financial, based in Plymouth Meeting, Pa., is another early entrant to the non-QM arena. It recently began offering its “Home Buyer Power” loans through retail branches and brokers in 47 states. Brian Simon, chief operating officer, told me the company’s initial target is “prime” credit borrowers who seek high balance mortgages but have debt loads that put them out of reach for most banks.

Bottom line- If you assume you can’t qualify for a mortgage because you depart from federal guidelines in some way, go shopping. The emerging non-QM mortgage market wants to hear from you.