From the time you start the loan application process all the way to closing day, every financial move you make could affect whether that loan is approved or denied. Guarantees are hard to come by in the mortgage industry.
Let’s take a look five financial mistakes to avoid making before you close on a home loan.
Moving Money Around
Lenders are going to take a long, hard look into your finances, from tax returns and pay stubs to bank statements and sometimes more.
You’ll need to explain any questionable deposits to or withdrawals from your account. Moving money around can cause concern for lenders. They’re looking for regular, verifiable transactions that come with a paper trail.
By all means, you can often use gift funds for a down payment or other mortgage costs. But you’ll need clear and consistent documentation. You can’t just dump a bunch of cash in your account and expect to sail through closing without questions.
Taking on New Debt During A Loan Application
Buying a new home can be an exciting time, especially as you start thinking about how to make it your own. Don’t let that turn into a shopping spree.
Racking up new debt or taking out additional credit will raise major red flags and could tank your credit score. That, in turn, could kill your loan outright.
It’s typically best to avoid making any major purchases or seeking new credit until after your loan closes and funds. Notify your loan officer as soon as possible if you absolutely have to charge something.
Co-Signing a Loan
Co-signing on a loan isn’t a terribly sound financial move under the best of circumstances. It’s definitely a bad idea if you’re currently under contract on a home.
Co-signing a loan for someone makes you financially liable for their debt. Lenders will factor the new responsibility into your overall affordability profile. That new debt could stretch an already thin debt-to-income (DTI) ratio beyond qualifying range.
Getting Behind on Bills
One 30-day late payment can cause your credit score to slip anywhere from 60 to 110 points. Even if you have sky-high credit, that kind of hit can seriously affect your ability to land a loan.
If that 30-day late payment is for a mortgage or rent, some lenders may toss your application altogether. Others may be able to work with a single 30-day late payment in the last 12 months. Don’t take any chances – pay your bills on time.
You don’t always have control over this last area. Needless to say, losing your job during the home loan process is going to be a big problem.
Lenders want to see a track record of stable, reliable income that’s likely to continue. Taking a new job in the same field may not be a huge problem. It’ll still trigger a new layer of scrutiny and further explanation.
But jumping into an entirely different career field or starting your own business will likely force you to put your homebuying dreams on hold.
Even something like shifting your income to a commission basis or getting a promotion can impact your loan. Regardless of the issue, constant communication with your loan officer is key, especially if things are in flux.
Let common sense and clear communication rule the day. Those two can go a long way toward getting you to closing.
About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, from Lenderama and Bigger Pockets to the Huffington Post and Motley Fool. A former newspaper and magazine writer, he is also content director for a leading VA lender. Follow him on Google+.
The real estate market is always a jumble of facts, stats and rumors. Each year seems to produce a fresh and fertile crop of worries and troubles, so I’d like to take a look at today’s pressing issues to see what’s real and what’s not. And get ready because there is one worry which is both real and hits at the heart of real estate.
Mortgage Requirements Are Too Tight
First, you have to admit, they just don’t make mortgages like they used to. The Mortgage Bankers Association tells us that its Mortgage Credit Availability Index (MCAI) stood at 113.5 in February, down from roughly 800 in 2007.
It’s true that credit standards were far-more relaxed in 2007 but let’s not ignore the COST of loose credit:
- More than 7 million people lost their homes to foreclosure.
- Lenders have paid out more than $100 billion to settle claims that representations and warranties from the go-go days of no-doc loans and toxic mortgages were allegedly subpar — and more settlements are on the way.
- Home values have yet to recover — the Federal Housing Financial Agency says that residential real estate prices in February 2014 remained well below the prices seen in April 2007.
Here’s what happens if we bring back the good old days of 2007 and again loosen mortgage standards too much: Mortgage investors, the people with money, will reduce their purchases of mortgage-backed securities. The result is that mortgage rates will be pressured higher and real estate sales and values will be pressured down as marginal buyers fall out of the market.
Conclusion: Don’t be so quick to ignore the benefits of “tight” credit, what used to be called common-sense mortgage underwriting. At the same time, don’t forget the costs to everyone which resulted from the lower and looser application standards that helped fuel the mortgage meltdown.
The FHA Is In trouble
We keep hearing that the FHA is in trouble. If true it’s a big problem because according to Ellie Mae, FHA loans represented 22 percent of all closed loans in February. HUD says that at the start of 2014 there were 7.8 million FHA loans outstanding.
Because it’s an insurance program the FHA maintains a reserve to cover claims. The reserve is supposed to equal 2 percent of all loans in force but the actual level is far lower. Indeed, HUD borrowed $1.7 billion from the Treasury last September to shore up the reserve fund.
So is the FHA program a deficit-plagued Ponzi scheme that’s soon to burst? Here are three facts you want to know:
First, the FHA had some $48 billion on hand as of October. In cash. It had to borrow from the Treasury because of arcane accounting requirements that do not fully recognize how the program has evolved. As well, it should be pointed out that not a single FHA claim has ever gone unpaid since the program was established in the 1930′s.
Second, the FHA has been profitable since 2010. The problem loans — the loans creating losses — were originated between 2000 and 2009. This year the FHA is likely to report a gross profit of $12.2 billion according to the Community Home Lenders Association. In fact, the FHA is so healthy CHLA wants HUD to cut FHA mortgage insurance premiums starting next year, something which would greatly help the real estate industry. (For context consider that Google — no slouch when it comes to profits — had a net income of $12.9 billion in 2013.)
Third, the next time someone moans about the FHA and its finances, remember this: The FHA is required to maintain a 2-percent cash reserve to ward off claims during the next 30 years based on assumptions made today, perhaps by soothsayers and fortune tellers. Meanwhile the FDIC has cash reserves equal to .35 percent of the more than $7 trillion in bank deposits it insures and you don’t hear a word about it. Apparently, what’s good for the goose is not worth mentioning when it comes to the gander.
Conclusion: Worries about the FHA are — you guessed it — overblown.
Mortgage Rates Are Too High
However, the idea of “higher” rates must be seen in context.
Are rates higher in 2014 than in 2012? Yes.
Are today’s rates high? No. According to Standard & Poors, the typical mortgage rate during the past 40 years was 8.6 percent — about double today’s rates. Freddie Mac says that the cost of a $200,000 mortgage in early 2014 is about $240 less than the same loan a decade ago.
Conclusion: Worries about today’s mortgage rates are — you guessed it again — overblown.
The Foreclosure Crisis Is Over
RealtyTrac reports that foreclosure activity in February reached its lowest level in seven years. MBA says that more than 90 percent of all seriously-delinquent mortgages stem from loans made before 2009.
Things are vastly better than they used to be but we’re not out of the woods yet.
Here are two examples:
First, short sales and foreclosures remain a big part of the marketplace. According to NAR, distressed sales represented 16 percent of all existing home transactions in February. These are homes that sell at discount so they impact neighboring home prices — and not in a good way.
Second, as of this writing Congress has refused to extend the Mortgage Forgiveness Debt Relief Act of 2007 meaning that distressed borrowers have less incentive to pursue short sales and deeds-in-lieu of foreclosure. The result will be more foreclosures than necessary and that helps no one.
Without foreclosure relief unpaid mortgage debt will now be considered taxable income. Imagine if Smith has a $200,000 loan but loses his home to foreclosure because his employer goes out of business. The sale of the property brings the lender $150,000 but without MFDRA the $50,000 in unpaid debt will now be regarded as taxable income for Smith.
Does this make sense to anyone? Will the government collect a dime going after a homeless and unemployed Mr. Smith? Does Smith have any reason to speed the foreclosure process or has he now been encouraged to fight the lender for months and perhaps years?
RealtyTrac Vice President Daren Blomquist tells us that in January the nation’s lenders held almost 525,000 REOs, a huge number and an inventory which will need to be substantially reduced before the housing market can fully return to better times.
Conclusion: We’re doing much better on the foreclosure front but persistent problems remain and we could do a lot better. This is an issue to watch.
The Real Threat To Home Prices
We know that existing home prices have risen 9.1 percent in the past year according to NAR, but can such a pace continue?
Pending home sales have declined for the past eight months. The S&P/Case Shiller Index tells us that while prices are up better than 13 percent during the past year, as of January home prices declined in 12 of the 20 major cities it follows. NAR’s latest metro housing report showed that in fourth quarter home values rose in 119 out of 164 metro areas. The same report also showed that values fell in 43 major population centers. Two were even.
And here’s one more: The Federal Housing Finance Agency says that home values rose 7.4 percent during the last year. It also tells us that home values today remain 8 percent below the 2007 peak.
Why is it that SEVEN YEARS later home values have yet to recover from the foreclosure meltdown? The answer is that there’s a brake in the marketplace: Household income in 2012 was 9 percent lower than in 1999 according to the Census Bureau and you have to ask: How can home values rise when take-home pay is falling?
Conclusion: Shrinking household incomes are a big deal. Without more jobs, better pay and more confidence a lot of potential buyers will never enter the marketplace.
No less important, many owners who now have financing will never move because they worry about taking on new debt in an environment where the workplace looks uncertain.
When you’re done sorting through all the polls and charts, the pressing issue which should most concern brokers, builders and lenders is the matter of jobs. That’s because — in the end — the future of the paycheck is the future of real estate.
From a speech presented by syndicated columnist and author Peter G. Miller before The Realty Alliance at their April 2014 meeting in Annapolis, MD. The Realty Alliance represents more than 100,000 real estate professionals nationwide. Copyright 2014 Peter G. Miller. All Rights Reserved.
In 2007, in a fit of common sense, Congress passed the Mortgage Forgiveness Debt Relief Act. This was an important piece of legislation because it corrected an obvious wrong. Let me explain:
Traditionally, if you didn’t repay your mortgage, the unpaid amount was treated as “imputed” income. In other words, if you had a $150,000, lost your job, faced foreclosure and could only pay back $115,000 through the sale of the property or a foreclosure auction, then the unpaid balance — $35,000 in this case — was regarded as taxable income.
You can instantly see what’s wrong with this situation: The government was going to chase down homeless people for taxes for fictional money they did not receive. The theory makes sense but the reality is absurd. If our homeless taxpayer had $35,000 or anything close he or she would not have been foreclosed.
Mortgage Forgiveness Debt Relief
But there is another problem here which is hardly mentioned: If you’re a lender you don’t want borrowers facing hard times to drag out foreclosure actions. It’s cheaper and easier to have an accommodation so that while no one is a winner at least everyone loses less.
In 2007, facing an historic wave of foreclosures, Congress passed the Mortgage Forgiveness Debt Relief Act. Basically, for most residential owners, there would no longer be a tax on imputed mortgage debt — at least until December 31, 2012 when the rule would expire.
By 2012 it was fairly obvious that the rule was still needed so it was extended until December 31, 2013. Now, at this writing, the rule is dead, it has not been extended, and so people facing hard times now have very little incentive to do anything but fight lenders, fights which will cost lenders billions in lost principal and interest.
To make matters worse, you can pretty much bet that people facing foreclosure and with no money have little incentive to fix up their homes. And, you can also pretty much bet that when the lender eventually gets title the value of the property will be in the dumper. The result is that local real estate values will once again see an upsurge in discounted home sales, sales which knock down neighborhood home values and property tax collections.
Mortgage Debt Forgiveness Relief In Washington
There is now some effort in Washington to re-establish debt relief but a big stumbling block is that idea that the Feds will collect $5.4 billion in new revenues over two years if debt relief legislation is not restored. This is delusional because it does not consider the vastly-larger sums which are being lost by neighboring home owners and state tax collectors. Moreover, the idea that the federal government will collect $5.4 billion from homeless people is absurd while the lawful chase for such money is simply immoral.
The Senate Finance Committee has now passed legislation to reinstate mortgage debt forgiveness. Such legislation needs to be enacted by the Senate and then acted on by the House. Most probably nothing will happen because people losing their homes do not have lobbyists or PAC money, the main engines of change in Washington. To its credit, the National Association of Realtors and the Mortgage Bankers Association, among others, are fighting to reinstate the legislation. Good for them, this is one case where interests are aligned in a way where the public will actually benefit.
Subprime loans seen today are very different from their cousins from 2000 through 2008. Under Dodd-Frank, lenders must show that borrowers have the ability to repay their loans, an absolutely obvious standard but one which was too often abandoned during the go-go mortgage era, a time infested with no-doc loan applications, subprime mortgages with prepayment penalties and toxic loan products.
To give you an idea of just how loose and idiotic lending standards were in the run-up to the mortgage meltdown one need only look at the Mortgage Credit Availability Index (MCAI). According to the Mortgage Bankers Association the MCAI reached 113.5 in February, meaning loan standards are looser than in March 2012, the base month. In comparison, says the MBA, “if the MCAI had been tracked in 2007, it would have been at a level of roughly 800, indicating the credit was much more available at that time.”
To understand what this means, imagine that instead of cooking a chicken at 300 degrees it was instead baked at 2,400 degrees. Things might be eight times hotter, but like a lot of subprime mortgages and alternative loan products from 2007 you would wind up with something hideous.
So what makes subprime mortgages more attractive to lenders today?
First, many subprime loans are not qualified mortgages, which means lenders can get bigger fees up front and thus more profits.
Second, we have re-defined the subprime space. It used to be that a credit score below 580 or so put you in subprime territory. Now the bar has been raised so that scores below 600, 620 and 640 — depending on the lender — are considered subprime. The effect of this change is to create less risk for lenders as well as higher costs for marginal borrowers.
Third, seriously impaired borrowers, those with credit below 580 are out. On one hand such borrowers represent too much risk, on the other it’s not unreasonable for lenders to say that borrowers should have a certain credit standing before getting a loan. Think of it this way, you would not make a loan to someone without an acceptable level of assurance that the money would be paid back.
Subprime Mortgages and The FHA Exception
The exception is FHA financing. The FHA offers loans to borrowers with credit scores between 500 and 580 as long as they put down 10 percent instead of the usual 3.5 percent. Such loans are out there today. right now, but the odds are overwhelming that few lenders are offering such financing — despite the fact that FHA insurance offers lenders 100 protection against loss.
Gifts can be perfectly acceptable under the lending guidelines for most types of mortgage financing available today, but it’s super important that they are documented properly or your loan could get turned down.
Acceptable Sources of Gifts
The first requirement of gift funds is that there is no expectation on the part of the donor for the funds to be repaid. Second, gifts need to come from an acceptable source, which can include the following depending on the type of financing you’re selecting:
- Employer or labor union
- Close friend
- Governmental agency or public organization that helps people buy homes
- Fiancé, fiancée, or domestic partner.
A gift donor cannot be any person or entity who has a financial interest in the purchase transaction, including the seller, real estate agent, broker, lender, building, or anybody associated with them. Work closely with your loan officer to be sure the source of the funds meets underwriting guidelines.
Minimum Contributions from Gifts
If you’re opting for a conforming or super conforming conventional loan, there are some limited circumstances where you may be required to make a minimum contribution towards the down payment. In other words, 100% of the down payment cannot be from the gift funds. This won’t apply to most borrowers, but be sure to check with your loan officer to see if this applies to you.
Writing the Gift Letter
As I mentioned already, it’s super important that you follow the correct procedures for documenting and paper trailing the gift funds. The first step is to write the gift letter, which must include the following information:
- The dollar amount of the gifts
- The address of the property being purchased
- The relationship of the donor to the person purchasing the home
- A statement affirming that the money is a gift and not a loan
- Signatures of all parties and the date
Don’t get wordy here! Include just the necessary information and nothing else. Writing long explanations and back stories can create added headaches that are better avoided.
How the Donor Needs to Document Gifts
If you’re the donor, I highly recommend using a check to gift the funds because it is much easier to document. Remember, the underwriter wants to see a good paper trail, so don’t cut corners here. Keep a copy of the check and make sure the check amount matches the amount on the gift letter (to the penny).
If you’re transferring funds out of another account (such as a stock account, for example) into the account you’re writing the check from, be sure to get statements showing the transfer from that account into your checking account. The underwriter will likely want to see the last ninety days worth of statements for all accounts involved.
How the Borrower Needs to Document Gifts
If you’re the borrower, take the check into your bank (so you can get a receipt) and deposit it into the account from which you’ll draw all funds for your down payment and closing costs. Don’t use multiple accounts or you’ll create some added paperwork headaches for yourself.
Also, don’t deposit anything else with the gift funds. The amount you deposit must match the amount on the gift letter. Be sure to get a receipt that you can forward onto the underwriter to document the deposit. The deposit amount on the receipt must match what’s on the gift letter.
Forward Documentation to the Underwriter for Gifts
Once the gift transaction is complete, be prepared to provide the following documentation to the underwriter:
- The signed gift letter.
- Last three months worth of complete bank statements (all pages) from the donor documenting the source of funds. Include statements for all accounts involved in the transaction.
- A copy of the check.
- Last three months worth of bank statements for the borrowers account from which the cash to close (for down payment, closing costs, etc.) will come.
- The receipt for the deposit of the funds into the borrower’s account.
Yes, it’s a pain in the neck to gather this all up, but don’t cut corners or the loan could be turned down. Again, the underwriter wants to see a solid paper trail, so be sure to provide them with one so the loan approval process goes smoothly.
Note that guidelines change all the time and the underwriter may be request different or added documentation depending on the circumstances. Be sure to work closely with your loan officer so that you can properly transfer and document the gift funds.
Happy home buying!
Zombie foreclosures and vampire real estate are clogging America’s neighborhoods. Look around and you can see such homes just about everywhere.
According to RealtyTrac, there were 152,033 zombie foreclosures lurking in cities and suburbs as of the first quarter of 2014. Zombie foreclosures are properties which are in the foreclosure process but not yet foreclosed. These abandoned homes represent 21 percent of all the homes currently being foreclosed. Amazingly, according to RealtyTrac, the typical legal process associated with a zombie foreclosure takes 1,031 days to complete — nearly three years.
Where can you find lots of zombie homes? According to RealtyTrac the general markets where such properties are most common include Tampa, Las Vegas and Melbourne, Fl.
Zombie Foreclosures Versus Vampire Real Estate
Zombie homes, of course, are different from vampire real estate. With zombie foreclosures we have a property which has not been foreclosed but the owners have moved out. This, as we have pointed out previously, is a bad situation for the lender because the home is unoccupied, no mortgage payments are being made and the lender does not have title. At some point the lender will foreclose or the property will be sold with a short sale.
With vampire real estate includes homes which have been foreclosed, sold at auction and are now owned by lenders. Although owned by a lender the real estate is actually still occupied by the original owners and may look like any other nearby home. Vampire real estate is better for lenders and neighbors because such homes are occupied and may appear entirely normal with mowed lawns and bright lights at night.
The terms “zombie foreclosures” and “vampire real estate” were developed originally by RealtyTrac Vice President Daren Blomquist to describe homes which were not quite foreclosed and not quite occupied in the usual sense.
Big homes have been in the news lately. On one side we have Viktor Yanukovych, the former Ukrainian president, who managed to acquire a mammoth palace clad almost entirely in marble all while earning $50,000 a year. You have to wonder how Mrs. Yanukovych had time to dust such real estate, maybe the in-laws stopped by to help with the luxury cars and the floating restaurant.
In the states we also have a big house problem: The average home size has continued to rise during the past four years, going from 2,362 square feet in 2009 to 2,679 square feet in 2013, according to the National Association of Home Builders.
Real Estate: The Mansion Mess
The NAHB tells us that between 2005 and 2011 new home production went from 1.28 million units to 306,000 units. That sure seems like a situation where the number of people employed in construction has fallen significantly and industry sales have shrunk.
The median income of new-home buyers has steadily climbed from $91,768 in 2005 to $107,607 in 2011, according to the NAHB. It also says that average prices have increased, going from $248,000 in 2009 to $318,000 in 2013. To give us an apples-to-apples comparison in 2005 the average price of a new home was $297,000 according to the Census Bureau.
Anybody see anything strange about all of this?
First, new homes today are gigantic. The typical home in the 1950s had 983 sq. ft. of space. Today’s new homes are roughly three times larger.
Second, it’s not just that today’s suburban castles are gigantic in terms of square footage, they are also colossal in terms of cubic size. The NAHB says that with new homes today “builders are likely to include are first-floor ceilings at least nine-feet high.” Is that smart? What does it cost to heat and cool such a vast volume of space? How many new home buyers are eight feet tall?
Third, while cavernous new homes are the norm today household sizes are shrinking. According to the Census Bureau, the average household had 3.37 people n 1950 — and 2.54 people in 2013. In other words, in 1950 there were 292 square feet of residential living space per person versus 1,055 square feet in 2013.
Fourth, while home sizes are ballooning incomes are not. The Census Bureau says the median household income was $51,017 in 2012. That’s less than half the income enjoyed by new home buyers in 2011 and 9 percent less than the median household income in 1999.
Fifth, many people get the idea that if you want to reduce real estate costs then it makes sense to buy a smaller home.
Conclusion: You can’t keep selling needlessly bigger and bigger McMansions to people who have less and less income. The proof? New home sales in 2013 were one-fourth the size of new home sales in 2005. Or, look at it this way: The NAHB had revenues of $94.4 million in 2008 while in 2011 revenues fell to $55 million.
Future Real Estate
Builders and buyers need to look ahead. Will future buyers want homes with nine-foot ceilings and vast internal acreage? Will today’s monster houses be easy re-sales or will buyers down the road prefer smaller homes with smaller mortgages, smaller property tax bills and smaller utility bills?
The home building industry is betting that bigger is better, or at least more profitable per unit. It’s a bet that benefits builders who erect elephantine homes, but it’s also a bet which is destroying the home building industry and damaging the economy. After all, if an additional 974,000 homes were sold in 2005 when compared with 2013 there must be a reason. Here’s a hint: It’s not that the population has shrunk or that mortgage rates have hit 12 percent; it is, instead, that huge homes mean high prices and goods with big costs are tough to sell in a fragile economy.
More and more building huge homes no longer resonates with most people. Just ask Viktor Yanukovych.
First, institutional investors — entities which purchase at least ten properties per year — accounted for 5.2 percent of all U.S. residential property sales in January, down from 8.2 percent in January 2013. The January share of institutional investor purchases, said RealtyTrac, represented the lowest monthly level since March 2012 — a 22-month low.
Metro areas with big drops in the Wall Street institutional investor share from a year ago, says RealtyTrac, included Cape Coral-Fort Myers Fla. (down 70 percent), Memphis, Tenn., (down 64 percent), Tucson, Ariz., (down 59 percent), Tampa, Fla., (down 48 percent), and Jacksonville, Fla., (down 21 percent).
The company also reports that counter to the national trend, 23 of the 101 metros analyzed in the report posted year-over-year gains in institutional investor share, including Atlanta (up 9 percent), Austin, Texas, (up 162 percent), Denver (up 21 percent), Cincinnati (up 83 percent), Dallas (up 30 percent), and Raleigh, N.C. (up 15 percent).
Metro areas with the highest share of institutional investor purchases included Jacksonville, Fla. (25.5 percent), Atlanta (25.1 percent), Austin, Texas (18.0 percent), Charlotte, N.C. (14.9 percent), and Greenville, S.C. (14.0 percent).
Meanwhile, while big institutional investors are reducing purchase activity smaller investors are plainly in the marketplace. All-cash sales, said RealtyTrac, accounted for 44.4 percent of all U.S. residential sales in January, the seventh consecutive month where all-cash sales have been above the 35 percent level.
Foreclosures and Short Sales
Second, the RealtyTrac report also shows that distressed property transactions such as short sales and foreclosures — including both sales to third party buyers at the public foreclosure auction and sales of bank-owned properties — accounted for a combined 17.5 percent of all U.S. residential sales in January 2014, down from 18.7 percent a year ago.
“Many have anticipated that the large institutional investors backed by private equity would start winding down their purchases of homes to rent, and the January sales numbers provide early evidence this is happening,” said RealtyTrac Vice President Daren Blomquist. “It’s unlikely that this pullback in purchasing is weather-related given that there were increases in the institutional investor share of purchases in colder-weather markets such as Denver and Cincinnati, even while many warmer-weather markets in Florida and Arizona saw substantial decreases in the share of institutional investors from a year ago.”
Local Market Results
“We have seen the big hedge fund investors entering into particularly the Columbus and Cincinnati markets, trying to buy up portfolios of distressed properties and then turning those properties into rentals, and I think that’s contributing to the lower levels of inventory available on the market.” said Michael Mahon, Executive Vice President at HER Realtors, covering the Columbus, Cincinnati and Dayton markets in Ohio. “We’ve also seen a dramatic decrease in short sales because of the expiration of the Mortgage Forgiveness Debt Relief Act, which provided short sellers protection from being taxed on debt forgiven through a short sale.”
“Buyers are starting to emerge again, and we are seeing multiple offers on REO properties due to low levels of available homes on the market,” said Sheldon Detrick, CEO of Prudential Detrick/Alliance Realty covering the Oklahoma City and Tulsa, Okla., markets. “Increased demand of properties and reduced supply of housing inventory result in price escalation, which explains the continued increase in home prices throughout the market.”
“The Denver metro area did not experience the typical winter slowdown that many markets across the country experienced and we continue to be very busy,” said Chad Ochsner, owner of RE/MAX Alliance covering the Denver, Colo., market. “Our January year-over-year sales counts are up about 7 percent, which is really encouraging. I think it has a lot to do with improved consumer confidence and low interest rates.”
“The Salt Lake Valley market is showing a 5 percent decrease in the number of residential properties sold compared to last year, but the market is still in line with projected home price increases of 5 to 7 percent,” said Steve Roney, CEO of Prudential Utah Real Estate covering the Salt Lake City and Park City, Utah markets. “Housing inventories remain low, but are gradually growing as underwater homeowners regain equity positions in their homes.”
“The Park City resort market tells a different story with a slight increase in the number of properties sold and a slight decrease in median sales prices. Park City housing inventory is at a historic low with significant demand for entry-level housing and ultra-high-end resort properties,” he added.
Subprime mortgages continue to be the riskiest type of mortgage you can get — and yet things are looking better for both subprime borrowers and subprime lenders.
How can that be?
Subprime mortgages are a form of financing designed for those with impaired credit. That’s a polite term for individuals who have low credit scores, often for reasons beyond their control such as a job loss, the death of a spouse, a divorce or medical expenses. In some cases, however, subprime borrowers have low credit scores for a very simple reason: They don’t pay their damn bills.
Notice that credit scores have nothing to do with income. Fast food workers who make payments on time and in full can have better credit scores than the richest family in town. The great secret of good credit is not how much you owe or how much you make it’s simply how you pay back your debts.
Subprime Mortgages and Fewer Foreclosures
The latest figures from the Mortgage Bankers Association show that subprime mortgages have become very much less risky — a concept which must be seen in context.
First, let’s look at how subprime loans have become less risky.
The MBA says that during the fourth quarter of 2013, the latest available numbers, lenders had started foreclosure proceeding with 1.66 percent of all subprime loans. This is a huge reduction from the first quarter of 2009 when lenders started foreclosures with 4.65 percent of all subprime mortgages. Indeed, the MBA reports that delinquency and foreclosure activity hit a six-year low in late 2013.
Why are there fewer subprime foreclosures today? Many new mortgage regulations under Dodd-Frank went into effect during January 2014 but large numbers of lenders – thinking ahead and wanting to avoid excess risk — started making less risky loans years ago. Their reward can be seen in the lower foreclosure start numbers. No less important, many of the lenders who were the leading suppliers of toxic loans are now out-of-business.
A second reason for fewer foreclosure starts concerns the marketplace in general. As RealtyTrac, the nation’s leading source for comprehensive housing data and listings, explains, “January marked the 40th consecutive month where U.S. foreclosure activity declined on an annual basis.” In fact, foreclosure activity in 2013 was down 18 percent from the year before.
One reason for fewer foreclosures is that the inventory of toxic loans originated between 2000 and 2008 continues to decline. A second reason is that the less-risk standards established under Wall Street reform are paying off.
Subprime Mortgages Remain Risky
That said, subprime loans remain more risky than other forms of financing. Again, using figures from the Mortgage Bankers Association, we can easily see why lenders are extremely cautious when making subprime mortgages, even with higher mortgage rates. The foreclosure start rates for various forms of financing looked like this during the fourth quarter of 2013:
- Subprime mortgages: 1.66 percent
- Prime mortgages: .34 percent
- FHA mortgages: .75 percent
- VA mortgages: .47 percent
- All mortgages: .54 percent
What these figures show is that even in better times subprime borrowers are nearly five times more likely to face foreclosure than prime borrowers, a pattern which has been fairly consistent for the past five years. The good news is that foreclosure levels in general are falling and that helps borrowers, lenders and mortgage investors.
Writing about mortgages and tiny houses, futurist Thomas Frey explains that “one of the biggest boat anchors for our lives tends to be our home and the gigantic home mortgage that comes with it. We sacrifice much for the sake of paying our mortgage.” (See: Why the Tiny Home Movement May Not Be So Tiny)
Frey’s commentary is exceptional, something which needs to be widely read. That said, I suspect the real problem he’s describing is not a joyous pilgrimage to homes with fewer than 200 square feet but rather an attempt to cope with a shrinking economy.
Mortgages and Economics
Frey says we should think of the trend toward tiny houses “as an obvious backlash to the banking, mortgage, and credit card industry. It’s also a backlash to glutinous consumption, poor job opportunities, and young people feeling betrayed by older generations.”
“The big thing this trend offers is freedom,” he argues, “and that’s not easy to quantify. It’s not just an efficient lifestyle, but a culture, a door-opener, a character-builder, and untethered nobility all rolled into one.”
Let me offer a different view: There is no backlash. Instead, we live in a contracting economy, one where there are fewer jobs, where the balance between workers and owners has largely been lost, and where the jobs that remain too often lead to static careers with little opportunity for advancement or personal satisfaction.
People are not choosing tiny homes because they love the joy of a 150-square-foot manor; instead they’re forced into smaller housing because the astonishing range of economic options available in the US after World War II are drying up. The new goal is not “freedom” it is instead survival in an economy which increasingly offers fewer opportunities. Little wonder that jobs — or the lack thereof — are now regarded as the biggest “problem” in America according to Gallup.
For instance, we are now debating whether to raise the minimum wage to $10.10 an hour. This means — if passed — that a full-time employee could make $21,000 a year (40 hours per week x 52 = 2080 hours per year. 2,080 hours x $10.10 = $21,008). A family of two might earn $42,000 a year.
How many households with at least two people can live well on $42,000 a year? And what if there are children in the household?
According to the Census Bureau the median household income in 2012 was $51,017. That’s up a whooping $17 from 2011. More importantly, the wages earned in 2012 are typically 9 percent lower than the same household earned in 1999. Is it any wonder that homeownership levels peaked in 2005? Or that student debt tops $1 trillion?
The reason more and more people now “want” tiny houses is not because such living spaces are wondrously desirable or somehow represent a cosmic notion of freedom, but because the American economy no longer produces the jobs, financial stability or opportunities for advancement enjoyed by our parents and grandparents.
Mortgages and Home Size
Frey says home size no longer bears any relationship to need, an issue identified in this space years ago. “In 1900,” he says, “the average house in the U.S. was a mere 700 sq. ft. with an average of 4.6 people living inside. A hundred years later, the average home had mushroomed to 2,500 sq. ft. with only 2.5 residents.”
In other words, one reason mortgages are so large is that big debt is necessary to finance big homes. One solution to this problem — societal norms be damned — is to buy a smaller, more affordable house. Frey points to tiny houses as an option. I don’t see that as a choice for most people but I remember that the home in which I was raised had three bedrooms and 1.5 baths, a home in which space was just not a problem.
Frey says we are seeing “a new breed of tiny homes that are comfortable, efficient, often portable, and most important, mortgage free. They represent freedom, freedom from debt, freedom from conspicuous consumption, and freedom to live a life of passion.”
Of course, another option is to rent. Savvy people who rent are trading tax breaks for the ability to move with ease and avoid declining home values, should they come. Home prices, it should be said, are now 8.9 percent lower at this moment then they were in 2007.
While I don’t believe that homes which are smaller than a house-trailer make sense for most people, especially those with children, tiny homes at least conform to Miller’s First Law of Real Estate: Never buy a house you don’t want to clean.