A creative way to reach a home sale

Jul 25, 2014

Kenneth R. Harney

WASHINGTON – If I pay money to your lender to lower your mortgage rate – permanently – will you make me a better offer on my house?

That’s a question that could become more commonplace as home sales slow, prices erode and mortgage rates increase. The cooling off trend is well underway in many areas, according to Veros Real Estate Solutions, a Santa Ana, Calif., analytics company. Veros’ forecast for the coming year, released last week, reported that prices in “all but the most upbeat [markets] are slowing” across the country, and one out of five markets could see year-to-year declines.

But could mortgage assistance by sellers for buyers help cushion the impact of these market shifts, bridging the gap between what owners want – or need because their equity positions are thin – and what increasingly picky buyers are willing to pay?

Realty agents and lenders in some areas believe the answer is yes. Agents have begun touting “seller-assisted below market rate financing” on the lawn signs they post outside their listed homes. Others are boning up on a marketing technique that’s long been used by home builders but rarely seen in resale transactions in recent years- interest rate buy-downs.

The idea is straightforward. To make their house more attractive to buyers as a financial proposition, sellers can offer to lower buyers’ long-term monthly mortgage expenses. The sellers achieve this by paying money upfront to the buyers’ lender in order to reduce the interest rate. The lower rate continues for the life of the loan.

The reduction might cost the sellers two or three “points” – a point is 1 percent of the mortgage amount – and produce a reduction in the buyers’ note rate of one half of a percent. The points paid by the sellers represent interest paid in advance. A larger cash payment of points would produce larger rate reductions.

David H. Stevens, president and chief executive of the Mortgage Bankers Association, says “we did a ton of buy-downs” on resales during 2006-09 when he was a senior executive with Long & Foster Cos., the country’s largest independent realty brokerage. In the right circumstances, Stevens believes, “they can be a pretty good opportunity” for sellers and buyers to come together on a deal, even with today’s lower mortgage rates. It’s all a matter of making sure the numbers work for both parties.

Oray Nicolai, a senior mortgage banker with Access National Mortgage, a subsidiary of Access National Bank, says rate buy-downs are particularly effective because they magnify the impact of the sellers’ financial concession by spreading it over many years. Buyers “keep getting the benefits of lower monthly mortgage payments for as long as they have the mortgage,” he notes.

Nicolai, who assists realty agents in structuring and presenting rate buy-downs to sellers and purchasers, provided this recent example. Buyers made an offer $50,000 less than the seller was willing to accept. By buying down the purchasers’ note rate by half a percentage point – from 4.25 percent to 3.75 percent fixed for 30 years – the sellers were able to get the price they needed. Meanwhile the buyers ended up with the same monthly principal and interest payment at the 3.75 percent rate they would have obtained on a conventional fixed-rate loan at 4.25 percent with a 20 percent down payment. The sellers’ buy-down cost them $13,600 – an expense that under IRS rules was deductible by the buyers – and the sellers ended up netting $36,000 more than they would have had they accepted the buyers’ initial low offer.

But buy-downs can have important limitations- Some purchasers want seller concessions in the form of contributions to closing costs. Or they simply want a lower sale price rather than reduced monthly mortgage expenses.

Plus buy-downs don’t work as well when the capital markets demand extra cash to buy down rates. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says a half percentage point note rate reduction may cost more than two points, forcing the seller to net less on the sale. Loan officers can usually explain how much of a rate break the current market is offering when points are paid up front.

Bottom line- Agents, sellers and buyers should at least be aware of the buy- down option. Then, if the numbers work and the buyer is open to a little creativity, make it happen.

The red flags bankers see

Jul 18, 2014 Kenneth R. Harney

WASHINGTON – Qualifying for a mortgage for large numbers of home purchasers not only is a tough challenge but one that ends unhappily – they get rejected.

The reasons for the turndowns typically involve multiple factors- below-par credit scores, inadequate documented income to support the monthly payments, little or no savings in the bank.

But a new survey by credit-score giant FICO offers buyers a rare peek inside the heads of credit-risk managers at financial institutions across the country and in Canada. Researchers asked a representative sample of them what single factor in an application makes them most hesitant to fund a loan request – in other words, what’s most likely to prompt them to say no.

The results provide practical insights to anyone who is thinking about applying for a mortgage. Tops on the list- Surprise. It’s not your credit scores. It’s not how much you’ve got for a down payment or what’s in the bank. It’s your “DTIs” – your debt-to-income ratios. Nearly 60 percent of risk managers in the FICO study rated excessive DTIs their No. 1 concern factor – five times the percentage who picked the next biggest turnoff.

Yet many new buyers have only a rough idea in advance of an application – even for a pre-approval letter – about their own DTIs, how lenders view them, and what sort of limits they’re likely to encounter.

Since they are so important to a successful application, here’s a quick overview on what goes into DTIs and why they are such a big red flag. Debt-to-income ratios for home loans are the most direct indication to a bank about whether you are going to be able to afford to repay the money you want to borrow.

Debt ratios for home loans have two components- the first measures your gross income from all sources before taxes against your proposed monthly housing expenses including the principal, interest, taxes and insurance that you’d be paying if the lender granted the mortgage you sought.

As a general target, lenders like to see your housing expense ratio come in at no higher than 28 percent of gross monthly income, though there is flexibility to go higher if other elements of your application are viewed as strong. In May, according to mortgage software and research firm Ellie Mae LLC, the average borrower who obtained home purchase money through investors Freddie Mac and Fannie Mae had a housing expense ratio of 22 percent. Federal Housing Administration-approved borrowers had average housing expense ratios of 28 percent.

The second DTI component – the so-called back-end ratio – measures your income against all your recurring monthly debts. These include housing expenses, credit cards, student loans, personal loan payments and others. Under federal “qualified mortgage” standards that took effect in January, your back-end ratio maximum generally is 43 percent, though again there is wiggle room case by case.

Most lenders making loans eligible for sale to Fannie or Freddie prefer not to see you anywhere close to 43 percent. In May, according to Ellie Mae, the average approved home purchase applicant had a back-end ratio of 34 percent. Even at FHA, which tends to be more lenient on credit matters than Fannie or Freddie, the average back-end ratio for buyers was 41 percent. The average for denied applications was 47 percent.

A good place to learn more about DTIs and to compute your own is Fannie Mae’s consumer-friendly “know your options” site (www.knowyouroptions.com), which includes calculators and other helpful tools.

The new FICO survey found that the second leading cause of concern for loan officers is “multiple recent [credit] applications.” Lenders spot these on your credit reports and take them as signals that you are seeking to add on even more debt, which could affect your ability to repay the mortgage money you’re asking them to give you.

In third place as an instant turnoff- your credit scores. Most lenders want to see FICO scores well above 700 – Fannie and Freddie averages were in the 755 range in May, FHA average approved scores were a more generous 684.

Bottom line here- If you want to be successful in your mortgage application, be aware of these key turnoff points for lenders and take steps to avoid the tripwires. Most important- Postpone your purchase until your DTI ratios tell you – yes, you can afford the house you want and lenders won’t reject you out of hand.

Scoring boost coming for renters’ credit

Kenneth R. Harney

June 27, 2014

WASHINGTON – Anybody buying a first home quickly learns how important credit scores are to mortgage lenders. They like them high.

But if you’ve been renting for years and have a stellar record of monthly payments to your landlord, you typically run into a sobering reality when you shop for a mortgage- All your on-time payments show up nowhere in your credit bureau files and do not contribute to your scores.

Ditto for other routine credit payments – your cellphone bills, cable and satellite TV, utilities. You may have perfect payment histories for all these, but nobody knows about them. Why? Because the landlord, phone and cable companies, and many other creditors don’t report your payments to Equifax, Experian or TransUnion, the big three credit bureaus. In the all-voluntary American credit system, they are not required to report anything to anyone.

This is a big deal. At a time when record numbers of first-time buyers are missing in action in the home purchase market – many of them in part because their credit scores don’t make the grade – the non-reporting of key credit records is costly to them and the economy as a whole.

But here’s some good news. Two of the national bureaus – Experian and TransUnion – have begun incorporating verified rental payment data into credit files where it can be included in the computation of consumers’ scores when they apply for a mortgage.

Experian announced last week that it is teaming up with RentTrack, a service that allows tenants nationwide to pay their rents online and have their monthly payments included in Experian credit reports. TransUnion confirmed that it too is working with RentTrack and is introducing a “ResidentCredit” service that encourages rental property managers to report monthly payment information for their tenants.

TransUnion also released a new research study that showed how the inclusion of rental data can raise consumers’ scores. When their monthly payments were reported to the bureau by landlords, nearly 20 percent of renters saw a 10-point increase or more in their score after just one month. Nearly two-thirds of renters saw at least some increase in their scores within a month or remained neutral.

The same study documented that simply transitioning from renter status, where monthly payments are not reported, to homeowner, where mortgage payments show up in credit reports, boosts most consumers’ scores. On average, said TransUnion, people who bought a first home in 2012 saw a 5.2 percent increase in their credit scores during the year. With the advent of Resident Credit, the company said rental managers and landlords will be able to report payment information at no charge, and that TransUnion will, if requested, share the data with other national credit bureaus for inclusion in their records and scores.

RentTrack (RentTrack.com) could be especially helpful to tenants, whether they’re in large apartment complexes or off-campus student housing or are renting from Mom-and-Pop landlords. Not only are payments reported directly to two of the three major credit bureaus, but tenants can pay rents using electronic checks rather than paper and can track their credit score progress.

The service costs $1.95 a month, but Matt Briggs, RentTrack CEO and founder, told me that “most [tenants] don’t pay anything because the property manager” or landlord picks up the charge. Renters who are interested simply have to ask their landlord or manager to visit the RentTrack site and sign up.

Other efforts are underway to help first-time buyers and others get monthly payments into their credit profiles. Brannan Johnston, Experian RentBureau managing director, said his company is exploring ways to incorporate utilities and cable payments into standard credit reports. Equifax has created a consumer services database on individuals’ telecommunications, utilities, cable and satellite payments that mortgage lenders can access if borrowers believe these records will improve their chance to qualify.

ECredable.com, an alternative credit data company, will verify a long list of your payments that aren’t reported to the major bureaus, then create a credit report and score based on these records. You can then present them to a mortgage loan officer and request that the information be considered as part of your application. Under federal credit regulations, the mortgage company is required to do so.

Bottom line- Just because you don’t have lots of traditional credit data on file doesn’t mean you can’t buy your first house. Things are looking up.

Some realty sites describe neighborhoods’ racial and ethnic makeup; is that legal?

BY KENNETH R. HARNEY

June 20, 2014

When you shop online for a home, some Web sites let you specify the characteristics of the community where you want to live. Maybe you’re looking for excellent schools, low crime rates, affordable prices and low property taxes.

But should you also be able to search for a home based on the racial or ethnic composition of the neighborhood? Should real estate sites supply detailed information on the percentages of African Americans, Hispanics, Asians, Caucasians and people of mixed race in the immediate area?

Some civil rights advocates cite the Fair Housing Act and say absolutely not- Connecting racial data with home sale transactions is barred by federal law, they argue, whether it’s done by a real estate agent or posted on a Web site.

But companies whose sites offer neighborhood-level racial, ethnic, linguistic and similar demographic details strongly disagree. Much of their data, they say, come from government sources such as the Census Bureau. It’s all public information and already available to anyone who makes an effort to find it, so how could its dissemination in connection with property searches possibly violate federal law?

Controversy over all this bubbled up last week when the head of the National Fair Housing Alliance — an umbrella group that represents more than 200 state and local civil rights organizations — said the alliance is investigating the practices of online search firms that have real estate tie-ins, whether as brokerages or as referral-generating services for realty agents.

The alliance has played a leading role in recent years battling discrimination in housing and mortgage finance. Its complaints and litigation have resulted in significant settlements in some cases. Shanna L. Smith, president and chief executive of the alliance, told me in an interview that her group is “concerned” about Web sites that connect real estate offerings with data packages including racial and ethnic characteristics.

In 2009, lawyers for the alliance threatened Movoto, a realty brokerage site, with federal fair housing complaints to the Justice Department and the Department of Housing and Urban Development. The lawyers warned Movoto that the provision of racial statistics for the neighborhood surrounding a property listing “may have the effect of steering prospective home buyers away . . . and undermining the promotion of racial integration, one of the purposes of the Fair Housing Act.”

Supplying such information, the lawyers said, also violated the code of ethics of the National Association of Realtors, which prohibits the volunteering of “information regarding the racial, religious or ethnic composition of any neighborhood.”

Movoto subsequently agreed to remove pie-chart breakdowns of neighborhood racial characteristics that could be displayed in connection with individual listings. However, a check last week revealed that Movoto continues to provide community-level racial, linguistic and other data, including “unmarried partner households” and “birthplace for foreign-born population.”

In an e-mail, Randy Nelson, a spokesman for Movoto, said the firm has denied any violations of the Fair Housing Act and “stands firmly against housing discrimination.”

Smith said the alliance also is studying NeighborhoodScout, a demographics-laden site run by Location Inc. NeighborhoodScout offers searches on more than 360 characteristics at the micro-market level, including income trends, home appreciation rates, crime and schools, along with race, ethnicities of residents, languages spoken, age and marital status.

Andrew Schiller, chief executive of Location Inc., said critics misunderstand his site’s business model. Though the firm is a licensed real estate broker, “we don’t practice real estate — you can’t buy a house on the site,” he noted. Portions of NeighborhoodScout’s data are free, but for certain “advanced search” content such as “race and ethnicity,” home shoppers must subscribe- $39.99 for a month, $29.99 per month for three months, $15.99 per month for a year.

NeighborhoodScout also functions as a referral conduit to 134,000 local realty agents. When a shopper referred to an agent purchases a house, the agent shares a portion of the commission with the Web site. Buyers may qualify for rebates from Location Inc.’s commission split.

In an interview, Schiller said that the site helps shoppers search for ethnically and linguistically diverse neighborhoods and that most of the data that critics object to come from the census. “We are showing public data to the public,” he said.

All of which raises the core question- In a hyper-wired era where consumers can access just about any data they want online, should real estate search sites enable them to select home locations on racial or ethnic grounds?

There’s no definitive legal answer right now. But fair housing advocates appear likely to push for one sometime soon.

Equity making a rebound

Kenneth R. Harney

June 13, 2014

WASHINGTON – If you’re like most homeowners, it’s your biggest asset. You can’t track it online or check monthly statements sent to you by a bank, but it’s crucially important for your personal financial well-being and your retirement planning.

It’s your home equity – the difference between the market value of your house and whatever debt you’ve got on it. Equity for most of us is a big deal and, based on data released last week by the Federal Reserve, Americans’ home-equity holdings are booming.

That’s great news for most owners – though not all – and for the economy as a whole. The more equity we have, the more likely we are to spend money on goods and services that create more jobs – the so-called “wealth effect.”

Now consider these brain-bending big numbers- Thanks to rising prices and substantial continuing pay-downs of mortgage debt, owners’ combined equity holdings increased by $795 billion during the three months between the end of last December and March 31 of this year. Homeowners’ equity holdings at the end of the first quarter totaled $10.8 trillion, the highest amount since late 2007 – but still well below the bubble-era record of $13.4 trillion reached in early 2006.

The ongoing boom is also pulling thousands of owners across the country out of real estate purgatory – they’ve been stuck in negative equity positions but are now transitioning to positive. According to new estimates from mortgage and housing analytics firm CoreLogic, the owners of 312,000 houses moved out of negative territory during the first three months of 2014. If prices rise by just 5 percent in the year ahead, say researchers, another 1.2 million owners could do the same.

Now for the sobering side of the home-equity story- Despite the boom in housing wealth underway, many owners are still not able to join the party. About 6.3 million of them remain underwater on their loans. The average amount of negative equity they’re carrying is often significant – they owe an average 33 percent more than their house could command in a sale today. That gives you an idea of the widespread pain still being felt in the wake of the bust and recession.

The impact is especially severe for owners who bought with little or nothing down and then loaded on additional debt with second mortgages. The average negative equity balance for owners with two mortgages is about $75,000, according to CoreLogic. For households with one mortgage, the average negative equity is around $52,000.

Also on the sobering side, millions of owners continue to have less equity than they’ll need if they want to sell or even refinance. At the end of March, 10 million owners had less than 20 percent equity in their properties and 1.6 million of them had less than 5 percent. Given real estate transaction costs, most people with less than 5 percent equity would have to bring money to the table to pay off the debt on their house when they sell.

Equity holdings are closely linked to market segments – higher-cost houses are less likely to be in negative equity positions than lower-cost homes – and geography. According to CoreLogic, only about 3 percent of homes costing more than $500,000 have negative equity. By contrast, 17 percent of homes costing less than $200,000 are in negative positions.

Not surprisingly, areas of the country that performed worst during the bust – where easy-money financing was most common during the boom – continue to have high rates of negative equity, even well into the housing rebound. But there’s one dazzling exception- California. In some inland counties during the recession, toxic financing contributed to home value losses of 50 percent and higher. Yet today, thanks to the most vigorous marketplace rebound of any state, just above 11 percent of California homes are in negative equity. Compare that with 29 percent in Nevada, 27 percent in Florida, 20 percent in Arizona.

Where are average equity levels highest? Texas, where home prices remained modest and affordable during the boom, is at the top. Just 3.3 percent of Texas homes have debt exceeding their resale values. Rounding out the top five, Montana, Alaska, North Dakota and Hawaii all have less than 5 percent negative equity on average. The District of Columbia, a high-cost market that has seen significant home-price appreciation in the past several years, ranks sixth best in the country with a 5.1 percent negative equity rate.