Good Old FHA Loans Make a Comeback
The collapse of the subprime mortgage business has revised interest in federally backed Federal Housing Administration loans among low-income and first-time home buyers who have been shut out of the mortgage market. After a three-year slump, applications for FHA loans jumped from 41,530 in December 2006 to 73,444 in June — a 76.8% increase at a time when the overall housing market was slowing. However, despite the rebound, FHA is flawed and in need of some major improvements, industry experts say. “FHA is definitely a step behind where the private markets have gone,” said Keith Gumbinger, vice president of HSH Associates, which publishes loan information. With a maximum $362,790 loan limit for a single-family home, FHA hasn’t kept up with rising home prices in high-cost areas. Also, a 3% downpayment is required, and lenders are required to complete cumbersome paperwork and costly audits. “Given how many borrowers really could benefit from FHA financing but how few of them do, I would say we are still very much in the doldrums,” says Meg Burns, the FHA’s director of the Office of Single Family Program Development. (www.usatoday.com)
USA Today (8/13/07); Christine Dugas
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Tax Deduction Under Fire for ‘McMansions’
House Energy and Commerce Committee Chairman John Dingell (D-Mich.) is drafting a “carbon tax” bill that would include removing the mortgage interest deduction on homes larger than 3,000 square feet in an effort to reduce carbon emissions by 60% to 80% by 2050. The preliminary estimate of Lawrence Yun, senior economist for the National Association of Realtors®, is that ending the deduction for larger homes would result in a 4% decline in the national median house price. He said that there are at least 10.4 million single-family houses with interior areas of 3,000 square feet or more, about 15% of the nation’s owner-occupied housing stock. Dingell’s plan could also push up foreclosures because every 1% decline in the median price leads to an additional 70,000 foreclosures, Yun said, citing industry research. A price decrease of 4% in a national market already swamped with foreclosures could add 280,000 to the total. Bill Killmer, a policy advocate for NAHB, called the Dingell plan “wrongheaded” in its focus on house size. “We believe a much better approach would be to look at consumer behavior — how efficient are the appliances they’ve installed, how energy-efficient are the windows, insulation, heating and air conditioning” and other systems, he said. Killmer said that “nobody questions” the importance of the environmental problem Dingell is trying to solve. “We just don’t think this is the right way to go about it,” he said. (www.washingtonpost.com)
Washington Post (8/25/07); Kenneth R. Harney
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As Woes Grow, Mortgage Ads Keep Up Pitch
As more home owners fall behind on mortgage payments and investors abandon the industry in droves, mortgage companies are facing greater scrutiny over their lending practices and disclosures to borrowers. One area where regulators are paying closer attention is advertising that promises tantalizingly low payments without clearly disclosing the myriad strings that accompany the debts. It is a tactic that has been widely used — and, critics say, abused — by lenders trying to lure new customers. Not including direct mail and Internet advertising, mortgage lenders have spent more than $3 billion since 2000 on advertising on television, on radio and in print, said Nielsen Monitor-Plus, which tracks ad spending. Consumer advocates say many ads are at best misleading and at worst steer consumers into risky loans with promises of low introductory rates that do not make clear that they could pay significantly more in a few months or years. In its ads, Livonia, Mich.-based Quicken Loans, suggested that consumers could pay off credit card bills, remodel their homes and lower their monthly payment if they got a Secure Advantage mortgage, which allowed home owners to roll what they would have paid in interest into the amount they owe. Many critics consider such mortgages, known as payment-option loans, dangerous for all but the most sophisticated borrowers, because many home owners do not realize that making just the minimum payment will mean they owe more on their house with each passing month. The company says it no longer offers that mortgage, didn’t make many of them and also made few loans to subprime borrowers. (www.nytimes.com)
New York Times (8/25/07); Louise Story and Vikas Bajaj
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Reverse Mortgages Moving Forward
Older adults now hold $4.3 trillion in home equity. By 2030, when the youngest members of the baby boom generation retire, Americans 62 and older will have $37 trillion in their houses, the National Reverse Mortgage Lenders Association predicts, and that is turning reverse mortgages into a booming business. Borrowers are expected to take out 120,000 of the most popular kind of reverse mortgage this year, a 57% increase from last year, according to the association. With conventional mortgages, borrowers make monthly payments to the lender. But with reverse mortgages, the home owners receive a lump sum, a monthly amount or a line of credit and don’t have to repay the debt for as long as they live in their homes. In most cases, the income is tax-free and generally doesn’t affect Social Security or Medicare benefits. When the borrower moves out of the house or dies, the loan becomes due, along with all fees and accumulated interest charges. The debt is usually paid off through a sale of the home. Because the borrowing costs can be high, financial advisers usually recommend the loans only for seniors who intend to live in their homes for at least five years. The reverse mortgage industry’s biggest player, Financial Freedom Senior Funding Corp., has seen its loan volume increase almost 17-fold in the last six years, from $300 million in 2001 to $5 billion in 2006. Even though 308,000 older adults have taken out a federally insured reverse mortgage since 1990, lenders say they’ve penetrated only 1% of the senior home owner market. (www.dallasnews.com)
Dallas Morning News (8/8/07); Bob Moos
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Layoffs Spreading in the Housing Industry
There have been some 21,000 layoffs since the beginning of the month in the real estate, construction and mortgage-lending industries, which is almost equal to the number for all of last year — 22,814. A simple real estate transaction can involve up to 20 people, says Steve Walsh, president of Scout Mortgage in Scottsdale, Ariz. “An escrow officer may make $1,000, the county recorder gets a few hundred, the appraiser makes $300 to $400, the termite man $50 to $100, and there are movers and landscapers and decorators.” Walsh says his accountant told him of some real estate agents who had been making $200,000 a year but are down to a $15,000 income. He says his firm, with business down 40%, has cut staff, too. The layoffs sweeping the mortgage brokerage industry are not surprising to Wayne Archer, a professor of finance, insurance and real estate at the University of Florida, Gainesville. “The business has always been extremely volatile,” he says, adding that it has often attracted people with less than stellar credentials. So far, in terms of actual numbers, the damage is not at the same level as the dotcom crash, when the layoffs helped drive the economy into a recession. “By way of contrast, this is a slow leak in a balloon,” says John Challenger, CEO of Challenger, Gray & Christmas. But at the same time the industry has been laying off people, it has also been hiring them, with an estimated 120,000 jobs created in the past year. (www.csmonitor.com)
Christian Science Monitor (8/23/07); Ron Scherer and Ben Arnoldy
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Soaring Home Prices Challenge South Florida
Recruiting workers and keeping them has become increasingly challenging for South Florida employers as home prices have soared out of reach even for many two-income households. So employers are getting increasingly creative — throwing in bonuses, allowing flexible schedules and, in the case of the University of Miami (UM), even kicking in up to 50% of a home’s purchase price. Income gains have not kept up with soaring home costs. In fact, the rise in income per person here between 2000 and 2006 — 28% to an estimated $39,900, says the University of Florida’s Institute for Economic Competitiveness — has been all but gobbled up by the rise in property taxes and insurance alone. The property tax on a median-priced home in unincorporated Miami-Dade rose to $8,011 last year from $3,114 in 2000 and hit $7,988 in unincorporated south Broward, up from $3,505 in 2000. Home owners insurance has skyrocketed similarly. Between 2000 and 2006, the median home price rose 172% to $375,800 in Miami-Dade and by 148% to $367,800 in Broward, says the Florida Association of Realtors®. “Anyone considering coming to Miami to work faces the growing burden from the mortgage payment, the real estate taxes and the storm insurance, says Dr. Richard Bookman, vice provost for research at UM’s School of Medicine, which is hiring aggressively from around the country. “It’s the bane of my existence and one of the big challenges to recruiting.” UM last year began kicking in up to 50% of the purchase price of a home, up to $300,000, in exchange for a stake in the property. So far, more than 65 eligible recruits have taken advantage of the benefit. (www.miamiherald.com)
Miami Herald (8/25/07); Martha Brannigan
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