Seeing green over mortgages

Seeing green over mortgages

Nov 22, 2013 Kenneth R. Harney

WASHINGTON — For the growing numbers of home purchasers who care about energy efficiency, it’s the ultimate “green” goal: Lenders should recognize the net savings that energy improvements provide to property owners and take them into account when they underwrite and set the fees for mortgages. Appraisers should also recognize the added value.

The rationale: Owners of homes that reduce energy consumption pay lower utility bills than owners of energy guzzlers, so why not factor these out-of-pocket savings into calculations of household debt-to-income ratios and appraised valuations? This might permit larger mortgage amounts for energy-efficient homes and help qualify more first-time buyers who are now frequently rejected on debt ratio grounds.

Though this is commonplace in other countries, it’s a work in progress in the United States. Bipartisan legislation is pending in the Senate — the Sensible Accounting to Value Energy (SAVE) Act — that would require Fannie Mae, Freddie Mac, the Federal Housing Administration and other federal mortgage players to revise their rules to better recognize and reward energy savings.

More than 125 local Realtor multiple-listing services across the country are helping out by including so-called “green fields” in their online listing information displays. The green fields allow sellers, buyers, realty agents and appraisers to describe energy improvements or special certifications that a property offers, such as high-performance windows and doors, heavy-duty insulation, Energy Star appliances, along with solar, geothermal and other features.

Thousands of appraisers are undergoing “green valuation” training and the country’s largest association in that field, the Appraisal Institute, has created a comprehensive “green addendum” that can be used to translate energy conservation improvements into higher property valuations.

But there’s just been another milestone on the way to seeing green in real estate: A major American private mortgage insurance company plans to jump into green lending, and is gearing up to offer a version of what it already provides to buyers in Canada — cost savings to energy conservers.

Adam Johnston, chief appraiser for Genworth Mortgage Insurance, says his company is determined to incorporate energy savings and green valuations into its underwriting procedures. This is becoming more feasible, he said, because of advances such as the green appraisal addendum, more accurate MLS listing data, and growing acceptance of energy-efficiency standards for homes.

In Canada, Genworth offers buyers a 10 percent “energy-efficient refund” of their mortgage insurance premiums, a break on debt-to-income ratio calculations in underwriting, and online access to discounts on a wide variety of commonly purchased household items.

Here’s an example of how the program works north of the border. On a $300,000 mortgage with a 5 percent down payment, the total insurance premium comes to $8,250. If you’re buying a house that doesn’t qualify on energy conservation standards, that’s what you’d pay.

But if the home you’re purchasing meets national or provincial energy efficiency guidelines, you may qualify for an $825 refund and have your monthly savings on heating factored into your debt service ratios. Your lender might also approve you for a larger mortgage amount if you needed it.

To get the benefits on an existing property, the house must be certified as either 20 percent more efficient than Canada’s Model National Energy Code for Buildings, or 5 percent more efficient than any applicable provincial standards, whichever is greater.

In an interview, Johnston said that while there’s no specific starting date yet for Genworth to begin offering mortgage insurance breaks on green-certified homes, it’s coming. By necessity, insurers such as Genworth are highly sensitive to a variety of borrower risk factors, and now they have statistical evidence that people who buy homes with significant energy-saving components present lower risks for lenders and insurers.

A national study tracking payments on 71,000 home loans found that mortgages on energy-efficient properties are 32 percent less likely to default. Funded by the Institute for Market Transformation and conducted by researchers at the University of North Carolina, the study controlled for other factors that might explain payment performance, including income, home values, credit scores and local utility costs.

Other, subtler factors could be at work — for example, are buyers who care about energy conservation and utility payments inherently more likely to care about keeping current on their mortgage? Who knows?

Bottom line: Though this country is years behind Canada in recognizing and valuing home energy efficiency, there are now determined efforts underway in the appraisal, lending, building and realty brokerage industries — even in Congress — to catch up, sooner rather than later.

CFPB Releases Final Rule on Mortgage Disclosure Forms

CFPB Releases Final Rule on Mortgage Disclosure Forms

by Kate Berry NOV 20, 2013 12:00am ET

The Consumer Financial Protection Bureau released a much-anticipated final rule on Wednesday that merged mortgage disclosure forms in an effort to help consumers more clearly understand the total costs of a loan.

The agency is calling the two new mortgage forms “Know Before You Owe,” an apt description since a hodgepodge of federal mortgage disclosures that the new forms will replace have long been considered duplicative and confusing.

The rule restricts lenders from imposing new or higher fees on a final loan unless there is a legitimate reason, the CFPB says. The final rule takes effect on Aug. 1, 2015, giving mortgage lenders time to implement the changes.

“Our new ‘Know Before You Owe’ mortgage forms improve consumer understanding, aid comparison shopping, and help prevent closing table surprises for consumers,” CFPB Director Richard Cordray said in a press release. “Today’s rule is an important step toward the consumer having greater control over the mortgage loan process.”

While lenders have generally been supportive of the concept of better disclosures, they have expressed concerns about the CFPB’s first attempt at the idea, saying the forms were not simple enough and could give potential borrowers “information overload.”

They also have been critical of other aspects of the disclosures including allowing too little deviation between the initial estimated charges and the final charges given in the disclosures, which has resulted in some charges being inflated.

Michael S. Malloy, mortgage policy and counterparty relations executive at Bank of America, wrote in a comment letter last year that a new requirement to add more fees to rate calculations would make many loans appear as if they were higher-cost loans.

“The ‘all-in’ finance charge would result in higher ‘points and fees’ figures, which are calculated using the finance charge as a starting point,” Malloy wrote. “Consequently, this would reduce the number of loans that would otherwise be ‘qualified mortgages’ under Dodd-Frank’s ability-to-repay requirements, given that qualified mortgages, as proposed, will not have points and fees in excess of three percent of the ‘total loan amount.’”

Lenders also wanted more flexibility in the granting of exceptions from the requirement that the Closing Disclosure be given to the consumer three business days before closing on a loan.

“Regarding subsequent redisclosures, we believe the rule needs to provide more flexibility to ensure that an additional three business day waiting period is imposed only when it will truly benefit the customer,” Michael J. Heid, president of Wells Fargo Home Mortgage, wrote in a letter last year.

For the past three decades, federal law has required that mortgage lenders give a consumer two different disclosures within three business days after receiving a mortgage application, and again at the closing table when they sign a mortgage contract.

But the Dodd-Frank Act required regulators to meld the forms required by the Truth in Lending Act and Real Estate Settlement Procedures Act. The Federal Reserve Board initially began work on that project before the CFPB assumed responsibility for mortgage disclosures and launched a two-year initiative to combine the forms.

The CFPB says the merged forms will help consumers better understand risky loan features such as prepayment penalties and bigger-than usual periodic payments. The two forms provide a clear breakdown of a loan’s terms including principal and interest payments, closing costs and for adjustable rate mortgages, the projected minimum and maximum payments over the life of the loan. The agency also argued that borrowers will have an easier time in making comparisons between lenders when they shop for a mortgage.

When the rule takes effect in 2015, consumers will be given a Loan Estimate form within three business days after they submit a loan application. The three-page Loan Estimate will replace the early Truth in Lending statement and the current Good Faith Estimate. The form provides a summary of loan terms, closing costs and the ability to compare costs and features of different loans.

The Closing Disclosure form is given to consumers three days before closing on a loan – not at the closing table. The five-page Closing Disclosure form replaces the final Truth in lending statement and what is known as the HUD-1 settlement statement, which is used to itemize fees charged to the borrower by a lender or broker.

The final rule also places restrictions on when lenders can charge borrowers more for settlement services than the amount stated on their loan estimate.

Tax benefits imperiled — again

Tax benefits imperiled — again

Nov 15, 2013 Kenneth R. Harney

WASHINGTON — Haven’t we seen this movie before? On Capitol Hill for the second year in a row, key federal tax assistance for homeowners is heading for expiration within weeks. And there’s no sign that Congress plans — or has the minimal political will — to do anything about it.

In fact, the prospects for extension of popular mortgage-forgiveness debt relief and deductions for mortgage insurance payments and home energy efficiency improvements appear to be more dire than they were last year at this time, when at least there was a formal bill pending to extend them.

This year there is none at the moment. The House and Senate are spending their time trying to figure out a budget, but are also considering overhauling the entire federal tax system, which could mean that a long list of special interest tax preferences — including for housing — might be sucked into the tax reform vortex and never revived if they expire as scheduled on Dec. 31.

Robert Dietz, vice president for tax policy issues at the National Association of Home Builders, says the name of the movie is “Groundhog Day”

Storm warnings as resets near

Storm warnings as resets near

Nov 8, 2013 Kenneth R. Harney

WASHINGTON — Could the real estate market be heading for a new — and as yet little publicized — financial storm? Maybe.

Some mortgage and credit experts worry that billions of dollars of home equity credit lines that were extended a decade ago during the housing boom could be heading for big trouble soon, creating a new wave of defaults for banks and homeowners.

That’s because these credit lines, which are second mortgages with floating rates and flexible withdrawal terms, carry mandatory “resets” requiring borrowers to begin paying both principal and interest on their balances after 10 years. During the initial 10-year draw period, only interest payments are required.

But the difference between the interest-only and reset payments on these credit lines can be substantial — $500 to $600 or more per month in some cases. If borrowers cannot afford or choose not to make the fully amortizing payments that reduce the principal debt, the bank that owns the note can demand full payment and foreclose on the house if there is sufficient equity.

According to federal financial regulators, about $30 billion in home equity lines dating to 2004 are due for resets next year, $53 billion the following year and a staggering $111 billion in 2018. Amy Crews Cutts, chief economist for Equifax, one of the three national credit bureaus, calls this a looming “wave of disaster” because large numbers of borrowers will be unable to handle the higher payments. This will force banks to either foreclose, refinance the borrower or modify their loans.

But refinancings often will not be possible, says Cutts, because the homeowners won’t qualify under the tougher mortgage rules taking effect in January, or the combined first and second mortgages may exceed the value of the house. Complicating matters further, interest rates are likely to rise from their current low levels as the Federal Reserve tapers its purchases of Treasury and mortgage-backed securities. Higher base rates would make the payment shocks even worse. Plus, according to Cutts, many of the owners with high balance credit lines already have low credit scores — legacies of the housing bust and recession — and have an elevated statistical risk of default after the reset.

Financial regulators, including the comptroller of the currency, are aware of the coming bulge in high-risk resets and have been urging the biggest banks to set aside extra reserves for possible losses. Last month, Citigroup said it is increasing reserves on its nearly $20 billion in home equity lines and acknowledged that the reset payment shocks for borrowers could be a major challenge.

Rating agency Fitch has also sounded the alarm, warning that banks face “increasing credit risk” in 2014 and beyond as borrowers who took advantage of easy terms and fast-rising home values during the boom now confront much tougher credit conditions and could default.

What does all this mean for homeowners with boom-era credit lines and hefty unpaid balances? Potentially a lot. Check your credit line documents to determine precisely when you’re scheduled for a reset. Consider contacting the bank that owns your note and asking for an estimate of what your post-reset payment could amount to at your current principal balance or what it would be if you paid off some of the principal.

Most important, be aware of your options. If you have adequate equity in the house but are strapped for monthly cash, talk to the bank about a possible refinancing or loan modification that could lessen the payment pain. Since banks are being pressured by regulators to deal with their potential equity loan issues in advance, you might be able to come up with a modification solution acceptable to both you and the bank.

If you are underwater on your mortgage — more than one out of every seven owners continues to be, according to realty data firm CoreLogic — and you can’t afford the reset payment, the bank may not foreclose on you because there’s no equity to recover. But the bank could sell your charged-off account to a debt collection firm or even pursue you for a deficiency judgment in states where that is permitted.

Any failure to pay, however, will be bad news for your credit scores, says Equifax’s Cutts — a “big negative” on your credit files, a blot that could cause you problems for years.

Bottom line: If you’re one of the many owners with a boom-time credit line facing a reset, don’t wait for trouble to happen. Start mapping out your strategy well in advance.

Jumbo home loans may grow more common if Fannie and Freddie trim their mortgage limits

Jumbo home loans may grow more common if Fannie and Freddie trim their mortgage limits

By Kenneth R. Harney October 31 | Updated: Friday, November 1, 8:50 AM

Should you be concerned that the maximum loan amount you’ll be able to obtain through the biggest players in the mortgage industry – Fannie Mae and Freddie Mac – might be cut sometime next spring? You just might.

That’s because mortgage applicants who no longer qualify under the revised limits will be forced to shop in the so-called jumbo arena, where minimum credit scores and financial reserve requirements tend to be tougher and down payments heftier than in the conventional space dominated by Fannie and Freddie.

You might also have to settle for a mortgage with an adjustable rate rather than a fixed rate. Or you might end up in a situation where you need a higher-rate “piggyback” second mortgage in order to afford the down payment on the first mortgage deal you’re offered.

Here’s a quick overview of what could push eligible loan amounts downward and what that may mean for buyers who abruptly find themselves in jumbo land.

At a meeting in Washington last week, Edward J. DeMarco, acting director of the agency that oversees Fannie and Freddie in conservatorship, said he is seriously considering reducing loan maximums as part of a strategy to lessen federal involvement in the mortgage market.

Though he offered no specifics on dollar amounts, industry analysts say the maximum Fannie-Freddie loan size could drop from the current $417,000 to $400,000 in most parts of the country, and from $625,500 to $600,000 in designated high-cost areas such as coastal California, metropolitan Washington, New York and its suburbs, parts of New Jersey, Massachusetts, New Hampshire, Colorado, Idaho, Wyoming and North Carolina. The decreased limits could be announced next month and take effect as early as May.

Those decreases may not sound like much, but they’ll have an impact on large numbers of consumers who want to purchase homes with prices above the average for their areas, especially newly built houses. Real-estate and lending groups are concerned that making mortgage money tougher to obtain – pushing buyers into a segment of the market where Fannie and Freddie cannot operate – is counterproductive in a housing economy still struggling to recover from bust and recession.

There’s another, perhaps more important problem here as well: Reducing loan amounts next spring would complicate what is already shaping up as a challenging lending environment for consumers in 2014, critics say. Starting in January, new federal regulations that restrict debt-to-income ratios and allowable total fees in “qualified” mortgages will take effect and make significant numbers of applications ineligible for Fannie-Freddie loan terms. Some industry estimates suggest that as many as one in five borrowers this year could not pass the qualified mortgage tests scheduled for next year.

Though DeMarco appears determined to lower the loan ceilings for Fannie and Freddie, congressional critics contend that he lacks the statutory authority to do so. A bipartisan group of 66 House members sent a letter to DeMarco arguing that he is prohibited by “specific language” in an economic stimulus law passed in 2008 from lowering the limits set by Congress. DeMarco’s legal team disputes that interpretation.

The fight over Fannie-Freddie loan limits focuses fresh attention on what could become a much more significant piece of the market: jumbos. Because they are larger than conventional mortgages – ranging from just above $417,000 to seven figures – jumbos traditionally have come with extra costs and underwriting restrictions. Though jumbo interest rates now average just slightly above conventional rates – roughly 41 / 8 percent for a 30-year fixed last week – they often require stellar FICO credit scores in the upper 700s, down payments of 20 percent or more, and lots of spare money in the bank. Fannie and Freddie loans, by contrast, are less restrictive and allow down payments of 5 percent to 10 percent with mortgage insurance.

Some lenders are beginning to relax their jumbo terms, however, and are offering options with smaller down payments. Ted Rood, a senior mortgage consultant with Wintrust Mortgage in St. Louis, for example, said his firm can do jumbos with down payments as low as 10 percent but at a slightly higher interest rate than jumbos with 20 percent to 30 percent down.

Bottom line: If you’re thinking about buying – or selling – a house with an above-average price for your area next year, think jumbo mortgages. They may be your main – or only – financing option.