Helping family with homeownership

real estateThe holiday season is about spending time with family and enjoying each other’s company. But as a consequence of the Great Recession, some family members (including adult children) have made “family time” a year round thing by moving in. Whether it’s a child moving back with parents after college, or maybe family who suffered a financial hardship; having accommodating family can be a blessing. However, as the economy slowly improves, the post-recession family nesting trend is changing and many are (re)establishing their own homes.

Some people are taking advantage of an improving housing market to create one of the recent housing trends – purchasing an investment property to “house” family members. Although the benefits of purchasing an investment property and having family live there may not be obvious, some realize that it can be mutually beneficial. Having a trusty and inherently loyal family member live in the rental property can mean a regular rent check, as well as ensure that the home is maintained. As with any investment property – the longer you own it, the greater potential for long term equity.

Some are banking on recent rising home values and taking out a home equity line to purchase investment homes, although some are fortunate to have the assets to pay cash. However, many rely on financing the property, which requires a hefty down payment (typically 20%) as well as an interest rate slightly higher than that of the owner-occupant mortgage you might have on your own home. And although buying an investment property to house family members sounds as if it is a no-brainer to get them out of your own house; due diligence is required to determine if this is advantageous for you, as well as consulting with your tax preparer about tax benefits and/or consequences.

If buying the investment property is not an option, you may be able to help family qualify for a mortgage of their own. Although FHA mortgages are typically common among first time home buyers and/or buyers who need a low down payment loan; FHA has been the go-to program for helping family buy a home –especially when the home buyer falls short of qualifying on their own because of a lack of employment history, assets, and qualifying income. Although Fannie Mae, Freddie Mac and VA permits co-borrowers who are not intending to live in the home to co-sign for family; FHA has additional features that may make the loan more attractive. Besides allowing family to gift the borrower’s down payment, FHA may allow alternate credit sources to be substituted when the borrower has insufficient established traditional credit.

Although “co-signing” as a non-occupying co-borrower might help your child or some other family member become a home owner, it should not be taken lightly. You have to consider that even though you do not intend to live in the house or make the mortgage payments, you are signing the mortgage note. Not only could you be held responsible if payments are not made, your credit may even be dinged even if payments are late.

Although there are benefits to having extended family live together, you might be thinking of helping them start their own household. Before making any decisions, do your due diligence. And talk to several lenders, as with any mortgage loan program – underwriting varies from lender to lender and guidelines typically change without notice.

© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Will new mortgage rules set stage for subprime resurgance

Subprime MortgageAfter much speculation, new mortgage and appraisal rules have recently been revealed and will go into effect in January.  Combined with the recent news of FHA’s reduction of loan limits (authorized increased limits sunset the end of 2013), there’s been a lot of buzz about how the housing market and home buyers could be affected.

On December 18th, the Consumer Financial Protection Bureau (CFPB) launched a campaign to educate consumers about new mortgage rules that go into effect January 10th; specific information and fact sheets can be found at consumerfinance.gov.  Among the new rules, several include: the creation of the Qualified Mortgage (QM); new mortgage servicing rules; and additional protections financially challenged borrowers.

The QM is classified by the CFPB as a loan which qualified borrowers are presumed to be able to repay; and is described as a “safer” loan compared to some of loans originated prior to the mortgage crisis.  One of the main features of a QM, as of January 10th, is that mortgage lenders will have to assess the borrower’s ability to repay.  Additionally, the borrower cannot exceed a total monthly debt-to-income ratio (all monthly obligations including mortgage payments) of 43%.  Although lenders must make an effort to determine a consumer’s ability to repay based on typical factors including: income, assets, and debts; the new rules do not eliminate all subprime mortgages.

Two additional features of a QM include safer terms and limiting points and fees.  A QM cannot have loan terms that have been attributed to “risky” loans, such as negative amortization or interest only payments.  Furthermore, if you are directly paying a mortgage broker to originate your loan, they can no longer receive additional payment by another party for the same transaction; a QM is limited to 3% of the loan amount for points and fees.

To assist borrowers, the CFPB has set new mortgage servicing rules that include: providing clear mortgage statements that show how payments are credited; addressing mistakes promptly; crediting payments when received; and providing early notice for adjustable interest rate increase.

To assist borrowers facing financial challenges, the CFPB institutes rules that include: foreclosure cannot be initiated prior to 120 days delinquent; a foreclosure cannot be initiated if a complete application for mortgage assistance has been submitted; servicer call centers must be able to answer borrower questions relating to critical documents; as well as providing accurate and timely foreclosure status to borrowers who ask.

Financially challenged borrowers seeking assistance through their mortgage servicer have additional protections.  Borrowers who make application for loss mitigation early on must have all their options evaluated with one application; an explanation must be provided to borrowers rejected for loss mitigation; and borrowers could appeal a loan modification rejection based on the servicer’s mistakes.

New appraisal rules instituted by the CFPB become effective January 18th.  Although these rules do not apply to all mortgages, typically a borrower should expect: a licensed appraiser; an interior of the property, and a copy of the appraisal prior to closing.  Additionally, a second appraisal is required for a home that is considered a “flip;” a home sale that has sold in the previous six months is classified as a flip.

Although some have speculated the new rules, along with reduced FHA loan limits, will limit the availability of mortgages for some home buyers; others see the resurgence of the subprime mortgage to fill the gap.

New mortgage rules, lowered FHA loan limits, and other new changes are increasing investor backing of non-conforming mortgages.

by Dan Krell © 2013
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Disclaimer.  This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice.  Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction.  This article was originally published the week of December 23, 2013 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

Another government shutdown article – what home buyers and sellers should know

by Dan Krell © 2013
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Housing MarketYes, another column about the federal government shutdown (like you need to read another column about the shutdown, right?). Although it is expected that the majority of home purchases won’t be affected by the shutdown, home buyers and sellers should be on their toes to avoid possible pitfalls; buyers and sellers should be aware of what could affect their purchase/sale. And even if both houses of Congress agree to some continuing resolution before publication, the shutdown information could be useful during the next budget battle (which is likely to occur in about two weeks).

Many experts agree that the government shutdown won’t last long. Regardless, there is a consensus that the longer the shutdown continues, the potential increases to impair the housing market. Additionally, some experts expect the shutdown to dovetail into an anticipated bitter debt ceiling battle later this month.

It has been widely acknowledged that the recovering housing market has been a major contributor to the 2% GDP growth. Economists have agreed that it would be logical to maintain government functions that compliment and support the still fragile housing recovery.

However, regardless of what you hear; the shutdown will certainly affect the housing market. Some mortgage originations and closings will be affected, and some buyer activity may be put on hold until the government shutdown ends (like the sequester). Although there appears to be a commitment to maintain FHA and VA loan operations during shutdown, new loan processing may experience delays (Federal department shutdown contingency plans can be viewed on Whitehouse.gov).

FHA’s (Department of Housing and Urban Development) contingency plan states that: “The Office of Single Family Housing will endorse new loans under current multi-year appropriation authority in order to support the health and stability of the U.S. mortgage market. (FHA endorsements currently represent 15% of the market.) Approximately 80% of FHA loans are endorsed by lenders with delegated authority. The remaining 20% are endorsed through the FHA Homeownership Centers, leveraging FHA staff with a contractor that works on-site.”

The VA’s (Department of Veteran Affairs) contingency plan states that during 1995-96 government shutdown, “Loan Guaranty certificates of eligibility and certificates of reasonable value were delayed.” However, learning from that experience, the shutdown contingency plans indicate that there will be 95% of employees who are either fully funded or required to perform “excepted” functions.

Conventional loans should be unaffected as Fannie Mae and Freddie Mac operations continue through the shutdown; Fannie and Freddie operations depend on lender paid fees.

Unlike shutdowns in the past (the last Federal shutdown was 1995-96), approximately 90% of all current mortgages in the country are insured, guaranteed, and/or purchased by federal entities. During the last shutdown, a thriving private sector mortgage industry existed; private investor groups that purchased mortgages on the secondary market, as well as many portfolio lenders (lenders that keep and service loans they originate) offered alternatives to home buyers. During the last shutdown, home buyers who were unable to obtain or wait for government loan approval, had other options for financing that included “Alt-A” and sub-prime mortgage programs that seem to not widely exist today.

If you are planning to settle on a home in the next few days, confirm with your lender that there are no delays. If you are in the process of looking for a home, check with your loan officer about a reasonable closing date before you enter into a sales contract.

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Disclaimer.  This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice.  Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction.  This article was originally published the week of September 30, 2013 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

Sequestration will affect real estate and housing markets

by Dan Krell
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Housing and Sequestraion(Dan Krell © 2013) Remember the “Fiscal Cliff?” Well, after a two month hiatus, sequestration concerns are again entering (if not intrusively) the minds of those who may be affected. And, if you remain indifferent on the matter, you might consider the local economic effect from looming government budget cuts that may begin on March 1st.

On February 14th, HUD Secretary Shaun Donovan provided written testimony to the “Hearing before the Senate Committee on Appropriations on The Impacts of Sequestration” (HUD.gov). Secretary Donovan outlined what he described as the “harmful effects of Sequestration” to not only at-risk populations, but families, communities, and the economy at large, as he concluded, “…Sequestration is just such a self-inflicted wound that would have devastating effects on our economy and on people across the nation.”

As a result, HUD counseling would be limited. According to Secretary Donovan, about 75,000 families would not be able to receive the critical counseling services that include pre-purchase counseling, and foreclosure prevention counseling. According to the Secretary: “…This counseling is crucial for middle class and other families who have been harmed by the housing crisis from which we are still recovering, and are trying to prevent foreclosure, refinance their mortgages, avoid housing scams, and find quality, affordable housing. Studies show that housing counseling plays a crucial role in those 3 efforts. Distressed households who receive counseling are more likely to avoid foreclosure, while families who receive counseling before they purchase a home are less likely to become delinquent on their mortgages.”

FHA has been the workhorse to stabilize the housing market as well as providing the means for affordable home purchases. Those directly affected by sequestration would be home buyers and home owners who are applying for FHA mortgages; as well as those seeking assistance through HAMP and HAFA. In written testimony, Secretary Donovan stated that “…furloughs or other personnel actions may well be required to comply with cuts mandated by sequestration.” As a result, “…The public will suffer as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties.”

Another concern is the possibility of a sharp increase in interest rates. Up until now, home buyers (and those refinancing) have had the benefit of historically low mortgage interest rates. Low mortgage interest rates are one of the reasons why home affordability is also at historic levels. A sharp rise in interest rates combined with FHA mortgage delays could shock the housing and real estate market. The result could be housing activity similar to what we experienced immediately after the financial crisis. Granted, the shock would probably not be as prolonged as what occurred in 2008-2009, but nonetheless significant.

In a region that has been relatively unaffected by unemployment and economic issues due to a strong government workforce, sequestration could essentially put a damper on the local housing recovery. Home buyer activity has already been affected, as those who are concerned about sequestration have either put their home purchase plans on hold, or have changed their housing plans altogether. And of course, over time, the changes to consumer behavior would trickle down to various sectors of the economy.

But don’t worry, although sequestration is set to begin March 1st, budget cuts won’t occur all at once. Unless Congress acts on the matter, you might not immediately feel its effects.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 18, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Necessary reforms to save FHA

by Dan Krell
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home for saleAfter the financial and foreclosure crises, FHA became the workhorse that not only kept the housing industry afloat, but assisted many financially distressed home owners keep their homes. After taking the brunt of the crises and almost facing insolvency, it’s time for FHA to get back to helping home buyers who might not otherwise have the means of purchasing a home.

The Federal Housing Authority (also known as FHA) was established in 1934, to help jump start a housing industry that was decimated by the Great Depression. Much like the housing downturn of the recent “Great Recession” which followed a housing boom; the 1930’s housing bust followed a 1920’s housing boom. At a time when a majority of Americans rented, the FHA provided the means for would be home buyers to become home owners.

Unless you’re familiar with the FHA’s history, you might have questioned the use of FHA as a means to refinance home owners with underwater mortgages as well as assisting those in foreclosure. However, FHA has a history of assisting home owners facing financial uncertainty, as well as making mortgages available to home buyers during times when conventional lenders were not lending. And although many criticized such assistance programs as being unnecessary and wasteful; in retrospect, these measures were significant and necessary during an uncertain time for the housing industry – regardless of the outcomes.

Last year, the outcomes of mortgage and home owner assistance programs were highly criticized as being responsible for almost bankrupting FHA. Although many describe FHA’s woes stemming from being saddled with non-performing loans and a historic number of borrowers; Tami Luhby, in her January 24th 2012 article in CNNMoney (Has Obama’s housing policy failed?; cnnmoney.com), provides some insight to the crises related assistance programs’ lender related bureaucratic issues and low success rates. She reported that at the time of her article, the HAMP program only helped about 910,000 home owners refinance to lower interest rate mortgages instead of the planned 4 million; and the HARP program “… which was intended to reach 5 million borrowers, has yielded about the same results. Through October [2011], when it was revamped and expanded, the program had assisted 962,000…”

It comes as no surprise that after eroding capital reserves, congressional hearings were held late last year to address FHA’s losses. As a result, FHA plans to shore up its financial short falls by increasing mortgage insurance premiums, increased down payment requirements for loans in excess of $625,500, as well as tightening underwriting standards.

FHA’s survival may come down to its perceived role in housing industry. And of course, there is criticism from both sides: some argue that FHA’s losses have become an unsustainable burden; while others argue the tightening measures will hurt the housing market and limit home ownership.

So, when I read Jacob Gaffney’s January 15th lamentation about refinancing out of an FHA mortgage (Refinancing Away From the Government; With an FHA Blessing: housingwire.com), the planned FHA changes not only make sense, but is necessary to preserve the access to homeownership that FHA provides. FHA Commissioner Carol Galante’s response to Gaffney not only impressed him, but may sum up the FHA mission: “…The role of FHA is to enable homeowners. FHA helped you get your home, made it happen” …”If you find you can move on, then I’m pleased you have that opportunity.”

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 4, 2013. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.