Condo financing program could be making a comeback

Kenneth R. Harney on May 26, 2017

WASHINGTON – Could condos financed with low down payment government-backed mortgages stage a surprise comeback under the Trump administration, which generally seeks to reduce federal involvement in housing? Would this be promising news for millennials and buyers with moderate incomes looking to purchase their first homes?

You bet – provided you take Housing and Urban Development secretary Ben Carson at his word. Speaking to a Realtor convention last week, Carson said he is “in lockstep” with proposals to revive the Federal Housing Administration’s condo financing program, which has been bogged down with controversial regulations and low volumes in recent years.

Though Carson did not offer specifics, he appeared to endorse some version of proposals made during the closing months of the Obama administration aimed at enabling greater numbers of buyers and condominium associations to participate in FHA’s condo program. One of the changes would give a green light to financings of individual units in condo buildings lacking FHA “certifications.”

Allowing single units to be financed – a return to what once was known as “spot” loans – would have potentially far-reaching impacts across the country since fewer than 7 percent of condo projects or buildings currently have FHA certification, according to estimates by the Community Associations Institute, a trade group. Under current rules, units in non-certified buildings are ineligible for FHA mortgages.

To become certified, condo association boards of directors must submit detailed information regarding financial reserves, insurance, budgets, numbers of renters, and a long list of other requirements. Thousands of condo associations dropped out of the FHA certification process after the Obama administration imposed regulations that were considered overly strict. Though leaders at FHA repeatedly said they recognized the importance of condos as affordable housing options, especially for first time buyers, the agency only began loosening its red tape and regulations last year.

Dawn Bauman, senior vice president of government affairs for the Community Associations Institute, said the return to individual unit financings “will be very helpful” for unit owners, buyers and condo associations themselves. Norva Madden, an agent with Long & Foster Real Estate in Maryland, said low down payment FHA financing on individual units “could work for sellers as well as buyers” and bring more affordable units into the market for sale.

Madden recounted an experience she had last year. An elderly woman listed a condo unit with her that was located in a building that lacked FHA certification. “The listing price was fair market” and affordable, said Madden in an interview, but the fact that the unit was ineligible for buyers using FHA loans was “a serious problem,” since most shoppers wanted to make use of FHA’s low down payment requirement (3.5 percent minimum) and generous approach to credit issues. Ultimately the seller moved out and reluctantly agreed to a lowball price thousands of dollars under list. “Those buyers got a real bargain,” Madden said, but her seller, “who really needed the money,” didn’t do so well – all because FHA’s onerous regulations had discouraged the condo board in the building from seeking certification.

John Meussner, a loan officer with Mason-McDuffie Mortgage in Laguna Hills, California, says the forthcoming rule changes should open “the door to a pool of buyers that may not have a large down payment but may otherwise be qualified.” Renters in high-priced markets will be able to “buy homes (since) they’ll” now have an “accessible and affordable product.”

Christopher L. Gardner, managing member of national consulting firm FHAPROS, LLC, cited federal estimates suggesting that 50,000 additional FHA mortgages could be insured under the revived program in the first year alone. And thanks to competitive loan terms, it should pull in buyers who otherwise might have opted for non-government, conventional financing.

But not everybody is convinced that resumption of spot loans automatically will solve FHA’s – or consumers’ – condo problems. Paul Skeens, president of Colonial Mortgage in Waldorf, Maryland, says the change will only be effective if FHA makes it “very, very simple” for lenders. Under the program, lenders still will need to investigate the financial stability of the underlying condo association and property. If that requires too much time and red tape, it won’t work.

The takeaway- If you’re potentially interested in buying an affordable condo unit with a low cash down, keep an eye on this space. FHA should announce its plans in the coming months, so start scoping out condos in your area – whether they’re FHA certified or not.

Zillow under fire for ‘Zestimate’ system

Kenneth R. Harney May 12, 2017

It was bound to happen: A homeowner has filed suit against online realty giant Zillow, claiming the company’s controversial “Zestimate” tool repeatedly undervalued her home, creating a “tremendous road block” to its sale.

The suit, which may be the first of its kind, was filed in Cook County Circuit Court by a http://www.chicagotribune.com/topic/chicago-suburbs/glenview-CHIS0025-topic .html> Glenview real estate lawyer, Barbara Andersen. The suit alleges that despite Zillow’s denial that Zestimates constitute “appraisals,” the fact that they offer market value estimates and “are promoted as a tool for potential buyers to use in assessing (the) market value of a given property,” meets the definition of an appraisal under state law. Not only should Zillow be licensed to perform appraisals before offering such estimates, the suit argues, but it should obtain “the consent of the homeowner” before posting them online for everyone to see.

Andersen said she is considering bringing the issue to the Illinois attorney general because it affects all owners in the state. She also has been approached about turning the matter into a class action, which could touch millions of owners across the country.

In the suit, Andersen said that she has been trying to sell her townhouse, which overlooks a golf course and is in a prime location, for $626,000 – roughly what she paid for it in 2009. Homes directly across the street, but with greater square footage, sell for $100,000 more, according to her court filing. But Zillow’s automated valuation system apparently has used sales of newly constructed houses from a different and less costly part of town as comparables in valuing her townhouse, she said. The most recent Zestimate is for $562,000. Andersen is seeking an injunction against Zillow and wants the company to either remove her Zestimate or amend it. For the time being she is not seeking monetary damages, she said.

Emily Heffter, a spokeswoman for Zillow, dismissed Andersen’s litigation as “without merit.” A publicly traded real estate marketing company based in Seattle, Zillow has been offering Zestimates since 2006. Currently it provides them for upward of 110 million houses – whether for sale or not. Type in almost any home’s street address and you’ll likely get a property description and a Zestimate. The value estimates are based on public records and other data using “a proprietary formula,” according to Zillow. A Zestimate “is not an appraisal,” the company says on its website, but instead is “Zillow’s estimated market value” using its proprietary formula.

The Zestimate feature is the cornerstone of Zillow’s business model since it pulls in millions of home shoppers, allowing the company to sell advertising space to realty agents. Zillow makes big money with the help of its Zestimates: In the first quarter of this year, it reported $245.8 million in revenues – a 32 percent jump over the year before – including $175 million in payments from “premier” agents, who pay for advertising.

But there’s a flip side to Zestimates. Homeowners, realty agents and appraisers have been critical for years about the valuation tool, citing estimates that too often are far off the mark – sometimes 20 or 30 percent too low or too high – and misleading to consumers. Zillow itself acknowledges errors. Nationwide, according to Heffter, it has a median error rate of 5 percent. Zestimates are within 5 percent of the sale price 53.9 percent of the time, within 10 percent 75.6 percent of the time and within 20 percent 89.7 percent of the time, Zillow claims.

Another way of looking at the Zestimate error rate: Roughly one-quarter of the time, the value estimate is off by 10 percent or more of the selling price, and wrong by 20 percent or more 10 percent of the time. Though the 5 percent median error rate sounds modest, when computed against median sales prices, the errors can translate into tens of thousands of dollars – hundreds of thousands in high-cost areas. Also, in some counties, error rates zoom beyond the 5 percent median – 33.9 percent, for example, in Ogle County, Ill., and 10 to 20 percent in a handful of counties in Ohio, Maryland, Florida, Oklahoma and Illinois.

Some appraisers are cheering Andersen’s suit and welcomed the idea of state-by-state legal challenges.

“They’ve been playing appraiser without being licensed for years and doing a bad job,” said Pat Turner, a Richmond, Va., appraiser. “It’s about time they got called on it.”

Zillow under fire for ‘Zestimate’ system

Kenneth R. Harney May 12, 2017

It was bound to happen: A homeowner has filed suit against online realty giant Zillow, claiming the company’s controversial “Zestimate” tool repeatedly undervalued her home, creating a “tremendous road block” to its sale.

The suit, which may be the first of its kind, was filed in Cook County Circuit Court by a http://www.chicagotribune.com/topic/chicago-suburbs/glenview-CHIS0025-topic .html> Glenview real estate lawyer, Barbara Andersen. The suit alleges that despite Zillow’s denial that Zestimates constitute “appraisals,” the fact that they offer market value estimates and “are promoted as a tool for potential buyers to use in assessing (the) market value of a given property,” meets the definition of an appraisal under state law. Not only should Zillow be licensed to perform appraisals before offering such estimates, the suit argues, but it should obtain “the consent of the homeowner” before posting them online for everyone to see.

Andersen said she is considering bringing the issue to the Illinois attorney general because it affects all owners in the state. She also has been approached about turning the matter into a class action, which could touch millions of owners across the country.

In the suit, Andersen said that she has been trying to sell her townhouse, which overlooks a golf course and is in a prime location, for $626,000 – roughly what she paid for it in 2009. Homes directly across the street, but with greater square footage, sell for $100,000 more, according to her court filing. But Zillow’s automated valuation system apparently has used sales of newly constructed houses from a different and less costly part of town as comparables in valuing her townhouse, she said. The most recent Zestimate is for $562,000. Andersen is seeking an injunction against Zillow and wants the company to either remove her Zestimate or amend it. For the time being she is not seeking monetary damages, she said.

Emily Heffter, a spokeswoman for Zillow, dismissed Andersen’s litigation as “without merit.” A publicly traded real estate marketing company based in Seattle, Zillow has been offering Zestimates since 2006. Currently it provides them for upward of 110 million houses – whether for sale or not. Type in almost any home’s street address and you’ll likely get a property description and a Zestimate. The value estimates are based on public records and other data using “a proprietary formula,” according to Zillow. A Zestimate “is not an appraisal,” the company says on its website, but instead is “Zillow’s estimated market value” using its proprietary formula.

The Zestimate feature is the cornerstone of Zillow’s business model since it pulls in millions of home shoppers, allowing the company to sell advertising space to realty agents. Zillow makes big money with the help of its Zestimates: In the first quarter of this year, it reported $245.8 million in revenues – a 32 percent jump over the year before – including $175 million in payments from “premier” agents, who pay for advertising.

But there’s a flip side to Zestimates. Homeowners, realty agents and appraisers have been critical for years about the valuation tool, citing estimates that too often are far off the mark – sometimes 20 or 30 percent too low or too high – and misleading to consumers. Zillow itself acknowledges errors. Nationwide, according to Heffter, it has a median error rate of 5 percent. Zestimates are within 5 percent of the sale price 53.9 percent of the time, within 10 percent 75.6 percent of the time and within 20 percent 89.7 percent of the time, Zillow claims.

Another way of looking at the Zestimate error rate: Roughly one-quarter of the time, the value estimate is off by 10 percent or more of the selling price, and wrong by 20 percent or more 10 percent of the time. Though the 5 percent median error rate sounds modest, when computed against median sales prices, the errors can translate into tens of thousands of dollars – hundreds of thousands in high-cost areas. Also, in some counties, error rates zoom beyond the 5 percent median – 33.9 percent, for example, in Ogle County, Ill., and 10 to 20 percent in a handful of counties in Ohio, Maryland, Florida, Oklahoma and Illinois.

Some appraisers are cheering Andersen’s suit and welcomed the idea of state-by-state legal challenges.

“They’ve been playing appraiser without being licensed for years and doing a bad job,” said Pat Turner, a Richmond, Va., appraiser. “It’s about time they got called on it.”

Fannie Mae eases burden of student loans

KENNETH R. HARNEY on May 5, 2017

WASHINGTON – Here’s some good news for home buyers and owners burdened with costly student loan debts- Mortgage investor Fannie Mae has just made sweeping rule changes that should make it easier for you to purchase a first home or do a “cash-out” refinancing to pay off your student debt.

Fannie’s new policies could be game changers for large numbers of consumers. Roughly 43 million Americans are carrying student debt – $1.4 trillion nationwide – according to industry estimates. These not only are a drag on borrowers’ ability to save money, but are a key reason why so many young, would-be home buyers remain renters – or are camped out in their parents’ homes.

There are three big changes that Fannie has made that could affect you-

- If you’re one of the 5 million-plus borrowers who participate in federal reduced-payment plans on your student loan, your actual monthly payments, as reported to the credit bureaus, will count toward your debt-to-income (DTI) ratio calculations. If your payments were originally supposed to be $500 a month but you’ve had them reduced to $100 through an “income-based repayment” plan, only the $100 will be added to your monthly debts for DTI purposes. Previously lenders were required to factor in 1 percent of your student loan balance as your monthly payment on the student loan, even though you were actually paying a fraction of that. As a result, many borrowers’ debt ratios were pushed beyond most lenders’ underwriting limits.

- For an estimated 8.5 million American home owners who are still carrying student debts, Fannie has lowered the costs of a “cash out” refinancing, provided the extra cash you pull out from your equity is used to retire your student debt. Among the potential beneficiaries- parents participating in “parent plus” programs that help pay off their kids’ student debts, and parents who have co-signed for their children’s student loans. Fannie is eliminating the usual extra fee it charges for cash-outs, as long as the funds that borrowers withdraw pay off student loan debts.

- If you have non-mortgage debts that are being paid for by someone else – say your parents pay your monthly credit card balances – these no longer will be included in your DTI computation, provided the payments have been made steadily for 12 months. This should improve the debt ratios of young buyers who are still getting a little help on their cash flows from Mom and Dad.

Jerry Kaplan, senior vice president for Cherry Creek Mortgage, a lender based in the Denver area, sees Fannie’s student loan changes as “a huge deal.” It’s “not uncommon,” he told me, to see loan applications showing $50,000 to $100,000 or more in unpaid student loan balances, and Fannie’s previous rules often made it difficult for them to get approved.

John Meussner, a loan officer at Mason McDuffie Mortgage in Orange County, California, described the negative impacts of Fannie’s previous method of treating student loans with income-based repayment amounts. His firm recently received an application from a borrower – a parent with $100,000 in student loan debts she took out for her children’s educations – who could not be approved for a refi under the old rules. Though she was actually paying just $100 a month, Fannie’s mandatory 1 percent calculation rule required Meussner to list her debt at $1,000 a month. Now, since the $100 in payments are on her credit reports, only $100 will go into her DTI calculation and she will likely qualify for the loan she sought.

“This is a step toward common sense,” said Meussner in an interview.

Not every lender is quite as enthusiastic about the changes, however. Steve Stamets, senior loan officer with Mortgage Link Inc. in Rockville, Maryland, says he has “mixed feelings.” On the one hand, he has applicants with heavy student debts who couldn’t be approved under the old rules and now will qualify under the new ones. But he worries about the sheer size of some of these student debts. If borrowers have trouble paying down these loans or making full payments, they could end up in default on their home mortgages.

For its part, Fannie Mae says it expects mortgages originated using the new guidelines to have low default rates. Borrowers must still meet Fannie’s regular credit score and other underwriting criteria, which some industry critics say are too stringent, not too lax.

Bottom line- Check out the pros and cons with lenders. You just might be a fit.