Consumer-friendly options open doors for home buyers

Kenneth R. Harney on Feb 26, 2016

WASHINGTON – So you say you want to buy a home but you’re locked out of the market because you don’t have enough money for a down payment. Or you don’t have adequate savings to meet lenders’ requirements on financial reserves. Or you have a “thin” credit file that lenders find tough to score and accept.

Understood. But have you checked out what’s been going on in the mortgage market lately? Are you aware of the multiple low-down-payment, consumer-friendly new options that have been launched recently – the latest just within the past week?

Maybe not, so here’s a quick overview. Pushed by regulators and consumer groups to expand home loan opportunities for first-time and moderate-income buyers, major mortgage players have come out with nationwide programs designed to turn renters who are creditworthy – but don’t have big down payments or closing-cost cash – into home owners.

The newest option, known as the Affordable Loan Solution plan, launched Feb. 22. It allows for down payments as low as 3 percent, no minimum cash reserves, loan amounts as high as $417,000 and, unlike other low-down-payment mortgages, there are no charges for traditional private mortgage insurance. The latter alone can sometimes add hundreds of dollars a month onto buyers’ costs and make ownership difficult to afford, so this is a big deal. For applicants with thin or no credit bureau files, the program allows for consideration of non-traditional forms of credit, such as monthly rent payments, utility bills and the like. There is no minimum required contribution toward the down payment and closing costs, so applicants can supplement their own cash with gifts, such as from parents, or even use grants or secondary financing that is available through some local government agencies. Significantly, applications won’t go through the usual automated underwriting systems that generate instantaneous approval-disapproval decisions. Instead, they’ll be handled the old-fashioned “manual” way, allowing for more individualized evaluation – and verification – of applicants’ situations.

The program is a joint effort of Bank of America, giant mortgage investor Freddie Mac and the Self-Help Ventures Fund, an affiliate of Self-Help Credit Union, a community development lender. Starting Feb. 22, Bank of America began offering these mortgages through its network of 4,800 local financial centers around the country, as well as through its online and call center channels. The bank plans to sell the mortgages to Self-Help, which will provide early-intervention servicing to borrowers who experience payment difficulties. Freddie Mac will ultimately purchase the loans. Self-Help will provide a financial backstop to cover default losses in lieu of traditional private mortgage insurance coverage.

Affordable Loan Solution mortgages are likely to compete with Federal Housing Administration (FHA) loans, which offer 3.5 percent minimum down payments. But for many applicants, they could prove to be the superior choice. Take this hypothetical case provided by Bank of America- On a $150,000 mortgage with prevailing rates as of mid-February, FHA’s 30-year fixed rate loan with a 3.5 percent down payment and mortgage insurance would require monthly payments of $887.31, exclusive of taxes and hazard insurance. An Affordable Loan Solution mortgage in the same amount with 3 percent down would cost the borrower nearly $105 less per month – $782.47.

However, there are important restrictions that come with the new loan. Borrowers can’t have incomes higher than the area median, generally can’t have total debt-to-income ratios higher than 43 percent, and they need FICO credit scores of 660 or higher. FHA, by contrast, goes as low as FICO 580 on loans with 3.5 percent down and is often more generous on debt-to-income and previous credit issues. Some applicants, including all first time buyers, will need to participate in home buyer education sessions conducted by housing counselors. D. Steve Boland, Bank of America’s consumer lending executive, stressed in an interview that this is a program designed for people “who have established histories of paying debts,” even if not all their histories show up in the national credit bureau files.

The Affordable Loan Solution plan joins two other relatively recent efforts to reach out to credit-worthy, moderate-income renters who don’t have a lot of cash on hand. Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs, which both offer 3 percent minimum down payments and flexible underwriting terms, are available through multiple lenders nationwide.

If you think you might fit the profile, get in touch with several lenders and learn what they’ve got to offer. You just might be surprised.

Bipartisan vote bodes well for condo buyers

Kenneth R. Harney on Feb 19, 2016

WASHINGTON – Everybody knows that congressional Democrats and Republicans can barely agree on anything. Yet in a rare and fleeting moment of unanimity in the House of Representatives, they recently approved legislation that could expand purchase prospects for thousands of people looking to buy their first home.

By a 427-0 vote, the House passed the Housing Opportunity through Modernization Act, co-sponsored by Reps Emanuel Cleaver (D-Missouri) and Blaine Luetkemeyer (R-Missouri.) Among other provisions, the bill would force the Federal Housing Administration to ease rules and restrictions that have essentially turned the agency’s once-vibrant condominium unit financing program into a minefield for would-be purchasers, condo associations and lenders.

The FHA is the government’s principal agency for helping consumers buy affordable homes. It does not lend money itself but instead insures mortgages made by private lenders. FHA requires as little as a 3.5 percent down payment on loans it insures, allows more flexible debt-to-income ratios than most other mortgage sources and tends to be more lenient on applicants’ past credit problems. As a result, FHA has long been the go-to mortgage source for young, first-time buyers, many of them minorities. The condo unit financing program was especially attractive because in most markets, condo units cost a median 20 percent to 30 percent less than single-family detached houses.

But at the start of this decade, FHA adopted a series of controversial restrictions that have sent its condo mortgage business plummeting. It required condo associations to obtain onerous and sometimes costly certifications of their financial eligibility, plus re-certifications every two years. The agency also stopped insuring so-called “spot” loans on individual units in uncertified condo developments, cutting off unit owners from selling to buyers using FHA mortgages.

Because of these and other restrictions, thousands of condo associations nationwide have dropped out of FHA eligibility altogether. Today, according to congressional estimates, barely 10 percent of all condo developments in the U.S. are eligible for FHA-financed purchases. Total FHA loan volume has shrunk from just under 100,000 condo units seven years ago to 22,800 in 2014.

Under the bill, FHA will be required to-

- Streamline its recertification procedures to make them “substantially less burdensome” for condo associations.

- Lower the minimum owner-occupancy ratio to 35 percent from the current 50 percent, unless the agency adopts and justifies a different minimum within 90 days of enactment of the legislation.

- Abandon its current restrictions on “transfer fees” that many condo associations collect when units are sold. The fees typically are used to support community services and are an important budget item.

These may not sound like dramatic changes, but condo industry experts say they will have major positive effects. Seth Task, a real estate broker and condo specialist with Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says the reduction in the owner-occupancy requirement is crucial to the financial health of many existing condo projects where the ownership ratio doesn’t meet the 50 percent threshold. In those developments, no units currently can be sold to buyers who choose or need to use FHA financing. The net effect in many cases, according to Task and other critics, has been to reduce the number of potential buyers for any given unit and ultimately reduce the unit’s market value. Task has seen it in his own transactions, where sellers in uncertified buildings have had to turn down offers from well-qualified FHA buyers, and then are forced to accept below-market offers thousands of dollars less from bottom-fishing all-cash investors who don’t even plan to live in the unit.

The new legislation “will actually increase owner-occupancy” in those buildings, Task predicted in an interview.

The ratio change will also help open up sales in some newly constructed condominiums where the builder still owns more than half of the units being marketed, but can’t sell to FHA buyers because the entire project is ineligible. Ending the transfer-fee ban and streamlining the recertification process should help convince condo associations who have left the FHA fold to reconsider applying for eligibility, according to Rita E. Tayenaka, a realty broker and past president of California’s Orange County Association of Realtors. The reforms “will be a great improvement for condo financing,” she believes.

Bottom line- The bill is great news for first-time and moderate-income buyers, but don’t expect changes overnight. It still must pass the Senate and get the President’s signature, but a 427 to zero bipartisan vote in the House bodes well for both.

Are some realty agents hyping their numbers?

Kenneth R. Harney on Jan 29, 2016

WASHINGTON – Are some realty agents hyping the pricing information on closed sales they report to their local multiple listing services? And if so, should you care?

A first-of-its-kind study by appraisal and real estate experts suggests that maybe you should. Researchers compared closing documents – which are supposed to indicate the final price in sales transactions – with the prices that agents actually reported to their local MLS and found that in nearly one of every 11 cases (8.75 percent) there were discrepancies. Overstatements of final price exceeded understatements by a ratio of nearly three to one. In one case, the price reported to the MLS was 21.4 percent above the actual closing price.

The study, published in the latest issue of the Appraisal Journal, is unusual because settlement statements (traditionally the “HUD-1″ form, now the “Closing Document”) are not public. The researchers, three professors at Florida Gulf State University, obtained the HUD-1 statements from two banks that had extended mortgages on the properties. They then matched them up with the prices reported by realty agents to the local MLS. A total of 115 listing agents or brokers made the reports on the 400 sales in the statistical sample.

One of the co-authors, Kenneth M. Lusht, a past president of the American Real Estate and Urban Economics Association, told me that some of the errors could simply be clerical mistakes – “typing errors” – but others could be the result of agents “purposely inflating” the prices they reported to the MLS.

Though the average overstatement was not huge, 6.7 percent, the authors expressed concern that because the home appraisal system depends on accurate price reporting to MLSs, errors can distort appraisers’ valuations. Appraisers use MLS pricing data to identify “comparable” houses to help estimate the values of homes on the market for sale.

Accurate appraisals are important to home buyers because lenders use them to help decide whether to approve their applications. Inaccurate appraisals also pose potential risks for lenders – if values are overstated, they may have less true “collateral” backing the mortgages they make, as they found to their horror during the housing bust of the last decade.

Multiple listing services exist to share property data among member realty brokers, appraisers and other real estate professionals. According to the Council of Multiple Listing Services there are more than 800 MLSs in the U.S., typically with rules emphasizing “data integrity.” Individual agents are supposed to report pricing and other property information to the MLS so that it can be viewed and used by other members.

Realty brokers, agents, appraisers and MLS officials I spoke with last week had starkly different interpretations of the study results. Several brokers and agents said they observe inaccuracies in pricing reports to their MLS frequently or occasionally. Several appraisers agreed. Others said they encounter little or none.

Joshua Hunt, founder and CEO of Trelora, a Denver realty brokerage, said “many agents aim to show a higher closed sale price to show that their list-versus-sold percentage is higher (and) they will use this in their listing pitch to show how great they are.” They do this, Hunt said, by omitting seller concessions – adjustments to the final price that reflect either repairs or closing costs the seller has agreed to fund – from the price they report to the MLS. The MLS doesn’t pick up these intentional misreportings, he said, because “there really is no audit system in place” to spot them.

Alexis Eldorrado, managing broker at Eldorrado Chicago Real Estate, says this “is not common in Chicago,” mainly because the local MLS has “an anonymous violation reporting system” that allows agents who observe misreporting of final prices to flag them for disciplinary action by the MLS if not quickly corrected.

Kathy Condon, president of the Council of MLSs and CEO of Massachusetts’ largest MLS, agreed. In an interview, she said “most MLSs do self-policing” rigorously to guard against inaccurate data. At her MLS, five staffers monitor reports and search for errors.

Bottom line- The jury is out on this one. Maybe the pricing errors found in the study sample were not typical. But maybe errors are more common than MLSs care to admit. As one Virginia appraiser told me, “we find inaccuracies quite often and have to verify information (on prices, square footage, etc.) before we use it.” He said he has seen pricing inaccuracies “more than two dozen times in the past year” alone.

Keeping your home deal on track in the new year

Kenneth R. Harney on Jan 22, 2016

WASHINGTON – So you’re selling or buying a house in 2016 and you want to make sure your transaction goes to closing without glitches. Is there any guide to the potential problems most likely to disrupt deals or delay them? If you know the major pitfall areas, maybe you could take steps in advance to avoid them.

Absolutely. New research pinpoints the biggest causes of home real estate delays and contract terminations. In an internal survey of 2,643 realty agents conducted last month but covering sales and purchases during the previous three months, the National Association of Realtors found that 32 percent – nearly one third – of all transactions encountered delays of some sort. That’s probably higher than you imagined.

The big three-

- Buyer financing setbacks.

- Home inspection issues.

- Appraisals that diverge from the agreed upon contract price.

According to the study, of the 32 percent that experienced delays, 46 percent were triggered by “financing issues,” which is up from 40 percent during the first half of 2015. Appraisal-related problems caused delays in 21 percent of transactions and home-inspection issues in 14 percent. Of the nearly one of every 16 (6 percent) of deals that turned into total disasters and fell through, home inspection and financing were the primary culprits. Sixteen percent went south because of the appraisal.

Here’s a quick look at each. Whitney Watson, a loan officer for First Heritage Mortgage in Glen Allen, Virginia, says financing falls apart for myriad reasons, some of them readily preventable. For example, credit scores can change between loan approval and closing – enough to render the would-be buyer ineligible for the mortgage. Though she warns clients not to incur any additional credit during this period – no new car purchases, no new furniture on credit, no new credit activity whatsoever – she gets phone calls from buyers with pending home purchase contracts pleading for an OK ((okay)) to lease a new auto or buy furnishings for the new house.

Debt-to-income ratios also can change when an underwriter discovers that a buyer failed to disclose ongoing payment obligations such as child support and no longer has acceptable debt ratios. Watson’s advice- “Tell your loan officer everything at application,” and avoid new debt or anything that could affect your qualifying income like changing your employment.

Home inspections are another quicksand pit. When an inspector finds defects in the property under contract, things can get tricky. Will the seller make the repairs before closing, cut the price or set aside escrowed funds to cover the costs? Are the problems found by the inspector as serious or expensive as the inspector alleges?

Diana Dahlberg, broker and owner of 1 Month Realty south of Milwaukee, recounted a situation where an inspector left both the home sellers and buyers in utter shock. While the seller was nursing her new baby and the buyers standing nearby, the inspector warned that there was a serious defect in the home’s furnace. He looked straight at the nursing mother and said, “If you don’t want to kill your baby, you better get a new furnace right away!”

The buyers “were totally freaked” by the inspector’s remark and bailed out of the contract, Dahlberg told me last week. Subsequent examination by a different inspector found nothing wrong with the furnace – no safety threats to the child or buyers – but the sale was dead.

Deal-killer inspectors may not be avoidable by sellers, but one way to be ready for them is to get a pre-listing inspection by a reputable professional before you put the house on the market. That allows you as a seller to fix anything important in advance and at the very least have defenses against inspection findings that might be at least partly aimed at lowering the price to the buyers’ advantage.

The same goes for appraisals. You can hire a top-notch local appraiser to do a pre-listing valuation of your home for a modest fee. Not only will that provide useful information for the listing price, but can be a counterweight when an appraiser with inadequate knowledge of local market conditions comes in with a low-ball number that threatens the whole deal. With the pre-listing valuation in hand, you can appeal to the lender to reassign the work to a second appraiser with local knowledge and experience. All this may delay the deal a little – that may be unavoidable – but it could also save it.

Updated credit scoring could open window for more buyers

Kenneth R. Harney on Jan 8, 2016

WASHINGTON – If you’ve been frustrated that the credit scoring system has prevented you from getting a home mortgage, 2016 could be a watershed year. Important changes are in the works.

The biggest players in the mortgage field are under pressure by federal regulators and Congress to adopt more inclusive and updated credit scoring models that incorporate non-banking forms of credit, such as rent, utilities and cellphone payments to supplement what’s in consumers’ standard credit files. For people who have “thin” files with minimal data at the national credit bureaus – or no files at all – the changes could bring tangible improvements.

In mid-December, the federal agency that oversees giant mortgage investors Fannie Mae and Freddie Mac ordered both companies to wrap up their plans for adopting “alternate or updated credit scores” this year and move ahead with putting them into action “as appropriate.”

At roughly the same time, legislation was introduced with bipartisan support in the House called the Credit Score Competition Act. Its goal, sponsors said, is to expand access to mortgage money for large numbers of creditworthy loan applicants – especially first-time buyers and minorities – who currently are shut out of consideration by the two companies’ credit scoring practices.

“Fannie Mae and Freddie Mac are the largest mortgage purchasers in the nation,” said Rep. Terri Sewell (D-Alabama), co-sponsor of the bill with Rep. Ed Royce (R-California), “but they rely on credit score models that don’t necessarily take into account something as simple as whether borrowers have paid their rent on time. Homeownership is an integral part of the American Dream that shouldn’t be out of reach for low-income, rural and minority borrowers who lack access to traditional forms of credit.”

Royce said the bill would eliminate “the credit score monopoly at Fannie and Freddie,” ending “an unfair practice that stifles competition and innovation in credit scoring.”

Both Fannie Mae and Freddie Mac rely on credit scoring tools from FICO, the dominant supplier of credit analytics for the mortgage industry and best known for its three-digit FICO scores that run from 300 (terrible credit) to 850 (outstanding credit, low risk of default).

The scoring models used by Fannie’s and Freddie’s automated underwriting systems have been in place for years without major updates, critics complain, and do not incorporate more recent, consumer-friendly improvements designed by FICO itself and by competitor VantageScore. FICO Score 9, introduced in the summer of 2014 but never adopted by Fannie or Freddie, provides fairer treatment for millions of consumers whose scores currently are depressed by medical bill collection accounts in their credit files or who have files with scant information because they make little or no use of the traditional banking system. Mortgage applicants whose only major negatives in their credit bureau files are medical collections stand to see their FICO scores improve by a median 25 points, according to the company.

VantageScore LLC, a joint venture started by the national credit bureaus – Equifax, Experian and TransUnion – to compete with FICO, has introduced its “3.0″ model that it claims can provide scores on as many as 35 million “previously unscoreable consumers.” The new score is widely used by banks and credit card companies but is frozen out at Fannie Mae and Freddie Mac. The Vantage scoring model incorporates information on a consumer’s rent, utilities and telecommunications payment histories that get reported to one or more of the national credit bureaus. Studies have shown that inclusion of alternative credit data such as rents can significantly improve consumers’ scoring outcomes.

One study by Experian found that out of a sample of 20,000 tenants living in government-subsidized apartment buildings, 100 percent of previously “unscoreable” tenants became scoreable once their rent payment histories were used in calculating their credit scores. Furthermore, the results showed that 97 percent had scores in the “prime” (average 688) and “non-prime” (average 649). Both score categories could help qualify these current renters to obtain home mortgages, provided their income, employment and debt ratios meet Fannie Mae or Freddie Mac underwriting requirements. But that won’t happen until both companies update their scoring models.

What’s the prospect for that? Fannie Mae officials say scoring system changes involve significant costs, not only for the company itself but for the lenders who sell them mortgages. But when Fannie’s and Freddie’s regulator – and maybe Congress – tell them to get moving on it, the odds increase that something good will happen, sooner rather than later.