Fannie, Freddie want to make mortgages easier for gig-economy workers

Kenneth R. Harney on Jun 1, 2018

WASHINGTON – The two biggest sources of home-mortgage money in the country – investors Fannie Mae and Freddie Mac – are quietly working on ways to make qualifying for a home purchase easier for participants in the booming “gig” economy.

The gig economy refers to hundreds of income-earning activities that allow workers to set their own hours, work for as long or as little as they choose, and function as independent contractors or freelancers as opposed to salaried employees. Prominent examples include people who work as drivers for Uber or Lyft, assemble IKEA furniture for TaskRabbit or offer rooms in their homes on Airbnb.

Estimates vary, but anywhere from just under 20 percent to 30 percent or more of the U.S. workforce participates in some way in the gig economy. Last year, Intuit, which owns TurboTax, estimated that 34 percent of the workforce earned money in gig pursuits and projected that this could rise to 43 percent by 2020.

But when it comes to buying a home, the challenge for these workers is to make their gig-sourced earnings count as income for mortgage-qualification purposes. Lenders typically look for stable and continuing income streams – two years of documented income plus reasonable prospects that those earnings will continue for another several years. Lenders also routinely obtain tax-return transcripts from the IRS to confirm an applicant’s self-reported income.

By its very nature, gig income often doesn’t fit neatly into these boxes. It can be sporadic and variable, depending on how much time an individual is able to devote to the work. Gig earnings can be substantial – thousands of dollars a month – but if that money can’t qualify as “income” under existing mortgage-industry guidelines, it may not help in buying a home with a standard mortgage.

“We’re seeing gig income becoming more and more prevalent, especially among the younger demographic – first time buyers who have embraced things like Uber and Airbnb as a means to make money,” John Meussner, executive loan officer for Mason-McDuffie Mortgage Corp. in San Ramon, California, told me.

Yet those earnings may not qualify under current rules for conventional mortgages.

Enter Fannie Mae and Freddie Mac. Fannie recently surveyed 3,000 lending executives and found that gig income on applications is increasingly common, but 95 percent said it’s difficult under current guidelines to use these earnings to approve borrowers’ applications. Two out of every three lenders said better treatment of this income would either “significantly” or “somewhat” improve “access to credit” for many buyers.

Fannie and Freddie are now actively pursuing projects that would do just that. The tricky part for both companies- Whatever solutions they develop must still produce high-quality loans with low risks of default at the end of the process, and ideally must be automatable – that is, borrower information could be entered into Fannie’s and Freddie’s electronic underwriting systems at the application stage.

Freddie’s efforts come under its “borrower of the future” initiative. Terri Merlino, vice president and chief credit officer for single-family business, told me the company is studying automated solutions “outside the box” to validate income from different sources for self-employed and gig-economy earners. Neither Freddie nor Fannie was able to discuss details on what they’re considering, but Freddie confirmed its partnership with high-tech software company LoanBeam, which provides automated verifications of multiple income streams of self-employed and other borrowers.

Meussner hopes that Fannie and Freddie take a more realistic perspective on gig earnings. “If someone is pulling income from Uber for only six months” – which won’t qualify under the two-years standard – “they may have been doing similar things for years beforehand” for a different company. “That should be [the] primary focus rather than the exact employer and position that generated the income.” After all, Meussner said, “if someone can make similar income over the course of years doing various things in various places [in the gig economy], it could be argued they’re more dependable than someone with a long history with a salaried position in a field that is being disrupted by tech, in which case the loss of a job would be devastating financially.”

You can bet Fannie and Freddie are listening to recommendations like this.

Bottom line- If you make money in the gig economy, be aware that your earnings may not be “income” for conventional mortgage purposes. But sometime soon, if pilot programs and research now underway at Freddie Mac or Fannie Mae are successful, they just might.

Lawsuit dismissed against Zillow’s Zestimates

Kenneth R. Harney on May 18, 2018

WASHINGTON – A Federal district court has dismissed a closely followed class-action lawsuit that charged Zillow – creator of the controversial Zestimate online home-valuation tool – with deceptive business practices designed to mislead consumers.

The suit, filed last year by Chicago-area home sellers, alleged that Zillow systematically engages in a confusing, unfair and deceptive marketing scheme that impairs homeowners and sellers in the sale of their houses. Plaintiffs charged that Zillow hides its multiple financial arrangements with realty agents and lenders, and that it ignores or refuses to correct “Zestimates that homeowners challenge as inaccurate or unfounded.” Plaintiffs also alleged that the company lowballs value estimates on so-called “FSBOs” – for sale by owner homes on its website – then increases them if a realty agent who pays money to Zillow subsequently lists them. An earlier version of the suit alleged that Zestimates undervalued plaintiffs’ homes and violated Illinois appraisal rules by serving as the functional equivalent of appraisals. That suit was dismissed, but the court allowed the plaintiffs to file an amended version.

If you’re not familiar with Zestimates, just tap any home address in the country into your search engine; you’ll likely see a value estimate pop up along with descriptions of the property’s features, photos and square footage. Zillow says it has Zestimates on more than 100 million homes, whether they are actively for sale or off the market. The estimates are based on “millions of public and user-submitted” information on homes, which get fed through its proprietary algorithms to generate value estimates, one-year forecasts of future value and rent estimates.

The company insists that its Zestimates are relatively accurate, with a “median [national] error rate” of 4.6 percent. But for years, consumers, appraisers and realty agents have criticized the company for having much higher error rates on individual properties – sometimes 10 percent or more in areas where housing types vary widely or property data is difficult to obtain. Some major metropolitan areas have error rates well in excess of Zillow’s national median – Dallas-Ft Worth’s rate is 8.2 percent – and some states have exceptionally high rates. Delaware’s statewide median error rate is 11.9 percent; certain counties in some states have error rates of 20 percent or higher. In Illinois, at least five counties have error rates of 20 percent or higher and one, Perry County, has a 26.7 percent rate.

In her decision, Judge Amy J. St. Eve of the U.S. District Court in Chicago, concluded that “Zestimates are not false or misleading representations of fact” that are likely “to confuse consumers” because they are “merely” an estimate of the market value of a home. Nor do they constitute a “bait and switch” scheme as alleged by the plaintiffs or constitute “self-dealing” because they “funnel” FSBO sellers to Zillow’s “premier” realty agents – those who pay the company for special advertising placement and leads on who is shopping for a home.

Asked for comment on the decision, Zillow said that “we are pleased that the court has dismissed the claims in this lawsuit not once, but now twice – finding the allegations in the lawsuit without merit.”

Barbara Andersen, an attorney whose frustrations with an allegedly lowball estimate on her home prompted her to file the original suit, said in an email that the court “is disregarding” the reality that consumers give credibility to Zestimates and use them for their own purposes.

“If you can give … buyer(s) a tool to manipulate a seller, they will use it and vice versa,” she said, “depending on whether the Zestimate is too high or too low.”

Andersen said she finds it “disappointing” that “the buying public does not realize Zillow’s income is from brokers who pay” money for leads and advertising tied to Zestimate pages. “So basically Zillow is financially motivated to keep the Zestimate inaccurate so it can ‘funnel’ disgruntled sellers to brokers” who then “cure an issue [inaccurate valuations] that Zillow created,” she said.

In response, Zillow said “the Zestimate is incredibly accurate, and Zillow is constantly working to improve its accuracy even more.”

What to make of the Zestimate decision? Best advice is to take Zillow’s own suggestion and see Zestimates as starting points, not end conclusions as to true value. Plus, be aware of how the Zillow model works- The company makes most of its money – $213.7 million, 71 percent of total revenues in the first quarter of 2018, according to its latest securities filing – from realty agents and brokers who pay it for advertising on its websites.

The growing gender gap that gets little notice – home buying

Kenneth R. Harney on May 11, 2018

WASHINGTON – It’s the gender gap you don’t hear so much about- Single women are buying homes and condos at what may be more than twice the rate of single males, and the trend appears to be accelerating.

Consider-

- Single women accounted for 18 percent of all home purchases last year compared with just 7 percent by single males, according to survey data from the National Association of Realtors. This makes single women the second largest segment in the entire home-purchase marketplace, behind married couples.

- Citing data from the most recent U.S. Census Current Population Survey, which covered 60,000 households, Ralph McLaughlin, chief economist for consulting firm Veritas Urbis Economics LLC, found that the share of home purchases by single women in 2017 – including never-married individuals, widows and divorcees – hit 22.8 percent, the highest on record. The gap between single females and single men was not as dramatic as in the Realtor study, however.

- Home builders have picked up on the trend and increasingly are designing homes and subdivisions to appeal to women’s preferences, including singles. Pat McKee, president of McKee Homes, a builder active in four North Carolina markets, has found that in some of the company’s developments, significant percentages of the homes – upward of 50 percent in one case – were purchased by single women in their 30s, 40s and older, so this is not just a phenomenon limited to younger singles. Many of these buyers, he told me, “are tired of living in apartments and now feel confident enough to buy a new home.”

- Single female purchasers tend to be more likely to see buying a home as an investment, according to Jessica Lautz, director of demographic and behavioral insights for the National Association of Realtors. Single women pay slightly more on their purchase on average than single men – $185,000 compared with $175,000 – and are more likely to have children under 18 in their households.

- Rising rents appear to be a hotter button for single women than for men. In a recent tracking study conducted by research and publishing firm Builders Digital Experience, 23 percent of single women cited rising rents as a “trigger” motivation behind a home purchase, well above the 16 percent average for all recent buyers.

Colleen Fleming of Chicago illustrates some of the aspects of the single-female buyer trend. She’s an instructional design program manager for the American College of Surgeons and, working with a RE/MAX broker in the city, recently bought her first home – a two-bedroom, two-bath condo with parking space in an uptown neighborhood. The condo cost $307,000 – more than she had originally planned – but far below what comparable units would command in the hyper-expensive San Francisco Bay area, where she previously lived.

“I found it more feasible to buy” than expected, Fleming said in an interview. She “definitely looked at it in investment terms,” but most important of all, “I had gotten to the point where I wanted having a place that’s really mine, where I could make the changes I wanted. Now financially it was a possibility.”

Shoshana Godwin, who is single and works as a real estate agent for brokerage company Redfin in Seattle, bought a condo close to downtown – a two-bedroom, one bath unit that cost her $285,000 two years ago. Comparable units in her building are now selling for $500,000 in Seattle’s crazy-hot market, confirming her impression that buying instead of renting would be a good investment. She says she encounters “lots of other” single women who are actively seeking the same- A place they can call their own that also will prove to be a productive use of their financial resources.

So what’s with the single guys out there? Why aren’t they doing what smart single women are doing? There appears to be less survey research available on that subject compared with women, but builder Pat McKee says that at least anecdotally from discussions he’s had, “planting roots just doesn’t seem to have the same priority” for single men as for single women.

Godwin, who works extensively with singles of both genders, notes that in markets like Seattle, where job transfers at high-tech companies are commonplace, single men appear to be “more concerned” than women about having to relocate. “They are a little more afraid” to make commitments in real estate but seem to be fine with living in a nice, well-located rental.

Appraisal-free loans save millions for buyers

Kenneth R. Harney on May 4, 2018

WASHINGTON – For homeowners and buyers, it’s been an unexpected windfall- relief from having to pay for a traditional mortgage appraisal that usually costs between $400 and $600. The savings nationwide to consumers in just the past year alone may total tens of millions of dollars.

Sounds great. But to some key players in the home financing arena, the savings look ominous – potentially risky for taxpayers and financially nightmarish for the professionals who provide the service being eliminated.

Last year, the two largest sources of American mortgage financing – federally backed Fannie Mae and Freddie Mac – began accepting home-purchase loans that carried no formal property appraisal. Instead, the valuations supporting the mortgages were performed by Fannie and Freddie in-house, using proprietary analytics and deep stores of property data. Only highly select loans were eligible for appraisal waivers, primarily those with sizable down payments (20 percent and up) plus previous appraisals on file. Buyers, refinancers and lenders were not permitted to request waivers; Fannie and Freddie were the ones that identified eligible properties and offered waivers at the application stage.

Both companies had introduced the no-appraisal concept earlier for refinancings. The expansion to home-purchase loans was a big deal, though, because they’re considered riskier than refinancings, where borrowers’ credit and equity are well established and known to lenders.

Fannie and Freddie haven’t publicly released data or the results of their shifts to no-appraisal mortgages, but last week both companies allowed a peek for this column. During 2017, Fannie Mae acquired roughly 60,000 no-appraisal mortgages – 5 percent of its total 1.2 million home-loan acquisitions. Assuming an average appraisal costs about $500, then the combined savings to buyers and refinancers totaled somewhere near $30 million. Freddie Mac declined to estimate specific savings but said through a spokesman that by accepting appraisal waivers, “borrowers may have saved millions.”

Fannie’s and Freddie’s no-appraisal option has been popular with lenders. Mat Ishbia, president and CEO of United Wholesale Mortgage, the country’s largest wholesale lender, says “we think it’s great for borrowers.” Not only does it “save time and money,” it leads to shorter interest-rate locks and quicker closings. The company is now doing more than 10 percent of its home-purchase loans appraisal-free.

Not surprisingly, all this gushing enthusiasm for appraisal-free mortgages isn’t shared by the segment of the housing industry most directly affected- Appraisers. Real estate brokers also have expressed concerns. Appraisers see the waivers not only as sucking money out of their pockets but as a potential threat to taxpayers – who had to bail out Fannie and Freddie because of ill-advised investments during the housing bust.

In a letter to Congress last fall, the Appraisal Institute, the largest professional group representing appraisers, warned of “a race to the bottom” between the two companies in pushing for more appraisal-free loans, which require no physical visit or inspection of homes being financed. The National Association of Realtors said Fannie and Freddie “must demonstrate” that their reliance on “data-based” valuations does not “put undue risk into the housing market.”

Individual appraisers are scathing in their criticism, arguing that professionals trained to perform interior and exterior inspections, identify recent sales comparables and render independent analyses are essential to accurate valuations. Ryan Lundquist, an appraiser in Sacramento, California, noted that computer programs “cannot smell 20 cats living at the property.” Nor can they spot other value-depressing interior conditions or severe deferred maintenance.

Pat Turner, a Richmond, Virginia appraiser, says worse yet, the “savings” from Fannie and Freddie may not always flow to buyers. He cited a recent case in the Richmond area where a major online lender allegedly charged a buyer $600 at settlement on a loan with an appraisal-free waiver. “The guy went ballistic,” says Turner, and “demanded to see the detailed appraisal report,” which did not exist. His money has yet to be refunded.

What’s all this mean for buyers? No. 1- Be aware that even if you are offered an appraisal waiver, the choice is yours. Fannie and Freddie require lenders to allow borrowers to opt for a traditional full appraisal. Also, careful as the two companies may be in offering waivers, the contract price you’re paying for the house may be inflated. Lundquist cited a local realty broker who recently had clients who declined the no-appraisal option and saved thousands of dollars as a result. A full appraisal found the property to be overvalued – which the waiver apparently missed – and allowed them to renegotiate the final price lower.

Tired of the hassle of selling your home? Try this all-cash alternative

Kenneth R. Harney on Apr 27, 2018

WASHINGTON – It’s the oldest fix-and-flip pitch in American real estate- “We’ll buy your home, guaranteed, no matter what its condition, and we’ll pay you quick cash with no commissions, and close in seven days or less.”

You’ve probably encountered versions of this on TV or elsewhere. The only way such offers make sense is if the buyers are low-ballers, paying sellers much less than their house is really worth. Some bottom-feeders buy at 25 percent to 40 percent discounts, slap on some paint, tidy up and flip for a fat profit.

It’s a business model that’s been around for decades because it serves genuine needs- Some people simply want to get out of their houses fast with minimal hassles. Maybe it’s because of a divorce, death, sickness or an inability to handle the costs of ownership. They’re willing to sacrifice price for speed and certainty. It works.

Some deep-pocket, high-tech players in real estate have taken a close look at this model and concluded- Wow! The direct-buy concept has a much broader potential market. Extensive consumer research has shown that large numbers of owners consider the traditional home-selling process too long and too fraught with inconvenience and mumbo-jumbo.

If those sellers were presented with a relatively fair price and quick offer for their homes – even if they net less money – they’d be interested. Unlike the fix-and-flip target market, these owners’ homes are in good shape and sellers could easily take the traditional route – hiring a realty agent.

Enter the “iBuyer.” A handful of Internet companies, armed with proprietary valuation data and algorithms, have jumped into the cash-offer arena. At least two tell me they plan to expand to most major real estate markets nationwide. With no obligation, owners can enter basic information online about their homes and receive a tentative offer within 24 to 48 hours. Following an inspection, they may get a binding, all-cash offer. The iBuyer later resells the house.

The pioneer in the space, San Francisco-based Opendoor, has purchased around 15,000 houses and is buying about 1,000 a month, co-founder JD Ross told me last week. Sellers run the gamut- Downsizing seniors, move-up families and folks who don’t enjoy keeping their homes “show ready” for extended periods. The company currently operates in Phoenix, Las Vegas, Orlando, Dallas-Fort Worth, Atlanta, San Antonio, Raleigh-Durham and Charlotte, North Carolina, but plans nationwide expansion. Its basic deal for sellers- a “fair” price for the home, plus a “service fee” around 7 percent that can go higher depending on needed property repairs and market conditions. Sellers are under no obligation to accept the offer and can use it to comparison-shop deals from traditional realty agents.

Opendoor’s chief rival so far is OfferPad, which is active in most of the same markets plus Tampa, Salt Lake City and Los Angeles. According to the company, it’s currently doing around $125 million in buy-sell transactions per month. Its basic fee to sellers is 6 percent. Additional charges vary with the condition of the home, location and market trends. The average fee is 7 percent, according to Brian Bair, co-CEO.

Relative newcomers include Zillow – best known for its Zestimate valuation tool and advertising services it sells to realty agents-which is testing its “Instant Offers” program in three markets (Orlando, Las Vegas and Phoenix). Its model brings in institutional investors to bid on houses or allows Zillow to purchase directly for subsequent resale. Home sellers receive a comparative market analysis prepared by participating local Zillow “premier” agents. Sellers can accept the all-cash offer, list with an agent or shop for a better deal. Jeremy Wacksman, chief marketing officer for Zillow, told me total fees to sellers range from 8 percent to 15 percent, depending on expected repairs and updates and local market dynamics. Offers may be at a “slight discount” to market value, he added.

Redfin, a national realty brokerage, has begun offering its “Redfin Now” direct-buyer program in San Diego and California’s Inland Empire. Fees average 7 to 9 percent, according to Quinn Hawkins, Redfin new ventures director.

What to make of the iBuyer concept? Wherever you are, some version is probably coming your way. The concept offers you a tradeoff- You’re likely to net less on your sale but save significant time and hassle. You may not like the offer prices, fees or the repairs you’re asked to pay for, but you’re under no obligation until you commit to the deal. Meanwhile, you’ve got an innovative all-cash alternative to the traditional way of selling your home.