First-time buyers aren’t contributing much to rebound in housing markets

By Kenneth R. Harney, Friday, February 22, 8:56 AM

Although the housing market is rebounding in many local markets, there is one important segment that is not: First-time buyers are missing in action; they represent a smaller proportion of overall sales activity than their historical norm.

Whereas first-timers typically account for roughly 40 percent of sales, lately they’ve been involved in anywhere from 30 to 35 percent, depending on the source of the data. Lawrence Yun, chief economist for the National Association of Realtors, estimates that there were 2.2 million fewer first-time purchasers in the United States between 2008 and 2012, a deficit of about 450,000 a year.

Recent surveys of Realtor members by Yun’s research team have found that first-time purchases slipped to just 30 percent during each of the past three months. Mortgage investment giant Freddie Mac reports that first-time purchasers accounted for just 35.9 percent of loans acquired by the firm in 2011. Last year, the Federal Reserve found that while about 17 percent of people age 29 to 34 took out a mortgage to purchase a first home between 1999 and 2001, the figure plunged to just 9 percent during the period from 2009 to 2011.

All of this represents a potentially significant issue for homeowners and sellers in the overall market. Without entry-level purchasers, the housing system doesn’t work well. If there’s no one to buy moderately priced starter homes, the owners of those houses can’t sell and move up.

So what’s the problem? Where are these first-timers who should be jumping in while mortgage interest rates are near all-time lows and prices in some markets are still at 2004-05 levels? Recent economic jolts – the recession and relatively high unemployment rates for younger workers – are crucial factors. Disproportionate numbers of 20- and-30-somethings have moved back home to live with their parents or they’re renting with others rather than purchasing a house.

Tougher underwriting and qualification requirements by the banks are also important contributors. Fed Chairman Ben S. Bernanke has said so, and President Obama singled out tight lending standards – even for borrowers with solid credit – as an issue in his State of the Union address.

On top of these burdens, though, there’s still another financial albatross: Massive student-debt levels and their toxic interaction with lenders’ stringent rules on “debt-to-income” ratios.

Student-loan debt loads have exploded in the past decade and now exceed $1 trillion, according to financial industry estimates. A Pew Research study last fall found that the average student-debt balance is $26,682, and that more than one in 10 graduates is carrying close to $62,000 in unpaid student loans. Both numbers are up sharply from just five years earlier.

Lenders and realty agents who work with first-time purchasers say the student debts that many prospective buyers bring to the table are often deal-killers.

“Even a $30,000 or $40,000 debt can mean you don’t make the cut,” said Paul Skeens, president of Colonial Mortgage Group in Waldorf. Lenders typically look at two debt-to-income measures to help gauge creditworthiness: the monthly costs of the proposed new mortgage compared with household income; and total recurring household debt (credit cards, auto payments, student loans and the new mortgage). If you have $3,000 a month in recurring debt payments and $6,000 a month in household income, you’ve got a total debt-to-income ratio of 50 percent.

Under current lending standards, a total debt ratio of 43 percent is about as high as an applicant for a conventional loan can go, absent strong compensating factors such as lots of money in the bank, something that most first-timers sorely lack.

FHA-insured mortgages offer a little more flexibility, says Skeens, who recommends them for buyers with student debts but usually after the applicants negotiate a deferral of those college payments if the balances are troublesome.

Paul Reid, an agent with online brokerage Redfin in Irvine, Calif., says it’s particularly tough for first-timers right now because even when they qualify for a mortgage, they often get outbid by investors who offer all-cash deals for starter homes. Reid tries to make first-timers more competitive by getting them fully underwritten in advance for a specific mortgage amount before they shop for a house and then keeping their offers as uncomplicated as possible so as not to put off sellers.

Good advice for first-timers carrying student debt: Check out FHA. Keep your offers simple. And work with an agent who knows how to navigate you through today’s perilous underwriting shoals.

A surprise on write-off’s cost

Feb 15, 2013 by Kenneth R. Harney

WASHINGTON — In the contentious debate over whether to reduce or eliminate the home-mortgage interest tax deduction — or leave it alone — one fact has been virtually unchallenged: The popular write-off used by millions of American owners costs the government massive amounts of revenue, somewhere in the range of $100 billion a year.

This adds to the federal deficit and debt, and has ranked the deduction high on the hit list of most tax reformers’ agendas, including the bipartisan Simpson-Bowles deficit commission’s plan. President Obama himself called for limiting it throughout his first term in office, and ran on a platform to pare down its costs in his re-election campaign. The compromise congressional tax package that ended the “fiscal cliff” crisis Jan. 2 also contained a limitation on the mortgage write-off, targeted at high-income taxpayers.

But hold on. How much does allowing owners to deduct the interest they pay on their home loans really cost the government? Congress’ technical experts on the subject have come up with new estimates that should figure into congressional deliberations expected later this year on overhauling the federal tax code. Their findings: The mortgage write-off costs tens of billions of dollars less than the government previously believed.

One day after the Internal Revenue Service released its latest instructions for homeowners on claiming the mortgage-interest write-off for the upcoming tax season, the nonpartisan Joint Committee on Taxation published revised estimates indicating that because of changes in the economy and tax legislation, the cost of the deduction for fiscal 2013 will be $69.7 billion.

That’s a dramatic reduction from the committee’s own earlier numbers. In a projection released in January 2010, it said the cost of the mortgage write-off in fiscal 2013 would hit an all-time high of $134.7 billion. Under the revised estimates, costs will slowly rise into the $70 billion-plus range over the coming several years and will only exceed $80 billion in fiscal 2017, when they hit $83.4 billion.

Sure, these are all eye-glazing, monstrous numbers. And there’s no question that mortgage write-offs can be criticized for being skewed toward wealthier owners, especially in higher-cost markets on the West and East Coasts. But the fact remains: There’s less fiscal meat here than previously advertised. The write-off is still a large and vulnerable target, but it’s not as costly as widely portrayed. You could even argue that if congressional tax reformers are looking for reductions in projected “tax expenditures” to reduce deficits, they just got a nice chunk via the revised estimates from the Joint Tax Committee, their own in-house technicians.

The same committee also just lowered its earlier estimates on local property tax write-offs by homeowners. Rather than the $30 billion cost for fiscal 2013 projected back in 2010, the updated estimate is now $27 billion. The only significant increase in the revised projections: Thanks in part to improvements in the housing market, capital gains exclusions — the $250,000 and $500,000 amounts that single and joint-filing homeowners respectively get to pocket tax-free on profits when they sell their primary homes — will cost the Treasury $23.8 billion in 2013, rather than the $19.8 billion estimated in 2010. In the curious world of tax subsidies, good news — in this case, home values — costs the government more.

Meanwhile, the IRS has released its latest instructions for owners seeking to take the mortgage-interest deduction in the coming tax-filing season. Among some noteworthy points:

FHA fees pack a bite

By Kenneth Harney

Posted: Friday, Feb. 08, 2013

Kenneth Harney, who lives in Washington, D.C., writes an award-winning column on housing and real estate.

If you want to buy a house with minimal cash by using an FHA-insured mortgage, here’s some sobering news: Thanks to an ongoing series of fee increases and underwriting tweaks – the most recent of which were announced Jan. 31 – FHA is getting steadily more expensive, and may not work for you.

FHA is the Federal Housing Administration, the largest source of low-down-payment mortgage money in the country. Its minimum down is just 3.5 percent, compared with anywhere from 5 percent to 20 percent or higher from conventional, nongovernment sources. For decades, FHA’s affordable financing has made homeownership possible for first-time buyers with modest incomes and credit history blemishes.

But in the wake of losses tied to bad loans insured during the housing bust years, FHA has been raising its loan insurance fees and backing more loans to applicants with higher credit scores. With the latest increases, things have gotten to the point where some lenders wonder whether the agency is trying to move away from its traditional customers.

Dennis C. Smith, broker and co-owner of Stratis Financial Corp. in Huntington Beach, Calif., is blunt: “I think FHA is putting itself out of business with the moves they’ve made in the past couple of years.”

While they wouldn’t agree with that assessment, FHA’s top officials readily admit that their priority is not growing market share but protecting the agency’s multibillion-dollar insurance fund reserves and cutting losses.

Starting April 1, FHA’s annual mortgage insurance premiums for most new loans will jump by one-tenth of a percentage point (10 basis points in lending parlance). This is on top of two previous increases since 2011. Other coming changes, but not scheduled to take effect until June 3, include: mandatory “manual” underwriting of applications by borrowers whose total household debt-to-income ratios exceed 43 percent and who have credit scores below 620; and mandatory 5 percent minimum down payments on FHA loans above $625,500 in high-cost areas such as California, metropolitan Washington, D.C., and others.

FHA also announced that as of June 3, it is rescinding its popular policy of canceling mortgage insurance premium charges for borrowers once their loan balance declines to 78 percent of the original amount. This will force FHA customers to pay premiums for as long as they keep their loans, and is in stark contrast to the private mortgage insurance market, where homeowners can request cancellation of premium payments once their loans hit the 78 percent mark.

“That stinks,” said Steve Stamets, a mortgage officer with Apex Home Loans in Rockville, Md. “It’s just a money grab” that will cause creditworthy borrowers to avoid FHA and seek out low-down-payment alternatives through Fannie Mae and Freddie Mac, using private mortgage insurance.

Already, said Stamets, FHA is the more expensive option for many borrowers who have good credit but don’t want to make hefty down payments. With FHA’s new fees, for example, Stamets estimates that an applicant with a 720 FICO score making a 3.5 percent down payment on a $250,000 fixed rate 30-year FHA mortgage will pay $144.66 more a month than a borrower with the same credit score on a conventional loan of the same amount with a 5 percent down payment and private mortgage insurance. Even with a 680 credit score, the conventional loan is cheaper by $85 a month – based on FHA’s new fee levels, said Stamets, and those monthly premium payments can be canceled at the 78 percent loan-to-value level whereas FHA will keep charging them for the life of the mortgage.

Steven R. Maizes, managing director of mortgage banking for Mortgage Capital Partners Inc. in Los Angeles, says FHA’s new fees and policies are likely to cost the agency valuable, low-risk business on refinancings. Maizes recently ran a spreadsheet analysis for a client with a $460,000 FHA loan at 5 percent. Even with a 1.5-point rate reduction, the added fees caused the monthly payment to decrease by just $97.11.

“If you couple that small saving with the fact that the mortgage insurance payment can never go away,” he said, refinancing an existing FHA loan for a creditworthy borrower into a new FHA loan will be tough to justify.

Bottom line for you: Make sure your loan officer runs the numbers comparing FHA with privately insured conventional alternatives. You may not want to be saddled indefinitely with higher payments – and no right to cancel.

Read more here: http://www.charlotteobserver.com/2013/02/08/3839913/fha-fees-pack-a-bite.htm l#storylink=cpy

Caught in a reverse nightmare

By Kenneth Harney

Posted: Friday, Feb. 01, 2013

The federal Department of Housing and Urban Development has a birthday gift for 91-year-old widow Jeanette Ogle that should cause any senior to think twice before signing up for a government-insured reverse mortgage.

Later this month, on Ogle’s 92nd birthday, her home in Lake Havasu City, Ariz., is scheduled for foreclosure – not because she did something wrong. Instead, she is expected to lose her house because during a refinancing in 2007, only her husband’s name was included on the reverse mortgage documents prepared by a loan broker. This was despite the fact that both her husband’s and her names were clearly listed as co-borrowers in the documents for the mortgage being refinanced, Ogle says, and the longtime married couple wanted no change in that status.

But under a controversial policy that is drawing national scrutiny and at least one major lawsuit, HUD – the agency that runs the reverse mortgage program – now insists that when a spouse dies, and the surviving spouse’s name is not on the loan documents, the full mortgage balance becomes due and payable. If a relative or the surviving spouse cannot purchase the house and pay off the debt, the loan may be subject to a foreclosure sale.

Ogle, whose husband, John, died in 2010, says she cannot imagine why she is facing foreclosure. “We did everything we were supposed to do,” she says. “I signed every piece of paper, we followed the rules.” Jeanette and John assumed that the loan they initially took out in 2004 would allow them to do what advertisements for reverse mortgages consistently promise: stay in their home indefinitely, with some extra money for living expenses.

But it’s not turning out that way.

“I just don’t understand why they are doing this to me,” she said in an interview. “I don’t want to lose my home.”

HUD’s reverse mortgage program, run through the Federal Housing Administration (FHA), has been big business. Promoted on TV by pitchmen such as Hollywood’s Robert Wagner and former Sen. Fred Thompson, there were 582,000 loans outstanding nationwide as of November 2011, according to the Consumer Financial Protection Bureau, which issued a critical evaluation of the program last year. Reverse mortgages are restricted to seniors 62 years or older. The program allows homeowners to tap into equity and pull out money for use in their retirement years. As long as they pay their property taxes and hazard insurance, generally they don’t have to repay any of the money until they move out, die or sell the house.

The policy change on surviving spouses that has snagged Jeanette Ogle was not adopted until late 2008, more than a year after the Ogles’ refinancing. That change has been challenged in a federal lawsuit filed by AARP, the seniors advocacy group. On behalf of two widows and one widower – Ogle was not a plaintiff – who were threatened with foreclosure, AARP charged that HUD disregarded clear statutory language that allows surviving spouses to remain in their homes even if their name is not on the documents. In an appellate court ruling last month, U.S. Circuit Judge Laurence H. Silberman said that the court was “somewhat puzzled as to how HUD can justify a regulation that seems contrary to the governing statute.”

HUD had no comment on that ruling, which sent the case back to a lower court, and refused to discuss Jeanette Ogle’s pending foreclosure. So did Ogle’s loan servicer, Reverse Mortgage Solutions, Inc. of Spring, Texas, which initiated the foreclosure action. Fannie Mae, the federally regulated mortgage investor that owns Ogle’s loan, said the foreclosure would have to proceed because the mortgage is insured by FHA and that agency’s rules effectively require it, given the absence of Ogle’s name on the documents.

Andrew Wilson, a Fannie Mae spokesman, says the company has a document purportedly signed by the Ogles acknowledging that their refinanced mortgage lists only John Ogle as the borrower. Jeanette Ogle says she has no recollection of signing anything of the sort. “Why would we?” she asked in an interview. Wilson says that whatever the facts, Fannie Mae is “sympathetic” toward Ogle’s plight, and will seek to delay any post-foreclosure eviction.

Jean Constantine-Davis, AARP’s senior attorney on the surviving spouse suit, called Ogle’s circumstances “pretty horrible,” and said HUD’s “current regulation has been devastating on surviving spouses.” AARP’s suit alleged that there are “hundreds” of elderly victims of the policy.

Ogle’s son, Robert, has asked the Arizona state attorney general’s office to intervene and investigate how his mother’s name was left off the mortgage. But in the meantime, the clock is ticking toward Jeanette Ogle’s foreclosure. And her 92nd birthday.

Read more here: http://www.charlotteobserver.com/2013/02/01/3825495_caught-in-a-reverse-nigh tmare.html#storylink=cpy