Monthly Archives: March 2014

Are Investors Turning Us Into a Nation of Renters?

Fast Fact: Since 2005, the number of renter households has grown 10 times faster than owner households.

WHY IT MATTERS

Big changes are happening in the home rental market that have the potential to affect your own home’s value and your ability to buy a home in the future.

Thanks to a new Wall Street strategy, big investors are buying huge numbers of single family homes and converting them to rentals. In just the last two years, investors have bought more than 200,000 single-family homes mostly through short sales and foreclosures. They purchased more than $250 million worth of foreclosed homes from Fannie Mae alone.

Traditionally, the business of renting single-family homes was a local mom and pop operation. But, as the numbers above illustrate, that landscape is quickly changing as large groups of investors, with no community ties, buy properties in bulk.

Some of these large investors are the very same ones who created and invested in residential mortgage securities, which fueled the real estate bubble a few years ago. Now they’re slicing and dicing debt tied to single-family rental homes and selling those bonds to investors. An estimated $7 billion in these new rental-backed securities is expected to be issued this year, and the market could easily grow to $20 billion.

As a result, lenders are racing to provide financing again — this time to investors instead of homeowners.

In a final twist of irony, many of the tenants in this new breed of rental homes are the very same homeowners who were foreclosed on.

FACT: Since 2005, the number of renter households has grown 10 times faster than owner households.

WHY IS THIS A PROBLEM?

Two reasons:

  1. Becoming a rental nation threatens the ability of many Americans to build wealth. These investors have made big promises about how profitable the securities will be. To fulfill those promises, they’ll charge increasingly higher rent. And while experts say you shouldn’t spend more than a third of your income for housing, many tenants today are paying 40% or more of their income in rent – while median renter income has fallen by 13%. As rents rise, it’s difficult for renters to save enough for a down payment to buy a home, which deprives them of a proven path toward financial security. Home equity has historically been the primary source of wealth for average Americans.
  2. Financial oversight is lacking. If we learned anything from the real estate bubble and bust, it’s that financial oversight of new investments like this is key to ensuring that taxpayers and homeowners don’t foot the bill again if there’s another bust. Think about this: If these investors take on too much debt or don’t get the profit they expect, will they decide to pull out, essentially flooding the home market? Haven’t we learned from our mistakes?

The good news is that some in Congress are taking notice of these new investors. Rep. Mark Takano (D-CA) has asked the House Financial Services Committee to hold hearings on the impact that single family rental bonds could have on America’s homes and homeowners.

Tell us what you think about investors buying up America’s homes, or email your questions to asktheexpert@shariolefson.com

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The Future of Fannie Mae & Freddie Mac and What It Means for You

Fast Fact: Your home’s value and a healthy housing market depend on availability of home loans. Fannie Mae and Freddie Mac back most loans today. But that’s changing — and it could affect you.

SEE WHY THE FUTURE OF FANNIE AND FREDDIE MATTERS TO YOU AND THE VALUE OF YOUR HOME

The government created Fannie Mae 75 years ago to help more Americans become homeowners. Fannie Mae (along with Freddie Mac, which was created in 1970) was incredibly successful, helping bring the dream of homeownership to well over half of all Americans.

And since housing accounts for about 20% of the overall economy, even non-homeowners benefitted.

Fannie and Freddie, together referred to as Government Sponsored Enterprises (GSEs), did this by buying home loans from banks and reselling them to investors in the form of mortgage-backed securities (MBS) on what’s called the secondary market. There was an implied guarantee that if the loans went into default the government would make good on them.

Over time, Congress and various presidents made more demands on Fannie and Freddie. Eventually, in addition to generating a profit for its shareholders, Fannie and Freddie started backing riskier loans to support affordable housing initiatives. Critics say they simply became political pawns.

When the real estate bubble burst, Fannie and Freddie got stuck with hundreds of billions of dollars of loans in default. Investors, concerned that the entire system was flawed, stopped buying loans, which caused banks to reduce lending.

Home loans quickly became tougher to get, hurting the housing market and home values even more. But it could have been worse if Fannie and Freddie weren’t there.

FACT: Some in Washington want to eliminate Fannie Mae and Freddie Mac.

In 2008 the U.S. government infused $189 billion in taxpayer money into Fannie and Freddie and placed them into conservatorship. The good news is that almost all of that money has been recovered, and Fannie and Freddie are now among the most profitable financial companies in the country.

Some in Congress and President Obama want to reform Fannie and Freddie, while others believe they should be dismantled. At the heart of these discussions is the desire to protect taxpayers from future bailouts, a goal everyone can agree on.

FACT: Reform is already happening. For example, effective November 1, Fannie Mae no longer allows mortgages with less than a 5% down payment.

Fannie and Freddie, despite their flaws, are helping the housing recovery. Getting rid of them doesn’t solve the problem. Reform is a better path. Making sure future homeowners have access to affordable home loans is good for the economy, and it’s good for home values.

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Why is it getting harder to get a mortgage? What does it mean for you?

Fast Fact: By some estimates, these stricter rules are already preventing about 15% of home buyers from being approved for a mortgage.

WHY IT MATTERS

We all remember the “liar loans” and fraud uncovered in the mortgage business when the real estate bubble burst. To try to prevent that from happening again, Congress passed the Dodd-Frank Act in 2010.

Now, after much debating and drafting, some of the most significant rules of Dodd-Frank are in effect (as of January 10), and they’re already changing the mortgage landscape.

Even though the new rules are a back-to-basics approach meant to reduce the risk of defaults and foreclosures, opponents argue that the new laws go too far, making mortgages unnecessarily difficult and costly to obtain. They say the new rules may even hurt the predominantly moderate-to-lower income borrowers they were designed to protect.

Under the new rules, if your lender makes a “Qualified Mortgage” or QM, it’s presumed to be a mortgage that you will be able to repay. These QM loans restrict risky features like excessive fees, teaser interest rates, interest-only payments and negative amortization loans where the principal balance of your mortgage increases over time.

Other factors of QM loans include:

  • Loans with terms over 30 years are not allowed.
  • Loan fees cannot exceed 3%.
  • Only certain types of adjustable rate or balloon loans are allowed.

These changes mean you’re less likely to have hidden surprises. Lenders won’t be able to lure you into a mortgage that’s not within your budget. These changes also put an end to most “no-doc” loans.

But perhaps most importantly, for you to be approved for a Qualified Mortgage, your monthly debt cannot be more than 43% of your income. With home prices rising — but wages not — this may be an increasingly difficult criteria for average home buyers to meet. In fact, by some estimates, stricter rules are already preventing about 15% of home buyers from being approved for a mortgage.

FHA, Fannie Mae, Freddie Mac, and some smaller banks are temporarily exempt from this debt-to-income ratio requirement while we all adjust to the new Dodd-Frank law. But you can expect to see pressure on politicians and regulators to reconsider this rule and other Dodd-Frank rules. In the meantime, if you’re thinking about getting a mortgage, make sure you’re prepared to meet the new Dodd-Frank mortgage rules.

Tell us what you think about these new Dodd-Frank mortgage laws or email your questions to asktheexpert@shariolefson.com.

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