Helping underwater Homeowners move on

Kenneth R. Harney on Jul 31, 2015

WASHINGTON – Could a little-noticed policy change by giant mortgage investor Fannie Mae help homeowners who’d like to move but can’t because they’re underwater – they owe more to the bank than the likely selling price of their houses? Could it help you?

Maybe. But you’re going to have to be able to qualify for a new mortgage to buy a new primary residence and rent out your current house, converting it into an investment property.

Here’s the background- Roughly 7.4 million American homeowners remain underwater as the result of plummeting prices during the housing bust and recession years, according to new data from research firm RealtyTrac. The vast majority have continued to make their mortgage payments on time and have maintained relatively good credit, say mortgage industry experts.

Many could qualify to purchase a new home but have been prevented from doing so. They either don’t have – or don’t wish to spend – the thousands of dollars needed to settle up with their lender as part of any sale. So they stay put. Daren Blomquist, vice president at RealtyTrac, estimates that 56 percent of underwater borrowers have owned their homes for nine years or longer. Nearly three-quarters have owned for six years or more.

“These (are) the folks who most likely would have had some life circumstance that makes it necessary for them to move,” such as a new job, a bigger family or simply a desire to live in a different neighborhood, he told me last week. Yet they haven’t because of their negative equity position.

Enter Fannie Mae’s recent policy change. With no fanfare or public announcement, Fannie has informed lenders that when owners seek to convert their primary homes to rental investment properties and buy a replacement home with a new mortgage, there will no longer be a minimum equity stake they’re required to have in the current home. Under previous rules, put in place during the last decade to counter fraud schemes, you needed at least 30 percent equity in your primary residence if you wanted to convert it into a rental, counting the rent toward your qualifying income for a mortgage on a new primary home. Plus you needed six months of liquid financial assets.

That’s all changed. Now you don’t need a minimum equity amount. Nor do you need a mandatory six months of liquid reserves – maybe just two months. In its notice to lenders, Fannie said it feels that it now has adequate controls on credit requirements, rental income and financial reserves in place to ensure that qualified borrowers who want to convert their primary homes into rental investments and buy a new house can do so responsibly.

How can this help owners who’ve been underwater and need a way out of their current houses? Take this real-life example. It involves a 37-year-old Maryland resident who bought her two-bedroom house at the peak of the price bubble – 2006. She owes $270,000 on it, but its current market value is just below $200,000. She’s never missed a payment – $1,615 a month – and has FICO credit scores in the low 700s. She earns $65,000 a year and needs a larger home, ideally with three bedrooms.

According to Paul Skeens, president of Colonial Mortgage Group, who is handling her application, she’s a good candidate for Fannie’s revised approach. With her current $5,416 monthly income plus $1,125 in net new rental income ($1,500 rent minus a mandatory vacancy factor of 25 percent), she qualifies for a $1,608 monthly new mortgage payment on a $230,000 three-bedroom home in the area.

But does this sort of solution work for everybody with negative equity and a hankering to buy another house? Not by a long shot. It takes a special set of circumstances- Underwater owners have to be able to pass all the standard tests to qualify for the new mortgage – credit, debt-to-income ratios that include car payments plus payments on both the old and new mortgages, as well as at least a couple of months of reserves. They also need to be prepared to handle the duties of being a landlord, collecting rents and managing the property.

Then there’s the debt on the rental property. Over time the owners will still have to figure out how to pay it off. They just won’t have to be stuck in the same old house while they do it.

What controls the speed of home sales?

Kenneth R. Harney on Jul 24, 2015

WASHINGTON – How fast should your house sell once you put it on the market? Within a week? A few weeks? A couple of months? Longer?

New research suggests that not only are typical selling times declining in the current bull market for housing, but they may have hit record lows. According to realty brokerage Redfin, the median time on market dipped to just 26 days during June – the shortest time on record for its database – with houses in some markets moving from listing to contract in 11 days or less. Denver homes sold in six days or fewer, according to Redfin; Seattle’s median was nine days; Portland, Oregon, 10 days; and Boston 11 days.

That’s hot. But there are dozens of cities around the country where selling speeds are nowhere near this quick. According to June data from real estate web portal realtor.com, which uses information from local multiple listing services nationwide, the median time on market for homes in Chicago was 54 days. In the Washington D.C. area it was 45 days, Miami 75 days, metropolitan New York 68 days, Oklahoma City 53 days. At the laggard end of the spectrum, the median house in Brownsville, Texas, took 122 days to sell, Myrtle Beach, South Carolina, 105 days.

Why such apparently wide variations from area to area, and what can a typical seller expect? Some basics- Part of selling speed depends on matters that you can control. But there are factors you can’t control – the strength of your local economy, employment and income growth. If the economy is on fire and there’s a low inventory of homes for sale to serve market demand, you’re going to see houses zipping from listing to contract rapidly.

Now for things you can control. Anyone can sell a house super fast simply by cutting the price far below what it’s worth. There are investment companies in most large markets that will buy your house for cash in almost no time – one hour, a day, a week – but at 40 to 50 percent below market value.

Putting aside deep discount deals, getting pricing “right” for your own objectives is probably the No. 1 control you have over speed. If you prefer to get the maximum within a relatively short time period, pricing just below what your agent believes to be the likely selling price could make sense. It might even set off a bidding competition and get you a higher price than you expected.

You can slow the process by pricing slightly higher than what you need – leaving room for bargaining with buyers – but there’s a risk. If you err too far on the upside, you could scare away prospective buyers for months. Alexis Eldorrado, managing broker at Eldorrado Chicago Real Estate LLC, says overpricing is the biggest traffic killer of all. “People see you’re asking too much and they just stay away,” she told me last week after listing and selling a suburban house for $1,025,000 in a single day.

How you present your house to buyers – the quality of the photography in the listing, the staging of the interior, the landscaping and the overall look of the house from the street – can also dramatically affect how long it takes to sell. Mary Bayat, principal broker at Bayat Realty Inc. and board chairperson of the Northern Virginia Association of Realtors, calls landscaping, professional staging and clearing out highly personal items “very important” to selling houses in short periods of time. If the interior is a jumble, you’re almost guaranteed a longer selling time. “Sometimes you go into a house and there’s so much stuff everywhere that you think you’re in an antique shop,” she says. That “really turns off potential buyers who are trying to imagine the house as their own,” with their own décor.

Kary Krismer, a managing broker with John L. Scott/KMS Renton in the Seattle area, says you can sell faster if you make it easier for agents to show your house. “It is best if agents can just get into a house using the key box and 10 minutes notice,” Krismer says. “At the other extreme, ‘appointment only’ without a key box can be a big mistake, unless it is an expensive, high-end house.”

Bottom line- In many, but not all, markets this summer, there are things you can do to sell faster or slow the process down. Except in areas with sluggish local economies, a lot is up to you.

What home equity bomb?

Kenneth R. Harney on Jul 17, 2015

WASHINGTON – It’s the emerging housing success story that almost nobody knows about- Hundreds of thousands of homeowners who took out record numbers of home equity lines of credit during the boom years of 2005-2008 are defying experts’ predictions of financial catastrophe.

How? By paying their debts. Rather than defaulting on their credit lines at the 10-year “end-of-draw” point when their required payments can abruptly jump by hundreds of dollars a month, the vast majority of owners are hanging in there, finding ways to stay current, often with the help of the banks who lent them the money.

Though Wall Street and credit industry analysts had warned of serious losses when hordes of housing-bubble borrowers hit the 10-year mark, beginning this year, the delinquency rates on these billions of dollars in equity lines are actually declining, not rising.

Here’s why. Between 2005 and 2008, banks extended an unprecedented $265 billion of equity credit lines to American homeowners, according to credit data company Experian. It was all part of the be-happy-don’t-worry days when home values were soaring and hocking your house to pull out cash was all the rage.

By contrast, during the pre-boom years of 2001 and 2003, banks extended around $60 billion in credit lines. Not only were the boom-time lines massively larger in volume, but the average balance of individual lines went supersized, too – into the low $70,000 range.

Most of the boom-era home equity lines – popularly known as HELOCs – featured 10-year initial draw periods, during which only interest needed to be repaid. After the initial period, the lines transformed into fully amortizing loans – interest plus principal – with higher monthly payments.

As the boom devolved into bust and global recession, millions of owners found themselves with minimal or negative equity, and simultaneously were hit with job losses and declining household incomes. To banking and credit analysts, the hundreds of billions of outstanding home equity lines began to look like a giant ticking time bomb. It seemed inevitable that by 2015, economically challenged owners would face payment shocks and the default rate would climb over the coming several years through 2018.

Amy Crews Cutts, chief economist for Equifax, one of the three national credit bureaus, called the approaching deadlines a potential “wave of disaster” for banks and consumers. Fitch Ratings Ltd., the Wall Street bond ratings agency, issued warnings about the “increasing credit risk” to the banking system posed by the upcoming credit line payment increases. One real estate data firm foresaw the situation as a looming “HELOC hell.”

So what’s happened with HELOCs? So far, nothing close to what was forecast. Last week the American Bankers Association released its first-quarter 2015 statistical report on consumer credit performance. Home equity credit lines dropped to their lowest delinquency level in nearly seven years, with just 1.42 percent of borrowers behind on payments. Bank of America, one of the biggest players in the home equity field, said “early stage delinquencies” on HELOCs are around 2 percent. TD Bank, another major lender, declined to provide me a number but confirmed that there is no surge underway in end-of-draw delinquencies.

What’s going on? It appears to be a combination of factors-

- The $5 trillion-plus increase in homeowners’ equity wealth during the past four years alone has improved their financial positions significantly.

- Aggressive and proactive outreach campaigns by the biggest banks to alert borrowers to upcoming payment changes and to offer them a variety of options – from refinancings to term extensions and restructurings – have been extraordinarily successful in keeping delinquencies low.

- And, finally, the broad improvements in the national economy overall – lower unemployment and at least modest growth in wages – have made it easier for many borrowers to pay off their HELOC debts, afford the higher payments, and refinance or restructure credit lines with their banks.

Adam Block, a home equity outreach executive for Bank of America, told me that thanks to a confluence of positive economic factors and a strong outreach campaign, “customers in general have been very focused on repaying their debt” – and that accounts a lot for low delinquencies.

Bottom line- If you’ve got a HELOC scheduled to hit the 10-year mark in the next year or two, make sure you know what the higher payments will be and the range of options you may have to handle them. And if your bank hasn’t reached out to you yet, reach out to your bank.

Mortgage customers vent – lenders fume

Kenneth R. Harney on Jul 10, 2015

WASHINGTON – Mortgage borrowers by the hundreds are lining up to vent their anger and tell their tales of woe on a federally run consumer complaint website – and the banks and mortgage companies who are the targets of their criticisms are steamed about it.

Welcome to the roiling controversy over the Consumer Financial Protection Bureau’s consumer complaint hotline. Since 2012, the bureau has encouraged consumers to send in complaints when they encounter problems dealing with lenders, credit bureaus, credit-card companies, debt collectors and other financial players.

The bureau logs each complaint by category in a massive, publicly viewable database and gives the company that is the subject of a complaint time to respond via a nonpublic online portal connecting it with the consumer through a bureau intermediary. In the past three years, according to the bureau, it has received and worked on more than 627,000 complaints. They range from alleged harassment by debt-collection attorneys, to foreclosures, student-loan defaults and poor treatment of customers by loan servicers. Roughly 28 percent of all complaints filed to date have been about mortgage issues – the largest single category. What’s been missing, though, has been any real detail about the troubling circumstances that triggered the complaint in the first place – expressed in the customer’s own words.

Starting in late June, that all changed. The bureau began posting what it calls “narratives” that name the bank or company involved and go into sometimes excruciating detail. Allegations get pretty serious – charges of lending fraud, violations of federal regulations and illegal overcharges. Some are heart-felt, such as one from a Virginia home buyer whose closing was repeatedly delayed by the bank- “Who compensates us for the loss of income for the days taken off from work (to attend closings)? For the movers that have been scheduled? For the pre-move-in renovations that cannot now be done because the contractors are fully scheduled for the rest of the summer?” (To see the narratives, go to http-//tinyurl.com/phnkq99)

The first batch of 7,700-plus narratives was posted June 25, including hundreds of mortgage complaints. The consumer’s name and address – other than state of residence – are redacted, as are all details the bureau or the consumer considers private. Lenders are not permitted to post their own narratives, but instead must use one of several stock responses, such as “company can’t verify or dispute the facts in the complaint” or “company believes it acted appropriately as authorized by contract or law.” Lenders can also decline to participate in the narratives process by saying “Company chooses not to provide a public response.”

One common thread running through the first batch of narratives is that mortgage customers get incensed when they contact the lender or loan servicer about a perceived problem and are then ignored or bounced around for extended periods in customer service hell – repeatedly directed to the wrong office or person, or sent to incompetent and unsympathetic staff. One Texas homeowner disputing an allegedly late payment said that when she finally got to a supervisor at the bank, that person “screamed at me.”

Disagreements over escrow accounts also are commonplace, such as the California borrower whose monthly escrow contribution allegedly was increased to $1,300 a month from $860 without explanation. Or the Connecticut owner whose escrow was allegedly overcharged by $300 a month because of a servicing company error. “I can understand a small increase due to insurance or taxes,” the owner wrote, “but because of an error somewhere I’m now unable to afford my mortgage.”

Lenders acknowledge that there are sometimes problems in handling customer disputes, but they bitterly resent the way the bureau is posting narratives. David Stevens, president and CEO of the Mortgage Bankers Association, told me the bureau’s approach is deeply flawed because it is one-sided- It uses “unsubstantiated and unverified” information that can be submitted by anyone, and the bureau does not “validate the authenticity of the complaint or the individuals making the complaint.”

But like it or not, the bureau’s publication of complaints apparently will be around for the foreseeable future. It’s also producing tangible benefits for at least some mortgage borrowers. In a video posted on the complaint site, Washington, D.C., homebuyer “Navid” – no last name was given – describes how his complaint to the CFPB got him a $12,750 refund check, and a formal letter of apology, from his lender in less than a week.