|Launch the Fireworks Again: Changing Credit Scores Benefit Mortgage, Housing Industries
Millions of Americans have another reason to celebrate again, a day after the Fourth of July.
The three nationwide consumer reporting companies, Equifax, Experian and TransUnion, have instituted new policies this week that have raised about 12 million consumers’ credit scores, and that should make it easier for them to qualify for mortgage loans.
The companies are now collecting more specific information about the public records that are included on credit reports, including bankruptcies, civil judgments and tax liens — which means consumers won’t be penalized as severely as they previously were for those black marks on their credit histories.
“This is a welcomed and needed change for millennials and first-time homebuyers that clearly will benefit the mortgage and housing industries,” says The Collingwood Group Chairman Tim Rood. “Small increases in consumers’ credit scores can push them into a higher credit category, from ‘fair’ to ‘good.’ Some lenders only lend to certain categories of consumers, so being included in the ‘good’ category could mean the difference for qualifying for mortgage loans,” says Rood.According to VantageScore Solutions, which is the competitor to FICO and widely viewed as the industry innovator, if ALL liens and judgments are removed from consumer credit files, approximately 8 percent of the population could receive an average score increase of 11 points. In reality it is likely that while nearly all public records may be removed, only approximately half of all tax lien records could be removed so ultimately the impact is expected to be modest.
Another issue is that most models built prior to the changes are built to use these data. To get ahead of the data suppression, VantageScore recently introduced its fourth generation credit scoring models that is aligned with the changes and is in fact its its most predictive scoring model yet.
Collingwood Group Chairman Tim Rood talks about this and more tomorrow (Thursday) at 6:20 a.m. ETon Fox Business’ “Mornings with Maria.”
We invite you to tune in.
Fannie Mae Changing Mortgage Rules
Fannie Mae is making it easier for some borrowers to spend up to half of their monthly pretax income on mortgage and other debt payments. But just because they can doesn’t mean they should.
Beginning at the end of July, Fannie’s automated underwriting software will approve loans with debt-to-income ratios as high as 50 percent without “additional compensating factors.” The current limit is 45 percent.
Fannie has been approving borrowers with ratios between 45 and 50 percent if they had compensating factors, such as a down payment of least 20 percent and at least 12 months worth of “reserves” in bank and investment accounts. Its updated software will not require those compensating factors.
Fannie made the decision after analyzing many years of payment history on loans between 45 and 50 percent. It said the change will increase the percentage of loans it approves, but it would not say by how much.
That doesn’t mean every Fannie-backed loan can go up to 50 percent. Borrowers still must have the right combination of loan-to-value ratio, credit history, reserves and other factors. In a statement, Fannie said the change is “consistent with our commitment to sustainable homeownership and with the safe and sound operation of our business.”
Before the mortgage meltdown, Fannie was approving loans with even higher debt ratios. But 50 percent of pretax income is still a lot to spend on housing and other debt.
The U.S. Census Bureau says households that spend at least 30 percent of their income on housing are “cost-burdened” and those that spend 50 percent or more are “severely cost burdened.”
The Dodd-Frank Act, designed to prevent another financial crisis, authorized the creation of a “qualified mortgage.” These mortgages can’t have certain risky features, such as interest-only payments, terms longer than 30 years or debt-to-income ratios higher than 43 percent. The Consumer Financial Protection Bureau said a 43 percent limit would “protect consumers” and “generally safeguard affordability.”
Some consumer groups are happy to see Fannie raising its debt limit to 50 percent. “I think there are enough other standards built into the Fannie Mae underwriting system where this is not going to lead to predatory loans,” said Geoff Walsh, a staff attorney with the National Consumer Law Center.
Mike Calhoun, president of the Center for Responsible Lending, said, “There are households that can afford these loans, including moderate-income households.” When they are carefully underwritten and fully documented “they can perform at that level.” He pointed out that a lot of tenants are managing to pay at least 50 percent of their income on rent.
A new study from the Joint Center for Housing Studies at Harvard University noted that 10 percent of homeowners and 25.5 percent of renters are spending at least 50 percent of their income on housing.
When Fannie calculates debt-to-income ratios, it starts with the monthly payment on the new loan (including principal, interest, property tax, homeowners association dues, homeowners insurance and private mortgage insurance). Then it adds the monthly payment on credit cards (minimum payment due), auto, student and other loans and alimony.
It divides this total debt by total monthly income. It will consider a wide range of income that is stable and verifiable including wages, bonuses, commissions, pensions, investments, alimony, disability, unemployment and public assistance.
Fannie figures a creditworthy borrower with $10,000 in monthly income could spend up to $5,000 on mortgage and debt payments. Not everyone agrees.
read more: SF Chronicle
Redfin Files for IPO
Redfin, the popular on-line real estate listings and mortgage site, has filed for IPO as it plans to take on Zillow and others.
The Seattle-based company unveiled its filing, suggesting that it will raise $100 million, a placeholder that is subject to change.
The timing of the filing implies that Redfin is likely to debut in late July or early August. Because of the JOBS Act, most companies can wait until 15 days before their investor roadshow to reveal their filing. Almost all of them take advantage of this.
This was a long time coming for Redfin, which got its start in 2004. Since then, the company has raised at least $167 million in venture funding.
Greylock Partners is the largest shareholder with a 12.4 percent stake, followed by Madrona Ventures with 11.4 percent, Tiger Global at 10.5 percent and Draper Fisher Jurvetson at 10.2 percent.
Manhattan Rents Back to Pre-recession Levels
A renter hoping to land a studio in Manhattan would need to earn a $100,000 salary in order to qualify for the average unit, according to a report that shows the speed of the rental market’s recovery since the Great Recession.
“Manhattan is a very resilient market,” said Gary Malin, head of Citi Habitats. “It’s a market people want to be in — will pay to be in — and that owners will continue to invest in.”
The report found that the rental market for Manhattan below 96th Street essentially went through three stages over the last decade: The Great Recession caused average rents to drop 8.8%, nearly doubled the vacancy rate and caused landlords to offer concessions for nearly half of all apartments. From 2009 to 2011 rents roared back, and vacancy fell to an all-time low. And since then apartment owners have seen steady growth, the report noted, with studios and one-bedrooms posting the largest gains.
“None of these periods take that long,” Malin said. “It might feel long when you’re in one of them, but they happen fairly quickly.”
That rapid recovery has led banks and developers to bet big on the borough. This year 5,844 new units are set to come online, more than double the amount that became available in 2007.
But another big shift in the landscape could temper future growth compared to previous years. Over the past decade, areas outside of core Manhattan, such as Brooklyn, Long Island City and now East Harlem, have become popular for new development because of their lower costs and have been pulling renters away as much of Manhattan has become pricier.
read more: Crain’s NY
Fed’s Bullard says Rate Hikes ‘Too Aggressive’ for Data
The U.S. Federal Reserve should defer on its rate hike agenda until concrete reforms emerge from Washington, according to one of its key policy makers.
James Bullard, president of the St. Louis Federal Reserve, told CNBC that weak data has undermined the Fed’s hawkish stance and the central bank should take a more reactionary approach if and when it sees solid signs of growth.
“The Fed can afford to wait and see what comes out of the political process,” said Bullard, who admitted he has retreated from his formerly more hawkish stance.
“Some of (President Donald Trump’s) policies can provide growth but they’ve got to get them through Congress,” he explained.
The Fed announced its most recent interest rate hike of 0.25 percentage points in June. However, it simultaneously admitted that it expects U.S. inflation to fall well short of its 2 percent target this year.
“The committee has been too hawkish for the data during the last 90 days or so,” said Bullard.
read more: CNBC
Program to Spur Low-Income Housing Is Keeping Cities Segregated
A mural on the wall of an elementary school in Houston proclaimed, “All the world is all of us,” but the hundreds of people packing the auditorium one night were determined to stop a low-income housing project from coming to their upscale neighborhood.
The proposed 233-unit building, which was to be funded with federal tax credits, would burden their already overcrowded elementary school with new children, many people argued during a lively meeting last year. Some urged the Houston Housing Authority to pursue cheaper sites elsewhere.
As cheers rang out over nearly three hours for every objection raised, Chrishelle Palay, a fair-housing advocate, confronted the mostly white crowd.
“It’s time to face your fears,” Ms. Palay said as boos rang out. “Stop succumbing to misleading rhetoric, and begin practicing the inclusive lifestyles that many of you claim to lead.”
The outcome was familiar. Elected officials sided with the opposition. And an effort to bring affordable housing to an affluent, majority white neighborhood failed in Houston, where low-income housing is overwhelmingly confined to poor, predominantly black and Latino communities.
A review of federal data by The New York Times found that in the United States’ biggest metropolitan areas, low-income housing projects that use federal tax credits — the nation’s biggest source of funding for affordable housing — are disproportionately built in majority nonwhite communities.
read more: NY Times
Buffett Bets on Banks
Warren Buffett’s Berkshire Hathaway plans to swap $5 billion of preferred stock in Bank of America Corp. for 700 million common shares, worth $17 billion.
Berkshire will exercise its warrants to buy common stock at a discounted rate of $7.14 a share when the Charlotte, North Carolina-based bank raises its per-share dividend to 12 cents, Berkshire said in a statement Friday. Buffett acquired the preferred shares through an investment in the lender six years ago.
The move, which will make Berkshire the bank’s biggest shareholder, is a fresh vote of confidence in Bank of America from one of the world’s savviest investors. It also was a sound move for Berkshire. Buffett laid out his thinking in a February letter to shareholders, saying that the decision would come down to simple math: The preferred investment pays $300 million a year in dividends, so it makes sense to convert that into common stock if those shares began earning more.
read more: Bloomberg
You Can Have Your Avocado Toast & Mortgage Too
SoFi has a new marketing initiative aimed at would-be homebuyers aimed at millennials : “For the month of July 2017, anyone who takes out a SoFi mortgage to purchase a home will receive a month’s worth of avocado toast delivered to their door.”
SoFi explains that its offering is being made in response to Australian millionaire Tim Gurner. In May, Gurner told Australia’s “60 Minutes” that millennials’ binging on the popular and pricey snack is to blame for their inability to buy property. “When I was trying to buy my first home, I wasn’t buying smashed avocado for $19 and four coffees at $4 each,” he said.
SoFi’s marketing campaign is clearly making a play for millennials who have been following the avocado toast debate. However, once you are ready to purchase a place of your very own, be sure to look into the options that are best for you. SoFi may be a solid option for people with robust and mostly spotless financial profiles; however, they’re likely not an option at all for people whose situations are messier or less secure. As BuzzFeed News explained, citing reports from financial agencies DBRS and Moody’s, the average annual income for a college graduate in 2015 was around $50,000. The average income for a person who qualified for a SoFi loan? More than $170,000.
Have a prosperous day and enjoy the avocado toast.