Homebuyers with heavy debt might find it tougher to get a mortgage Kenneth R. Harney on Mar 29, 2019 WASHINGTON – First-time and move-up homebuyers with heavy debt loads, low credit scores and small down payments face a daunting new mortgage hurdle- The Federal Housing Administration is toughening its underwriting standards. Large numbers of applications could be turned down in the coming months as a result. Industry estimates vary about the impact of the agency’s abrupt changes, but mortgage company executives told me last week that they are bracing for reductions in their FHA business by anywhere from 10 percent to 30 percent. Here’s what’s happening- For several years, FHA has insured loans to buyers who previously would have been considered too risky or marginal at best. Those applicants often carried crushing monthly personal debts – for credit cards, auto loans, student loans and other obligations – totaling more than half of their monthly incomes. Many also had histories of credit problems that lowered their credit scores. Combined with skimpy down payments of 3.5 percent and minimal bank reserves, these borrowers have a high statistical probability of defaulting on their loans. To prevent big losses to FHA’s insurance fund, the agency recently informed lenders nationwide that from March 18 onward, it would be applying more stringent standards to applications from high-risk homebuyers. In its letter, FHA documented its reasons for the crackdown. According to FHA Commissioner Brian Montgomery, the agency has been seeing disturbing trends in the quality of loans lenders have been delivering to it- – Nearly one of every four approved home purchasers had a debt-to-income (DTI) ratio exceeding 50 percent, the worst since 2000. In January, 28 percent of buyers were in that category. – FICO credit scores are tanking. They’ve fallen to the lowest level since 2008 – an industry-low average of 670. In the first quarter of fiscal 2019, more than 28 percent of all new purchase loans had FICOs below 640. In the same quarter, more than 13 percent of new loans had scores under 620 – 19 percent higher than the same period in the previous fiscal year. (FICO scores range from 300 to 850; low scores predict higher risks of nonpayment. Average scores for purchasers at giant mortgage investors Fannie Mae and Freddie Mac average around 750.) – Borrowers are siphoning equity from their homes at an alarming rate. In fiscal 2018, FHA saw a 60 percent increase in “cash-out” refinancing as a percentage of all refinancings. Cash-outs allow borrowers to convert equity into spendable money. – Growing numbers of loans have multiple indications of serious future risk of nonpayment – combinations of low credit scores of 640 or less and DTI ratios that exceed 50 percent. Given these omens, FHA clamped down by amending its automated underwriting system. Lenders must now conduct time-consuming “manual” analysis of every new loan application flagged as high risk. Compared with standard automated underwriting, manual processing is far more intensive and entails higher staffing costs and liabilities for lenders. Many balk at it. Some investors refuse to buy manually underwritten loans. As a result, fewer of them make it through the process. John Porter, vice president of Mortgage Master Service Corp. in Kent, Washington, predicts that FHA’s abrupt rule change will slash the number of FHA loans approved nationwide by anywhere from 20 percent to 30 percent in the coming months. Other lenders believe the decline will be smaller. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says a 10 percent dropoff is more likely. But most lenders agree that substantial numbers of borrowers hoping to qualify for FHA’s liberal down-payment and credit terms face rejections they wouldn’t have encountered under the old rules. “Absolutely they’re going to turn a lot of loans down,” said Skeens. Joe Metzler, a loan officer at Mortgages Unlimited in St. Paul, Minnesota, welcomes the stricter standards. “FHA has become the dumping ground for crappy [loan] files with ridiculous DTI allowances and bad scores,” he said. “A lot of it lately has been straight-up subprime. We should not be doing them.” According to FHA, nearly 83 percent of its home-purchase loans in January went to first-time buyers. Just under 40 percent went to minorities. Those who have the weakest financial profiles – FICO scores under 640 with debt ratios above 50 percent – could be shocked when they go to buy a house this spring. They may have to turn to subprime lenders who charge much higher interest rates, or they may have to simply postpone their purchase until they’re in better financial shape.

Class action suit could change real-estate commissions Kenneth R. Harney on Mar 22, 2019 WASHINGTON – In what could be the most far-reaching antitrust lawsuit for the real estate market in decades, the National Association of Realtors and four of the largest realty companies have been accused of a conspiracy to systematically overcharge home sellers by forcing them to pay commissions to the agents who represent the buyers of their homes. The class-action suit, filed in federal district court in Chicago, focuses on a rule it says has been imposed by the NAR. The rule requires brokers who list sellers’ properties on local multiple listing services (MLSs) to include a “non-negotiable offer” of compensation to buyer agents. That is, once a home seller agrees in a listing to a specific split of the commission, buyers cannot later negotiate their agents’ split to a lower rate. That requirement, the suit alleges, “saddle(s) home sellers with a cost that would be borne by the buyer in a competitive market,” where buyers pay directly for the services rendered by their agents. In overseas markets where there is no such mandatory compensation rule for buyer agents, total commission costs tend to be lower – averaging 1 percent to 3 percent in the United Kingdom, for example – versus the 5 percent to 6 percent commonplace here. The suit alleges that if buyers in the U.S. could negotiate fees directly with the agents they choose to represent them, fees would be more competitive and lower. Today many American buyers are unaware of their agent’s commission split. Sellers typically know the percentage because they agree to it in the listing contract. But they may wonder- Why am I required to pay the fee of the buyer’s agent, who may be negotiating against my interests in the transaction? Also, at a time when buyers often search for and find the house they want to buy online, shouldn’t compensation for a buyer’s agents be decreasing, rather than stuck in the 2.5 percent to 3.0 percent range? Besides NAR, the suit names RE/MAX Holdings Inc., Keller Williams Realty Inc., HomeServices of America Inc. and Realogy Holdings Corp. as co-defendants. NAR, with 1.3 million members, is the largest trade group in the industry. The four realty companies named as defendants are behemoths- franchisor Keller Williams has approximately 180,000 agents in the U.S. and Canada; RE/MAX has 120,000 agents; Realogy includes among its brands Better Homes and Gardens, Century 21, Coldwell Banker Real Estate and ERA; HomeServices of America is a Berkshire Hathaway affiliate and includes among its companies regional powers such as Long and Foster Real Estate and Edina Realty. The plaintiff in the case is Christopher Moehrl, who sold a home in 2017 using a RE/MAX broker to list the property; the buyer was represented by Keller Williams. Moehrl paid a total commission of 6 percent. Just under half of that, 2.7 percent, went to the buyer’s agent. If Moehrl’s case is certified as a class action, the potential number of sellers affected would be massive. It includes sellers who have paid a broker commission during the past four years in connection with a home listed by an MLS in these metropolitan areas- Washington D.C.; Baltimore; Cleveland; Dallas; Denver; Detroit; Houston; Las Vegas; Miami; Philadelphia; Phoenix; Salt Lake City; Richmond, Virginia; Tampa, Orlando, Sarasota and Ft. Myers, Florida; Charlotte and Raleigh, North Carolina; Austin and San Antonio, Texas; Columbus, Ohio; and Colorado Springs, Colorado. NAR Vice President Mantill Williams called the suit “baseless” and said it “contains an abundance of false claims,” but he provided no specifics. Representatives of the four realty companies declined comment. But some Realtors say the suit could dismantle the compensation system as it now exists. Anthony Lamacchia, broker-owner of Lamacchia Realty in Waltham, Massachusetts, says if the suit is successful “it would basically destroy buyer agency, which would not be in the best interests of buyers or sellers.” Lamacchia argues that even in an era where buyers frequently find homes online, buyer agents have important functions in managing contract negotiations, providing strategic advice and guiding clients through the process to closing. Some brokers challenged allegations in the suit, such as buyer agents refusing to show homes with low commission splits. Alexis Eldorrado, managing broker of Eldorrado Chicago Real Estate, told me that “in reality, if the buyers have found the place they want and are interested in seeing it, NAR’s code of ethics requires the agent to show it.” [Disclosure- Having sold a house in 2017, I am a potential class member if a class action is certified. To avoid any perceived conflict of interest, I will opt out of the class.]

Buying a home just got easier for many in the gig economy Kenneth R. Harney on Mar 15, 2019 WASHINGTON – If you’re one of the millions of Americans who are self-employed or earn money on the side through freelance, contract or “gig” work, you may know the drill firsthand- Applying for a mortgage can be an intrusive ordeal. Compared with people who have W-2 forms or pay stubs to verify their income, you encounter a much more time-consuming process. Lenders want to see your full tax returns for a couple of years – the whole box of stuff, not just an electronic transcript from the IRS. They need hard documentation of any income you’re claiming to qualify for the loan. And even if you can document your sideline pay, it might not be steady enough or ongoing long enough to be eligible under mortgage-industry rules. You’re likely to get hit with a lot of questions- How come you reported less on your tax returns than what you’re claiming as your income on your loan application? You may also get charged more in fees, take longer to get approved, and end up with a slightly higher interest rate on your loan. Lenders do this because self-employed earnings for mortgage eligibility purposes can be squishy, and there’s a lot riding on accuracy. If they approve a loan that turns out to be based on inflated or ineligible self-employment income, they can be hit with severe penalties. If they sold your mortgage to an investor, which is commonplace, they could be forced to buy it back. But major improvements are underway- As of last week, the two largest sources of mortgage money in the U.S. – investors Freddie Mac and Fannie Mae – have deployed remarkable new technology that automates underwriting for applicants who are self-employed or have significant side income. Applications that previously would have taken days to analyze and verify may now take just minutes, thanks to the use of “optical character recognition” (OCR) technology that reads tax returns, identifies what qualifies as eligible income, and integrates it into both companies’ electronic underwriting systems. Dallas-based tech company LoanBeam supplies the OCR solution in both cases. Freddie Mac notified its thousands of lenders of the change March 6; Fannie Mae introduced its program in December. Instead of an underwriter having to plow through wads of tax documents, lenders can now upload the paperwork directly to LoanBeam, where it will be scanned and analyzed within minutes, saving time and money for borrowers and lenders alike. Andy Higginbotham, a Freddie Mac senior vice president, told me the new system “takes three to five days out of the process,” can cut hundreds of dollars in costs, and slashes risk for the lender. If Freddie’s automated underwriting system approves the application with the LoanBeam-verified income, Freddie will not hold the lender responsible for inaccuracies that pop up later. Fannie Mae’s system does the same. The move to automation could have wide impacts. In 2016, the Bureau of Labor Statistics reported that there were approximately 15 million self-employed individuals in 2015, one of every 10 people in the workforce. A tax-preparation industry estimate indicated that more than one-third of workers earned income from “gig-economy” sources in 2015 – such as driving for Lyft or renting out a house via Airbnb – and that the total will exceed 40 percent by 2020. Lenders say Freddie’s and Fannie’s improvements could have benefits for home buyers, sellers and realty agents that may not be immediately obvious. Josh Moffitt, president of Silverton Mortgage, headquartered in Atlanta, says that having absolute certainty about income eligibility up front should give buyers greater confidence as they shop for a home. And it could help dramatically in meeting contingency-clause financing deadlines in contracts, eliminating situations where underwriters are still struggling with verifying income days or hours before a contingency expires. John Meussner, executive loan officer for Mason-McDuffie Mortgage in San Ramon, California, says streamlined underwriting should also eliminate a lot of confusion – and conflict – between applicants and lenders. Currently there is often “a huge disconnect [between] what self-employed borrowers THINK they make versus what they actually make” under mortgage-industry rules, he said in an email. “Many people still fail to realize they can’t write off income in tax returns and then use that written-off income as qualifying income for a mortgage.” Bottom line- If you’re self-employed or have gig income, be aware of the changes. Since the programs are new, not all lenders may offer streamlined income verification yet, but if they’re on the ball, they soon will.

Zillow sued over hacked listing of California mansion Kenneth R. Harney on Mar 8, 2019 WASHINGTON – What may be the first-ever hijacking of an active real-estate listing online – a palatial mansion overlooking the Pacific Ocean in Bel Air, California – has led to a lawsuit seeking $60 million in damages against home-sale marketing company Zillow. One or more hackers seized control of the mansion’s listing page on Zillow’s popular Zestimates site in February, causing it to display a series of bogus sales that were tens of millions of dollars below the $150 million asking price, according to the complaint filed in federal district court in Los Angeles. The net effect was to inflict financial damage on the seller by “corrupt[ing] the listing price dramatically,” according to the complaint, making it more difficult to obtain anywhere near the price the seller is seeking. The newly constructed hilltop house is a knockout, even by Hollywood standards- 12 bedrooms, 21 baths, 38,000 square feet of interior space, 17,000 square feet of “entertainment decks,” three kitchens, five bars, fitness spa, four-lane bowling alley, basketball and tennis courts, wine cellars and an 85-foot “glass-tile infinity pool,” to cite just some of the amenities. It is owned by a limited liability company controlled by Los Angeles luxury builder Bruce Makowsky. The hijacking occurred when someone using a Chinese IP address and a made-up U.S. phone number managed to successfully claim “ownership” of the mansion on Zillow’s Zestimates page. Zillow, which displays pages on 110 million American homes – properties listed for sale and off the market – offers a feature that allows owners to amend descriptions of their homes on the site. The feature is heavily used by legitimate owners to modify information posted about their house – numbers of bedrooms and baths, for example, or a recent remodeling that affects the property’s market value. To successfully make such a claim, owners must answer questions designed to verify their identity. In this case, according to the suit, hackers figured out how to get past Zillow’s security questions and began manipulating information on the site. They erroneously reported that the house sold for $110 million on Feb. 4, then for $90.5 million on Feb. 9 and $94.3 million Feb. 10. They also listed an open house for the property on Feb. 8, something that would be unusual in the rarified world of super luxury homes, where showings tend to be exclusively by appointment. The suit alleges that Zillow was negligent in allowing false and harmful information to be posted on the mansion’s page, despite repeated requests for “over a week” from the seller’s lawyers to pull the plug on the hackers. Zillow does not have adequate “safeguards in place to prevent Internet trolls, criminals” and others “to commit illegal acts” by “logging into their system to post the false information,” the suit alleges. Asked for comment, Kate Downen, a Zillow spokesperson, said that “while we don’t discuss pending litigation, I can tell you that [the company] goes to great lengths to display current and accurate data.” Downen added that Zillow is “in the process of updating” the verification system for access to owner pages on the Zestimate site. In an exhibit accompanying the complaint, attorneys for the owner included a copy of an email from Kim Nielsen, senior lead counsel for Zillow Group Inc., in which she says, “Unfortunately if someone is able to provide responses to the verification questions, they are able to claim the home … we do not manually check each time someone attempts to claim a home.” The complaint also quotes Nielsen as saying that “any home on our website can be claimed by the homeowner. There are a series of questions … but if someone attempts to claim [the property] enough times, they will know the questions asked and be able to figure out what information they need to verify their identity.” Ronald Richards, the seller’s attorney, asked “How is it that someone with a fake phone number (bad area code) and Chinese IP address and email can hijack [a] $150 million house?” In an interview, Richards said “it’s impossible to have a site” like the Zestimate owner-claim page if effectively there are “no security protections.” So what should homeowners whose house is listed on Zillow make of this suit? Even if your home is not a dazzling palazzo on a hill, the secret is out- Though it’s highly unlikely, your Zillow page can be hacked and stolen by online troublemakers. Until Zillow announces verification reforms, it’s probably worth checking your Zestimate page now and then. (To view the Bel Air property, here is a link- http-//tinyurl.com/ycx8nyz3)

More Americans are paying mortgages on time Kenneth R. Harney on Mar 1, 2019 WASHINGTON — It’s a real estate and social barometer that doesn’t get a lot of publicity, but it’s important: More Americans are paying their mortgages on time today than they have in nearly two decades — maybe even longer. That’s a big deal, because when large numbers of owners do the opposite — stop paying on their home loans for months at a time — the entire economy feels the effects. Spiking delinquencies in 2007-2008 ushered in the global financial crisis and spawned tidal waves of foreclosures that devastated borrowers and their communities. Some of the wounds are still fresh. Delinquency rates may sound like a yawn, but they are a key economic bellwether that shouldn’t be ignored by anyone serious about real estate. So here’s the good news: The national delinquency rate on home loans hit the lowest level it’s been in 18 years as of the final quarter of 2018, according to data compiled by the Mortgage Bankers Association. Borrowers with conventional mortgages, those eligible for sale to investors Fannie Mae and Freddie Mac, are the best performers; roughly 97 percent of them are paying on time. Borrowers with Federal Housing Administration-insured (FHA) mortgages pay late nearly three times more frequently; even so, more than 91 percent of them are on time. The big gap between homeowners with conventional loans and FHA borrowers shouldn’t be surprising, because FHA borrowers have lower credit scores, higher debt-to-income ratios and lower down payments on average. All three factors multiply the risk that borrowers will pay late. Yet even at 8.65 percent, the current FHA delinquency rate is much better than it was a decade ago, when it hovered around 14 percent. Overall, says Freddie Mac Chief Economist Sam Khater, U.S. homeowners are performing better today in terms of on-time payments and foreclosure avoidance than they have in 30 years. What’s contributing to this good behavior? It’s no secret: Since 2010, stricter federal underwriting rules imposed on the mortgage industry have banned some of the lending industry’s previous worst habits, and required them to screen out high-risk borrowers — essentially limiting their customer base to people who can truly afford the mortgages they’re seeking. In the conventional market, that’s why Fannie Mae and Freddie Mac — the country’s two largest sources of mortgage money — have kept their average FICO credit scores near a relatively pristine 750, well above levels typical before the financial crisis. (FICO scores run from 300 to 850, with low scores indicating a high probability of future delinquencies and foreclosures.) An improving economy has helped significantly as well. Mortgage interest rates continue to be below historical averages. Unemployment has fallen steadily and is now at or near multi-decade lows. Plus many of today’s owners are sitting on sizable equity gains as they pay down mortgage balances on their homes while price inflation pushes their values up. The Federal Reserve estimates homeowner equity now totals a stunning $1.5 trillion, the highest ever. For some owners, that cushion functions as an insurance policy should anything threaten their ability to pay the mortgage. How long can the current impressive performance continue? No one can be certain, but here are a couple of observations. Mortgages originated in the past several years under strict federal rules constitute what lenders and investors call “the cleanest book of business” they’ve seen in many years. If the lending industry begins to relax underwriting standards in any significant way in order to dig deeper into the pool of riskier credit applicants to pump up their volume of home-purchase mortgages, it’s inevitable that delinquencies will rise. There’s some evidence that a modest loosening of standards got underway last year. Homeowners’ demand for refinancing dissipated with rising interest rates, and some lenders began easing standards to include a broader mix of applicants. FICO itself confirmed in a study that average credit scores were on the decline in the home-mortgage arena. Fannie Mae relaxed its policy on debt-to-income (DTI) ratios for buyers, allowing more applicants with DTIs up to 50 percent to pass muster for a loan. Previously, the cut-off was 45 percent. Meanwhile, the FHA has seen notable declines in average credit scores and is approving low-down-payment purchasers with DTI ratios well above 50 percent. Steps like these may appear — and be — helpful for marginally qualified first-time buyers. But what will they look like through hindsight during the next recession?