Requirements for mortgages are easing

Feb 20, 2015

Kenneth R. Harney

WASHINGTON – A closely watched index that tracks mortgage credit availability – lender requirements on credit scores, down payments and other key loan terms – has some good news for potential homebuyers- Things are finally loosening up.

After years of progressively tighter rules on borrower eligibility in the wake of the housing bust, banks and mortgage companies have begun modestly easing their requirements and even expanding the types of mortgages they offer. The Mortgage Bankers Association’s latest credit availability index reported improvements in all four of its loan categories during January. The improvements mainly reflect positive lender responses to government efforts to ease regulations and improve affordability in the housing market – all of which means an improved environment for mortgage shoppers.

Among the initiatives- giant investor Fannie Mae’s resumption of purchases of conventional mortgages with as little as 3 percent down. Freddie Mac, another major investor, is planning to begin similar 3 percent down loan purchases for mortgages closed on or after March 23. According to Mike Fratantoni, chief economist for the mortgage banker’s group, “roughly 40 percent of investors” already have begun offering the Fannie 3 percent down program. The guidelines for the Freddie Mac program are in lenders’ hands and there’s likely to be a strong rollout for it as well.

Also contributing to better affordability- the Federal Housing Administration’s reduction late last month of its costly upfront mortgage insurance premiums, a move that could expand eligibility for home purchases to thousands of buyers, according to industry estimates. Virtually all lenders who work with the FHA program began offering the lower mortgage insurance premiums when the reduction took effect in late January. FHA insures loans with down payments as low as 3.5 percent.

Brad Blackwell, executive vice president of Wells Fargo Home Mortgage, the country’s largest-volume mortgage originator, is certain about what’s underway in the market- “Things are looking better for homebuyers and refinancers” – not only in terms of underwriting requirements but in the cost of credit as well.

Wells Fargo has been “gradually opening up the credit box,” Blackwell told me in an interview, in part because of helpful policy clarifications and changes at Fannie Mae and Freddie Mac. Those changes give lenders greater confidence in lending to a broader spectrum of borrowers, including those who don’t have high credit scores and ready cash for big down payments.

For example, he said, though the bank previously had a credit score minimum – 660 FICO on conventional loan applications – now it requires no hard and fast minimum. Instead, if Fannie Mae’s and Freddie Mac’s automated underwriting systems accept the application – say you’ve got a relatively low credit score but strong compensating factors such as solid income, ample reserves and a large-enough down payment – the bank won’t say no to you solely because of the low score. This could be especially important to people who had tough economic experiences during the recession that damaged their credit but who are now excellent candidates for a loan. On FHA applications, the bank will now accept FICO scores as low as 600, down from its previous 640 standard.

Wells Fargo also has relaxed its policy on gifts to borrowers by relatives and friends to defray part of the down payment and closing costs. On conventional loans with 5 percent or lower down payments, Wells Fargo previously required borrowers to contribute at least 5 percent of the total costs from their own financial resources. Now that’s been cut to 3 percent, which allows for more generous gift assistance.

Some major real estate firms confirm that they are seeing the first signs of credit easing by mortgage lenders, but that most potential first time and move-up borrowers are not yet aware of the changes.

Joseph Rand, a managing partner of Better Homes and Gardens Rand Realty and an affiliated mortgage company, Rand Commercial Services, in the New York City suburbs, says the improvements are not huge, but “it’s a welcome thing. Loan officers are excited about it.” Nonetheless, he told me last week, “it’s going to take some time” for the message to get out to renters and others who assume that the rules in the market would still preclude a loan approval.

Bottom line- If you’ve been stuck on the home buying sidelines, check out what’s going on. Talk to lenders and mortgage brokers. Who knows – maybe the opening of the credit box, even if it’s just a crack, might be enough to help you buy a house at today’s near-historic low rates.

The scoop on Zestimates

Kenneth R. Harney

Feb 6, 2015

WASHINGTON – When “CBS This Morning” co-host Norah O’Donnell asked the CEO of Zillow last week about the accuracy of the website’s automated property value estimates – known as Zestimates – she touched on one of the most sensitive perception gaps in American real estate.

Zillow is the most popular online real estate information site, with 73 million unique visitors in December. Along with active listings of properties for sale, it also provides information on houses that are not on the market. You can enter the address or general location in a database of millions of homes and likely pull up key information – square footage, lot size, number of bedrooms and baths, photos, taxes – plus a Zestimate.

Shoppers, sellers and buyers routinely quote Zestimates to realty agents – and to one another – as gauges of market value. If a house for sale has a Zestimate of $350,000, a buyer might challenge the sellers’ list price of $425,000. Or a seller might demand to know from potential listing brokers whey they say a property should sell for just $595,000 when Zillow has it at $685,000.

Disparities like these are daily occurrences and, in the words of one realty agent who posted on the industry blog ActiveRain, they are “the bane of my existence.” Consumers often take Zestimates “as gospel,” said Tim Freund, an agent with Dilbeck Real Estate in Westlake Village, California. If either the buyer or the seller won’t budge off Zillow’s estimated value, he told me in an interview, “that will kill a deal.”

Back to the question posed by O’Donnell- Are Zestimates accurate? And if they’re off the mark, how far off? Zillow CEO Spencer Rascoff answered that they’re “a good starting point” but that nationwide Zestimates have a “median error rate” of about 8 percent.

Whoa. That sounds high. On a $500,000 house, that would be a $40,000 disparity – a lot of money on the table – and could create problems. But here’s something Rascoff was not asked about- Localized median error rates on Zestimates sometimes far exceed the national median, which raises the odds that sellers and buyers will have conflicts over pricing. Though it’s not prominently featured on the website, at the bottom of Zillow’s home page in small type is the word “Zestimates.” This section provides helpful background information along with valuation error rates by state and county – some of which are stunners.

For example, in New York County – Manhattan – the median valuation error rate is 19.9 percent. In Brooklyn, it’s 12.9 percent. In the District of Columbia Zillow is unable to compute an error rate. In Somerset County Maryland, the rate is an astounding 42 percent. In some rural counties in California, error rates range as high as 26 percent. In San Francisco it’s 11.6 percent. With a median home value of $1,000,800 in San Francisco, according to Zillow estimates as of December, a median error rate at this level translates into a price disparity of $116,093.

Some real estate agents have done their own studies of accuracy levels of Zillow in their local markets. Last July, Robert Earl, an agent with Choice Homes Team in the Charlottesville, Virginia, area, examined selling prices and Zestimates of all 21 homes sold that month in the nearby community of Lake Monticello. On 17 sales Zillow overestimated values, including two houses that sold for 61 percent below the Zestimate. In Carlsbad, California, Jeff Dowler, an agent with Solutions Real Estate, did a similar analysis on sales in two ZIP codes. He found that Zestimates came in below the selling price 70 percent of the time, with disparities ranging as high as $70,000. In 25 percent of the sales, Zestimates were higher than the contract price. In 95 percent of the cases, he said, “Zestimates were wrong. That does not inspire a lot of confidence, at least not for me.” In a second ZIP code, Dowler found that 100 percent of Zestimates were inaccurate and that disparities were as large as $190,000.

So what do you do now that you’ve got the scoop on Zestimate accuracy? Most important, take Rascoff’s advice- Look at them as no more than starting points in pricing discussions with the real authorities on local real estate values – experienced agents and appraisers. Zestimates are hardly gospel – often far from it.