July 24, 2017

Your Money: Tighter Rules Will Make It Harder to Get a Reverse Mortgage

Now the rules are about to change again.

As a result, some people with heavy debt who were hoping a reverse mortgage would solve their financial problems may find that it is no longer a viable option. Under the new rules, which go into effect on Sept. 30, many borrowers will be able to get access to even less of the value locked in their home — about 15 percent less — compared to the maximum available now. The rules also put new limits on the amount of money that can be taken out in the first year, which may further deter the most distressed prospective borrowers.

“The changes really put the product on track as a long-term financial planning tool as opposed to a crisis management tool,” said Ramsey Alwin, senior director of economic security at the National Council on Aging.

The Federal Housing Administration, which insures most reverse mortgages, is making the changes in an effort to strengthen the program, which allows people 62 and older to tap their home equity without making payments. Lenders get their money back once the house is sold.

Since the economic crisis, more homeowners withdrew the entire pile of cash they were eligible for all at once, which strained the program’s reserve funds (lenders were also paid more when borrowers took large sums, and reverse mortgage experts say lenders prodded borrowers in this direction). Declining home values also hurt the program’s overall finances, since lenders often could not recoup the full loan amounts when the houses were ultimately sold.

The F.H.A. hopes that the changes, particularly the limits on how much can be withdrawn in the first year, will encourage people to tap their home equity slowly and steadily, in a way that will enable property owners to stay in their homes as they age. That’s a change that several consumer advocates, along with members of the industry, agree was necessary.

Up until now, just about anyone could qualify for a reverse mortgage. But perhaps the biggest change to the program will go into effect early next year, when borrowers will also need to prove that they have the wherewithal to pay property taxes and insurance over the life of the loan. If they cannot, they will have to set that money aside — and that could consume much of the loan’s proceeds.

There is still a little time to get a mortgage using the current program. As long as prospective borrowers go through the required financial counseling and receive a case number before Sept. 28, they will be able to qualify under the current rules.

Here’s a closer look at how the changes will affect prospective borrowers:

FIRST-YEAR LIMIT There will now be a limit on the amount of money that can be withdrawn in the first year. A homeowner eligible to withdraw a total of $200,000 in cash, for example, would be allowed to get only $120,000, or 60 percent of that sum, in the first year.

There are exceptions. Some homeowners will be able to draw a bit more if their existing mortgage, along with other items like delinquent federal debts, exceed the 60 percent limit. Homeowners are required to pay off those items — which regulators call “mandatory obligations” — before qualifying for the loan. So borrowers can withdraw enough to pay off these types of obligations, plus another 10 percent of the maximum allowable amount (in this case that’s an extra $20,000, or 10 percent, of $200,000).

Credit cards are not considered a mandatory obligation, so people with significant credit card debt may find they can’t withdraw enough money to pay those loans off, said Christopher J. Mayer, professor of real estate, finance and economics at Columbia Business School, who is also a partner in a start-up company, Longbridge Financial, that provides reverse mortgages. “There will be fewer financially distressed borrowers for whom a reverse mortgage will provide a satisfactory solution,” he added. “The product will be more attractive for people using it as part of a retirement plan.”

Article source: http://www.nytimes.com/2013/09/07/your-money/tighter-rules-will-make-it-harder-to-get-a-reverse-mortgage.html?partner=rss&emc=rss

News Analysis: Washington Steps Warily On Housing

Instead, the stopgap nationalization of housing finance has hardened into one of the most enduring legacies of the Great Recession. The federal government guaranteed about 87 percent of new mortgage loans last year, through Fannie Mae and Freddie Mac and the Federal Housing Administration, effectively setting the terms and providing the money for nine out of 10 home purchases and refinanced loans.

In a speech on Tuesday, President Obama signaled that Washington may finally be returning to the place where the financial crisis started. With the housing market on the mend, Mr. Obama said it was time to “wind down” Fannie Mae and Freddie Mac.

“I believe that our housing system should operate where there’s a limited government role and private lending should be the backbone of the housing market,” Mr. Obama said in Phoenix, a city that is a symbol of both housing booms and busts.

The president praised a bipartisan Senate effort to replace Fannie and Freddie with a system that would charge lenders for explicit government guarantees of some mortgage loans. And while there is a risk that the cost of borrowing would increase, Mr. Obama also said that he wanted to preserve the wide availability of the 30-year, fixed-rate loans that are preferred by most Americans.

House Republicans are proposing a sharper retreat, preserving only the government’s support for lending to lower-income families. Proponents say it, too, would preserve the availability of 30-year fixed-rate loans, though they are not widely available in countries without government-backed systems.

“Washington has suddenly come alive on housing finance reform,” said David Stevens, president of the Mortgage Bankers Association, who headed the Federal Housing Administration during Mr. Obama’s first term. “We saw nothing substantive prior to this year, but now we’re in a housing recovery and the odds have clearly improved given that both the House and Senate have weighed in.”

For all the talk, however, it will be difficult to alter the government’s role in housing finance, which has remained substantially unchanged for half a century — notwithstanding Fannie and Freddie’s move from informal to formal wards of the state. That is because Americans like cheap mortgage loans and it is hard to preserve the benefits without the costs of the current system.

Fannie, Freddie and the Federal Housing Administration backed 87 percent of new mortgage loans over the last five years, the same share they backed in 2012, according to estimates by Inside Mortgage Finance, a trade publication. In the years before the crisis, less than 40 percent of the market was government-backed.

The government’s heavy hand is holding down interest rates, helping the housing market and the broader economy to recover. The average rate on a 30-year loan was 4.37 percent in July, according to Freddie Mac, a full percentage point above rates earlier in the year, but still very low by historical standards.

There is growing concern, however, that the government’s risk aversion and the absence of private competition are suppressing the availability of loans. The average credit score for borrowers whose loans were bought by Freddie Mac rose to 756 in 2012 from 720 in 2006, according to its securities filings.

“Every few days somebody comes in who in my mind should be able to get a mortgage loan, and I have to turn them away,” said Louis Barnes, a mortgage lender with the Premier Mortgage Group in Boulder, Colo. “It’s like trying to push ice cream out of the wrong end of the ice cream cone.”

Mortgage companies, backed by some federal officials, say Fannie and Freddie are being too aggressive in pursuing refunds from lenders when borrowers default, leading lenders to reject applicants they deem even mildly risky.

Other critics of Fannie and Freddie make the opposite point, that government support for housing, by making mortgage loans more affordable, is distorting the economy. The government, they say, is subsidizing homeownership, with much of the benefit flowing to affluent Americans, at the expense of biomedical research or bridge repairs.

Article source: http://www.nytimes.com/2013/08/07/business/washington-edges-warily-into-housing.html?partner=rss&emc=rss

Economix Blog: Further Progress on Housing Finance

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

The House Financial on Services Committee will hold a hearing on Thursday to consider draft legislation for housing finance reform put forward by its chairman, Jeb Hensarling, Republican of Texas, that would end the taxpayer backstop on mortgages now provided through Fannie Mae and Freddie Mac and wind down the two companies over five years. Under the proposal, private investors rather than taxpayers would fund mortgages and take on the risks and rewards of housing investments.  

Today’s Economist

Perspectives from expert contributors.

New rules would foster increased use of covered bonds, under which a pool of private assets rather than a government guarantee protects investors against losses. The legislation further seeks to ensure that smaller banks continue to play a role in housing finance. The Hensarling approach thus has the desirable features of moving to a housing finance system driven by private incentives while protecting taxpayers and ensuring the participation of banks of all sizes.

The government role in the new system would be sharply defined, with regulators focused on oversight and setting standards rather than providing insurance. The Federal Housing Administration would continue to guarantee mortgages under the Hensarling proposal but would focus on first-time home buyers with moderate incomes.

Currently, the Federal Housing Administration is involved with loans of up to $729,750, which is difficult to square with the agency’s mission to expand sustainable homeownership. As documented by Joseph Gyourko, a professor of at the Wharton School of the University of Pennsylvania, the agency has financial troubles of its own. (I testified about the need for its reform at a hearing in February of the Senate Banking committee). The Hensarling bill includes changes that would address this situation.

Mortgage interest rates will rise with any overhaul that brings in private capital, but this reflects that the system is now undercapitalized with taxpayers at risk. Before the financial crisis, private-label mortgages bundled into securities without a then-implicit guarantee provided by Fannie and Freddie had interest rates from 0.5 to 1 percentage point higher than loans backed by the two government-sponsored enterprises.

It is hard to know quite how much rates would rise without a government backstop, but the housing market is in an upswing and affordability remains high, so it seems likely that the housing sector would continue to recover even with higher rates from both changes in housing finance and the Federal Reserve’s eventual normalization of monetary policy. [Read more…]

Article source: http://economix.blogs.nytimes.com/2013/07/17/further-progress-on-housing-finance/?partner=rss&emc=rss

Economic View: Owning a Home Isn’t Always a Virtue

ENCOURAGING homeownership has been considered a national goal at least since “Own Your Own Home Day” was introduced in 1920 by various business and civic groups as part of a National Thrift Week. The newly popular word “homeownership” represented a goal and a virtue for every good citizen — to get out of the tenements and into one’s own home. Homeownership was thought to encourage planning, discipline, permanency and community spirit.

In the aftermath of the subprime mortgage crisis, our national commitment to homeownership is sure to be questioned as we consider what to do about Fannie Mae and Freddie Mac, the enterprises that are meant to increase the supply of money available for mortgages and are now under government conservatorship; the Federal Housing Administration, which directly subsidizes homeownership; and the Federal Reserve’s quantitative easing program, which was intended to lower interest rates. For both political and economic reasons, any or all of these encouragements for homeownership — not to mention the mortgage interest deduction — could be sharply curtailed.

Which is why this is a good time to ask a basic question: In today’s world, is it wise for the government to subsidize homeownership?

In answering it, we have to look at the big picture by considering all the presumed advantages of owning a home, including the encouragement of thrift that animated the founders of “Own Your Own Home Day.”

Consider Switzerland, which by several accounts has had one of the lowest rates of homeownership in the developed world. In 2010, only 36.8 percent of Swiss homes housed an owner-occupant; in the United States that same year, the rate was 66.5 percent. Yet Switzerland is doing just fine, with a gross domestic product that is 4 percent higher, per capita, than that of the United States, according to 2011 figures produced at the University of Pennsylvania.

It’s not that the Swiss inherently prefer renting. A 1996 survey asked a sample of Swiss whether, if they could freely choose, they would rather be homeowners or renters. Eighty-three percent said homeowners.

CERTAINLY, many of us have a basic drive to create our own habitats. We enjoy personalizing our living spaces, inside and out. But there are also important practical advantages to renting to consider — especially when asking if government should support or discourage homeownership.

For example, renters are more mobile. That means they are more likely to accept jobs in another city, or even on the other side of a large metropolis. In addition, it’s hardly wise to put all of one’s life savings into a single, highly leveraged investment in a home — as millions of underwater borrowers today can attest.

So why the difference in American and Swiss homeownership rates? According to a 2010 study, “Why Do the Swiss Rent?” by Steven C. Bourassa at the University of Louisville and Martin Hoesli at the University of Geneva, tax policy provides much of the explanation. For example, owner-occupants in Switzerland pay income tax on what is known as the imputed rent they derive from living in their own homes — yes, they pay tax on the rent they could be charging themselves. This imputed rent is estimated by looking at market rents for similar properties.

In the United States, taxation of imputed rent was struck down by the Supreme Court in 1934. (Britain tried such a tax but abandoned it in 1963.) And, given the likely resistance to any new tax, it is highly unlikely that the idea could re-emerge anytime soon, however sensible it might be. But we do have the option of cutting back on government incentives to own rather than rent.

Beyond tax policy, we need to look at landlord-tenant law. Mr. Bourassa and Mr. Hoesli contend that Switzerland’s law in this area is relatively attractive, compared with those of other countries. In the United States, it is administered by 50 separate states, so treatment of renters is confusing to national economic commentators. The law, of course, should offer congenial ways to resolve disputes between landlords and tenants. But it should also ensure that people’s various concerns about renting — about possible evictions and rent increases, for example, — are handled well.

There was a revolution in American landlord-tenant law in the 1960s and ’70s, focusing on the inequities facing minority groups. But since 1972, there has been no major update of the Uniform Residential Landlord and Tenant Act issued by the National Conference of Commissioners on Uniform State Laws. Perhaps there should be another revolution in this body of law, focused on making renting more rewarding to people of every background and income level.

Last week, it was good to see that one agenda item for the commissioners, meeting in Boston, was to discuss proposals to revise the law to make the rental process work better.

We should also remember that a goal of “Own Your Own Home Day” was to emphasize thrift. And it is still true today that most people don’t save enough. In a 2011 paper, James M. Poterba of M.I.T., Steven F. Venti of Dartmouth and David A. Wise of Harvard showed that retirement saving in most American households was inadequate and that most households nearing retirement in 2008 had most of their wealth in home equity.

Many people don’t save much unless a regular schedule of mortgage repayment, which builds home equity, enforces it. The 2011 paper argued that the home-equity portion of saving tends to be conserved until very late in life after retirement, thus providing insurance against the risk of living longer than expected.

THUS, encouraging homeownership in the past encouraged better saving plans. And yet the Swiss, without such encouragement, manage to have a high household saving rate. Our national policy needs to take away much of the enormous subsidy to homeownership — but if and when it does so, it will have to find some other way to promote proper saving.

Robert J. Shiller is Sterling Professor of Economics at Yale.

Article source: http://www.nytimes.com/2013/07/14/business/owning-a-home-isnt-always-a-virtue.html?partner=rss&emc=rss

Your Money: Rules for Reverse Mortgages May Become More Restrictive

Right now, practically anyone who is breathing can qualify for a reverse mortgage — no underwriting or credit scores necessary. But that might be about to change.

Most reverse mortgages, which allow homeowners 62 and older to tap their home equity, are made through the Department of Housing and Urban Development, whose Federal Housing Administration arm insures the loans. But declining home prices after the housing crisis took a big toll on the federal program. So did the popularity of one type of mortgage, which allowed homeowners to withdraw the maximum amount of money available in a big lump sum.

The F.H.A. eliminated that type of loan this year. And over the last few years, in an effort to strengthen the program, the agency raised its fees and reduced the amounts people could borrow.

But now, the F.H.A. says it will need to take even bigger steps by the beginning of its new fiscal year in October.

Because of the turmoil in the housing market and because many borrowers in the program didn’t have enough money to pay their property taxes and homeowners insurance over the long term, the F.H.A. wants to require borrowers to undergo a financial assessment. It may also factor in borrowers’ credit scores, something it has not done in the past.

Before the agency can do either, it needs Congressional approval. The House gave its assent last month, but it’s unclear whether the Senate will follow suit.

If the F.H.A. fails to get Congress’s blessing, it will have to take more draconian actions in the coming months, according to F.H.A. officials who did not want to be named because they were still working with Congress on the issue. That means that effective Oct. 1, yet another of its reverse mortgage products will probably be eliminated, leaving borrowers with options that would allow them to get access to 10 to 15 percent less cash than they can now.

“Instead of using a scalpel, they will have to use a hatchet,” said Christopher J. Mayer, professor of real estate, finance and economics at Columbia Business School, who is also a partner in a start-up company, Longbridge Financial, that provides reverse mortgages.

Borrowers who are now contemplating what is called a HECM (pronounced HECK-um) Standard (for home equity conversion mortgage) reverse mortgage should know that it could disappear in the fall. (Of course, that doesn’t mean borrowers should rush out and get one. We will probably know the fate of the loan sometime next month.)

With all reverse mortgages, the amount of cash you can obtain largely depends on the age of the youngest borrower, the home value and the prevailing interest rate. The older you are, the higher your home’s value and the lower the interest rate, the more money you can withdraw. You don’t have to make payments, but the interest is tacked onto the balance of the loan, which grows over time. When borrowers are ready to sell (or when they die), the bank takes its share of the proceeds from the sale, and borrowers or their heirs receive whatever is left, if anything.

Right now, using a “standard” reverse mortgage, a 65-year-old borrower with a home worth $400,000 could tap about $226,800 in cash or a line of credit after various fees, according to calculations by ReverseVision Inc., a reverse mortgage software company.

Borrowers can receive the money in several other ways, too, including payments over the life of the loan or in installments in higher amounts over a specific term.

If the F.H.A. were to eliminate the standard mortgage, the same borrower could instead use the “saver” reverse mortgage, which has lower fees but permits you to withdraw less: this homeowner could withdraw about $194,800, or 14 percent less than the “standard,” in cash or a line of credit, after all fees. (Another “saver” option would also be available; see the chart accompanying this article for more specifics).

F.H.A. officials told me that they would prefer to keep all of the agency’s mortgage offerings and instead put rules into place that would help ensure that they accept only borrowers who can actually afford to pay their property taxes and homeowners insurance, which is required to avoid foreclosure. Nearly 10 percent of reverse mortgage borrowers are in default because they failed to make those payments.

Article source: http://www.nytimes.com/2013/07/13/your-money/rules-for-reverse-mortgages-may-become-more-restrictive.html?partner=rss&emc=rss

Economic View: Confidence and Its Effects on the Economy

That opinion seems to be based on several salient facts. Unemployment has been declining, from 10.0 percent in October 2009 to 7.7 percent last month. More spectacularly, the stock market has more than doubled since 2009 and has been especially strong for the last six months, with the Dow Jones industrial average reaching record closing highs last week and the S. P. 500 flirting with superlatives, too.

And the housing market, seasonally adjusted, has been rising. The S. P./Case-Shiller 20-city home price index gained 7 percent in 2012.

These vital signs make many people believe that we’ve turned the corner on the economy, that we’ve started a healing process. And their discussions often note one particular sign of systemic recovery: confidence. There is considerable hope that the markets are heralding a major development: that Americans have lost the fears and foreboding that have made the financial crisis of 2008 so enduring in its effects.

Hope is a wonderful thing. But we also need to remember that changes in the stock market, the housing market and the overall economy have relatively little to do with one another over years or decades. (We economists would say that they are only slightly correlated.) Furthermore, all three are subject to sharp turns. The economy is a complicated system, with many moving parts.

So, amid all those complications, there are other possibilities: Could we be approaching another major stock market peak? Will the housing market’s takeoff be short-lived? And could we dip into another recession?

There are certainly risks. Congress is mired in struggles over the budget crisis and the national debt. The government is questioning the risk to taxpayers in its huge support of housing through Fannie Mae, Freddie Mac, the Federal Housing Administration and the Federal Reserve. Problems in Europe, Asia and the Middle East could easily shift people’s confidence. There have been abrupt and significant changes in confidence in European markets since 2009. Is there any reason to think that the United States is immune to similar swings?

For years, I’ve been troubled by the problem of understanding the social psychology and economic impact of confidence. There hasn’t been much research into the emotional factors and the shifts in worldview that drive major turning points. The much-quoted consumer sentiment and confidence indexes don’t yet seem able to offer insight into what’s behind the changes they quantify. It also isn’t clear which factors of confidence drive the separate parts of the economy.

Along with colleagues, I have been conducting surveys about aspects of stock market confidence. For example, since 1989, with the help of some colleagues at Yale, I have been collecting data on the opinions and ideas of institutional investors and private individuals. These data, and indexes constructed from them, can be found on the Web site of the Yale School of Management.

I have called one of these indexes “valuation confidence.” It is the percentage of respondents who think that the stock market is not overvalued. Using the six-month moving average ended in February, it was running at 72 percent for institutional investors and 62 percent for individuals. That may sound like a ton of confidence, but it isn’t as high as the roughly 80 percent recorded in both categories just before the market peak of 2007.

HOW do the these figures relate to other stock market measures? I rely on the measure of stock market valuation that Prof. John Campbell of Harvard and I developed more than 20 years ago. Called the cyclically adjusted price-earnings ratio, or CAPE, this measure is the real, or inflation-adjusted, Standard Poor’s 500 index divided by a 10-year average of real S. P. earnings. The CAPE has been high of late: it stands at 23, compared with a historical average of around 15. This suggests that the market is somewhat overpriced and might show below-average returns in the future. (The use of the 10-year average reduces the impact of short-run, or cyclical, components of earnings.)

For perspective, compare today’s valuation, confidence and CAPE figures to those of other important recent periods in the stock market. In the spring of 2000, a sharp market peak, only 33 percent of institutional investors and 28 percent of individual investors thought that the market was not overvalued. The CAPE reached 46, a record high based on data going back to 1871. (For the period before 1926, we rely on data from Alfred Cowles 3rd Associates.) Yet most respondents in 2000 thought that the market would go up in the next year, so they hung in for the time being. That suggests that the 1990s boom was indeed a bubble, with investors suspecting that they might have to beat a hasty exit. They ended up trying to do just that, and brought the market down.

But then consider the valuation confidence in October 2007, another major peak, after which the stock market fell by more than 50 percent in real terms. At that peak, the CAPE was at 27 — a little higher than it is now, though not extraordinarily lofty. In 2007, valuation confidence was 82 percent for institutional investors and 74 percent for individual investors, or not far from today’s levels. Investors at the time didn’t think that they were floating on a bubble, and they saw the probability of a stock market crash as unusually low. Yet a plunge soon occurred. The cause appears not to have been so much the bursting of an overextended bubble but the subprime mortgage crisis and a string of financial failures that most investors couldn’t have known about.

Clearly, confidence can change awfully fast, and people can suddenly start worrying about a stock market crash, just as they did after 2007.

Today, the Dodd-Frank Act and other regulatory changes may help prevent another crisis. Even so, regulators can’t do much about some of the questionable thinking that seems to drive changes in confidence.

For example, why is a record high in the United States stock market a reason for optimism? Nothing is remarkable about reaching a market record: the S. P. Composite Index has done it 1,007 times, based on daily closes, since the beginning of 1928. That’s about once every 23 trading days, on average, though the new records tend to come in bunches.

The important fact is that we haven’t set a nominal stock-market record in six years. And we haven’t set one in 13 years if we use the inflation-corrected S. P. Composite total-return index. That this index may be about to set a record means only that we haven’t made any real money in the stock market in 13 years, which hardly seems a reason for confidence.

But public thinking is inscrutable. We can keep trying to understand it, but we’ll be puzzled again the next time the markets or the economy make major moves.

Robert J. Shiller, professor of economics and finance at Yale, has collaborated with Barclays Bank on a family of indexes and investment products.

Article source: http://www.nytimes.com/2013/03/10/business/confidence-and-its-effects-on-the-economy.html?partner=rss&emc=rss

F.H.A., Short Billions, May Need Rescue by Taxpayers

WASHINGTON — The Federal Housing Administration, a government agency that insures mortgages, is on the verge of requiring taxpayer financing for the first time in its eight-decade history.

An independent audit to be released on Friday projects that the administration will not have the cash reserves to pay all of its obligations, with the total shortfall amounting to about $16.3 billion.

“This does not mean F.H.A. has insufficient cash to pay insurance claims, a current operating deficit or will need to immediately draw funds from the Treasury,” the report stressed.

But it does make a taxpayer bailout likely. Reserves at the administration, which insures more than $1 trillion in mortgages, fell to below $3 billion last year. And the report cites a number of weaknesses on the agency’s books.

“We will continue to take aggressive steps to protect F.H.A.’s financial health while ensuring that F.H.A. continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times,” said Carol J. Galante, its acting commissioner, in a statement.

The F.H.A. “has weathered the storm of the recent economic and housing crisis by taking the most aggressive and sweeping actions in its history to reform risk management, credit policy, lender enforcement and consumer protections,” Shaun Donovan, the secretary of housing and urban development, said in a statement.

Politicians in Washington, particularly Republicans, have voiced concerns that the agency could become a drain on the taxpayer, much like Fannie Mae and Freddie Mac. Those two mortgage finance giants have not required additional taxpayer funding in recent quarters, as the housing market has stabilized. But they have nevertheless received about $190 billion in federal financing in the last four years.

An agency release cites three reasons for its deteriorating financial position. Home prices have not risen as quickly as the administration’s actuaries expected. Low interest rates have weakened its books. The agency’s independent actuary used a “refined methodology this year to more precisely predict” its losses.

More broadly, the agency is still struggling from the burst of the real estate bubble. By many measures, housing prices have only recently started to stabilize and increase. The rate of foreclosures remains high.

The agency’s books are improving, a release said. But it noted that its portfolio of loans insured between 2007 and 2009 — after the housing bubble started to collapse — were placing a “significant” strain on its finances. The independent actuaries project more than $70 billion in losses on those loans.

Article source: http://www.nytimes.com/2012/11/16/business/fha-short-billions-may-need-rescue-by-taxpayers.html?partner=rss&emc=rss

Unemployed Mortgage Holders Get Payment Extension

Freddie Mac and Fannie Mae, the government-sponsored housing finance companies that represent approximately half of all mortgages, have announced plans to extend their existing programs so that unemployed borrowers can defer part or all of their monthly payments for up to 12 months while they are out of work.

The moves come after the Obama administration announced last July a similar program for loans backed by Federal Housing Administration insurance, as well as mortgages serviced by lenders that are participating in the government’s loan modification program.

Fannie Mae sent guidance to lenders on Wednesday saying that banks could offer unemployed borrowers up to six months of lowered or skipped payments without seeking Fannie’s prior approval, and that banks could extend that forbearance up to 12 months with approval. This guidance modified a policy from September 2010, when Fannie expanded its existing forbearance option for other hardships like natural disasters to include unemployment.

Wednesday’s announcement also said that unemployed homeowners who apply for an official forbearance after already missing some payments can skip only up to a maximum of 12 months. After that, if homeowners are still unemployed or unable to make payments, lenders and borrowers would have to consider other options, including a permanent loan modification or a short sale.

Freddie Mac announced last Friday that it would permit jobless borrowers to skip or reduce payments for up to 12 months as well. Previously, borrowers whose loans were owned by Freddie were eligible for up to only three months of suspended or reduced payments. In most cases, the homeowners must pay back the lower or skipped payments over a longer loan period.

“These expanded forbearance periods will provide families facing prolonged periods of unemployment with a greater measure of security by giving them more time to find new employment and resolve their delinquencies,” Tracy Mooney, a senior vice president at Freddie Mac, said.

The financial firms and banks do not report exactly how many jobless people have used the programs.

Under the new rules, lenders are required to consider a forbearance plan among a number of options to prevent foreclosure. Most of the government programs intended to forestall or prevent foreclosure have not lived up to expectations, and many homeowners have lost their homes. Last year, foreclosures were filed against about two million properties, down from 2.9 million in 2010, according to RealtyTrac, a real estate data provider.

Neither Fannie nor Freddie could specify how many borrowers might be eligible for the forbearance options, but it would be up to lenders to administer them.

Bank of America said it was “currently assessing operational aspects of implementing” the extensions. GMAC Mortgage said it was already participating in forbearance programs and would continue to follow Fannie and Freddie guidelines. Wells Fargo said it would review the details of Freddie and Fannie’s updated options.

Some analysts were skeptical of the programs’ effects. “It’s a humane and not at all unreasonable policy, but I wouldn’t expect it to do much to the housing problem,” said Joseph Gyourko, professor of real estate at the Wharton School at the University of Pennsylvania. “This will save some of them,” Professor Gyourko said. “But some of them shouldn’t be in the homes they are in and some of them won’t end up finding jobs that will enable them to pay for their mortgages, so there could be some downside because it could slow the foreclosure pipeline.”

And it is not clear that many borrowers who are eligible for delayed or suspended payments have been granted the option. Only 16,633 homeowners have been granted forbearances under the Treasury’s program for lenders who are participating in the government’s loan modification program. Only 3,000 homeowners whose loans are backed by F.H.A. insurance have been granted a forbearance since July.

Housing advocates said Fannie and Freddie’s options should help more struggling borrowers. Forbearance “is a real life saver,” said Lewis Finfer, a community organizer at the PICO National Network, a coalition of faith-based organizations. Jobless borrowers will have more time “to hopefully get more hours or get re-employed, and they can save their home during that period.”

Article source: http://feeds.nytimes.com/click.phdo?i=6e4fb9e147637b49f078036d9975f556

Mortgages: Financing a Vacation Home

There is loan money available for second-home purchases, but expect bigger down payments, higher interest rates and other standards tighter than on a principal residence — and those standards are tight already. In addition, there are quirks specific to vacation markets.

Vacation-home purchases accounted for 10 percent of home sales last year, according to a National Association of Realtors survey released this spring. Investment purchases accounted for 17 percent — but sometimes the line between the two is a bit blurry. That’s down sharply from the height of the real estate boom in 2005, when vacation and investment sales accounted for 40 percent combined.

Then, “there was virtually no difference in underwriting for vacation homes versus owner-occupied homes,” said Guy Cecala, the publisher of Inside Mortgage Finance. “That’s something that’s changed dramatically. The days of being able to buy a vacation home with little or no money down are over.”

Loans insured by the Federal Housing Administration with down payments of as little as 3.5 percent aren’t available to vacation-home buyers. That means 20 percent for deals that meet stringent requirements of Fannie Mae and Freddie Mac. For loans that don’t fit — for instance, that are bigger than the government ceilings, which vary by county — down payments can be higher. Kevin Santacroce, an executive vice president and the chief lending officer of Bridgehampton National Bank on Long Island, said that for the jumbo loans his bank writes, down payments are “closer to 25 percent, maybe 30 percent.” In Suffolk County, a jumbo loan is more than $729,750, among the nation’s highest. (As Mr. Santacroce points out, that’s the loan amount, not the purchase amount; still, it’s a rare house in the Hamptons that would fall into the non-jumbo category.)

Thirty percent also seems to be the “comfort zone” this year for down payments in the Jersey Shore towns where Michael Loundy, a broker at Seaside Realty, works. “You can get 20 percent down,” he said, “but the buyer has to look very strong with income-debt ratios.”

Pinning down the details of a loan is challenging, Mr. Loundy said. For instance, during the loan approval process, exact terms may shift — a rate can go up one-eighth or one-quarter of a percentage point for any deal that isn’t exactly “pristine,” he says — and pristine means a free-standing single-family house instead of a condo, a credit score of 725 or more, and full documentation of income.

Even when all else is equal, a vacation-home loan is pricier. Mr. Cecala just refinanced his own primary and secondary homes on the same day, and the interest on the vacation place was one-quarter percentage point higher.

Some vacation areas offer distinct challenges. David Knudsen of Catskills Buyer Agency in Sullivan County says appraisals can be dicey in an area like his, because big banks may, for instance, require that sales be in the same school district to be comparable — which is not so easy with tiny school districts and spread-out sales. Local banks, he said, are better able to assess the worth of, say, a house on one lake versus one on another.

Banks aren’t the only places to get financing. Some sellers will carry loans. “That’s a question some buyers forget to ask sellers,” Mr. Loundy said. “Not everybody is in trouble.”

And what about cash, after all? Vacation-home buyers tend to be older and more affluent than other buyers, so all-cash deals are common. According to the Realtors’ survey, 36 percent paid cash, as did 59 percent of investment buyers.

Mr. Knudsen said that half his sales in the last year were all cash. These buyers don’t need to have appraisals; they can close in 30 days instead of 60 or more; and they can consider houses in less-than-perfect physical condition, like foreclosures.

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High & Low Finance: After Seven Years of Red Flags, a Conviction

Fannie Mae stopped doing business with the firm, called the Taylor Bean Whittaker Mortgage Corporation.

For Taylor Bean, it was a crisis. Its checks bounced.

But Mr. Farkas scrambled, and Taylor Bean survived to commit more frauds.

This week, Mr. Farkas, 58, was convicted of 14 counts of fraud and conspiracy in what had become a $2.9 billion scandal.

Testifying in his own defense in federal court in Alexandria, Va., Mr. Farkas explained that in 2002 Taylor Bean had sold eight real loans to a lender who resold them to Ginnie Mae, the government agency that buys loans guaranteed by the Federal Housing Administration. When the loans were found to be ineligible for F.H.A. guarantees, Ginnie Mae demanded its money back.

Taylor Bean did not have the cash. So it created fictitious loans and used them as collateral to get the money from a bank. The loans were not supposed to be sold, he said, but a subordinate mistakenly put them in a group of loans to be sold to Fannie Mae.

“I had no intention of paying payments on those loans,” he testified. “It wasn’t my obligation. It was simply a way to keep track of it, and it was, it was an idea I had that probably wasn’t a great idea, but it was an idea that I had how to do it.”

It was also an idea that indicated something very strange was happening at Taylor Bean. It should have been the end for the company.

But it was not. Fannie Mae would no longer do business with Taylor Bean, but there was still Ginnie Mae as well as the other government-sponsored enterprise, Freddie Mac.

“Ginnie Mae did not do anything,” Mr. Farkas testified. “Freddie Mac came down and sent the head of, head of the division that dealt with us and all these other people, and they decided that they would let us, let us live.”

The fraud would last for seven more years, ending in 2009 because Taylor Bean’s principal bank, Colonial Bank of Montgomery, Ala., was itself in danger of failing. Mr. Farkas came up with a scheme to appear to recapitalize the bank, and thus get federal bailout money, but it did not work.

Fannie escaped unscathed. Freddie and Ginnie did not. Two major European banks, Deutsche Bank and BNP Paribas, thought their $1.68 billion in loans was fully secured by collateral. But only a tenth of that collateral was real. Colonial had lent hundreds of millions on the security of mortgage loans that were either nonexistent or had already been sold to someone else.

Mr. Farkas was the seventh person convicted in the case. The witnesses against Mr. Farkas included the other six — four executives from Taylor Bean and two from Colonial Bank, all of whom pleaded guilty. Mr. Farkas was sent to jail and is awaiting a sentence that is almost certain to leave him imprisoned for life.

The Justice Department, which has been criticized for the paucity of criminal charges stemming from the financial crisis, celebrated the verdict. “His shockingly brazen scheme poured fuel on the fire of the financial crisis,” an assistant attorney general, Lanny A. Breuer, said. The United States attorney in Alexandria, Neil H. MacBride, said Mr. Farkas had orchestrated “one of the longest and largest bank fraud schemes” ever seen.

Mr. Farkas did not prove to be a very good witness on his behalf. He insisted no crime had been committed, but his understanding of the law seemed to be a little unusual.

Patrick F. Stokes, a deputy chief of the Justice Department’s criminal fraud section, asked Mr. Farkas if he thought Taylor Bean’s agreement with Colonial Bank allowed the mortgage firm “to sell fraudulent, counterfeit, fictitious loans” to the bank.

“Yeah, I believe it does,” he replied.

“It’s very common in our business to, to sell — because it’s all data, there’s really nothing but data — to sell loans that don’t exist,” he explained. “It happens all the time.”

The second-most important player in the fraud, after Mr. Farkas, was Catherine Kissick, the head of Colonial Bank’s Mortgage Warehouse Lending Division. Her division was in Ocala, Fla., which was also Taylor Bean’s headquarters, and she appears to have been hired by Colonial to enable it to get Taylor Bean’s business, which she had handled for her former employer, SunTrust.

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