Window is rapidly closing to get hassle-free reverse mortgage

By Kenneth R. Harney April 9 at 12-00 PM

Interested in a reverse mortgage without a lot of hassles? Better get your application in fast. As of April 27, the federal government is imposing a series of extensive “financial assessment” tests that will make applying for a reverse mortgage tougher – much like applying for a standard home mortgage.

Reverse mortgages always have been different- They’re available only to seniors 62 and older whose homes have equity that they want to convert into cash. There are no repayments required until the borrower sells the house, moves out or dies. Loan recipients’ main responsibilities are to keep current on local property taxes, pay hazard insurance premiums and keep the place in reasonable condition.

The Federal Housing Administration has for three decades run the country’s dominant insured reverse mortgage program, and the agency has been relatively easygoing with respect to underwriting. If you qualified on age and equity, you’ve pretty much had a good shot at getting a loan.

[FHA orders stiffer underwriting standards for reverse mortgages]

But during the years of the recession and mortgage bust, thousands of borrowers fell into default because they didn’t pay their required property taxes and hazard insurance premiums. On top of that, real estate values plunged, producing huge losses on defaulted and foreclosed properties for the FHA. The losses got so severe that the Treasury Department had to provide the FHA with a $1.7 billion bailout in 2013, the first in the agency’s history since its creation in the 1930s.

All of which led to the dramatic changes coming April 27. Applicants are now going to need to demonstrate upfront that they have both the “willingness” and the “capacity” to meet their obligations. Reverse-mortgage lenders are going to pull borrowers’ credit reports from the national credit bureaus, just as they do with other mortgages.

Applicants are going to have to show that they paid their real estate taxes, homeowner association fees and other property-related charges on time for at least the past 24 months. They will be asked to produce documentation of their employment status (if they are still working), income and financial assets, and they will undergo a “residual income” analysis that examines all their monthly expenses and cash flow.

If they get inadequate marks on these tests, they may be required to create a “life expectancy set-aside” – essentially a reserve account or escrow funded wholly or in part from their loan proceeds. For some borrowers, the set-asides may be so substantial they’ll be left with minimal cash at closing, making the entire reverse-mortgage process a waste of effort.

All of which, say experts in the reverse-mortgage industry, will exclude potentially thousands of senior homeowners from obtaining a reverse mortgage, especially those who are on the margins economically and need the cash to help pay for ongoing household expenses.

Reza Jahangiri, chief executive of American Advisors Group, the highest-volume reverse-mortgage lender, told me last week that his Orange, Calif.-based company expects a decline in loan activity by 8 to 10 percent after the financial assessment rules take effect. He also expects a countervailing shift toward “mainstream” borrowers who seek to use a reverse mortgage as part of their overall retirement financial planning, including raising money to purchase a new house or to establish a flexible line of credit they can draw from as needed. Many seniors currently can’t qualify for home-equity credit lines from banks, he said, but with adequate credit, income and assets, they can qualify for a reverse mortgage in the form of a credit line.

Maggie O’Connell, who originates FHA-insured reverse mortgages for the Federal Savings Bank from offices in Reno, Nev., and Danville, Calif., says she has been scrambling to give pre-deadline assistance to people who might encounter difficulty – or be turned off by all the required documentation – under the new rules. Although she may do fewer loans in the short term, she said in an interview, in the long term the tougher rules “are probably all in all a good thing” because they will prevent financially weak borrowers from taking out loans that they can’t handle and that will eventually end up in default, “which is bad for them and bad for us.”

Bottom line- Tougher credit standards have come to reverse mortgages – finally. Before applying, be aware of the types of documentation you’ll need. And when you talk with a lender or financial counselor about a reverse loan, make sure you involve the entire family, so everybody knows what you are getting into.

Requirements for mortgages are easing

Feb 20, 2015

Kenneth R. Harney

WASHINGTON – A closely watched index that tracks mortgage credit availability – lender requirements on credit scores, down payments and other key loan terms – has some good news for potential homebuyers- Things are finally loosening up.

After years of progressively tighter rules on borrower eligibility in the wake of the housing bust, banks and mortgage companies have begun modestly easing their requirements and even expanding the types of mortgages they offer. The Mortgage Bankers Association’s latest credit availability index reported improvements in all four of its loan categories during January. The improvements mainly reflect positive lender responses to government efforts to ease regulations and improve affordability in the housing market – all of which means an improved environment for mortgage shoppers.

Among the initiatives- giant investor Fannie Mae’s resumption of purchases of conventional mortgages with as little as 3 percent down. Freddie Mac, another major investor, is planning to begin similar 3 percent down loan purchases for mortgages closed on or after March 23. According to Mike Fratantoni, chief economist for the mortgage banker’s group, “roughly 40 percent of investors” already have begun offering the Fannie 3 percent down program. The guidelines for the Freddie Mac program are in lenders’ hands and there’s likely to be a strong rollout for it as well.

Also contributing to better affordability- the Federal Housing Administration’s reduction late last month of its costly upfront mortgage insurance premiums, a move that could expand eligibility for home purchases to thousands of buyers, according to industry estimates. Virtually all lenders who work with the FHA program began offering the lower mortgage insurance premiums when the reduction took effect in late January. FHA insures loans with down payments as low as 3.5 percent.

Brad Blackwell, executive vice president of Wells Fargo Home Mortgage, the country’s largest-volume mortgage originator, is certain about what’s underway in the market- “Things are looking better for homebuyers and refinancers” – not only in terms of underwriting requirements but in the cost of credit as well.

Wells Fargo has been “gradually opening up the credit box,” Blackwell told me in an interview, in part because of helpful policy clarifications and changes at Fannie Mae and Freddie Mac. Those changes give lenders greater confidence in lending to a broader spectrum of borrowers, including those who don’t have high credit scores and ready cash for big down payments.

For example, he said, though the bank previously had a credit score minimum – 660 FICO on conventional loan applications – now it requires no hard and fast minimum. Instead, if Fannie Mae’s and Freddie Mac’s automated underwriting systems accept the application – say you’ve got a relatively low credit score but strong compensating factors such as solid income, ample reserves and a large-enough down payment – the bank won’t say no to you solely because of the low score. This could be especially important to people who had tough economic experiences during the recession that damaged their credit but who are now excellent candidates for a loan. On FHA applications, the bank will now accept FICO scores as low as 600, down from its previous 640 standard.

Wells Fargo also has relaxed its policy on gifts to borrowers by relatives and friends to defray part of the down payment and closing costs. On conventional loans with 5 percent or lower down payments, Wells Fargo previously required borrowers to contribute at least 5 percent of the total costs from their own financial resources. Now that’s been cut to 3 percent, which allows for more generous gift assistance.

Some major real estate firms confirm that they are seeing the first signs of credit easing by mortgage lenders, but that most potential first time and move-up borrowers are not yet aware of the changes.

Joseph Rand, a managing partner of Better Homes and Gardens Rand Realty and an affiliated mortgage company, Rand Commercial Services, in the New York City suburbs, says the improvements are not huge, but “it’s a welcome thing. Loan officers are excited about it.” Nonetheless, he told me last week, “it’s going to take some time” for the message to get out to renters and others who assume that the rules in the market would still preclude a loan approval.

Bottom line- If you’ve been stuck on the home buying sidelines, check out what’s going on. Talk to lenders and mortgage brokers. Who knows – maybe the opening of the credit box, even if it’s just a crack, might be enough to help you buy a house at today’s near-historic low rates.

The scoop on Zestimates

Kenneth R. Harney

Feb 6, 2015

WASHINGTON – When “CBS This Morning” co-host Norah O’Donnell asked the CEO of Zillow last week about the accuracy of the website’s automated property value estimates – known as Zestimates – she touched on one of the most sensitive perception gaps in American real estate.

Zillow is the most popular online real estate information site, with 73 million unique visitors in December. Along with active listings of properties for sale, it also provides information on houses that are not on the market. You can enter the address or general location in a database of millions of homes and likely pull up key information – square footage, lot size, number of bedrooms and baths, photos, taxes – plus a Zestimate.

Shoppers, sellers and buyers routinely quote Zestimates to realty agents – and to one another – as gauges of market value. If a house for sale has a Zestimate of $350,000, a buyer might challenge the sellers’ list price of $425,000. Or a seller might demand to know from potential listing brokers whey they say a property should sell for just $595,000 when Zillow has it at $685,000.

Disparities like these are daily occurrences and, in the words of one realty agent who posted on the industry blog ActiveRain, they are “the bane of my existence.” Consumers often take Zestimates “as gospel,” said Tim Freund, an agent with Dilbeck Real Estate in Westlake Village, California. If either the buyer or the seller won’t budge off Zillow’s estimated value, he told me in an interview, “that will kill a deal.”

Back to the question posed by O’Donnell- Are Zestimates accurate? And if they’re off the mark, how far off? Zillow CEO Spencer Rascoff answered that they’re “a good starting point” but that nationwide Zestimates have a “median error rate” of about 8 percent.

Whoa. That sounds high. On a $500,000 house, that would be a $40,000 disparity – a lot of money on the table – and could create problems. But here’s something Rascoff was not asked about- Localized median error rates on Zestimates sometimes far exceed the national median, which raises the odds that sellers and buyers will have conflicts over pricing. Though it’s not prominently featured on the website, at the bottom of Zillow’s home page in small type is the word “Zestimates.” This section provides helpful background information along with valuation error rates by state and county – some of which are stunners.

For example, in New York County – Manhattan – the median valuation error rate is 19.9 percent. In Brooklyn, it’s 12.9 percent. In the District of Columbia Zillow is unable to compute an error rate. In Somerset County Maryland, the rate is an astounding 42 percent. In some rural counties in California, error rates range as high as 26 percent. In San Francisco it’s 11.6 percent. With a median home value of $1,000,800 in San Francisco, according to Zillow estimates as of December, a median error rate at this level translates into a price disparity of $116,093.

Some real estate agents have done their own studies of accuracy levels of Zillow in their local markets. Last July, Robert Earl, an agent with Choice Homes Team in the Charlottesville, Virginia, area, examined selling prices and Zestimates of all 21 homes sold that month in the nearby community of Lake Monticello. On 17 sales Zillow overestimated values, including two houses that sold for 61 percent below the Zestimate. In Carlsbad, California, Jeff Dowler, an agent with Solutions Real Estate, did a similar analysis on sales in two ZIP codes. He found that Zestimates came in below the selling price 70 percent of the time, with disparities ranging as high as $70,000. In 25 percent of the sales, Zestimates were higher than the contract price. In 95 percent of the cases, he said, “Zestimates were wrong. That does not inspire a lot of confidence, at least not for me.” In a second ZIP code, Dowler found that 100 percent of Zestimates were inaccurate and that disparities were as large as $190,000.

So what do you do now that you’ve got the scoop on Zestimate accuracy? Most important, take Rascoff’s advice- Look at them as no more than starting points in pricing discussions with the real authorities on local real estate values – experienced agents and appraisers. Zestimates are hardly gospel – often far from it.

Consumer agency gets an incomplete grade

Kenneth R. Harney Jan 23, 2015

WASHINGTON – When the federal government’s consumer protection agency for financial matters tells you how to shop for a good deal on a home mortgage, you should follow the advice, right?

Maybe some of it. The Consumer Financial Protection Bureau, which was created in the backwash of the worst national mortgage disaster since the Great Depression, went online with a new interactive mortgage tool last week. The CFPB’s site (www.consumerfinance.gov) offers helpful tips on shopping and has a guide to loan alternatives, closing costs and a “rate checker” feature.

At first glance, the rate checker appears to be a quick way to research prevailing mortgage interest rates in your area. Here’s how it works- You enter the state where you want to apply, a FICO credit score estimate, your desired loan amount and the loan term. The rate checker then displays the local daily rate quotes collected from banks and credit unions by its data vendor, Informa Research Services Inc. of Calabasas, California.

Say you live in Virginia or California and want to see what rate you might get on a $400,000 house purchase with a $40,000 down payment. You input your estimated credit score. Say you’ve got a FICO 680. In Virginia, according to the rate checker readout Jan.16, “most lenders” in the survey would quote you 3.875 percent or less for a 30-year fixed-rate loan. Two lenders offered 3.625 percent and six quoted between 4 percent and 4.375 percent.

In California, most lenders also quoted 3.875 percent or less, one quoted 3.75 percent and five came in between 4 and 4.375 percent. None went as low as 3.625 percent.

But something important is missing here- The various fees and charges that the CFPB itself requires lenders to disclose as part of any mortgage quote to a consumer. As regulator of the Truth in Lending Act, CFPB regulations mandate precise disclosures of loan discount fees or “points” and lender closing charges among others. (A point equals 1 percent of the loan amount.) These are included in the Annual Percentage Rate (APR) – the effective rate applicants will be paying over the life of the loan.

When lenders advertise their rates, they must include the APR along with the base interest rate. There may be other charges that come into the total cost picture as well, such as lender-paid mortgage insurance and investor “overlay” add-ons.

So how big a deal could it be when only the interest rate is provided? In a statement for this column, Quicken Loans, the second largest retail lender in the country, said that quoting a rate alone, with no reference to specific points, fees and the APR, “will deliver a cost estimate that greatly differs from what is accurate.” Steve Stamets, senior mortgage banker for Apex Home Loans, Rockville, Maryland, told me “it’s inherently misleading because you’re not getting all the potential charges” you’re going to have to pay.

For example, said Stamets, a loan officer might violate CFPB rules by quoting a 3 percent rate on a hypothetical $400,000 loan to pull in customers, but not mention that to obtain that rate they will need to pay 5 points – $20,000. Those points could be paid at settlement or financed and included in the interest rate. In the latter case, using one rule of thumb measure, the effective rate on the loan might jump to 4.25 percent, not the 3 percent advertised.

David Stevens, CEO and president of the Mortgage Bankers Association, said in an interview that CFPB’s rate checker’s failure to disclose full costs “violates everything a lender must do” to quote rates to borrowers in compliance with the agency’s own rules. “It’s just a bad idea,” he said. “It needs to come down.”

But the CFPB shows no signs of yielding to critics. In a statement for this column, the agency said the rates quoted “assume” discount points ranging between one half a point to minus one half a point “and a 60-day rate lock,” but do not include lender closing charges. Dave Hershman, a nationally known trainer and author who helps mortgage companies comply with the rules, scoffed at the CFPB’s defense- “Could you imagine (the bureau) allowing a mortgage company to be that nebulous? And to quote rates without an APR?”

Bottom line- Check out the Rate Checker. But remember- There’s much more to a mortgage quote than just the rate.

Not all buyers benefit from lower FHA interest rates

Kenneth R. Harney

Jan 16, 2015

WASHINGTON – If you saw the White House announcement of lower insurance payments on Federal Housing Administration home mortgages last week, you might have wondered- Does this matter to me as a potential home buyer or refinancer? Who specifically will benefit from the decrease in fees?

The Obama administration estimates that by lowering FHA’s annual mortgage insurance premiums by half a percentage point, as many as 250,000 new buyers will be able to purchase a house. That’s great news and overdue. FHA almost priced itself out of competition with giant investors Fannie Mae and Freddie Mac by raising its premiums several times in recent years. FHA made itself too expensive and its market share has plunged.

So who is best positioned to take advantage of the new, more consumer-friendly mortgage pricing? Here’s a quick overview. Start with your FICO credit score. If you’ve got a score anywhere from 620 to 719 and you have a down payment of 5 percent or less, FHA is likely to become your first choice in terms of monthly payments. It will cost you less in principal, interest rate and mortgage insurance charges compared with what you’d pay for a “conventional” loan eligible for purchase by Fannie Mae or Freddie Mac with private mortgage insurance.

Consider this example using data provided by MGIC, one of the major private insurance underwriters. Say you want to buy a $220,000 first home with a 5 percent down payment. You’ve got a slightly below average FICO score between 680 and 699. Before the premium reduction, your monthly payment using a 30-year FHA loan at current interest rates would have been $1,225. The same conventional loan with private mortgage insurance would have cost you $1,168 a month – $57 less than FHA. After the premium reduction, the monthly payment on the FHA loan will drop to $1,138 – $30 cheaper than the conventional alternative.

But what if you’ve got a higher FICO score? On the same 5 percent loan and rate and term assumptions as above, with a FICO score of 729 to 759, your monthly payment should be lower with a conventional loan. You’d pay $1,106 a month compared with $1,138 – $32 more – for an FHA-insured mortgage with the reduced premiums. At 760 and above, the payment drops to $1,092. So FICOs matter.

What other factors might influence you to opt for an FHA loan over a competing conventional mortgage and vice versa? There are several important issues to consider. FHA is more flexible when it comes to underwriting. Take debt-to-income ratios. Conventional lenders using private mortgage insurance typically will not approve you if the ratio of your recurring monthly debt payments to your documented monthly gross income exceeds 45 percent.

FHA, by contrast, may stretch that if other aspects of your application – steady income, reasonable financial reserves – look strong. Some lenders say they can squeeze their FHA applicants through with debt ratios higher than 50 percent – one lender told me he’s done 56 percent. Plus, FHA is more sympathetic in the way it treats one of the biggest obstacles facing many millennial applicants – student debt. According to Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., buyers whose student debts have been deferred for 12 months or more won’t have them factored into the application, whereas conventional lenders include them.

Some downsides of FHA? Tops on the list- It charges borrowers an upfront premium of 1.75 percent that typically gets tacked onto the principal they’re borrowing, financed over the term of the loan. FHA could have, but did not, lower that fee.

Why’s that significant? Because unlike private mortgage insurance, which by federal statute can be canceled once a borrower’s equity position reaches 20 percent of the home’s value, FHA’s premiums on most loans continue for the life of the mortgage. That add-on to principal stays with you for years beyond the date you’d be able to cancel your private insurance payments, which in some scenarios can be as early as four to five years. Put another way- You will build equity in your home faster with a conventional loan compared with FHA.

Bottom line- If you have a FICO score well above 720, and you’ve got money for a 5 percent down payment and a debt ratio below 45 percent, conventional is probably your better bet. But if your FICO is in the 600s and you have some complications to your application or debt issues, FHA will probably treat you kindlier.