Appraisal-free home sales draw mixed reviews

Kenneth R. Harney on Sep 1, 2017

WASHINGTON – Would you welcome the option to buy a house but not have to pay hundreds of dollars for an appraisal?

Are you kidding? Sign me up, you might say. Who doesn’t want to save $500 or $700 for someone to confirm that the price you and the home seller agreed to makes sense? Appraisals are mainly for lenders, right?

If an appraisal-free home purchase sounds intriguing, you might be interested in ground-breaking new policy changes by the two largest sources of home financing – Fannie Mae and Freddie Mac. Both government-chartered companies are now willing to waive their decades-old appraisal mandates for certain home purchases, provided their automated valuation models – loaded with previous appraisal and current market data – flash a green light.

You as a buyer won’t have to do a thing; the entire process will be handled between your mortgage lender and either Fannie or Freddie. Your lender will submit your loan file for underwriting analysis by the companies’ proprietary online systems with a property value estimate but no appraisal. If an underwriting model determines that there is sufficient information available on the house, you’ll get a choice- Do you want to do a traditional appraisal, at your cost, or go with Fannie’s or Freddie’s in-house valuation, which will cost you nothing?

Simple as that. If you opt for no appraisal, you’ll know immediately whether your contract price is acceptable for the mortgage amount you’re seeking. That’s impossible with the traditional approach where you have to wait for the appraiser to bless the deal, which sometimes doesn’t happen because the appraisal comes in lower than the contract price.

Eligible properties for Fannie Mae’s version of the program include single family homes, second homes and condos. Cooperatives, multi-unit and manufactured homes aren’t allowed. You’ll need to have at least 20 percent equity going in – so this is not an option for people buying with skimpy down payments.

Freddie’s program is slightly more restrictive. It is limited to single family, single-unit houses that are used as the borrower’s principal residence – no second homes. Houses valued at more than $1 million are not eligible. It requires a 20 percent equity stake. Freddie won’t go appraisal-free if the lender knows of “adverse physical property conditions,” whether noted in the sales contract, an inspection or the seller’s disclosures. Foreclosed homes are barred as well.

Not surprisingly, opinions on the two giant companies’ departure from strict dependence on traditional appraisals vary widely. Appraisers think the idea stinks. In a statement for this column, the country’s largest appraisal group, Chicago-based Appraisal Institute, predicted that eliminating humans from the process – even a little to start – will be dangerous for lenders, Fannie and Freddie and the public. The group warned that the changes could “result in a race to the bottom” in terms of loan quality, “and create more risk for taxpayers.”

Carl S. Schneider, an appraiser in Tulsa, Oklahoma, said appraisers function as the lender’s and consumer’s essential “eyes and ears,” and no computer program “can replace” them. They inspect interiors, which computers cannot do. “Buyers may want to avoid the cost of an appraisal,” he added, “and that is their prerogative.” But he foresees trouble ahead when investors in Fannie’s and Freddie’s mortgage bonds discover “loans were made to unscrupulous borrowers and the collateral is crap.”

Real estate brokers generally see the companies’ limited moves as worthwhile, particularly given recent frequent delays in delivery of appraisals, higher fees to buyers because of surcharges by appraisal management companies and few appraisers available – or willing – to perform home valuations in some markets. A new survey of members by the National Association of Realtors found that appraisal issues were involved in 17 percent of all delayed home sale closings, second only to problems in obtaining mortgages.

Anthony Lamacchia, broker-owner of Lamacchia Realty in Waltham, Massachusetts, told me he thinks appraisal-free loans are “a good thing,” provided buyers have made significant down payments. But he worries that if Fannie and Freddie waive appraisals at lower equity levels “it will lead to what happened in the bust.”

One of the mortgage industry’s most prominent leaders supports the companies’ new tech-driven initiatives, but has some words of caution for home buyers. David Stevens, president and CEO of the Mortgage Bankers Association, says automated valuations might satisfy a lender’s purposes but they “may not necessarily be the best assessment” of “the right price to pay for a property.”

Good point to remember.

What’s it take to be in the home equity elite?

Kenneth R. Harney on Aug 25, 2017

WASHINGTON — Americans readily gossip about home values — “Did you hear the crazy high price the house down the street sold for?” “Did you hear how little our neighbors were forced to take on their sale?”

But people are much more reticent when it comes to home equity, which is not surprising: Prices and assessed values are public information. Equity holdings are not public, and they take some effort to figure out. Equity is intimate financial information, like a bank account or retirement fund balances, and represents a major part of most owners’ net worth.

So it tends to be closely held.

All of which makes a new statistical report on the equity levels of owners of more than 150 million homes with mortgages intriguing. The report comes from ATTOM Data Solutions, a research and analytics firm that tracks equity movements on a quarterly basis using public property information and proprietary automated valuation systems. According to ATTOM researchers, 34 percent of all American homeowners have 100 percent equity in their properties — they’ve either paid off their entire mortgage debt or they never had a mortgage.

Equity is the difference between the current market value of your home and the debt you’ve got against it. If you own a $400,000 house and your mortgage debt is $150,000, you’ve got $250,000 in equity. During the five years following the housing bust in 2007, when the real estate recovery began taking hold, American homeowners lost billions of dollars in equity. But today many have recouped all or most of it, and the Federal Reserve estimates that homeowners now control an astounding $1.37 trillion in equity wealth.

The latest ATTOM report opens a window on equity — where and in what types of homes equity holdings are especially large and where they tilt negative, with property values well below what owners could expect to get from a sale.

Some quick highlights:

‘Co-marketing’ arrangements put Zillow in hot water

Kenneth R. Harney on Aug 18, 2017

WASHINGTON – You’re probably familiar with the online realty marketing giant Zillow because of its voluminous home sale listings and its controversial “Zestimate” property valuation feature.

But you may not know this- Zillow is in hot water with the federal government over alleged violations of anti-kickback and deceptive practices rules. According to Zillow, the Consumer Financial Protection Bureau has concluded a two-year investigation into the company’s “co-marketing” arrangements that allow mortgage lenders to pay for portions of realty agents’ monthly advertising costs on Zillow websites. In exchange for the money, lenders are presented in agents’ ads to site visitors as sources of financing, which ultimately generates “leads” and new mortgage business. Consumers typically are in the dark about the featured lender’s role in making payments for the realty agent to Zillow.

Though the CFPB declined to comment for this column, Zillow confirmed that the bureau has threatened it with legal action if it does not agree to a settlement. The CFPB has not publicly detailed its specific reasons for pursuing Zillow, but the company says the allegations involve the Real Estate Settlement Procedures Act (RESPA) – which prohibits kickbacks in exchange for business referrals – and a section of the Consumer Financial Protection Act that prohibits “unfair, deceptive or abusive” practices.

A Zillow spokeswoman told me that “we believe our program is lawful,” and the company welcomed an opportunity to discuss the allegations with the CFPB.

Some background- Thousands of agents across the country pay Zillow for advertising space, mainly because millions of consumers visit its sites to check out listings and information on more than 100 million homes, whether they are for sale or not.

On homes listed for sale, frequently there is also contact information for local “premier agents” who may or may not be the actual listing agent. Premier agents pay Zillow for the promotional space and other benefits – typically hundreds of dollars per month but sometimes well above $1,000 – and receive leads to consumers who are actively searching for a home or plan to in the future. Premier agent monthly payments are a crucial part of Zillow’s business model, amounting to nearly $190 million during the second quarter of 2017 alone. This represented more than 70 percent of Zillow’s total revenues during the quarter.

Legal experts say the CFPB’s concerns likely focus on an optional feature of the premier agent program that permits real estate agents to have their monthly advertising fees paid for in part – or almost entirely – by lenders who seek leads to potential borrowers. A loan officer who is given exclusive promotion along with a premier agent might pay 50 percent of the agent’s monthly bill. Three lenders who’ve cut individual deals with the agent might pay a combined total of up to 90 percent.

The sticky legal question here is whether the lenders or loan officers are paying for referrals of business – banned by RESPA – or whether they are simply jointly advertising their wares and paying fair market value for the exposure. In a multimillion-dollar settlement in January with national lender Prospect Mortgage over alleged violations of the anti-kickback law, the CFPB tipped its hand- It cited payments made by loan officers to subsidize realty agents’ advertising costs on an unnamed online site that was widely understood to be Zillow. In that case, the CFPB levied fines against real estate brokerages as well as the lender – opening the door to possible future legal attacks against realty agents themselves.

Marx Sterbcow, a RESPA legal expert based in New Orleans, said that absent details from the CFPB, the anti-kickback case against Zillow is “confusing” since individual loan officers and realty agents appear to be the direct participants in the payment arrangements. However, he said, Zillow’s role in providing “substantial assistance” to the arrangements could make it vulnerable to charges by the CFPB under the deceptive practices act.

George Souto, sales manager and loan originator for McCue Mortgage in New Britain, Connecticut, told me he checked out the Zillow program but “got a bad feeling very quickly.”

“Once I saw the way it really works, it became clear to me that it wasn’t a lead generator but a way to pay for referrals. I felt uncomfortable,” he said, and worried about possible legal action by the CFPB or banking regulators.

Where’s this all headed? Only lawyers at Zillow and the CFPB know whether the case is destined for litigation or a settlement. Meanwhile, now you know how agents and lenders end up on Zillow pages- They pay. Or co-pay.

Mortgage approval could be easier than you think

Kenneth R. Harney on Jul 28, 2017

WASHINGTON – So what does it take to get approved for a mortgage to buy a house this summer, whether you’re a first-timer, planning to move up or downsize? Maybe not all that you think.

For most people, the key requirement is that you’ve got the right package of stuff – acceptable credit score, down payment, financial reserves, debt-to-income ratio – to get an acceptable grade from the automated underwriting systems or “black boxes” installed at the dominant investors in the market, Fannie Mae and Freddie Mac.

Though the intricate webs of algorithms and big data spun inside Fannie’s and Freddie’s black boxes are kept under tight security, we do get monthly read-outs on some of the characteristics of loans they’re approving.

For example, in June the average FICO credit score for home purchase loans at Fannie and Freddie was 754. That’s a big reach for millions of would-be buyers. It’s well above the national average FICO score of 700 and considerably higher than what was typical during much of the previous two decades. (FICO scores range from 300 to 850, with higher scores indicating lower risk of default.)

But that’s not the whole picture. According to data newly compiled by Ellie Mae, a mortgage origination software and analytics firm that tracks loan characteristics, substantial percentages of applications are receiving approvals from Fannie and Freddie with lower FICO scores than you might imagine. Nearly 13 percent of their approved loans in June had scores between 650 and 699. Scores like these are typical of consumers who have moderate dings in their national credit bureau files or are recovering from credit woes suffered during the Great recession but are now bouncing back. Another 4.3 percent of loans approved had even lower FICOs, ranging from the low 500′s to 649.

Mortgages backed by the Federal Housing Administration (FHA) closed in June spanned an even broader range of scores. FHA’s average score for home purchase loans was 683, but more than one out of four (26 percent) of its borrowers had scores from 550 to 649. Just under 2 percent had scores FHA considers the rock bottom it will allow – 500 to 549 – indicating serious derogatory items in applicants’ credit files, possibly even previous mortgage defaults or foreclosures. Note that FHA uses its own proprietary underwriting system, known as TOTAL, which often yields more generous decisions on approvals than Fannie’s or Freddie’s.

Debt-to-income (DTI) ratios are another major factor hard-wired into the black boxes – and can be deal-breakers in mortgage applications that otherwise look pretty good. DTI refers to the ratio of your monthly credit-related expenses – including current rent, mortgage payments, credit cards, student loans and the like – compared with your monthly gross income. If you have $6,000 in income and $2,500 in total debt payments, your DTI is 42 percent.

Fannie’s and Freddie’s average DTIs look strict, but there’s actually more wiggle room for mortgage applicants this summer than any time in recent years. The average DTI for Fannie and Freddie during June was 39 percent. FHA, which tends to be more forgiving on debt matters, had average DTIs in June of 43 percent. But Fannie, Freddie and FHA recognize that even solid, creditworthy applicants can be carrying high debt loads in the current economy, and they are open to higher DTIs than the monthly statistics suggest. In an important policy change taking effect this month, Fannie raised its permissible maximum DTI to 50 percent. A study released last week by the Urban Institute predicts that this change alone could open the mortgage door to 95,000 additional home buyers. That’s potentially a big splash.

Freddie Mac has had flexibility on DTIs built into its underwriting system for years and also can go to 50 percent, ideally for borrowers with compensating factors such as a higher down payment or high bank reserves. FHA is by far the most liberal of the three on DTI, funding loans with total debt loads in excess of 55 percent.

Down payment requirements also are super low at the moment. Fannie and Freddie both have programs that permit just 3 percent down, and some lenders using those programs have cut that to 1 percent or even zero. FHA’s minimum down is 3.5 percent.

Bottom line- Get rid of preconceived notions you may have about how tough it is to get approved. Standards are more flexible and not as tough as you probably thought. At the very least, check them out.

Tax overhaul plans in summertime slow motion

Kenneth R. Harney on Jul 14, 2017

WASHINGTON – If you’re a tax-savvy home owner, buyer or investor, you might be wondering- Hey, what’s going on with that big tax code overhaul bill the Trump administration and Republicans in Congress have been promising to deliver?

There’s been plenty of news about health care legislation – the other blockbuster Republican campaign plank – but hardly a peep lately about a tax bill that could have far-reaching effects on real estate and other segments of the economy. Among the potential real estate changes that have surfaced- An end to home owner write-offs of state and local taxes; a doubling of the standard deduction, thereby watering down the mortgage interest deduction; severe limitations or an end to tax-deferred exchanging. Plus there have been questions about how any tax overhaul plan would treat the most generous lump-sum tax code benefit available to home owners- Exclusion of up to $250,000 or $500,000 tax-free from capital gains on home sales, depending on whether they file singly or jointly. Some analysts say that benefit, which is projected to cost the Treasury $166 billion in uncollected tax revenues between 2016 and 2020, could be reined in.

This is important stuff to millions of owners and buyers of real estate, so where’s the legislative “reform” package Republicans have promised, cutting tax rates for individuals and corporations and simplifying returns for just about everybody? Does this have enough life in it to pass this year? Or is it shriveling away in the summer political heat?

Here are a couple of things you should know- The tax overhaul efforts on Capitol Hill and at the White House are alive and active but are mainly occurring behind closed doors. There have been no public hearings, no introductions of draft language, no markups of bills. In fact – and this may surprise you – there is no “tax bill” per se that you can look at, even though we are halfway through 2017.

The Trump administration’s tax plan released in April consisted of just a one-page handout, and there have been no significant details since then. The House Ways and Means Committee is working off a “blueprint” of proposals dating back to mid-2016 but hasn’t yet released an actual bill for 2017. And Senate Finance Committee Republicans have not yet produced even rough conceptual drafts of what they want to do, at least not for public consumption. The chairman of the committee, Sen. Orrin Hatch (R-Utah), only recently assigned members specific areas of the tax code to consider for possible changes. So it doesn’t appear that the Senate is all that far along in the process either.

Treasury Secretary Steven Mnuchin predicted that a comprehensive tax bill would be ready by August. He has since revised that to “this year.” House Speaker Paul Ryan (R-Wisc.) agrees. Nobody can give you a definitive answer on these predictions, but the odds against it grow longer every day. Even though shaking up the tax code is important, other, more immediate major issues coming before Congress stand in its way. They include a must-do budget resolution for the next fiscal year, a revised debt ceiling, appropriations bills and, of course, health care.

Any or all of these could eat up substantial time and political oxygen. Add in the fact that Congress doesn’t have a lot of scheduled work days in Washington – by one count less than 60 days from mid-July through December – and you begin to see the squeeze taking shape.

Even more important- Comprehensive tax code reform is always a minefield. It’s one of the toughest and most divisive exercises any Congress can attempt. That’s why the last time it happened successfully was back in 1986. A narrow-bore tax bill that doesn’t touch as many sensitive nerves but cuts corporate and individual tax rates would have a better shot at passage this year, but even that would likely require revenue-raising provisions in order to pass – and raising revenue, aka increasing taxes on somebody or another, is anathema to most Republicans and many Democrats.

So where does this leave home owner and investor tax breaks? Safe from any radical changes for the time being. But even if a wide-ranging overhaul doesn’t pan out in 2017, you can bet it will be high on the agenda next January. Then again, 2018 is a congressional election year. Incumbents don’t like to run on the message- Vote for me – I took away some of your cherished real estate tax benefits.

So all bets might be off.