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Tuesday, April 15, 2014

Lend Responsibly: Subprime Safety

Back in 2007, “subprime” became a dirty word.  In the years leading up to the recession, lenders became increasingly aggressive in their lending guidelines in the pursuit of a greater market share of a very profitable business.  Looking back it is obvious that subprime lending had gotten out of control like an alcoholic at an open bar.  There was no chance that the evening would end well.

But should subprime be forever banned from the housing finance market?  Of course not.  Even the alcoholic can be fun to have at a party as long as we don’t let him drink anything stronger than ginger ale.  There is a need for sober subprime lending in the housing market.  In fact, some responsible subprime lending has already returned.  Wisely, no one actually refers to it as “subprime,” since to many people that is still a dirty word.
There are mortgage products available today to homeowners with less than perfect credit, but they require strong income documentation and a sizable down payment.  As more private capital becomes confident in the mortgage market, we will see an expansion of responsible subprime lending.  But let's promise to keep it under control.

Thursday, March 13, 2014

That's a lot of Boomerangs!

In 2013, singer-songwriter Lyfe Jennings introduced his hit song “Boomerang” (just ask your kids if you haven’t heard it!). The lyrics include the line “So throw me away, cause if I were a boomerang, I’d turn around and come back to you.”  Likewise, in 2014 the housing industry will have a big hit from “Boomerang Buyers.”  If you’re not familiar with this term, you’ll soon understand the analogy.  From 2008 through 2013 there were 269,049 properties in the Greater Phoenix area that were either foreclosed or short sold.  Those former homeowners that experienced defaults have for the most part been thrown out of the homebuyer market.  But now in most cases, those former homeowners are eligible to purchase homes again.  They’re coming back.  Ergo, they are dubbed “Boomerang Buyers.”  In 2013 the top two markets for “Boomerang Buyers” were Riverside-San Bernadino and Los Angeles.

The waiting period to qualify for a home loan after an event like a foreclosure or short sale varies depending on the type of mortgage.  Short sale waiting periods for conventional loans range from 2 to 4 years, 3 years for an FHA loan.  Foreclosure waiting periods range from 3 to 7 years. 

Based on the number of short sales and foreclosures that have already taken place, Fletcher Wilcox at Grand Canyon Title Agency estimates that 42,444 previous homeowners that either short sold or were foreclosed on will have completed the three year FHA waiting period and will be eligible to purchase a home with an FHA insured loan in 2014.  That’s a lot of boomerangs, and potentially a lot of homebuyers coming into a market that has slowed down in recent months.  As the market shows slight signs of softening, now is a great time for boomerang buyers to come back.

Thursday, March 6, 2014

5 Financial Benefits to Homeownership

In our article from a few weeks ago, “Ownership Generation,” we explored social and emotional reasons why young renters grow up to be homeowners.  But the reasons to buy a home are not just warm and fuzzy.  There are also cold-hard money related advantages too.  In this article we will discuss some financial benefits to owning the roof over your head.  This list of benefits is adopted from a December 2013 report from the Joint Center for Housing Studies at Harvard University.

1.       Housing is the one leveraged investment available

According to the report, “Homeownership allows households to amplify any appreciation on the value of their homes by a leverage factor.”  For example, if a home is purchased with a 10% down payment, and the home appreciates by 10%, the homeowner has doubled their investment even though the value of the home increased by only 10%.

2.       You’re paying for housing whether you own or rent

When making a mortgage payment part of that payment goes to pay down the principal which increases your equity.  With rent, you’re only improving the landlord’s equity position.  I would also add that rent is similar to an adjustable rate mortgage, as each year there is the risk that the payment will increase.

3.       Owning is usually a form of “forced savings”

The report states that “Having to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings.”

4.       There are substantial tax benefits to owning

Our tax code is very favorable to homeowners.  Mortgage interest and property taxes can be deducted each year from a household’s taxable income.

5.       Owning is a hedge against inflation

Although our economy hasn’t experienced significant inflation in many years, there is always a risk of inflation in the future.  According to the report, home values tend to rise at or above the rate of inflation which is a valuable hedge against inflation risk.

The homeownership rate in America fell as a result of the recession, but the benefits of owning a home still apply.  Those advantages are social and emotional, but as we have demonstrated they are also financial.

Tuesday, March 4, 2014

Business Owner Blues

Last week’s article “Getting a Mortgage These Days:  It’s Not That Bad,” generated a lot of questions specific to the challenges of qualifying business owners.  As more of the workforce moves away from 9 to 5, W-2 employment, more potential homebuyers have a complicated task of documenting their income for the purpose of qualifying for a mortgage.

The stated income loans of the past made qualification much easier for self-employed borrowers.  Today, due to legislation and rules responding to the Great Recession, all income needed to qualify for a mortgage must be documented.  For business owners or individuals that work on contract, that generally means 2 years of individual and business tax returns must be provided to the lender for review.

Applicants that have just started a business will find it difficult, if not impossible; to qualify as the business must have a 2 year history of generating income.  Also, since most new businesses rarely report a profit in the first year, the tax returns are unlikely to reflect adequate qualifying income. 

One of the advantages of owning a business is having the ability to write-off expenses related to the business from taxable income.  This is wonderful for reducing tax liability, but it also reduces the maximum loan amount that the business owner can qualify for.  The exception to this rule is depreciation expenses.  Since depreciation is only a “paper” expense, the lender is able to add the reported depreciation back to the applicant’s net income.

Yes, business owners must provide more documentation in order to qualify for a mortgage, but we are closing loans for these types of clients every day.  With planning and sound advice from a licensed mortgage professional, self-employed mortgage applicants can navigate through the rules to qualify for and obtain a home loan.

Monday, February 24, 2014

Getting a Mortgage These Days: It's Not THAT Bad!

I read an article this week titled “From ‘No Doc’ to ‘Every Doc’” on Fox Business.  In the article the author complained that lenders have become too strict and make the mortgage process too cumbersome for borrowers.  At the same time he rightfully acknowledged that if given the choice between the two, “Every Doc” is a healthier choice than “No Doc” for borrowers, lenders, and the overall economy.  If you have read articles or heard stories about how difficult it is to get a loan these days, here are a few tips to help ensure the process is a smooth one.

Have a Documentable Source of Income

For most people this is easy.  Employees of companies receive paystubs and W-2’s and their documentation is fairly straight forward.  When fluctuating sources of income come into play like commission or overtime additional documentation will be required.  Those types of income can be used for qualification provided they are consistent or improving year over year, and are documented for at least 2 years.

Self-employed borrowers have had the toughest transition since the days of “no doc” or stated income loans.  Many business owners write-off so many expenses on their tax returns that their remaining documented qualifying income isn’t adequate for the loan amount they seek.  Knowing that they need to provide their lender with two years of personal and business tax returns, self-employed individuals should plan ahead and thoroughly consider all expenses in the year or two proceeding when they expect to apply for a mortgage.

Make Sure Down Payment Funds are in a Documented Account

Most buyers save up their down payment in an account in their own name.  Sometimes documenting a down payment can get complicated if the funds are in a business account.  This situation is not uncommon with self-employed borrowers and can lead to additional documentation.

If the down payment funds are in an account that doesn’t belong to the borrower, then a gift needs to be documented between the owner of the account and the borrower.  Sometimes the borrower sells an asset, like a car, that also must be documented so that the down payment funds can be sourced.

When reviewing bank statements to document the down payment, the lender will question any large non-payroll deposit that is greater than 25% of the borrower’s monthly gross income.  Since most of the purchase price is covered by a loan, the lender is trying to make sure that the borrower has their own assets (or a documented gift) into the property.  It’s their “skin in the game.”

Don’t Add Any New Debt during the Process

While purchasing a home, please don’t purchase a car or any other large item that will cause one to incur debt.  Also, if one is purchasing new furniture or appliances for the home, be sure not to buy it on credit without consulting with your loan originator first.

When thinking about buying a home, the first person one should speak with is a licensed mortgage professional.  Most real estate agents that value their time won’t even show a buyer a home until they have been pre-qualified by a lender.  Consult with your lender first.

Thursday, February 20, 2014

Ownership Generation

What was the impact of the housing bubble on the American psyche?  Is the American dream of homeownership no longer held in high regard?  Are millennials less likely to want to own a home when they saw their parents lose their home to foreclosure?

In the aftermath of the Great Recession, many experts believe that young people will be more likely to grow up to be renters rather than homeowners.  There are advantages to renting:  mobility; low maintenance; and less responsibility.  All of those are aspects are associated with the characteristics of young people which is why there might be a belief that young people will grow up to be renters.

So will more young people grow up to be renters?  The key is that eventually young people do “grow up,” and when they do their lives change.  They get married, have children, and then they want some stability.  Their kids enroll in school and suddenly they are less mobile and take on more responsibility.  The characteristics of the millennial generation that experts say will result in more renters are really just characteristics of young people.  While the stability that parents seek for their families is less secure if they don’t own the home they live in. 

The recession was a major setback for many people.  It did in fact reduce the rate of homeownership in America.  But it is this author’s belief that most Americans still want to own a home, and when they are in a financial position to own a home they will do so.

Tuesday, January 21, 2014

Loans and Oranges

If you were to pick any industry and shrink it by 30%, chances are that it would have a dramatically negative effect on the participants in that industry. Let’s take citrus as an example.  If the predictions in the country for citrus consumption for the foreseeable future dropped by a third, you can probably imagine what that would do to citrus farmers.  Many of them would likely sell their farms and exit the business. 

In addition, what would happen if the government started telling the citrus farmers exactly what size, color and shape of oranges were allowed to be sold in the open market? You would likely see a percentage of these farmers getting out of the industry because their product no longer conformed to government requirements.

The analogy about citrus farmers is not all that far off from what the mortgage industry is experiencing right now.

The Mortgage Bankers Association recently dropped their 2014 forecast for loan originations.  They expect that the volume of loans originated this year will be a full one-third less than what was originated in 2013.  The main reason is that interest rates are rising and there is very little refinance activity.  Also, on January 10th the CFPB's Qualified Mortgage Rule went into effect which eliminates certain types of loans that mortgage bankers and brokers originated in the past.

So what’s going to happen to those lenders that spent 2012 and 2013 riding the wave of easy refinance business?  Who knows for sure, but many of them are likely to go away. What will happen to lenders who did not prepare for the recent regulatory changes in the industry? Some of them will be closing shop too. 

This all sounds grim, but fear not! Even though many lending companies will likely close shop or be forced out of the industry, there are many others who have planned well and are prepared for the changes in our industry. This is why it is important to align yourself with a lender that is intensely focused on helping homebuyers become homeowners.  For example, our business model at Homeowners Financial Group has been the same for over a decade.  Sure, we are happy to help our clients when they need a refinance, but we never lost focus on our commitment to homebuyers and our partners in the home buying process, real estate agents and builders.

In 2014 and beyond, make sure you work with a lender that has the know-how, commitment and “staying-power” to succeed in today’s market.