Tag Archives: mortgages

How mowing your lawn might be soon affect your ability to get a mortgage

Posted on by

A new proposed FICO score algorithm will include things like whether you have been cited for not mowing your lawn:

Just when you thought you knew all the ins and outs of how your credit score is calculated, it all changes. Last month FICO announced a new partnership with CoreLogic to create a new FICO score for use in the mortgage industry. While there are many credit bureaus that provide scoring on Americans, your FICO score is the report most widely used for mortgages. That’s because FHA and other government-backed mortgages use FICO as part of their means testing for approval. If FICO standards change, it could have a widespread effect on families looking for mortgage approval…

The addition of the CoreScore to your FICO will greatly increase a bank’s access to your personal finance information. The more doors that are open, the more doors that you will need to guard—even doors you didn’t know existed.

It’s not common knowledge, but seemingly unrelated aspects of your finances can get exposed through public information. Town ordinances and zoning are becoming increasingly restrictive in communities. There are plenty of local governments that can cite you for not mowing your lawn, leaving your garbage out on the curb overnight or owning one too many dogs. These types of local penalties may seem ridiculous and unfair, but they do have teeth. Many localities have the ability to place a lien on your property if citations remain outstanding. That means that it could get noticed by the new FICO score.

Failure to mow your lawn really could lead to a rejection on your mortgage application. The addition of the CoreScore opens the floods gates on financial information that was once unavailable to lenders.

From a lender’s point of view, having extra information is helpful. Yet, I wonder at the statistical connection between maintaining a lawn (and avoiding local fines) and paying a mortgage: are they always linked? Having too many pets/animals indicates less of a likelihood of paying a mortgage?

I wonder if there isn’t something else at work here. Given the increase in foreclosures, mortgage holders behind in their payments, and underwater mortgages, perhaps lenders are more interested in how well the home will be maintained so that if the lender does end up reclaiming the property in a few years, they don’t have to drastically reduce the price or spend money to fix up the home.

A last comment: the article suggests such local ordinances “may seem ridiculous and unfair” but there are at least two big rationales behind him. First, it is all about property values. You may want the right to keep garbage and junk on your property or return your yard to a more natural state but your neighbors could be negatively affected. Second, the uptick in foreclosures in recent years has pushed many communities to adopt stricter regulations as homeowners and banks don’t keep up some properties, affecting nearby property values as well as contributing to the appearance of social disorder.

Australia retakes the lead for largest new homes in the world

Posted on by

In recent years, Australia and the United States have alternated having the largest new homes. New data suggests Australia has retaken the lead:

In any case, that Australian homes should be costly is not so surprising given the peculiarities of the domestic market.

The Australian dream requires you to own a detached house with a large garden, a land-hungry type of accommodation that makes up no less than 76 percent of all homes.

Three-quarters of all homes have three or more bedrooms, and almost a third have four or more. The average newly built home is now the largest of any country at 243 square meters (2,615 square feet), taking the McMansion mantle from the United States.

And, while it is one of the emptiest countries on the planet, it is also one of the most urbanized, with most of the population crowding the coast in just eight sprawling cities.

I wonder how much this has to do with something I suspect is at play in the United States: housing starts may be down but those that are being built are primarily aimed at the upper ends of the market toward people who haven’t been hit as hard by the recession.

It is interesting that this is buried in the final paragraphs of a story about the Australian housing market. The overall piece suggests that a country can have large homes without necessarily having an overextended housing market like we see in the United States. One complaint about McMansions in the United States is that they have ruined the housing market, pushing buyers and lenders to have bloated mortgages and generally corresponding with American habits of overspending and incurring debt. But it doesn’t have to be this way: the article tells of different mortgage patterns in Australia such as homeowners paying them off quicker and having a small amount of subprime loans. In other words, having a large home doesn’t have to be tied to the ideas of profligate spending if the system is set up in a different way.

Wells Fargo pays more than $175 million to settle case of steering minorities to worse mortgages

Posted on by

This is part of what discrimination looks like today: Wells Fargo has just agreed to a big settlement for offering minorities worse terms on mortgages.

At least 34,000 African-American, Hispanic and other minority borrowers paid more for their mortgages or were steered into subprime loans when they could have qualified for better rates, according to the Department of Justice. The DOJ settled a fair-lending lawsuit with Wells Fargo, the nation’s largest mortgage lender, on Thursday…

The complaint also says that between 2004 and 2008, “highly qualified prime retail and wholesale applicants for Wells Fargo residential mortgage loans were more than four times as likely to receive a subprime loan if they were African-American and more than three times as likely if they were Hispanic than if they were white.”

During the same period, the complaint says, “borrowers with less favorable credit qualifications were more likely to receive prime loans if they were white than borrowers who were African-American or Hispanic.”

Wells will pay at least $175 million to settle the case; it denies any wrongdoing in settling. Bank of America agreed to pay $335 million in settling similar charges in December.

This is not unusual: audit studies have shown that minorities tend to have more difficulty renting, securing a car loan, getting a job, and getting mortgages compared to whites.

Even though I have looked at several news reports on this, here is what I really want to know: is this a large enough settlement for Wells Fargo to really care? In other words, is this a light fine or a heavy fine? And perhaps more importantly, how do we know that they and other banks won’t pursue similar tactics in the future?

The rules for buying a home, seven years ago

Posted on by

Here is one writer’s take on the rules for buying a home circa 2005:

The old-school home-buying rules (well, not your granny’s old school, more like 7 years ago old school) told us:
A. To buy as much home as we could afford, ahem, qualify for, with as little money down as possible.
B. To buy the biggest McMansion in the neighborhood so everyone would know we “made it.”…
C. We’d always make money, because homes “always appreciated.”

While I haven’t seen rules like these formally written down, I suspect many observers would agree that these rules were commonly followed (if not formally written) and helped lead to the current economic crisis. However, I wonder how many people actually followed these rules. In other words, what percentage of mortgages actually qualified as A? How many people actually bought their homes for the primary reason to show people they “made it”? What percentage of homes lost money between 2005 and 2012? Since I suspect 100% of home purchases did not meet these criteria, how much does the common narrative fit what actually happened?

McMansions are not retirement vehicles

Posted on by

In a discussion of the number of Americans approaching retirement age, one economist briefly mentions one issue: the expectation some retirees had that their homes would be retirement vehicles may be misguided.

“The fact of the matter is that this aging-but-not-yet-aged segment of the baby boomer class can’t afford to retire,” said David A. Rosenberg, the chief economist of Gluskin Sheff, a Canadian firm, noting that overall household net worth was 15 percent lower than at the prerecession peak. “Dreams of the 5,000-square-foot McMansion being a viable retirement asset have morphed into nightmares of a deflationary ball and chain.”

This is indicative of a larger shift: with the ongoing housing crisis, homeowners can’t expect to cash out their homes in the same way they might have in the late 1990s and early 2000s. McMansions are emblematic of people taking out large mortgages and then having difficulty in paying off their mortgages or moving (“downshifting”) to a cheaper residence because of the reduced value of their homes. Of course, this shift moves housing back to its historic role as a dwelling but not necessarily as a golden nest-egg for retirees.

I would be interested in knowing at which age people tend to purchase McMansions or other large homes. For example, buying a McMansion in one’s 50s might not be the best idea if someone wants to retire at 65. If a homeowner is willing to live in a home for a longer period of time, say more than 10-15 years, then such a purchase might not be as unreasonable as the homeowner can pay off more of their mortgage. Living in a home long-term may not be possible for everyone given changing job circumstances as well as the general mobile nature of American society but there are ways to help ensure one could make more money off of selling a large home.

Illinois has the third highest rate of foreclosures in the US

Posted on by

New data shows that Illinois has the third highest rate of foreclosures in the country

Almost 7.5 percent of all one-to-four-unit mortgage loans in Illinois were in foreclosure in the first quarter, compared with a national average of 4.39 percent, according to data released Wednesday by the Mortgage Bankers Association.

“Illinois and New Jersey trail only Florida as being the worst in the country, and they’re getting worse,” said Jay Brinkmann, the association’s chief economist “The rate in Illinois more than twice that of California. In the judicial states the problem continues to get worse in terms of the backlog of loans in the foreclosure process.”

Added Michael Fratantoni, the association’s vice president of research and economics, “This is not a case that loans are entering foreclosure at a greater extent than in nonjudicial (states.) It’s that they’re staying in foreclosure longer.”

Illinois is not alone, according to the trade group’s quarterly national delinquency survey. In judicial states, the percent of loans in the foreclosure process reached an all-time high of 6.9 percent during the first quarter. That compares with a rate of 2.8 percent in non-judicial states, the lowest since early 2009.

The larger story about foreclosures in recent years has tended to focus on certain Sunbelt places like Florida, Las Vegas, and California so it is interesting to hear that Illinois has one of the highest rates – even if this is due to the particulars about how foreclosures are dealt with in the courts.

Based on this, could one argue that places like Las Vegas, said to be hard-hit by foreclosures, actually will be able to move past foreclosures more easily because of quicker court procedures? Speaking broadly, is it better for a state’s economic health and for its citizens for foreclosures to move more quickly in the courts even if this has some negative shorter-term effects? What is the proper trade-off between helping current residents and clearing bad mortgages off the books?

Should the American Dream include a McMansion?

Posted on by

Van Jones suggests the American Dream may have once included a McMansion but such hopes have been downgraded in these tough economic times:

We may not be able to save the American Dream from the point of view of, you know, everybody is going to have a McMansion and be rich, but we should be able to make a—have a country where you can work hard and get somewhere. The two big barriers right now are these. It used to be the case that the pathway from poverty into the middle class was go to college and buy a house. Today, those are the trapdoors from the middle class into poverty, because student debt is crushing a whole generation of young people who are trying to make a better life for themselves, and underwater mortgages—one-quarter of every mortgage in America underwater—is dragging people from the middle class into poverty. So the American Dream, so-called, has been turned upside down, inside out.

Isn’t Jones suggesting that the Dream once included a McMansion? If so, this fits with an idea I’ve shared before: McMansions may always have their critics but if the economy turned around and McMansions became more attainable again, they would receive less criticism and people would go back to buying them. At the peak of the housing market in the mid-2000s, you could find plenty of people who vocally shared their reasons for disliking McMansions. However, this criticism has been backed in recent years by a narrative that McMansions (along with SUVs and perhaps Starbucks lattes) either exemplify or brought down the crashed American economy and we should say away from these houses in the future.

 

More foreclosures on the way in 2012?

Posted on by

While many might hope for economic progress during 2012, some are suggesting that another wave of foreclosures will hit during 2012:

In 2011, the “robo-signing” scandal, in which foreclosure documents were signed without properly reviewing individual cases, prompted banks to hold back on new foreclosures pending a settlement.

Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur…

Online foreclosure marketplace RealtyTrac estimated that while foreclosures dropped slightly nationwide in February from January and from February 2011, they rose in 21 states and jumped sharply in cities like Tampa (64 percent), Chicago (43 percent) and Miami (53 percent).

One big difference to the early years of the housing crisis, which was dominated by Americans saddled with the most toxic subprime products — with high interest rates where banks asked for no money down or no proof of income — is that today it’s mostly Americans with ordinary mortgages whose ability to meet payment have been hit by the hard economic times…

Is this the final wave?

If it is primarily “hardworking, everyday Americans” who bear the brunt of the 2012 foreclosures, will the coverage of foreclosures and the proposed remedies change? In previous years, it has been easy for some to suggest that those who made and accepted subprime mortgages deserved what they had coming as they extended their credit and debt too far. If this year’s foreclosures are now occurring to people who didn’t overextend themselves yet still fell prey to the economic crisis, will the narrative change?

Banks are foreclosing on more churches

Posted on by

Houses aren’t the only structures being foreclosed on during this economic crisis. Churches have been hit hard in recent years:

Since 2010, 270 churches have been sold after defaulting on their loans, with 90 percent of those sales coming after a lender-triggered foreclosure, according to the real estate information company CoStar Group.

In 2011, 138 churches were sold by banks, an annual record, with no sign that these religious foreclosures are abating, according to CoStar. That compares to just 24 sales in 2008 and only a handful in the decade before…

“Churches are among the final institutions to get foreclosed upon because banks have not wanted to look like they are being heavy handed with the churches,” said Scott Rolfs, managing director of Religious and Education finance at the investment bank Ziegler…

Church defaults differ from residential foreclosures. Most of the loans in question are not 30-year mortgages but rather commercial loans that typically mature after just five years when the full balance becomes due immediately.

Its common practice for banks to refinance such loans when they come due. But banks have become increasingly reluctant to do that because of pressure from regulators to clean up their balance sheets, said Rolfs.

Several things strike me here:

1. It would be interesting to talk with banks about how they negotiate this situation where they don’t want to appear heavy-handed with churches and yet still need to profit off their mortgages. Where is the line – is it just about the amount of money involved or does the possible response from the congregation also factor in? The article hints that these aren’t strictly business decisions but include consideration of cultural and moral values.

2. While the article suggests these foreclosed on churches are often bought by other churches, what kind of market is there for people to buy former churches who want to use the existing building? I’ve seen some interesting pictures over the years of churches that are converted into residential spaces (either large homes or multi-family units) but this requires the extra time and resources for rehab. I assume newer, auditorium-type churches might be more attractive here.

3. Will there be any extra indignation about churches outspending their means and not being able to meet their mortgage obligations?

The wealthy “walking away from the McMansions”

Posted on by

One commentator suggests the number of wealthy homeowners walking away from their large mortgages is on the rise:

Nationwide, foreclosures on loans over $1 million are up nearly 600 percent since 2008…

Walking away has even become something of a boast among the more-or-less wealthy – a solution with few downside risks that also marks the walker as a smart player.

That’s because California is one of a small number of “non-recourse” states. Here, the mortgage lender cannot recover the full value of the loan if the homeowner defaults; the lender can only recover the house, not the owner’s other assets.

The effect is producing a death spiral for loaded McMansions in some upscale neighborhoods. When owners default, they expand the inventory of over-priced houses, undercutting the value of similar homes in the neighborhood, lowering their resale value and prompting a new round of “strategic defaults” by other owners.

I wonder how lenders are responding to this issue. Would they move more or less quickly since these homes are worth more and the bank could make more money (though they might lose more on the mortgage)?

Another issue: how much does walking away from a large mortgage hurt someone who was able to get such a large loan in the first place? While foreclosures for “average homeowners” are often portrayed as huge problems (looking for somewhere to live, a hit to their credit rating), is this as much of an issue for those with bigger mortgages? According to this look at Beverly Hills, this decision is being made by some who can pay the mortgage but don’t want to deal with the decreased value of their homes:

Many are walking away not because they can’t pay, but because they judge it would be foolish to keep doing so…

She said she had seen in Beverly Hills a big increase in “strategic defaults,” in which owners who can still afford to make their monthly mortgage payment choose not to because the property is now worth so much less than the giant loan used to buy it during the housing bubble…

Bremner said she helped a client buy a Beverly Hills mansion last year that the prior owner had bought for over $4 million. He decided to stop paying his $3 million mortgage – even though he could easily afford it – when the value of the property had dropped to $2.5 million.

“They were able to comfortably cover the loan,” Bremner said. “They were just no longer willing to see the value of the property drop.”

If more wealthier homeowners are walking away from their mortgages, is there anything that should be done? Should they have harsher penalties if they have other assets to cover the mortgage? Should we be concerned that the Beverly Hills housing market is having difficulties, i.e. does this effect other housing markets or is it simply an issue between wealthy players?

It would be nice to have some exact numbers on how much this is happening across the country…