September 30, 2022

Mortgages: Making ‘Green’ More Affordable

A bipartisan Senate bill supported by a broad coalition of business, real estate, energy and environmental groups seeks to put energy cost savings into the underwriting equation. Called the SAVE Act (for Sensible Accounting to Value Energy), the legislation could make energy-efficient features more affordable to average-income home buyers by allowing them to qualify for a larger loan amount.

The legislation would require Fannie Mae, Freddie Mac and the Federal Housing Administration to incorporate energy efficiency into their underwriting policies. The energy savings would be considered only when a buyer or homeowner chose to submit a qualified home-energy report, the guidelines for which would come from the Department of Housing and Urban Development.

“Right now appraisers really don’t have an effective way of considering energy-efficient features,” said Robert Sahadi, the director of energy efficiency finance policy for the Institute for Market Transformation, a major supporter of the legislation. “The ruling methodology is the sales comparison approach, and to the extent that there aren’t enough comparables in the marketplace, they’re sort of hamstrung. What is being advocated is having a third-party energy report on the house.”

Even when home appraisers do account for energy savings in a valuation, mortgage underwriters tend to reject the adjustment, either out of an abundance of caution or because they don’t understand it, said Sandra Adomatis, an appraiser in southwest Florida who also works as a consultant for Advanced Energy in Raleigh, N.C. “I’m hearing all over that the underwriters are insisting they take out the energy adjustment,” she said.

A spokesman for the Mortgage Bankers Association said the group had not endorsed the SAVE Act, which is part of a broader energy bill awaiting action, and had no position on it. The bill would help borrowers in two ways. First, in the same way that lenders include property taxes and insurance costs when weighing a borrower’s income against monthly expenses, they would have to factor in energy cost savings. The resulting adjustment in the borrower’s debt-to-income ratio could mean a larger loan amount.

Second, lenders would have to add the value of projected energy savings to the home’s value, if the appraiser hadn’t already done so. Since mortgage amounts are based on a percentage of the home’s value, a higher value would translate into a larger mortgage.

Richard L. Borges II, the president of the Appraisal Institute, called the proposed use of energy audit reports a “very meaningful approach,” especially when compared with the incomplete and inaccurate energy-efficiency information often presented to appraisers.

“The people that are exposing the properties to the market — the Realtors — are not conversant and well skilled to describe exactly what they have in a factual manner,” Mr. Borges said.

Loan performance on energy-efficient homes, Mr. Sahadi noted, is considerably better than on other homes. A study commissioned by the institute found that default risks are 32 percent lower on homes that meet the government’s “Energy Star” guidelines than on similar non-Energy Star homes. The study examined 71,000 home loans from 2002 to 2012.

The findings demonstrate that the SAVE Act approach “isn’t some boutiquey idea that we just want to get out there,” he said. “We’ve made a case that this is underwriting positive instead of negative.”

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Mortgages: Mortgages

In a forbearance program, a lender agrees not to foreclose on a property and gives a borrower several months’ grace from or reduction in monthly mortgage payments. The programs work best for temporary setbacks, like job loss, health problems or natural disasters.

Along with the reprieve come drawbacks — most significantly a larger total debt from the smaller payments. “Your unpaid balance keeps getting higher and higher and higher,” said Jennifer Murphy, the director of lender-servicer relations for the nonprofit Center for New York City Neighborhoods.

The new temporary mortgage payment is often set to 31 percent of your household income; in some cases lenders agree to accept no payments. Fannie Mae’s extended unemployment program, first offered in the fall of 2010, limits any nonpayment or other forbearance plans to one year, with the second six months requiring its approval as well as the lender’s.

But even with the program in place, your lender could still report a mortgage as delinquent, which would adversely affect your credit, so ask about its policy, said Martha Cedeno-Ross, a foreclosure assistance counselor with Neighborhood Housing Services of Waterbury, Conn. Because some agreements may add onerous terms and conditions, homeowners should also consult with a real estate lawyer, or a housing counselor certified by the Department of Housing and Urban Development.

Some 26,801 homeowners completed Fannie Mae loan forbearance and repayment plans in the first nine months of 2011, up 13 percent from the same period in 2010. By comparison, the total for all of 2008 was 7,892, according to Fannie Mae’s financial filings with the Securities and Exchange Commission.

To qualify, borrowers must be unemployed, which means not working at all, though a co-borrower could still be employed, said Brad German, a Freddie Mac spokesman.

To get started, gather up your financial information and consider writing a “hardship letter,” an overview that clearly states what happened and when, Ms. Cedeno-Ross said. The letter could also serve as a starting point for a loan modification and other programs. Give details about your previous salary, severance payments and unemployment benefits; if you have had job interviews, include those details, she said.

You will need to fill out the four-page uniform borrower assistance form used by both Freddie and Fannie, Mr. German said. It is also good for government mortgage assistance programs like Making Home Affordable — — and

Be sure to plan an “end strategy” well before the forbearance agreement runs out.

“The big question every homeowner should find out: Where will this forbearance lead me?” said Charles Das, a housing counselor for Brooklyn Housing and Family Services. Homeowners usually get a repayment plan or a loan modification, he said, but he has seen some denied the modification because of low income.

Ms. Murphy says homeowners should use the 6 to 12 months of reduced payments to work with a financial or housing counselor, and if possible, save money and pay off secured debts.

Sometimes borrowers may determine after counseling that they cannot afford the home, said John Walsh, the president of Total Mortgage Services of Milford, Conn. They may then need to sell the home or arrange for “a graceful exit” — for instance, agreeing to give up the deed in lieu of foreclosure, or pursuing a short sale, in which the lender agrees to accept less than the mortgage balance.

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Bucks: What’s a Reasonable Home Down Payment?

Pretty much everyone agrees it’s a good idea for home buyers to put some of their own money down when borrowing to buy a house. Having a stake in the property, the thinking goes, encourages homeowners to keep making payments on the mortgage.

But how much of a down payment is reasonable? Ten percent? Twenty? Five?

Jay Laprete/Bloomberg News

That question is part of a debate in Congress and among a cluster of federal regulatory agencies as they try to craft new rules for mortgage lenders following the housing debacle.

As part of the financial reforms mandated last year by the Dodd-Frank law, the agencies, including the Federal Reserve, the Federal Deposit Insurance Commission, the Department of Housing and Urban Development and the Federal Housing Finance Agency, among others, must set criteria for what constitutes a reasonably safe, plain-vanilla mortgage.

Lenders issuing such mortgages — what are to be called “qualified residential mortgages”  — will be able to sell them to investors and avoid retaining any of the risk associated with a default of the loan on their own books. Loans that don’t meet the new standards won’t be considered qualified and will be considered riskier so the lender will have to retain 5 percent ownership. The goal is to encourage banks to thoroughly vet a borrower’s ability to repay the loan. In other words, the banks must have “skin in the game” for loans that don’t meet the standards by setting aside extra capital for possible defaults.

The agencies proposed requiring qualified mortgages to have a down payment of 20 percent, but that idea provoked a firestorm of opposition from an unusual alliance of banks, real estate agents and consumer housing advocates. The Center for Responsible Lending, which has been vociferous in urging financial reforms to protect borrowers, argued that 20 percent down, or even 10 percent down, would price many homeowners out of the mortgage market. Many creditworthy borrowers would find it difficult to meet the down payment rule and would end up paying more for their loans because lenders would boost interest rates on their loans to cover their extra costs, the center argued.

The group’s Web site has a chart showing the length of time it would take borrowers of different occupations to save enough for a 10 percent down payment. A public school teacher at the median salary of $33,530, for instance, would take 14 years to save enough cash to buy a $173,000 home.

Kathleen Day, spokeswoman for the center, said a borrower’s ability to repay a loan should be determined by thorough underwriting, that is, an assessment of risk through examining a borrower’s credit history, income and debt, by the lender.

“We’re not advocating for zero percent down,” says Kathleen Day, spokeswoman for the center. “We think down payments are good. But we think the market should set them, based on the underwriting.”

(Loans insured by the Federal Housing Agency, which can be obtained with small down payments, are exempt from the qualified mortgage mandates.)

Due to an outpouring of concern from the industry and consumer groups, as well as members of Congress, the regulatory agencies have extended the public comment period on the change to Aug. 1.

What do you think? Is it reasonable to set a minimum down payment for home loans?

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2 Big Banks Exit Reverse Mortgage Business

Wells Fargo, the largest provider, said on Thursday that it was leaving the business, following the departure in February of Bank of America, the second-largest lender. With the two biggest players gone — together, they accounted for 43 percent of the business, according to Reverse Market Insight — prospective borrowers may find it more difficult to access the mortgages.

Reverse mortgages allow people age 62 and older to tap what may be their biggest asset, their home equity, without having to make any payments. Instead, the bank pays the borrowers, though they continue to be responsible for paying property taxes and homeowner’s insurance.

But the loans have increasingly become a riskier proposition. Banks are not allowed to assess borrowers’ ability to keep up with all their payments, and more borrowers do not have the wherewithal to stay current on their homeowners’ insurance and property taxes, both of which have risen in many parts of the country. At the same time, borrowers have been taking the maximum amount of money available, often using it to pay off any remaining money owed on the home. Yet home prices continue to slide.

“We are on new ground here,” said Franklin Codel, head of national consumer lending at Wells Fargo. “With house prices falling, you reach a crossover point where they owe more than the house is worth and it creates risk for us as mortgage servicers and for HUD.” He was referring to the Department of Housing and Urban Development, whose Federal Housing Administration arm insures the vast majority of these loans through its Home Equity Conversion Mortgage program.

As a result, banks are seeing a rise in what are known as technical defaults, when homeowners fall behind on their taxes or homeowner’s insurance, both of which are required to avoid foreclosure. According to Reverse Market Insight, about 4 to 5 percent of active reverse mortgages, or 25,000 to 30,000 borrowers, are in default on at least one of those items.

Bank of America, meanwhile, said that declining home values made fewer people eligible for reverse mortgages. So it decided to redeploy at least half of those working on the mortgages to its loan modification division, which has been criticized for failing to help enough homeowners on the brink of foreclosure.

For Wells Fargo, however, the inability to assess borrowers’ financial health was the biggest factor for exiting the business. Anyone over the age of 62 with enough home equity can take out a reverse mortgage, regardless of their other income. The amount of money received is determined by the borrower’s age, the amount of equity in the home and prevailing interest rates.

“We are not allowed, as an originator, to decline anyone,” added Mr. Codel of Wells Fargo. We “worked closely with HUD to find an alternative solution and we were unable to find one with them, which led to this outcome.”

Reverse mortgage borrowers are required to pay premiums for mortgage insurance, which protects the lender if the homes are ultimately sold for less than the mortgage value, since the government is required to pay the difference to the lender. The premium rates were increased last October to account for declining home values (though one sizable upfront mortgage premium was eliminated to make the loans more attractive to certain borrowers).

But lenders are responsible for making tax and insurance payments on behalf of delinquent borrowers until they submit an insurance claim to HUD, at which point the agency would be responsible since it provided the insurance against default.

In January, HUD sent a letter to lenders and reverse mortgage counselors that provided guidance on how to report delinquent loans to the agency, and what steps the lenders could take to get borrowers back on track, like establishing a realistic repayment plan that could be completed in two years or less, or getting a HUD-approved mortgage counselor involved to help come up with a solution. If one cannot be reached, the lenders must begin foreclosure proceedings.

Both Wells Fargo and Bank of America have said they have not foreclosed on any borrowers to date.

The National Reverse Mortgage Lenders Association, the industry group, said it has been working with HUD to come up with procedures that would allow lenders to assess a prospective borrower’s income and expenses, or at least require homeowners to set aside money to pay for taxes and insurance. A spokeswoman for HUD said the guidance is still being drafted.

As it stands now, borrowers are required to see a HUD-approved lender before they can apply for a reverse mortgage. As part of that process, consumers are educated on the nuts and bolts of how the loans work and what their responsibilities are, including that they need to be able to continue to pay taxes, insurance and keep the property in good repair.

“We don’t tell consumers what decision to make, but we do try to give them the tools to make a decision,” said Sue Hunt, director of reverse mortgage counseling at CredAbility, a nonprofit consumer credit counseling agency. She added that their sessions last about an hour and 15 minutes, on average. The counselors also look at the consumer’s budget to see if it is sustainable with the mortgage, as well as what circumstances might arise that could throw the borrower off track.

“Outside factors are affecting people who thought five or six years ago that they were in pretty good shape,” she added. “The world has changed a bit around them.”

In days past, the borrower would get the reverse mortgage, and equity would continue to build, experts said, which would provide borrowers with more options — like refinancing — should they fall on hard times. Declining home values have changed that calculus for both bankers and consumers. Borrowers have not been able to pull out as much money. At the same time, the government has also tightened its withdrawal limits.

There were a total of more than 50,000 reverse mortgages, totaling $12.66 billion, made industrywide since last October, according to HUD.

Both Wells Fargo and Bank of America will continue to service their existing reverse mortgages. And the reverse mortgage association has said it will work with its members to ensure that senior citizens who need the loans can get them, though some experts said that less competition could increase certain fees.

“There is a certain amount of the business done by Wells and Bank of America that happens because of their bank branches, brand names and large sales forces,” said John K. Lunde, president of Reverse Market Insight. “We would expect something more than half of their volume to be absorbed by the rest of the industry, with something less than half not happening.”

Wells Fargo, which said that reverse mortgages represented 2.2 percent of its retail mortgage business, employs about 1,000 reverse mortgage workers. They are being given a chance to find other positions at the bank. Bank of America said that about half of its 600 workers have been reassigned within the bank. MetLife, the third-largest provider of reverse mortgages, declined to comment on its business.

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U.S. Sues Deutsche Bank Over Loan Practices

The mortgages, guaranteed by the Federal Housing Administration, are expected to cost the government more than $1 billion. They came from loans issued by a company called MortgageIT, which Deutsche acquired in 2007.

The F.H.A. said it discovered the fraud in 2009, while reviewing its overall portfolio. At the time, loans were defaulting at record levels and worries were growing about the ultimate cost to taxpayers. Since the financial crisis, the F.H.A. has broadened its role in the housing market and now backs about one-third of all new mortgages, up from just 5 percent a few years ago. In the last couple of years, the F.H.A. has also overhauled its processes to improve quality control, and loans made more recently are performing better.

Officials from the Justice Department and the Department of Housing and Urban Development said the lawsuit should serve as a warning to other lenders that are issuing loans using a government guarantee. At a news conference on Tuesday, the United States attorney for the Southern District of New York, Preet Bharara, said Deutsche “cannot get away with lies and recklessness.” He said there was not evidence to justify a criminal complaint and declined to say whether there would be more cases claiming F.H.A. fraud.

In an interview, Helen R. Kanovsky, the general counsel of the Department of Housing and Urban Development, said that Deutsche Bank was an outlier and that most loan originators had not had such high incidences of fraud.

Responding to the government’s case, filed in Federal District Court in New York, the bank issued a statement saying it was not involved in most of the 39,000 loans cited in the complaint. Almost 90 percent were issued before the bank acquired MortgageIT, a real estate investment trust, the bank said. At the time of its acquisition, MortgageIT had been operating under H.U.D. oversight for nearly a decade, the bank said.

“We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously,” the bank statement said.

Of the MortgageIT loans backed by the F.H.A. from 1999 to 2009, worth $5 billion in total, about one-third have defaulted, according to the government’s complaint against the bank. MortgageIT was not a large F.H.A. partner — it ranked 33rd by volume at the end of 2008 — and it stopped issuing government-backed loans in 2009.

The F.H.A. referred the problems it spotted with MortgageIT to the Justice Department because it could not bring its own action once the company stopped issuing loans. The case was pursued by a civil fraud unit that Mr. Bharara set up about a year ago.

The complaint against Deutsche Bank stands out because the government has filed relatively few cases against big banks related to the financial crisis. Its actions have mainly been civil complaints, as was the one against Deutsche Bank. The government has found it difficult to prove intent to defraud, a requirement for a criminal case, and investigators got off to a slow start in building possible cases during the crisis because regulators were primarily focused on stabilizing the system. The Justice Department has generally had more success prosecuting small mortgage brokers and borrowers for mortgage fraud than it has had in pursuing major financial institutions.

The Deutsche suit does not name any individual bank employees. And it is not centered on the subprime loans that kicked off the housing collapse.

Deutsche was, however, a large player in the subprime market, and mortgage bonds created by the bank sit in many investors’ portfolios. Its mortgage bundling behavior was outlined in a recent report issued by the Senate’s Permanent Subcommittee on Investigations.

The Deutsche loans that were backed by the F.H.A. jumped out during the portfoliowide review of mortgages, said Ms. Kanovsky. “The real harm to us was clear,” she said.

MortgageIT had been warned by the F.H.A. for years, Ms. Kanovsky said, long before Deutsche bought it. Workers there frequently told the government that they were taking care of the problems, “all of which turned out to be not true.”

The problems at MortgageIT are rooted in the same sort of behavior that plagued the overall lending market — bankers did not take enough care to ensure the quality of their mortgages because they could resell the loans to private investors. Deutsche, the complaint said, had “powerful financial incentives to invest resources into generating as many F.H.A.-insured mortgages as quickly as possible for resale to investors.”

MortgageIT was qualified by H.U.D. to issue mortgages guaranteed by the F.H.A. MortgageIT and Deutsche filed annual certifications that the loans they issued complied with H.U.D. rules. The complaint says the bank had a fiduciary duty to make correct representations to the government.

Yet, the complaint says, Deutsche “repeatedly lied to H.U.D. to obtain and maintain MortgageIT’s direct endorsement lender status.” In particular, the complaint said Deutsche did not monitor how often home owners defaulted on their mortgages immediately after receiving the loans.

Trouble was apparent at MortgageIT as early as 2003, according to the complaint. When a HUD audit revealed that the company had not met quality control levels, the company assured the government that it had altered its practices to comply. But it had not, the complaint says. There were several other instances where the company made similar false statements about its quality control unit, which was chronically understaffed, the complaint says.

MortgageIT, based in New York even before the Deutsche acquisition, once had over 2,000 employees, mortgage loan offices across the country and licenses to issue loans in all 50 states.

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