That new car could drag down your housing options

Kenneth R. Harney on Aug 14, 2015

WASHINGTON – Could that shiny new car you just financed with a big dealer loan or lease put a damper on your ability to refinance your mortgage or move up to a different house? Could your growing debt load – for autos, student loans and credit cards – make it tougher to come up with all the monthly payments you owe?

Absolutely, and some mortgage and credit analysts are beginning to cast a wary eye on the prodigious amounts of debt American homeowners are piling up. New research from Black Knight Financial Services, an analytics and technology company focused on the mortgage industry, reveals that homeowners’ non-mortgage debt has hit its highest level in 10 years.

New debt taken on to finance autos accounted for 81 percent of the increase – a direct consequence of booming car sales and attractive loan deals. The average transaction price of a new car or pickup in April was $33,560, according to Kelly Blue Book researchers.

Student loan debt also is contributing to strains on owners’ budgets. Those balances are up more than 55 percent since 2006. Credit card debt is another factor, but it has not mushroomed like auto and student loans. Nonetheless, homeowners carrying balances on their cards owe an average $8,684, according to Black Knight data.

The jump in non-mortgage debt is especially noteworthy among owners with Federal Housing Administration (FHA) and Veterans (VA) home loans. These borrowers, who typically have lower credit scores and make minimal down payments – as little as 3.5 percent for FHA, zero for VA – now carry non-mortgage debt loads that average $29,415. By contrast, borrowers using conventional Fannie Mae and Freddie Mac financing have significantly lower debt loads – an average $22,414 – but typically have much higher credit scores and have made larger down payments.

Is there reason for concern here? Bruce McClary, vice president at the National Foundation for Credit Counseling, believes there could be if the debt-gorging pattern continues.

“Some people have lost sight” of the ground rules for responsible credit and are “pushing the boundaries,” he told me last week. For example, McClary says auto costs – monthly loan payments plus fuel and maintenance – shouldn’t exceed 15 percent to 20 percent of household income. Yet some people who already have debt-strained budgets are buying new cars with easy-credit dealer financing that knocks them well beyond prudent guidelines.

According to a recent study by credit bureau Equifax, total outstanding balances for auto loans and leases surged by 10.5 percent in the past 12 months. Of all auto loans originated through April of this year, 23.5 percent were made to consumers with subprime credit scores.

Ben Graboske, senior vice president for data and analytics at Black Knight Financial Services, cautions that although rising debt loads may look ominous, there is no evidence that more borrowers are missing mortgage payments or heading for default. Thanks to rising home-equity holdings and improvements in employment, 30 day delinquencies on mortgages are just 2.3 percent, he said in an interview, the same level as they were in 2005, before the housing crisis. Even FHA delinquencies are relatively low at 4.53 percent.

But Graboske agrees that there are other consequences of high debt totals that could limit homeowners’ financial options- They “are going to have less wiggle room” when it comes to refinancing their current mortgages or obtaining a new mortgage to buy another house.

Why? Because debt-to-income (DTI) ratios are a crucial part of mortgage underwriting and are stricter and less flexible than they were a decade ago. The more auto, student loan and credit card debt you’ve got along with other recurring expenses such as alimony and child support, the tougher it’s going to be to refinance or get a new home loan.

If your total monthly debt for mortgage and other obligations exceeds 45 percent of your monthly income, lenders who sell their mortgages to giant investors Fannie Mae and Freddie Mac could reject your application for a refi or new mortgage, absent strong compensating factors such as exceptional credit scores and substantial cash or investments in reserve. FHA is more flexible but generally doesn’t want to see debt levels above 50 percent.

Bottom line- Before signing up for a hefty loan on that new car, take a hard, sober look at the impact it will have on your DTI. When it comes to what Graboske calls your mortgage wiggle room, less debt, not more, may be the way to go.

Renewed tax benefits would pay off for homeowners

Kenneth R. Harney on Aug 7, 2015

WASHINGTON – Just before Congress headed out for summer vacation this week, a Senate committee started something that’s likely to prove important to thousands of homeowners and buyers across the country- Extensions for popular but expired tax benefits for energy-efficient home improvements, mortgage-debt forgiveness, and deductions of mortgage-insurance premiums.

By a lopsided bipartisan margin, the Senate Finance Committee voted to approve the 2015 version of what has become an annual event that often carries on well into December. The issue- What to do about the tax “extenders,” a grab-bag bill that reauthorizes 50-plus tax code provisions designed to benefit special interests, including real estate. All these targeted subsidies – ranging from tax credits for research and development to favorable tax treatment for race horses and car racing tracks – are much beloved by the niche constituencies they benefit.

But they all have temporary status in the federal tax code and need to be renewed periodically or they disappear. Homeowners’ special tax deals expired last Dec. 31 and currently cannot be used by taxpayers for 2015 unless extended retroactively.

Among the key real estate provisions in the Finance Committee’s bill now heading for full Senate action this fall-

- A retroactive extension through 2016 of the mortgage debt relief law that allows owners to escape federal taxation on any loan amounts forgiven – written off – by lenders in connection with mortgage modifications, short sales and foreclosures. Without this amendment to the tax code, owners who receive debt reductions from their lenders this year would face potentially staggering tax bills. All principal amounts written off by the lender would be treated by the IRS as ordinary income, taxable at ordinary rates. The same rule generally holds for other types of debt.

Since its first enactment in 2007, this special exception – designed to help taxpayers struggling through the horrors of the housing bust – has saved tens of thousands of owners in financial distress from having to pay the IRS billions of dollars in tax levies. By extending the exception, people who receive debt cancellations this year and next on their principal homes could save a lot of money. Senate tax experts evidently expect large numbers of underwater and financially stressed owners to make use of the extension. They estimate the cost in uncollected federal revenues for the two-year extension to be $5.1 billion.

- Reauthorization of the popular tax credits for home-related energy-efficiency improvements, such as high-performance windows, insulation and appliances. This allows owners to qualify for a maximum tax credit of $500. Unlike a deduction, a credit is a direct subtraction from your bottom line tax owed. The credits are for 10 percent of the cost of purchasing energy-efficient windows (maximum credit $200), furnace or boiler (maximum credit $150) and up to $300 for other improvements, including insulation. According to estimates by the National Association of Home Builders, this extension alone is expected to save owners who are remodeling their homes nearly $700 million in federal taxes during 2015 and 2016.

- Extension of the deductibility of mortgage insurance premiums, whether for conventional private mortgage insurance or the premiums or guaranty fees paid on Federal Housing Administration (FHA) insured loans and Veterans (VA) loans and rural housing mortgages backed by the Department of Agriculture. This writeoff is of special significance for first-time and middle-income buyers. That’s because it is generally restricted to taxpayers with incomes of $100,000 or less and gets phased out in graduated steps for borrowers with incomes up to $110,000.

The extenders bill also renews authority for a tax incentive widely used by new home builders that provides a $2,000 credit for construction of highly energy-efficient residences. According to industry estimates, the bill would save builders $380 million annually in taxes during 2015 and 2016.

So where’s all this headed and when? Probably there’s a slow and bumpy ride ahead, not because the extenders bill itself is controversial, but because Congress has an overloaded plate of other, weightier issues to deal with during the remaining weeks of scheduled sessions this fall. These include the federal budget, the debt ceiling, highway funding and possibly international tax reform.

Lobbyists say the House and Senate are likely to eventually agree on and approve an extenders bill in some form, but maybe not until late fall, possibly even mid-December.

That’s not guaranteed of course. Nothing is on Capitol Hill.

Helping underwater Homeowners move on

Kenneth R. Harney on Jul 31, 2015

WASHINGTON – Could a little-noticed policy change by giant mortgage investor Fannie Mae help homeowners who’d like to move but can’t because they’re underwater – they owe more to the bank than the likely selling price of their houses? Could it help you?

Maybe. But you’re going to have to be able to qualify for a new mortgage to buy a new primary residence and rent out your current house, converting it into an investment property.

Here’s the background- Roughly 7.4 million American homeowners remain underwater as the result of plummeting prices during the housing bust and recession years, according to new data from research firm RealtyTrac. The vast majority have continued to make their mortgage payments on time and have maintained relatively good credit, say mortgage industry experts.

Many could qualify to purchase a new home but have been prevented from doing so. They either don’t have – or don’t wish to spend – the thousands of dollars needed to settle up with their lender as part of any sale. So they stay put. Daren Blomquist, vice president at RealtyTrac, estimates that 56 percent of underwater borrowers have owned their homes for nine years or longer. Nearly three-quarters have owned for six years or more.

“These (are) the folks who most likely would have had some life circumstance that makes it necessary for them to move,” such as a new job, a bigger family or simply a desire to live in a different neighborhood, he told me last week. Yet they haven’t because of their negative equity position.

Enter Fannie Mae’s recent policy change. With no fanfare or public announcement, Fannie has informed lenders that when owners seek to convert their primary homes to rental investment properties and buy a replacement home with a new mortgage, there will no longer be a minimum equity stake they’re required to have in the current home. Under previous rules, put in place during the last decade to counter fraud schemes, you needed at least 30 percent equity in your primary residence if you wanted to convert it into a rental, counting the rent toward your qualifying income for a mortgage on a new primary home. Plus you needed six months of liquid financial assets.

That’s all changed. Now you don’t need a minimum equity amount. Nor do you need a mandatory six months of liquid reserves – maybe just two months. In its notice to lenders, Fannie said it feels that it now has adequate controls on credit requirements, rental income and financial reserves in place to ensure that qualified borrowers who want to convert their primary homes into rental investments and buy a new house can do so responsibly.

How can this help owners who’ve been underwater and need a way out of their current houses? Take this real-life example. It involves a 37-year-old Maryland resident who bought her two-bedroom house at the peak of the price bubble – 2006. She owes $270,000 on it, but its current market value is just below $200,000. She’s never missed a payment – $1,615 a month – and has FICO credit scores in the low 700s. She earns $65,000 a year and needs a larger home, ideally with three bedrooms.

According to Paul Skeens, president of Colonial Mortgage Group, who is handling her application, she’s a good candidate for Fannie’s revised approach. With her current $5,416 monthly income plus $1,125 in net new rental income ($1,500 rent minus a mandatory vacancy factor of 25 percent), she qualifies for a $1,608 monthly new mortgage payment on a $230,000 three-bedroom home in the area.

But does this sort of solution work for everybody with negative equity and a hankering to buy another house? Not by a long shot. It takes a special set of circumstances- Underwater owners have to be able to pass all the standard tests to qualify for the new mortgage – credit, debt-to-income ratios that include car payments plus payments on both the old and new mortgages, as well as at least a couple of months of reserves. They also need to be prepared to handle the duties of being a landlord, collecting rents and managing the property.

Then there’s the debt on the rental property. Over time the owners will still have to figure out how to pay it off. They just won’t have to be stuck in the same old house while they do it.

What controls the speed of home sales?

Kenneth R. Harney on Jul 24, 2015

WASHINGTON – How fast should your house sell once you put it on the market? Within a week? A few weeks? A couple of months? Longer?

New research suggests that not only are typical selling times declining in the current bull market for housing, but they may have hit record lows. According to realty brokerage Redfin, the median time on market dipped to just 26 days during June – the shortest time on record for its database – with houses in some markets moving from listing to contract in 11 days or less. Denver homes sold in six days or fewer, according to Redfin; Seattle’s median was nine days; Portland, Oregon, 10 days; and Boston 11 days.

That’s hot. But there are dozens of cities around the country where selling speeds are nowhere near this quick. According to June data from real estate web portal realtor.com, which uses information from local multiple listing services nationwide, the median time on market for homes in Chicago was 54 days. In the Washington D.C. area it was 45 days, Miami 75 days, metropolitan New York 68 days, Oklahoma City 53 days. At the laggard end of the spectrum, the median house in Brownsville, Texas, took 122 days to sell, Myrtle Beach, South Carolina, 105 days.

Why such apparently wide variations from area to area, and what can a typical seller expect? Some basics- Part of selling speed depends on matters that you can control. But there are factors you can’t control – the strength of your local economy, employment and income growth. If the economy is on fire and there’s a low inventory of homes for sale to serve market demand, you’re going to see houses zipping from listing to contract rapidly.

Now for things you can control. Anyone can sell a house super fast simply by cutting the price far below what it’s worth. There are investment companies in most large markets that will buy your house for cash in almost no time – one hour, a day, a week – but at 40 to 50 percent below market value.

Putting aside deep discount deals, getting pricing “right” for your own objectives is probably the No. 1 control you have over speed. If you prefer to get the maximum within a relatively short time period, pricing just below what your agent believes to be the likely selling price could make sense. It might even set off a bidding competition and get you a higher price than you expected.

You can slow the process by pricing slightly higher than what you need – leaving room for bargaining with buyers – but there’s a risk. If you err too far on the upside, you could scare away prospective buyers for months. Alexis Eldorrado, managing broker at Eldorrado Chicago Real Estate LLC, says overpricing is the biggest traffic killer of all. “People see you’re asking too much and they just stay away,” she told me last week after listing and selling a suburban house for $1,025,000 in a single day.

How you present your house to buyers – the quality of the photography in the listing, the staging of the interior, the landscaping and the overall look of the house from the street – can also dramatically affect how long it takes to sell. Mary Bayat, principal broker at Bayat Realty Inc. and board chairperson of the Northern Virginia Association of Realtors, calls landscaping, professional staging and clearing out highly personal items “very important” to selling houses in short periods of time. If the interior is a jumble, you’re almost guaranteed a longer selling time. “Sometimes you go into a house and there’s so much stuff everywhere that you think you’re in an antique shop,” she says. That “really turns off potential buyers who are trying to imagine the house as their own,” with their own décor.

Kary Krismer, a managing broker with John L. Scott/KMS Renton in the Seattle area, says you can sell faster if you make it easier for agents to show your house. “It is best if agents can just get into a house using the key box and 10 minutes notice,” Krismer says. “At the other extreme, ‘appointment only’ without a key box can be a big mistake, unless it is an expensive, high-end house.”

Bottom line- In many, but not all, markets this summer, there are things you can do to sell faster or slow the process down. Except in areas with sluggish local economies, a lot is up to you.

What home equity bomb?

Kenneth R. Harney on Jul 17, 2015

WASHINGTON – It’s the emerging housing success story that almost nobody knows about- Hundreds of thousands of homeowners who took out record numbers of home equity lines of credit during the boom years of 2005-2008 are defying experts’ predictions of financial catastrophe.

How? By paying their debts. Rather than defaulting on their credit lines at the 10-year “end-of-draw” point when their required payments can abruptly jump by hundreds of dollars a month, the vast majority of owners are hanging in there, finding ways to stay current, often with the help of the banks who lent them the money.

Though Wall Street and credit industry analysts had warned of serious losses when hordes of housing-bubble borrowers hit the 10-year mark, beginning this year, the delinquency rates on these billions of dollars in equity lines are actually declining, not rising.

Here’s why. Between 2005 and 2008, banks extended an unprecedented $265 billion of equity credit lines to American homeowners, according to credit data company Experian. It was all part of the be-happy-don’t-worry days when home values were soaring and hocking your house to pull out cash was all the rage.

By contrast, during the pre-boom years of 2001 and 2003, banks extended around $60 billion in credit lines. Not only were the boom-time lines massively larger in volume, but the average balance of individual lines went supersized, too – into the low $70,000 range.

Most of the boom-era home equity lines – popularly known as HELOCs – featured 10-year initial draw periods, during which only interest needed to be repaid. After the initial period, the lines transformed into fully amortizing loans – interest plus principal – with higher monthly payments.

As the boom devolved into bust and global recession, millions of owners found themselves with minimal or negative equity, and simultaneously were hit with job losses and declining household incomes. To banking and credit analysts, the hundreds of billions of outstanding home equity lines began to look like a giant ticking time bomb. It seemed inevitable that by 2015, economically challenged owners would face payment shocks and the default rate would climb over the coming several years through 2018.

Amy Crews Cutts, chief economist for Equifax, one of the three national credit bureaus, called the approaching deadlines a potential “wave of disaster” for banks and consumers. Fitch Ratings Ltd., the Wall Street bond ratings agency, issued warnings about the “increasing credit risk” to the banking system posed by the upcoming credit line payment increases. One real estate data firm foresaw the situation as a looming “HELOC hell.”

So what’s happened with HELOCs? So far, nothing close to what was forecast. Last week the American Bankers Association released its first-quarter 2015 statistical report on consumer credit performance. Home equity credit lines dropped to their lowest delinquency level in nearly seven years, with just 1.42 percent of borrowers behind on payments. Bank of America, one of the biggest players in the home equity field, said “early stage delinquencies” on HELOCs are around 2 percent. TD Bank, another major lender, declined to provide me a number but confirmed that there is no surge underway in end-of-draw delinquencies.

What’s going on? It appears to be a combination of factors-

- The $5 trillion-plus increase in homeowners’ equity wealth during the past four years alone has improved their financial positions significantly.

- Aggressive and proactive outreach campaigns by the biggest banks to alert borrowers to upcoming payment changes and to offer them a variety of options – from refinancings to term extensions and restructurings – have been extraordinarily successful in keeping delinquencies low.

- And, finally, the broad improvements in the national economy overall – lower unemployment and at least modest growth in wages – have made it easier for many borrowers to pay off their HELOC debts, afford the higher payments, and refinance or restructure credit lines with their banks.

Adam Block, a home equity outreach executive for Bank of America, told me that thanks to a confluence of positive economic factors and a strong outreach campaign, “customers in general have been very focused on repaying their debt” – and that accounts a lot for low delinquencies.

Bottom line- If you’ve got a HELOC scheduled to hit the 10-year mark in the next year or two, make sure you know what the higher payments will be and the range of options you may have to handle them. And if your bank hasn’t reached out to you yet, reach out to your bank.