Are lower tax rates linked to higher home appreciation?

Kenneth R. Harney on Apr 20, 2018

WASHINGTON – Nobody likes getting tax bills, especially homeowners who are burdened with ever-escalating local property taxes. Last year, property taxes collected by local and state governments rose by an average 6 percent – $293.4 billion in total – almost three times the annual rate of inflation.

But the tax rates you pay are probably very different from what owners pay elsewhere. In Essex County, New Jersey, the average property tax on a single-family home last year was just under $12,000, according to a new study by ATTOM Data Solutions, a firm that tracks information on 155 million U.S. properties. In West Virginia, by contrast, the average was just $807.

Sure, average home values in New Jersey and West Virginia differ dramatically, as do the effective tax rates imposed by local governments to pay for the services they provide. But here’s a question- Is there a link between property-tax rates and the rate at which your home appreciates in value? Are areas with high housing costs and tax rates less likely to see high appreciation rates? Do markets with more affordable prices and low tax rates do better on appreciation?

It’s a complex subject. But ATTOM Data’s voluminous property-tax files, plus its trove of current and historical home value and price information, open the door to take at least a peek. For this column, I asked ATTOM to conduct a new statistical analysis, comparing recent appreciation rates and home-value data with effective local property rates around the U.S.

The findings are intriguing-

- Homes in areas with the highest effective property-tax rates – that is, the average tax rate expressed as a percentage of estimated home values – appear to have appreciated more slowly during the past year and the past five years on average than homes in markets with high tax rates. Homes in those areas increased in value by an average of 28 percent during the past five years and 3 percent in 2017.

- Homes in the middle third of markets, where effective tax rates are more modest, experienced higher rates of home-value appreciation – 35 percent on average over five years, 7 percent during the past year.

- Homes in the bottom third in terms of effective tax rates saw values increase faster – an average 42 percent over five years, 5 percent in the past year.

Daren Blomquist, senior vice president of ATTOM, cautions that there are exceptions to the overall trend here, “notably markets in Texas with high property-tax rates but also very strong home-price appreciation over the past year and five years.” Illinois has high tax rates (2.2 percent) yet saw average values statewide increase by 10 percent last year.

As a general rule, the highest effective tax rates in the nation are in the Northeast and the Midwest, with a smattering in Florida and Oregon. New Jersey had the highest overall rate (2.28 percent and an average five-year price appreciation rate of just 6 percent.) Connecticut’s 1.99 percent effective tax rate ranked it seventh highest nationwide. But the state experienced a one-year average price gain of just 1 percent and a five-year average of just 5 percent.

Maryland and Virginia average home prices are relatively high, but their effective tax rates are surprisingly moderate compared with the nation overall. Maryland posted an average rate of 1.03 percent and experienced a five-year, 15 percent average home-price gain. Virginia’s average tax rate was 1.05 percent; its five-year average gain 20 percent. The District of Columbia is a mixed bag – a below-average 0.65 percent effective rate on an average home value of $789,391, a 1 percent average value gain last year and a 26 percent appreciation rate over the past five years. California had a below-average effective property tax rate of 0.76 percent in 2017 and a one-year average gain in value of 8 percent.

What to make of these results? The study’s three general conclusions above are noteworthy, but keep in mind that the study’s scope and methodology were limited. Taxes alone do not determine demand – or home-appreciation rates. Multiple combined factors can also be important- local economic conditions, employment and school quality, among others.

But on average, low to modest tax rates appear to be connected to higher recent appreciation. If you’re on a fixed income and looking at potential retirement areas, or you’re a first-time buyer and affordability is key, tax rates may be an essential consideration.

Equity-affluent Americans have options for tapping into funds

Kenneth R. Harney on Apr 13, 2018

WASHINGTON – Americans are awash in record amounts of equity in their homes, posing the question for millions- So what do we do with it?

Leave it for a rainy day or retirement? Tap into it to remodel the house? Make a down payment on a vacation condo?

These are crucial financial decisions, but the abundance of equity is giving large numbers of owners options they didn’t have before.

Consider-

- According to the latest Federal Reserve estimates, homeowners control more than $14.4 trillion in equity, up by nearly $1 trillion during 2017. This explosive growth is being driven by increases in home values and selling prices, tight inventories of houses for sale, and pay-downs of principal on existing mortgages.

- As a practical matter, not all of this can be turned into spendable cash. Only roughly $5.4 trillion is “tappable,” according to data analytics and software firm Black Knight. That is, it could be extracted by owners using loan types that require borrowers to retain at least 20 percent equity after a transaction. To illustrate, say you own a $400,000 house with a $200,000 first mortgage balance. You’ve got $200,000 in equity, putting aside transaction costs.

You’d like to transform some of it into cash to invest in a new business venture. How much can you get? Most lenders require that the total mortgage indebtedness secured by your home not exceed 80 percent of the property’s value – $320,000 in this case. So assuming that you qualify on credit and other criteria, you might be able to pull out up to $120,000 from your equity.

There are three main ways you can consider to accomplish this– Home-equity line of credit (HELOC). This is a credit line secured by your home equity that allows you to withdraw amounts you need whenever you choose. Typically, HELOCs come with floating interest rates tied to an index, often the bank prime rate. You pay interest-only for a pre-set period, at which point your outstanding balance comes due. Or the HELOC morphs into full amortization mode, requiring payments of principal plus interest.

Here’s an example of current HELOC terms from an active lender, TD Bank. Your house is valued at $400,000, you’ve got a $200,000 balance on a first mortgage at 3.25 percent that you snagged when rates were near historic lows. Assuming you’ve got solid credit, you might qualify for a $100,000 HELOC at an annual percentage rate (APR) of 3.99 percent, with monthly interest-only payments of $327.95.

Looks good. But there are complications- If you want to use that $100,000 for anything other than home improvement or purchase, your interest payments won’t be deductible under new tax rules. Plus, with the Federal Reserve planning to ratchet up interest rates, your interest costs likely will increase.

- Cash-out refinancing. This involves replacing your current first mortgage with a larger one, allowing you to pocket the additional funds. A downside here- The loan you exchange your precious 3.25 percent rate for is likely to cost at least one percentage point more than your current loan. And you should check with your tax adviser on what precisely may be deductible if your new total debt exceeds the amount of your original mortgage.

Here’s an example of a $100,000 cash-out refi using the same scenario above, provided by Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland- Your new mortgage amount on your $400,000 home will be $300,000, with a new fixed-mortgage rate for 30 years at 4.375 percent, plus half a point (.5 percent of the loan amount). Your monthly payment comes to $1,497.86.

Skeens says in the present rising-rate environment, most of his clients are opting for the fixed-rate cash-out refi instead of a HELOC. But Freddie Mac deputy chief economist Len Kiefer says both cash-outs and HELOCs are likely to grow in popularity – the key difference being the rate owners have on their current mortgage.

- Home-equity loan. These are traditional second mortgages and come with fully amortizing fixed rates currently in the low and mid 5-percent range and higher, depending on your credit. TD Bank, for example, quotes a rate of 5.31 percent APR for 15 years with a payment of $805.98 for the same $100,000 deal discussed above. Some lenders offer more generous qualifying terms than HELOCs but have the same tax restrictions if you want to deduct the interest.

Bottom line- If you’re among the newly equity-affluent Americans, check out your options with lenders. Or just sit tight and enjoy the ride.

Cutbacks in high debt ratio loans could hurt buyers

Kenneth R. Harney on Mar 16, 2018

WASHINGTON – A key policy change by mortgage giant Fannie Mae that offered homeownership to thousands of new buyers – many of them minorities – could face significant cutbacks. The reason- Private mortgage insurers are re-thinking their decisions to participate.

The change, which took effect last July, allowed borrowers with http://www.authoritytrcker.com/rd/r.php?sid=10712&pub=300908&c1=debt&c2=Arc amax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousing/s- 2058832> debt-to-income (DTI) ratios as high as 50 percent to obtain low down payment mortgages. Homeownership advocates generally welcomed the move, arguing that it could open the marketplace to http://www.authoritytrcker.com/rd/r.php?sid=6368&pub=300908&c1=credit&c2=Ar camax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousing/s -2058832> credit-worthy families who simply carry high http://www.authoritytrcker.com/rd/r.php?sid=10712&pub=300908&c1=debt&c2=Arc amax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousing/s- 2058832> debt loads. A study by the Urban Institute predicted it could stimulate 95,000 new home purchases a year nationwide, especially among Latinos and African-Americans, who have higher DTIs on average than other buyers.

Debt-to-income is a crucial factor in mortgage underwriting and is one of the biggest reasons for application rejections. It measures borrowers’ recurring monthly debts – http://www.authoritytrcker.com/rd/r.php?sid=10679&pub=300908&c1=credit%20ca rd&c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationsh ousing/s-2058832> credit card bills, auto loan payments, rent, etc. – against their gross monthly income. As a general rule, the lower your DTI, the better your chances at being approved for a loan. If your DTI is exceptionally high, with http://www.authoritytrcker.com/rd/r.php?sid=6368&pub=300908&c1=credit&c2=Ar camax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousing/s -2058832> credit payments eating a hefty chunk of your income, you’re considered more likely to encounter financial strains and miss http://www.authoritytrcker.com/rd/r.php?sid=1066&pub=300908&c1=mortgage%20p ayments&c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenat ionshousing/s-2058832> mortgage payments.

The federal government’s maximum DTI for a “qualified mortgage” is 43 percent. Fannie Mae, the single largest source of mortgage money in the U.S., has in recent years stretched that limit to 45 percent and sometimes beyond when borrowers had compensating factors in their applications, such as a high http://www.authoritytrcker.com/rd/r.php?sid=6988&pub=300908&c1=credit%20sco re&c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationsh ousing/s-2058832> credit score or substantial cash reserves. In its push to raise the ceiling to 50 percent DTI, Fannie noted that all the loans would have to pass the standard tests of its automated underwriting system, which are designed to flag or reject excessive http://www.authoritytrcker.com/rd/r.php?sid=6368&pub=300908&c1=credit&c2=Ar camax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousing/s -2058832> credit risks.

In the intervening months, the relaxed DTI requirement attracted increasing numbers of new buyers. Fannie Mae won’t say how many precisely, but in its most recent quarterly securities filing it acknowledged that it had grown to 20 percent of new purchase loan acquisitions. In all of 2016, by comparison, the proportion had been just 5 percent. But as the numbers rose, concerns began to mount among some of the private mortgage insurance companies who play an essential role in all of Fannie Mae’s low down payment mortgage programs. On loans where borrowers put less than 20 percent down, these companies insure against defaults – essentially taking a portion of the risk of loss from default in exchange for premium payments from the borrower.

Several major insurers say they began detecting an ominous trend last fall- Too many of the applicants being approved presented multiple risks, including http://www.authoritytrcker.com/rd/r.php?sid=6988&pub=300908&c1=credit%20sco res&c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenations housing/s-2058832> credit scores indicating previous payment problems, low or no financial reserves to fall back on in the event of a budget squeeze, plus low down payments. Mike Zimmerman, a spokesman for one major insurer, MGIC, told me in an interview that past experience has shown that “layering” of multiple risks like these produced 30 percent to 50 percent higher rates of default, opening the door to unacceptably high future losses for the company and potential financial disasters for borrowers.

“We’ve seen this movie before,” he said, “so we don’t think it’s right.” MGIC stopped insuring mortgages with debt ratios above 45 percent March 1, unless they come with FICO http://www.authoritytrcker.com/rd/r.php?sid=6988&pub=300908&c1=credit%20sco res&c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenations housing/s-2058832> credit scores of 700 or higher. Essent Guaranty announced a similar policy effective March 12. Genworth Mortgage Insurance says it plans to do the same starting March 19. Radian Guaranty Inc., another big player, is taking a slightly different approach, banning certain high DTI loans where the down payment is less than 5 percent. Radian said in a statement that it will “continue to monitor these applications and assess any need for further changes.”

For its part, Fannie Mae acknowledged the problem in its most recent quarterly securities filing and said it plans to revise its automated underwriting system’s treatment of high DTI loan applications that carry multiple layers of risk. As a result of the revisions, Fannie said, it expects to approve fewer high DTI mortgages with multiple risk factors than in recent months.

Some lenders say the reductions could frustrate home purchase opportunities this spring for families across the country. “If they (the insurers) are going to have 700-plus (FICO) scores as the driving force,” said Joe Petrowsky of RightTrac Financial Group, “that will affect a lot of prospective buyers. Minorities will get hurt for sure.”

Lenders who prey on veterans hurt other home buyers as well

Kenneth R. Harney on Feb 16, 2018

WASHINGTON – Could predatory lending practices affecting veterans also be inflating http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=interest%20rate s&c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationsho using/s-2049258> interest rates paid by thousands of unsuspecting http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=home%20buyers&c 2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousi ng/s-2049258> home buyers using FHA loans?

The answer appears to be yes – and the underlying abuses in home loans to veterans are prompting action by federal authorities and legislation on Capitol Hill.

Here’s what’s happening- According to officials, some lenders active in the Department of Veterans Affairs (VA) home-mortgage program have been inducing borrowers to refinance their loans frequently in order to generate fat fees for the lenders themselves, rather than benefiting veterans with lower costs or better loan terms.

The lenders use baiting tactics reminiscent of the housing-boom era – “teaser rates,” promises of zero payments for one or two months, refunds of escrows, switches from long-term fixed rates to short-term floating rates, and a grab-bag of bogus claims about saving money. In fact, many veterans have ended up paying more for their loans after the predatory refinancings, and some have found themselves left with little or no equity in their homes. Officials estimate that anywhere from 12,000 to 20,000 veterans have been affected by these marketing tactics during recent years.

All this may sound horrible, but it gets worse- Abuses in the VA mortgage-lending arena have spilled over onto borrowers in the much larger Federal Housing Administration (FHA) market, which primarily serves first-time home purchasers and others who lack significant cash for a down payment.

The linkage is via a little-publicized but exceptionally important agency, the Government National Mortgage Association or Ginnie Mae. Ginnie connects individual http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=home%20buyers&c 2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousi ng/s-2049258> home buyersand refinancers using federal mortgage programs with deep-pocket investors around the world – giant pension funds and banks, among others. Ginnie pools VA, FHA and U.S. Department of http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=agriculture&c2= Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousing /s-2049258> Agriculture rural housing loans into mortgage bonds, and provides a federal guarantee of timely payments to investors.

The inevitable result of the VA lenders’ predatory activities is an unusually high number of refinancings within the pools, which disrupts the expected long-term payment flows to investors. That, in turn, prompts investors to lower what they’ll pay for the bonds, and has the side effect of raising lenders’ interest-rate quotes to VA, FHA and rural home buyers and refinancers.

Michael Fratantoni, chief economist for http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=the%20mortgage& c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshous ing/s-2049258> the Mortgage Bankers Association, told me “it absolutely impacts http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=interest%20rate s&c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationsho using/s-2049258> interest rates” adversely when investors cut the prices they’ll pay for Ginnie Mae bonds. It sounds complicated, but the simple fact is this- If pension funds or banks are less enthusiastic about Ginnie’s bonds, individual borrowers sitting across from loan officers or making applications online end up paying higher http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=interest%20rate s&c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationsho using/s-2049258> interest rates on their government-backed loans.

Michael R. Bright, executive vice president and chief operating officer of Ginnie Mae, estimated in an interview last week that the abuses in VA refinancings have caused interest rates on FHA, VA and rural housing recently to be one-quarter of a percent to one-half of a percent higher than they otherwise would have been. What does that mean in dollar terms to applicants? Steve Stamets, senior loan officer for http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=the%20mortgage& c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshous ing/s-2049258> The Mortgage Link Inc. in Rockville, Maryland, told me that on a $300,000 FHA loan, a half a percentage point rate increase could add more than $1,000 a year to a home buyer’s payments.

“It’s heinous,” said Ted Tozer, immediate past president of Ginnie Mae. “People don’t realize this affects all borrowers who are getting a [government-backed] home loan.” Given the fact that FHA alone insured 882,000 new single-family-home purchase loans in fiscal 2017, you can begin to grasp how many borrowers may have been overcharged on their http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=mortgage%20inte rest&c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenation shousing/s-2049258> mortgage interest.

What’s being done to end this scandal? Last week, Ginnie Mae announced that it has notified a small group of lenders who allegedly have been abusing veterans on refinancings that they face potential exclusion from Ginnie’s principal bond program if they don’t stop what they’ve been doing. That would effectively cut them off from their main source of institutional funding for loans – a severe penalty. The agency did not identify specific lenders, but Bright told me the first penalties could be imposed as early as next month.

Meanwhile a bipartisan group of senators has introduced legislation that would block lenders from foisting rotten refi deals on VA borrowers. The “Protecting Veterans from Predatory Lending Act,” co-sponsored by Sens. Thom Tillis, R-N.C., and Elizabeth Warren, D-Mass. The legislation would require lenders to produce a “net tangible benefits” analysis – demonstrating real savings to borrowers before initiating a refinancing and guaranteeing decreases in interest rates.

New real-estate survey offers helpful insight for buyers and sellers alike

Kenneth R. Harney on Feb 2, 2018

WASHINGTON – They are gnawing questions that many http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=homebuyers&c2=A rcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousing/ s-2044670> homebuyers inevitably ponder- What are my chances of getting the house I’ve fallen in love with at a price I can afford, which happens to be well below what the seller is asking? What are the odds that pesky contract contingencies, such as mortgage financing or the appraisal, could jeopardize my good deal?

Sellers have different concerns- What are the chances that I could actually get a higher price than what my cautious realty agent has persuaded me to offer? Might I have to throw in costly incentives to attract a buyer or – horrors – slash my price?

A new survey of 4,283 members of the National Association of Realtors offers some valuable insights, no matter what side of the deal you’re on.

Take pricing. Except in a handful of superheated markets where few houses are available for sale, the odds are strong that you as a buyer will be able to get the house you want for less than the list price. Just 34 percent of agents in http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=the%20survey&c2 =Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousin g/s-2044670> the survey reported sales above or at the original asking price. So you’re probably more likely to write a successful below-list contract than you assume.

What about sales incentives – the sort of financial goodies that sellers throw into the pot to sweeten the deal? Are they commonplace? You might think so, but statistically they are not. Barely 20 percent of sellers offered any sweeteners whatsoever, according to http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=the%20survey&c2 =Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousin g/s-2044670> the survey. Typically they involved the seller paying for some of the buyer’s closing costs or fronting the premiums for home warranty http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=insurance&c2=Ar camax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousing/s -2044670> insurance coverage. Another concession- Sellers agreed to set aside money to remodel http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=the%20kitchen&c 2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousi ng/s-2044670> the kitchen or a http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=bathroom&c2=Arc amax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousing/s- 2044670> bathroom to the buyer’s specifications. But overall, 80 percent of sellers opt to avoid concessions. If there needs to be a cost adjustment, presumably they prefer simply to subtract it from the price they’re asking.

Sales contract contingencies are another key factor in your transaction. But here’s a surprise- Though they are boiler-plate standard in many local realty contracts, large numbers of final contracts end up with none. No language requiring the buyer to obtain a mortgage commitment within a specified time, no requirement regarding appraisal, not a word about an inspection.

Twenty-one percent of contracts covered in http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=the%20survey&c2 =Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshousin g/s-2044670> the survey were contingency-free. That’s an eye-opener because contingency clauses can be crucially important for buyers and sellers. Say you sign a contract on a home that looks great but has defects you missed – the roof is 10 years beyond its economic life, the plumbing is a disaster waiting to happen. Without an inspection clause, you may have no escape hatch out of the deal and no way to argue for a lower price.

Why do buyers agree to contracts like this? The survey provides no details, but there are several possibilities- Multiple bids on the house can push buyers to offer “clean” contracts; all-cash or distress sales may require the buyer to take the house “as is”; and some sellers may simply voluntarily waive certain contingencies.

But most buyers and sellers are smart- 75 percent of all final contracts include at least one contingency clause; 55 percent require a home inspection (still surprisingly low); and 43 percent have mortgage contingencies.

How about your prospects of going to settlement on time – or worse yet, having your sale blow up before or at closing? A few years ago, delays and cancellations were shockingly common, but in the latest survey things look much better. Seventy-one percent of sales settled on schedule in December, while 25 percent encountered delays but eventually went to closing.

What caused the delays? Buyers’ inability to obtain http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=the%20mortgage& c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshous ing/s-2044670> the mortgage they wanted topped the list, accounting for 31 percent of all delays. Examples might include glitches that turn up in the buyers’ credit files or the discovery of previously undetected liens or judgments that must be resolved before the lender could commit to http://www.closettrail.com/rd/r.php?sid=11478&pub=300908&c1=the%20mortgage& c2=Arcamax&c3=https://www.arcamax.com/homeandleisure/consumer/thenationshous ing/s-2044670> the mortgage. Appraisal issues triggered 16 percent of all delays, home inspection disputes another 12 percent.

But here’s a really encouraging statistic- Total blowups are way down from where they were a couple of years back. During early 2015, between 9 and 10 percent of all real estate contracts were canceled before final settlement. Today that’s down to just 4 percent.

In the often contentious and complicated world of real estate, that passes for great news. Buyers and sellers are working out their problems … rather than walking away.