First-time homebuyers back in the market

Kenneth R. Harney on Jun 26, 2015

WASHINGTON – When Federal Reserve head Janet Yellen was asked about housing issues last week, she gave a classic economist’s “on-the-one-hand, on-the-other-hand” answer. But because she neatly summed up the disparate economic realities confronting millions of owners, sellers, renters and would-be buyers around the country, it’s worth taking a closer look.

On the one hand, she said, rising home prices have been terrific news for many owners. “The increase in house prices is restoring the wealth of many households who have [home equity] as their major asset,” she said. Though Yellen didn’t cite specific statistics, the numbers have been impressive – even explosive in some major markets. According to the latest Case-Shiller 20-city composite index, home prices were up 5 percent year over year. In San Francisco, prices are 10.3 percent higher than a year ago, in Seattle 7.5 percent higher and in Los Angeles they’re up by 5.5 percent.

Overall, according to the Fed’s latest calculations, Americans’ home equity – the difference between the market value of their homes and the mortgage debt they owe – hit $11.7 trillion in the first quarter of this year, up a stunning $1.1 trillion from the same period in 2014 and $5.3 trillion from 2011.

These are brain-numbing, almost incomprehensible numbers, but as Yellen pointed out, they are crucially important to the overall economy. Homeowners who have growing equity tend to spend more and help expand the economy.

On the other hand, there are millions of renters who are being squeezed by the housing gains of owners and landlords. Many of them are prospective first-time buyers frustrated by higher asking prices; others are so-called “rebounders” who encountered difficulties during the financial crisis but have now rebuilt their credit and want to buy.

But both groups face not only rising rent demands from landlords – in some large metropolitan areas they have jumped by double digits during the past year – but what Yellen described as “credit availability” conditions that are “quite constrained.” Interest rates remain low – around 4 percent on average last week for 30-year fixed-rate loans – but underwriting requirements remain stringent.

“Anyone who doesn’t have a pristine credit rating finds it very difficult at this point to qualify for a mortgage,” said Yellen. As a result, she added, “we’re seeing quite a bit of reluctance, given the job market and … the history of … house prices,” on the part of renters who’d like to buy but feel frozen out.

There’s no question about tough mortgage approval standards. In fact, average FICO credit scores on new mortgages for home purchases by giant investors Fannie Mae and Freddie Mac actually increased during May to 757 – the highest level in more than a year and up by 5 points since January, according to new data compiled by mortgage technology company Ellie Mae. The average down payment last month at both government-administered companies- 19 percent. Those are formidable hurdles for just about anybody, especially for younger workers hoping to get into a home of their own.

But there may be a trend taking shape that could brighten prospects for consumers that the Federal Reserve and Yellen haven’t kept tabs on yet- In recent weeks, rising numbers of first-time buyers have been finding ways to get past the hurdles.

According to a June 19 Campbell/Inside Mortgage Finance tracking survey, which polls 2,000 real estate agents nationwide, first-time buyers accounted for nearly 39 percent of home purchases in May – the highest level since August 2010. The National Association of Realtors reported June 22 that first-time purchases in May rose to 32 percent of all buying activity – the highest it’s been since September 2012.

What might be going on? Tom Popik, research director for Campbell Surveys, told me that one key change he sees in the data has been in financing. The Federal Housing Administration cut its annual mortgage insurance premium rate drastically in late January. That has made 3.5 percent down payment loans affordable to first-time buyers with FICO scores and debt-to-income ratios that would trigger rejections elsewhere in the market.

The FHA’s move is not the only change underway – wage growth and employment are picking up, giving consumers greater confidence in major purchases, among other possible factors. First-timers need to check out FHA again. For many of them, it could be the way to finally own, rather than keep paying rent.

And there’s no on-the-one-hand, on-the-other-hand economist talk here. The change is for real.

Fixing a reverse mortgage trap

Kenneth R. Harney on Jun 19, 2015

WASHINGTON – Soon after Judy Stephens of Lafayette, Louisiana, lost her husband this past January, she got hit with more bad news, this time from the mortgage company. She needed to come up with $107,000 – the amount of principal, accrued interest and fees racked up by the reverse mortgage on the home she owned with her husband for the past 16 years – or face foreclosure.

She didn’t have the money, nor could family members come up with the cash needed to buy the house. So, Stephens told me last week, the mortgage company informed her that it would foreclose in mid-August.

Why? Because like an estimated 12,000 other widows and widowers around the country, Stephens, 65, is a “surviving spouse” whose name does not appear on the reverse mortgage note. Though she and her husband, Raymond, had been assured multiple times since 2009 by loan officers and others that in the event of her husband’s death, she could continue to live in the home indefinitely, the reality turned out to be starkly different. She was not protected.

The mortgage company servicing the loan, James B. Nutter & Co. of Kansas City, “was sympathetic” after Stephens’ husband’s death, she recalls. “They said they were sorry about his passing,” but the letter they sent was all business- Pay up what’s owed or we will foreclose as required under federal reverse mortgage rules. Later on, Stephens said, representatives of the mortgage company posted notices on her front door urging her to call James B. Nutter & Co. immediately.

“I did,” she says, “and they told me ‘you’ve got six months’” until the scheduled foreclosure. That’s the last official information she’s received about the fate of her home.

But thanks to a far-reaching policy shift announced last week by a federal agency, Stephens may be able to stop worrying about the August deadline.

Here’s the story – one that could touch many of the thousands of people facing potentially similar situations. A reverse mortgage allows seniors 62 and older to withdraw funds against their home equity and not pay back the debt until they die, move out or sell the property.

The most popular type of reverse mortgage is run by the Department of Housing and Urban Development and accounts for more than 90 percent of all loans outstanding, including the one on Stephens’ home. You see these loans hawked regularly on TV by pitchmen such as Henry “Fonzie” Winkler and former Tennessee Republican Sen. Fred Thompson.

But HUD has been buffeted by substantial criticism and lawsuits over its controversial rules regarding spouses who live in the house but whose names were not included on the reverse mortgage documents. Sometimes those omissions can be traced back to a loan broker who promised a higher maximum mortgage amount to the applicants if only the older spouse was on the note. The broker may not have disclosed that the higher loan amount also earned the broker a larger commission.

Other times, as in Stephens’ case, one spouse had not yet reached the required borrower threshold age of 62 – she was 58 at the time of the reverse mortgage closing – but was assured that she could have her name included on the note when she reached 62. When she requested inclusion at that age three years ago, however, Stephens says she was told by a loan servicing agent that it was totally unnecessary and that including her name would cost the couple $17,000 in new fees.

Until last week, all non-borrower surviving spouses whose loans were insured before Aug. 4, 2014, were subject to demands such as what Stephens received – pay up or we foreclose. But on June 12, HUD changed its policy and told loan servicers that they now had a new, more consumer-friendly option- Instead of foreclosing on non-borrower surviving spouses, they could assign the loan back to HUD and make a claim for monies owed against the agency’s FHA insurance fund.

Where does this leave Judy Stephens? I asked James B. Nutter & Co. for comment. Here’s what the company said- Though it can never discuss individual customers’ situations, “we view HUD’s new (policy) as a very positive development … and a potential game-changer that will help us keep a lot of good people in the homes they love.”

Game-changer sounds encouraging. Though the final decision is up to Nutter, maybe Judy Stephens won’t be forced out of her house in August. We’ll check back then.

Insider’s guide to housing marketplace

Kenneth R. Harney on Jun 12, 2015

WASHINGTON – When the country’s largest real estate trade group bares some of its innermost worries, should home owners, sellers and buyers pay attention?

Absolutely – if you want valuable insights into current issues and problems in the housing marketplace. You might even save some money or avoid a bad experience with an agent or broker.

In an unusual move for a major American trade association, the million-member National Association of Realtors has commissioned and released a frank and sometimes searing assessment of top challenges facing its industry for the next several years. The critiques hit everything from the professionalism and training of agents to the commissions charged consumers, and even the association’s leadership.

Consider these broadsides to get the flavor of the report-

- “The real estate industry is saddled with a large number of part-time, untrained, unethical and/or incompetent agents. This knowledge gap threatens the credibility of the industry.” Ouch!

- Low entry requirements for agents are a key problem. While other professionals often must undergo extensive education and training for thousands of hours or multiple years, realty agents need only complete 70 hours on average to qualify for licenses to sell homes, with the lowest state requirement for licensing at just 13 hours. Cosmetologists, by contrast, average 372 hours of training, according to the report.

- Professional, hard-working agents across the country “increasingly understand that the ‘not-so-good’ agents are bringing the entire industry down.” Yet there “are no meaningful educational initiatives on the table to raise the national bar … .”

- The commissions that realty brokers and agents charge are under attack and highly vulnerable to reductions because of pressure from cost-sensitive consumers. While typical commission rates in this country are around 6 percent, fees in other developed countries are significantly lower. In the United Kingdom, they average 1 to 2 percent; in Australia, 2 to 3 percent; Belgium, 3 percent; Germany, 3 to 6 percent.

- In response to consumer demand for lower fees, “a growing new generation of brokers and agents [is] exploring … new business models and pricing models that will most likely become commonplace in the next 5 to 10 years.” The reference here is to technology-driven discount brokers who are making inroads in many markets. Baby boomers looking to downsize and millennials seeking first homes are especially interested in shaving fees to save money.

- Realty brokerages face their own challenges, such as compliance with aggressively enforced federal regulatory policies. Among the most prominent, according to the report- The Consumer Financial Protection Bureau’s anti-kickback and referral-fee rules governing brokers’ financial arrangements with title companies, lenders and others. Though “most brokerage companies are either ignorant of the fact or believe they are in compliance,” says the report, “most are likely in violation already.”

The 160-page study, known as the “DANGER” report (www.dangerreport.com) was commissioned by NAR’s “strategic thinking advisory committee” and authored by industry consultant Stefan Swanepoel of the Swanepoel /T3 Group. It is based on a survey of 7,899 Realtors, interviews with 74 top realty CEOs plus additional research. Other problem areas it details concern multiple listing services, state Realtor associations and NAR itself.

Sara Wiskerchen, managing director of media communications for NAR, emphasized in comments to me that the DANGER study was stimulated by the “belief that it is healthy and helpful to hear what others are saying, especially those ideas that might be uncomfortable or disagreeable.” The association is “neither celebrating or disappointed in the author’s perspectives,” she added.

What are the takeaways for consumers? Top of the list- Since the study alleges that “a large number” of realty agents lack sufficient training and competency, make sure any agent you sign up with has the experience and track record that match your objectives as a buyer or seller. Among other things, ask about advanced training and certifications the agent has earned or is pursuing.

Given the report’s emphasis on the threats to traditional brokerages posed by innovative, tech-driven alternatives now growing in the market, check out their discount pricing, whether for a sale or purchase. But don’t assume that cheaper is always better. Some of these firms have their own shortcomings despite their cool technology tools – agents may not be experienced, and their marketing skills, services and local knowledge may not come close to those of top-tier traditional agents. Always negotiate commissions with whomever you work. Your goal should be to hire the most competent agent for your purposes at the most affordable fee.

Tougher standards needed for tax transcripts

Kenneth R. Harney on Jun 5, 2015

WASHINGTON – You probably heard about the massive security breach the IRS disclosed last week that allowed hackers to obtain detailed tax return information on 104,000 taxpayers.

But you might not have connected that event with a procedure encountered by most home buyers seeking a mortgage- Lenders routinely require them to sign an IRS form that allows underwriters to obtain transcripts covering multiple years of past tax returns. The form involved is known as a 4506-T and it’s part of the paper blitz applicants get hit with in the loan process.

So what’s the possible connection between the security hole at the IRS and your mortgage application? Is there some potential for abuse when loan officers and brokers pull your detailed tax data using third-party vendors? Is your most private financial information safe from hackers or other criminals?

The hackers penetrated what’s known as the “Get Transcript” application on the IRS’ website, www.irs.gov. Get Transcript, which was pulled offline in the wake of the breach, allowed individual taxpayers to access their tax information from past years, but they needed to navigate a minefield of identity verification queries – Social Security number, email address, “personal, financial and tax related questions,” according to the IRS.

Though the IRS said that just half of hackers’ estimated 200,000 attempts to access tax transcripts were successful, the sobering fact remains- Criminals were able to steal prodigious quantities of private tax information.

Now to the 4506-T system used for mortgage applications. It works like this- You fill out the form, indicating which year or years of transcripts you authorize to be pulled. Your mortgage broker or lender then typically provides it to a third-party vendor who has signed up with IRS to access taxpayer transcripts under the “IVES” (Income Verification Express Service). Some of these vendors are large, well-known corporations, including credit reporting agencies and data and technology enterprises that perform other services for mortgage lenders. Others are little-known and small.

To sign up on the IVES system, according to IRS instructions online, vendors must submit basic information about their business and check a box indicating that they have read and agree to comply with an IRS publication spelling out procedures to “Safeguard Taxpayer Data.”

The IRS provided no comment to my requests for information on the 4506-T program, potential vulnerabilities to data breaches, nor would it say how many vendors participate in the tax transcript program. Industry sources said the number of vendors involved is significant.

So where are the potential problems here? Critics of the transcript system say that although there have been no reported breaches of taxpayer information to date, the relatively low bars set by the IRS to qualify and monitor third-party participants are troubling. In 2011, the Treasury Department’s Inspector General for Tax Administration conducted an investigation of the program and concluded that taxpayer information “is at risk of theft or misuse when taxpayers submit IVES requests for tax return information through third parties because controls are insufficient … .” A key problem, said the Inspector General, is that the IRS did not have an adequate “screening process” nor adequate “minimum requirements” to ensure security and privacy. In its response to the auditors, the IRS promised to make improvements, but in the absence of an IRS response to questions in the wake of the Get Transcript breach, it’s not clear how many of the reforms have been implemented.

Curtis R. Knuth, executive vice president of one major transcript vendor, New Jersey-based NCS, told me that his firm and others have urged the IRS to “toughen its standards” and security controls for participants, some of whom are subject to “very minimal screening.” Without stricter requirements, Knuth said, “there is the potential” for breaches of mortgage applicant tax data.

However, the head of another large vendor of tax transcripts, Nick Lim, CEO of California-based Veri-Tax LLC, said that while “there is no system that is bullet proof,” his company “prides (itself) on taking security seriously,” and that it completes annual audits designed to test data security to the highest standards. NCS also undergoes rigorous audits, Knuth said.

What to make of all this as a mortgage applicant? Could a loan application inadvertently open you to identity theft or worse? Based on the record so far, your tax data appears to be safe. Then again, the IRS – and thousands of taxpayers – thought the IRS’ own in-house tax transcript system was well guarded from theft and fraud. That turned out to be incorrect.