Booming home equity- Financial opportunity or warning sign?

Kenneth R. Harney on Jun 29, 2018

WASHINGTON – If you’ve got it, don’t piggybank it – borrow against it.

That seems to be the prevailing sentiment among tens of thousands of American homeowners who’ve seen their property values surge and then decided- Hey, we’ve got a ton of equity sitting here, let’s do something with it.

According to the latest estimates from real estate analytics firm ATTOM Data Solutions, 347,875 new home-equity lines of credit (HELOCs) were taken out during the first quarter of this year – up a surprising 18 percent from the final quarter of 2017 and 14 percent higher than the same time last year.

The increase is eye-opening in part because last year’s federal tax law changes were seen as a major negative for home-equity borrowing. The law removed interest deductibility for home-equity loan balances – new and existing – that are not used to renovate, build or acquire a home. The loss of deductibility made tapping home equity more expensive on an after-tax basis for many borrowers.

But owners apparently haven’t been deterred. Not only have new borrowings for HELOCs risen sharply this year, but another form of equity-tapping – cash-out refinancings – has hit its highest level since the housing boom. In a cash-out refi, a homeowner pays off an existing mortgage and replaces it with a new, larger loan. The owner can pocket the difference, tax-free, and spend the money on whatever he or she chooses.

In the first quarter of this year, 68 percent of all refinancings at investor Freddie Mac involved cash-outs. Though total volumes of refinancings are down significantly, cash-outs are at their highest percentage since the fourth quarter of 2007, just before the crash.

Are the sizable jumps in equity-tapping portents that we shouldn’t ignore? In the years immediately preceding the financial crisis, many homeowners used HELOCs like credit cards or ATMs – hocking their inflated property values to finance boats, autos, even daily living expenses – until the game ended. Home prices sagged and crashed; owners’ equity holdings turned to vapor.

Some economists have worries, but most point out that today’s market and regulatory conditions are markedly different. Most banks now require borrowers to have relatively high credit scores and a cushion of equity – generally 20 percent of the estimated home value – and to document everything. Back in the funny-money heydays of the boom, some lenders essentially required no equity and no documentation – even negative equity was occasionally OK. Today’s credit scores, by contrast, according to Amy Crews Cutts, chief economist for Equifax, are high- A median 770 Vantage score for HELOCs and 713 for home equity loans or second mortgages.

But there are concerns. Frank Nothaft, chief economist for CoreLogic, a real estate valuation and data analytics firm, notes that one-third of the largest metropolitan markets are now “overvalued” – there’s a mismatch between the frothy growth rate in median home prices compared with growth in per capita incomes. During the lead-up years to the crash, two-thirds of all metro markets were overvalued.

Nothaft suggests that although the U.S. is not in a “valuation bubble,” there are “many urban areas where prices appear to have become de-linked to the long-term relationship with income” and thus affordability. That “raises the specter of a new bubble forming within the next few years,” he warns.

Sam Khater, chief economist for Freddie Mac, argues that fears about the fast growth in cash-out refinancings are misplaced. Though rising cash-out levels coincided with the boom years, he said in an interview, today they’re less meaningful because the number of refinancings has fallen dramatically in the past year as interest rates have increased. Most owners who have refinanced this year, he said, have not been seeking lower interest rates but rather equity extraction, raising the cash-out percentage.

Today’s owners appear to be making more responsible use of their home-equity borrowings. In a study of equity-loan requests on its network of banks and mortgage companies so far this year, Lending Tree, the online shopping comparison platform, found that 81.2 percent of owners said they plan to use the loan proceeds either for home improvements or debt consolidation. The latter can be a smart move because it allows the owner to pay off credit card bills and other high-cost debts with relatively low-cost home-equity dollars.

But remember this about home equity- It’s not money in the bank. It’s wealth that depends on market movements, and can melt if the market turns.

Paying the right commission is ultimately up to you

Kenneth R. Harney on Jun 22, 2018

WASHINGTON – So you think things don’t get rough in real estate and feathers don’t fly when agents’ commission money is at stake? Ha. Listen to what Joshua Hunt, founder and CEO of discount-fee realty brokerage Trelora recently said here at a meeting of the Federal Trade Commission and Justice Department.

Trelora, which is based in Denver, charges home sellers a flat $2,500 to list their home and allows them to pay agents another $2,500 for bringing in buyers, no matter the price of the house. Hunt told the meeting, which was organized to examine the present state of competition in the real-estate market, that competing brokers and agents loathe his firm’s business model because it reduces the total commissions they receive.

“We’ve had bricks thrown through car windows,” he said, “we’ve had our cars egged, we’ve had hate mail sent to our sellers” – all because Trelora clients don’t pay enough in commission dollars, split between the listing agent and the buyer’s agent.

Many competitors won’t even show Trelora-listed homes, said Hunt. “I’ve got a list here of 719 brokerages in Denver” that will not show Trelora properties unless the seller agrees to pay the buyer’s agent 2.8 percent to 3 percent of the sale price as commission. On a $500,000 house that’s a big difference – $2,500 versus $14,000 or $15,000.

Hunt has also fought pitched battles with local Multiple Listing Services insisting that they allow consumers – not just agents – to see the full commission splits on listings. That means disclosing the buyer’s agent’s cut of the pie – which many buyers don’t know and don’t ask about – as well as the listing agent’s.

Buyers often “have no clue where the money is coming from” in the transaction, which ultimately is out of their own pocket via the price they pay the seller for the house, according to Hunt. Plus “sellers are told that it’s illegal to offer less than 3 percent” for the buyer’s agent fee, and he “has dozens of emails logged” saying “it’s required.”

Hunt’s aggressive advocacy of lower and more transparent commission rates raises key questions for anyone considering selling or buying today- What is the “typical” commission rate on a home sale? Is it all negotiable? And do you know how commissions get divvied up?

Steve Murray president of RealTrends, which tracks brokerage commissions and is widely considered the authority on the subject, says actual rates nationwide are not necessarily what consumers assume. Last year, he told me, the average home-sale commission rate across the country in 2017 was 5.08 percent. That’s down from 6.1 percent in 1991 and 5.42 percent in 2010. The average rate hasn’t been north of 6 percent for decades.

On negotiating, the reality is this- All commission rates are negotiable. It’s never “illegal” to offer a discounted fee. There is no “standard” rate, though some highly experienced, full-service agents may not be willing – or need – to accept a discounted commission.

At the FTC-Justice meeting, a senior executive from national realty firm ERA described one of the company’s top-producing agents, who charges all clients 7 percent to list and sell their homes. When owners inevitably ask how she can charge that much when competing agents quote less, she answers- “They should.” In other words, she believes they don’t bring as much oomph to the table – she sells houses faster and at higher contract prices than competitors. Besides, she’s free to charge whatever she wants. Take it or leave it.

How much of the 7 percent she keeps for herself is up to her, but most likely she values the services of top local buyers’ agents enough to pay them a generous fee. Splits between listing and buyer’s agents are also fully negotiable, though as Hunt pointed out, that gets handled in a separate, typically undisclosed agreement between the agents involved.

Another reality on commission rates- You’ve got an unprecedented array of fee and service level options available to you today. If you want to do most of the heavy lifting in the marketing of your home – showing it, holding it open, writing contracts – you can go online and find a mind-bending menu of companies who’ll do so at far less than what you’d pay a traditional full-service agent. If you choose to pay a flat or deeply discounted fee, no problem, there are lots of competitors.

Bottom line- Bone up on your options. And your negotiating skills. Paying the right amount of commission ultimately is up to you.

Doomsday predictions over tax cuts have not come true -yet

Kenneth R. Harney on Jun 15, 2018

WASHINGTON -What if Congress passed a massive tax bill with scary cutbacks in deductions for homeowners -prompting dire predictions of mass property-value declines -but nothing much happened?

What if home prices in the market segments expected to be hurt the most by the tax changes actually rose significantly and showed no hints of decreasing? Six months after the passage of the Tax Cuts and Jobs Act of 2017, where are we?

The law slashed the maximum mortgage amount qualified for interest deductions to $750,000 from $1 million; capped write-offs for state and local taxes at $10,000, (previously there was no limit); and clamped new restrictions on home-equity loans and credit lines, stripping the section on “home equity” from the federal tax code altogether.

The net effects of the changes, which were designed to raise billions of dollars in new federal revenues, were widely predicted to be negative for owners, especially in high-cost, high-tax areas of the country. These include metropolitan areas along the West and East coasts, along with dozens of pockets of high-cost neighborhoods in the Midwest, South and Rocky Mountain states. Late last year, some independent economists and real estate industry advocates predicted declines in home values nationwide averaging 10 percent, with potentially much higher reductions in high-price, high-tax markets. One group forecast devaluations of up to 17 percent.

Back to the original question- Where are we now? Here’s a quick update.

-The latest data from the National Association of Realtors on existing home sales in the high-cost brackets -the most vulnerable to the federal tax hatchet -suggest that demand is actually up- Sales between $500,000 and $750,000 rose by 11.9 percent in April, compared with a year ago. Sales of $750,000 to $1 million homes jumped by 16.8 percent, and those above $1 million increased by 26.7 percent. That’s frothy.

-New research by analytics and data company CoreLogic found that overall demand for homes is stable or up slightly in the 500 highest cost, highest-tax ZIP codes compared with all other ZIP codes. During the first three months of 2018, loan-application demand in high-cost, high-tax areas actually exceeded levels of the previous four years.

-The dollar amounts of home equity line of credit (HELOC) authorizations by lenders during the first three months of 2018 are “running at the same pace” as 2017, according to Frank Nothaft, CoreLogic’s chief economist. This is despite the tax law’s elimination of interest write-offs on new home-equity borrowings that are not used to renovate, buy or build a house, effective Jan. 1, 2018.

-Home-equity growth and prices overall are soaring. Homeowners saw their equity holdings surge by $1.01 trillion from the first quarter of 2017 to the same period this year. Owners nationwide gained an average $16,300 in equity for the year and presumably far more in expensive, fast-appreciating neighborhoods. Zillow’s Real Estate Market Report issued in May found that median home values nationwide are up 8.7 percent for the year -the fastest pace in 12 years. In Seattle, values are up 13.6 percent; in Las Vegas, 16.5 percent; and in San Jose, 26 percent.

Realty agents in some of the highest-cost areas say the tax bill is a non-subject among affluent buyers and sellers. Jeff Dowler of Solutions Real Estate in Carlsbad, California, told me “I haven’t heard anything from clients or potential buyers. The market is actually very strong and demand hasn’t changed” since the tax law’s enactment. Anthony Lamacchia, broker-owner of Lamacchia Realty Inc. in the Boston area, agrees. His “gut” sense is there’s been “no difference” post-tax law. But Alexis Eldorrado of Eldorrado Chicago Real Estate LLC, believes the new law could be contributing to an increase of inventory in the upper brackets. Exceptionally high property and income taxes, capped as deductions at just $10,000 a year, are prompting owners to want to sell in rising numbers.

What to make of all this? It’s still early in the process to be definitive about the long-term impacts of the tax law. Other, possibly short-term macroeconomic factors may be overwhelming the real estate tax changes -record low unemployment, rising incomes, and record low inventories of homes for sale that are driving prices higher.

But next year, who knows? Meanwhile it’s safe to say the calamitous plunges in home values so boldly forecast by economists last December are nowhere in sight -not yet anyway.

Homebuyers can reap bargains thanks to growing lender competition

Kenneth R. Harney on Jun 8, 2018

Washington – Could lenders’ pain be your gain if you’re shopping for a home mortgage? Maybe.

Though it hasn’t been in the headlines, mortgage companies are having a challenging year. Not only have total originations of new loans declined as the refinance market shrinks because of rising interest rates, but many lenders could be staring at red ink and staff layoffs, as well. Michael Fratantoni, chief economist for the Mortgage Bankers Association, the industry’s largest trade group, says the “typical” lender in the U.S. may “not be profitable” when the books are closed on the first quarter of 2018. Inside Mortgage Finance, a trade publication, reports originations “tanked” during the first three months of 2018, hitting their lowest level in three years.

Possibly as a result, competition for new home-purchase loan applications is on the upswing. One bellwether- Lending Tree, the popular online marketplace where banks and mortgage companies compete for borrowers’ business, tells me that shoppers for home loans are receiving significantly more offers on average through its lender network compared with a year ago. “It’s getting very competitive,” said Lending Tree chief economist Tendayi Kapfidze, and “lenders are expanding their credit box” to pull in more borrowers. Some may not even be fully passing along recent rate increases, he added.

Another indicator- Lenders appear to be offering slightly more attractive deals. The Mortgage Bankers Association’s mortgage credit availability index -which monitors credit-score requirements, down payments and other key underwriting terms at major lenders – improved by 1.9 percent for conventional (non-government) mortgages in April. This suggests posted mortgage terms were slightly more favorable to consumers than they had been previously.

Still another sign- The latest quarterly Default Risk Index, compiled by credit bureau TransUnion and credit score developer VantageScore Solutions, LLC and released last week, found that while lenders in the auto-loan, student-loan and bank credit-card sectors are tightening up on terms to applicants, mortgage lenders appear to be easing. Lenders seeking higher loan production are willing to take on slightly more risk.

So how does this translate for you in practical terms as a homebuyer thinking about applying for a mortgage this summer? More competition among lenders is always good for consumers, so you should definitely be shopping among multiple lenders and getting competing offers.

But don’t expect mortgage companies or banks to give away the store. The easing underway is modest, the capital market cost of money is broadly the same for most lenders, and the mortgages they close generally have to be acceptable under “ability to repay” and other standard federal rules adopted after the financial crisis. The easing more likely will be felt at the margins of the market – first-time purchasers and borrowers whose debt levels or lack of down-payment cash made them tough to approve in the past, as well as applicants for “jumbo” loan ($453,100 and up) with cream-puff credit.

Here’s what you might find currently-

- More flexibility on debt-to-income ratios (DTIs). Investors Fannie Mae and Freddie Mac are allowing lenders to say yes to credit-worthy buyers with DTIs as high as 50 percent – up from the previous 45-percent limit. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says the flexibility “really helps” in qualifying buyers with high-debt burdens because of student loans, medical bills, alimony payments and similar burdens. FHA is allowing DTIs of 56 percent-plus.

- Heavier use of 3-percent-down loans through Fannie Mae and Freddie Mac programs aimed at qualifying more buyers with moderate incomes. Gene Mundt, regional manager for American Portfolio Mortgage Corp. south of Chicago, says first-time buyers who qualify on income and credit scores “are the real winners” this summer. Plus Freddie Mac is rolling out a new “Home One” program solely for first-time purchasers – 3 percent down, no income limits – in July.

- Greater availability of “non-QM” (non-Qualified Mortgage) loans for borrowers who don’t fit into the usual underwriting boxes – especially the millions of self-employed individuals whose income patterns are sporadic, depending heavily or solely on sales, commissions and bonuses. Non-QM loans, which must comply with federal “ability to repay” rules for borrower and lender safety, come with higher interest rates compared with standard loans, but the “spread” – the difference in rates – between them is narrowing, according to non-QM lender Angel Oak Companies Senior Vice President Tom Hutchens.

Bottom line- Shop aggressively or miss out on the opportunities for better deals.

Fannie, Freddie want to make mortgages easier for gig-economy workers

Kenneth R. Harney on Jun 1, 2018

WASHINGTON – The two biggest sources of home-mortgage money in the country – investors Fannie Mae and Freddie Mac – are quietly working on ways to make qualifying for a home purchase easier for participants in the booming “gig” economy.

The gig economy refers to hundreds of income-earning activities that allow workers to set their own hours, work for as long or as little as they choose, and function as independent contractors or freelancers as opposed to salaried employees. Prominent examples include people who work as drivers for Uber or Lyft, assemble IKEA furniture for TaskRabbit or offer rooms in their homes on Airbnb.

Estimates vary, but anywhere from just under 20 percent to 30 percent or more of the U.S. workforce participates in some way in the gig economy. Last year, Intuit, which owns TurboTax, estimated that 34 percent of the workforce earned money in gig pursuits and projected that this could rise to 43 percent by 2020.

But when it comes to buying a home, the challenge for these workers is to make their gig-sourced earnings count as income for mortgage-qualification purposes. Lenders typically look for stable and continuing income streams – two years of documented income plus reasonable prospects that those earnings will continue for another several years. Lenders also routinely obtain tax-return transcripts from the IRS to confirm an applicant’s self-reported income.

By its very nature, gig income often doesn’t fit neatly into these boxes. It can be sporadic and variable, depending on how much time an individual is able to devote to the work. Gig earnings can be substantial – thousands of dollars a month – but if that money can’t qualify as “income” under existing mortgage-industry guidelines, it may not help in buying a home with a standard mortgage.

“We’re seeing gig income becoming more and more prevalent, especially among the younger demographic – first time buyers who have embraced things like Uber and Airbnb as a means to make money,” John Meussner, executive loan officer for Mason-McDuffie Mortgage Corp. in San Ramon, California, told me.

Yet those earnings may not qualify under current rules for conventional mortgages.

Enter Fannie Mae and Freddie Mac. Fannie recently surveyed 3,000 lending executives and found that gig income on applications is increasingly common, but 95 percent said it’s difficult under current guidelines to use these earnings to approve borrowers’ applications. Two out of every three lenders said better treatment of this income would either “significantly” or “somewhat” improve “access to credit” for many buyers.

Fannie and Freddie are now actively pursuing projects that would do just that. The tricky part for both companies- Whatever solutions they develop must still produce high-quality loans with low risks of default at the end of the process, and ideally must be automatable – that is, borrower information could be entered into Fannie’s and Freddie’s electronic underwriting systems at the application stage.

Freddie’s efforts come under its “borrower of the future” initiative. Terri Merlino, vice president and chief credit officer for single-family business, told me the company is studying automated solutions “outside the box” to validate income from different sources for self-employed and gig-economy earners. Neither Freddie nor Fannie was able to discuss details on what they’re considering, but Freddie confirmed its partnership with high-tech software company LoanBeam, which provides automated verifications of multiple income streams of self-employed and other borrowers.

Meussner hopes that Fannie and Freddie take a more realistic perspective on gig earnings. “If someone is pulling income from Uber for only six months” – which won’t qualify under the two-years standard – “they may have been doing similar things for years beforehand” for a different company. “That should be [the] primary focus rather than the exact employer and position that generated the income.” After all, Meussner said, “if someone can make similar income over the course of years doing various things in various places [in the gig economy], it could be argued they’re more dependable than someone with a long history with a salaried position in a field that is being disrupted by tech, in which case the loss of a job would be devastating financially.”

You can bet Fannie and Freddie are listening to recommendations like this.

Bottom line- If you make money in the gig economy, be aware that your earnings may not be “income” for conventional mortgage purposes. But sometime soon, if pilot programs and research now underway at Freddie Mac or Fannie Mae are successful, they just might.