Mortgage Lenders, Do the Right Thing

“Integrity is doing the right thing, even when no one is watching.” – C.S. Lewis

The mortgage industry brought trouble upon itself when too many people in the industry weren't doing the right thing, and no one was watching.  Now everyone is watching, the CFPB, OCC, and each of the states’ regulators.  The prefaced C.S. Lewis quote makes the distinction that integrity is doing the right think simply because it is the right thing to do, not because you will otherwise get into trouble.  The mortgage lenders that are still around today likely were well-intentioned during the housing bubble, and did the right thing when the regulators weren't looking.  But now we are in a position to not only do the right thing, but document and prove that we do the right thing.  This adds costs which are ultimately charged to consumers.

In our business, we will be in trouble with our regulators and our customers if we don’t follow the alphabet soup of laws and regulations that we face:  RESPA, ECOA, TILA, HMDA, ATR, MDIA, UDAAP, HOEPA, FCRA, etc.  But when we apply C.S. Lewis’ definition of integrity to our core values, then we follow these rules because it is the right thing to do.

Each of us in the mortgage industry has the responsibility to understand the rules and abide by them.  Ignorance of the rules is not a valid excuse to violate them.  The CFPB has made that clear.  

Today we are taught to do the right thing because of the plethora of ways for us to get into trouble, but ultimately if we do the right thing because it is right for the consumer, I believe (translated "I hope") that we will escape the wrath of regulators.

Mixed Messages From a Schizophrenic Economy

Initial jobless claims fell to 302,000, better than expected.  That’s great news, right?  The economy is bouncing back, right?  Not so fast, my friend!

The initial jobless claims report is just another mixed message from our schizophrenic economy that stumbles through a weak recovery.  There are positive signs for unemployment, inflation, and job creation.  But GDP growth, wage growth, labor force participation, and labor productivity all remain weak.  What’s a Fed Chairwoman to do?

As QE winds down, Fed Chair Janet Yellen and the rest of the Federal Reserve Board want to begin the inevitable process of raising short term interest rates, but they won’t until the economy shows that it can stand on its own two feet.  The risk of relying completely on past statistics and waiting too long is that inflation may sneak up on us and get out of control.  That could give the economy an entirely new set of problems.

The Fed has a very difficult challenge ahead of it.  When they decide to raise rates , it will impact all of us.  But with so many weak indicators of the economy, it will be extremely difficult for them to raise rates anytime soon.

In Suburbia

“Let’s take a ride, and run with the dogs tonight, in Suburbia.” 

I have no clue what the Pet Shop Boys meant with that line of their 1986 hit song, “Suburbia.”  It seems to me that one would either take a ride with the dogs, or run with the dogs, but not both.  But regardless if you are riding or running, more people seem to be doing both in “Suburbia,” more commonly called “the suburbs.”

This reverses a prior trend that showed that America’s big cities have grown faster than their suburbs in recent years.  A report from the U.S. Census Bureau shows that fourteen of the nation’s 20 biggest cities saw their growth slow or populations decrease in 2013.  Only 18 of America’s 51 metropolitan areas with populations greater than 1 million people had their cities grow faster than their suburbs.  That’s down from 25 in 2012.  So now it’s Suburbia that is growing faster than the urban core of cities.

Why the change?  Just recently we were discussing the appeal of condominiums in the core of major cities.  While those projects are selling well, it seems that greater growth is attributed to single family homes with yards and fences.  Most of us that grew up in the west grew up in a suburb.  That trend continues, especially for families with children.  That’s good news for home builders, and the economy since the construction of single family homes creates more jobs than multi-family projects.

Ducks in a Row

We’ve all used, or at least heard, the expression, “Get your ducks in a row.”  Generally it is in the context of organizing so that we are prepared for a meeting or event.  Why ducks?  And why would ducks need to be in a row?  More on that later.

When applying for a mortgage, getting one’s “ducks in a row” makes the process move much more smoothly.  One should be sure to keep well-organized personal files with income and asset documentation, so that when the documentation is asked for by the lender, it can be delivered quickly and without much headache.  When completing a mortgage application, have the following documents ready to provide to your lender:

·         Paystubs covering most recent 30 day period

·         W-2 forms for the most recent 2 years

·         Tax returns for the most recent 2 years

·         Bank statements for the most recent 2 months

·         Explanation for any derogatory credit

·         Be ready for some additional documentation if you own your own business

Now that you know how to have your “ducks in a row” for a mortgage loan, let’s get back to the ducks.  I found quite a few explanations for the “ducks in a row” idiom.  One of them is from a newspaper story in 1901 about a game hunter that supposedly killed 42 wild ducks by baiting them with corn in a long galvanized trough and firing just once with a large shot gun.  The more likely and less gruesome origin could be the common image of the mother duck leading a straight line of ducklings waddling in a row, one behind the other.

How Much Can I...?

I sometimes get annoyed when I ask a question and the answer I receive is another question, but I am often guilty of that response myself.  So when I am asked “How much can I qualify for?” by someone that wants to be prequalified for a mortgage, I often answer with a couple of questions.  First, “How much do you pay now for housing?” and “How much are you comfortable budgeting each month for housing?”  From there I work to calculate debt to income ratios to see if the homebuyers budgeting expectations are in line with underwriting guidelines.

It is tempting, but dangerous to find a house and then reverse engineer a budget that is dramatically different from one’s current spending habits.  Don’t get me wrong, it’s great to trim unnecessary expenses out of the budget, but people need to be realistic about what changes they are willing to make about their expenses and how it affects their overall happiness.  Instead of just telling the homebuyer the maximum amount they can borrow and still get approved, we have a deeper discussion about what they can truly afford.

Every new homebuyer should create a household budget, especially when the home purchase results in an increase in their monthly housing expenses.  Consider all expenses when creating the budget.  There are a number of expenses that a lender won’t consider when qualifying a buyer such as tuition, medical insurance, prescriptions, as well as discretionary costs.  These can be major expenses and will impact how much is available to pay for a home.  Depending on lifestyle, travel and hobby expenses can greatly impact a household budget.  Pricey hobbies like golf and skiing, or even pets can take a bite out of a monthly budget. 

At least one of the line items on a budget should be savings.  This can be for retirement, college, or any other financial goal.  All of these costs are real and should be considered by a homebuyer when deciding how much they are willing to pay for the roof over their head.

Bad News in Portugal is Good News on Main Street U.S.A.

Poor Portugal.  First their national soccer team and superstar Cristiano Ronaldo failed to advance past the group stage of the World Cup.  Now concerns over the solvency of the major Portuguese bank, Banco Espirito Santo, is creating waves through the global financial system.  Stock markets are moving downward on the uneasiness.  Coincidently, Cristiano Ronaldo is also a paid spokesperson for Banco Espirito Santo (see BES advertisement).

In this case, and in general, bad news for the stock market and other securities drives investors to the safety of U.S. bonds.  That leads to lower mortgage interest rates for American homebuyers.  So those of you in the market to purchase a home or refinance are in a position to benefit from the struggles of Portugal, Banco Espirito Santo, and Cristiano Ronaldo. 

Condos are Movin' on Up

Condos are “Movin’ on Up”

One of the more dynamic segments of the housing markets is the condo market.  As the overall real estate market recovered from the recession, condos have come back strong.  Many “broken” projects that were victims of poor timing in 2007-2008 have new life and strong sales.  Luxury condo projects in highly desirable locations are in demand.  Likewise, more moderately priced condos allow budget conscious homebuyers entry into neighborhoods where single family homes are priced out of reach.

In order for buyers to obtain conventional financing for condo, the project must be approved by the lender.  In general, here are just a few of the guidelines that lenders must follow when offering mortgages on condos:

·         No more than 50% of the project’s units may be occupied by renters

·         For new projects, as few as 50% of the units must have been conveyed or under contract for purchase

·         No single entity may own more than 10% of the units

·         No more than 15% of the total units can be more than 30 days delinquent on association fee payments

·         Minimum insurance coverage and other requirements apply

Condos may also be financed with FHA and VA home loans with project approval.  Condos are an attractive form of housing for a growing number of people that desire low maintenance living in an urban environment. 

Lend Responsibly: Subprime Safety

Back in 2007, “subprime” became a dirty word.  In the years leading up to the recession, lenders became increasingly aggressive in their lending guidelines in the pursuit of a greater market share of a very profitable business.  Looking back it is obvious that subprime lending had gotten out of control like an alcoholic at an open bar.  There was no chance that the evening would end well.

But should subprime be forever banned from the housing finance market?  Of course not.  Even the alcoholic can be fun to have at a party as long as we don’t let him drink anything stronger than ginger ale.  There is a need for sober subprime lending in the housing market.  In fact, some responsible subprime lending has already returned.  Wisely, no one actually refers to it as “subprime,” since to many people that is still a dirty word.

There are mortgage products available today to homeowners with less than perfect credit, but they require strong income documentation and a sizable down payment.  As more private capital becomes confident in the mortgage market, we will see an expansion of responsible subprime lending.  But let's promise to keep it under control.

That's a lot of Boomerangs!

In 2013, singer-songwriter Lyfe Jennings introduced his hit song “Boomerang” (just ask your kids if you haven’t heard it!). The lyrics include the line “So throw me away, cause if I were a boomerang, I’d turn around and come back to you.”  Likewise, in 2014 the housing industry will have a big hit from “Boomerang Buyers.”  If you’re not familiar with this term, you’ll soon understand the analogy.  From 2008 through 2013 there were 269,049 properties in the Greater Phoenix area that were either foreclosed or short sold.  Those former homeowners that experienced defaults have for the most part been thrown out of the homebuyer market.  But now in most cases, those former homeowners are eligible to purchase homes again.  They’re coming back.  Ergo, they are dubbed “Boomerang Buyers.”  In 2013 the top two markets for “Boomerang Buyers” were Riverside-San Bernadino and Los Angeles.

The waiting period to qualify for a home loan after an event like a foreclosure or short sale varies depending on the type of mortgage.  Short sale waiting periods for conventional loans range from 2 to 4 years, 3 years for an FHA loan.  Foreclosure waiting periods range from 3 to 7 years. 

Based on the number of short sales and foreclosures that have already taken place, Fletcher Wilcox at Grand Canyon Title Agency estimates that 42,444 previous homeowners that either short sold or were foreclosed on will have completed the three year FHA waiting period and will be eligible to purchase a home with an FHA insured loan in 2014.  That’s a lot of boomerangs, and potentially a lot of homebuyers coming into a market that has slowed down in recent months.  As the market shows slight signs of softening, now is a great time for boomerang buyers to come back.

5 Financial Benefits to Homeownership

In our article from a few weeks ago, “Ownership Generation,” we explored social and emotional reasons why young renters grow up to be homeowners.  But the reasons to buy a home are not just warm and fuzzy.  There are also cold-hard money related advantages too.  In this article we will discuss some financial benefits to owning the roof over your head.  This list of benefits is adopted from a December 2013 report from the Joint Center for Housing Studies at Harvard University.

1.       Housing is the one leveraged investment available

According to the report, “Homeownership allows households to amplify any appreciation on the value of their homes by a leverage factor.”  For example, if a home is purchased with a 10% down payment, and the home appreciates by 10%, the homeowner has doubled their investment even though the value of the home increased by only 10%.

2.       You’re paying for housing whether you own or rent

When making a mortgage payment part of that payment goes to pay down the principal which increases your equity.  With rent, you’re only improving the landlord’s equity position.  I would also add that rent is similar to an adjustable rate mortgage, as each year there is the risk that the payment will increase.

3.       Owning is usually a form of “forced savings”

The report states that “Having to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings.”

4.       There are substantial tax benefits to owning

Our tax code is very favorable to homeowners.  Mortgage interest and property taxes can be deducted each year from a household’s taxable income.

5.       Owning is a hedge against inflation

Although our economy hasn’t experienced significant inflation in many years, there is always a risk of inflation in the future.  According to the report, home values tend to rise at or above the rate of inflation which is a valuable hedge against inflation risk.

The homeownership rate in America fell as a result of the recession, but the benefits of owning a home still apply.  Those advantages are social and emotional, but as we have demonstrated they are also financial.

Business Owner Blues

Last week’s article “Getting a Mortgage These Days:  It’s Not That Bad,” generated a lot of questions specific to the challenges of qualifying business owners.  As more of the workforce moves away from 9 to 5, W-2 employment, more potential homebuyers have a complicated task of documenting their income for the purpose of qualifying for a mortgage.

The stated income loans of the past made qualification much easier for self-employed borrowers.  Today, due to legislation and rules responding to the Great Recession, all income needed to qualify for a mortgage must be documented.  For business owners or individuals that work on contract, that generally means 2 years of individual and business tax returns must be provided to the lender for review.

Applicants that have just started a business will find it difficult, if not impossible; to qualify as the business must have a 2 year history of generating income.  Also, since most new businesses rarely report a profit in the first year, the tax returns are unlikely to reflect adequate qualifying income. 

One of the advantages of owning a business is having the ability to write-off expenses related to the business from taxable income.  This is wonderful for reducing tax liability, but it also reduces the maximum loan amount that the business owner can qualify for.  The exception to this rule is depreciation expenses.  Since depreciation is only a “paper” expense, the lender is able to add the reported depreciation back to the applicant’s net income.

Yes, business owners must provide more documentation in order to qualify for a mortgage, but we are closing loans for these types of clients every day.  With planning and sound advice from a licensed mortgage professional, self-employed mortgage applicants can navigate through the rules to qualify for and obtain a home loan.

Getting a Mortgage These Days: It's Not THAT Bad!

I read an article this week titled “From ‘No Doc’ to ‘Every Doc’” on Fox Business.  In the article the author complained that lenders have become too strict and make the mortgage process too cumbersome for borrowers.  At the same time he rightfully acknowledged that if given the choice between the two, “Every Doc” is a healthier choice than “No Doc” for borrowers, lenders, and the overall economy.  If you have read articles or heard stories about how difficult it is to get a loan these days, here are a few tips to help ensure the process is a smooth one.

Have a Documentable Source of Income

For most people this is easy.  Employees of companies receive paystubs and W-2’s and their documentation is fairly straight forward.  When fluctuating sources of income come into play like commission or overtime additional documentation will be required.  Those types of income can be used for qualification provided they are consistent or improving year over year, and are documented for at least 2 years.

Self-employed borrowers have had the toughest transition since the days of “no doc” or stated income loans.  Many business owners write-off so many expenses on their tax returns that their remaining documented qualifying income isn’t adequate for the loan amount they seek.  Knowing that they need to provide their lender with two years of personal and business tax returns, self-employed individuals should plan ahead and thoroughly consider all expenses in the year or two proceeding when they expect to apply for a mortgage.

Make Sure Down Payment Funds are in a Documented Account

Most buyers save up their down payment in an account in their own name.  Sometimes documenting a down payment can get complicated if the funds are in a business account.  This situation is not uncommon with self-employed borrowers and can lead to additional documentation.

If the down payment funds are in an account that doesn’t belong to the borrower, then a gift needs to be documented between the owner of the account and the borrower.  Sometimes the borrower sells an asset, like a car, that also must be documented so that the down payment funds can be sourced.

When reviewing bank statements to document the down payment, the lender will question any large non-payroll deposit that is greater than 25% of the borrower’s monthly gross income.  Since most of the purchase price is covered by a loan, the lender is trying to make sure that the borrower has their own assets (or a documented gift) into the property.  It’s their “skin in the game.”

Don’t Add Any New Debt during the Process

While purchasing a home, please don’t purchase a car or any other large item that will cause one to incur debt.  Also, if one is purchasing new furniture or appliances for the home, be sure not to buy it on credit without consulting with your loan originator first.

When thinking about buying a home, the first person one should speak with is a licensed mortgage professional.  Most real estate agents that value their time won’t even show a buyer a home until they have been pre-qualified by a lender.  Consult with your lender first.

Ownership Generation

What was the impact of the housing bubble on the American psyche?  Is the American dream of homeownership no longer held in high regard?  Are millennials less likely to want to own a home when they saw their parents lose their home to foreclosure?

In the aftermath of the Great Recession, many experts believe that young people will be more likely to grow up to be renters rather than homeowners.  There are advantages to renting:  mobility; low maintenance; and less responsibility.  All of those are aspects are associated with the characteristics of young people which is why there might be a belief that young people will grow up to be renters.

So will more young people grow up to be renters?  The key is that eventually young people do “grow up,” and when they do their lives change.  They get married, have children, and then they want some stability.  Their kids enroll in school and suddenly they are less mobile and take on more responsibility.  The characteristics of the millennial generation that experts say will result in more renters are really just characteristics of young people.  While the stability that parents seek for their families is less secure if they don’t own the home they live in. 

The recession was a major setback for many people.  It did in fact reduce the rate of homeownership in America.  But it is this author’s belief that most Americans still want to own a home, and when they are in a financial position to own a home they will do so.

Loans and Oranges

If you were to pick any industry and shrink it by 30%, chances are that it would have a dramatically negative effect on the participants in that industry. Let’s take citrus as an example.  If the predictions in the country for citrus consumption for the foreseeable future dropped by a third, you can probably imagine what that would do to citrus farmers.  Many of them would likely sell their farms and exit the business. 

In addition, what would happen if the government started telling the citrus farmers exactly what size, color and shape of oranges were allowed to be sold in the open market? You would likely see a percentage of these farmers getting out of the industry because their product no longer conformed to government requirements.

The analogy about citrus farmers is not all that far off from what the mortgage industry is experiencing right now.

The Mortgage Bankers Association recently dropped their 2014 forecast for loan originations.  They expect that the volume of loans originated this year will be a full one-third less than what was originated in 2013.  The main reason is that interest rates are rising and there is very little refinance activity.  Also, on January 10^th the CFPB's Qualified Mortgage Rule went into effect which eliminates certain types of loans that mortgage bankers and brokers originated in the past.

So what’s going to happen to those lenders that spent 2012 and 2013 riding the wave of easy refinance business?  Who knows for sure, but many of them are likely to go away. What will happen to lenders who did not prepare for the recent regulatory changes in the industry? Some of them will be closing shop too. 

This all sounds grim, but fear not! Even though many lending companies will likely close shop or be forced out of the industry, there are many others who have planned well and are prepared for the changes in our industry. This is why it is important to align yourself with a lender that is intensely focused on helping homebuyers become homeowners.  For example, our business model at Homeowners Financial Group has been the same for over a decade.  Sure, we are happy to help our clients when they need a refinance, but we never lost focus on our commitment to homebuyers and our partners in the home buying process, real estate agents and builders.

In 2014 and beyond, make sure you work with a lender that has the know-how, commitment and “staying-power” to succeed in today’s market. 

Keys for the Housing Market in 2014

2013 was characterized by a contrast between the first and second half of the year.  The first half had the benefit of record low interest rates that helped to push up prices as buyers attempted to out-bid each other for homes.  Los Angeles saw an increase in median price of nearly 30%, and Phoenix had an increase in excess of 50%.  With higher prices in place, the second half of the year also saw higher interest rates which tempered the strong demand.  So what should we expect in 2014?

There are reasons to believe that 2014 will be a strong year for housing.  But there are also some concerns about where the market might go.  As the old saying goes, “Hope for the best, but be prepared for the worst.”

Why 2014 will be a good year for housing.

·         Housing formations are expected to pick up which will boost demand for new homes.  This will lead to an increase in construction as inventory levels have been low. 

·         The overall economic picture should continue to improve.  Jobs are the driving force behind housing, and as wages increase there will be more consumers in a position to buy their first home or move-up.  Also, delinquencies continue to fall which indicates consumers are in a better financial position than they have been in recent years.

·         Although rates are rising, they are still very low by historical standards which will aid affordability.

Now here’s the other side of the coin.  What could derail the market in 2014?

·         Speaking of interest rates…  If rates continue to rise as expected it will impact affordability and reduce demand.  Most buyers still need a mortgage to purchase a home, and affordability to them is mostly based on how much that monthly mortgage payment is.

·         Some argue that the recovery we experienced in the past year was a mirage.  The Federal Reserve’s stimulus (QE 1, 2, & 3) was the main driving force in making payments so affordable (with low rates) that prices had to rise.  Therefore when rates go up, those prices will have to go back down.

In either perspective, inventories will play a critical role.  There are far fewer foreclosures coming onto the market which has contributed to the lack of inventory.  Increases in new construction need to happen to meet the demand, and as prices rise builders have greater incentive to build homes.

The mortgage industry also plays a role.  Credit is still perceived to be tight, although the industry has made a lot of progress developing programs that don’t fit in the conforming box, such as Homeowners Financial Group's Clean Slate product for buyers that have a foreclosure or short sale on their record.

If you’re looking for a prediction, you won’t find one here.  No one can say with certainty what 2014 will bring, but everyone should be aware of the key issues that will determine what the year brings for housing.