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The Improving Housing Market - Should You Buy Now?

Is the housing market in a definite upswing nationally? If you have held off buying a home, is now the time to act before prices go much higher?

Over the past year housing market observers of various stripes –analysts, economists, professional money managers and real estate professionals- have all cautiously noted what appeared to be a nascent housing recovery, one broad based geographically.  Robust improvements in housing starts numbers over the past several months have been significant enough that the adjective nascent may no longer be applicable.  According to the Wall Street Journal, a housing start is defined as the beginning of excavation of the foundation for a construction intended primarily as a residential building. Housing starts hit 894,000 in October, exceeding analysts’ expectations by more than 50,000.  This continues a trend going back a number of months of strong, and at times vigorous, increases in residential construction throughout the country, with September 2012 housing starts showing a 34.8% year-over-year increase.  These numbers, among others, indicate that there is a strong, sustained recovery within the housing market that can be projected with some confidence into the near future.

This conclusion is buttressed by a broader index compiled by Fannie Mae called the National Housing Survey, conducted on a monthly basis in an effort to assess attitudes toward owning and renting a home, mortgage rates, homeownership distress, the economy, household finances, and overall consumer confidence.  Despite the uncertainty surrounding the Fiscal Cliff, this survey illustrates increasingly strong consumer confidence.   According to Doug Duncan, senior vice president and chief economist of Fannie Mae, “Consumer attitudes toward both the economy and the housing market continue to gather momentum, with many of our 11 key National Housing Survey indicators at or near their two-and-a-half-year highs.”

In spite of the promising data, Ben Bernanke, chairman of the Federal Reserve, warned in mid-November that the housing market is "far from being out of the woods," and blamed, in part, overly tight lending standards. He termed these standards as an appropriate response to the housing crisis, but stressed that with the crisis in the past, banks now need to be willing to lend to a broader base of customers than they have during the previous four years, saying that “…overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery."  Bernanke emphasized that the Federal Reserve would continue doing everything within its mandate to help the recovery including the continuation of the ongoing third round of quantitative easing or QE III that is currently engaged in buying $40 billion worth of mortgage backed securities (MBS) every month.

Others were more specific in their critique of the housing market numbers of recent months, pointing out that the housing start levels of October, while representing the highest totals in four years, were similar to levels during the recessions of 1981 and 1991 and remain 60% below the housing start numbers of January 2006.  Additionally, concern was voiced regarding the primary driver of the spike in housing start totals, the initiation of construction of multifamily homes intended primarily as rentals.  Typically these types of structures are owned by investors, not by new home buyers, and while a growth in housing construction cannot be construed as anything but positive, it does support the belief that consumers are still more focused on rentals than on purchases; the number of multifamily housing starts are up 63% year over year, while the number of single family housing starts, homes that are typically purchased, not rented, are flat over the same time period.  Posited reasons for these trends include the still weak economic recovery, the struggling jobs market, uncertainty over future fiscal policy and the possibility that mortgage interest rate deductions will be eliminated as part of the Fiscal Cliff negotiations.

So how can consumers and investors take advantage of the current context?  If you are well positioned enough financially to qualify for a mortgage in this restricted lending environment, buying a home would represent an ideal investment.  With consumer confidence on the rise, the volume of real estate purchases should increase.  This, in turn, should lead to a hike in interest rates due to the increased demand for mortgages.  This rise in interest rates will likely be mitigated, however, by the Federal Reserve’s stated intention to keep rates artificially low via the deployment of open market operations through the end of 2014.  This leaves a window of approximately two years where home buyers or investors should be able to take advantage of lower rates with which to finance their purchase.

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Many Mortgage Borrowers Leaving Thousands of Dollars on Table

A new report from Fannie Mae indicates that many U.S. mortgage shoppers are leaving thousands of dollars on the table when they apply and close a mortgage.

A new report from Fannie Mae indicates that many U.S. mortgage shoppers are leaving thousands of dollars on the table when they apply and close a mortgage. Data from Fannie Mae’s November 2012 National Housing Survey Topic Analysis Report suggests that consumers could save money and find a more suitable mortgage product if they shopped more effectively and took the time to research different lenders and rates. This confirms a report issued by the Deparment of Housing and Urban Development which suggested that borrowers who obtained multiple quotes from mortgage lenders could save $1,000 or more on closing costs alone.

Conclusions from The Housing Survey Topic Analysis were made based on interviews with 1,000 homeowners and renters. According to the data, 54% of low income respondents shopped around for a mortgage compared to 64% of high income borrowers. This still leaves a considerable numbers of borrowers who have not shopped arouond or received multiple quotes on what may be the largest puchase they ever make.

The data also shows that higher incomes individuals are more likely to use electronic means to gather comparative data. Still, only 17% of high income individuals use a third-party research site to quickly view and compare rates across banks. The number drops to 11% for low income individuals.

Lack of ARM Understanding

When asked to determine the potential maximum ARM payment, 41% of all respondents were unable to offer even a guess. Of those that did respond, the guess made (average of 10%) was significantly out of the range of what they could eventually be paying (Fannie Mae calculated the maximum potential ARM rate to be about 50%).

In responding to the report, Fannie Mae's Chief Economist Doug Duncan stated:

“Homeowners who don’t obtain multiple mortgage offers or compare rates are essentially leaving money on the table, particularly given today’s unprecedentedly low interest rates. Although a home purchase is the largest financial obligation most people will ever make, many borrowers do not fully understand their mortgage products and costs. As a result, some homeowners in this position may find themselves with unsustainable payments down the road.”

Does the Home Affordable Refinance Program (HARP) Need to Be Expanded Again?

HARP has proven to be an effective tool for helping underwater homeowners refinance their mortgages down to more affordable levels. But is the program as currently constructed reaching enough homeowners to make a real difference in the housing market?

In April 2009, the Obama Administration launched the Home Affordable Refinance Program (HARP).  This program was part of a broader effort, known as the Making Home Affordable Program (MHA), whose stated purpose is “…to help homeowners avoid foreclosure, stabilize the country’s housing market and improve the nation’s economy.”  HARP was designed exclusively for conventional, fixed rate loans backed by Fannie Mae or Freddie Mac, specifically those that had been securitized before June 1st, 2009.  Borrowers that had not missed any payments on their mortgage in the prior six months and had not previously participated in HARP were eligible.  Whether the borrower’s current lender was a part of the program was irrelevant; any lender participating in HARP could be chosen by the borrower, thus giving customers the option to shop around for the best rate as they would in a normal refinance process. The intent of HARP was to give the millions of borrowers who owed more on the mortgage than their home was currently worth, that is borrowers who were “underwater”, the chance to refinance.  Without HARP such borrowers would have little or no chance at refinancing given the unwillingness of financial institutions to work with them. 

HARP proved to be effective, but it became clear that certain restrictions in the program were preventing a larger pool of needy borrowers from accessing its benefits, so a second version, creatively titled HARP 2.0, was launched in March 2012.  This iteration greatly expanded the number of eligible homeowners by removing the limits that had been in place on how far underwater a borrower could be in order to qualify; this included doing away with the previous loan to value (LTV) cap of 125%.  An attempt at streamlining the procedure was also made, as most homeowners would no longer be required to have an appraisal or have their loan underwritten; these modifications, along with the elimination of certain fees, served to make the process less expensive as well as less time consuming.  This new and improved HARP achieved even greater success than its predecessor; more loans were refinanced under the new rules in the first five months of 2012 than had been during all of 2011.   Particularly effective was the abolishment of the LTV cap of 125%; according to an independent study by CoreLogic, a global consumer information and analytics company, of the 11.1 million borrowers underwater when HARP 2.0 was launched, 6.7 million had only a single lien on their property.  The average LTV for these homeowners: 130%.  For homeowners with additional liens, such as home equity loans (HELOCs), the average LTV of the combined loans was even higher, at 138%.  Clearly the previous LTV cap was a hindrance to access to HARP for a significant number of the very borrowers the initial program was intended to target. 

Not everything about HARP 2.0 worked out as planned, however.  The removal of the LTV cap was met with a less than enthusiastic response by the institutions which comprised the mortgage lending market, Wells Fargo, the largest of the group, in particular.  Taking advantage of a loophole in HARP that permitted individual lenders to add their own requirements, called overlays, to those mandated by HARP, Wells Fargo announced that it would not refinance loans under HARP 2.0 which exceeded an LTV of 105% with a single lien or 110% with multiple liens that it did not already service.  The resultant guidelines issued by the bank, more restrictive than had been expected, were also more restrictive than the first version of HARP.  Given Wells Fargo’s status as the home mortgage industry leader –they had been responsible for nearly 25% of all residential mortgages in 2011- this development was especially troubling.  Although the volume of loans through HARP had clearly increased under the new directives that volume was not as high as it could have been if the banks had not been allowed to supersede the specifics of HARP 2.0.

Another problem with both iterations of HARP is that only mortgages securitized by Fannie Mae or Freddie Mac are eligible for refinance consideration. According to a study by the Center for Responsible Lending (CRL), loans known generically as Option ARM which had been sold to consumers with low initial interest rates and the option to make minimum monthly payments or interest only payments, had led to an epidemic of negative amortizations.  Negative amortization occurs when the borrower chooses to make minimum monthly payments which don’t cover the interest due for the month.  The difference between the minimum monthly payment and the full payment is added to the outstanding principal balance leading to a loan total that would actually increase, or negatively amortize, instead of decrease, like a normal loan would.  This feature, combined with the adjustability of the initial rate, generally to a level that the borrower simply couldn’t afford, led to a significant percentage of the underwater mortgages that occurred during the housing crisis, many of which resulted in foreclosures.  According to the CRL, “foreclosure rates are consistently worse for borrowers who received high-risk loan products that were aggressively marketed before the housing crash, such as loans with prepayment penalties, hybrid adjustable-rate mortgages (ARMs), and option ARMs.”  Loans of this type were not sold to Fannie Mae and Freddie Mac, but instead were securitized through sales to private investors, thus making them ineligible for HARP.  The riskiest loans, therefore, are not eligible to be refinanced by the Obama administration initiative. 

The maneuverings of banks like Wells Fargo to avoid those aspects of HARP 2.0 which failed to meet with their approval, combined with the lack of access to HARP for those borrowers saddled with the most onerous types of loans that had been issued prior to the housing crisis have led some to call for HARP 3.0.  Addressing the shortcomings of HARP 2.0, however, will likely prove problematic.  An expansion of HARP to cover those mortgages not backed by Fannie Mae or Freddie Mac would involve the government once again entering the market to back risky investments; this is unlikely to prove popular.  Forcing the banks to adhere to all tenets of HARP will also represent a challenge as financial institutions are not required to participate in the program.  An attempt to force those that do participate to follow the exact letter of the program could potentially lead to banks simply refusing to take part altogether.  The most effective proposal currently being discussed is an adjustment to the securitization deadline from June 1st, 2009 to June 1st 2010.  This would serve to help homeowners who are ineligible for no other reason than they had missed the cutoff date and would not lead to the alienation of the very lenders needed to facilitate the program or involve a government bailout.  While not a perfect solution, it is a logical one that involves no risk for a clearly identifiable reward.

Everything possible needs to be done to heal our housing market as its struggles is at the very core of our country’s overall economic problems.  Without a healthy housing market we will not have a healthy economy and this long, painful recovery will remain just that: long and painful.  A simple adjustment to the deadline represents a small price to pay for what could be a significant step towards segueing from recovery to robust economic growth.

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Getting a Mortgage for a Manhattan Co-op

Unlike buying a house, when you buy an apartment in a New York co-op, you’re not buying real property, but shares in a corporation. Because the buyer does not actually own any real estate, getting financing for a co-op can be more complicated and tricky than obtaining a traditional mortgage for a house.

A co-op mortgage is more commonly known as a “share loan.” Unlike traditional mortgages taken to buy a house, share loans are taken by co-op buyers to buy shares in the corporation, which in turn gives the buyer exclusive right to live in a unit with the co-op building. The buyer then makes monthly payments to the lender to pay back the share loan. Additionally, the co-op corporation also receives monthly maintenance fees from the buyer to cover certain building expenses.

Fewer banks finance co-op share loans than finance traditional mortgages in New York, making securing one difficult for co-op buyers. The down payment for these loans tends to be around 10 percent, much higher than the standard FHA (Federal Housing Authority) 3.5 percent down for a condo. Besides the larger down payment, similar to the qualifications needed for conventional loans, borrowers need to have a good credit score, along with sufficient income and assets needed to cover the loan payments.

However, truth be told, many banks simply do not give loans to people buying into co-ops. Certain big banks like Citi, Wells Fargo, Bank of America, Chase, and a number of smaller banks offer co-op loans, but even a borrower with good qualifications may be rejected for various other reasons decided by the bank. Finding someone with rich experience in the co-op loans arena is key when trying to secure a share loan.  

Being the only bank in the United States that dedicates itself to delivering nationwide banking products and solutions to cooperatives and other member-owned organizations, the National Cooperative Bank (NCB), in addition to providing mortgage loans for co-op buildings, also provides share loans for co-op unit owners, which might be something a prospective co-op buyer may want to look into.

As co-ops are harder to finance, purchase, and sell compared to condos, the market rate for co-ops are suppressed to a certain extent. Hence, co-op prices are usually lower than a comparable condominium, and may be attractive to those on a slightly tighter budget. However, getting through the board approval process and ultimately securing a share loan is the hard part.

Still, even if a co-op buyer is able to secure a share loan, there are many intricacies that come with it. Much paperwork is involved when securing the loan, and organization in documentation is a must.

First, like traditional mortgages, a share loan is a secured loan. Along with a promissory note, the lender will file a lien against the borrower’s property. Filing a UCC-1 Financial Statement creates the lien. Lenders will also most likely require the original stock certificate and a copy of the proprietary lease. Additionally, a recognition agreement, which prohibits the co-op corporation from allowing the buyer additional financing, or canceling the stock or lease without the lender’s permission is also required.    

When a buyer fails to make or keep up with the monthly maintenance fees, the recognition agreement requires the co-op to inform the lender. In this case, payments can be made on behalf of the borrower to prevent foreclosure. With a signed stock power and assignment of the proprietary lease, lenders can protect themselves in the event of a loan default and make the necessary transfers in the event of a foreclosure by the bank. However, it is also important to note that if the co-op has a lien against the borrower’s property for unpaid maintenance fees, that lien has priority over the lender’s. 

Even when a share loan is paid off, there is still paperwork to be taken care of. In the end, all documentation shall be returned to the borrower and the borrower should receive what is known as the UCC-3 Termination Statement to remove the lien on the property.

Overall, the limited supply of share loans out there and the higher down payment required may limit the amount of prospective buyers for a co-op. However, for those who want to own their own home without the intention of renting to tenants, along with a desire for a high level of maintenance and services associated with a co-op, working to secure a share loan to buy a co-op unit may be worth it. Working with a good lender or an attorney with related experience can definitely make the process smoother for prospective buyers.       

Find more information on the differences between a New York City co-op and a condo here.   Compare New York mortgage rates here.

The Nuances of Buying a Manhattan Co-op versus a Manhattan Condo

Those moving to New York for the first time and those New Yorkers who grow tired of paying rent and looking to purchase their own place are all likely to end up dealing with a choice that most homeowners outside New York do not face: whether to opt for a co-op or a condo. The pros and cons of each are discussed here.

Co-ops

First, what is a Co-op? Short for co-operative, the concept of a co-op is a phenomenon that has been around for decades, mainly limited to the borough of Manhattan. In New York City, approximately 70 to 75% of all apartments available for purchase (and close to all pre-war apartments) are in co-operative buildings. These co-ops are owned by an apartment corporation. Hence, when you buy a co-op in a co-op building, you are actually buying shares of the corporation, which entitles the buyer or in this case, the shareholder, to a proprietary lease, authorizing the lessee exclusive use of an apartment in the building.

Essentially, unlike buying a house or a condo, you do not actually own your apartment. You own shares of the apartment corporation that owns the co-op building. The bigger your apartment, the more shares of the corporation you own. Shareholders contribute a monthly carrying charge (often called a monthly maintenance fee) to cover building expenses, which covers heat, hot water, insurance, real estate taxes, and staff salaries among other things.

Co-op Pros

Compared to condos, they are generally less expensive. A recent NY Times article noted that with all things being equal, “the value of a condo is about 9% more than the value of a co-op.”  Others have suggested that the figure for entirely equivalent properties could be as high as 30%.

Additionally, the real estate tax portion of the monthly maintenance fees is tax deductible.

The Nuances

Prospective buyers must be approved by a co-op Board of Directors. The approval process is often time-consuming, tedious and rigorous, requiring detailed information regarding the finances and background of the buyer.

The Board of Directors can determine how much of the purchase price can be financed and usually require higher down payments than condos.

As the monthly maintenance fee paid includes the underlying mortgage for the co-op building, the fees are generally higher for co-ops than for condos. Nonetheless, with regards to the underlying mortgage, the amount attributable to each unit is tax deductible. Some co-ops do not have an underlying mortgage, but a vast majority of them do. On the flip side, some condos may also have underlying mortgages.   

Another distinction between co-ops and condos is that many co-ops limit or forbid subletting. Each co-op building has its own set of rules regarding these limitations.  

Condos

The other 25 to 30% of apartments available for purchase in New York City are mainly condos, short for condominiums. These are becoming more popular and new construction is almost entirely condos. Like buying a house, condos are considered “real” properties. Buyers get a deed instead of stocks in a corporation.

Condo Pros  

Condos come with more flexibility as you can finance up to 90% of the purchase price and sublet them without restriction. 

There is no need to go through any sort of Board approval process when buying a condo.

Monthly maintenance fees are lower for condos as the fee does not include an underlying mortgage for a condo building. However, in this case, real estate taxes (usually paid annually) are not included in the monthly maintenance fee. This means that condo fees are not necessarily lower when you factor in the fact that real estate taxes are a separate payment that must be made.     

The Nuances

As mentioned before, condos are generally more expensive.

Unlike co-ops, the monthly maintenance fees are not tax-deductible, but the real estate tax paid separately is. 

Options are limited as there are way fewer condos than co-ops in the city.

Co-ops or Condos?

Overall, condos may be more attractive to buyers who want more flexibility in terms of financing and subletting, keeping in mind that they are usually more expensive and limited in supply. Co-ops, on the other hand may be more attractive to buyers who really just want to buy an apartment to live in, and do not mind going through the arduous Board approval process for a generally less expensive apartment.  

Compare mortgage rates for New York here.  See this article for more tips on getting a mortgage for New York co-op.

Could New Mortgage Rules Make Obtaining A Mortgage More Difficult

While lending restrictions seem to be very stringent right now, there are new regulations that are set to be in place in 2013 which could make them even stricter.

If you have been paying attention to the news in the mortgage industry, you may have heard about some of the new mortgage rules and regulations that are set to take effect in 2013.  If you are unfamiliar with them, following is a brief explanation:

  • The Basel III Agreement calls for higher bank capital standards and are designed to increase regulatory requirements on a lender’s leverage and liquidity.
  • The “qualified mortgage” rule refers to a borrower’s ability to repay the loan if it is granted to them. In order to receive a qualified mortgage, the bank must determine that you are reasonably expected to make payments every month. However, there have been no clear guidelines in the new legislation as to what determines a qualified mortgage, so lenders have a safety net built into the regulation which makes it more difficult for borrowers to sue a lender for granting a mortgage to someone who was less than qualified to repay it.
  • The “qualified residential mortgage” rule states that banks and lending institutions that approve mortgage-backed securities should hold on to 5 percent of the loan. This rule gives banks more responsibility in determining to whom they decide to loan money to for mortgages. By incorporating the idea of “risk retention,” this will make lenders more hesitant about who can qualify for a mortgage loan.

Analysts are expecting these three new rules to severely limit the number of mortgages that will be given to home buyers when they go into effect in 2013. According to a report by the American Action Forum and quoted in an article in the Wall Street Journal, the new guidelines are expected to increase the costs for borrowing for millions of new home buyers across the country. The credit restrictions are going to increase more so than they already have and fewer people are going to qualify for a mortgage.

Using the lending standards that were prevalent in 2001 as a baseline for “more normal lending standards,” the study by the AAF examined the current regulations and the guidelines that are to be set in place next year. The study found that today’s credit lending standards for mortgage borrowers would decrease the number of loans by  between 14 percent and 20 percent in the next three years. This could reduce sales of homes by as much as 13 percent. As a result of the slowed home purchases, there would be a 1.1 percent decrease in the GDP by 2015, which is something that definitely will not help the economy.

While there are few, if any, people arguing that we should go back to the loose standards of 2001 that resulted in the housing crisis in the last decade, some are saying that policymakers should not over-regulate the mortgage industry and make the standards too high for home ownership. Others say that the Dodd-Frank rules would give more protection to consumers without creating stringent rules that would choke the housing market out of new buyers.

Which side of the fence are you on? Do you think the new Dodd-Frank regulations that are set to go into effect will have a positive or a negative impact on the mortgage industry? Should there be some changes to the regulations to make them work better?

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Are You Benefitting from the Mortgage Interest Deduction?

The mortgage interest deduction has been on tax forms for many years. Would it affect you at all if that deduction was no longer available?

There has been a lot said during the presidential campaign in recent months about taxes, mortgages, and deductions. One of the most hotly debated topics on the campaign trail is the mortgage interest deductions that you can claim on your taxes. While some politicians and lawmakers want to do away with this deduction, there are others who say we should keep it.  A recent article in the New York Times questioned whether it is actually an effective deduction that benefits the majority of homeowners and society at large. 

According to Joseph Rosenberg with the Urban-Brookings Tax Policy Center, most homeowners chose to not claim the mortgage interest deduction when filling out their taxes. The reason for this is because most of them do not itemize their deductions. In fact, according to Rosenberg, only about 30 percent of homeowners claim this tax deduction each year instead of taking the standard deduction.

Another finding by this policy center is that most of the taxpayers who itemized deductions on their tax forms were typically upper-middle class families and upper-class families. In those two categories, the households that earn between $100,000 and $500,000 benefit the most from the mortgage interest deduction.

So why are households with a higher income taking advantage of the mortgage interest deduction more often than the households with a lower income? The answer is simple – those are the households that stand to benefit the most from the deduction. According to the policy center’s calculations, this deduction for the households with the higher incomes can account for as much as 1.5 percent of their after-tax income. Compare that to the 0.3 percent and the 0.7 percent for households making $40,000 to $50,000 and $50,000 to $75,000 respectively, and you can see why the upper income brackets would itemize their deductions to take advantage of it. In addition to that, many of the people making between $100,000 and $500,000 have a vacation home. Under the current mortgage guidelines, they can deduct the mortgage interest on both of those homes, as long as it does not exceed more than $1 million all together. Some opponents of the deduction say we should do away with it since it is only benefitting the upper class households without offering much help to the lower income earners.

Proponents of the deduction have a different viewpoint. People like Robert Dietz, who is with the National Association of Home Builders, says that some households could be considered middle class even if they are earning $200,000 a year. In some of the metropolitan parts of the country, a $200,000 annual income could be considered average when compared to the surrounding households. The $200,000 income might sound high, but households that make this much are generally living in areas where the cost of living is much higher.  Dietz also says that the highest rate of mortgage interest deductions where taken by homeowners between the ages of 35 and 45 – a time when they are buying their first home.

Where do you stand on the mortgage interest deduction? Are you for keeping it the way it is or doing away with it altogether?

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