Don’t let closing costs take you by surprise

Kenneth R. Harney February 21, 2017

Everyone knows that financing and closing on a home purchase can be complicated. Which is why more than a year ago the http://www.chicagotribune.com/topic/business/u.s.-consumer-financial-protec tion-bureau-ORGOV00000233-topic.html> Consumer Financial Protection Bureau issued a set of new disclosures and rules designed to bring greater clarity – and certainty – to transactions.

So how’s that going? Maybe not so well from a consumer perspective, if a new survey of 1,000 first-time and repeat purchasers is any guide. Sponsored by ClosingCorp, an industry technology firm, and conducted by Wilson Perkins Allen Opinion Research, the study found that more than 50 percent of buyers were “surprised” by the amounts they were charged at closing, despite the new federal disclosures aimed at eliminating or sharply limiting surprises.

Buyers also told researchers that “52 percent of lenders were ‘off’ on their initial loan estimates” of the fees required to obtain and close on the loan. Fifty-eight percent of buyers said their initial loan estimates had changed or been revised before closing, and 35 percent said their total fees were higher than they had expected. Just 31 percent of buyers reported that there were no shocks or surprises at closing because their lenders’ upfront estimates and the final charges were in sync. A stunning 17 percent of buyers said they were not even aware that closing costs are required when obtaining a home mortgage.

The CFPB’s two new disclosure forms – the Loan Estimate and the Closing Disclosure – replaced the previous Good Faith Estimates, Truth in Lending and HUD-1 settlement statement, which had been in use for many years. The Loan Estimate covers the key information an applicant needs to understand a mortgage quote: principal and interest payments, mortgage insurance premiums, taxes, hazard insurance premiums, closing costs, recording fees, homeowner association fees and the amount of cash the borrower will need to close. The Loan Estimate must be provided to the buyer within three business days after an application.

The Closing Disclosure itemizes final settlement charges and must be delivered no later than three business days ahead of closing or the date on which the borrower becomes contractually bound to the terms of the deal. The rules governing the disclosures allow for changes by the lender – including increases in charges – under certain limited circumstances, but at the end of the process the itemized charges in the Loan Estimate typically should line up with the final closing costs.

Bob Jennings, CEO of ClosingCorp, said that it’s clear that “a sizable portion of the industry still doesn’t have a firm grasp on fees,” and therefore must make updates to disclosures during the process that can be confusing to borrowers. Jennings rejected the idea that because the CFPB’s regulations governing the new disclosures were lengthy and complex, lenders have had trouble getting the numbers right upfront. To the contrary, he said, the disclosures are expressly designed to put strict “accountability on lenders” for their estimates – a major problem under the old disclosures when borrowers sometimes wouldn’t learn about increases in expenses until the day of the scheduled closing.

Pete Mills, a senior vice president at the Mortgage Bankers Association, told me that although there was an initial learning curve for lenders in gearing up for the new rules, “our sense is that things have gotten better.” He cited an industry audit by Aces Risk Management that found that by midyear 2016, just 1.63 percent of loan files contained “critical defects” – errors in the documents or the procedures followed by lenders that violated the CFPB’s rules.

Mills said the fact that 58 percent of buyers in the ClosingCorp survey reported their initial loan cost estimates had changed “is evidence that the rule is working as written.” When there are changed circumstances affecting the application, the lender is supposed to reflect that in the disclosures.

Asked for comment on the ClosingCorp findings, Sam Gilford, a spokesman for the CFPB, said the “survey results show that lenders and closing agents can do more to educate borrowers about the purchase process and associated fees, and for lenders to improve the initial accuracy of their loan estimates.”

What does this all mean for you if you’re planning to buy a house or get a mortgage? Most important: Be aware that even if there is a change or two in estimates along the way, ask your lender for explanations immediately, and make sure you receive and review your final closing charges well in advance of the settlement. You should never end up surprised.

Realty kickbacks prompt penalties by consumer agency

KENNETH R. HARNEY on Feb 10, 2017

WASHINGTON – If your real estate agent requires you to get a mortgage pre-approval from one specific lender as a condition of submitting an offer to buy a house – even if another lender already pre-approved you – would you think something is fishy?

If an agent offered discounts off the price of the house you want to buy – but only if you used a designated lender for your mortgage – would you be suspicious? What if the agent’s sales contracts had the name of a lender “written in” to the deal? What if you could be charged higher transaction fees for not using the preferred lender?

Would you wonder, just a little, whether kickbacks could be in play?

You might, and a set of new federal actions against real estate and mortgage companies would give you good reason. In landmark settlements with one of the country’s largest retail mortgage lenders plus two real estate brokerages and a home loan servicing company, the Consumer Financial Protection Bureau alleged that they participated in illegal referral schemes aimed at home buyers and sellers.

The settlements shed fresh light on what realty industry and legal experts say is a persistent problem- Brokers and agents continue to pocket cash and other compensation for steering business to lenders and title companies in violation of federal anti-kickback rules, as interpreted and enforced by the CFPB. The new actions are a signal to realty firms that they are not exempt from penalties for taking payments for referrals. Earlier cases primarily targeted lending or title firms, not the brokers and agents who actually took the kickbacks.

Prospect Mortgage LLC, a California lender active nationwide, had “improper” agreements with more than 100 realty firms designed to “funnel payments to brokers and others in exchange” for mortgage referrals, according to government consent order documents. The arrangements took varied forms, but all had the effect of steering buyers to obtain mortgages from Prospect. The government said “thousands of consumers” were illegally referred to the lender through under-the-table arrangements.

The CFPB also moved against two realty brokerage firms – Re/Max Gold Coast of Ventura, California, and Keller Williams Mid-Willamette of Corvallis, Oregon – for allegedly accepting illegal payments for referrals from Prospect. Dozens of other realty firms that CFPB investigators found had referral deals with Prospect elsewhere in the U.S. were not identified and were not part of the settlements. The bureau would not tell me why they were omitted. The CFPB also took action against Connecticut-based Planet Home Lending, a loan servicer.

All the companies denied wrongdoing as part of their consent orders, but agreed to pay penalties. Prospect was fined $3.5 million and the two realty brokerages and Planet Home Lending agreed to pay a combined $495,000 in consumer redress or fines.

The consent order with Prospect detailed a laundry list of alleged referral schemes, including-

- Payments to brokers for hot “leads” – names, addresses, phone numbers – of prospective buyers who would then be solicited by loan officers. Brokers “passed on some of the spoils” to individual agents for supplying the leads. One broker openly handed out cash to agents during company meetings.

- Compensation to agents for their marketing expenses on an unnamed “third party website” in exchange for referrals of shoppers.

- Allowing some listing agents to impose “per diem” penalties on buyers who used competing lenders and failed to close their sales on time.

- Having agents insist that home shoppers pre-qualify or be approved by Prospect if they wanted to submit an offer on any house the agent showed them.

- Inserting Prospect into the “agents only,” non-public comments section on local Multiple Listing Service (MLS) entries of properties for sale as the exclusive lender. Only Prospect-approved buyers could write contracts on houses the agents showed them.

Marx Sterbcow, an attorney based in New Orleans and an expert on the federal law that prohibits kickbacks in home mortgage and real estate transactions, said consumers typically “are completely unaware” of these illegal arrangements. Often they are difficult to detect because they are carefully hidden from buyers and sellers.

Despite that stealth, here’s a key fact for you to know to avoid being shunted to a lender or other vendor who may not have the best rates or service in your area: You are guaranteed the right under federal law to shop for the best deals on your financing and settlement services, even if your realty agent seems to be` pushing you toward one source in particular.

Credit, debt dings don’t always doom mortgage applications

KENNETH R. HARNEY on Feb 3, 2017

WASHINGTON – How tough is it to get approved for a mortgage? How low can your FICO credit score go before your lender shows you the door? And how much monthly debt can you be shouldering – credit cards, student loans, auto payments – but still walk away with the mortgage you’re seeking?

You might be surprised. New data from technology company Ellie Mae, whose loan application and management software is widely used in the mortgage field, reveals that even if you’ve got what seems to be a deal-killing low FICO score or you’re carrying a mountain of debt, you still might have a shot at qualifying for a mortgage to buy the house you want.

Consider some of these findings from Ellie Mae’s latest sampling of recently closed loan applications nationwide-

- FICO scores on most successful applicants remain well above historical averages, but significant numbers of home buyers are squeaking through with sub-par scores. (FICO scores run from 300 to 850, with the upper end of the scale indicating lower risk of default.) Though the vast majority of lenders shy away from – or absolutely rule out – applications with FICO scores below 620 or 640, applicants with scores that are sometimes 100 points below are being approved and funded.

Roughly 5 percent of all Federal Housing Administration (FHA) insured loans closed in December had FICO scores below 600; 3.4 percent had FICOs between 550 and 599, and 1.5 percent scored between 500 and 549. FHA, whose role in the marketplace is to provide a doorway to homeownership for applicants who could have difficulties being approved for “conventional” loans – those eligible for sale to giant investors Fannie Mae and Freddie Mac – still pulls in plenty of applicants with solid scores. Thirty seven percent of approved applicants had FICO scores of 700 to 799 in December. But the majority – 56 percent – had FICOs between 600 and 699.

Meanwhile, even in the more exclusive conventional marketplace, there are big variations in acceptable scores. Thirteen percent of home buyers whose conventional loans closed in Decembers had FICOs ranging from 650 to 699.

- Debt-to-income (DTI) ratios have more wiggle room in them than you might assume. Though the typical buyers whose conventional loans were closed in December had “back end” debt ratios averaging 35 percent, at FHA the average was 42 percent. (The back-end DTI ratio measures buyers’ total monthly debt obligations, including payments due on their new mortgage, against their monthly gross income.) Depending on other factors in the application, conventional lenders generally have flexibility to push the ratio to 45 percent, while FHA lenders can go considerably higher in some cases, even above 50 percent. That’s scary high for most people, but loans like these are getting done routinely.

- Down payments can be much smaller than a lot of buyers sitting on the sidelines might think. The average down payment on VA (Veterans) mortgages in December was just 2 percent – and that’s higher than the VA’s bare minimum requirement, which is zero down. FHA’s minimum is 3.5 percent and the typical approved applicant came close to that at 4 percent down. The average conventional down payment on home purchase mortgages was 20 percent but both Fannie Mae and Freddie Mac offer loans that require just 3 percent down. A few lenders – most prominently Quicken Loans – have cut that to as little as 1 percent down.

So how do buyers with sub-par FICOs, skimpy down payments and high DTIs manage to get a mortgage? The key is this- They don’t have these negative factors rolled into their applications all at once. If they did, they’d be rejected. If they’ve got a weak FICO, they need strong “compensating factors” elsewhere in their application to counter-balance the credit score deficiency. Maybe it’s a larger down payment than typical, a lower than average DTI or higher bank reserves. Maybe you’ve got a co-borrower with solid financials to ease the lender’s concerns. Maybe you are able to afford a slightly higher rate on the loan. Whatever the compensating factors are, you absolutely need them.

John Walsh, president of Total Mortgage Services, a Connecticut-based lender active in 44 states, told me “it’s all about the total picture,” not just one glaring negative. “The whole application has to make sense.” So if you look terrible in one area of your application, don’t give up. If you can bring other strengths to the table, you’ve got a chance – even in a tough lending environment.

Republicans may change tax code to make property swaps less attractive

Defenders of tax-deferred exchanges say small investors may lose incentives to upgrade their holdings.

By Kenneth R. Harney January 25

The small-scale owners of millions of rental homes, parcels of investment land and income-producing commercial and business real estate may not know it, but one of their key financial planning and tax tools is in danger of disappearing on Capitol Hill.

House Republicans are working on a proposal that, as part of an overall streamlining of the Internal Revenue Code and a reduction in tax rates, may eliminate or seriously restrict the use of tax-deferred exchanges – property swaps – under Section 1031 of the code. President Trump has identified tax revision as one of his top priorities, and legislation is expected to move quickly in the new Congress.

In a tax-deferred exchange, owners can postpone recognition of gains on investment real estate when they swap one property for another of “like kind.” The capital gains tax that would otherwise be due gets deferred until the owner sells the replacement property and receives cash.

Under Section 1031, which has been part of the tax code since 1921, a rental house in Santa Barbara, Calif., might be exchanged for an investment duplex in suburban Chicago. Oklahoma farmland could be exchanged for rental condos in Washington, Boston or Miami. Exchanges are also used to further environmental protection objectives, such as through swaps involving conservation easements to preserve habitat and prevent future development.

To qualify for tax deferral, exchanges must follow a detailed set of IRS rules specifying the timing for identifying replacement properties and transaction closing deadlines. An entire industry of what are called “qualified intermediaries” exists to facilitate exchanges by escrowing proceeds and administering transactions to comply with IRS rules. Fixer-upper houses and other real estate held for short periods and then flipped to new purchasers do not qualify for tax-deferred exchanges, nor do owner-occupied residences.

Loss of the ability to use an exchange would be a significant blow to “Mom and Pop” and other small-scale realty investors. According to a study posted on the website of the National Rental Home Council, there were 15.7 million rental homes in the United States as of 2015, and 99 percent of them were owned by noninstitutional investors. A study by professors at the University of Florida and Syracuse University estimated that most exchanges involve relatively small properties; in 2011, 59 percent had a sale price of less than $1 million.

Bill Horan of Realty Exchange Corp. in Gainesville, Va., told me about recent transactions that illustrate some of the objectives of tax-deferred property swaps. In one, a rental property owner exchanged it for two Dollar General stores. The owner “didn’t want to be a daily landlord anymore,” which involved hands-on management duties and liabilities, Horan said. By rolling his rental housing gains and equity into “triple net” leased retail properties, where the tenants essentially are responsible for everything, he was able to simplify his life, diversify his portfolio and potentially make greater gains in the future with retail real estate.

Another small investor swapped a rental home in Virginia for a rental condo in Fort Myers, Fla., where he intends to move for retirement. “He wanted to own property near where he’s going to live,” Horan said. Because the Fort Myers unit cost $412,000 and the rental home he relinquished was valued at $525,000, the investor ended up paying a modest amount of capital gains taxes.

Exchanges have been on congressional tax writers’ hit lists before, in part because they generate tax “expenditures” – losses of otherwise immediately collectible revenue for the federal government. In December 2015, the congressional Joint Committee on Taxation estimated that during fiscal 2017, exchanges would generate tax expenditures of $11.7 billion attributable to corporations and $6 billion attributable to individual taxpayers. For the same year, by comparison, revenue losses caused by deductions for mortgage interest and local property taxes by individual homeowners were much larger: $84.3 billion and $36.9 billion, respectively.

Exchange proponents, such as Suzanne Baker of Investment Property Exchange Services in Chicago, argue that most of the deferred taxes ultimately are collected when properties get sold for cash and that exchanges stimulate economic activity – redevelopment and upgrades of properties, for example – that would not occur if owners faced immediate taxes on their gains and therefore simply sat on them.

Bottom line: If you own investment real estate and have contemplated a Section 1031 exchange, be aware: There’s a significant possibility that tax revisions could knock your plans off track. Keep a close eye on what’s happening, because it could happen fast.

Update: As noted as a possibility in last week’s Nation’s Housing column, the Trump administration has suspended indefinitely the reduction in FHA home mortgage insurance premiums that had been scheduled to take effect Jan. 27.

Premium reduction is good news – but might be fleeting

KENNETH R. HARNEY on Jan 20, 2017

Published in https://www.arcamax.com/homeandleisure/consumer/thenationshousing/ The Nation’s Housing

WASHINGTON – Here’s some potentially good news for anyone seeking a low down payment mortgage without high credit scores- The Federal Housing Administration is cutting its mortgage insurance premium charges, making its loans a little more affordable.

But if this sounds attractive, be aware that it could be temporary. Although the Obama administration scheduled the reduction to take effect on new FHA loans insured on or after Jan. 27, there could be a problem. Key House Republicans have objected to the cost reduction and are pressing the incoming Trump administration to reverse it. At his confirmation hearing, Ben Carson, nominee to be the new secretary of the Department of Housing and Urban Development, said if confirmed, he would “examine” whether it’s a good move or not.

The premium reduction is not huge – just one quarter of one percent off the previous charge – but it will lower FHA monthly mortgage payments at a time when the rest of the market is trending costlier because of rising interest rates. Consider this scenario prepared for this column by Michael Zimmerman, senior vice president of MGIC, a major private mortgage insurer based in Milwaukee.

Say you want to buy a house and find one for $220,000, which is slightly below the median national price of existing homes at the end of last year. You’ve got a 720 FICO credit score and can make a 5 percent down payment, resulting in a loan amount of $209,000. Before the cut in FHA fees, at typical interest rates quoted earlier this month, you’d have paid $1,153 monthly (exclusive of property taxes and hazard insurance) for an FHA-insured mortgage. The same loan but with private mortgage insurance would have cost $2 more a month – $1,155. On monthly payments, your FHA loan and a conventional Fannie/Freddie alternative would have cost about the same.

After the premium reduction, however, the monthly cost for the FHA loan will be $45 cheaper than the competing conventional loan – a cost advantage of $540 the first year. For larger sized loans, the savings will be greater. No big deal? It depends- For new home buyers short of cash, any savings can be important. Plus at the application stage, the lower mortgage cost helps buyers’ debt-to income (DTI) ratio calculations – a crucial factor in loan approvals and rejections.

What about first-timers who can’t come up with any more than the absolute minimal down payment allowed on either FHA (3.5 percent) or Fannie/Freddie conventional mortgages (3 percent)? Here the cost differentials become significantly greater. Purchasing the same $220,000 house with a 720 FICO score and a 3.5 percent down payment FHA loan will cost you $129 less per month following the premium reduction compared with a 3 percent down conventional loan eligible for sale to Fannie Mae or Freddie Mac, according to an analysis prepared by Paul Skeens, president of Colonial Mortgage Group, a lender based in Waldorf, Maryland. The FHA payment comes to $1,088.45, the conventional loan payment to $1,217.45.

You might say, wow, it looks like for new low down payment buyers, FHA is always the way to go. But that’s not the case. Keep these pros and cons in mind when you comparison shop for a mortgage requiring minimal dollars down-

- Both FHA and conventional loans require payment of mortgage insurance premiums. But FHA loans come with a glaring negative- Unlike private mortgage insurance, FHA premiums are non-cancellable for the life of the loan if you make less than a 10 percent down payment. With a conventional loan, you get to cancel your premium payments when you achieve a 20 percent equity stake in the house. That can occur when your principal payments reduce your debt to 80 percent of the original balance or an increase in the market value of your house grows your equity. When your loan balance declines to 78 percent – your equity is 22 percent – your loan servicer is required by federal law to terminate premium payments.

- On the plus side, FHA has far more generous and forgiving underwriting rules on credit, debt-to-income ratios and financial assistance from home sellers to help with buyers’ closing costs. It exists to serve working families and individuals who might otherwise find it difficult to get an affordable loan. If your FICO credit score is below 720 and you can cobble together a 3.5 percent down payment, FHA is usually the right choice. The new, lower premiums merely underline that fact.