Hope is on the horizon for home buyers in gig economy

Kenneth R. Harney on Sep 7, 2018

WASHINGTON – Here’s some promising news for self-employed entrepreneurs, “gig” economy workers and small business owners- There’s a bipartisan push underway on Capitol Hill to make the home-mortgage process a lot easier for you.

For years, federal lending rules have favored applicants with easily documentable incomes – people who can show underwriters pay stubs, W-2s and two years of steady income plus the likelihood it will continue. The same rules have made it more challenging for people who work for themselves, earn money at multiple jobs or have big seasonal swings in what they earn.

Say you’re a Lyft driver and you run a cash-intensive food truck business on the side. You earn good money and you have decent credit scores and savings, but your income jumps around from month to month depending on sales. You’re likely to have a hard time convincing lenders about your total income – it’s not steady, and at least some of it can be difficult to document. Your loan officer may end up saying- Sorry, I can’t fit your income pattern into the boxes mandated by federal qualified-mortgage (QM) regulations, so I just can’t do your loan.

This may not knock you out of the mortgage market entirely, but it could force you to pay a higher interest rate or make a larger down payment elsewhere from a lender who offers non-qualified mortgages (non-QM) on less favorable terms.

Enter the “Self-Employed Mortgage Access Act,” co-sponsored by Sens Mark R. Warner, D-Va., and Mike Rounds, R-S.D.. It would expand lenders’ permissible sources to verify incomes beyond the relatively narrow range specified in current federal QM regulations. According to Warner, as many as 42 million Americans – roughly 30 percent of the workforce – are self-employed or in the gig economy.

“Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income – pay stubs or W-2s – as someone who works 9 to 5,” said Warner in introducing the bill.

Mortgage lenders say applications from buyers with non-traditional income patterns are a growing issue. “I deal with a lot of people who fall out of the guidelines,” says Don Calcaterra Jr., owner of Local Lending Group in Troy, Michigan. Calcaterra told me about a recent client who moved from being a W-2 employee to independent contractor status. She couldn’t show two years of steady income in her current role, couldn’t wait for two years to qualify to buy the house she needed, and ultimately couldn’t fit into current federally prescribed income rules.

Calcaterra’s firm does commercial lending as well as home mortgages. He says it’s ironic, but “it’s now easier to do a $5 million commercial loan than it is” to do a small QM mortgage for a person with non-traditional income – even if the home buyer is a good credit risk based on assets and down-payment cash.

Pete Mills, senior vice president for residential policy at the Mortgage Bankers Association, offered an example of how the current “QM” rules are overly prescriptive- An auto-industry worker wanted to buy a home using his full-time employment income and earnings from a small sideline business – a recent partnership he formed with a friend to sell vegetables at a farmer’s market. Because of start-up cost deductions, the partnership claimed a $500 tax loss for its first year on IRS Schedule 1040E. Ultimately, the applicant was forced to only use his regular employment income for the mortgage, because QM-rule paperwork requirements to substantiate the $500 in losses were excessive – two years of federal-tax statements, a year-to-date profit-and-loss statement and a balance sheet for the business.

Mills called the current rules “well-intentioned” but “antiquated.” Prospects for the Warner-Rounds bill? Mills said he expects House sponsors to offer their version of the Senate bill soon. Given the bipartisan nature of the proposal and the breadth of constituents affected, he thinks the legislation has an excellent chance, though probably not until next year’s congressional session.

Meanwhile the two largest sources of mortgage money in the U.S., investors Fannie Mae and Freddie Mac, are actively exploring ways to more fairly underwrite self-employed and gig economy applicants. A Freddie Mac official told me the focus is on automated solutions that would be able to document the incomes typical for self-employed and gig economy workers.

Bottom line- Remedies are in the works – and they could come in the months ahead.

Sellers’ price-cutting trend could be good news for buyers

Kenneth R. Harney on Aug 24, 2018

WASHINGTON – You might be relaxing at the beach or in the mountains, but if you’re considering purchasing a home in the coming months, you should be aware of an important shift emerging in the market- List prices on growing numbers of houses are being cut, even in places where previous appreciation has been strong and sales at record levels. The great American post-recession housing-price boom appears to be losing at least a little of its ooomph, opening opportunities for alert buyers.

New research released last week by realty marketing site Zillow found that one of every seven listings (14 percent) across the country saw a price reduction during June, the latest month covered by the study data. The rate of reductions was higher than it’s been in some markets for years. In Seattle, which has been scorching hot – with multiple offers and double-digit appreciation routine – 12 percent of listings got a price reduction in June, the highest rate since 2014. The median cut was 3.1 percent.

Some of the largest cities and their suburbs are also seeing growing numbers of price adjustments-

- Nearly one of every five listings in Chicago saw a price cut averaging 2.7 percent in the survey.

- In the Washington D.C. metro area, 15.4 percent of all listings had price reductions that averaged 2.5 percent.

- In Miami-Ft. Lauderdale, the average decrease was 2.9 percent; metropolitan New York, 3.6 percent; Boston, 3 percent; San Francisco, 4.2 percent; San Diego, 2.3 percent; Charlotte, North Carolina, 2.4 percent; and Columbus, Ohio, 2.7 percent.

In San Diego, one of every five listings got pared back in June, a significantly higher rate than had occurred the year before, when one of every eight listings (12 percent) was reduced in price.

Of special note here- Reductions are occurring most frequently at the upper end of the price spectrum, where the average share of listings with cuts jumped to 16.2 percent. Lower-priced homes actually have seen a small decrease in the percentage of listings with reductions. Overall, according to Zillow, home-price appreciation is slowing in nearly half of the country’s 35 largest metropolitan markets.

Zillow’s study dovetailed with new research by realty brokerage Redfin, which found slowdowns and price softness in the upper-end, luxury segments – the top 5 percent most expensive homes – of some cities and suburbs. In Boston, luxury sales prices slumped by 16.7 percent year-over-year in the second quarter, compared with a 9.7 percent average increase in the non-luxury segment. Overall, however, luxury home prices increased nationwide by about 5.2 percent, down from 7.3 percent the previous quarter.

What’s going on? Multiple factors are at work. The recovery from the recession and housing bust has been underway since at least 2012. But every major up-cycle in home prices eventually runs out of fuel because buyers’ incomes can’t keep pace with price increases. Once buyers begin balking, sales start to soften – note that June saw existing home sales nationwide on the decline for the third straight month – and inventories of available properties slowly begin to accumulate. Inventories of listings at the entry-level price range generally remain low and continue to sell fast, sometimes with multiple offers. But upper-bracket listings tend to be relatively more available and sell more slowly. Sometimes it takes six to 12 months to sell them, according to Lawrence Yun, chief economist of the National Association of Realtors.

Jonathan Miller – a nationally known appraiser active in metropolitan New York, Philadelphia, Miami and Los Angeles – told me the pattern he sees almost everywhere is “soft at the top” tier of the price spectrum and “tighter as you move lower in price.” He advises potential buyers to keep a close eye on local sales statistics, because declining sales point to more price reductions in the future.

Here’s what could be another emerging trend, which turned up in the Redfin luxury sales study- Small but noticeable numbers of homeowners who live in high-cost, high-tax states such as New York and California appear to be fleeing to lower-tax markets. Some communities in Florida, Nevada and Washington are seeing unusually large price jumps in sales of upper bracket homes. Buyers aren’t reticent about their reasons either- Congress’ $10,000 cap on deductions of state and local property and incomes taxes. You might think local taxes are no big deal for well-off owners, but consider this- One house listed for $12 million in Massachusetts came with a $101,346 local real-estate tax bill.

Ouch!

Escrow-free loans raise credit-risk questions

Kenneth R. Harney on Aug 3, 2018

WASHINGTON – Do you really need an escrow account attached to your mortgage? Aren’t you capable of remembering when it’s time to pay tax and insurance bills? These questions suddenly are more controversial than you might guess.

A new program offered by one of the country’s highest-volume lenders allows a wide swath of borrowers to say no-thanks to escrow accounts, at no charge. More importantly, the escrow-free option is open to borrowers who have dings in their credit histories and are making small down payments.

Traditionally, borrowers granted waivers from mandatory escrow accounts have had good to excellent credit scores and substantial down payments – often 20 percent or more. Opening the door to escrow-free status for borrowers who don’t fit this profile is raising eyebrows in the mortgage field. Michael Fratantoni, chief economist for the Mortgage Bankers Association, told me it would be “a troubling development” if large numbers of new buyers with sub-par credit opted out of escrow accounts, exposing them to potential problems down the road.

A little background here- Escrow (or impound) accounts are standard features on many conventional home mortgages in the U.S. They require the borrower to deposit money in advance for later payment of local property taxes and hazard-insurance premiums by the lender or loan servicer. The idea is that individual borrowers are more likely to forget – or otherwise fail to pay – insurance and tax bills that come due annually or semi-annually. Failing to make those payments exposes the property to foreclosure, endangering the lender’s collateral and the owner’s equity.

Waivers of escrow requirements are possible for borrowers who meet lenders’ criteria on financial capacity and credit, subject to a fee – often one-quarter of a percent of the loan amount.

A program now being introduced by United Wholesale Mortgage, the country’s largest wholesale lender, departs from the traditional approach to escrows- It allows conventional loan applicants who have significant dings to their credit – FICO credit scores of 640 – and who make down payments as low as 5 percent to avoid escrow accounts. The loans are being originated for sale to Fannie Mae and Freddie Mac, the big federally regulated mortgage investors. FICO scores for home-purchase loans at both companies average in the 750s, according to data and software vendor Ellie Mae. UWM has a network of 7,000 brokerage firms with 30,000 individual loan officers, according to the firm. Unlike banks or mortgage companies that have retail operations, wholesale lenders purchase loans originated by third parties, typically brokers.

The idea behind escrow-free loans, according to UWM, is to slash costs. On a hypothetical $300,000 first mortgage, borrowers could save $3,625 – $750 that would otherwise be paid at closing for an escrow waiver fee, $2,500 on deposits for property taxes and another $375 for insurance premiums.

But aren’t there inherent extra risks when buyers with low cash and sub-par credit scores handle their own tax and insurance payments? During the super-easy credit years preceding the housing bust – no or minimal down payments, no documentation, super low credit requirements – many of the subprime loans that ended up in foreclosure had no escrow accounts. When hard times hit, those borrowers found it difficult to come up with large, lump-sum tax and insurance payments and frequently lost their homes.

Mat Ishbia, president and CEO of UWM, told me in an email that this is not the scenario ahead for his company’s new program. “These are all high-quality borrowers that are approved through automated engines at Fannie Mae and Freddie Mac, and verified by our underwriters.” The program saves money and “it’s better for consumers to have options,” Ishbia said.

For its part, Fannie Mae permits waivers under specified guidelines but had no comment on UWM’s loan option. Freddie Mac also had no comment on the program.

Some experts on escrow accounts are highly critical of the idea, however. David I. Ginsburg, CEO of Loantech LLC, a national authority on escrow account audits, says UWM’s program “sounds like we are back in 2008 again. When the next slowdown occurs, those borrowers will have problems, and we know what that will look like.” Paul Skeens, president of Colonial Mortgage Corp of Waldorf, Maryland, called the program “foolish.”

What to make of all this? No question the upfront savings are attractive, especially for cash-short first-time buyers. But they better keep track of their tax and insurance due dates, and build up rainy-day financial reserves to handle economic rough spots ahead.

Closing costs can bust a homebuyer’s budget

Kenneth R. Harney on Jul 27, 2018

WASHINGTON – In the emotional rush that precedes buying a home – negotiating contract details and price, beating away rival bidders, searching for the best mortgage deal – closing costs often aren’t a pressing concern. Yet what you pay at settlement can be surprisingly expensive, even a budget buster.

Would you believe that the average buyer of a single-family home in Kings County, New York – better known as Brooklyn – got hit with $57,333 in total closing costs at settlement during the past year? Or that the average buyer of a home in the District of Columbia shelled out more than $20,000?

Ouch! Granted, the average cost of the houses was between $900,000 and $1 million in Brooklyn and close to $800,000 in D.C. In both cases, the single largest component of the closing bill was local government-imposed transfer taxes – a stunning $50,189 in Brooklyn, $14,022 in D.C.

Then there’s Montgomery County, Maryland, where the average buyer paid $22,181 in total settlement fees, Philadelphia ($16,463), Los Angeles ($10,991), Miami ($9,364) and Cook County, Illinois (Chicago area, $7,085).

All these figures come from a comprehensive new compilation of what buyers pay for closing services and taxes in the 50 states and the District of Columbia, plus hundreds of counties and “core” metropolitan statistical areas. The study was conducted by ClosingCorp, a data and technology company for the real estate industry. It covered more than 900,000 home-purchase transactions that went to settlement nationwide between October 2017 and March of this year.

The study’s primary focus- measuring the fees charged for the services typically involved in closings – title insurance (lenders’ and owners’ coverage), appraisals, recordation, land surveys, settlement charges – plus transfer taxes. The variations buyers can encounter are eye opening.

On a national basis, the average-priced single-family home purchased during the study period cost $318,362. The average appraisal charge was $526; lender’s title insurance policy, $1,282; owner’s title insurance, $517; and recording fee, $197. The settlement fee charged by the agent or attorney administering the closing came to $916. Real estate transfer taxes added $3,438, and the total for all services plus taxes came to $5,651.

Depending upon where you live, $5,651 in closing fees might strike you as low, reasonable or ridiculously high. For example, if you lived in Pottawattamie County, Iowa, where home prices average a little more than $149,000, you’d have paid just $1,821 when you closed on your house. That included all the regular services – from title to appraisal to surveys – plus $117 in taxes. Pretty cheap. You’d also probably feel you’re getting a good deal in Tippecanoe, Indiana, where the closing charges on your $133,000 home came to $2,029, with zero transfer taxes.

But real estate is all about location, and when the location is in or close to a big city or along the east or west coasts, you tend to have to pay a lot more – for the house, for settlement fees and taxes. So it’s not surprising that the highest average total closing fees, including taxes, are in Washington D.C. ($20,228), New York ($15,254), Maryland ($13,358), Delaware ($13,293) and Pennsylvania ($10,206). Removing taxes from the equation, D.C. is still the highest-cost “state” in the country with average closing-service fees of $6,206. Excluding taxes, Hawaii is second most expensive, California is next at $5,276, and they are followed by New York ($4,915) and Washington state ($4,860).

But focusing on dollar amounts paid at settlement is not the only useful way to look at closing costs. High-price housing markets will almost always be expensive at closing. But here’s an alternative way to look at it- Putting aside local tax levies, what portion of a home-sale price is paid for the actual services rendered – from title insurance to surveys, appraisals, and the money paid to the attorneys or agents who conduct the closing? Analyzing it this way allows you to gauge the costs of the services themselves relative to the price of the house.

By this measure, Pennsylvania turns out to have the highest closing charges – 1.91 percent of average home price. Illinois is second most expensive at 1.85 percent, Michigan comes in at 1.69 percent, Oklahoma at 1.62 percent, and Ohio at 1.5 percent. Also using this measure, some of the highest housing price areas look like bargains- D.C. closing fees represent just 0.81 percent of the average home sale price; California, 0.80 percent; and Massachusetts, 0.83 percent.

Bottom line- Check out local closing-cost variations before you purchase. Thousands of your dollars are at stake.

Could baby boomers spur a housing bust?

Kenneth R. Harney on Jul 20, 2018

WASHINGTON – Will baby boomers turn into party poopers when they unload their homes in large numbers starting in the next decade? Could they create an indigestible oversupply in the market that lowers home prices and frustrates sales?

That’s a sobering scenario outlined by two new, provocative studies. One, from Fannie Mae’s Economic and Strategic Research group, warns that the “beginning of a mass exodus looms on the horizon,” where “homeownership demand from younger generations is insufficient to fill the void left by multitudes of departing older owners.” The net result- gluts in some local markets with potentially negative impacts.

A second study, from the Stephen S. Fuller Institute at George Mason University, focuses on the Washington D.C. market and sees a similar problem ahead. “The significant number of older owners in relatively large homes may portend a ‘baby boomer sell-off’” in the D.C. region and elsewhere in the U.S., it reports. Some long-time owners “may have difficulty attaining the price gains they witnessed in their neighborhoods during recent years,” according to author Jeannette Chapman, the Fuller Institute’s deputy director.

Both studies cite demographic and housing data to make their cases. Boomers – the giant generation of Americans born between 1946 and 1964 – own 32 million homes, two of every five in the country. The generations preceding them occupy another 14 million homes. Collectively their properties are valued around $13.5 trillion, according to the Fannie Mae study, co-authored by Patrick Simmons of the strategic research group and Dowell Myers, a professor at the University of Southern California.

All of these homeowners face key choices- Do we stay put, sell, downsize or move to a rental? At some point, the inevitable kicks in- health issues and death will force them to dispose of their properties.

Fannie’s study estimates that from 2016 to 2026, between 10.5 million and 11.9 million older owners will end their ownership status. Between 2026 and 2036, another 13.1 million to 14.6 million will do the same.

This massive and unprecedented generational unloading of houses could be “negative for the home sales market,” the Fannie study warns, because the upcoming generations of buyers may not have the financial capacity – or desire – to absorb the large numbers of homes coming to market. How much of a price hit to boomers’ and potentially other owners’ properties could occur can’t be predicted at this point, co-author Myers told me in an interview.

“It’s impossible” to forecast price impacts “10 years ahead,” he said. “We do not mean to be alarmists,” he added, but hope to spur discussion of the impending challenges and the need for public and private policies that might cushion the impacts. Among the possibilities- Create additional financing programs that encourage Millennials and others to purchase first-time homes, so that they have the equity needed to purchase boomers’ homes 10 to 20 years from now.

In the Fuller Institute study, author Chapman notes that there’s already a mismatch in many Washington D.C. area neighborhoods, where empty nest seniors own homes with far more space than they need. More than 273,000 homes are owned by individuals 50 years and older that have at least two more bedrooms than the number of people living in the house. “As these owners downsize or move elsewhere … ” Chapman says, “the potential for increased supply is large enough to moderate price gains.”

Arthur C. Nelson, a professor of planning and real estate development at the University of Arizona, says some local markets with large oversupplies of boomer homes for sale could encounter significant price declines. In an email, Nelson, who has written about the coming challenges with boomers’ homes for several years, suggested that in the worst-hit areas, price declines could be as crushing as “a quarter or a third or more” – essentially the next housing crash.

Not everybody agrees. Lawrence Yun, chief economist for the National Association of Realtors, says such dark forecasts ignore positive developments well underway – strong U.S. population growth, the rising importance of foreign born buyers who will help sop up the oversupply of large houses in metropolitan suburbs, and the “glacial” speed at which the oversupply is likely to manifest itself.

Yun is emphatic- There should be “no measurable price declines” attributable to the boomers.

What’s this all mean for you? At the very least, be aware of the issue. And think about devising a strategy for dealing with whatever scenario sounds most realistic to you, whether you’re an owner or future buyer.