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January 27, 2017July 13, 2019

FHA mortgage insurance facts

There’s been a lot of reporting on FHA mortgages lately, creating some confusion. Of course I’m referring to the controversy surrounding FHA’s annual mortgage insurance premium (also known as MIP). Many were surprised to hear that one of the outgoing directives of the Obama administration was to lower the FHA MIP. And, eleven days later, many were just as surprised to hear that the new Trump administration reversed that directive. So what are the FHA Mortgage Insurance Facts?

FHA Mortgage Insurance Facts

Mortgagee Letter 2017-01, dated January 9, 2017 described revisions to the annual MIP for “certain” FHA loans. The effective date of the revisions was to be January 27^th. Meaning, that FHA mortgages that closed and/or disbursed on or after January 27^th would have had the lower MIP. Although the general reporting was that borrowers would save an average of $500 per year (an average of about $41 per month), the actual savings would have depended on the amount borrowed, term of loan and loan-to-value (percentage of loan amount to home value).

Additionally, the lower MIP would have been on new loans that were to have been disbursed (closed) on or after January 27^th. Contrary to some reporting (and more reporting and more reporting) and social media postings, existing FHA loans would not have benefited from the lowered the MIP. Also, the reduction was suspended before the effective date, so MIP did not increase for new mortgages.

The rational stated in Mortgagee Letter 2017-01 (Purpose and Background sections) for the lower MIP was that FHA has met the obligation to its Mutual Mortgage Insurance Fund (MMIF). The MMIF covers lender losses on FHA mortgages. Historically, HUD has adjusted the MIP (by increasing or decreasing MIP) as needed to meet the MMIF mandated requirements. HUD’s last FHA MIP reduction occurred in 2015. The November 15, 2016 Federal Housing Administration Annual Report to Congress reported that the MMIF increased from the previous year and the Fund’s capital ratio was 2.32 percent (above the 2 percent minimum capital reserve requirement). The Report did not signal any impending reduction to the MIP this year.

Some have talked about FHA mortgage insurance facts to include budget juggling and over projecting to make the MMIF appear solvent. Consider that the MMIF pre-crisis reserve ratio was well above the minimum 2 percent but needed about $1.7 billion to replenish reserves after the crisis. When the FHA MIP was reduced in 2015, many testified to congress about the potential risks. Douglas Holtz-Eakin, President of the American Action Forum provided such testimony February 26, 2015 to the United States House of Representatives Committee on Financial Services Subcommittee on Housing and Insurance “The Future of Housing in America: Oversight of the Federal Housing Administration, Part II.” Holtz-Eakin provided data stating:

Adding to concern surrounding premium reductions, FHA’s recent history has been plagued by missed projections. These missed projections enhance the perception that FHA downplays risks borne by taxpayers and cast doubt on the assumption that FHA will continually improve as projected despite cutting annual premiums. Since FY 2009, FHA’s capital ratio has been below the 2 percent minimum mandated by Congress. FHA has repeatedly projected marked improvement only to miss its targets…

In every actuarial review since 2003, the economic value of FHA’s MMIF has come in lower than what was projected the previous year …While FHA has in the past pointed to programs like home equity conversion mortgages (HECM) or the prevalence of seller-funded down payment assistance for losses greater than anticipated, erroneous economic assumptions and volume forecasts are more frequently to blame.

Following the dramatic fall in FHA’s economic value shown in Table 1, legislative attempts to reform FHA in the last Congress would have raised its mandated capital ratio even higher. Reform proposals have included a new capital ratio of either 3 percent or 4 percent, levels FHA’s MMIF is not expected to reach until 2018 and 2019 respectively before factoring in the effects of premium reductions. FHA’s capital buffer is meant to protect taxpayers in an economic downturn while preserving FHA’s ability to fulfill its mission; its restoration is critical. Furthermore, many rightly worry that FHA’s current economic value is overstated due to the influx of money from major mortgage‐related legal settlements and the one-time appropriation of $1.7 billion from the Treasury Department ..

An example of budgetary juggling is hinted by HUD Secretary Julián Castro in his July 13, 2016 oral testimony to the U.S. House Committee on Financial Services Hearing on “HUD Accountability.” In his statement earlier this year, he attributed the health of FHA’s MMIF to HUD’s Distressed Asset Stabilization Program (The DASP was put into place to help troubled home owners who were at risk of default, as well as dealing with delinquent and defaulted mortgages):

“…And when you consider that DASP has contributed more than $2 billion to the MMI Fund above what would’ve otherwise been collected, it’s clear this innovative program is a significant reason why the Fund’s capital reserve ratio is now above its 2 percent requirement.”

Of course, FHA mortgage insurance facts include changes to DASP. This would most likely reduce contributions to the MMIF. A HUD press release outlines those changes (FHA Announces Most Significant Improvements to Date for Distressed Notes Sales Program; June 30, 2016):

In addition, FHA’s latest enhancements prohibit investors from abandoning low-value properties in high-foreclosure neighborhoods to prevent blight. FHA is also offering greater opportunity for non-profit organizations, local governments and other governmental entities to participate in DASP. Loans are not eligible to be sold through DASP unless and until all FHA loss mitigation efforts are exhausted. On average, mortgages sold through this sales program are 29 months delinquent at the time of the auction.

One of the FHA mortgage insurance facts is that FHA is supposed to be self-funded through its MMIF. Suspending the MIP reduction may be to assure the longevity of FHA to future home buyers. In suspending the MIP reduction, Mortgagee Letter 2017-07 stated (Background section): “FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers. As such, more analysis and research are deemed necessary to assess future adjustments while also considering potential market conditions …”

Original published at https://dankrell.com/blog/2017/01/27/fha-mortgage-insurance-premium-facts/

By Dan Krell
Copyright © 2017

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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.

January 12, 2017January 13, 2017

Best home sale?

As the housing market strengthens, consumer confidence in real estate increases. Along with a stronger home sale market comes the increase of for-sale-by-owners (FSBO). The obvious upside to selling a home on your own is to increase your net. And a study conducted in 2009 may support your FSBO yearnings. But is FSBO the best home sale?

Research conducted by Hendel, Nevo, and Ortalo-Magné (2009; The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com; American Economic Review; 99:1878-98) found that homes that sold on a FSBO website sold for as much as homes that were listed in the MLS. However, homes that sold on the MLS did so with significantly fewer days on market. The authors also found that a significantly higher proportion of home buyers bought homes listed on the MLS. The research concluded that “FSBO attracts a particular type of seller…” A FSBO seller is very patient to wait for someone to pay for their higher priced home.

The research conclusion about sale price is contrary to annual surveys reported by the National Association of Realtors. For example, the National Association of Realtor’s 2015 Profile of Home Buyers and Sellers reported that the average home sale price for a FSBO was $185,000, while the average home sale price for an agent assisted home sale was $240,000. Of course, the 2009 research indicated that homes that did not sell on the FSBO website were promptly sold on the MLS. Besides being limited to a specific market, excluding “failed” FSBO sales from their data set could have skewed results and could explain 2009 study’s conclusion about sale prices. From NAR’s Field Guide to Quick Real Estate Statistics:

For Sale By Owner (FSBO) Statistics

FSBOs accounted for 8% of home sales in 2015. The typical FSBO home sold for $185,000 compared to $240,000 for agent-assisted home sales.

Most difficult tasks for FSBO sellers:

Getting the right price: 18%

Preparing/fixing up home for sale: 13%

Understanding and performing paperwork: 12%

Selling within the planned length of time: 3%

Having enough time to devote to all aspects of the sale: 3%

Going FSBO sounds simple and maybe the best home sale; but going it alone is not for everyone. Selling a home is much more than putting a sign in the yard – especially if you are demanding top dollar. Take your efforts up a notch to increase the probability of realizing your sales goal. Among the many tasks that are essential for a successful home sale, consider a basic marketing plan. Attract more buyers with professional high quality photos. Prepare for buyers to visit your home by decluttering and making minor repairs. You should also have a contract ready in case there is no buyer agent. Even though you are selling FSBO, you still have to comply with federal, state, and local disclosure laws. Be prepared for the details of the transaction, which include: negotiating home inspection repairs; providing sale comps to appraiser; dealing with the buyer’s lender and title company.

If going FSBO is intimidating, consider hiring a real estate agent that offers à-la-carte services. The agent can assist you in many areas of your sale, only charging you for the pieces you need. You can even pay a flat fee for a MLS placement of your sale.

If you’re like many FSBO’s, you’ll realize the value of a Realtor. Real estate agents are housing and marketing experts that can assist you in setting a realistic sale price. Besides freeing up your time, experienced agents can facilitate offers and are expert negotiators. They know of latest home sale trends and are aware of any new legislation that can affect your sale.

The best home sale

You may find selling FSBO attractive. But selling a home is in the details that are executed throughout the transaction. The best home sale may actually be through a Realtor. The research supports the notion that hiring a Realtor can provide a more successful and satisfying home sale than doing it FSBO.

As I wrote about FSBO’s in 2005:

How much money can you realistically save? …there as been a trend of negotiated commissions, so actual savings for a FSBO have been reduced….Additionally, FSBO’s are contracting and paying commission with more Realtors and their homebuyers in this environment of limited home inventory. In the end, the FSBO’s savings from Realtor commissions may be marginal.

… there are some real negative aspects of selling your home FSBO, such as time, expense, and contractual obligations.

How much is your time worth? Selling a home requires the application of time to tasks. Among the many tasks of selling a home, the top things that a FSBO may do include (and is not limited to) preparing the home for the open house, contacting the paper to advertise, putting up signs, meeting potential homebuyers, and negotiating contracts. The time quickly adds up.

Selling your home FSBO is supposed to save you money right? Well, there is a bit of expense that is necessary. A FSBO must have signs in the yard, as well as directionals (the small arrow signs) to point homebuyers in your direction. Additionally, you might consider paying the local paper for advertising, as well as paying for an internet advertisement (although there are many websites that will allow you to post for free). Another expense may be to have your attorney to prepare and review the contract…. It seems that the expenses also quickly add up.

…even FSBO’s are responsible to adhere to certain federal and local laws pertaining to the sale of real estate (i.e., equal housing, lead paint, Maryland disclaimer-disclosure, etc). This is the one area that FSBO’s get themselves in trouble because of the lack of knowledge and expertise. There is an increased liability potential.

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January 6, 2017November 23, 2021

Greedy home seller tips

Don't be a greedy home seller — Pricing Strategy for a Home Sale (infographic from forsalebyowner.com)

When there is a buzz about home sellers being greedy, you know home sales are doing well. So, not surprisingly, along with last year’s record home sales came the reports of greedy home sellers. Are you a greedy home seller? Or are you adjusting to a market where home prices are increasing?

Greed has developed a bad rap. Surely there is an evolutionary basis for greed. Many believe that early hominids promoted personal and group survival by being “greedy” (although disputed by some). Those who hoarded food, so as to have more than enough, lived through difficult winters and droughts. During times of financial prosperity, greed is looked upon favorably. However, in the aftermath of a recession, greed is thought of as the basis for fiscal calamity. Immortalized in Gordon Geckko’s famous “greed is good” speech in the 1987 movie Wall Street, “greed” is a cinematic vehicle to show the fine line between a healthy desire to prosper and a corrupt drive to have more than enough.

Avoid being viewed as a greedy home seller by creating a realistic pricing strategy. Creating a pricing strategy is an art and a science. When selling a home, you have to determine the list price. There are many factors to consider besides recent neighborhood sales, such as condition of your home, sales trends, mortgage interest rates, economic trends, etc. Like other home sellers, you fall into a conundrum. If you price your home too high, then it will limit potential home buyers who visit. However, if you price your home too low to increase home buyer interest, you may not get the price you want.

Contrary to some assertions that a home’s list price doesn’t play a role in the sale, there is evidence to suggest that it really does matter. Lu Han and William C. Strange determined that a lower list price does increase home buyer visits – but only to a point (What is the Role of the Asking Price for a House? University of Toronto, Rotman School of Management; 2012). They concluded that there is a point at which the home price is perceived to attract too much buyer competition, which may turn off other home buyers. Furthermore, their data shows that there is a negative relationship between a list price and the number of home buyers: meaning that the higher the list price relative to the neighborhood, the lower number of home buyer visits, and vice-versa.

If you fear being a greedy home seller by asking for a high price for your home, there is research to suggest that you’ll let go of the greed in order to make a deal. A 2013 study by Nuno T. Magessi and Luis Antunes looked at how the emotions of fear and greed compete internally (Agent’s fear monitors the spread of greed in a social network; Proceedings of the 11th European Workshop on Multi‐Agent Systems EUMAS, 12-13). They concluded that greed is mitigated by the fear of loss within the confines of a social network. When applied to a home sale, the fear of not selling a home competes with the impulse to hold out for the high price. Deducing further, there is a need to fit within one’s social network by trying to sell a home for the most money, and yet avoid the stigma of a failed home sale.

Don’t be a greedy home seller. RealtorMag described three common home seller mistakes in a 2015 post (3 Mistakes Sellers Often Make; realtormag.realtor.org; April 12, 2015). Included were “Not being honest with the home’s history,” “Not making a better home presentation,” and “Being unrealistic about the home’s value.” About unrealistic home value, it was said:

“…Despite tight inventories of homes for-sale in many markets, sellers still need to be careful not to get too greedy with their list price, say real estate professionals…Home owners tend to get a much lower price when they overprice a home at the onset and then drop the price several times. The longer the home lingers on a market, the more likely it will receive a deeper discount…”

If your home doesn’t sell, you must examine your pricing strategy. Was the price realistic, or were you too greedy?

Original published at https://dankrell.com/blog/2017/01/06/greedy-home-seller/

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December 29, 2016July 13, 2019

Lot premium value on new home

There is an ongoing debate about the lot premium. Essentially, is there a value of paying a “premium” for a home site when buying a new home? Certainly, the home builder is seeking to increase their profit margin. But for a home buyer, there is a question of future value at resale.

A home builder will typically sell certain home sites within a community at a higher price, effectively increasing the price of a new home. Some home sites are deemed to be more “valuable” because of the lot’s characteristics and/or location. A lot premium may be charged if a home site is larger, flatter, and/or more symmetrical than others in the community. Lots tucked away from the main road or close to common areas are typically premium priced as well.

Don’t hate the home builder for charging a lot premium on your new home. Home builders are trying to sustain a business by recouping the cost and financial risk of land development. Placing a premium on home sites has become a science, and research consultants typically provide data on developing home sites and pricing.

However, there is also an economic factor. When the housing market was still reeling from the Great Recession, charging a lot premium was not common. However, home builders added lot premiums when sales recovered.

John Burns, CEO of John Burns Consulting, wrote about the rising premiums on home sites as the new home market recovered in 2013 (Lot Premiums Are Back!; realestateconsulting.com; May 23,2013), stating “Our consulting team has noted a significant trend in the market: lot premiums are rising substantially!” Burns broke down lot premiums based on region. And, of course, lot premiums increased according to how the region’s housing market recovered. For example, lot premiums in Florida were about 10 percent at that time; While Southern California was trending to include the premium in the list price to help stabilize prices. Also, the DC region’s housing market was still recovering and home builders were only charging 1 to 2 percent for a lot premium.

Burns also noted that buyer demographics can also dictate lot premiums. At that time, it was reported that home builders in Southern California were charging a 5 percent premium based on feng shui and home site orientation. And a 20 percent premium was charged for home sites with “good feng shui” that were located on a cul-de-sac.

The availability of buildable home sites may also dictate lot premium charges in the near future. A recent National Association of Home Builders survey indicated a shortage of home building lots (Lot Shortages Worse Than Ever According to NAHB Survey; nahb.org; May 26, 2016). NAHB Chief Economist Robert Dietz stated, “We have monitored lot availability for the last two decades, and it is clear that the scarcity of building lots is growing… Whether due to land use policy, geographic constraints or other regulatory constraints, the lack of lots for residential construction will have negative impacts on housing affordability in many markets.”

To understand the relative numbers, NAHB stated “…this record shortage comes at a time when new homes are being started at a rate of under 1.2 million a year. In 2005, when total housing starts were over 2 million, the share of builders reporting a shortage of lots was 53 percent…”

If you pay a lot premium on a new home, however, it is not always clear that you would be able to pass on the premium when you re-sell. But a recent study conducted by Paul K. Asabere and Forrest E. Huffman (The Relative Impacts of Trails and Greenbelts on Home Price; Journal of Real Estate Finance and Economics; May 2009; vol 38, p408) provides some data on what you might expect: home sites close to trails, greenbelts, and greenways can demand a price premium of up to 5 percent. A similar effect can also be found in homes with a “view” or in a cul-de-sac; as well as homes that are adjacent to a golf course, playground, tennis court, neighborhood pool.

Original published at https://dankrell.com/blog/2016/12/29/lot-premium-value-on-new-home/

By Dan Krell
Copyright © 2016

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December 23, 2016December 13, 2022

Credit report reforms

One of the main reasons you’re likely to be declined for a mortgage is your credit report. More specifically, derogatory information contained therein. Unfortunately, many of us are still not proactive when it comes to our credit report. And for many, erroneous information that is foisted upon them without their knowledge affect their daily lives.

Flawed data has been a long standing issue in the credit industry. A 2012 study conducted by the Federal Trade Commission (ftc.gov) found that “one in five consumers” disputed and corrected an error that was reported to a credit reporting agency (CRA). A follow-up study conducted in 2015 found that “Most consumers [almost 70 percent] who previously reported an unresolved error on one of their three major credit reports believe that at least one piece of disputed information on their report is still inaccurate.” The follow-up study recommended that CRA’s “review and improve” the dispute process, as well as increase consumer education efforts. From the FTC report:

The follow-up study announced today focuses on 121 consumers who had at least one unresolved dispute from the 2012 study and participated in a follow-up survey. It finds that 37 of the consumers (31 percent) stated that they now accepted the original disputed information on their reports as correct. However, 84 of these consumers (nearly 70 percent) continue to believe that at least some of the disputed information is inaccurate. Of those 84 consumers, 38 of them (45 percent) said they plan to continue their dispute, and 42 (50 percent) plan to abandon their dispute, while four consumers are undecided.
The final study also examined whether consumers from the 2012 study who had their credit reports modified after disputing information on their credit reports had any of the negative information that had been removed subsequently reappear on their reports. The study found two instances of this, representing about 1 percent of these consumers.

On March 9, 2015, New York Attorney General Eric T. Schneiderman announced an agreement that was worked out with the three credit repositories (Experian, Equifax, And Transunion). The agencies agreed to seek improvements to the credit report dispute resolution process, as well as increasing protections for consumers from false claims and reporting paid debt (such as medical bills).

As A.G. Scheiderman’s statement was released, the Consumer Data Industry Association (the trade association for the consumer data industry) announced the creation of the National Consumer Assistance Plan. The roll-out of The Plan is to be over three years, and includes a website (nationalconsumerassistanceplan.com) where consumers and the CRAs are to interface about credit reporting news and information. Stuart Pratt, President and CEO of the Consumer Data Industry Association, stated in a press release:

“…The nationwide consumer credit reporting companies are making important changes to their procedures that will improve their ability to collect accurate information, and we want to make sure consumers know about the new options available to them…”

Additionally, the press release included highlights of the National Consumer Assistance Plan:

Consumers visiting www.annualcreditreport.com, the website that allows consumers to obtain a free credit report once a year will see expanded educational material.
Consumers who obtain their free annual credit report and dispute information resulting in modification of the disputed item will be able to obtain another free annual report without waiting a year.
Consumers who dispute items on their credit reports will receive additional information from the credit reporting agencies along with the results of their dispute, including a description of what they can do if they are not satisfied with the outcome of their dispute.
The credit reporting agencies (CRAs) are focusing on an enhanced dispute resolution process for victims of identity theft and fraud, as well as those who may have credit information belonging to another consumer on their file, commonly called a “mixed file.”
Medical debts won’t be reported until after a 180-day “waiting period” to allow insurance payments to be applied. The CRAs will also remove from credit reports previously reported medical collections that have been or are being paid by insurance.
Consistent standards will be reinforced by the credit bureaus to lenders and others that submit data for inclusion in a credit report (data furnishers).
Data furnishers will be prohibited from reporting authorized users without a date of birth and the CRAs will reject data that does not comply with this requirement.
The CRAs will eliminate the reporting of debts that did not arise from a contract or agreement by the consumer to pay, such as traffic tickets or fines.
A multi-company working group of the nationwide consumer credit reporting companies has been formed to regularly review and help ensure consistency and uniformity in the data submitted by data furnishers for inclusion in a consumer’s credit report.

An improved credit reporting industry was to take another leap forward with the introduction of H.R. 5282 – Comprehensive Consumer Credit Reporting Reform Act of 2016 (congress.gov). Introduced in Congress May 19, 2016, the bill is a comprehensive restructuring of the credit reporting process. Among the many details, the bill also: calls for a new dispute process; “meaningful” disclosures about resulting investigations; limits credit reports for employment purposes; requires removal of items that were a result of identity theft, fraud and other crimes; and transfers authority from the FTC to the CFPB on “procedures for reporting identity theft, fraud, and other related crime.” The bill was referred to committee, where it appears to have stalled.

Your credit report has become akin to your “financial soul.” Some of its uses include assisting entities in deciding whether to employ you, lend to you, or extend you credit. It has even become vogue for individuals to check someone’s credit report before going out on a date!

Financial experts and government agencies recommend you become proactive and check your credit report annually, and dispute inaccurate information. Annualcreditreport.com is the only “authorized” website where you can receive a free credit report annually from the three repositories. The site also contains information on protecting your identity, and links to the FTC and CFPB for topics such as how to maintain good credit, and credit repair.

By Dan Krell
Copyright © 2016

Original published at https://dankrell.com/blog/2016/12/23/credit-report-reforms/

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