Tag Archives: mortgages

Federal move toward making more credit available for homeownership

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New actions announced this week are intended to help more Americans own homes:

On Tuesday, Mel Watt, the newly installed overseer of Fannie Mae and Freddie Mac, said the mortgage giants should direct their focus toward making more credit available to homeowners, a U-turn from previous directives to pull back from the mortgage market.

In coming weeks, six agencies, including Mr. Watt’s, are expected to finalize new rules for mortgages that are packaged into securities by private investors. Those rules largely abandon earlier proposals requiring larger down payments on mortgages in certain types of mortgage-backed securities.

The steps mark a sharp shift from just a few years ago, when Washington, scarred by the 2008 crisis, pushed to restrict the flow of easy money that fueled the housing bubble and its subsequent bust. Critics of the move to loosen the reins now, including some economists and lenders, worry that regulators could be opening the way for another boom and bust.

For the past year, top policy makers at the White House and at Federal Reserve have expressed worries that the housing sector, traditionally a key engine of an economic recovery, is struggling to shift into higher gear as mortgage- dependent borrowers remain on the sidelines.

Both Treasury Secretary Jacob Lew and Federal Reserve Chairwoman Janet Yellen last week noted the housing market as a factor holding back the economic recovery.

Two thoughts:

1. It is not surprising that the federal government would want to support homeownership: pretty much every President since the 1920s has extolled the virtues of owning a home. Additionally, since the late 1800s homeownership has been a key marker of the American Dream.

2. The comments made earlier this week make it sound like the government sees housing as a sector that should help lead the economy. In other words, housing is an industry with a wide impact from developers to the construction industry to real estate agents to individuals looking for a home. Housing doesn’t necessarily have to be viewed this way; the article also hints that housing is lagging behind other parts of the economy. Put differently, housing improves after other parts of the economy improve.

Don’t let your McMansion turn into a financial McPrison

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A real estate firm argues buyers shouldn’t buy a home that could turn into a McPrison:

McMANSION OR McPRISON?
WHICH ONE WOULD YOU RATHER HAVE?

The sprawling McMansion that someone said you can afford may quickly turn into a McPrison when all of your money is locked up in it. There are lots of home affordability guidelines out there. Start with this one:

  • Don’t spend more than 300% of your gross household income.
  • Another is to pay no more than 150 to 200 times the monthly rent of a comparable property.
  • All of that said, don’t buy a home unless you plan to spend at least seven years in that area.

Some conservative guidelines for buying a home, particularly from those whose livelihoods depend on moving houses. Yet, the contrast between a McMansion and a McPrison is interesting. According to this advice, the main negative of a McMansion is that it can cost too much. The McMansion can appear to be a good thing that ends up trapping the homeowner. This has been a common argument after the economic crisis: too many people and lenders overextended themselves in purchasing and enabling McMansions. Part of the definition of McMansion from Investopedia reinforces this idea:

Many McMansion homeowners live beyond their means as mortgages on these monstrous properties may be 100% mortgages, interest-only mortgages and/or amortized over 40 or more years. The cost of utilities and maintenance in a larger home are also more significant, as is the cost of commuting from the distant suburban settings in which these homes are often located.

Two quick responses:

1. Of course, non-McMansions can be pricey as well depending on their size, location, and design.

2. Ultimately, this ignores the numerous other critiques leveled against McMansions (i.e., you could be trapped by a lack of community in McMansion neighborhoods) and focuses on the financial implications. If the homebuyer wanted a McMansion and could financially make it happen, there is nothing on this page to suggest the realtors would disapprove.

Unclear how much student debt is holding back the housing market

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The sluggish housing market is likely not helped by the amount of student debt held by young adults:

[T]he Federal Reserve Bank of New York reports today that in 2013, student debtors between the ages of 27 and 30 were less likely to own a home—or, specifically, to have a mortgage—than their peers who were student-debt free. Homeownership rates have fallen fast among all young adults since the recession. But, as shown below, they’ve dropped most precipitously among those who borrowed for school.

6a01348793456c970c01a511b13bd1970c450wi_1Federal Reserve Bank of New York

There’s one key detail this graph leaves out, however, which the Fed shared in a separate report from early last year (and which I’ve written on before). It turns out that, at the end of 2012, borrowers who were current on their student loan payments were actually more likely to take out a mortgage than other young adults. Borrowers who were delinquent on their student loans, however, took out barely any mortgages at all. In other words, young people who already couldn’t handle their debt simply weren’t in the market for houses.

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Federal Reserve Bank of New York

A key point: having college debt doesn’t completely stop mortgage originations. So, reducing college debt (and look at the median, not the average) could help free up the housing market but it isn’t the only problem.

I wonder if there isn’t another way to think about this: more young Americans are willing to trade a college degree for homeownership before they are 30. This could be due to a variety of reasons including earning potential due to a college degree but also a decreased interest in owning a home as opposed to accomplishing other goals like living in an exciting place or establishing themselves in a career. In other words, this issue may not really be about college debt holding people back but rather about the relative interest young adults have in owning a house.

Really low mortgage rates may be limiting mobility

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Here is how low mortgage interest rates may be restricting the mobility of lots of homeowners:

But what does the uptick mean for those homeowners who did take advantage of ultralow rates? According to researchers at DePaul University’s Institute for Housing Studies, it has created a new population of homeowners who are seemingly stuck in their homes.The housing crisis created a large class of people who couldn’t sell their homes because they were underwater, owing more on the mortgages than the properties were worth. But in addition, another class of homeowner has formed, those who took advantage of the low rates and would have to give them up if they sell their homes.

Compounding the increase in interest rates is that the home price gains seen in Chicago and other markets last year are moderating. As a result, homeowners who refinanced, and those who bought homes at the low rates, could see smaller home price appreciation going forward. Yet even if they buy a house for the same price as the one they are selling, it will cost them more because of the higher interest rates. That scenario could affect their mobility and, as a result, the overall number of homes that change hands, the study concluded.

Similar scenarios have played out in the past, according to the researchers, who noted that the average monthly rate for a 30-year, fixed-rate mortgage rose from 10.1 percent in November 1978 to 17.8 percent in November 1981. An earlier study of that period found that every 2 percentage-point increase in rates lowered household mobility by 15 percent.

Generally, lower rates are seen as good things for homebuyers as it gives them more purchasing power. However, if rates then go back up, having a lower interest rate may not help in the step up to the next more expensive house. It will take some time for the market to balance out. Although it is unlikely there will be such a swing like in the late 1970s/early 1980s, the housing market is still quite delicate in many places and even small changes could lead to bigger disruptions.

All that said, higher rates of mobility are assumed in the United States. In order to have a thriving economy, workers need to be able to move to where they can find economic opportunities and moving up the ladder of houses (starter home, family home, retirement home, etc.) keeps the housing industry going.

Quicken Loans’ $1 billion bracket challenge set to find more mortgage customers

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Your odds of winning $1 billion from Quicken Loans for having a perfect NCAA bracket are really low – and the company will get great free data on potential mortgage customers.

To register for the contest, you have to sign up for a Yahoo account—a boon in itself for Yahoo, on whose site the contest is run. Then you’re asked to enter your name, address, email, birthday, and the answers to several questions about your home mortgage situation. All of this information goes to Quicken Loans, the fourth-largest mortgage-lender in the U.S.

It’s no coincidence that this information—where do you live? Do you want to buy a home? What’s your current mortgage rate?—is exactly what you need if you want to sell someone a home loan…

It’s not uncommon for companies like Quicken to pay between $50 and $300 for a single high-quality mortgage lead, Lykken says.

Quicken says the info-gathering is not intended for lead generation. Instead, the company says it’s building a base of relationships with people who may want home loans in the future. “The people that are playing the Billion Dollar Bracket kind of fit our demographic,” says Jay Farner, Quicken’s president and marketing chief. “But for the most part, unless they’ve opted in and said ‘please call me,’ it’s not a mortgage lead for us.”

This is the magic of the Internet for companies: users are willing to trade their information for some good. On Facebook, it is a trade of ongoing personal information for social interaction. In this bracket challenge, it is the trade of personal information for the chance to win both (1) $1 billion and (2) the ultimate bragging rights of having a completely correct bracket when millions of others couldn’t do it. Instead of having to make broad appeals to all consumers, companies can instead target specific consumers.

The argument in this article is that the particular trade here is not good for the average player: with the odds at “a 1 in 8,500 chance that anyone wins,” it is not worth giving up personal information. But, this is the sort of calculation that all Internet users must make all the time with all sorts of sites. Do I want to give up information about my music tastes to Spotify if they can use that to sell me targeted ads? What happens when Amazon gets information about hundreds of products I like? What if Google can see all of my searches? These trade-offs are harder to calculate and to avoid making them, the average user won’t be able to do much online.

Americans like homeownership – but some really dislike the process of obtaining a mortgage

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Recent data suggests numerous Americans don’t like the process of getting a mortgage:

To be fair, a little more than half the 1,000 people polled this fall found the buying-lending experience rather simple and easy to navigate. But nearly 1 in 4 said they would rather gain 10 pounds, and almost 1 in 8 would rather spend 24 hours with the person they dislike the most.If you think that’s bad, 7% would rather have a root canal, and almost that many would choose a night in prison over going through the mortgage process again.

Asked another way — “Which of the following makes you extremely uneasy or anxious” — obtaining financing again scored very low in the Guaranteed Rate study. In fact, more people were more comfortable with public speaking, being in high places, flying in an airplane, being around snakes and being in a confined space than they were going through the mortgage process.

This flies in the face of the latest J.D. Power mortgage origination satisfaction study, which found that more borrowers were pleased with their lenders now than at any time in the last seven years.

Overall customer satisfaction improved for the third consecutive year. But as you might expect, first-time buyers who have never had to navigate the system weren’t as tickled as repeat buyers and refinancers.

I remember a whole mess of paperwork though the actual numbers and costs didn’t seem too complicated. Several pieces of this process might lower people’s satisfaction:

1. The idea that someone knows all of your financial information. Americans are pretty guarded about their incomes (try bringing it up even vaguely in social settings) so even though the bank needs all of this information, it makes people nervous.

2. The purchase of a home will be the biggest single investment many people make so it induces nervousness about being tied down and having to make monthly payments for the next (usually) 30 years. Perhaps this kind of investment should make people nervous…

3. First-time homeowners are not well educated about what it takes to purchase a home, even if they have a strong idea that they should purchase a home. For example, HGTV shows the mortgage process isn’t much of anything at all: you go from liking a home, making an offer, to living happily ever after in the home. Granted, getting the mortgage and working out the details is not exciting television but there is little information about mortgages conveyed by these shows.

It is too bad the article doesn’t discuss the characteristics of those who disliked the mortgage process more. Could it be disproportionately lower-income residents who don’t have that much money to spare? Could it be younger adults who are used to processes going quicker?

Claim that Bank of America takes better care of foreclosed properties in white neighborhoods than in minority neighborhoods

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A new report from the National Fair Housing Alliance argues Bank of America has taken better care of foreclosed properties in white neighborhoods:

A year ago, the alliance and several of its member organizations filed a complaint against the bank with the Department of Housing and Urban Development, arguing that the bank had violated the federal Fair Housing Act by neglecting foreclosed properties in minority communities in Denver, Atlanta, Miami, Dayton and Washington, D.C. Today, the groups amended their complaint with a stack of evidence – in maps, data, and photos – showing that the problem has persisted in each of those cities, while documenting it anew in Memphis, Denver, Las Vegas, Tucson and Philadelphia.

In total, housing advocates have now identified the problem in 18 metropolitan areas, across 621 Bank of America properties…

The sample size in each city varied, from about a dozen properties to more than 44 of them in Denver. But across all of the cities, homes in minority communities were two times more likely than those in predominantly white areas to have more than 10 maintenance or marketing problems. In Denver, homes in minority neighborhoods were 9.3 times more likely to have a broken door or lock. In Las Vegas, they were 4.5 times more likely to have damaged windows. In Philadelphia, they’re twice as likely to have accumulated substantial amounts of trash, relative to homes in white neighborhoods in the same market.

The pattern suggests yet another way that subtle housing discrimination may further handicap the ability of minority communities to recover from the housing crisis (or, put another way, this suggests why the effects of the recession will linger in minority communities for much longer). Federal fair housing law prohibits actions (or attempts at action) that “perpetuate, or tend to perpetuate, segregated housing patterns,” or that obstruct the choices in a community or neighborhood. It’s not hard to envision how these neglected homes could wind up doing just that.

Bank of America responded that the methodology of the study was flawed and that some of the homes in more disrepair were the responsibility of other entities.

More broadly, this suggests a potential new line of research questions about how banks and financial institutions respond after an economic crisis and whether this is stratified by race and class. How have banks made decisions regarding which foreclosed properties to improve or leave to others? Have they primarily worked with more valuable pieces of property, ones that might be found more often in middle to upper class neighborhoods? Is there also more political pressure (from local homeowners to municipalities) to address these more expensive homes or places with higher property values? It also seems like the analysis here would benefit by looking at the actions of multiple mortgage holders to see if there is a pattern across institutions.

Richmond, CA wants to address foreclosures with eminent domain

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Richmond, California is seriously considering a more radical municipal approach to foreclosures:

The city has offered to buy more than 600 underwater mortgages at below the homes’ current value.

“If they are unwilling to negotiate a sale of the loans, which we want them to do, then we will consider using eminent domain as another option to purchase these loans at fair market value,” said Richmond Mayor Gayle McLaughlin…

Richmond is the first city in the country to take the controversial step of threatening to use eminent domain, the power to take private property for public use. But other cities have also explored the idea…

Banks, the real estate industry and Wall Street are vehemently opposed to the idea, calling it “unconstitutional” and a violation or property rights, and something that will likely cause a flurry of lawsuits.

It will be interesting to see how this plays out. I suspect a number of communities would argue they have few other options in order to force the hands of mortgage providers.

More Americans retiring with a mortgage

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The number of Americans retiring while still having to pay off a mortgage has increased in recent decades:

In 1989, just 26.4% of all households were retired with a mortgage, according to data from the Federal Reserve’s Survey of Consumer Finances. That jumped to 46.5% by 2007, before receding a bit during the recession.

These stats trouble traditionalists, who view owing money on a house in retirement as heresy. After all, paying off a mortgage brings peace of mind, because you know your living expenses have been cut and that your home equity offers a sturdy safety net.

Yet clinging to a mortgage in retirement has benefits too, especially with the average 30-year fixed-rate mortgage running at just 3.5%. You might be better off keeping the mortgage and investing the money elsewhere, which amounts to borrowing at a tax-deductible 3.5% in order to start a business, invest in stocks, or purchase an income property. Over time, such investments should provide superior returns.

This new calculus assumes that you have the means to pay off your mortgage in the first place. Many folks have been downsized into retirement prematurely and may still hold a mortgage because they can’t do anything about it. But for those with a choice, the basic rule of thumb: If you expect to earn more after tax on your investments than you pay after tax on your mortgage, keep the mortgage. However, if you are a conservative investor and keep your money in bank CDs and Treasury bonds, it is probably better to pay off the housing debt.

I imagine most of these Americans who have retired with a mortgage would say they don’t like having a mortgage at retirement. But, they likely have some say in this: they could wait longer to retire to help pay off their mortgage.

What is behind this? It could be a number of reasons. Perhaps Americans moving around more at later ages, leading to more mortgages near retirement age in the first place. Perhaps this is the result of economic issues – people are not as able to pay off mortgages. Homeownership rates haven’t changed all that much since 1989, roughly 2% point difference in recent years (Table 14 here), so something is happening with the nature of mortgages or the age at which mortgages are started.

Housing recovery more than just the McMansions of Toll Brothers?

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One analyst suggests the housing recovery in recent months is more than just an uptick in McMansions and big homes:

The housing market appears to have recovered from the depth of its decline. Toll Brothers (TOL) reported a whopping 46% jump in its latest earnings report and Home Depot’s (HD) earnings soared 18%. Today the National Association of Realtors reported that April existing home sales surged to their highest level in more than three years…

Michael Santoli, senior columnist for Yahoo! Finance, says the housing recovery seems to have a new leg based on a scarcity of supply coupled with low interest rates and growing demand.

“This can feed on itself for a while,” says Santoli, “not just with regard to Toll Brothers, which makes higher end McMansion-type houses, but across the industry.”

Santoli says not to expect a steep rise in prices from here despite a “bottleneck of demand.” And don’t expect all housing-related stocks to surge.

It would be helpful to see more exact housing figures at different levels of the market. Big homes seem to be doing okay as evidenced by the strength of Toll Brothers. But, the lower ends of the market don’t seem to be recovering as much as underwater mortgages lead to limited supply and hold the housing market back. When the housing market is truly recovering, shouldn’t a broad swath of Americans benefit? Or, are we seeing a fundamental shift in American housing where middle and lower-class residents have continuing difficulty in purchasing homes?