Home equity lines are back in vogue

Kenneth R. Harney

Nov 28, 2014

WASHINGTON – If you’re thinking about taking out a new home equity line, you’re hardly alone. Credit lines tied to home equity – popularly known as HELOCs – are one of the fastest-growing segments in the mortgage market. Volume during the first half of 2014 is up by an extraordinary 21 percent compared with the same period last year, according to data collected by credit bureau Equifax.

The main reasons- Owners’ equity holdings nationwide are up sharply – the Federal Reserve estimates gains at nearly $4.5 trillion since 2011 – and interest rates are near historical lows. Owners borrowed $66 billion against those fattened equity stakes during the first half of this year, a six-year high. Banks and other lenders extended 670,000 new HELOCs during the same period, also a six-year high, according to Equifax.

What are these people doing with their sudden access to ready cash and how much are they pulling out? A new national survey, based on a representative sample of 1,364 homeowners with HELOCs, offers some important answers. The study was conducted last month by research firm Vision Critical for TD Bank.

The No. 1 finding- Most people aren’t spending their home equity line money on dumb stuff. There’s no evidence of a repeat of the wacky days of the last decade when houses morphed into ATMs and credit lines paid for groceries and nights out on the town. By contrast, 52 percent of current borrowers say they are using or have used their drawdowns for projects that are likely to increase the market value of their properties – updating kitchens, adding bathrooms, putting on a new roof and similar remodelings. Another 29 percent have used their HELOC money to take advantage of today’s wide gaps in interest rates among different financial products. They are consolidating debts – paying off credit card balances with interest rates in the double digits using equity line funds borrowed at rates in the low single digits.

Nearly a quarter of borrowers say they’ve used some of the equity line dollars as form of insurance against unforeseen “emergency” expenses – paying off bills for events that popped up without warning and might have been otherwise unaffordable. Other major uses, according to the survey- Buying new autos (27 percent of borrowers); paying medical bills (18 percent); spending on kids’ and adults’ education costs (15 percent)- travel (15 percent); and small-business investments (13 percent). Relatively few owners (13 percent) say they use their equity line dollars for day-to-day expenses.

Michael Kinane, TD Bank’s head of consumer and mortgage lending, says that he interprets the strong recent surges in home equity borrowing as a delayed reaction by owners who’ve put off home improvements and other expenditures for years because they were unsure about the economy, their jobs, and where real estate values were headed.

“Now they’re stepping back in,” he told me in an interview, “they’ve got more confidence” in the economy and they’ve seen their property values increase to the point where they can responsibly pull out some cash secured by their equity.

Home equity lines as a financial product “are much safer” in 2014 – for borrowers and lenders alike – than they were a decade ago, Kinane believes. Most banks now limit the combined loan-to-value ratio – the total of the primary mortgage balance plus the maximum draw amount on the new credit line compared with the home value – to 80 percent. And full documentation of income, employment, credit and property values is the rule, not the exception.

In 2005 and 2006, by contrast, 100 percent ratios were readily available with minimal underwriting and documentation. Some lenders, including TD Bank, now allow select customers to borrow more (TD’s ceiling is 89 percent) but only those applicants with pristine credit reports, high FICO scores, lots of income and plentiful financial reserves.

Today’s rates and fees on HELOCs generally are as good as or better than they were at the height of the boom. A quick search of deals offered on Bankrate.com last week turned up rates anywhere from the low 3 percent range to 4 percent and up, depending on the dollar limit on the line and applicants’ credit scores. Some credit unions and banks offer special rates – below 3 percent – for existing customers or members with solid credit.

Bottom line- HELOCs are hot. If you’ve got the need, the equity and the capacity to handle one, now might be a good time to check them out.

Still twisting in tax limbo

Kenneth R. Harney Nov 14, 2014

WASHINGTON – David Foster, who sold his condo in Chicago last month, isn’t plugged into Capitol Hill’s political games. But he has banked the financial future of his family on Congress accomplishing at least one thing during the post-election session that began this week- Renewing the expired Mortgage Forgiveness Debt Relief Act so that he and his wife and three young children aren’t crushed by unaffordable taxes next year on the $100,000 his lender agreed to cancel as part of a short sale.

Like thousands of other owners across the country who have been struggling with underwater properties, Foster, a 33-year-old campus pastor with a local ministry group, knew he was taking a risk when he negotiated the short sale and debt cancellation. In a short sale, the lender allows a new purchaser to buy a house at a price below the mortgage amount owed by the seller. As part of the deal, the lender typically forgives the unpaid balance.

The risk Foster took was this- If the Senate and House do not pass an extension of the mortgage debt relief law during the lame-duck session, the full principal balance his lender wrote off on his mortgage likely will be treated as ordinary income for 2014. Though he never received a dollar of that “income” in his wallet, under the federal tax code he’ll owe a tax payment to the government – $28,000 – on the $100,000 his lender wrote off.

“I don’t know how or where we could come up with that,” Foster told me last week. “I can’t believe anyone would think this is a reasonable thing to do” – hit underwater home sellers with heavy tax bills while they’re still struggling to recover from their own financial crises.

That is precisely the issue now before the House and Senate – whether to extend for one more year a temporary tax relief provision expressly designed for homeowners such as Foster. It took effect in 2007 as foreclosures began to mount across the country and millions of people fell behind on mortgage payments. Then came the bust in 2008. Then the Great Recession, which hasn’t really ended for many families.

The mortgage debt relief law expired last Dec. 31, along with other special interest tax breaks that usually would have been renewed as a package. That process broke down last year, however, leaving people who have received principal debt reductions during 2014 – whether through short sales, loan modifications or foreclosures – twisting in tax limbo.

In Foster’s case, a condo he purchased for $202,000 in May 2008 began to plunge in value almost immediately, as did many others in the greater Chicago area. By the time of his short sale last month, the bank concluded the most it could get for the condo was $50,000, which an investor agreed to pay. Yet Foster’s remaining loan balance was about $150,000, two-thirds of which the bank wrote off.

Last summer, the mortgage debt relief extension appeared to be moving ahead in the Senate. In a bipartisan vote, the Finance Committee approved what became known as the EXPIRE Act. Along with a package of other short-term tax benefits, the bill extended the mortgage debt relief provisions through December 2015.

Sen. Ron Wyden, D-Ore., chairman of the committee, sent the bill to Majority Leader Harry Reid, D-Nev., for floor debate and a vote. But Reid barred it from the legislative schedule when Republicans insisted on adding an amendment to the package that would repeal an excise tax that funds the Affordable Care Act. Reid said he would only consider allowing a vote on the EXPIRE bill during the lame-duck session after the midterm elections.

So here we are. Reid indicated last week that the extenders bill should get a vote. Most Capitol Hill experts say there’s a good chance the bill will pass. On the House side, the outlook is muddier. Ways and Means Committee Chairman Dave Camp, R-Mich., opposes piecemeal extensions of tax breaks. He favors comprehensive tax reform, with no temporary extenders, as do many of his Republican colleagues.

Where’s this headed? No one can yet say for sure, but Alexis Eldorrado, the Chicago realty broker who helped Foster accomplish his short sale, says Congress needs to find a way to do the right thing for thousands of financially pressed owners. To fail to pass one more extension, she says, “would be unconscionable.”

Unleashing the red-hot condo market

Kenneth R. Harney Nov 7, 2014

WASHINGTON – Call it the condo conundrum- Demand for condominium units is rising in many urban areas nationwide, according to new real estate industry estimates, yet mortgage financing is getting squeezed for entry-level condo buyers by a key federal agency.

It’s a little schizophrenic. List prices for condos in major markets are rising faster for single-family detached homes in the same area. Nationwide, condo sales are steadily taking away market share from traditional homes as suburban boomers downsize and other owners want to live closer to urban workplaces and center city attractions.

But here’s the troublesome flip side- Significant financing barriers erected by the federal government are making purchases of entry-level condos by millennials and other first-time buyers more difficult. Despite indications from the White House as recently as last month that the government wants to loosen up on mortgage credit availability for middle-income Americans, the Federal Housing Administration continues to severely restrict the number of condo projects where it will make its low down payment insured mortgages available. The same restrictions make it impossible for large numbers of seniors who own condo units to obtain reverse mortgages – an important home-loan niche that the FHA dominates.

Despite these problems, condos on the whole are doing well. The real estate site Trulia reports that increases in asking prices in the 20 largest condo markets are outpacing increases in single-family asking prices. In Miami, list prices for condos in September were 17 percent higher than the year before, compared to single-family list prices, which jumped 11.7 percent. In Boston, condo list prices increased at a rate four times as fast as single-family homes. In the Washington, D.C., area and San Diego, condo list prices rose by nearly double the rate of single-family homes. Nonetheless, selling prices for condos remain significantly below detached homes on average nationwide, making them more affordable.

All of this points to rising popularity and market share for condos. Lawrence Yun, chief economist for the National Association of Realtors, estimates that condos recently have grown from roughly an 8 percent market share to between 11 percent and 12 percent. But in some urban markets, the condo share is considerably higher. During September in Los Angeles, according to CoreLogic’s DataQuick, condos accounted for about 27 percent of home resales. In Miami, they were 44.9 percent.

The main problem in the otherwise surging condo sector, many housing experts say, is the unnecessary blockage of entry points at the lower ranges of the price spectrum. The FHA, which for decades was the go-to source of mortgage money for first-time buyers, currently will only consider insuring mortgages in less than 7 percent of the country’s estimated 150,000-plus condominium developments. The agency has stopped approving so-called “spot” loans in condo projects that have not applied for and received special “certification” – a process that many condo homeowner association boards consider burdensome and frequently leads to rejection.

David Stevens, who was FHA commissioner in 2010 when the agency banned spot loans and now heads the Mortgage Bankers Association, says “it’s time” to bring them back with reasonable restrictions because for many young first-time purchasers, “FHA is the sole source” of low down payment financing. Though the agency confronted significant condo foreclosure problems stemming from the housing bust, Stevens told me in an interview “that doesn’t mean you keep [these restrictions] on” when the crisis has abated, as at present.

Eric Boucher, chief operating officer of ReadySetLoan, a national condo consulting firm based in South Windsor, Conn., says the current spot loan ban can have crushing impacts on seniors who need reverse mortgages to supplement their incomes. He says he attended a condo association meeting recently where unit owners in their 80s described their inability to obtain a reverse mortgage, solely because of the FHA’s policy.

So are there any fresh signs of a change of heart at the FHA – any reason to hope for an improvement? Maybe. The agency declines to comment on whether it might loosen its certification restrictions and allow spot loans to buyers and owners in uncertified developments that can qualify under financial stability criteria. But industry and other sources say the agency is feeling the political heat – from real estate and mortgage lobbies as well as from Capitol Hill – and is drafting a major condo proposal for 2015 that could bring back FHA financing to greater numbers of buyers and existing unit owners.