Today mortgage information provider CoreLogic released its “Annual Fraud Report” documenting a rise in consumer mortgage fraud. The report highlights that recently convicted former Trump campaign manager isn’t the only one who submitted false applications to secure mortgage loans. As in the case of Manafort, mortgage fraud is a federal offense and the penalties can be stiff, including incarceration.
Even though the economy has improved, the rise in home prices and corresponding amount of income needed to qualify for a loan has increased. Although it is a risk management issue the numbers note approximately 1 in 109 applications have some type of fraud. The report reflects the fraud index has increased for the past seven quarters.
Two fraud issues that are top of mind for risk managers right now are false credit disputes and income misrepresentation.
(cover photo by Mindy Schauer/Digital First Media/Orange County Register via Getty Images)
Reverse mortgages, technically known as Home Equity Conversion Mortgages (HECM) have tougher underwriting guidelines effective October 1st.
The announcement was made by the Federal Housing Administration (HUD) which is part of the United States Housing and Urban Development (HUD) agency. HUD insures the mortgages which are originated by lenders at the consumer level, thus allowing borrowers a tool to utilize the equity in their homes to obtain a loan.
The move essentially means in addition to the initial appraisal used to determine property valuation, a second independent appraisal will now be required. The borrower’s loan will be based on the lower of the two appraisals. In a gesture to appease the borrower’s chagrin of the new requirement, the cost of the second appraisal is allowed to be financed as part of the closing costs. In making the move HUD announced it needed extra protection for the collateral being used to obtain the loan, as it battles with a shrinking insurance pool.
House rich, cash poor
HECM’s have picked up in popularity since the early 2000’s. As people have lived longer lives, it was a statistical reality that many seniors were dealing with a precarious situation. For a variety of reasons their cash reserves were being depleted and the result was a negative impact to their day-to-day living. It was also noted many in that population who were homeowners were sitting on large equity positions. Unfortunately, underwriting guidelines made it prohibitive for them to obtain standard mortgage loans.
HECM’s solved that solution, at least for those who were at least 55 years of age and had sufficient equity. Instead of a regular loan where you make monthly payments, the loan actually provides the borrower income based on the equity position. Paying off the debt was not required until the borrower deceased or it was somehow refinanced.
The new guideline is not expected to thwart the popularity of the program. But, it is one critical guideline that HUD feels will help sustain the viability of the program.
Real estate is a key component of the U.S. economy. Aside from providing basic shelter, it is a commodity that consumers desire to purchase and a mortgage is used to finance the transaction. Yet, it was the environment in 2008 where an industry as we knew it offered slim prospects of recovery.
Fast forward to 2018, recovery is obvious. home prices continue to climb to record levels leaving many to wonder if they will ever be able to afford a home, let alone experience the “American dream?” At the same time if must not be discounted that millions, for various reasons lost homes. For them, then and now home-ownership represents the biggest transaction they will complete in their lifetime. Likewise, it represents the biggest financial asset.
For some 2008 seemed like a lifetime ago. No doubt it was a scary time especially for those who were part of the economic meltdown. Cash was tight, employment or the ability to earn a living was in great jeopardy, homes which were treasured started disappearing in record numbers – like never seen before. Many were lured into the notion property appreciation was constant and even though they may have bet on risky mortgage products, they felt confident they would be able to refinance out of any calamity. Political leaders labeled the period as one not seen since the great depression of the 1930’s.
The crisis erupted in 2008, however signs were simmering that something might be amiss as early as 2005. Interestingly it was a common refrain for the very political leaders and even industry leaders to target the culprit as subprime lending. The problem with that assessment is it is incorrect, at least from a practical definition.
Prior to subprime coming into the mortgage vernacular in the mid 1990’s, most mortgages were considered prime. You had to fully qualify, including for some with what appeared to be exhaustive documentation. . Your credit was not required to be perfect as long as any blemishes could be documented and explained.
Sub is a suffix and means “less than” or “below.” Unfortunately, some would have you believe it meant bad credit, inferior housing or something that was substandard. No doubt many who obtained mortgages were in that population but there was a good percentage who in fact had good credit as well as good property.
A more reasonable understanding is defining subprime as synonymous with alternative. In other words, subprime mortgages merely meant the borrower could not qualify for a prime mortgage. As stated, there were millions of borrowers whose credit was above average and the alternative mortgages became a solid vehicle for them to obtain affordable mortgages. Why was an alternative mortgage necessary? For some, they could not fully document their income via traditional methods. However, they had just as much money in their bank accounts as normal borrowers and their credit was just as solid. Lenders recognized this challenge thus alternative mortgages were born and the market took off.
As lenders created alternative mortgages they became part of the overall subprime population. However, it did not have the negative connotation subprime became labeled. That is why blaming the crisis on those on the fringes with credit issues appears an easy explanation but that short-changes the reality of the subprime market.
There were many reasons which led to the crisis that erupted in 2008. Experts have suggested factors germinated as early as 2006 and the signs of a downfall was apparent. The only problem was many were in denial and for a good chuck of that population it was simply too late to recover.
“I’ve been in this business a long-time and have trained real estate professionals all over Southern California. I’m telling you, the market is about to crash! The late Jerry Timpone, 2006
In 2008 the average home price in Southern California was $429,000. However, it must be noted that due to the crisis millions of homes were being snapped up for far less (via foreclosure and other issues which left many homeowners fleeing their properties).
Compared to today’s average home price of over $600,000, even $429,000 seems like a steal! 2008 was a turbulent time and compared today, it is a thing of the past. During that ten-year period many who held onto their homes have been able to secure a more fixed payment mortgage, thus the surprises of a fluctuating mortgage which was popular during the early to mid-2000’s has been mitigated.
Companies/Business were imploding as we Cities
As indicated real estate, specifically the mortgage sector is important to our economy. As the implosion of businesses picked up steam, the residual effect found cities and communities in great peril. They too were dealt blow after blow as neighborhoods became decimated, thus reducing taxes cities need to operate.
While economic challenges are not the main concern as it was in 2008, today the primary concern is having enough income and down payment to snag a property. Of course, even those who may be in a qualifying position are contemplating the definition of a “fixer-upper” or considering moving outside of the metropolitan area, which years ago would have been unthinkable.
So, average prices come and go. Economic conditions are constant but looking back ten years is important to recognize the cyclical nature of real estate and realizing that most things are relative. The take-away is if $429,000 was a jolt, and $600,000 redefines sticker-shock, it is a good bet prices will go higher before they go lower.
As for mortgages and looking back ten years, it is a simple equation; people will always have the need for shelter and a good many will be lucky enough to become homeowners. Mortgage lenders will always look to satisfy those borrowers who are seeking affordable financing because assuming everyone has at least twenty percent as down payment and stellar credit would depress the market to a point that is not reasonable. The trick, like any consumer purchase is to properly assess your situation so that you are not forced into a mortgage or a predicament which has the remnants of the 2008 meltdown.
Single Family Residences a 10-year look-back
Single Family Residences
Single Family Residences
Single Family Residences
Condominiums / Co-Ops
Condominiums / Co-Ops
Condominiums / Co-Ops
Condominiums / Co-Ops
* 2018 Median price is for May 2018
N/A – Data not available from source
Note: Movement in regional sales prices should not be interpreted as measuring changes in the cost of a standard home. Prices are influenced by changes in costs and variations in the characteristics and size of homes actually sold.
The housing crisis was an important historic event. Fred Thomas, III tags himself as a “student” of the mortgage industry and speaks with credibility having been employed at Countrywide Home Loans, IndyMac Bank and Bank of America. He is currently working on a book which takes a look at the rise and fall as well as the importance they played and the development of the industry.
[Expo Park – Los Angeles, CA] Last Thursday the California African-American Museum hosted the final symposium series on gentrification. The event was created by Karen Mack of L.A. Commons. “Evolution of View Park: Making Sense of Gentrification” featured great audience participation, some solid questions and an excellent presentation.
As mentioned in previous articles on this series; the gentrification topic is very complex and one that can be quite emotional in discussing, particularly from the brave souls in attendance who offered compelling anecdotal commentary. These types of events are eye-openers as the commentary offered by the audience oftentimes transforms into a venting session which is necessary to put the topic front and center. However, it can be precarious as the venting can go on and on…….leaving very little room for solutions based strategies to be communicated.
“This series has been so successful Karen should take it on the road” Robert Lee Johnson, Community Author
The event started at 2pm and once again the venue was packed to the brim. As predicted due to the primary area of discussion; View Park, the majority of those in attendance were African-American.
Crack epidemic in the 80’s
The civil rights movement of the 1960’s as well as the dismantling of racial covenants which previously kept African-Americans from moving into certain communities was critical as there was an increase in the movement towards achieving middle class status through home ownership.
Families grew at an impressive clip. What gets lost in the whole gentrification discussion, particularly trying to answer the question of if certain neighborhoods or property was hard to achieve why did some of those same families leave and flee to the suburbs and other areas? For those who cherish Ronald Reagan as an icon of growth while perpetuating the “American dream,” those from the African-American communities have a different perspective. It is well documented funds needed to fight the Nicaraguan war as well as other conflicts in Central and South America came from the purchase of the readily supply of cocaine. The product found haven in urban centers across America. The result was turf battles, killings and other negative consequences which dismantled neighborhoods that were once beacons of progress and hope. As those areas decayed, it became ripe for reinvestment to replace current occupants.
Legacy and affordability
A key theme or issue which many were seen nodding their heads in agreement was the notion that offspring of those who purchased property in the 60’s, 70’s, 80’s and beyond have great difficulty in being able to purchase their own home, today! While that is a statement many seem to affirm, it raises many questions. Did those parents who originally purchased home not do an adequate job in helping their offspring achieve financial literacy? Due to their successes, did they seem to project a road that their offspring would not have to work or sacrifice like they did? Why do they assume their offspring cannot qualify for financing, while admitting their incomes are perhaps higher based on the age they first purchased? It is more complex then assessing those who grew up in the area cannot afford the very area they grew up in.
The interest in the symposium topic was obvious based on packed crowds at each event. There was a strong sentiment of how homeownership was achieved and how it was critical for them to create a legacy for their heirs. More important was the need for African-Americans to maintain those neighborhoods.
United States history is ripe with laws, regulations, discrimination and other tactics to deprive groups such as African-Americans from owning property or relegating them to specific communities. Some in attendance were quick to point out their pleas to keep neighborhoods in the hand of African-American should not be construed as defining them as racist. Technically that would be impossible as racism is using race to oppress other ethnic groups. African-Americans are not creating any laws or systemic maneuvers to keep any out.
As mentioned due to the venting there was more assessment of the problem versus solution. However, that is to be expected as what Karen Mack organized was a starting point to discuss the issue and that is crucial for stakeholders to speak to their issues.
One important theme offered by those presenting possible solutions was the need to become organized and take a more active role in legitimate organizations.
Due to time the event had to conclude but many in attendance committed to taking this discussion offline and continue to address issues to combat the negative reality of gentrification.
Readers are encouraged to educate themselves on this topic. Karen Mack may or may not agree to a road show, in the meantime those interested must stay engaged in community platforms such as the one which brought folk together for this series.
[McLean, VA] For the eighth consecutive week mortgage rates have continued their climb. Now at 4.40% which is just two basis points in week- over-week reporting, it represents the highest mark of 2018. The increase did not catch anybody off guard as the 10-year Treasury climbed over 2.90%. The 10-year Treasury is known as the long-term index which affects mortgage rates.
Going forward, rates are projected to keep climbing. Also, based on economic movement experts have suggested the Fed is positioned for three and perhaps four discount rate hikes for 2018. This is designed to counter inflationary worries and keep the economy in check.
Consumers haven’t pushed the panic button as when evaluating year over year data, mortgage rates have only increased fourteen basis points. That difference is well within the range of mortgage rate movement as they are very cyclical.
Rate recap for the week:
February 22, 2018
Fees & Points
Freddie Mac known technically as Federal National Home Loan Corporation purchases mortgages from it approved mortgage originators. The primary market rate survey is the industry standard published weekly and is used by consumers and industry experts to gauge rate movement.
For the first time in eight months mortgage rates have climbed above the 4% threshold. The news was expected as financial markets continue to post positive numbers including improved business and consumer confidence.
Lenders who fund mortgage applications typically offer rates in a range based on various factors. Today’s report is from Freddie Mac’s primary market rate survey. It is the industry standard used to gauge rates and the data is compiled from a sample of lenders who sell their closed mortgage loans on the secondary market. This week’s rate is 4.04% and is based on the benchmark thirty-year mortgage.
While mortgage rates inched higher they stil make home ownership affordable. At the same time consumers realize timing is everything and as overall economic conditions improve, increases may be the result.
[Los Angeles, CA] On September 13th KCET in partnership with The California Endowment hosted the premiere screening of CITY RISING. The theme of the documentary is gentrification. An overflow crowd of nearly 700 was on hand to see the “Director’s Cut” which was 90 minutes. Coincidently, on the same evening KCET showed the regular 60-minute screening on their channel.
If you’re black, get back!
If you’re brown, stick around!
If you’re white, it’s all right!
from an anonymous social scientist
Gentrification, a working understanding
Not every white person is rich and not every black person or those of color is poor! One legacy of the history of the United States is the construct of racism or using race as a controlling factor. On basic quality of life issues; from economic or the ability to earn money, to health, to housing and other areas whites were granted privilege over other groups. Even today many attempt to dismiss this very basic fact of not understanding or accepting the issue in a historical context.
“He who gets behind in a race must forever stay behind or run faster than the man ahead of him, that is our dilemma” – Dr. Martin Luther King, Jr. January 1961
That privilege buffered by legal discrimination, including specific land covenants of who could buy land or live in certain communities which set in motion the premise of defining the American Dream as being able to afford a home. Unfortunately, the dream dismissed the reality of certain groups being blocked based on race.
In addition to basic shelter, the more important benefit of home ownership is wealth accumulation or a legitimate asset which has generational benefits. The lack of it, is one reason for the marginalization.
Inner cities, the target of gentrification
Following the great depression and leading up to the industrial revolution, cities throughout the U.S. witnessed an economic boon. Labor was the fuel that fed the boon and many ethnic groups relocated and the result was financial uplift. As the majority group or whites were enjoying the lions-share of the boon, they created the strategy in developing suburbs which allowed them to flee the urban core. They were able to transfer their properties (through sale or renting) to the minority groups who remained. Thus, the term “white flight” was coined. More important and critical to the gentrification discussion is the reality that as whites moved out of the urban core, critical resources were stripped and went with them. Employment stability left. Stores left. Services left. Resources which are necessary for a community to thrive slowly disappeared. The result was communities were disseminated and succumbed to blight and other negative forces. As bad as that may appear the groups who remained didn’t die off. Instead they created their own identity based on their culture to create a vibrancy which allowed them to thrive and redefine the space they occupied.
City Rising focuses on several communities in California. They are Santa Ana, Long Beach, Sacramento, Oakland, Boyle Heights and South-Central Los Angeles.
One poignant part of the documentary is discussing the issue of racial covenants which made it illegal to sell property to certain groups. Many people are ignorant to this reality and dismiss it as being made up or something which happened lifetimes ago. The sad reality; it is current history regarding real estate ownership. Assemblyman Hector De La Torre lives in South Gate, CA. The discussion centered around him showing the covenant as part of the land title documentation which years earlier would have prevented him from purchasing the very home where he was being interviewed. Even though the practice was outlawed through fair housing legislation, it remained as permanent language within the documentation. Using his activism as a political leader he created a law which would have required title companies to remove the language from the report. Unfortunately, even though the law passed, then Governor Arnold Schwarzenegger vetoed it and the language remained as a reminder of the discrimination meted out against certain groups.
The documentary does a good job in highlighting the effects of gentrification. Even though race plays a huge role in its impact, the subtle reality is the class divide or the “haves versus the have nots.”
Cities that were once thought of as “dead” have sprung to life through various forms of reinvestment. Interestingly many of the families who fled the urban core, see their offspring take on a renewed pioneering spirit to reclaim areas. With their economic status, they are able to pick up properties, many on the cheap and with modest investment, transform what was unthinkable into havens of a new lifestyle. Through this process and focus on redevelopment they are able to attract stores and services which provide a great opportunity, assuming one has the money to operate.
People can only buy your property if you agree to sell
Who doesn’t want to live in a “nice” neighborhood? The problem with gentrification and this is where CITY RISING shines is as new people reclaim or move back into neighborhoods, the issue is what happens to the current occupants? Do they just disappear? Do they escape in the middle of the night? For many it’s pure economic, especially the vast majority who are renters. Those who reclaim properties and invest in the restoration are not motivated by some benevolent gesture, but from an economic perspective so it boils down to return on investment. The result is the rise of home prices as well as the rise of rents. Many occupants simply become priced out and that is the ire of those who oppose gentrification. The community they thought they knew……no longer exist, so they must rebuild their lives or try to coexist with their “new neighbors.” Some do it very successfully, most don’t because they do not have the leverage of home ownership.
There is much more to this topic. The causes and effects are worthy of examination. This documentary does an excellent job in creating a foundation for you to move forward.
As predicted, mortgage rates climbed eight basis points in week over week reported and now sit at 3.960%. The move was expected and based on the shortened trading factoring the July 4th holiday. Therefore, the two-point gain from last week was wiped out.
Overall rates are very attractive for home buyers as well as those seeking to refinance their existing mortgage. The key for most consumers to take advantage of rates is positioning or being able to make a formal application and having the ability close within a reasonable period of time. Refinancing can be trickier as many lenders lock in the rate for 60 days at time of preliminary approval. Consumers completing a purchase transaction are guided by the close of escrow, so locking before that time might be unavailable.
Supply and Demand
While the 10-year treasury bond is the key instrument in gauging mortgage movement, there are other factors to consider such as the overall economy and even world events. Supply is demand triggers movement up or down.
Mortgage applications have been stable, however should there be a surge the result may be higher rates. Just this month, lenders are preparing for more applications as underwriting guidelines have changed which may motivate more borrowers to consider a transaction.
The Freddie Mac Primary Mortgage Market Survey® (PMMS®) has evolved since its inception in April 1971 into the foremost reliable, representative source of regional and national mortgage rate trends and is relied upon by the mortgage industry and the public in gauging market conditions and evaluating mortgage loan options.
If you are trying to purchase a home or refinance your existing mortgage, starting this month the break you may have been hoping for is here. At least for those on the margins who may have lower credit scores or excessive debt to income.
Tax liens and civil penalties may be dropped from your credit report, thus allowing your score to increase. Additionally, Fannie Mae and Freddie Mac who are the two largest institutional mortgage providers who purchase mortgages from their large cadre of lenders will allow borrowers debt to income ratio to move from 45 percent to 50 percent.
Tax liens and civil penalties can be a thorn for borrowers who sometimes don’t find out about them until late in a transaction. The issue is sometimes they are not 100% complete or may contain erroneous information. If that is your circumstance and you can document your position, the three credit reporting bureaus cannot report them as being authentically delinquently, thus your credit score will not reflect them as negative.
Again, this is critical if you are at the margins of being defined as having great credit versus good credit, or good credit versus poor credit. As an example, most lenders use risk based pricing to determine which interest rates borrowers will be afforded.
Using a first-time buyer for the sake of illustration on a $200,000 mortgage, using today’s benchmark 30-year mortgage at zero discount points, equals 3.875%.
Great credit, FICO above 720. payment is $940 per month.
Good credit, FICO below 720 but higher than 680, rate is 4.125% or to obtain 3.875% discount points of 1.250% must be applied. Payment is $969 per month or to achieve $940 payment, discount points of $2,500 must be paid.
$29 difference does not seem like a lot of money but over time you are paying more than necessary.
This is just a crude example but as you can see your credit score will determine which rate you are offered and before the announcement, lenders were required to put the information on your credit report as it was assumed to be accurate.
The other component where borrowers may get some breathing room is the increase of the debt to income ratio.
Again, using the $200,000 mortgage as an example and a purchase price of $250,000, assume taxes and insurance are $300, so the total mortgage payment would $1,240. Assuming you have $1,000 in debt, so your total housing debt based using basic underwriting guidelines would be $2,240, thus you would need a gross household income of $5,600 per month to gain mortgage approval. With the new guidelines, you now would need just $4,480 per month. The difference is a whopping $1,120 per month and that could represent the opportunity to qualify for a larger mortgage which is crucial as home prices continue to rise or you simply could easier qualify for the mortgage of your liking.
Of course, there are critics to these two changes as some reflect back to the housing crisis of 2008 as well as the core reasons which led to the downfall.
At the same time, many lenders feel their portfolios are healthier and the benefits outweigh the risk, particularly as application production has been tepid, if not flat.
If you are in these two categories the best advice is:
Present your documentation or your dispute to the three major credit reporting agencies Equifax, TransUnion and Experian.
Check with your lender or mortgage originator to make sure the mortgage is based on Fannie Mae or Freddie Mac underwriting guidelines, and to determine if the new debt to income levels are in place.