Tag Archives: first-time homebuyers

Sustainable Housing for FHA Borrowers

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photo by Michael Daddino

Federal Reserve Bank of New York

Donghoon Lee and Joseph Tracy of the NY Fed have posted a staff report, Long-Term Outcomes of FHA First-Time Homebuyers. It opens,

The Commissioner of the Federal Housing Administration (FHA), David Stevens, in remarks delivered on December 12, 2009, defined the purpose of the FHA as follows. “As a mission-driven organization, FHA’s goal is to provide sustainable homeownership options for qualified borrowers.” These remarks followed a remarkable increase in the scope of the FHA mortgage insurance program in response to the financial crisis and housing bust. This comment by Commissioner Stevens is important in that it clarifies a goal of the FHA program. However, this clarity was not followed up by the FHA with a definition of “sustainable homeownership.” Nor was there any documented attempt by the FHA to develop metrics to track their progress toward this objective, or a commitment by the FHA to make this information available to the public in the future.

Program evaluation is an integral part of any effective program—government or private. We illustrate in this paper that advances in data availability offer the opportunity for the FHA to both define what it means by sustainable homeownership and to measure its progress against this definition. We believe that it would be beneficial for the FHA to be transparent in this effort and to report on not only its definition and metrics, but also on its progress on an annual basis. Improved tracking of long-term outcomes of FHA borrowers will better help inform the FHA on program design. This should lead to improved outcomes over time and enhanced public support.

We focus our analysis on first-time homebuyers who are an important market segment for the FHA. The mission of sustainable homeownership is particularly relevant for these new homeowners. The benefits of a government mortgage insurance program that helps to facilitate the transition from renting to owning rests importantly on the success of these new borrowers in remaining homeowners in the future. However, to date, the FHA has not systematically tracked the progress of its first-time homebuyers after they pay off their credit risk to the FHA. We use the New York Fed’s Consumer Credit Panel (CCP) data to do this analysis starting with the 2002 cohort of FHA first-time homebuyers. (1, footnotes omitted)

This is inarguably right. The FHA should set forth performance metrics and provide annual progress reports for them. For too long, the FHA has cherry-picked metrics without providing a holistic perspective on its performance. The authors conclude,

A stated mission of the FHA mortgage insurance program is to support sustainable homeownership. An examination of the history of the FHA program illustrates a strong initial focus on sustainability, but legislated changes in the 1950s and early 1960s shifted the focus to affordability. If sustainability remains an important goal for the FHA, then it would be desirable for the FHA to define what they mean by sustainability and to track their performance over time. Only by being transparent and holding themselves accountable can the FHA improve on this objective over time. (14)

Amen to that.

Down in ARMs

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group-of-hand

TheStreet.com quoted me in Top 5 Lowest 7-Year ARM Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates, especially if you don’t plan on staying in your first home for more than seven years and are learning toward 7/1 adjustable rate mortgages (ARMs)?

The 7-year ARMs are attractive to consumers, especially first-time homebuyers, because the interest rates are lower, helping you save more money each month compared to the traditional 30-year mortgage.

“You get what amounts to a fixed rate mortgage, but at a lower rate than the traditional 30-year fixed,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

While lower monthly payments are appealing, the interest rates reset after seven years, and it can be difficult to determine how much they will increase.

“If your timetable changes, then you may want to reconsider the loan you have,” he said. “You don’t want to be in the position of facing rising monthly payments that squeeze your budget or jeopardize your ability to afford your own home.”

Consumers on fixed incomes and saddled with student loans and credit card debt might opt for a 30-year fixed rate mortgage, because it represents “permanent payment affordability,” McBride said. The principal and interest will never change, because it is a fixed rate and can be easier to budget.

“It may not always be the optimal choice, but it is the safest choice,” he said.

Adjustable rate mortgages can still be beneficial if homeowners take advantage of the savings each month and allocate it towards paying down debt or into an emergency fund.

“Even if you’re still holding the 7-year ARM at the end of seven years, that doesn’t automatically turn it into a bad decision,” McBride said. “You will have banked seven years of savings relative to the fixed rate mortgage that can help you absorb any payment increases until you refinance or sell the home.”

Many consumers gravitate toward the 30-year mortgage, because the payments are stable and have been very low, said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. Others are seeking the 7-year ARM, because they are more likely to qualify for a mortgage.

Mortgage activity so far in 2016 reveals that only 3% of mortgages have had shorter rate terms, according to Realtor.com’s analysis of purchase mortgage activity. Hybrid term mortgages such as the 7/1 ARM typically increase in share when “mortgage rates rise because the shorter fixed term offers a lower rate, often between 40 and 100 basis points,” he said. “The lower rate translates into a lower payment for the duration of the initial term, which is seven years.”

Each lender utilizes a benchmark such as a the 10-year U.S. Treasury or LIBOR rate and a margin, which is “what is added to the benchmark to determine your new rate,” Smoke said. The loans also have a cap on how high any single rate change can be and also a ceiling on how high the rate can ever be, he said.

At the end of the seven years, homeowners can choose to refinance to a lower fixed rate, but need to budget for the closing costs.

A lower rate upfront can be favorable for younger homeowners, but examining the ceiling rate and how it will impact your monthly payments is crucial.

“A mortgage broker or lender can help you walk through scenarios to determine if your timeline could benefit,” Smoke said. “To help calm any nerves about just how high your payment could go, ask yourself if you are willing to exchange the initial seven year savings for how long you might keep that mortgage after the seven-year period is up.”

Paying the premium for the peace of mind that your payments will remain static means that if interest rates rise several percentages in the next few years, you won’t be faced with having to consider the lower rate options or lower priced homes and/or more money down, he said.

“That’s why hybrids will likely become more popular in the future compared to how little they are used today,” Smoke said.

Since people have a tendency to change homes every seven years on average, a 7/1 ARM could be a good option because the savings can be substantial, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“Even if you are not planning to move now, the future may bring changes such as divorce, frail relatives, job loss or new job opportunities,” he said. “Some people like the certainty of the 30-year fixed rate mortgages, but it is worth calculating just how much that certainty will cost you.”

Thursday’s Advocacy & Think Tank Round-Up

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  • Enterprise Community Partners’ latest blog post in the Spotlight on HOME Investment Partnership series highlights the experience of 22 year old Lani, a single mother of two boy’s, who was able to transition from homelessness to stability with the help of Project Independence, a program administered by Adobe Services in Alameda California, partially funded by HOME.  Enterprise is highlighting the effectiveness of the program because deep budget cuts threaten to reverse the success of HOME.
  • The Mortgage Bankers Association (MBA) released a letter sent to the Consumer Financial Protection Bureau (CFPB) expressing concerns that the recently implemented Know Before You Owe/Truth in Lending Act/Real Estate Settlement Procedures Acts (TILA/RESPA) regulations are causing widespread market disruptions in the mortgage industry, and that lenders are worried about mistakes and potential liability – causing a decline in loan approval rates and ultimately liquidity.  The CFPB’s Director, Corday, issued a letter in response, acknowledging that the new rules will require extensive operational adjustment and stating: “examiners will be squarely focused on whether companies have made good faith efforts to come into compliance” and that initial examinations will be “corrective and diagnostic, rather than punitive.”
  • The National Association of Realtors (NAR)’s Pending Home Sales Index (a forward looking index) is down slightly for November, the fourth straight monthly decline.  Year over year the metric is up, for the 15th straight month. According to NAR the decline is attributable to tight inventory and rising home prices.
  • NAR’s RealtorMag predicts the top cities for first time homebuyers in 2016, among the contenders are Orlando, Florida; DeMoines, Iowa; and Banton Rouge, Louisiana.

Homebuyer’s Guide to Rate Hike

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Day Donaldson

Fed Chair Yellen

U.S. News & World Report quoted me in A Consumer’s Guide to the Fed Interest Rate Hike. It opens,

The era of cheap money isn’t exactly over, but on Wednesday, after seven years of having near zero interest rates, the Federal Reserve voted to raise the central bank’s benchmark interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent. Economists have largely seen this as a positive development – it means the American economy is considered strong enough to handle higher interest rates – but, of course, the all-important question on everyone’s minds is likely: What does this mean for me?

It depends, of course, on where you’re putting your money these days.

Homebuying. While it’s expected that the minor interest rate hike will result in it being more costly to borrow money to buy a home, that isn’t necessarily the case. Numerous factors influence mortgage rates, from where in the country your home is located to the state of the global economy to whether inflation is believed to be around the corner. Still, there’s a pretty fair chance that the interest rate hike will lead to higher borrowing costs.

But it’s worth remembering that even if the rates go up, it’s still cheap to buy a house compared to the recent past. According to Freddie Mac’s website, the average 30-year fixed-rate mortgage currently stands at 3.94 percent. If you bought a house, say, 15 years ago, the annual average rate in 2000 was 8.05 percent.

David Reiss, a law professor at Brooklyn Law School who specializes in real estate, says he wouldn’t rush out to buy a home based on the Fed’s announcement.

“I would caution strongly against letting the Fed’s actions on the interest rate influence the home-buying decision all that much, no matter what market you live in,” Reiss says. “First of all, the mortgage market has taken the Fed’s likely actions into account already, so interest rates … incorporate some of the rise in rate already.”

Bottom line, he says: “Generally, people should be buying a home when it makes sense for their lifestyle. Expect to stay put for a while? Maybe you should buy a home. Expecting kids? Maybe you should buy a home. Retiring to a warmer clime?  Maybe you should buy a home.”

Again, the interest rate climbed 0.25​ percent, and while the Fed has indicated that rates may continue to rise, Federal Reserve Chair Janet Yellen has stressed that any future hikes will be gradual.

“Small changes in interest rates do not generally make that much of a dollars-and-cents difference in the decision to buy,” Reiss says.

Home Buyers & Home Sellers

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Jkirriemuir

The National Association of Realtors has issued its 2015 Profile of Home Buyers and Sellers (highlights only at this link). The profile derives from NAR’s annual survey of recent home buyers and sellers. NAR found that

Demographics continue to shift as the share of first-time home buyers dropped further from last year’s report to 32 percent of the market. This is second only to the lowest share reported in 1987 of 30 percent. Last year’s report had a share of first-time buyers of 33 percent. First-time home buyers are traditionally more likely to be single male or female home buyers and traditionally have lower incomes. As the share of repeat buyers continues to rise, the number of married couples increases and the income of home buyers purchasing homes is higher. Married couples have double the buying power of single home buyers in the market and may be better able to meet the price increases of the housing market. (5)

This adds to the findings of a variety of earlier studies that have described long-term demographic trends that will affect the housing market in very big ways.

I was particularly intrigued by one finding about sellers,

Increased prices are also impacting sellers. Tenure in the home had risen to a peak of 10 years, but in this year’s report it has eased back to nine years. Historically, tenure in the home has been six to seven years. Sellers may now have the equity and buyer demand to sell their home after stalling or delaying their home sale. (5)

This is a dramatic change and reflects the the long-term effects of the Great Recession — just as people delayed buying a new car after the financial crisis, they also delayed purchasing a new home. It’s just that they delay takes longer to see.

The report also has a series of highlights about houses, brokers and mortgages that are worth a looksee.

 

Reiss on Privatization of Fannie and Freddie

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BadCredit.org profiled an article of mine in Brooklaw Professor Pushes for Privatization of Fannie Mae/Freddie Mac. The profile opens,

Since the end of the Great Recession, policymakers, academics and economists have been struggling with a very difficult question — what should we do with Fannie Mae and Freddie Mac? Should the government continue its role in providing mortgage credit to millions of American?

Fordham University Associate Professor of Law and Ethics Brent J. Horton made a proposal in his forthcoming paper “For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933“:

“The best way to reduce risk taking at Fannie Mae is to subject its MBS offerings to the disclosure requirements of the Securities Act of 1933,” Horton writes.

However, Brooklyn Law School Professor of Law David Reiss believes “the problems inherent in Fannie Mae’s structure are greater than those that increased disclosure can address.”

In his response, titled “Who Should Be Providing Mortgage Credit to American Households?” Reiss points to increased privatization as one way to address the question of what to do with Fannie Mae and Freddi Mac.

Reiss on Who Should Be Providing Mortgage Credit to American Households?

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I have posted a short Response, Who Should Be Providing Mortgage Credit to American Households?, to SSRN (as well as to BePress).  The abstract reads,

Who should be providing mortgage credit to American households? Given that the residential mortgage market is a ten-trillion-dollar one, the answer we come up with had better be right, or we may suffer another brutal financial crisis sooner than we would like. Indeed, the stakes are as high as they were in the Great Depression when the foundation of our current system was first laid down. Unfortunately, the housing finance experts of the 1930s seemed to have a greater clarity of purpose when designing their housing finance system. Part of the problem today is that debates over the housing finance system have been muddled by broader ideological battles and entrenched special interests, as well as by plain old inertia and the fear of change. It is worth taking a step back to evaluate the full range of options available to us, as the course we decide upon will shape the housing market for generations to come. This is a Response to Brent Horton, For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933, 89 Tulane L. Rev. __ (forthcoming 2014-2015).