Tag Archives: household

Shared Equity Financing

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Financing by Nick Youngson CC BY-SA 3.0 Alpha Stock Images

Ernira Mehmetaj and I published The Promise and Perils of Shared Equity Financing in the ABA’s Probate and Property magazine. It opens,

It is the rare homeowner, or even lawyer, who thinks twice about why mortgages are part of so many real estate transactions.  Real estate is expensive, and few have the money to pay for a home all in cash.  As a result, people enter in transactions with mortgage lenders and are exposed to all of the risks that come along with that type of financing:  default, late fees, foreclosure.

If you stripped away all of our history and our current practices in financing home ownership with mortgages, you might ask how could people with limited assets acquire something as expensive as a home?  It turns out that there are all sorts of ways to slice and dice the rights and responsibilities of homeownership to offer households just the aspects they want and no more.

A new development, shared equity financing, will make us all think twice about mortgages.  Its sharing of the risks and rewards of a home purchase will be attractive to many, but it also has its own share of perils that are unique to it.

The Housing Market Since the Great Recession

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photo by Robert J Heath

CoreLogic has posted a special report on Evaluating the Housing Market Since the Great Recession. It opens,

From December 2007 to June 2009, the U.S. economy lost over 8.7 million jobs. In the months after the recession began, the unemployment rate peaked at 10 percent, reaching double digits for the first time since September 1982, and American households lost over $16 trillion in net worth.

After a number of economic stimulus measures, the economy began to grow in 2010. GDP grew 19 percent from 2010 to 2017; the economy added jobs for 88 consecutive months – the longest period on record – and as of December 2017, unemployment was down to 4 percent.

The economy has widely recovered and so, too, has the housing market. After falling 33 percent during the recession, housing prices have returned to peak levels, growing 51 percent since hitting the bottom of the market. The average house price is now 1 percent higher than it was at the peak in 2006, and the average annual equity gain was $14,888 in the third quarter of 2017.

However, in some states – including Illinois, Nevada, Arizona, and Florida – housing prices have failed to reach pre-recession levels, and today nearly 2.5 million residential properties with a mortgage are still in negative equity. (4, footnotes omitted)

By the end of 2017, ” the most populated metro areas in the U.S. remained at an almost even split between markets that are undervalued, overvalued and at value, indicating that while housing markets have recovered, many homes have surpassed the at-value [supported by local market fundamentals] price.” (10) This even split between undervalued and overvalued metro areas is hiding all sorts of ups and downs in what looks like a stable national average.  You can get a sense of this by comparing the current situation to what existing at the beginning of 2000, when 87% of metro areas were at-value.

And what does this all mean for housing finance reform? I think it means that we should not get complacent about the state of our housing markets just because the national average looks okay. Congress should continue working on a bipartisan fix for a broken system.

 

Housing Problems and Federal Assistance

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Family living in a one-room tenement. New York, NY, USA (1890) by Jacob Riis. This version was colorized by Kelly Short.

The Urban Institute’s G. Thomas Kingsley has posted a brief, Trends in Housing Problems and Federal Housing Assistance. It opens,

In the 1930s, many American families lived in seriously deficient housing. To address that challenge, the federal government began building subsidized housing, and in the decades that followed, a complex array of federal programs evolved to tackle the continuing housing problems of low-income renters. Almost 10 years ago, the Urban Institute prepared a “primer”to assess this evolution. This brief is an update of major sections of that report, focusing on trends in national housing problems and federal housing assistance over the past decade. It shows that renter housing needs have grown substantially—almost totally because of unaffordably high rents rather than physical deficiencies—and federal housing assistance is not keeping up. The number of low-income renters that actually receive federal housing assistance has dropped notably as a fraction of the low-income households that need it. Evidence indicates that this gap will worsen.

. . . this brief explains the basics of US housing assistance to those unfamiliar with the field. After a summary, it (1) reviews recent changes in the number of US households by tenure and the nature of the housing problems renters face, (2) identifies the nation’s major federal housing assistance programs and explains how they work, (3) examines changes in the scale and spatial patterns of federal housing assistance and the characteristics of assisted households, and (4) identifies recent policy shifts and issues affecting future directions for these programs and pointing out literature offering fuller explanations. (1)

Its main findings include,

  • Household formation has slowed, and the renter share has significantly increased (mostly among the lowest-income groups).
  • Physical housing problems decline as the affordability challenge increases.
  • There are many more households with housing needs.
  • Since 2007, the number of households receiving HUD project-based assistance (in public housing or in privately owned subsidized projects) remained stable, while the number receiving housing vouchers increased.
  • But the modest increase in HUD deep-subsidy assistance has been overshadowed by growth in the need; the housing assistance gap has widened significantly.
  • The beneficiaries served by HUD programs is shifting away from families with children and toward the elderly and disabled.
  • The Low-Income Housing Tax Credit has been the fastest-growing US housing program over the past two decades. It does not necessarily add to the number of households receiving assistance, but it allows deep-subsidy resources to be spread among more households than would be possible without it.
  • Given forces at play, the housing assistance gap will likely worsen. (2-3)

There’s a lot more in the brief for those who want an overview of where we are with housing in the early 21st century.

Easy Money From Fannie Mae

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The San Francisco Chronicle quoted me in Fannie Mae Making It Easier to Spend Half Your Income on Debt. It reads in part,

Fannie Mae is making it easier for some borrowers to spend up to half of their monthly pretax income on mortgage and other debt payments. But just because they can doesn’t mean they should.

“Generally, it’s a pretty poor idea,” said Holly Gillian Kindel, an adviser with Mosaic Financial Partners. “It flies in the face of common financial wisdom and best practices.”

Fannie is a government agency that can buy or insure mortgages that meet its underwriting criteria. Effective July 29, its automated underwriting software will approve loans with debt-to-income ratios as high as 50 percent without “additional compensating factors.” The current limit is 45 percent.

Fannie has been approving borrowers with ratios between 45 and 50 percent if they had compensating factors, such as a down payment of least 20 percent and at least 12 months worth of “reserves” in bank and investment accounts. Its updated software will not require those compensating factors.

Fannie made the decision after analyzing many years of payment history on loans between 45 and 50 percent. It said the change will increase the percentage of loans it approves, but it would not say by how much.

That doesn’t mean every Fannie-backed loan can go up 50 percent. Borrowers still must have the right combination of loan-to-value ratio, credit history, reserves and other factors. In a statement, Fannie said the change is “consistent with our commitment to sustainable homeownership and with the safe and sound operation of our business.”

Before the mortgage meltdown, Fannie was approving loans with even higher debt ratios. But 50 percent of pretax income is still a lot to spend on housing and other debt.

The U.S. Census Bureau says households that spend at least 30 percent of their income on housing are “cost-burdened” and those that spend 50 percent or more are “severely cost burdened.”

The Dodd-Frank Act, designed to prevent another financial crisis, authorized the creation of a “qualified mortgage.” These mortgages can’t have certain risky features, such as interest-only payments, terms longer than 30 years or debt-to-income ratios higher than 43 percent. The Consumer Financial Protection Bureau said a 43 percent limit would “protect consumers” and “generally safeguard affordability.”

However, loans that are eligible for purchase by Fannie Mae and other government agencies are deemed qualified mortgages, even if they allow ratios higher than 43 percent. Freddie Mac, Fannie’s smaller sibling, has been backing loans with ratios up to 50 percent without compensating factors since 2011. The Federal Housing Administration approves loans with ratios up to 57 percent, said Ed Pinto of the American Enterprise Institute Center on Housing Risk.

Since 2014, lenders that make qualified mortgages can’t be sued if they go bad, so most lenders have essentially stopped making non-qualified mortgages.

Lenders are reluctant to make jumbo loans with ratios higher than 43 percent because they would not get the legal protection afforded qualified mortgages. Jumbos are loans that are too big to be purchased by Fannie and Freddie. Their limit in most parts of the Bay Area is $636,150 for one-unit homes.

Fannie’s move comes at a time when consumer debt is soaring. Credit card debt surpassed $1 trillion in December for the first time since the recession and now stands behind auto loans ($1.1 trillion) and student loans ($1.4 trillion), according to the Federal Reserve.

That’s making it harder for people to get or refinance a mortgage. In April, Fannie announced three small steps it was taking to make it easier for people with education loans to get a mortgage.

Some consumer groups are happy to see Fannie raising its debt limit to 50 percent. “I think there are enough other standards built into the Fannie Mae underwriting system where this is not going to lead to predatory loans,” said Geoff Walsh, a staff attorney with the National Consumer Law Center.

Mike Calhoun, president of the Center for Responsible Lending, said, “There are households that can afford these loans, including moderate-income households.” When they are carefully underwritten and fully documented “they can perform at that level.” He pointed out that a lot of tenants are managing to pay at least 50 percent of income on rent.

A new study from the Joint Center for Housing Studies at Harvard University noted that 10 percent of homeowners and 25.5 percent of renters are spending at least 50 percent of their income on housing.

When Fannie calculates debt-to-income ratios, it starts with the monthly payment on the new loan (including principal, interest, property tax, homeowners association dues, homeowners insurance and private mortgage insurance). Then it adds the monthly payment on credit cards (minimum payment due), auto, student and other loans and alimony.

It divides this total debt by total monthly income. It will consider a wide range of income that is stable and verifiable including wages, bonuses, commissions, pensions, investments, alimony, disability, unemployment and public assistance.

Fannie figures a creditworthy borrower with $10,000 in monthly income could spend up to $5,000 on mortgage and debt payments. Not everyone agrees.

“If you have a debt ratio that high, the last thing you should be doing is buying a house. You are stretching yourself way too thin,” said Greg McBride, chief financial analyst with Bankrate.com.

*     *     *

“If this is data-driven as Fannie says, I guess it’s OK,” said David Reiss, who teaches real estate finance at Brooklyn Law School. “People can make decisions themselves. We have these rules for the median person. A lot of immigrant families have no problem spending 60 or 70 percent (of income) on housing. They have cousins living there, they rent out a room.”

Reiss added that homeownership rates are low and expanding them “seems reasonable.” But making credit looser “will probably drive up housing prices.”

The article condensed my comments, but they do reflect the fact that the credit box is too tight and that there is room to loosen it up a bit. The Qualified Mortgage and Ability-to-Repay rules promote the 43% debt-to-income ratio because they provide good guidance for “traditional” nuclear American families.  But there are American households where multigenerational living is the norm, as is the case with many families of recent immigrants. These households may have income streams which are not reflected in the mortgage application.

State of the Nation’s Housing 2017

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photo by woodleywonderworks

Harvard’s Joint Center for Housing Studies has released its excellent State of the Nation’s Housing for 2017, with many important insights. The executive summary reads, in part,

A decade after the onset of the Great Recession, the national housing market is finally returning to normal. With incomes rising and household growth strengthening, the housing sector is poised to become an important engine of economic growth. But not all households and not all markets are thriving, and affordability pressures remain near record levels. Addressing the scale and complexity of need requires a renewed national commitment to expand the range of housing options available for an increasingly diverse society.

National Home Prices Regain Previous Peak

US house prices rose 5.6 percent in 2016, finally surpassing the high reached nearly a decade earlier. Achieving this milestone reduced the number of homeowners underwater on their mortgages to 3.2 million by year’s end, a remarkable drop from the 12.1 million peak in 2011. In inflation-adjusted terms, however, national home prices remained nearly 15 percent below their previous high. As a result, the typical homeowner has yet to fully regain the housing wealth lost during the downturn.

*     *     *

Pickup In Household Growth

The sluggish rebound in construction also reflects the striking slowdown in household growth after the housing bust. Depending on the government survey, household formations averaged just 540,000 to 720,000 annually in 2007–2012 before reviving to 960,000 to 1.2 million in 2013–2015.

Much of the falloff in household growth can be explained by low household formation rates among the millennial generation (born between 1985 and 2004). Indeed, the share of adults aged 18–34 still living with parents or grandparents was at an all-time high of 35.6 percent in 2015. But through the simple fact of aging, the oldest members of this generation have now reached their early 30s, when most adults live independently. As a result, members of the millennial generation formed 7.6 million new households between 2010 and 2015.

*     *     *

Homeownership Declines Moderating, While Rental Demand Still Strong

After 12 years of decline, there are signs that the national homeownership rate may be nearing bottom. As of the first quarter of 2017, the homeownership rate stood at 63.6 percent—little changed from the first quarter two years earlier. In addition, the number of homeowner households grew by 280,000 in 2016, the strongest showing since 2006. Early indications in 2017 suggest that the upturn is continuing. Still, growth in renters continued to outpace that in owners, with their numbers up by 600,000 last year.

*     *     *

Affordability Pressures Remain Widespread

Based on the 30-percent-of-income affordability standard, the number of cost-burdened households fell from 39.8 million in 2014 to 38.9 million in 2015. As a result, the share of households with cost burdens fell 1.0 percentage point, to 32.9 percent. This was the fifth straight year of declines, led by a considerable drop in the owner share from 30.4 percent in 2010 to 23.9 percent in 2015. The renter share, however, only edged down from 50.2 percent to 48.3 percent over this period.

With such large shares of households exceeding the traditional affordability standard, policymakers have increasingly focused their attention on the severely burdened (paying more than 50 percent of their incomes for housing). Although the total number of households with severe burdens also fell somewhat from 19.3 million in 2014 to 18.8 million in 2015, the improvement was again on the owner side. Indeed, 11.1 million renter households were severely cost burdened in 2015, a 3.7 million increase from 2001. By comparison, 7.6 million owners were severely burdened in 2015, up 1.1 million from 2001.

*     *     *

Segregation By Income on The Rise

A growing body of social science research has documented the long-term damage to the health and well-being of individuals living in high-poverty neighborhoods. Recent increases in segregation by income in the United States are therefore highly troubling. Between 2000 and 2015, the share of the poor population living in high-poverty neighborhoods rose from 43 percent to 54 percent. Meanwhile, the number of high-poverty neighborhoods rose from 13,400 to more than 21,300. Although most high-poverty neighborhoods are still concentrated in high-density urban cores, their recent growth has been fastest in low-density areas at the metropolitan fringe and in rural communities.

At the same time, the growing demand for urban living has led to an influx of high-income households into city neighborhoods. While this revival of urban areas creates the opportunity for more economically and racially diverse communities, it also drives up housing costs for low-income and minority residents. (1-6, references omitted)

One comment, a repetition from my past discussions of Joint Center reports. The State of the Nation’s Housing acknowledges sources of funding for the report but does not directly identify the members of its Policy Advisory Board, which provides “principal funding” for it, along with the Ford Foundation. (front matter) The Board includes companies such as Fannie Mae, Freddie Mac and Zillow which are directly discussed in the report. In the spirit of transparency, the Joint Center should identify all of its funders in the State of the Nation’s Housing report itself. Other academic centers and think tanks would undoubtedly do this. The Joint Center for Housing Studies should follow suit.

 

Poverty in NYC

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photo by Salvation Army USA West

NYU’s Furman Center has released its annual State of New York City’s Housing and Neighborhoods along with a focus on Poverty in New York City. The State of the City report is always of great value but each year’s focus is where we get to see the City in a new light. This year is no different:

In New York City in recent years, rents have risen much faster than incomes. The pressures of rising housing costs may be greatest on those with the fewest resources—people living in poverty. New York City has a larger number of people living in poverty today than it has since at least 1970. This sparks a range of questions about the experience of poverty in New York City that we address in this year’s State of New York City’s Housing and Neighborhoods Focus. Who in New York City is poor today? Where do they live? What are the characteristics of the neighborhoods where poor New Yorkers live? Are poor New Yorkers more likely to be living in areas of concentrated poverty than they were in the past? How, if at all, do the answers to each of these questions differ by the race, ethnicity, and other characteristics of poor households?

Though the share of New Yorkers living in poverty has been relatively constant over the past few decades, there was a drop at the end of the last decade and then an increase in 2011–2015. Poverty concentration—the extent to which poor New Yorkers are living in neighborhoods with other poor New Yorkers—followed a similar trend, dropping in 2006–2010 and increasing again since then. The neighborhood of the typical poor New Yorker varies substantially from that of the typical non-poor New Yorker, but those disparities are largely experienced by black and Hispanic New Yorkers living in poverty. The typical poor Asian and white New Yorkers live in neighborhoods that do better on the measures we examine than the neighborhoods of the typical non-poor New Yorker. We also find that neighborhood conditions vary significantly based on the level of poverty in a neighborhood. Higher poverty neighborhoods have higher violent crime rates, poorer performing schools, and fewer adults who are college educated or working. And, poor New Yorkers are not all equally likely to live in these neighborhoods. Poor black and Hispanic New Yorkers are much more likely to live in higher poverty neighborhoods than poor white and Asian New Yorkers. Children make up a higher share of the population in higher poverty neighborhoods than adults or seniors. (1, footnotes omitted)

Policymakers should have a lot to chew over in this report. Let’s hope they give it a read.