Fannie Mae will ease financial standards for mortgage applicants next month

By Kenneth R. Harney, June 6, 2017

The top reason mortgage applicants nationwide get rejected is because they’re carrying too much debt relative to their monthly incomes. Fannie Mae will be raising its DTI ceiling from the current 45 percent to 50 percent as of July 29.

It’s the No. 1 reason that mortgage applicants nationwide get rejected: They’re carrying too much debt relative to their monthly incomes. It’s especially a deal-killer for millennials early in their careers who have to stretch every month to pay the rent and other bills.

But here’s some good news: The country’s largest source of mortgage money, Fannie Mae, soon plans to ease its debt-to-income (DTI) requirements, potentially opening the door to home-purchase mortgages for large numbers of new buyers. Fannie will be raising its DTI ceiling from the current 45 percent to 50 percent as of July 29.

DTI is essentially a ratio that compares your gross monthly income with your monthly payment on all debt accounts — credit cards, auto loans, student loans, etc., plus the projected payments on the new mortgage you are seeking. If you’ve got $7,000 in household monthly income and $3,000 in monthly debt payments, your DTI is 43 percent. If you’ve got the same income but $4,000 in debt payments, your DTI is 57 percent.

In the mortgage arena, the lower your DTI ratio, the better. The federal “qualified mortgage” rule sets the safe maximum at 43 percent, though Fannie Mae, Freddie Mac and the Federal Housing Administration all have exemptions allowing them to buy or insure loans with higher ratios.

Studies by the Federal Reserve and FICO, the credit-scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor. And for good reason: If you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.

Using data spanning nearly a decade and a half, Fannie’s researchers analyzed borrowers with DTIs in the 45 percent to 50 percent range and found that a significant number of them actually have good credit and are not prone to default.

“We feel very comfortable” with the increased DTI ceiling, Steve Holden, Fannie’s vice president of single family analytics, told me in an interview. “What we’re seeing is that a lot of borrowers have other factors” in their credit profiles that reduce the risks associated with slightly higher DTIs. They make significant down payments, for example, or they’ve got reserves of 12 months or more set aside to handle a financial emergency without missing a mortgage payment. As a result, analysts concluded that there’s some room to treat these applicants differently than before.

Lenders are welcoming the change. “It’s a big deal,” says Joe Petrowsky, owner of Right Trac Financial Group in the Hartford, Conn., area. “There are so many clients that end up above the 45 percent debt ratio threshold” who get rejected, he said. Now they’ve got a shot.

That doesn’t mean everybody with a DTI higher than 45 percent is going to get approved under the new policy. As an applicant, you’ll still need to be vetted by Fannie’s automated underwriting system, which examines the totality of your application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes. The system weighs the good and the not-so-good in your application, and then decides whether you meet the company’s standards.

Fannie’s change may be most important to home buyers whose DTIs now limit them to just one option in the marketplace: an FHA loan. FHA traditionally has been generous when it comes to debt burdens: It allows DTIs well in excess of 50 percent for some borrowers.

But FHA has a major drawback, in Petrowsky’s view. It requires most borrowers to keep paying mortgage insurance premiums for the life of the loan — long after any real risk of financial loss to FHA has disappeared. Fannie Mae, on the other hand, uses private mortgage insurance on its low-down-payment loans, the premiums on which are canceled automatically when the principal balance drops to 78 percent of the original property value. Freddie Mac, another major player in the market, also uses private mortgage insurance and sometimes will accept loan applications with DTIs above 45 percent.

The big downside with both Fannie and Freddie: Their credit-score requirements tend to be more restrictive than FHA’s. So if you have a FICO score in the mid-600s and high debt burdens, FHA may still be your main mortgage option, even with Fannie’s new, friendlier approach on DTI.

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More new mortgages are risky ones

March 12, 2017 - Paul Davidson , USA TODAY

Riskier borrowers are making up a growing share of new mortgages, pushing up delinquencies modestly and raising concerns about an eventual spike in defaults that could slow or derail the housing recovery.

The trend is centered around home loans guaranteed by the Federal Housing Administration that typically require down payments of just 3% to 5% and are often snapped up by first-time buyers. The FHA-backed loans are increasingly being offered by non-bank lenders with more lenient credit standards than banks.

The landscape is nothing like it was in the mid-2000s when subprime mortgages were approved without verification of buyers' income or assets, setting off a housing bubble and then a crash. And Quicken Loans, one of the largest FHA lenders, dismisses the concerns as overwrought. Still, for some analysts, the latest development is at least faintly reminiscent of the run-up to that crisis.
“We have a situation where home prices are high relative to average hourly earnings and we’re pushing 5%-down mortgages, and that’s a bad idea,” says Hans Nordby, chief economist of real estate research firm CoStar.

The share of FHA mortgage payments that were 30 to 59 days past due averaged 2.19% in the fourth quarter, up from about 2.07% the previous quarter and 2.13% a year earlier, according to research firm CoreLogic and FHA. That’s still down from 3.77% in early 2009 but it represents a noticeable uptick.

While that could simply represent monthly volatility, “the risk is that the performance will continue to deteriorate and then you get foreclosures that put downward pressure on home prices,” says Sam Khater, CoreLogic’s deputy chief economist. Such a scenario likely would take a few years to play out.

The early signs of some minor turbulence in the mortgage market add to concerns generated by recent increases in delinquent subprime auto loans, personal loans and credit card debt as lenders target lower-income borrowers to grow revenue in the latter stages of the recovery.

FHA mortgages generally are granted to low- and moderate-income households who can’t afford a typical downpayment of about 20%. In exchange for shelling out as little as 3%, FHA buyers pay an upfront insurance premium equal to 1.75% of the loan and 0.85% annually.

Some economists are concerned about the growth of riskier home loans for first-time buyers (Photo: Kevin P. Casey, for USA TODAY)

FHA loans made up 22% of all mortgages for single-family home purchases in fiscal 2016, up from 17.8% in fiscal 2014 but below the 34.5% peak in 2010, FHA figures show.

The share has climbed largely because of a reduction in the insurance premium and home price appreciation that has made larger downpayments less feasible for some, says Matthew Mish, executive director of global credit strategy for UBS. House prices have been increasing about 5% a year since 2014.

At the same time, the nation’s biggest banks, burned by the housing crisis and resulting regulatory scrutiny, largely have pulled out of the FHA market as the costs and risks to serve it grew. Non-bank lenders, which face less regulation from government agencies such as the FDIC, have filled the void.
Non-banks, including Quicken Loans and Freedom Mortgage, comprised 93% of FHA loan volume last year, up from 40% in 2009, according to Inside Mortgage Finance. Meanwhile, the average credit score of an FHA borrower fell to 678 in the fourth quarter from 693 in 2013, according to FHA, below the 747 average for non-FHA borrowers. Mish says non-banks generally have looser credit requirements, and lenders have further eased standards – such as the size of a monthly mortgage payment relative to income – as median U.S. wages stagnated even as home values marched higher.

Here’s the worry: If home prices peak and then dip, homeowners who put down just 5% and are less creditworthy than their predecessors will owe more on their mortgages than their homes are worth. That would increase their incentive to default, especially if they have to move for a job or face an extraordinary medical or other expense, Khater says.  Foreclosures would trigger price declines that ignite more defaults in a downward spiral.

In turn, funding for the non-bank lenders from banks and hedge funds likely would dry up, and FHA loans would be harder to get, dampening the housing market and the broader economy, Mish says.
Guy Cecala, publisher of Inside Mortgage Finance, says such fears are unfounded, noting Federal Reserve officials have complained that FHA loan standards have been too rigorous.

“The non-banks are bringing a welcome change,” he says. They still must meet FHA standards, he says, and are regulated by agencies such as the Consumer Financial Protection Bureau.

Bill Emerson, vice chairman of Quicken Loans, the largest non-bank lender, says the credit standards of his firm and his peers are actually stringent by historical standards and appear looser only because banks sharply tightened their requirements after the housing crash.

“I don’t have any concerns about” a potential increase in delinquencies or defaults, Emerson said in an interview. “In the last three, four years, consumers have more access to credit….and all of a sudden it’s, ‘Here we go again.’ Likening the mid-2000’s meltdown to a 100-year flood, he added, “I don’t believe we’re anywhere close.”


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Trump’s Transition Team Pledges to Dismantle Dodd-Frank Act

- Nov. 10, 2106, Jesse Hamilton, Elizabeth Dexheimer 

President-elect Donald Trump is translating some of his populist campaign rhetoric into policy statements, including the contention that the Dodd-Frank Act should be scrapped because it has made Wall Street banks an even bigger threat to the nation’s economy and working families.

After the government’s answer to the 2008 financial crisis, the “big banks got bigger while community financial institutions have disappeared at a rate of one per day, and taxpayers remain on the hook for bailing out financial firms deemed ‘too big to fail,’” says a statement posted on Trump’s official transition website. “The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

U.S. bank stocks climbed for a second straight day on Thursday as investors bet a Trump presidency will lead to less regulation and sideline industry critics in Congress led by Senator Elizabeth Warren.
The 24-company KBW Bank Index advanced 3 percent at 3:16 p.m. in New York, led by Wells Fargo & Co., which rose 7.4 percent. Bank of America Corp. advanced 4.5 percent, while JPMorgan Chase & Co. climbed 4.4 percent.

Trump Antagonist

The call to scrap Dodd-Frank isn’t likely to go over well with Warren, the Wall Street scourge and Trump antagonist who said Thursday that she’d be willing to work with the incoming administration to enact economic and banking policies so long as he didn’t loosen existing rules. In remarks prepared for an AFL-CIO labor federation event in Washington, Warren cited issues they agree on, including the need to curtail Wall Street influence in politics, reinstate Glass-Steagall Act limits on banking activities and reform trade deals.

“When President-elect Trump wants to take on these issues, when his goal is to increase the economic security of middle-class families, then count me in,” the Massachusetts Democrat said on Thursday. “I will put aside our differences and I will work with him to accomplish that goal.”
 
In addition to repealing Dodd-Frank, Trump’s transition website outlines several policies that will be familiar to those who followed his campaign, including calls for a moratorium on new rules so existing measures can be reviewed. It also broadly addressed a tax-code overhaul, saying Trump’s plan “can be summarized as lower, simpler, fairer, and pro-growth.”

The new administration’s plans for financial regulation could pull from a proposal released earlier this year by Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee. His bill -- dubbed the Choice Act -- calls for ripping up core parts of Dodd-Frank, including a provision that empowers the government to dismantle failed banks. He also wants to do away with Volcker Rule restrictions on banks’ trading and investments, and to weaken the reach of the Consumer Financial Protection Bureau.

Warren’s pledge offers a first glimpse of a strategy she may use next year when Republicans control the White House and both chambers in Congress.
“Americans want to hold the big banks accountable,” Warren said. “If Trump and the Republican Party try to turn loose the big banks and financial institutions so they can once again gamble with our economy and bring it all crashing down, then we will fight them every step of the way.”

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Why You Should Avoid Zillow at All Costs

by Kristina Modares

Why You Should Avoid Zillow at all Costs....and Trulia and Realtor.com...etc

In a society obsessed with technology and social media, we are bombarded by loads of content. Today, anybody can post information online and just because something’s popular doesn’t mean it’s accurate. Now more than ever, we need to be very conscious of where our information comes from. Does the founder of this website have a motive for posting certain content? What is the real reason this website exists?

In real estate, most websites exist to extract your contact information. They’re giant traps created as a lead machine for Realtors (the ones who pay anyway). Websites such as Zillow, Realtor.com and Trulia are all designed with the sole purpose of creating (weak) leads for Realtors, and in turn, revenue for the websites. At the same time, these are the exact sites where buyers begin their home search and where sellers look to find the value of their current home. This creates a variety of problems due to the false advertising and inaccurate data. 

 Of all the online real estate databases, Zillow may be the very worst. It’s the most commonly used site despite the false advertising and information. I was first introduced to Zillow leads when I left my previous real estate team. It was my first time working entirely on commission, and I was doing whatever I could to generate leads. An agent in my brokerage told me about the Zillow leads she paid for. She offered to share a few of them as she didn’t have enough time to contact all of them in a timely manner. It seemed so easy. The first Zillow lead email she forwarded me included the name, number and email address of somebody who was interested in a South Austin home. At the time, I didn’t realize how the Zillow lead system worked. So, I called this lead, ready to give them more information on the home, happy to help and excited to talk to a potential client.

The voice on the other end of the line sounded exhausted, “You’re the 20th Realtor to call me in the past hour. Please stop calling.” Not exactly the type of response I was hoping for when following up on these “hot leads”. I instantly felt guilty and apologized. The image below shows that the potential buyer was interested in talking to somebody about the property and did inquire about it. Little did he know he’d get dozens of calls from multiple agents over the next week.  

I understand sales jobs are competitive and finding good leads is key to survival, but was this even a way to obtain strong, profitable leads?  
 
Zillow creates a lose-lose situation. The potential buyer is angry, the agent is paying way too much money to compete with way too many agents, and it’s overwhelming for a buyer who is only on Zillow to browse through the home photos. During the timeline of these first searches, many buyers are in no way ready to transact on a property. I’m sure some Realtors thrive using Zillow leads, but it puts a sour taste in my mouth. It’s not honest, and it’s not accurate. Who is winning here? Zillow.

Let’s look into this a bit more. What is the lowdown on Zillow and similar sites?
  
Inaccurate information
For buyers:
Many of the homes listed on Zillow may not be for sale. For example, a client of mine was intrigued by a house they saw on Zillow. Zillow’s data showed the house was currently for sale, had been on the market for almost a month and was in the area and budget they wanted. What I found via the MLS is that the house had sold in three days a month prior and for over asking price.

Another way Zillow can provide inaccurate information is through the agent listed with the property. You would think this is the “listing agent” or the “seller’s agent.” Wrong. It’s usually attached to a paying Realtor client of Zillow. It’s misleading advertising, and it’s taking advantage of people. So instead of turning to a massive online real estate database like Zillow, turn to friends and family. A simple social media post asking for a great local Realtor will probably get you great results!

For sellers:
Zestimates are Zillow’s algorithm-produced appraisals. They provide people with a basic estimate of what a particular property is worth. Are Zestimates ever accurate? Rarely. According to economist John Wake, the typical Zillow Zestimate error is $14,000. “You don’t know if it’s $14,000 too high or $14,000 too low. And it gets worse because HALF the time Zillow Zestimates are off by a lot more than $14,000”. How can they be accurate when there are so many factors to determine how much a house is worth. No two houses are the same which makes it impossible for a computer to determine it’s value. Zillow uses a computer generated algorithm based on what has sold in the area, the square footage and the number of bedrooms. The basics. They don’t have inspectors checking out each property making sure their data is accurate. That’s the only way to determine a property’s worth. Yet, many sellers will only look to Zillow when they start thinking about putting their house on the market.

Unwanted Communication

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May 12, 2016 -

N.J. continues to lag nation on clearing foreclosures

By KATHLEEN LYNN, The Record

New Jersey led the nation in foreclosure starts in the first quarter, as the state continues to grapple with the fallout from the housing crash, the Mortgage Bankers Association said Thursday.

About 11.5 percent of New Jersey mortgages were either in foreclosure or late on payments in the first quarter, almost double the national average of 6.5 percent, the MBA said.

While national foreclosure rates are back to pre-recession levels, New Jersey’s court system is still dealing with a large backlog of distressed properties. Last year, almost 36,000 residential foreclosures were filed in the state. So far this year, an average of about 2,500 foreclosures have been filed each month, according to the state Judiciary.

Mortgage troubles don’t just affect the homeowners involved, said Patrick O’Keefe, an economist with the accounting firm CohnReznick in New York and Roseland. They also “influence the value of neighboring properties,” he said, because homes in foreclosure tend to be poorly maintained and sell at a discounted price. That affects appraisals and prices of nearby homes.

The national foreclosure and delinquency numbers in the first quarter reflect “a consistent downward trend that began in the second quarter of 2012,” according to Marina Walsh, an MBA vice president.
New Jersey has lagged the nation for several reasons. First, it is one of about two dozen states that require foreclosures to go through the courts, which takes longer. And the process was further slowed several years ago, when courts imposed a near-freeze on foreclosures while the mortgage industry responded to allegations it was abusing homeowners’ rights in the rush to evict.

In addition, New Jersey’s rate of job creation took a while to catch up to the national rate. While the unemployment rate has dropped in New Jersey to 4.4 percent, lower than the national rate of 5 percent, the Garden State still has not made up all the jobs lost in the recession, a milestone the nation passed two years ago.

A check of the properties heading for foreclosure auction in North Jersey showed many properties in lower- and middle-income places like Hackensack, Garfield, Elmwood Park and Paterson, with unpaid mortgages in the $100,000 to $300,000 range.

But more affluent towns have not been immune. Lenders have filed foreclosure actions against properties with million-dollar mortgages in Allendale and Upper Saddle River, as well as an Alpine home where $2.6 million is owed.

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 Daniel Barli, Esq.
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